<PAGE>
FILED PURSUANT TO RULE 424(B)(3)
FILE NO. 33-74868
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1998
SECURITIES AND EXCHANGE COMMISSION
_____________________
POST EFFECTIVE AMENDMENT NO. 4
TO
FORM S-1
Registration Statement
Under
THE SECURITIES ACT OF 1933
____________________
H.D. VEST, INC.
(Exact name of registrant as specified in charter)
Texas 6210 75-2154244
----- ---- ----------
(State or other jurisdiction (Standard Industrial (IRS Employer
of organization) Classification Code No.) Identification Number)
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
(Address of principal executive offices and principal place of business)
Registrant's telephone number, including area code (972) 870-6000
HERB D. VEST, CHAIRMAN
H.D. VEST, INC.
6333 NORTH STATE HIGHWAY 161
FOURTH FLOOR
IRVING, TEXAS 75038
(972) 870-6000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies of communications to:
Curtis Swinson
Malouf Lynch Jackson Kessler & Collins
A Professional Corporation
700 Preston Commons West
8117 Preston Road
Dallas, Texas 75225-6306
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: MAY 8, 1995
Calculation of Registration Fee
<TABLE>
<CAPTION>
===================================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Offering Price Per Aggregate Offering Registration Fee
Registered Unit Price (2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units consisting of:
Cash Equivalents $7,000,000 100% $7,000,000(1) $2,413.80
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $7,000,000 100% $7,000,000 $2,413.80
===================================================================================================================================
</TABLE>
(1) The Company estimates for the purposes of calculating the registration fee
that its Representatives will acquire through deferral of compensation
Units consisting of Cash Equivalents pursuant to a Deferred Compensation
Plan (see Plan of Distribution) equal to $7,000,000.
(2) Before deducting estimated offering expenses payable by the Company of
$250,000.
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(B)
<TABLE>
<CAPTION>
ITEM IN FORM S-1 CAPTION IN PROSPECTUS
- ---------------- ---------------------
<S> <C>
Item 1 Forepart of the Registration
Statement and Outside Front Cover Page
of Prospectus............................................ Outside Front Cover Page
Item 2 Inside Front and Outside Back
Cover Pages of Prospectus................................ Inside Front Cover Page; Outside
Back Cover Page
Item 3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges....................... Prospectus Summary; Risk Factors, Selected Financial
Information
Item 4 Use of Proceeds.......................................... Use of Proceeds
Item 5 Determination of Offering Price.......................... Not Applicable
Item 6 Dilution................................................. Not Applicable
Item 7 Selling Security Holders................................. Not Applicable
Item 8 Plan of Distribution..................................... Plan of Distribution
Item 9 Description of Securities
to be Registered........................................ Description of Securities
Item 10 Interests of Named Experts and Counsel................... Not Applicable
Item 11 Information with Respect to the Registrant
(a) Description of Business.............................. Business, Prospectus Summary
(b) Description of Property.............................. Property
(c) Legal Proceedings.................................... Legal Proceedings
(d) Market Price of and Dividends on the
Registrant's and Related Stockholder Matters......... Risk Factors-Potential Future Sales Pursuant to Rule 144;
Description of Securities
(e) Financial Statements................................. Consolidated Financial Statements
(f) Selected Financial Data.............................. Selected Financial Information
(g) Supplementary Financial Information.................. Not Applicable
(h) Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................ Management's Discussion and Analysis of Financial Condition
and Results of Operations
(i) Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure................................. Not Applicable
(j) Directors and Executive Officers..................... Management
(k) Executive Compensation............................... Business; Management
(l) Security Ownership of Certain Beneficial
Owners and Management................................ Principal Shareholders; Certain Transactions
(m) Certain Relationships and Related
Transactions......................................... Business; Management; Certain
Transactions
Item 12 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................................. Not Applicable
</TABLE>
<PAGE>
FILED PURSUANT TO RULE 424(B)(3)
FILE NO. 33-74868
H.D. VEST, INC.
UNITS IN A NON-QUALIFIED DEFERRED COMPENSATION PLAN
EACH UNIT CONSISTS OF AN INTEREST IN A NON-QUALIFIED, UNFUNDED DEFERRED
COMPENSATION PLAN.
DEFERRED COMPENSATION PLAN
- --------------------------
H.D. Vest, Inc., (the Company) is offering Units in its non-qualified, unfunded
deferred compensation plan (the Plan). These Units are offered solely to
Representatives of the Company in conjunction with the Company's Representative
non-qualified, unfunded, deferred compensation plan (the Plan.) Representative
is defined as an independent contractor associated with the Company or any of
its subsidiaries, who is neither an employee nor officer of the Company or any
Subsidiary. All of the Units offered hereby will be distributed through H.D.
Vest Investment Securities, Inc. (HDVIS) a wholly-owned Subsidiary of the
Company. See Plan of Distribution.
The Units consist of the amounts deferred by Representatives pursuant to the
Plan as Cash Equivalents.
The Company's Common Stock is listed on the NASDAQ National Market tier of the
NASDAQ Stock Market under the symbol: HDVS. On December 29, 1998, the closing
price for the Company's Common Stock on the NASDAQ National Market System was
$6.00. See Market Information.
THE SECURITIES IN THIS OFFERING ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION (SEE RISK FACTORS AND BUSINESS).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
Price to Public Underwriting Proceeds to
Discounts Company (3)(4)
And Commissions
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Deferred Compensation Plan Units 100% $ 0.00 (3) $7,000,000 (2)
(1)
- ---------------------------------------------------------------------------------------------------
Total:
Deferred Compensation Plan Units $7,000,000(2) $ 0.00 $7,000,000 (2)
===================================================================================================
</TABLE>
(1) Cash Equivalents as defined in Plan.
(2) The Company estimates the Representatives will defer Cash Equivalents in an
amount at least equal to $7,000,000.
(3) HDVIS, a subsidiary of the Company will participate in the offering as sole
selected dealer. As selected dealer, HDVIS will sell Units solely to
Representatives as defined in the first paragraph of this cover page of this
Prospectus pursuant to the Plan. The Company will not be compensated for
such sales. See Plan of Distribution.
(4) Before deducting estimated offering expenses payable by the Company of
$250,000.
THE DATE OF THIS PROSPECTUS IS DECEMBER 30, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission. All of this
information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, 450 5th
Street, N.W., Washington, D.C. 20549 and at regional offices of the Securities
and Exchange Commission at Room 1204, 219 South Dearborn Street, Chicago,
Illinois 60604, and 75 Park Place, New York, New York 10007. The Commission
also maintains a website that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Securities and Exchange Commission at http:\\www.sec.gov.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Items Page
- ----- ----
<S> <C>
Prospectus Summary............................................ 4
Market Information............................................ 7
Risk Factors.................................................. 8
Selected Financial Information................................ 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Use of Proceeds............................................... 24
Capitalization................................................ 26
Business...................................................... 27
Registered Representatives.................................. 27
Technical and Sales Support Services........................ 29
Regional Support System..................................... 29
Educational Services........................................ 29
Representative Recruiting................................... 30
Representative Development.................................. 30
Information Services........................................ 30
Insurance Agency Management Services........................ 31
Investment Services......................................... 31
Trading and Customer Service................................ 31
Representative Licensing.................................... 32
Compliance and Supervision.................................. 32
Professional Investment Advisory Services................... 32
New Programs................................................ 33
Operations and Sources of Revenue............................. 38
Trademarks.................................................... 38
Dependence on a Single Customer............................... 38
Government Regulation......................................... 39
Competition................................................... 40
Employees..................................................... 40
Property...................................................... 41
Management.................................................... 41
Directors and Officers...................................... 41
Remuneration of Directors and Management.................... 46
Certain Transactions.......................................... 47
Issuance of Series A Preferred Stock........................ 47
Transactions with Management................................ 47
Security Ownership of Certain Beneficial Owners and
Management.................................................. 54
Principal Shareholders........................................ 55
Shares Eligible for Future Sale............................... 55
Description of Securities..................................... 56
Plan of Distribution.......................................... 58
Transfer Agent & Registrar.................................... 58
Legal Proceedings............................................. 58
Legal Matters................................................. 59
Experts....................................................... 59
Additional Information........................................ 60
Report of Independent Public Accountants...................... F-1
Consolidated Financial Statements............................. F-2
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of some of the pertinent information contained in
this Prospectus. This summary is qualified in its entirety by the more detailed
information, financial statements and notes to financial statements appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety.
THE COMPANY
H.D. Vest, Inc. (the Company), founded by Herb D. Vest, was formed on December
17, 1986, as a Texas corporation. 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 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
4
<PAGE>
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.
See "Business" for a more detailed description of the business activities of the
Company and its subsidiaries.
THE OFFERING
DEFERRED COMPENSATION PLAN
- --------------------------
The Plan is an optional, non-qualified, unfunded, deferred compensation plan
available exclusively to the Company's Representatives. (Capitalized terms used
herein are defined under the Plan [see Plan of Distribution - Representatives
Deferred Compensation Plan].) The Plan provides Representatives an opportunity
to forego receipt of Compensation on a pre-tax basis for selected periods, thus
postponing recognition of income otherwise currently taxable, and subsequently
receiving the deferred compensation plus a Matching Contribution. At the end of
each Deferral Period, the Deferral Amount and the related Matching Contribution
will be paid to the Participant.
Elections by Representatives under the Plan to defer portions of their
Compensation shall be made annually beginning with the Initial Enrollment Period
following the Effective Date. Compensation shall be deferred in accordance with
the Plan as earned. (See Plan of Distribution - Representatives Deferred
Compensation Plan.)
<TABLE>
<S> <C>
SECURITIES OFFERED...................... Units consisting of: Cash Equivalents
as defined in the Plan. (See
Description of Securities.)
SHARES OF COMMON STOCK OUTSTANDING
AT SEPTEMBER 30, 1998................... 5,423,341 shares (See Capitalization
and Description of Securities.)
SHARES OF COMMON STOCK OUTSTANDING
AFTER THIS OFFERING..................... 5,423,341 (1) (2)
NASDAQ - NMS LISTING.................... The Company's Common Stock is listed
on the NASDAQ -National Market tier of
the NASDAQ stock market under the
trading symbol: HDVS. (See Market
Information.)
</TABLE>
(1) Assumes that the outstanding stock options, covering 385,948 shares, are
not exercised (see Management - Stock Options).
(2) Assumes that the outstanding 250,067 shares of Series A Preferred Stock are
not converted into Common Shares (see Certain Transactions - Issuance of
Series A Preferred Stock.)
5
<PAGE>
USE OF PROCEEDS
The Company intends to use the proceeds of this offering for certain new
programs in the following areas: Operating Improvements, Marketing Initiatives
and Representative Development Activities (see Use of Proceeds and Business -
New Programs).
RISK FACTORS
An investment in the Company's securities is highly speculative due to the
absence of profitable operations in each of the years ended September 30, 1984,
1986, 1987, 1988, 1989, 1992 and 1994. Since the Company plans to use all
amounts deferred by Representatives pursuant to the Plan (including the proceeds
of this offering) for certain programs (see Use of Proceeds, Risk Factors, and
Business - New Programs), the Company may incur losses due to these
expenditures. Also see Risk Factors for additional risk factors associated with
an investment in this offering.
6
<PAGE>
MARKET INFORMATION
As of September 30, 1998 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 1998 was 1,009,021. 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 9/30/98 $ 9.25 $6.38
6/30/98 11.75 4.75
3/31/98 11.00 4.88
12/31/97 $ 5.50 $4.13
-----------------------
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
-----------------------
</TABLE>
As of September 30, 1998, there were 620 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 two 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 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 a substantial portion of 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.
7
<PAGE>
RISK FACTORS
THE SECURITIES BEING OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. BEFORE MAKING AN INVESTMENT IN THE COMPANY, PROSPECTIVE
INVESTORS SHOULD GIVE CAREFUL ATTENTION TO THE FOLLOWING RISK FACTORS INHERENT
IN AND AFFECTING THE BUSINESS OF THE COMPANY.
1. LOSSES DUE TO EXPANSION OF OPERATIONS. Although the Company generated net
income in fiscal 1995, 1996, 1997 and 1998, it incurred losses in the years
ended September 30, 1984, 1986, 1987, 1988, 1989, 1992, and 1994 of $1,831;
$6,576; $1,816,777; $1,085,206; $1,363,832; $3,187,347; and $369,901,
respectively. These losses were generated, in part, by recruiting and
Representative development expenditures during expansion of operations in these
periods. The Company plans to continue to devote available capital to these
activities and to operating improvements and marketing initiatives. Losses may
be incurred in the future to the extent that available capital is devoted to
these expenditures (see Use of Proceeds and Business - New Programs). The
Company had net working capital of $5,392,094 and $5,054,298, and a
shareholders' investment of $8,389,938 and $7,048,561, as of September 30, 1998
and 1997, respectively. (See Selected Financial Information.)
2. OBLIGATIONS UNDER THE REPRESENTATIVES DEFERRED COMPENSATION PLAN. Pursuant to
the terms of the Company's Representative Deferred Compensation Plan the Company
will be required to distribute to each participating Representative all deferred
amounts plus matching amounts equal to 30%, 60% or 100% of the amounts deferred.
The Company plans to utilize all deferred amounts for expenditures under certain
programs (see Use of Proceeds and Business) and will not be reserving any funds
for the future obligations under the Plan. To the extent that cash flow from
operations is not sufficient to meet these obligations, the Company may be
unable to meet its future cash payment obligations under the Plan.
TAX TREATMENT. The Company has obtained an opinion from Arthur Andersen LLP
concluding that amounts deferred under the Plan will receive deferred tax
treatment and that such amounts plus Matching Contributions will be taxable as
received during the Distribution Period. This opinion will not be binding on the
Internal Revenue Service (IRS). If the IRS were to successfully challenge the
deferred tax treatment, then the individual participants would have to recognize
and report the deferral amounts as income in the year in which they were
deferred. If such an event occurred, the individual participants may be required
to recognize current and prior year tax liabilities related thereto.
8
<PAGE>
4. ECONOMIC TRENDS. Prospective investors should understand that the Company's
revenues are directly affected by regional, national and international economic
and political considerations and broad trends in business and finance. Lower
trading volume could result in reduced commission revenues, therefore affecting
the profitability of the Company. As a result of these and other factors, a
number of broker-dealer firms have failed or otherwise ceased doing business
during the past several years. (See Business.)
5. DEPENDENCE ON KEY PERSONNEL. The Company's success during the foreseeable
future will depend to a great extent on the experience, ability and continued
services of Herb D. Vest and other officers, directors and employees. If any of
these persons should become incapacitated or otherwise unavailable, the Company
would be required to seek a qualified replacement. The Company maintains key-
man life insurance policies of $3.0 million on Herb D. Vest. (See
Management.)
6. COMPETITION. The financial service industry is intensely competitive.
Many competitors have been in the business for many years and have substantially
greater financial resources than the Company. There is competition from other
broker-dealers for Representatives and the clients of Representatives. These
competitors offer similar products and services to the clients of the
Representatives. Other broker-dealers, financial planners and financial
institutions often have substantially greater resources and may have greater
operating efficiency than the Company. The existence and expansion of other
firms and of firms providing other financial services may adversely effect the
Company. In addition to competition, the Company's operations and its
profitability will depend upon a number of factors beyond the control of the
Company, including the general strength of the economy, legislative and
administrative changes and government regulations and policies. (See
Competition.)
7. REGULATION. The securities, financial planning and insurance industries are
subject to extensive regulation on both federal and state levels. The SEC
regulates broker-dealers with respect to such matters as net capital
requirements, the holding of customers' credit balances and transactions in
securities. Much of the regulation of broker-dealers has been delegated to self-
regulatory organizations, principally the National Association of Securities
Dealers (NASD) and the national securities exchanges. Subject to SEC approval,
these self-regulatory organizations (SROs) adopt rules by which the SEC
regulates the industry. In addition, the SROs conduct periodic examinations of
member broker-dealers. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets rather
than the protection of creditors and shareholders of broker-dealers. Failure to
comply with such regulations or with any of the other laws, rules or regulations
of state, federal or industry authorities, primarily the NASD, could result in
censure, fine, suspension or expulsion, all of which would have a materially
adverse effect upon the Company. Financial planning and
9
<PAGE>
investment advisory services are subject to regulation by the SEC on the federal
level and most states have similar regulations. The insurance industry is
regulated at the state level where insurance laws vary from state to state. (See
Regulation and Legal Proceedings.)
8. EFFECT OF NET CAPITAL REQUIREMENTS. The SEC has stringent net capital
requirements applicable to the operation of broker-dealers in securities. A
significant operating loss or any extraordinary charge against net capital would
adversely affect the ability of HDVIS to expand its business or, depending upon
the magnitude of the loss or charge, require HDVIS to suspend activities pending
recovery of net capital. Failure to comply with these requirements would have a
material adverse effect upon the Company. (See Regulation.)
9. DIVIDENDS. The Company has not paid dividends on its Common Stock since
incorporation. The Company intends to continue to devote a substantial portion
of its earnings, if any, to the growth and development of the Company.
10. CONTROL BY CURRENT PRINCIPAL SHAREHOLDERS. Existing principal shareholders
of the Company own approximately 75% of the Common Stock outstanding and are in
a position to elect all the Company's directors and otherwise control the
Company. If Herb D. Vest converted his 166,667 shares of Class A Preferred Stock
and 359,148 exercisable common stock options, the principal shareholders would
own approximately 77% of the common stock outstanding.
11. POTENTIAL FUTURE SALES PURSUANT TO RULE 144. Of the 5,423,341 shares of
common stock outstanding as of September 30, 1998, 4,059,554 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 2,490,272 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 1,464,188
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.
10
<PAGE>
12. BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use
the proceeds from this offering for certain new programs in the areas of
operating improvements, marketing initiatives and Representative development
activities. Accordingly, the Company's management will have broad discretion as
to the application of such proceeds. (See Use of Proceeds and Business-New
Programs.)
13. CONFLICTS OF INTEREST. Herb D. Vest, the principal common shareholder and
director of the Company, operates a sole proprietorship, H.D. Vest Insurance
Services (HDVIns), to which the Company provides certain management and other
services. To the extent that the Company renders such services to HDVIns for
which it is not compensated, such action could constitute a substantial conflict
of interest. Accordingly, HDVIns could receive an economic benefit that may not
be recognized by the Company. This could result in a direct benefit to Mr.
Vest, the sole proprietor of HDVIns.
14. ETHICS ISSUES AFFECTING CERTIFIED PUBLIC ACCOUNTANTS (CPAS). Currently, 15
boards of accountancy have regulations or laws prohibiting CPAs from receiving
commissions for the sale or referral of products or services to their clients.
Since 1984, 35 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. California enacted legislation to allow CPAs
to receive commissions effective January 1, 1999. However, litigation continues
as a result of actions initiated under the currently effective law. There is no
assurance that the remaining states will change their rules. The growth of the
Company may be materially impacted in the event these rules remain unchanged.
(See Business - H.D. Vest Representatives.)
15. VOLATILITY OF STOCK PRICE. The stock market has from time to time
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. In addition, the Common
Stock, like the stock prices of many publicly traded financial services
companies, has been and may continue to be highly volatile. (See Market
Information.)
16. INDEPENDENT CONTRACTOR STATUS. H.D. Vest Representatives are independent
contractors, rather than employees of the Company. Based on two Private Letter
Rulings, a test has been established to determine what the Internal Revenue
Service (IRS) considers to be the classification of individuals working for a
company. Based on these Private Letter Rulings and other applicable law, the
Company classifies H.D. Vest Representatives as independent contractors, rather
than employees of the Company. In the event that federal regulations or other
law governing worker classification should change, or that the IRS otherwise
determines that H.D. Vest Representatives are employees, the Company could be
subject to IRS withholding rules and be required to contribute Federal Social
Security and Medicare taxes on each
11
<PAGE>
Representative's behalf. In addition, the Plan may then be subject to the
Employee Retirement Income Security Act of 1974, as amended (ERISA). This could
have a significant adverse affect on the Company and its revenues, and could
result in losses.
17. CONVERSION OF SERIES A PREFERRED STOCK. The holders of the Series A
Preferred Stock may at any time convert such shares to an equivalent number of
Common Stock shares. There are currently 250,067 shares of Preferred Stock
outstanding, of which Herb D. Vest owns 166,667 shares. (See Certain
Transactions - Issuance of Series A Preferred Stock.)
18. LEGAL PROCEEDINGS. The Company is subject to legal proceedings and claims
which arise in the ordinary course of its business. If the Company were to lose
a material claim, it could have an adverse effect on the Company's results of
operations.
19. ECONOMIC CONDITIONS. Production for the Company's Representatives is lower
than that of Representatives of other independent broker-dealers.
In understanding this fact, management of the Company believes there are several
factors that should be considered.
. Representatives are primarily accountants/tax professionals that have
a difficult time overcoming the psychological barriers and long held
professional restrictions on selling products to their clients.
. Individuals typically have a full-time job and income when they become
Representatives of the Company. They add financial planning as a
part-time business and are frequently distracted by their ongoing
business which pays their expenses. Therefore, the Company has a
significant challenge of motivation and focus to address with each
Representative.
. The Company has lost an average of 10% of its Representatives each
year for the last 5 years. The primary reasons for these
Representatives leaving are: 1) transfers to other broker-dealers and
2) non-producers who have chosen not to stay in the financial planning
business.
The Company has identified the following external factors that it believes have
more impact on Representatives' production than any internal factors that could
be controlled by the Company:
. Interest Rates: When interest rates are low clients are searching for
alternatives to their current investments (such as CDs). This puts
H.D. Vest Representatives in the unique position to assist their
clients in choosing alternative investments such as mutual funds.
12
<PAGE>
. Taxes: Tax law changes provide the Representatives with special
challenges as well as opportunities. In the face of significant
change most clients are hesitant to make changes in their investments
and the Representative as their accountant is not as likely to pursue
this business as the typical full-time independent representative.
Opportunities also exist for Representatives that the typical
independent representative does not have. When tax laws change the
accountant is the logical choice for clients to discuss potential
effects on their investments.
. Market Conditions: The Company's revenues are related to the strength
of the financial markets. Fluctuations in inflation and interest
rates have a direct correlation to the investments the public will use
in their search for a higher return. Significant stock market gains
and losses dramatically influence the performance of H.D. Vest
Representatives. In periods of market decline H.D. Vest
Representatives have historically been hesitant to advise their
clients regarding investment products.
. Legislation/Regulation: Legislative and regulatory policies and
actions affect the ability of the Company and its Representatives to
generate revenues and control costs. Legislation related to taxes,
qualified plans, insurance, tax credit elimination and the regulation
of the securities, financial planning, accounting and insurance
industries are the issues of most interest to the Company. Many of
the laws and regulations currently in place limit the ability of H.D.
Vest Representatives to service their clients effectively and
efficiently. One of the most important issues has been the CPA
commissions compensation issue whereby certain states have prohibited
(via laws and regulations) CPAs from accepting commissions as a form
of compensation. The Company has actively contested these regulations
over the past 10 years. To the extent that these issues are resolved
in the Company's favor, they may have a significant effect on
production per Representative. The Company has developed an
alternative to the commissions compensation issue through the
development of the VestFlex, VestPremiere and VestAdvisor fee-based
programs.
. Competition: The Company's Representatives face competition for the
services they provide from the accounting, financial planning, stock
brokerage and insurance industries. The Company's Representatives are
not aggressive in overcoming this competition which puts them at a
disadvantage.
13
<PAGE>
SELECTED FINANCIAL INFORMATION
The following summary of certain financial information relating to the Company
for the five years ended September 30, 1998 has been derived from the audited
financial statements of the Company. Such information should be read in
conjunction with the Company's consolidated financial statements and the report
thereon of Arthur Andersen LLP, independent public accountants, located
elsewhere in this document.
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
As of September 30,
-------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $121,253,636 $87,824,382 $67,509,222 $44,670,051 $50,287,196
Net Income (Loss) 1,427,312 2,142,063 1,188,707 1,329,001 (369,901)
Income (Loss)/
Common Share 0.24 0.37 0.20 0.22 (0.09)
Ratio of Earnings to
Fixed Charges or
Coverage Deficiency 3.52 5.52 4.03 4.08 (0.05)
</TABLE>
SUMMARY OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION:
<TABLE>
<CAPTION>
As of September 30,
-------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 5,392,094 $ 5,054,298 $ 2,821,115 $ 1,293,871 $ 1,012,016
Total Assets 29,111,026 19,747,631 16,950,759 11,666,371 12,336,852
Long-Term Debt And
Capital Leases(net of
current maturities) 2,506,506 1,016,257 676,844 430,739 543,848
Total Liabilities 20,721,088 12,699,070 11,949,226 7,726,010 9,697,957
Shareholders'
Investment 8,389,938 7,048,561 5,001,533 3,940,361 2,638,895
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's financial position remains strong. The
Company's net working capital at September 30, 1998 was $5,392,094 compared to
net working capital of $5,054,298 at September 30, 1997. The $337,796 increase,
for the year ended September 30, 1998, is primarily a result of (i) strong cash
flows provided by operations, (ii) proceeds from the Plan for its
Representatives and (iii) repayment of notes receivable from officers. The
Company's primary uses of cash for the year were attributable to (i) purchase of
property and equipment and (ii) acquisition and development of internal computer
software.
During 1998 the Company dedicated much of its capital to the development of a
new information system infrastructure. Management believes the improved
information systems will provide the Company more capacity to manage its current
growth and support future growth. Approximately $3.4 million of the Company's
fiscal 1998 funding for information systems and property and equipment came from
operating and capital leases. The Company has dedicated $1.8 million of proceeds
from the Plan and the remainder from operating cash flows to the purchase and
development of its information systems and the purchase of property and
equipment.
In June 1998, Herb D. Vest reduced to zero the outstanding principal balance,
together with the accrued interest, of his revolving line of credit from 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,
1998, amounts from these sources have been approximately $2.5 million, $2.6
million, $5.1 million and $13.3 million, respectively.
In July 1995, the Company began accepting contributions for the Plan for its
Representatives. Pursuant to the Plan, Representatives may forego current
compensation, and subsequently receive the deferred compensation plus a Company
matching contribution, as defined in the Plan. As of September 30, 1998 and
1997, approximately $2,385,000 and $1,167,000, 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, commission expense will increase 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
15
<PAGE>
ultimately be paid to the participant in the form of cash. As of September 30,
1998 and 1997, the Company had accrued matching contributions of approximately
$365,000 and $156,000, respectively. Accrued matching contributions will be paid
out over a maximum of seven years. As of September 30, 1998 the Company had paid
$10,458 to participants representing deferred amounts and $2,654 representing
matching contributions.
Historically, the Company has significantly increased its recruiting and
development activities upon obtaining financing through the sale of stock or
cash flows. 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 that the Company would record substantial
expenses in the periods subsequent to obtaining such financing.
Management believes that, in addition to external financial resources (primarily
bank leases); the Company's cash flow is sufficient to maintain its current
operations as well as its continued growth plan. The Company continually
monitors the capital markets for opportunities to obtain financing to meet its
growth needs.
16
<PAGE>
RESULTS OF OPERATIONS
REVENUES:
The Company's revenues for the years ended September 30, 1998, 1997, and 1996
were $121,253,636, $87,824,382, $67,509,222, respectively, a 38%, 30%, and 51%
change from the years ended September 30, 1997, 1996, and 1995, respectively.
Management believes that the increase in revenues for the fiscal years is due to
(i) the continued strength in the overall financial markets, (ii) the Company's
continued development of programs to support and educate Representatives, (iii)
the expansion of the Company's Representative force through recruitment and (iv)
the Company's commitment to fee-based programs. Revenue for the fourth quarter
was negatively effected by market conditions during this period.
The increase in revenues during the past three years is in part due to favorable
economic conditions that have made certain investments products, such as those
offered by the Company, attractive to investors. To the extent that these
economic conditions change in the future and make these investment products less
attractive to investors, the Company's revenues could be negatively
impacted.
Management believes that revenues are related to the experience and education of
the Company's Representatives. To that end, the Company provides many programs
to educate and develop the Representatives knowledge of the investment industry.
These programs include computer software, education seminars, self study
courses, and the Regional Support System that allows less experienced
Representatives to gain assistance from the Company's more experienced
Representatives.
Management also believes that revenues are related to the number of
Representatives affiliated with the Company. The Company actively recruits
Representatives using methods that have been proven to be the most effective in
the past in order to gain market share.
The increase in revenues for fiscal years 1998, 1997 and 1996 is due in part to
the growth in the Company's fee-based programs. Fee-based programs produce
revenue based on quarterly charges to clients for the management of their
accounts, whereas, commission-based services produce revenue based primarily on
one time front end sales charges for the purchase of products. Some clients may
prefer fee-based programs as opposed to more traditional commission-based
services. The Company hopes to maximize revenue by making both fee-based and
commission-based services available to customers. Management believes that
current market demand has caused fee-based services to grow at a greater rate
than commission-based services in recent years. Portfolio management fees from
these programs were $17,049,614 for the year ended September 30, 1998, a 54%
increase over the year ended September 30, 1997. Portfolio fee revenue for the
years ended September 30, 1997 and 1996, were $11,070,632 and $6,480,537,
respectively, a
17
<PAGE>
71% and 101% increase over the years ended September 30, 1996
and 1995, respectively.
The reasons for changes in the Company's revenues in the years ended September
30, 1998, 1997, and 1996 are summarized in the following table:
<TABLE>
<CAPTION>
% Change for the Years Ended September 30,
as compared to Previous Years
------------------------------------------
Source of Revenue 1998 1997 1996
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Mutual Fund and UITs (1) +39% +21% +47%
Insurance Products (2) +37% +30% +81%
Stocks, Bonds and
Options (1) +47% +48% +43%
Partnership Interests (3) +71% -20% -36%
Trading (4) -55% +664% N/A
Portfolio Management
Fees (5) +54% +71% +101%
Marketing and
Educational Fees (6) +14% +53% +43%
Facility and Service
Fees (7) -8% +29% -24%
Other (8) -5% +34% -14%
</TABLE>
(1) Revenues increased in 1998, 1997 and 1996 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.
(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 for fiscal 1998, increased due to greater demand for this type of
product. Revenues for 1997 and 1996 decreased due to a decline in demand
for this type of product.
(4) Revenues from trading activities were $102,282, $228,217 and $29,863 for
the years ended September 30, 1998, 1997 and 1996, respectively. Changes
are due to market demand.
(5) 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. During 1998, 1997 and 1996, the Company has devoted
significant resources to further develop its fee-based programs.
(6) Revenues in 1998, 1997 and 1996 increased due to increases in sales and the
expansion of the educational programs and seminars provided by the Company.
Product sponsors assist in the funding of the Company's educational
services. Revenues in 1995 decreased as a direct result of a sluggish
18
<PAGE>
market, which reduced the receipts from product sponsors.
(7) Facility and Service Fees declined in fiscal 1998 due to the decline in the
attractiveness of fixed insurance investments, offered by HDVINS, due to a
decline in interest rates which, management believes, reduced demand for
fixed insurance investments. Facility and Service Fees increased in 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.
(8) The decrease in 1998 is due in part to a decrease in revenue from the
Company's catalog sales products. Revenue from this area has been offset
with Representatives use of TCC credits for items purchased in the catalog.
The increase in 1997 is due to increased interest income received by the
Company from increased cash reserves maintained during the year.
NET INCOME:
Net income for the year ended September 30, 1998 was $1,427,312 compared to net
income of $2,142,063 and $1,188,707 for the years ended September 30, 1997 and
1996, respectively.
Commission expense for the year ended September 30, 1998, was $68,152,972 or 71%
of Commission revenue compared to $48,384,293 or 70% for the year ended
September 30, 1997. The increase in Commission expense is the result of
increased production by Representatives at higher payout levels. Portfolio
management fee expense for the year ended September 30, 1998 was $11,263,667 or
66% of Portfolio management fee revenue compared to $7,375,367 or 67% of the
related revenue for the year ended September 30, 1997. The decrease in Portfolio
management fee expense is the result of Representatives at lower payout levels
switching their clients to fee-based investment products.
General and administrative expenses for the year ended September 30, 1998 were
$27,803,227, an increase of 43% from the prior year. Included in the increase of
general and administrative expenses were nonrecurring costs of approximately
(i) $826,000 for expenses related to the settlement of claims arising from the
actions of a Representative and (ii) $572,000 associated with the relocation of
the Company's corporate headquarters. Additionally, the increase in general and
administrative expenses was due, in part, to (i) $648,553 for the expansion of
the Company's compliance and supervision of Representatives, (ii) $750,959 in
human resource expense related to the Company's increase in staffing and
employee training programs and (iii) $707,427 in costs related to the Company's
mail fulfillment operations. In addition the Company's expenses related to
operations increased by approximately $1,023,805 due to increased staffing and
consulting work related to the development of a new system for processing
investment transactions, as well as an increase of $1,514,620 for information
services related to the system development.
General and administration expenses for the year ended September
19
<PAGE>
30, 1997 were $19,394,200 an increase of 21% from the fiscal year ended
September 30, 1996. 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 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 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. Representative development costs for the year
ended September 30, 1998, 1997 and 1996 were $8,837,451 $7,485,266 and
$6,506,014, respectively.
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.
At September 30, 1998, the Company has approximately 5,828 fully licensed
Representatives and approximately 1,474 Representatives in various stages of
licensing. The Company's recruiting efforts for the years ended September 30,
1998, 1997, and 1996 resulted in increases in new affiliates of approximately
2,227, 1,815 and 722, respectively. Representative recruiting costs for the
years ended September 30, 1998, 1997 and 1996, were $2,231,364, $1,677,594 and
$773,909, respectively.
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
20
<PAGE>
referral of products or services to their clients. Since 1984, 35 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. California enacted legislation to allow CPAs to receive commissions
effective January 1, 1999. However, litigation continues as a result of actions
initiated under the currently effective law. The Company has chosen to
vigorously support these Representatives. The Company has incurred legal costs
of approximately $286,000, $351,000 and $242,000 for the years ended September
30, 1998, 1997 and 1996, 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 in preceding sections of this Management's
Discussion and Analysis. 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.
YEAR 2000 ASSESSMENT
The Company recognizes the need to ensure that its operations will not be
adversely impacted by "Year 2000" systems failures. Year 2000 issues arise
because some computer software and hardware (computer systems) were designed to
handle only a two-digit year, not a four-digit year (e.g. 1997 is seen by the
computer as "97"). When the year 2000 begins, these computer systems may
interpret "00" as the year 1900 and not 2000, and could either stop processing
date-related computations or process them incorrectly.
In order to minimize the impact of the Year 2000 on the Company, a Year 2000
plan has been established for the evaluation and management of risks associated
with material Year 2000 issues. The plan includes a review of material computer
systems that the Company currently has in place, modification or replacement of
such systems if required, inquiry to third-party providers with whom the Company
has material business relationships as to their state of readiness for potential
Year 2000 issues and the development of contingency plans in the event material
Year 2000 issues arise in Company or third-party computer systems.
As of September 30, 1998, the Company has identified material computer systems
and completed testing of approximately 25% of such systems. The Company
anticipates completing all testing and any required modifications or
replacements by September 30, 1999. As of September 30, 1998, the Company has
expended approximately $55,000 to address potential Year 2000 issues, exclusive
of costs
21
<PAGE>
associated with previously scheduled modifications or replacements unrelated to
Year 2000 issues. The Company anticipates spending approximately $100,000 for
additional testing, modification and replacement related to Year 2000 during the
fiscal year ending September 30, 1999.
Based on current and anticipated operating needs, many of the Company's critical
computer systems are in the process of being replaced with more technologically
advanced versions. Each new system being installed has been reviewed for Year
2000 compliance. The computer systems that have been or are in the process of
being replaced, include, but are not limited to, the Company's investment
processing system, accounting system, human resources and payroll system, work
station and network operating systems and systems used to communicate with the
Company's Representatives. The remaining computer systems, including but not
limited to, phone equipment and general office equipment are currently being
reviewed for Year 2000 compliance as part of the overall plan for testing and
modification referenced above.
In addition to reviewing its own computer systems, the Company is in the process
of communicating with material third-party providers, including, but not limited
to, suppliers, product sponsors, financial institutions, facility owners and
other companies with which the Company has material business relationships in
order to assess these companies' state of Year 2000 readiness. The
communication requests, among other things, disclosure of the companies' plans
for minimizing the impact of the Year 2000 on their computer systems and the
Company. The Company anticipates receiving from these third-party service
providers assurance of their Year 2000 capability. As of September 30, 1998,
the Company has not received from any third-party provider with which a material
business relationship exists notice of a material Year 2000 issue or inability
to address material Year 2000 issues prior to the Year 2000. The Company is
generally not in a position to verify whether third-party service providers are
or will become Year 2000 ready apart from such assurances or until a Year 2000
issue arises.
Management does not anticipate a material effect on business operations as a
result of Year 2000 computer system issues. As a precaution, however, the
Company is in the process of developing a contingency plan for business
operations in the event material Year 2000 issues arise in the Company's or
third party computer systems. In the event material issues arise, the Company
is prepared to conduct business, particularly the processing of investment
transactions, utilizing manual processes and third party, off site, computer
systems and back-up data routinely archived by the Company. The Company
anticipates that the cost of conducting business utilizing the Company's
contingency plans would be higher than conducting business utilizing current and
anticipated operational plans, although the Company is unable to estimate
potential cost increases in this regard.
In the event the Company receives notice from a material third party provider as
to a potential Year 2000 issue effecting the
22
<PAGE>
Company, or a material Year 2000 issue arises as to a third party, the Company
anticipates minimizing potential business interruptions by shifting business
critical functions, including, but not limited to, products sold or recommended
by the Company's subsidiaries, to third party providers demonstrating Year 2000
compliance.
To the extent the Company or third party providers cannot correct material Year
2000 issues, and the Company is unable to efficiently conduct business in
accordance with its anticipated contingency plans, operations of the Company
could be negatively impacted.
23
<PAGE>
USE OF PROCEEDS
The net proceeds to be realized by the Company from the sale of Units consist of
an estimated $7,000,000 in Cash Equivalents. Deferrals by a Representative
pursuant to the Plan shall be made as such Compensation is earned. Accordingly,
the amount attributed to Cash Equivalents will be received by the Company over
an extended period of time. The Company anticipates that the net proceeds of
the offering will be used for certain new programs in the following areas: (i)
operating improvements, (ii) marketing initiatives and (iii) Representative
development activities (see Business - New Programs). As of September 30, 1998,
the Company's Representatives had deferred approximately $2,385,000 pursuant to
the Plan.
The following table represents the Company's estimate of the allocation of the
estimated proceeds of this offering that will be received over an extended
period of time. The Company may find it necessary or desirable to reallocate
the net proceeds among the described categories if its expectations regarding
general economic conditions and conditions in the financial service industry
should change (see Business - New Programs). If attractive opportunities become
available, or if circumstances indicate that it is imprudent or impractical to
follow the following estimated allocations, the Company may use portions of the
proceeds for other uses which may not be presently identifiable.
<TABLE>
<CAPTION>
Approximate Percent
Dollar Amount(1) of Net
---------------- --------
<S> <C> <C>
Operating Improvements (2) $4,000,000 57%
Marketing Initiatives (2) 900,000 13%
Representative Development
Activities (1) 2,100,000 30%
---------- ---
$7,000,000 100%
========== ===
</TABLE>
(1) The estimate by the Company is that Representatives will defer $7,000,000
as Cash Equivalents over an extended period of time.
(2) See "Business - New Programs"
As of September 30, 1998, the Registered Representatives have deferred
approximately $2,385,000 of compensation. Of this amount, $1,935,000 of the
deferred compensation proceeds was used for Corporate Integrated Systems and
$285,000 of the deferred compensation proceeds was used for Representative
Integrated Systems, as defined in the New Program section herein. At September
30, 1998, the Company had approximately $165,000 of unallocated deferred
compensation proceeds which will be allocated when identified projects are
approved by the Company's management. The Company plans to allocate both the
remaining balance of $165,000 and any future deferred compensation in accordance
with the allocation of the estimated proceeds as outlined in the table
above.
24
<PAGE>
Beginning in July 1998, the Company began distributing deferred compensation to
the participants along with matching contributions. As of September 30, 1998,
the Company had paid $10,458 to participants representing deferred amounts and
$2,654 representing matching contributions.
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1998:
<TABLE>
<CAPTION>
Actual at Adjusted For Deferral of
September 30, 1998 Cash Equivalents (2)
----------------------- ------------------------
<S> <C> <C>
Long term deferred compensation $ 2,661,619 $ 3,661,619
Shareholders' investment:
Preferred stock, $6 par value,
10,000,000 shares
Authorized; 250,067 issued 1,500,402 1,500,402
Common stock, $.05 par value,
100,000,000 shares authorized;
5,423,341 outstanding (1) 271,167 271,167
Additional paid-in capital 5,154,934 5,154,934
Retained earnings 1,463,435 1,463,435
----------- -----------
Total shareholders' investment 8,389,938 8,389,938
----------- -----------
Total capitalization $11,051,557 $12,051,557
=========== ===========
</TABLE>
(1) Does not include up to 800,000 shares reserved for stock options (see
Management- Stock Options).
(2) Assumes $1,000,000 of deferred compensation during the next twelve months
and $7,000,000 over the life of the Plan.
26
<PAGE>
BUSINESS
H.D. Vest, Inc. (the Company), founded by Herb D. Vest, was formed on December
17, 1986, as a Texas corporation. The Company is a financial services company,
organized for the purpose of investing in financial service companies and
providing management services to such companies as well as other entities. The
Company also conducts operations under the corporate assumed name of H.D. Vest
Financial Services. The Company owns all the outstanding shares of the following
subsidiaries.
H.D. Vest, Inc.
d/b/a H.D. Vest Financial Services
<TABLE>
<CAPTION>
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 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.
REGISTERED REPRESENTATIVES
The Company utilizes a Representative base to market its financial service
products. As of September 30, 1998, the Company has approximately 5,828 fully
licensed Representatives
27
<PAGE>
and approximately 1,474 Representatives in various stages of the licensing
process.
H.D. Vest Registered Representative
Distribution by State as of September 30, 1998
The following table identifies the geographic location of the Company's
approximately 5,828 fully-licensed Representatives.
<TABLE>
<S> <C> <C> <C>
Alabama 35 Montana 18
Alaska 10 Nebraska 21
Arizona 157 Nevada 27
Arkansas 40 New Hampshire 24
California 810 New Jersey 204
Colorado 127 New Mexico 13
Connecticut 71 New York 372
Delaware 16 North Carolina 104
District of Columbia 11 North Dakota 14
Florida 348 Ohio 227
Georgia 109 Oklahoma 148
Hawaii 12 Oregon 49
Idaho 13 Pennsylvania 300
Illinois 185 Puerto Rico 1
Indiana 81 Rhode Island 16
Iowa 36 South Carolina 34
Kansas 40 South Dakota 8
Kentucky 46 Tennessee 63
Louisiana 96 Texas 852
Maine 37 Utah 40
Maryland 129 Vermont 23
Massachusetts 154 Virginia 101
Michigan 125 Washington 88
Minnesota 87 West Virginia 19
Mississippi 47 Wisconsin 135
Missouri 93 Wyoming 12
-----
Total 5,828
=====
</TABLE>
28
<PAGE>
TECHNICAL SALES AND 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.
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 develops educational materials and seminars designed to enhance the
technical skills and knowledge of Representatives. The educational materials
developed for the Company's Representatives and their clients include, but are
not limited to training videos, self study courses, computer based training
programs, newsletters and promotional pieces. The Company's seminars include
two national events, each offering Representatives a full week of training, as
well as other seminars such as the "Tax Season Crash Course" which provides
investment training prior to the tax rush experienced by Representatives
preparing tax returns for their clients.
During fiscal 1998 the Company introduced regional conferences to the seminar
offering. These conferences are located in cities across the country and are
designed to offer training on the Company's Internet site, computer software and
technical
29
<PAGE>
investment topics.
REPRESENTATIVE RECRUITING
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 education events. The Company may employ
additional methods of recruiting in order to develop and determine the
effectiveness of such alternatives.
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. The training and marketing programs
also offer educational events such as the RSS meetings (described above) and
marketing initiatives including self-study kits, newsletters, and various other
regional and national meetings sponsored by the Company.
INFORMATION SERVICES
The Information Services Department provides computer support services for both
the Company and its Representatives.
At the Company level, the Information Services Department is responsible for
developing programs and maintaining the hardware that supports operations.
During fiscal 1998, the Company upgraded its computer infrastructure with faster
computers and a more stable network for information processing. The Information
Services Department also provided support for new processing systems in human
resource management, accounting and transaction processing.
At the Representative level, the Information Services Department continued to
develop the Company's Internet site and other
30
<PAGE>
programs to support the Representatives. The H.D. Vest Internet site provides or
will provide the Representatives with access to account information,
consolidated statements, stock quotes and market news, while creating a venue
for sharing ideas with other Representatives. Other programs developed to assist
the Representatives include a CD-ROM Resource Library, which provides reference
materials and investment transaction forms, the CD-ROM Financial Check-Up System
that assists in identifying clients needs, and the CD-ROM RSP which provides
training on investment basics.
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 $493,604, $538,700 and $416,298 for the years ended
September 30, 1998, 1997 and 1996, respectively. As of September 30, 1998, the
Company had a receivable of approximately $138,496 from HDVIns.
INVESTMENT SERVICES
H.D. Vest Investment Securities, Inc., formed in 1983 as a Texas Corporation, 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.
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.
31
<PAGE>
The following table summarizes the number of securities transactions processed
by the Company:
Fiscal Years Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
5,551,515 4,042,941 2,422,705
Customer accounts for trading of stocks and bonds and certain mutual fund and
direct participation programs are cleared on a fully disclosed basis through
National Financial Services Corporation, 161 Devonshire Street, Mail Stop D6,
Boston, Massachusetts 02110. National Financial Services Corporation, as the
clearing firm for HDVIS, 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. The Company's Compliance Department is responsible
for Representatives' compliance with rules of the regulatory bodies that
supervise the financial services industry. Due to the strict regulation of the
financial services industry by federal and state agencies, it is important that
the Company stay abreast of the activities of its Representatives and internal
staff. The Company's Compliance Department supervises the investing activities
of all Representatives.
PROFESSIONAL INVESTMENT ADVISORY SERVICES
H.D. Vest Advisory Services, Inc. conducts 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 ability to provide fee-based financial planning
services to their clients.
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<PAGE>
HDVAS provides three fee-based services. The VestPremiere Investment Program is
designed for clients with a minimum $100,000 of 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 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 report
is provided to each client detailing investment performance.
NEW PROGRAMS
The Company plans to use the proceeds of this offering as well as cash amounts
deferred under the Plan to undertake several new programs in the coming years in
an effort to improve the productivity of its Representatives and the efficiency
of the Company's corporate support staff. Such new programs will be implemented
at the discretion of the Company.
OPERATIONAL IMPROVEMENTS:
The Company is competing in an industry that is rapidly changing. In order to
effectively respond to the competition, the Company and its corporate support
staff and Representatives must evolve to meet these demands. The Company's goal
is to provide its staff with the training opportunities and the systems support
to meet this challenge.
Staff Training:
- ---------------
In order to achieve this goal the Company must continually assess and enhance
its employees' skills and effectiveness. With the changes in the financial
services industry, the Company's staff must learn new skills that will make it
more adaptable and flexible. In order to ensure that the Company's staff is
ready to meet the challenges afforded by working for a growth company in a fast-
paced industry, the Company will develop a comprehensive training and continuing
education curriculum. Various training media will be utilized for the delivery
of the training programs, including audio, video, self-study and computer-based
training.
33
<PAGE>
Corporate Integrated Systems:
- -----------------------------
In order to stay competitive in the financial services industry, the Company
must improve its systems' capabilities. Because of the labor intensive nature of
the Company's business caused by increases in regulatory paperwork and
disclosure and pressure from Representatives regarding fees and payout, firms
that do not keep pace with technology advancements will be left behind by their
competition.
To the extent feasible due to current regulatory requirements, the Company's
goal is to electronically communicate with the Representatives, eliminating as
much mail, paper and telephone calls as possible. This affects every department
at the Company and every Representative and client in the field. The ability of
the Company to improve technological capabilities in a cost-effective manner
could significantly affect growth and profitability.
Over the coming years, the Company plans to make the following systems
improvements and enhancements:
. Improve analysis through development of systems.
. Improve telemarketing systems in Recruiting and Marketing.
. Develop software that integrates existing systems with outside product
information clearing houses to facilitate:
- Client account maintenance
- Transaction processing
- Cash Management
- Exchange of information regarding client accounts with major
product sponsors.
. Implement work flow management to improve staff efficiencies.
. Develop expert system for staff and Representatives providing them
access to information with 70% of expert ability.
Representative Integrated Systems:
- ----------------------------------
The Representatives have the same challenges that the Company faces in competing
in today's financial services industry. They require integrated systems to
effectively manage their practices. The Company must be on the leading edge of
providing the best systems available for the management of all areas of our
Representatives business. Over the coming years, the Company plans to develop or
improve Representative systems in the following areas:
34
<PAGE>
. Communication software that not only allows direct communication with
the home office but also provides look-up capabilities for client
account information, commission status, customer service problem log
status and access to compliance and licensing information and
educational event registration.
. Develop integrated systems to support marketing and operations,
including contact management, tax preparation, marketing from the tax
return, financial planning integrated with tax preparation software
and investment monitoring and reporting.
. Develop programs for preparing client presentations.
MARKETING INITIATIVES:
The Company firmly believes that in order to achieve its objectives, it will
need to become well known by accounting and financial professionals as well as
by the public at large. The Company has developed several strategies to achieve
public awareness.
Book Publishing and Public Seminars:
- ------------------------------------
The Company has identified a series of financial planning oriented books to be
published for the general public. The Company has published two books, "Wealth:
How to Get It, How to Keep It" and "Wealth Workout", published in 1993 and 1995,
respectively. The Company promotes these books to Representatives,
Representatives' clients and to the general public.
Cooperative Advertising:
- ------------------------
Representatives who meet specific criteria and agree to adhere to certain
standard procedures will be invited to participate in the Company's future
cooperative advertising programs and will share in the cost of development,
testing and implementation of national, regional and local advertising
initiatives.
Fee-Based Products and Services:
- --------------------------------
The Company believes that in order to attract and retain successful
Representatives, it must offer a variety of fee-based compensation programs in
addition to the commission-based products that now comprise the majority of its
revenues. In 1993 the VestFlex program was introduced. The program has been
well received by the Company's Representatives and is expected to expand over
the next five years to include:
. Flexible investing into specific mutual funds
. Portfolio consisting of mutual funds of more than one fund family
. Complete systemization of the processing of transactions and
simplification of paperwork
Additionally, in October 1995, the VestAdvisor Program was introduced. This
program accommodates clients with a minimum of $25,000 of current investment
assets.
35
<PAGE>
Direct Marketing Programs:
- --------------------------
The Company plans to develop tested direct marketing programs for use by its
Representatives. These would include marketing letters, brochures, seminar
presentations and one-on-one client presentations and include complete training
on use and implementation of the programs.
Public Seminars:
- ----------------
The Company plans to develop and conduct public seminars to educate the public
on the importance of understanding basic financial principles.
REPRESENTATIVE DEVELOPMENT ACTIVITIES:
Support:
- --------
The accountant/tax professional Representative needs the support of the Company
to implement financial planning services into their existing tax practice.
. FIELD SUPPORT. The Company believes that an important element that is
currently missing from its support services is the availability of in-
field training and sales assistance for new Representatives and those
who need more personalized services than can be provided via the
telephone support of the home office. The Company believes that this
can be accomplished through the widespread implementation of the
Regional Support System (RSS). The RSS is a field support program
designed to train and support Representatives in the technical aspects
of financial planning, motivation and sales training, time and
practice management, financial products, and support in actual client
situations.
. TECHNICAL SUPPORT. The Company offers comprehensive Technical Support
services to its Representatives. These services include support in the
areas of Retirement Planning, Investment Planning, Education Planning,
Employee Benefits, Tax Planning, Risk Management, Qualified Plans,
Product Selection, Bank Marketing Programs and Marketing Strategies.
The Company employs staff experts in every area who are dedicated to
providing technical information to its Representatives. The Company
believes that the addition of staff experts in Estate Planning,
Portfolio Management, Asset Allocation and Insurance are key to the
continued success of the Technical Support services.
. PRODUCT SUPPORT. Because of the large volume of product sales the
Company supplies to major product sponsors, it has been able to
negotiate personalized product support from the wholesaler teams of
the sponsors. The wholesalers are available to Representatives for
client presentations, seminar presentations and assistance in product
selection.
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<PAGE>
Training:
- ---------
The Company has done extensive research into the training necessary to
accomplish a successful and profitable transition for the tax professional to
provide financial planning services to his or her clients. The research has
shown that the basic needs for training fall into the following categories:
. Technical (identifying client needs)
. Product (choosing a product)
. Operations (processing paperwork)
. Sales (making the recommendation)
. Marketing (proven marketing techniques)
. Motivation (overcoming fears)
. Practice Management (transition to financial planning)
In June, 1994, the Company completed work on the first in its series of many
comprehensive, integrated training programs (the Rep Success Program). These
programs will utilize various training media in order to maximize the success of
the program.
In addition to providing top quality training programs to enhance the skills of
the Representatives, the Company plans to provide Continuing Professional
Education (CPE) credit where available for CPAs, CFPs, EAs, CLUs, ChFCs and
other financial services designations.
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<PAGE>
OPERATIONS AND SOURCES OF REVENUE
The Company and its subsidiaries operate primarily in a single industry segment:
securities brokerage and related financial services. The following table sets
forth the Company's total revenues by major source:
SUMMARY OF COMPANY'S SOURCES OF REVENUE
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
1998 1997 1996
--------------- ------------- -------------
Commission Revenue
<S> <C> <C> <C>
Mutual Fund and UITs $ 75,289,791 $54,222,732 $44,960,556
Insurance Products 13,785,487 10,098,858 7,753,815
Stocks, Bonds and
Options 6,006,235 4,084,707 2,752,832
Partnership Interests 174,060 101,885 126,945
Trading 102,282 228,217 29,863
Portfolio Management Fees 17,049,614 11,070,632 6,480,537
Marketing and Education
Fees 7,319,004 6,396,111 4,182,201
Facility and Service Fees
from Affiliate 493,604 538,700 416,298
All Other 1,033,559 1,082,540 806,175
------------ ----------- -----------
Total Revenue $121,253,636 $87,824,382 $67,509,222
============ =========== ===========
</TABLE>
The Company had assets of $29,111,026, $19,747,631 and $16,950,759 for the years
ended September 30, 1998, 1997 and 1996, respectively. The Company had net
income of $1,427,312, $2,142,063 and $1,188,707 for the years ended September
30, 1998, 1997 and 1996, respectively.
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.
DEPENDENCE ON A SINGLE CUSTOMER
No material part of the Company's consolidated commission revenues is originated
by a single Representative.
38
<PAGE>
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 50
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.
HDVIS is a member of the Securities Investors Protection Corporation (SIPC).
SIPC provides protection to customers (but not shareholders) if a SIPC member
fails financially. Customers (NOT INCLUDING INVESTORS IN THE STOCK OF THE
COMPANY) of HDVIS that have securities and/or cash on deposit with HDVIS, would
be protected up to a maximum of $500,000, including up to $100,000 on claims for
cash.
HDVIS is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. Minimum net capital can never be lower than $250,000 or 6 2/3% of aggregate
indebtedness, as defined, whichever is greater. In computing net capital under
the Uniform Net Capital Rule, various adjustments are made to net worth to
exclude assets which are not readily convertible into cash and to conservatively
state other assets, such as a firm's position in the securities that it holds in
its own account. To that end, a deduction is made against the market value of
such securities to reflect the possibility of a market decline prior to their
disposition. For each dollar that net capital is reduced, by means of such
deductions or otherwise (for example, through operating losses or capital rules,
which are unique to the securities industry), financial restrictions are imposed
upon the Company which are more severe than those imposed
39
<PAGE>
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, 1998, 1997 and 1996 as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net capital $2,134,772 $1,992,987 $1,409,407
Required net capital ------------ ---------- ----------
407,842 381,470 392,490
---------- ---------- ----------
Excess net capital $1,726,930 $1,611,517 $1,016,917
========== ========== ==========
</TABLE>
H.D. VEST ADVISORY SERVICES, INC. - The financial planning industry is subject
to federal regulation under the Investment Advisor Act of 1940, requiring those
providing fee-based investment advice to register with the SEC. Most states
also have registration and reporting requirements. HDVAS is registered as an
investment advisor with the SEC and all 50 states, the District of Columbia, and
the Commonwealth of Puerto Rico.
COMPETITION
There is intense competition in the brokerage and insurance industry from large,
diversified, well-capitalized brokerage firms, financial institutions and other
organizations. Retail financial service providers and other financial
institutions are investing substantial capital in advertising and direct
solicitation of customers to increase their market share. In many cases the
Company is competing directly with these organizations for the same market
share.
EMPLOYEES
At September 30, 1998, the Company employed 301 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, 1999.
Employees by Department
As of September 30, 1998
<TABLE>
<S> <C>
Marketing and Technical Support 126
Administration and Other 42
Operations 119
Educational Services 14
---
Total Employees 301
===
</TABLE>
The majority of employees are college graduates and are securities licensed.
40
<PAGE>
PROPERTY
During January 1998, the Company relocated its corporate headquarters, occupying
approximately 80,000 square feet of office space in a new facility, located at
6333 North State Highway 161, Fourth Floor, Irving, Texas 75038. The Company's
lease expires in December 2007. The Company also occupies approximately 15,000
square feet of space used for warehouse, mail fulfillment and printing located
at 3225 Premier Street, Suite 150, Irving, Texas 75063.
MANAGEMENT
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, 1998.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---------------------------- ------------ ----------------------------
<S> <C> <C>
Herb D. Vest 54 Chairman of the Board of
Directors, President and
Chief Executive Officer
Barbara Vest 52 Representative Relations
Director, and Board of
Directors
Kenneth E. Reynolds 69 Board of Directors
Jack B. Strong 68 Board of Directors
Jerry M. Prater 56 Board of Directors
Phillip W. Mayer 56 Board of Directors
Lynn R. Neidermeier(1) 45 Board of Directors
Kenneth R. Petree 55 Board of Directors
Roger Ochs 37 Marketing Director
Shannon A. Soefje 39 Senior Vice President and
Corporate Secretary
Ted Sinclair 34 Vice President and Chief
Financial Officer
</TABLE>
(1) Resigned from the Board of Directors effective August 26, 1998. Ms.
Niedermeier accepted a position with Arthur Andersen LLP in Phoenix, and was
required to resign her position on the Board of Directors of an Arthur Andersen
LLP audit client.
DIRECTORS AND OFFICERS
41
<PAGE>
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
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. Mr.
Vest is a Certified Public Accountant, Certified Management Accountant,
Certified Financial Planner, Chartered Financial Analyst, Certified Fund
Specialist, Chartered Life Underwriter, Registered Health Underwriter, Chartered
Financial Consultant, Accredited Personal Financial Specialist and Certified
Employee Benefit Specialist. He holds certificates in Pension and Executive
Compensation and Estate Planning & Taxation from the American College. 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 from an unaccredited law school 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. Following
graduation from college in 1966, Mr. Vest served as an infantry officer in the
U.S. Army, including two 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 - 1998, 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 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
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<PAGE>
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 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
43
<PAGE>
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. Effective August 26, 1998, Ms. Niedermeier resigned from the Board of
Directors. Ms. Niedermeier accepted a position with Arthur Andersen LLP in
Phoenix, and was required to resign her position on the Board of Directors of an
Arthur Andersen LLP audit client.
KENNETH R. PETREE, BOARD OF DIRECTORS. Mr. Petree is a Development Officer for
the Central, North, West and East Texas Regions for Bank United, Texas. He
currently serves on the Board of Directors and chairs the Loan and Discount
Committee for the Fort Worth Economic Development Corporation, a non-profit
entity. Mr. Petree has extensive experience in the banking industry and has held
executive positions with Overton Bank and Trust, N.A., and Irving National Bank.
Mr. Petree was appointed to the Board of Directors to complete the term of Ms.
Niedermeier.
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, 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
44
<PAGE>
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.
45
<PAGE>
REMUNERATION OF DIRECTORS AND MANAGEMENT
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>
Name & Principal Fiscal Restricted Stock All Other
Position Year Salary Bonus Stock Awards Options(1) Compensation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb D. Vest 1998 900,000 2,340,148 - - 53,700
Chairman of the 1997 862,500 1,869,497 - - 45,774
Board of Directors, 1996 687,500 1,500,000 - - 21,996
President and Chief
Executive Officer(2)
Barbara Vest 1998 325,000 27,283 - - 29,500
Director and Director 1997 284,167 - - - 43,793
Of Representative 1996 - - - - 220,008
Relations
Roger Ochs 1998 150,000 194,898 - - -
Marketing Director 1997 150,000 155,791 - - -
1996 136,045 125,000 - - -
Shannon Soefje 1998 140,000 90,952 - - -
Senior Vice President and 1997 135,000 65,851 - - -
Corporate Secretary 1996 125,500 62,500 - - -
Ted Sinclair 1998 145,000 90,952
Vice President and Chief 1997 140,000 75,753 - - -
Financial Officer 1996 130,625 62,500 - - -
- -------------------------------------------------------------------------------------------------------------
</TABLE>
1) All officers are covered under a stock option plan (see Management - Stock
Options and Certain Transactions - Stock Options). No goals have been set
to issue common stock options for fiscal years ending September 30, 1998,
1997 or 1996. No awards were earned in 1998, 1997 or 1996.
2) See Management Agreements for a description of the terms of Mr. Vest's
current management agreement.
46
<PAGE>
CERTAIN TRANSACTIONS
ISSUANCE OF SERIES A PREFERRED STOCK
The Company issued 166,667 shares of non-voting Series A Convertible Preferred
Stock at a price of $6.00 in exchange for $1,000,002 in principal amount on a
note held by a Financial Services company. The price of the non-voting Series A
Convertible Preferred Stock was determined through consultation with RAF
Financial Corporation. This transaction was completed pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933 and was
effective September 30, 1991 (see Certain Transactions - Loan Agreements). In
August of 1997, Herb D. Vest, principal common shareholder, acquired these
shares in a private transaction.
The Company issued for cash 83,400 shares of non-voting Series A Preferred Stock
at a price of $6.00 per share, in exchange for $500,400, to a second Financial
Services company. This sale was effected pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933 and was effective
September 24, 1991.
TRANSACTIONS WITH MANAGEMENT
The terms of the transactions described below are as fair to the Company as
could have been made with unaffiliated parties where available and were approved
by the Company's independent and disinterested directors.
Future transactions between the Company and its affiliates will be approved by
the independent and disinterested directors and will be on terms no less
favorable than could be obtained from unaffiliated parties, where available.
MANAGEMENT AGREEMENTS
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. The agreement with Herb D. Vest
provides for a management fee per year including 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 38% 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 $2,340,148 bonus under the executive officer's compensation plan
in fiscal 1998. The Company paid a bonus of $1,869,497 and $1,500,000 in fiscal
1997 and 1996, respectively. Management fees under these agreements were
$3,240,148, $2,731,997 and $2,187,500 for the years ended September 30, 1998,
1997 and 1996, respectively.
The Company also had a consulting agreement with Ms. Barbara Vest
47
<PAGE>
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, 1998,
1997, and 1996 under these arrangements were approximately $325,000, $300,000,
and $200,000 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 1998 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 $493,604, $538,700 and $416,298 for the
years ended September 30, 1998, 1997, and 1996 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%. In June 1998, Mr. Vest reduced to
zero the outstanding principal balance, together with the accrued interest, of
his revolving line of credit from the Company. At September 30, 1998, Mr. Vest
had no outstanding principal or accrued interest outstanding on this line.
The Company has an agreement to provide Barbara Vest a revolving line of credit
in an amount not to exceed $700,000, collateralized by Ms. Vest's unrestricted
Company common stock in an amount equal
48
<PAGE>
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, 1998, Ms. Vest had drawn $407,643 in principal against the
line of credit. The Company has recorded $38,925 of accrued interest on this
line at September 30, 1998.
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 cents for each dollar contributed, up to an annual limit of $1,848 per
employee. Company contributions to the 401(k) retirement plan for the fiscal
years ended September 30, 1998, 1997 and 1996 were $106,042, $87,776 and
$55,077, respectively.
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
49
<PAGE>
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 are determined by the Chief Executive
Officer of the Company as allocable to a particular participant. This
restricted stock is credited to the participant's account and will be vested and
distributable upon the first to occur of the following events: (1) Long term
disability, death of the participant or attaining the preselected Deferral Date;
or (2) The date of a "change-in-control" of the Company (as that term is defined
in the executive officer's deferred compensation plan). No stock was earned
under the Executive Officer's Compensation Plan for the fiscal year ended
September 30, 1998. 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 goals have been
set to issue common stock options for fiscal years ending September 30, 1998,
1997 or 1996. No awards were earned in 1998, 1997 or 1996.
STOCK OPTIONS
The Board of Directors of the Company adopted a Stock Option Plan as of October
1, 1987, in order to attract, retain, motivate and encourage stock ownership by
employees, officers and directors of the Company and its subsidiaries. The
Stock Option Plan is administered by a stock option committee (Committee),
appointed by the Chief Executive Officer, consisting of one to three members.
The members of the Committee shall be eligible to receive options under the
Stock
50
<PAGE>
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.
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; 49,948 of these options remain
outstanding as of September 30, 1998.
During 1992, options covering 460,000 shares were granted at an option price
ranging from $2.50 to $6.00 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, 1998. 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, 1998.
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
51
<PAGE>
on the date of issuance and to be issued quarterly to the independent directors.
During June 1998, the Board of Directors resolved to eliminate the stock options
for the independent directors. At September 30, 1998, 76,000 options were
outstanding. During June 1998, Mr. Vest purchased 64,000 of these options from
two independent directors.
As a result of the foregoing, options covering 385,948 shares of common stock,
with exercise prices ranging from $2.38 to $8.50 per share have been issued to
officers, directors, and employees of the Company. The following table provides
information with respect to the named officers and directors concerning the
options outstanding as of September 30, 1998:
Aggregated Option Exercises in Last Fiscal Year
End and Fiscal Year End Option Values
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Shares Number of Unexercised Options Value of Unexercised,
Acquired Held At In-The-Money Options at Fiscal
Through Fiscal Year End Year End
--------------- --------
Name Options Value Exercisable Unexercisable Exercisable Unexercisable
Exercised Realized (1) (2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb D. Vest - - 359,148 - 735,080 -
Wesley T. Sinclair - - 1,456 - - -
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on September 30, 1998 and the exercise price of the options.
(2) The current fair market value of the stock at September 30, 1998 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 (i)to oversee the Company's system of internal control and
the financial reporting process; (ii)to review the internal audit function;
(iii)to approve the selection of the Company's independent accountants; and
(iv)to review audit reports. The members of the Audit Committee during fiscal
1998 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 employees of the Company. As of September 30, 1998, the
Compensation Committee are the members of the Board of Directors: Herb D. Vest,
Barbara Vest, Kenneth R. Petree, Jack Strong, Kenneth Reynolds, Jerry Prater and
Phillip Mayer.
52
<PAGE>
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, 1998 is as follows:
<TABLE>
<CAPTION>
Name Title Compensation
---- ----- ------------
<S> <C> <C>
Herb D. Vest Chairman of the Board of $53,700
Directors
Barbara Vest Director 29,500
Jack Strong Director and Member-Audit 33,500
Committee
Kenneth Reynolds Director 29,500
Jerry Prater Director and Chairman of the 35,500
Audit Committee
Phillip Mayer Director and Member-Audit 33,500
Committee
Lynn Niedermeier Director 27,042
Kenneth Petree Director 2,458
</TABLE>
Prior to June 1998 the independent Board members were 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.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's By-Laws contain certain indemnification provisions for its
officers and directors whereby each is to be indemnified to the fullest extent
permitted by Texas law for expenses and liabilities arising out of litigation by
reason of the fact that such person was an officer or director of the Company.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
53
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following information is furnished as of September 30, 1998, 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 3,137,478 (1) 53%
Barbara Vest 1,475,481 27%
Shannon A. Soefje 1,339 *
Kenneth E. Reynolds 550 *
Jack B. Strong 100 *
W. Ted Sinclair 1,481 *
Roger Ochs 2,324 *
Officers and Directors
as a Group 4,618,753 78%
</TABLE>
* Less than one percent.
(1) Includes 2,611,663 of Outstanding Common Stock, 314,000 Common Stock
Options with an exercise price ranging from $2.38 to $5.06, 45,148 Common
Stock Options with an exercise price of $8.50, and 166,667 Exercisable
Convertible Series A Preferred Stock with a conversion rate of one
preferred share for one share of common stock. Ownership percentage
excluding Common Stock Options and the Convertible Series A Preferred
Stock is 48%.
54
<PAGE>
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Percent Shares Owned Percent
Shares Owned of Shares Upon Completion Of
------
Owner Before Offering Of Offering (1) Shares
- ----- ------------------- --------------------- ---------
<S> <C> <C> <C> <C>
Herb D. Vest (2) (3) (4) 2,611,663 48% 2,611,663 48%
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
Barbara Vest 1,475,481 27% 1,475,481 27%
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
Other Shareholders (2) 1,336,197 25% 1,336,197 25%
</TABLE>
(1) Assumes that no stock options are exercised .
(2) Assumes that the holders of the 250,067 shares of Preferred Stock,
including 166,667 shares held by Herb D. Vest, do not exercise their
conversion privileges.
(3) Not included in this number are options to purchase 314,000 shares of the
Common Stock of the Company, which are presently exercisable at an exercise
price ranging from $2.38 to $5.06.
(4) Not included in this number are options to purchase 45,148 shares of the
Common Stock of the Company which are presently exercisable at an exercise
price of $8.50.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 5,423,341 shares of common stock outstanding as of September 30, 1998,
4,059,554 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 2,490,272 shares, which are subject to Rule 144. Mr. Vest
acquired the majority of his shares in February 1987. Barbara Vest, an employee
and Director of the Company owns 1,464,188 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.
55
<PAGE>
DESCRIPTION OF SECURITIES
REPRESENTATIVES DEFERRED COMPENSATION PLAN
In March 1995, the Board of Directors established the H.D. Vest Representatives
Deferred Compensation Plan ("the Plan" - capitalized terms used in this section
have specific meanings as defined in the Plan). The Plan is an optional, non-
qualified, unfunded, deferred compensation plan which is available exclusively
to the Company's Representatives who are independent contractors and neither
employees nor officers of the Company. The Plan provides Representatives an
opportunity to defer receipt of Compensation on a pre-tax basis for selected
periods, thus postponing recognition of income otherwise currently taxable, and
subsequently receiving the deferred compensation plus a Matching Contribution.
At the end of each Deferral Period, the Deferral Amount and the related Matching
Contribution will be paid to the Participant.
DEFERRAL OPTIONS
- ----------------
Participants may defer up to one hundred percent (100%) of their Net
Compensation and may elect to defer Net Compensation for one of three Deferral
Periods (36, 60 or 84 months). Amounts deferred by Participants and the
Company's Matching Contribution will ultimately be paid to the Participant
pursuant to the Plan in the form of cash.
PARTICIPATION
- -------------
Enrollment in the Plan is optional. The Initial Enrollment Period will be a
period of 60 days commencing January 1 of each year the Plan is made available
or commencing three days after the Effective Date, whichever is later.
CHANGES IN ELECTIONS
- --------------------
The Annual Election Period is a 60 day period commencing January 1 of each
year.
Representatives who become affiliated with the Company subsequent to the Initial
Enrollment Period shall not be eligible to become a Participant until the next
Initial Enrollment Period, if any, following the date that such Representative
becomes affiliated with the Company.
Elections to increase Deferral Amounts may be made by written notice a minimum
of thirty (30) days prior to the beginning of each calendar quarter and are
effective on a prospective basis beginning the first Compensation Date of the
next calendar quarter. A Compensation Date is the fifth business day following
the first and fifteenth of each month (or such other dates the Company
establishes) on which Net Compensation is paid to Representatives.
56
<PAGE>
DEFERRAL ACCOUNTS
- -----------------
In accordance with the Participant's Plan elections, the Administrative
Committee of the Plan will credit each Participant's Account with the amount of
Cash Equivalents. A Cash Equivalent is a hypothetical cash amount.
MATCHING CONTRIBUTIONS
- ----------------------
Depending on the Deferral Period and Deferral Amount selected by the
Participant, the Company shall allocate a Matching Contribution to such
Participant's Account. A Matching Contribution is an amount which the Company
credits as a Cash Equivalent to a Participant's Account. Prior to any calendar
year, the Company may establish a Matching Contribution for aggregate total
Deferral Amounts elected by all Participants for such year.
DISTRIBUTIONS
- -------------
The distribution of each Deferral Amount and Matching Contribution will be made
on the 36th, 60th or 84th month anniversary of the deferral as determined by the
election in effect at the time of the deferral. The duration of such
Distribution Period shall be the same number of consecutive calendar months as
the Deferral Period which it immediately follows.
RIGHTS
- ------
All Accounts are unfunded and paid from the Company's general assets. As
general unsecured obligations, these accounts will be senior in rank to the
Common Stock listed on NASDAQ-NMS. Participants maintain a position as general
creditors of the Company with respect to their Accounts and will have no right
to receive either the Deferral Amount or the Company's Matching Contribution
until they are paid the applicable Distribution. If the Representative's
affiliation with the Company terminates prior to the expiration of a Deferral
Period, for reasons other than death, Disability, or attaining age 65, the
Representative will forfeit all Company Matching Contributions.
The Company has obtained an opinion from Arthur Andersen LLP concluding that
amounts deferred under the Plan will receive deferred tax treatment and that
such amounts plus Matching Contributions will be taxable as received during the
Distribution Period. In the event of a successful challenge by the IRS, the
Company may choose to amend the Plan or terminate the Plan and refund all
Deferral Amounts without Matching Contributions.
57
<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby are being distributed exclusively by H.D. Vest
Investment Securities, Inc., a wholly-owned subsidiary of the Company. No
selling discount, commissions, or other sales charges will be received by HDVIS
in connection with the sale of the securities being offered hereunder. A bona
fide market exists for the Company's Common Stock as of the effective date of
this prospectus and accordingly, pursuant to Schedule E of the Bylaws of the
NASD, (Schedule E) no independent underwriter is being utilized by the Company
in connection with this offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and registrar for the Common Stock is Harris Trust and
Savings Bank, whose physical address is 1601 Elm Street, CB39 Thanksgiving
Tower, Suite 2320, Dallas, Texas.
LEGAL PROCEEDINGS
Beginning in September 1997, claims were made against the Company or its
subsidiary in regard to the activities of a former Registered Representative.
As of September 30, 1998 the claimants sought recovery for alleged out-of-pocket
losses totaling approximately, $990,000. As of September 30, 1998, the Company
or the subsidiary has paid approximately $260,000 in settlement of approximately
$550,000 of the alleged out-of-pocket losses.
At September 30, 1998, the Company or its subsidiary has accrued approximately,
$560,000 for the estimated settlement costs and additional legal expenses
anticipated to be incurred related to these claims.
Subsequent to September 30, 1998 additional claims of approximately $350,000
were made against the Company or its subsidiary. Additionally, subsequent to
September 30, 1998 the Company or its subsidiary paid approximately $280,000 to
settle approximately $450,000 in remaining claims.
58
<PAGE>
In connection with the same matter, and in order to avoid potential claims and
litigation, the Company paid approximately $45,000 during fiscal 1998 to
individuals with potential claims estimated to be approximately $270,000.
Subsequent to September 30, 1998 the Company or its subsidiary paid
approximately $52,000 to individuals with potential claims estimated to be
approximately $140,000.
Subsequent to November 17, 1998, the Company or its subsidiary paid
approximately $312,000 to settle approximately $340,000 of asserted claims.
These settlements disposed of the pending litigation and claims related to the
matter described above.
The Company is currently unable to determine the likelihood that additional
material claims arising from this Registered Representative's conduct will be
made. Although the Company believes that a defense to any additional claims
exists, and could vigorously defend such claims if necessary, a negative result
in multiple claims could have a material adverse impact on the Company.
In connection with the conduct of a former Registered Representative in 1992 and
1993, a group of the former Representative's clients filed a civil action suit
against HDVIS and the former Registered Representative alleging violations of
securities laws, fraud, conversion and related causes of action. In June 1995,
the Company reimbursed the plaintiffs approximately $450,000 for out-of-pocket
losses plus interest. In September 1996, an arbitration panel awarded the
plaintiffs approximately $1.7 million. A fidelity bond issued in favor of HDVIS
covered approximately $250,000 of the judgment. In September 1997, the Company
paid the plaintiffs' award and ended 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.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed upon
for the Company by Malouf Lynch Jackson Kessler & Collins, A Professional
Corporation, Dallas, Texas.
EXPERTS
The opinion regarding the deferred tax treatment of amounts deferred under the
Plan referred to in this prospectus and elsewhere in the Registration Statement
has been rendered by Arthur Andersen LLP, independent public accountants, and
has been referred to herein in reliance upon the authority of such firm as
59
<PAGE>
experts in giving said opinion.
The financial statements included in this prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants and are included herein in reliance upon the authority of
said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the Securities
Act of 1933, as amended, with respect to the shares of Common Stock offered by
this Prospectus. For further information with respect to the Company and the
Common Stock, reference is made to such registration statement, including the
exhibits thereto and the financial statements filed as part thereof. Statements
contained in this Prospectus as to the content of any contracts or other
documents are necessarily incomplete, and in each instance reference is made to
the copy of such contract or other documents filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. Copies of these documents may be inspected by anyone without
charge at the public reference facilities maintained by the Commission at its
principal office located at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C., 20549. Copies of all such material may be obtained from the Public
Reference Section of the Commission upon payment of prescribed fees.
60
<PAGE>
Financial Statements and Supplementary Data
-------------------------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Statements of Financial F-2 & F-3
Position - September 30, 1998 and 1997
Consolidated Statements of Operations - F-4
Three years ended September 30, 1998,
1997, and 1996
Consolidated Statements of Shareholders' F-5
Investment - Three years ended September 30,
1998, 1997, and 1996
Consolidated Statement of Cash Flows - F-6
Three years ended September 30,
1998, 1997, and 1996
Notes to Consolidated Financial Statements F-7
</TABLE>
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Directors of H.D. Vest, Inc.:
We have audited the accompanying consolidated statements of financial
position of H.D. Vest, Inc. (a Texas Corporation) as of September 30, 1998 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, 1998. 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
November 17, 1998
F-1
<PAGE>
Page 1 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,204,362 $ 6,384,992
Commissions and accounts
receivable 9,201,486 6,642,200
Current portion - notes receivable
related parties 97,159 590,320
Receivable from affiliate 138,496 142,145
Prepaid expenses 739,061 503,738
----------- -----------
Total current assets 19,380,564 14,263,395
----------- -----------
Property and equipment, net of
accumulated depreciation
of $2,194,457 and $1,485,366
at September 30, 1998 and 1997,
respectively 6,313,281 2,755,457
Notes receivable - related parties,
net of current portion 349,409 2,127,613
Intangible and other assets, net of
accumulated amortization 3,067,772 601,166
----------- -----------
Total assets $29,111,026 $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,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 8,629,878 $ 3,930,651
Amounts due on clearing transactions 469,462 539,538
Commissions payable 4,889,130 4,738,908
----------- -----------
Total current liabilities 13,988,470 9,209,097
----------- -----------
Obligations under capital leases,
excluding current installments 2,506,506 1,016,257
Other noncurrent liabilities 2,946,702 1,323,375
Unearned revenue 1,279,410 1,150,341
Shareholders' investment:
Preferred stock, $6 par value;
10,000,000 shares authorized,
250,067 shares issued and outstanding
in both 1998 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,
1998 and 1997 271,167 271,167
Additional paid-in capital 5,154,934 5,113,334
Retained earnings 1,463,435 163,658
----------- -----------
Total shareholders' investment 8,389,938 7,048,561
----------- -----------
Total liabilities and
shareholders' investment $29,111,026 $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,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Commissions $ 95,357,855 $68,736,399 $55,624,011
Portfolio management fees 17,049,614 11,070,632 6,480,537
Marketing and education fees 7,319,004 6,396,111 4,182,201
Facility and service fee
from affiliate 493,604 538,700 416,298
Other 1,033,559 1,082,540 806,175
------------ ----------- -----------
Total revenues 121,253,636 87,824,382 67,509,222
------------ ----------- -----------
Expenses:
Commissions 68,152,972 48,384,293 38,254,754
Portfolio management fees 11,263,667 7,375,367 4,109,284
General and administrative 27,803,227 19,394,200 16,072,510
Representative development 8,837,451 7,485,266 6,506,014
Representative recruiting 2,231,364 1,677,594 773,909
Interest 294,981 222,271 96,161
------------ ----------- -----------
Total expenses 118,583,662 84,538,991 65,812,632
------------ ----------- -----------
Net income before state
and federal income tax 2,669,974 3,285,391 1,696,590
Provision for state and federal
income tax 1,242,662 1,143,328 507,883
------------ ----------- -----------
Net income $ 1,427,312 $ 2,142,063 $ 1,188,707
============ =========== ===========
Net income
per common share-basic $ 0.24 $ 0.37 $ 0.20
============ =========== ===========
Net income
per common share-dilutive $ 0.24 $ 0.37 $ 0.20
============ =========== ===========
Weighted average number of
common shares outstanding 5,423,341 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, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Shares of Stock Additional Retained
Outstanding Preferred Common Paid-in Earnings
--------------------------
Preferred Common Stock Stock Capital (Deficit) Total
--------------- --------- ----------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Capital Contribution - - - - 41,600 - 41,600
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 1,427,312 1,427,312
--------------- --------- ----------- --------- ----------- ----------- ----------
Balance at
September 30, 1998 250,067 5,423,341 $1,500,402 $271,167 $5,154,934 $ 1,463,435 $8,389,938
=============== ========= =========== ========= =========== =========== ==========
</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,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,427,312 $ 2,142,063 $ 1,188,707
Reconciliation of net income to
net cash provided by operating activities
Depreciation and amortization 1,431,617 933,014 901,093
Loss on sale of assets 282,783 21,564 120,716
Non-cash compensation expense 41,600 32,500 -
Rent abatement 285,083 - -
Changes in assets and liabilities
Commissions and accounts receivable (2,559,286) (2,132,781) (1,179,550)
Deferred tax 679,586 480,370 (480,370)
Receivable from affiliate 3,649 (11,865) (31,351)
Prepaids and other assets (235,323) (415,821) (72,702)
Payable to officers and directors - - (125,006)
Accounts payable and accrued expenses 3,011,066 (1,727,263) 2,414,075
Commissions payable 150,222 1,421,812 1,094,661
Amounts due on clearing transactions (70,076) (190,053) 60,404
Unearned revenue 129,069 219,231 (109,892)
----------- ----------- -----------
Net cash provided by operating activities 4,577,302 772,771 3,780,785
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs to acquire/develop software (2,200,982) - -
Additions to other assets (11,580) (211,645) (69,372)
Purchases of property and equipment (2,355,885) (988,061) (315,179)
Proceeds from sale of assets 48,670 57,850 10,000
----------- ----------- -----------
Net cash used for investing activities (4,519,777) (1,141,856) (374,551)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (127,535) (127,535) (127,535)
Advances from deferred compensation plan 1,438,317 576,022 518,286
Advances on notes receivable to related
parties (485,670) (397,804) (463,713)
Payments on deferred compensation plan (13,112) - -
Collection on notes receivable from
related parties 2,757,035 347,402 338,017
Payments on notes payable and
capital lease obligations (807,190) (378,854) (319,503)
----------- ----------- -----------
Net cash provided by (used for)
financing activities 2,761,845 19,231 (54,448)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,819,370 (349,854) 3,351,786
CASH AND CASH EQUIVALENTS,
beginning of year 6,384,992 6,734,846 3,383,060
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 9,204,362 $ 6,384,992 $ 6,734,846
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION - H.D. Vest, Inc. (the Company) is a Texas corporation formed
in December 1986, to manage the various financial services divisions of the H.D.
Vest Financial Services group. Through its wholly-owned subsidiaries, the
Company provides financial services through tax and accounting professionals.
The Company's services are designed to assist in making individual tax and
accounting professionals financial service centers for their clients.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
(B) CASH AND CASH EQUIVALENTS - Included in cash and cash equivalents are cash
balances and highly liquid investments with an original maturity of three months
or less.
(C) COMMISSIONS AND ACCOUNTS RECEIVABLE - Commissions and accounts receivable
is stated net of certain allowances for doubtful accounts. The allowances at
September 30, 1998 and 1997 were $811,229 and $658,154, respectively.
(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, 1998 and 1997, property
and equipment consisted of:
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Leasehold improvements $ 908,448 $ 145,081
Computer equipment 3,089,547 1,714,334
Furniture and fixtures 3,697,377 1,762,492
Telephone equipment 812,366 618,916
Less accumulated depreciation (2,194,457) (1,485,366)
----------- -----------
Total property and equipment, net $ 6,313,281 $ 2,755,457
=========== ===========
</TABLE>
F-7
<PAGE>
Other assets consists 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, 1998 and 1997, other assets and accumulated
amortization are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997
------------ ----------
<S> <C> <C>
Software Development 3,575,554 882,270
Other assets $ 398,764 $ 639,634
Accumulated amortization (906,546) (920,738)
---------- ---------
Total other assets, net $3,067,772 $ 601,166
========== =========
</TABLE>
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
assessment of possible impairment is based on the ability to recover the
carrying amount of the asset from expected future cash flows on an undiscounted
basis. If the assessment indicates that the carrying amount of the asset
exceeds the undiscounted cash flows an impairment has occurred. The impairment
is calculated as the total by which the carrying amount of the asset exceeds its
fair value. The fair value of long-lived assets is estimated based on quoted
market prices, if available, or the expected total value of cash flows, on a
discounted basis.
(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).
(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.
F-8
<PAGE>
(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.
(I) INCOME TAXES - Deferred income taxes are provided for temporary differences
between the tax basis 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) SUPPLEMENTAL CASH FLOW INFORMATION - Cash interest payments for the years
ended September 30, 1998, 1997 and 1996 were $294,016, $222,271 and $96,161
respectively. Cash payments for federal income taxes for the years ended
September 30, 1998 and 1997 were $1,187,265 and $1,463,950 respectively. During
the fiscal years ended September 30, 1998, 1997 and 1996 the Company acquired
assets through capital leases amounting to $3,219,053, $828,949 and $690,191,
respectively.
(K) 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.
(L) 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.
F-9
<PAGE>
2) 401(K) RETIREMENT PLAN
In March 1993, the Company formed a 401(k) retirement plan for eligible
employees. To be eligible for the plan an employee must be employed on a
continuous full-time basis for one year and work a minimum of 40 hours per week.
The Company matches contributions made by employees at a rate of 20 cents for
each dollar contributed, up to an annual limit of $1,848 per employee. Company
contributions to the plan for the fiscal years ended September 30, 1998, 1997
and 1996 were $106,042, $87,776 and $55,077, respectively.
3) FINANCING ARRANGEMENTS
In September 1997, the Company entered into a lease line of credit with a bank
under which the Company may finance leases up to an arrangement amount 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, as defined. The collateral for each lease will be the
equipment it finances.
In February 1998, the Company also renewed its line of credit with a bank for
$500,000. The line bears interest, payable monthly, at prime plus 1% (9.25% as
of September 30, 1998). 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, 1999. At
September 30, 1998, no amount had been drawn against the line.
4) EARNINGS PER SHARE
Basic earnings per share (basic EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding.
The number of shares used to compute basic EPS for the years ended September 30,
1998 and 1997 was 5,423,341. Diluted earnings per share (diluted EPS) is
computed similarly to the computation of basic EPS except that the denominator
is increased to include the number of additional common shares that would have
been outstanding if the potential dilutive common shares had been issued. The
number of shares used to compute diluted EPS for the years ended September 30,
1998 and 1997 were 5,537,762 and 5,442,949, respectively.
F-10
<PAGE>
Options to purchase 49,948 shares of common stock at $8.50 per share were
outstanding during the years ended September 30, 1998 and 1997. These options
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of outstanding common
shares.
There were 250,067 shares of convertible preferred stock outstanding during the
year ended September 30, 1998 and 1997 not included in the computation of
diluted EPS because the conversion had an anti-dilutive effect on EPS.
5) 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, 1998 and 1997 the capitalized basis of the
leases included in property and equipment was approximately $5,136,889 and
$1,592,226 and accumulated amortization applicable to the leased equipment was
approximately $1,288,933 and $903,144, respectively.
In August 1997, the Company entered into a ten year operating lease agreement
for new office space of approximately 80,000 square feet in a new facility in
Irving, Texas. In January 1998 the Company moved its corporate headquarters to
the new office space.
F-11
<PAGE>
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, 1998, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
<S> <C> <C>
Year ended September 30:
1999 $1,425,831 $ 2,233,363
2000 1,112,700 1,988,810
2001 791,902 1,908,218
2002 671,829 1,896,105
2003-thereafter 179,128 9,468,815
---------- -----------
Total minimum lease payments 4,181,390 $17,495,311
===========
Less amount representing interest 544,964
----------
Present value of net minimum
capital lease payments 3,636,426
Less current installments
included in accounts payable 1,129,920
----------
Obligations under capital
leases, excluding current
installments $2,506,506
==========
</TABLE>
Rent expense for the years ended September 30, 1998, 1997 and 1996 was
approximately $2,149,893, $796,991 and $667,126, respectively.
(B) LITIGATION AND CONTINGENCIES - Beginning in September 1997, claims were
made against the Company or its subsidiary in regard to the activities of a
former Registered Representative. As of September 30, 1998 the claimants sought
recovery for alleged out-of-pocket losses totaling approximately, $990,000. As
of September 30, 1998, the Company or the subsidiary has paid approximately
$260,000 in settlement of approximately $550,000 of the alleged out-of-pocket
losses.
At September 30, 1998, the Company or its subsidiary has accrued approximately,
$560,000 for the estimated settlement costs and additional legal expenses
anticipated to be incurred related to these claims.
F-12
<PAGE>
Subsequent to September 30, 1998 additional claims of approximately $350,000
were made against the Company or its subsidiary. Additionally, subsequent to
September 30, 1998 the Company or its subsidiary paid approximately $280,000 to
settle approximately $450,000 in remaining claims.
In connection with the same matter, and in order to avoid potential claims and
litigation, the Company paid approximately $45,000 during fiscal 1998 to
individuals with potential claims estimated to be approximately $270,000.
Subsequent to September 30, 1998 the Company or its subsidiary paid
approximately $52,000 to individuals with potential claims estimated to be
approximately $140,000.
Subsequent to November 17, 1998, the Company or its subsidiary paid
approximately $312,000 to settle approximately $340,000 of asserted claims.
These settlements disposed of the pending litigation and claims related to the
matter described above.
The Company is currently unable to determine the likelihood that additional
material claims arising from this Registered Representative's conduct will be
made. Although the Company believes that a defense to any additional claims
exists, and could 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 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.
F-13
<PAGE>
In July 1995, H.D. Vest Investment Securities, Inc. and the Securities and
Exchange Commission entered into a settlement agreement with regards to an on-
going investigation concerning a former Registered Representative. 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 connection with this matter, a group of the former Representative's clients
filed a civil action suit against HDVIS and the former Registered Representative
alleging violations of securities laws, fraud, conversion and related causes of
action. In June 1995, the Company reimbursed the plaintiffs approximately
$450,000 for out-of-pocket loses plus interest. In September 1996, an
arbitration panel awarded the plaintiffs approximately $1.7 million. A fidelity
bond issued in favor of HDVIS covered approximately $250,000 of the judgement.
In September 1997, the Company paid the plaintiffs' award and ended the
litigation.
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.
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 1998, 1997, and 1996, 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
(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, 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net capital $2,134,772 $1,992,987 $1,409,407
Required net capital 407,842 381,470 392,490
---------- ---------- ----------
Excess net capital $1,726,930 $1,611,517 $1,016,917
========== ========== ==========
</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 including 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 38% 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 $2,340,148 bonus under the plan in fiscal 1998. The Company paid
bonuses of $1,869,497 in fiscal 1997 and $1,500,000 in fiscal 1996. Management
fees under these agreements were $3,240,148, $2,731,997 and $2,187,500 for the
years ended September 30, 1998, 1997 and 1996, respectively.
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%. As of September 30, 1998, Herb D.
Vest had reduced to zero the outstanding principal balance, together with the
accrued interest, of his revolving line of credit from the Company.
F-15
<PAGE>
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, 1998, 1997, and
1996, under these arrangements were approximately $325,000, $300,000, and
$200,000, 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, 1998, Ms. Vest
had drawn $407,643 in principal against the line of credit. As of September 30,
1998, the Company has recorded $38,925 of accrued interest on this line of
credit.
H.D. Vest Insurance Services (HDVIns) is a sole proprietorship owned by Herb D.
Vest. HDVIns general insurance agency appoints Representatives with various
insurance companies to enable them to sell insurance products to their clients.
The Company, in accordance with the terms of a facilities and services
agreement, provides certain management and other services to HDVIns and is paid
a fee for these services. The value of these services for fiscal year ended
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 $493,604, $538,700 and $416,298 for the
years ended September 30, 1998, 1997, and 1996 respectively, for management
services rendered. As of September 30, 1998, the Company had a receivable of
approximately $138,496 from HDVIns.
F-16
<PAGE>
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. In June 1998, Herb D. Vest,
principal common shareholder, purchased options to acquire 64,000 shares of the
Company's restricted common stock with exercise prices between $2.38 and $7.63
from two directors of the Company's Board of Directors. Generally accepted
accounting principles 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, net of tax effect,
and 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:
<TABLE>
<CAPTION>
September 30,
---------------------------------
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Current:
Federal $ 433,801 $ 407,628 $ 692,741
State 129,275 255,330 295,512
Deferred:
Federal 643,619 411,458 (411,458)
State 35,967 68,912 (68,912)
---------- ---------- ---------
$1,242,662 $1,143,328 $ 507,883
========== ========== =========
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of
federal 7.5 9.9 13.4
Other 5.1 (9.1) 10.2
Alternative minimum
taxes - - (5.9)
Reversal of deferred
tax asset valuation
allowance - - (6.0)
Utilization of net
operating loss
carryforward - - (15.8)
---------------------
Effective rate 46.6% 34.8% 29.9%
=====================
</TABLE>
The following table presents the components of the net deferred tax liability:
<TABLE>
<CAPTION>
Deferred
October 1, Expense September 30,
1997 (Benefit) 1998
---- -------- ----
<S> <C> <C> <C>
Research and development - 779,070 (779,070)
Depreciation (149,318) 66,167 (215,485)
Unearned revenue - (82,557) 82,557
Other 149,318 (83,094) 232,412
--------- -------- ---------
Net deferred tax
liability $ - $679,586 $(679,586)
========= ======== =========
</TABLE>
The deferred tax liability is included in other noncurrent liabilities in the
financial statements.
F-18
<PAGE>
10) STOCK OPTION PLANS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
(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.
The Company has a Nonqualified Stock Option Plan (the 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, 1998, 299,948 options are outstanding under the Nonqualified Plan.
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. During June 1998, the Board of Directors resolved to
eliminate the stock options for the independent directors. At September 30,
1998, 76,000 options were outstanding. During June 1998, Mr. Vest purchased
64,000 of these options from two independent directors.
F-19
<PAGE>
A summary of the status of the Company's outstanding stock options as of
September 30, 1998, 1997, and 1996 and changes during the years then ended are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ----------
- --------------------------------------------------------------------------------------
Exercise Exercise Exercise
Shares price (1) Shares price (1) Shares price(1)
--------- --------- -------- ---------- ---------- --------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 378,306 $5.23 362,306 $5.25 470,450 $5.63
Granted 8,000 6.26 16,000 4.74 16,000 3.19
Exercised - - - - - -
Expired and - -
cancelled (358) - (124,144) 6.39
Outstanding at
end of year 385,948 5.25 378,306 5.23 362,306 5.25
Exercisable at
end of year 385,948 5.25 328,000 4.73 62,000 3.62
Fair value of
options granted $4.93 $ 3.82 $ 2.60
- -------------------------------------------------------------------------------------
</TABLE>
1) weighted average per option granted.
The 385,948 options outstanding as of September 30, 1998 have exercise prices
between $2.38 and $8.50, with a weighted average exercise price of $5.25 and a
weighted average remaining contractual life of 10 years. All of these options
are exercisable as of September 30, 1998.
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 1998 and 1997 for both the Nonqualified Plan and
Directors Plan.
1998 1997
---- ----
Risk free interest rate 5.86% 6.50%
Expected dividend yields - -
Expected lives in years 10 10
Expected volatility 66.77% 70.17%
F-20
<PAGE>
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:
1998 1997
------ ------
Net income - as reported $1,427,312 $2,142,063
Net income - pro forma 1,387,872 2,127,088
Earnings per share - as reported .24 .37
Earnings per share - pro forma .23 .37
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, 1998 and 1997 were $2,385,178 and
$1,167,165, respectively, and are included in other noncurrent liabilities and
accrued expenses. As of September 30, 1998 the Company had paid $10,458 to
participants representing deferred amounts and $2,654 representing matching
contributions.
Matching contributions of amounts deferred under the Plan must be accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants. Such increases in commission expense will have an
adverse effect on the net income of the Company. To the extent that
Representatives elect to defer receipt of compensation under the Plan, such
compensation will ultimately be paid to the participant in the form of cash.
Matching contributions accrued as of September 30, 1998 and 1997 approximated
$364,913 and $156,200, respectively, and are included in other noncurrent
liabilities.
F-21
<PAGE>
12) SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to November 17, 1998, the Company or its subsidiary paid
approximately $312,000 to settle approximately $340,000 of asserted claims.
These settlements disposed of the pending litigation and claims discussed above
in Note 5(b).
F-22
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized in connection with this
offering to give any information or to make any representation other than that
as contained in this Prospectus and if given or made such information or
representation must not be relied upon as having been authorized by the Company.
This Prospectus does not constitute an offer or solicitation in any State or
other jurisdictions to any person to whom it is unlawful to make such an offer
or solicitation in such State or jurisdiction.
- --------------------------------------------------------------------------------
------------------------------------
Deferred Compensation Plan Units
H.D. Vest, Inc.
------------------------------------
Offering Price: Market Value
------------------------------------
-----------------
Prospectus
-----------------
December 30, 1998
------------------------------------
H.D. Vest Investments
Securities, Inc.
6333 North State Highway 161
Irving, Texas 75038
(972) 870-6000
------------------------------------
- --------------------------------------------------------------------------------
This Company, H.D. Vest, Inc., plans to furnish annual reports including audited
financial statements, to the shareholders. The Company will issue unaudited
interim reports to its shareholders on a quarterly basis.
- --------------------------------------------------------------------------------
<PAGE>
H.D. VEST, INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses Of Issuance And Distribution (estimated).
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
a. SEC and NASD Filing Fee . . . . . . . . . . . $ 10,000
b. Blue Sky Fees and Expenses . . . . . . . . . 3,000
c. Printing and Engraving Costs . . . . . . . . 10,000
d. Legal Fees . . . . . . . . . . . . . . . . . 102,000
e. Accounting Fees. . . . . . . . . . . . . . . 100,000
f. Miscellaneous . . . . . . . . . . . . . . . 25,000
------------
Total . . . . . . . . . . . . . . . . . . . $ 250,000
</TABLE>
Item 14. Indemnification Of Directors And Officers.
- ----------------------------------------------------
The By-Laws of the Company and each of its subsidiaries contain provisions which
provide for the indemnification of directors, officers, and other employees or
agents of the Company properly appointed to serve in an official capacity who,
while acting in good faith, in the best interests of the Company and within the
scope of their offices, are or are threatened to be named a defendant or
respondent in a civil or criminal action. The extent of the indemnification is
limited to judgements, penalties, fines, settlements and reasonable expenses
actually incurred.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Item 15. Recent Sales Of Unregistered Securities.
- --------------------------------------------------
The Company issued 166,667 shares of Series A Preferred Stock at a price of
$6.00 in exchange for $1,000,002 in principal amount on the note held by Kemper
Financial Services, Inc. This transaction was completed pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933 and
was effective September 30, 1991. In August of 1997, Herb D. Vest, principal
common shareholder, acquired these shares in a private transaction.
The Company sold 83,400 shares of Series A Preferred Stock at a price of $6.00
per share to Oppenheimer Management Corp. This sale was effected pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933 and
was effective September 24, 1991.
The Company issued 22,800 shares of Common Stock, to certain officers of the
Company, as compensation for services to the
1
<PAGE>
Company through March 31, 1991. These shares were issued pursuant to an
exemption under Section 4(2) of the Securities Act of 1933 at a basis of $5.00
per share.
The Company sold Common Stock through a private offering under Regulation D and
Section 4(2) of the Securities Act of 1933. This Stock, therefore, has
restrictions on the ability to sell it for the next two (2) years. It was sold
to 14 accredited investors (as defined in the Securities Act of 1933 Section
2(15)) and 34 unaccredited investors. The private offering was closed out on
May 15, 1987, with a total of 113,600 shares sold at $5.00 per share net
proceeds to the Company. The shares were sold through the assistance of HDVIS
licensed registered Representatives and other registered selling agents.
At the initial capitalization of the Company, each outstanding share of HDVIS
was exchanged for four shares of the Company. The creation of the Company was
necessary in order to expand the services offered by the Company to its
Representatives.
Item 16. Exhibits
-------- --------
3.1 Articles of Incorporation and By-Laws (1)
3.2 First Articles of Amendment to the Articles of Incorporation of H.D.
Vest, Inc. (1)
3.3 Second Articles of Amendment of Articles of Incorporation of H.D.
Vest, Inc. (1)
5. Opinion Regarding Legality (1)
22. List of Subsidiaries (1)
24.1 Consent of Arthur Andersen LLP (2)
28.1 Specimen Common Stock Certificate (1)
28.2 Registered Representative Sales Agreement (1)
28.3 B Warrant Certificates (1)
28.4 B Warrant Agreements (1)
28.5 Non-Qualified Stock Option Plan (1)
28.6 Facilities and Services Agreement with H.D. Vest Insurance Services (1)
28.7 Representative's Warrants to Purchase Common Stock (1)
28.8 Management Agreement with Herb D. Vest (1)
28.9 H.D. Vest Representatives Deferred Compensation Plan (2)
28.10 Opinion of Arthur Andersen, LLP regarding Federal Income Tax
Consequences (1)
28.11 Agreement for Line of Credit with Herb Vest and Barbara Vest (1)
(1) Previously filed.
(2) Amended herewith.
(3) New Exhibit.
Item 17. Undertakings
- ----------------------
Subject to the terms and conditions of Section 15 (d) of the Securities and
Exchange Act of 1934, the undersigned Registrant
2
<PAGE>
undertakes to file with the Securities and Exchange Commission such
supplementary and periodic information, documents and reports as may be
prescribed by any rule or regulation of the Commission heretofore or hereafter
duly adopted pursuant to authority conferred in that section.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes: (1) to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement, (i) to include any prospectus required by section 10(a)
(3) of the Securities Act of 1933, (ii) to reflect in the Prospectus any facts
or events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement, (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; (2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof; (3) to remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering; (4) and agrees that each such post-effective
amendment will comply with the applicable forms and rules and regulations in
effect at the time such post-effective amendment is filed; (5) and agrees that,
in the event it enters into any arrangements with third parties on terms
differing from those set forth herein, it will promptly file an appropriate
post-effective amendment setting forth the pertinent information.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
H.D. VEST, INC.
---------------
(Registrant)
Date: December 29, 1998 By:/s/ Herb D. Vest
------------------
Herb D. Vest
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By:/s/ Herb D. Vest By:/s/ Barbara Vest
------------------ -----------------------
Herb D. Vest Barbara Vest
Chairman of the Board, President and Chief Director
Executive Officer
By:/s/ Kenneth E. Reynolds By:/s/ Jack B. Strong
----------------------- -----------------------
Kenneth E. Reynolds Jack B. Strong
Director Director
By:/s/ Jerry M. Prater By:/s/ Phillip W. Mayer
----------------------- -----------------------
Jerry M. Prater Phillip W. Mayer
Director Director
By:/s/ Kenneth R. Petree By:/s/ Wesley Ted Sinclair
----------------------- -----------------------
Kenneth R. Petree Wesley Ted Sinclair
Director Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
4
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report on
the fiscal 1998, 1997, and 1996 consolidated financial statements of the Company
and to the use of our opinion dated January 8, 1998 regarding the deferred tax
treatment of amounts deferred under the Plan (and to all references to our Firm)
included in or made part of this registration statement.
Arthur Andersen LLP
Dallas, Texas,
December 28, 1998
<PAGE>
EXHIBIT 28.9
H.D. VEST, INC. REPRESENTATIVES'
DEFERRED COMPENSATION PLAN
<PAGE>
Section 1. INTRODUCTION
1.1 Establishment. H.D. Vest, Inc., a Texas Corporation, established the
-------------
Deferred Compensation Plan (the "Plan") for the Representatives of the Company
in March, 1995. The Plan provides (i) the opportunity for Participants to defer
part or all of their Cash Compensation through an effective tax mechanism and
(ii) the opportunity to receive an additional deferred Company Matching
contribution.
1.2 Purpose. The purpose of the Plan is to provide the Company's
-------
Representatives with the opportunity both to defer the receipt of compensation
on a pre-tax basis and to receive additional income in the form of the Company
Matching Contribution.
1.3 Effective Date. This Plan shall be effective upon the Effective Date as
--------------
defined below.
Section 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. The following capitalized words and phrases when used in
-----------
the Plan shall have the meanings set forth below:
A. "Account" means an account established for a Participant which contains
the Participant's Cash Equivalents and the Company's Matching
Contribution and which will be carried by the Company as a general
unsecured obligation senior in rank to Vest's stock listed on NASDAQ/NMS.
B. "Administrative Committee" means the committee appointed by the Board and
serving pursuant to Section 7.
C. "Annual Election Period" means a sixty (60) day period commencing January
1 of each year subject to the provisions of Section 3.2 and 3.3.
D. "Enrollment" means a Representative becomes enrolled as a Participant in
the Plan under Section 3.2 or 3.3.
E. "Board" means the Board of Directors of Vest.
F. "Cash" means money in the form of United States Currency or some
reasonable equivalent thereof.
-1-
<PAGE>
G. "Cash Equivalent" means a hypothetical Cash amount allocated to the
Participant's Account.
H. "Company" means H. D. Vest, Inc., and its subsidiaries.
I. "Company Matching Contribution" means an amount which the Company
credits as a Cash Equivalent to a Participant's Account pursuant to
the Plan.
J. "Compensation" means cash remuneration, including but not limited to
gross commissions, advisory or other fees or any other type of
remuneration, earned by and while a Representative of the Company.
K. "Compensation Date" means the dates on which Net Compensation is paid
to Representatives, which currently occurs, twice a month, on the
fifth business day following the first and fifteenth of each month, or
such other dates the Company establishes to pay Net Compensation to
Representatives.
L. "Deferral Amount" means the amount of Net Compensation for each
Deferral Period which a Participant elects to defer under the Plan.
M. "Deferral Period" means the period of time constituting a moving
number of aggregate and consecutive calendar months for which a
Participant elects under the Plan to delay receipt of any Deferral
Amount. Each Deferral Period begins on the last day of the Annual
Election Period and ends on the last day of the next consecutively
following 36th, 60th or 84th calendar month, depending on the number
of months established pursuant to Section 3.2, 3.3 or 5.1.
N. "Disability" means a determination by the Administrative Committee
that a Participant is unable because of illness, injury, accident or
other reason to perform substantially all of the acts which a
Representative normally performs and that such inability is likely to
continue for at least five consecutive months.
O. "Distribution Period" means the thirty-six (36), sixty (60) or eighty-
four (84) consecutive calendar months immediately following the end of
a Deferral Period. The duration of a Distribution Period shall be the
same number of consecutive calendar months as the Deferral Period
which it immediately follows.
-2-
<PAGE>
P. "Effective Date" means the first date in which a Registration
Statement filed with the Securities and Exchange Commission ("SEC")
becomes effective, any required state Registration Statement becomes
effective, and the Company's Board has approved the Plan.
Q. "Gross Compensation" means the total amount of a Participant's
Compensation, including advisory service fees, but excluding
compensation earned on the sales of certain insurance products through
H.D. Vest Insurance Services, unreduced by any amount.
R. "Initial Enrollment Period" means a sixty (60) day period commencing
January 1 of each year the Plan is made available, or commencing three
(3) days after the Effective Date, whichever is later.
S. "Net Compensation" means Gross Compensation earned by and while a
Representative of the Company multiplied by the Participant's payout
rate (as defined in the applicable current H.D. Vest payout schedule)
and less any fees, expenses, or other amounts which reduce Gross
Compensation.
T. "Participant" means a Representative of the Company who elects to
participate in the Plan pursuant to Section 3.2 or 3.3, who satisfies
all requirements established by the Administrative Committee and who
designates a Deferral Amount and a Deferral Period pursuant to the
Plan. Participant does not include employees or officers of the
Company.
U. "Representative" means an independent contractor associated with the
Company through H.D. Vest Investment Securities, Inc. The Company
shall promptly inform the Administrative Committee if any individual
ceases to be a Representative. Representative does not include any
employee or officer of the Company.
V. "Vest" means H.D. Vest, Inc., a Texas Corporation.
2.2 Construction. Whenever any word is used herein in the singular form,
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it shall be construed as though it were also used in the plural form in all
cases where it would so apply. Headings of articles and sections are inserted
for convenience and reference, and they constitute no part of the Plan. Except
where otherwise indicated by the context, any masculine terminology herein shall
include the feminine and neuter. When the Plan requires or permits an act to
occur on a day and that day falls on a Saturday, Sunday, or Vest holiday, the
day for the act shall be
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the next business day.
Section 3. ELIGIBILITY AND PARTICIPATION
3.1 General. All Participants may defer from a minimum of one percent (1%)
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to a maximum of one hundred percent (100%) of their Net Compensation and may
elect to defer Net Compensation for one of three Deferral Periods. The Deferral
Amount shall not exceed the Participant's Net Compensation.
3.2 Initial Enrollment: All Representatives shall have the opportunity to
-------------------
enroll in the Plan during the Initial Enrollment Period. As such, they shall,
at that time, choose the Deferral Amount of their future Net Compensation earned
after the end of the Initial Enrollment Period and elect a Deferral Period from
the three Deferral Period Options. All such Deferral Amounts shall be allocated
to each Participant's Account as a Cash Equivalent beginning after the end of
the Initial Enrollment Period. After the Initial Enrollment Period, any
modification of any Deferral Amount or Deferral Period is governed by Sections
4 and 5.
3.3 Enrollment. Future Representatives. Representatives who join the
----------- ----------------------
Company after the Initial Enrollment Period shall not be eligible to become a
Participant until the next Initial Enrollment Period, if any, immediately
following the date that a Representative becomes affiliated with Company.
However, no Representative will be eligible to enroll in the Plan if, prior to
an Initial Enrollment Period, the Plan is not registered with the SEC or the
Representative's state of residence, if required, or the Board elects to
terminate or suspend the Plan pursuant to Section 7.3. Upon enrollment in the
Plan, said Representative shall be subject to the same terms as those who are
Participants.
Section 4. ASPECTS OF DEFERRAL
4.1 Electing Deferral Amount. A Participant may elect a Deferral Amount
------------------------
and Deferral Period during each Annual Election Period by complying with the
Plan and all Administrative Committee requirements (including giving timely
written notice and properly completing all forms required by the Administrative
Committee). A Participant must specify the Deferral Amount as a specific
percentage, or dollar amount, of his total Net Compensation earned after an
Annual Election Period and during a Deferral Period. The Deferral Amount shall
not exceed the Participant's Net Compensation. Anyone who is no longer a
Representative shall no longer be entitled to elect any Deferral Amounts and
Deferral Amounts shall immediately stop.
4.2 Accounts. When a Participant has appropriately selected a Deferral
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Amount, the Administrative Committee shall
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establish or continue an Account on the Company's books in the Participant's
name. The Participant's Account is a Cash Equivalent account.
4.3 Participant's Rights. Neither the Administrative Committee nor the
--------------------
Company shall be required to reserve or otherwise set aside funds for the
payment of any Cash Equivalents or other amounts credited to any Account. All
Accounts are unfunded accounts established under the Plan in the Participant's
name. Moreover, until a Participant actually receives a distribution of Cash
from his Account, the Participant maintains a position as a general creditor of
the Company as regards any Cash Equivalent or other amount credited to or to be
distributed from the Participant's Account and as regards any and all rights of
the Participant under the Plan. In addition, the Company shall not be required
to actually fund any Cash Equivalents or credit Cash to any Account until the
time for payment thereof during the Distribution Period. As general unsecured
obligations, Participant's account will be senior in rank to the Company's
Common Stock listed on NASDAQ/NMS. The Company has received an opinion letter
from Arthur Andersen LLP as to the federal income tax consequences to
Representatives of the Company who become Participants in the Plan. Each
Participant may request a copy of the opinion letter.
4.4 Time for Electing Deferral. Except as otherwise permitted in Section
--------------------------
3.2, 3.3 or 4.5, during each Annual Election Period, a Participant shall select
the (i) Deferral Amount and (ii) Deferral Period. Except as provided in Section
4.5, only one Deferral Amount can be selected for one Deferral Period during any
Annual Election Period. Any election so made shall remain in effect until the
next Annual Election Period and shall immediately cease if the Participant is no
longer a Representative.
4.5 Prospectively Increasing Deferral Amount. A Participant may elect to
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increase future Deferral Amounts only pursuant to this Section. Any election to
increase the Deferral Amount may be made only on a calendar quarterly basis and
must be in writing and actually received by the Administrative Committee no
later than 30 days before the beginning of a calendar quarter. Any election to
increase prospectively the Deferral Amount shall begin on the first Compensation
Day of the next calendar quarter. Unless the Participant prospectively
increases the Deferral Amount under this Section 4.5, such an election shall
remain in effect until the next Annual Election Period or the Participant ceases
to be a Representative. Any such increase in the Deferral Amount elected shall
be deferred for the same Deferral Period which applies to the other Deferral
Amount selected during the most recent preceding Initial Enrollment Period or
Annual Election Period during which the Participant elected a Deferral Amount.
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4.6 Irrevocable Selections. Once the Participant has selected a Deferral
----------------------
Amount and an Annual Deferral Period, he may not change that Deferral Period and
he may only change the Deferral Amount for the Deferral Period pursuant to
Section 4.5.
Section 5. DEFERRAL PERIODS AND COMPANY MATCHING CONTRIBUTIONS
5.1 Deferral Periods. Except as otherwise permitted in Sections 3.2 or 3.3,
----------------
during an Annual Election Period, Participants shall select one of three
Deferral Periods:
Option No. 1 Deferral Amount deferred for thirty-six months (36 months).
Option No. 2 Deferral Amount deferred for sixty months (60 months).
Option No. 3 Deferral Amount deferred for eighty-four months (84
months).
5.2 Company Matching Contribution. Depending on the Deferral Period and
-----------------------------
Deferral Amount selected by the Participant, the Company shall allocate the
Company's Matching Contribution to the Participant's Account pursuant to Section
4.2. In addition, the Company may prior to any calendar year establish a
Matching Contribution for aggregate total Deferral Amount elected by all
Participants for such year. For the initial Plan year ending December 31, 1996,
the amount of the Company's Matching Contribution is determined as follows:
COMPANY MATCHING CONTRIBUTION
AS A PERCENTAGE OF THE DEFERRAL AMOUNT
--------------------------------------
DEFERRAL PERIOD COMPANY MATCHING
--------------- ------------------
CONTRIBUTION CASH
------------------
Option 1: 36 Months 30%
Option 2: 60 Months 60%
Option 3: 84 Months 100%
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5.3 Forfeiture of Company Matching Contribution. Anyone who is no longer a
-------------------------------------------
Representative shall no longer receive any Company Matching Contributions.
Anyone who ceases being a Representative of the Company before the expiration of
the Deferral Period for any reason other than death, disability, or attaining
the age of 65, shall forfeit all of the Company's Matching Contributions for
which any Deferral Period has not expired. Forfeited Company Matching
Contributions shall revert to the Company. The Company shall distribute the
rest of the terminated Participant's Account, excluding all amounts attributable
to the Company's Matching Contributions, during the Distribution Period. A
disabled Participant or Participant attaining the age of 65 who ceases being a
Representative of the Company shall not forfeit the Company's Matching
Contribution unless the Participant becomes a registered representative of a
broker/dealer other than H.D. Vest Investment Securities, Inc. prior to the end
of the Participant's Deferral Period.
Section 6. DISTRIBUTION OF ACCOUNTS
6.1 Payment of Accounts. The Participant has no right to demand or receive
--------------------
any payment or distribution in kind or in Cash of any amount in a Participant's
Account until its payment is due during the Distribution Period. All amounts
credited to an Account shall be distributed as Cash. Subject to the Plan, the
Deferral Amounts and non-forfeited Company Matching Contributions credited to a
Participant's Account for each Deferral Period shall be distributed to the
Participant as follows:
Normal Representative Commissions are paid bi-monthly; therefore, the payments
of the Deferred Compensation and Matching Contributions will be paid bi-
monthly subsequent to the end of the Deferral Period. Consequently, if a
Representative elects to defer an amount of his or her bi-monthly compensation
for a period of 36 months, he or she will receive payment of that Deferred
Amount and matching contribution 37 months from the date of the deferral. Each
representative payroll period and Deferral Amount shall be payable
independently from one another under the Plan.
6.2 Payment to Deceased Participant's Estate. If a Participant dies before
----------------------------------------
all of his Account has been distributed to him, the amount remaining shall be
distributed at the Administrative Committee's discretion either (i) in payments
at the same times, and in the same manner, as were being paid to the Participant
before death or (ii) in accelerated payments to any
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extent that the Administrative Committee determines appropriate. Such
distribution shall be made to the beneficiary or beneficiaries determined under
Section 6.3.
6.3 Designation of Beneficiary. A Participant may designate a beneficiary in
--------------------------
a form provided, approved, and accepted by the Administrative Committee. In the
absence of such a form, all amounts remaining in a deceased Participant's
Account shall be distributed to the deceased Participant's estate.
6.4 Disabled Participants. If a Participant becomes disabled before all of
---------------------
his Account has been distributed to him, the amount remaining shall be
distributed at the Administrative Committee's discretion either (i) in payments
at the same times, and in the same manner, as were being paid to the Participant
before his disability or (ii) in accelerated payments to any extent that the
Administrative Committee determines appropriate.
Section 7. MISCELLANEOUS
7.1 Plan Administration. The members of the Administrative Committee shall
-------------------
be appointed by the Board and shall function pursuant to rules and procedures
approved or ratified by the Board. Any vacancy on the Administrative Committee
shall be filled by the Board.
7.2 Finality of Determinations. Sole and absolute authority and discretion
--------------------------
to apply, interpret and implement this Plan, including the determination of any
contested issues or claims arising under the Plan, shall be vested in the
Administrative Committee. By way of example, the Administrative Committee shall
assure that allocations to any Account are based on Net Compensation actually
earned by a Representative/Participant and may make any increases or deductions
in any Account to correct any erroneous amount of Net Compensation, Deferral
Amount or Company Matching Contribution. Any determination by the
Administrative Committee shall be final and binding for all purposes and upon
all interested persons and their heirs, successors and personal representatives.
7.3 Amendment, Suspension, or Termination of the Plan. The Board may amend,
-------------------------------------------------
suspend or terminate the Plan in whole or in part at any time, provided that
such amendment, suspension or termination shall not adversely affect any rights
or obligations under the Plan with respect to amounts credited to the Account of
any Participant before the amendment, suspension or termination.
7.4 Limitations on Transfer. Participants shall have no right to any amount
-----------------------
credited to their Accounts except as set forth
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in the Plan. Neither such rights nor any amount credited to any Account may be
anticipated, assigned, alienated or transferred, except pursuant to Section 6.3.
Any attempt to alienate, sell, exchange, transfer, assign, pledge, hypothecate
or otherwise encumber or dispose of any such rights or amounts by a Participant,
the spouse of a Participant, or any other person shall be void and of no effect.
The foregoing limitations on transfer or assignment shall apply with equal force
and effect to any person who is designated or becomes a beneficiary pursuant to
Section 6.3.
7.5 Release. The Administrative Committee may require as a condition
-------
precedent before the distribution of any amount from any Account a complete
release and final settlement from the Participant and/or the Participant's
spouse, any beneficiary or either or any other person of all claims against the
Company, the Administrative Committee, the Plan or any other individual or
person.
7.6 Governing Law. The Plan and all agreements hereunder shall be construed
-------------
in accordance with and governed by the laws of the State of Texas. Any
elections to be made under this Plan shall be accepted and all actions to be
taken or payments under the Plan shall occur and be made at the Company's home
office located at 6333 North State Highway 161, Fourth Floor, Irving, Texas,
75038, or as such other location specified by the Administrative Committee.
Because of its terms and provisions, the Plan is not governed by the Employer
Retirement Income Security Act of 1974, as amended.
7.7 Statement of Account. A statement will be sent to each Participant as to
--------------------
his Account at least once each calendar year.
7.8 Expenses of Administration. All costs and expenses incurred in the
--------------------------
operation and administration of this Plan shall be borne by the Company.
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