<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
X Annual Report Pursuant to Section 13 or 15(d)
- -----
of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended September 30, 1998
Transition Report Pursuant to Section 13 or 15(d)
- -----
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from _____ to _____
Commission File No. 0-19614
H.D. VEST, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2154244
----- ----------
(State or other jurisdiction of (IRS Employer ID.)
incorporation or organization)
6333 North State Highway 161, Fourth Floor, Irving, Texas 75038
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (972)870-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Exchange on which registered
---------------------------- ----------------------------
Common stock, $.05 par value NASDAQ National Market Tier
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such requirements for the past
90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [X]
Aggregate market value of voting stocks (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of September 30, 1998,
as computed by reference to the closing sale price of the registrant's Common
Stock on the NASDAQ National Market Tier of the NASDAQ Market System on such
date: $9,489,495.
Number of shares of the registrant's Common Stock outstanding as of September
30, 1998: 5,423,341.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
H.D. Vest, Inc. (Company), founded by Herb D. Vest, was formed on December 17,
1986, as a Texas corporation. The Company is a financial services company,
organized for the purpose of investing in financial service companies and
providing management services to such companies as well as other entities. The
Company also conducts operations under the corporate assumed name of H.D. Vest
Financial Services. The Company owns all outstanding shares of the following
subsidiaries:
H.D. Vest, Inc.
d/b/a H.D. Vest Financial Services
Incorporated
Subsidiaries (TEXAS) Services
------------ ------------ --------
H.D. Vest Investment Securities, Inc. 1983 Registered Securities
"HDVIS" Broker-dealer
Products:
Mutual Funds
Unit Investment Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 Registered Investment
"HDVAS" Advisor
Agent Licensing
Assistance
Money Management
Services
H.D. Vest Mortgage Services, Inc. 1989 Inactive Subsidiary
"HDVMS"
H.D. Vest Collateral Management Company 1988 Inactive Subsidiary
"HDVCMC"
H.D. Vest Business Valuation Services, Inc. 1987 Inactive Subsidiary
"HDVBVS"
H.D. Vest Corporate Finance, Inc. 1990 Inactive Subsidiary
"HDVCF"
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
2
<PAGE>
believes that the tax professional is uniquely qualified to give confidential
professional financial advice and implement financial plans due to the tax
professional's knowledge of his or her clients' financial affairs. The Company
offers the tax professional the means to provide personalized financial services
to the consumer while simultaneously providing the tax professional with an
additional source of income.
The Company actively recruits tax professionals to become affiliated with the
Company's subsidiaries HDVIS and HDVAS, and an affiliated insurance entity, in
order to maintain and expand a network for providing financial services.
Representatives registered with the Company include CPAs, CFPs, Enrolled Agents
(EA), CFAs, tax attorneys, and other tax professionals. Many hold state or
national offices in CPA societies, EA organizations and public accounting
societies.
The Company's subsidiary HDVIS is a securities broker-dealer, registered with
the Securities and Exchange Commission (SEC) and securities regulatory
commissions in all 50 states, the District of Columbia and the Commonwealth of
Puerto Rico. HDVIS is a member of the National Association of Securities Dealers
(NASD), Securities Investors Protection Corporation (SIPC) and the Securities
Industry Association (SIA). HDVIS' Representatives are primarily tax
professionals located throughout the United States that provide their clients
with a wide range of financial services consisting of such investments as mutual
funds, unit investment trusts, limited partnership interests, stocks and bonds.
The Company utilizes the Representative base of HDVIS to market other services
provided by the Company through its subsidiaries and an affiliated insurance
entity.
The Company's subsidiary HDVAS is an investment advisor registered with the
Securities and Exchange Commission and various state regulatory agencies as well
as a member of the Investment Company Institute. The Company's Representatives
can register as Investment Advisor Representatives under HDVAS. HDVAS has
developed proprietary fee-based services, which give its Representatives the
capability of providing fee-based money management services to their clients.
3
<PAGE>
(b) Financial Information About Industry Segments
The Company and its subsidiaries operate primarily in a single industry segment:
securities brokerage and related financial services. The following table sets
forth the Company's total revenues by major source:
SUMMARY OF COMPANY'S SOURCES OF REVENUE
Year ending September 30,
-------------------------
1998 1997 1996
------------ ----------- -----------
Commission Revenue
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
============ =========== ===========
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.
(c) Narrative Description of Business
THE REGISTRANT AND ITS SUBSIDIARIES
The Company conducts its business under its corporate name and under the assumed
name of H.D. Vest Financial Services. Through its business divisions and
nationwide network of Representatives, the Company provides a comprehensive
package of financial services and products.
4
<PAGE>
The various services of the Company, provided by the Company and/or its
subsidiaries, are as follows and are discussed in more detail on the pages that
follow:
Entity Name: Service Performed
------------ -----------------
H.D. Vest, Inc. Technical and Sales Support Services,
Regional Support System, Educational
Services, Representative Recruiting,
Representative Development, Information
Services, Insurance Agency Management
Services.
H.D. Vest Investment Securities, Investment Services, Trading and Customer
Inc. Service, Representative Licensing,
Compliance and Due Diligence Services.
H.D. Vest Advisory Services, Inc. Professional Investment Advisory Services
H.D. Vest Mortgage Services, Inc. Inactive Subsidiary
H.D. Vest Collateral Management
Company, Inc. Inactive Subsidiary
H.D. Vest Business Valuation
Services, Inc. Inactive Subsidiary
H.D. Vest Corporate Finance, Inc. Inactive Subsidiary
TECHNICAL AND SALES SUPPORT SERVICES
The Company has assembled staff experts in areas of individual and business
financial planning, including Certified Public Accountants, Certified Financial
Planners, Chartered Financial Analysts, Chartered Life Underwriters, Certified
Investment Management Analysts, Chartered Financial Consultants, Certified
Employee Benefits Specialists, Chartered Pension Consultants, Enrolled Agents,
Certified Management Accountants, American Institute of Certified Public
Accountants-Accredited Personal Financial Specialists, Lawyers and Pension and
Executive Compensation Certificate recipients. The Company's staff of financial
professionals provide financial planning and product information to H.D. Vest
Representatives who in turn assist their clients with their financial planning
needs. These services to
5
<PAGE>
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 program training is facilitated with monthly
meetings held across the country between the months of May and December. 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 specified criteria and attended Company training prior
to training 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 investment topics.
6
<PAGE>
REPRESENTATIVE RECRUITING
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 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 the most effective
in the past. These methods include direct mail, recruiting seminars,
telemarketing, trade shows, referral incentive programs, trade publication
advertising and various educational events. The Company may employ additional
methods of recruiting in order to develop and determine the effectiveness of
such alternatives.
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.
7
<PAGE>
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 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.
8
<PAGE>
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, and unit investment trusts and individual securities.
In addition, the H.D. Vest Discount Brokerage Service allows investors to buy
and sell individual securities at discounted commission rates.
The following table summarizes the number of securities transactions processed
by the Company:
Fiscal Years Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
5,551,515 4,042,941 2,422,705
The Company clears stock and bond trades and certain mutual fund and direct
participation programs, 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
9
<PAGE>
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.
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.
10
<PAGE>
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.
TRADEMARKS
The Company has trademarks, including H.D. Vest Financial Services, that protect
the Company against the unauthorized use of its corporate name and programs.
These trade names are valuable assets of the Company and unauthorized use of
these trade names are prosecuted as necessary to protect the Company's
interests.
GOVERNMENT REGULATION
H.D. VEST INVESTMENT SECURITIES, INC. - The securities industry in the United
States is subject to extensive regulation under federal and state laws. The SEC
is the federal agency charged with administration of the federal securities
laws. Much of the regulation of broker-dealers, such as HDVIS, has been
delegated to self-regulatory organizations like 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
11
<PAGE>
enforcement of existing laws and rules often directly affect the method of
operation and profitability of broker-dealers. The SEC and the self-regulatory
organizations may conduct administrative proceedings that can result in censure,
fine, suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulations and discipline of broker-dealers is the
protection of customers and the securities markets rather than protection of
creditors and stockholders of broker-dealers (see Item 3 Legal Proceedings).
HDVIS is a member of the Securities Investors Protection Corporation. SIPC
provides protection to customers (but not shareholders) if a SIPC member fails
financially. Customers (NOT INCLUDING INVESTORS IN THE STOCK OF THE COMPANY) of
HDVIS that have securities and/or cash on deposit with HDVIS, would be protected
up to a maximum of $500,000, including up to $100,000 on claims for cash.
HDVIS is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. Minimum net capital can never be lower than $250,000 or 6 2/3% of aggregate
indebtedness, as defined, whichever is greater. In computing net capital under
the Uniform Net Capital Rule, various adjustments are made to net worth to
exclude assets which are not readily convertible into cash and to conservatively
state other assets, such as a firm's position in the securities that it holds in
its own account. To that end, a deduction is made against the market value of
such securities to reflect the possibility of a market decline prior to their
disposition. For each dollar that net capital is reduced, by means of such
deductions or otherwise (for example, through operating losses or capital rules,
which are unique to the securities industry), financial restrictions are imposed
upon the Company which are more severe than those imposed on corporations
engaged in certain other types of business (see Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources).
12
<PAGE>
HDVIS had net capital, required net capital and excess net capital for the years
ended September 30, 1998, 1997 and 1996 as follows:
1998 1997 1996
---------- ---------- ----------
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
========== ========== ==========
H.D. VEST ADVISORY SERVICES, INC. - The financial planning industry is subject
to federal regulation under the Investment Advisers 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.
DEPENDENCE ON A SINGLE CUSTOMER
No material part of the Company's consolidated commission revenues is originated
by a single Representative.
COMPETITION
There is intense competition in the brokerage and insurance industry from large,
diversified, well-capitalized brokerage firms, financial institutions and other
organizations. Retail oriented financial service providers and other financial
institutions are investing substantial funds in advertising and direct
solicitation of customers to increase their market share, and in many cases the
Company is directly competing with such organizations for the same market share.
EMPLOYEES
At September 30, 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.
13
<PAGE>
Employees by Department
As of September 30, 1998
Marketing and Technical Support 126
Administration and Other 42
Operations 119
Educational Services 14
---
Total Employees 301
===
The majority of employees are college graduates and are securities licensed.
Item 2. Description of 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.
Item 3. 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 remaining 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.
14
<PAGE>
While the Company believes it has defenses against pending claims, in order to
avoid anticipated costs of trial and to minimize the possibility of additional
losses, the Company anticipates settling such 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.
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.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
NONE
16
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
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.
High Low
---- ---
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
--------------------------------
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 2 market makers.
If the Company were subsequently delisted from the NASDAQ National Market
System, such delisting would materially limit the public market for the
Company's common stock through loss of news coverage, possible decline in share
price and possible difficulty
17
<PAGE>
in obtaining subsequent financing. In such event, a stockholder might encounter
difficulty in selling his or her common stock.
The Company has paid no dividends on its common stock since incorporation. The
Company intends to continue to devote its earnings, if any, to the growth and
development of the Company. Any dividends in the future will depend upon the
Company's financial requirements and other factors.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144
Of the 5,423,341 shares of common stock outstanding as of September 30, 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.
18
<PAGE>
Item 6. Selected Financial Data
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 Consolidated Financial
Statements and the report thereon of Arthur Andersen LLP, independent public
accountants, located elsewhere in this document.
<TABLE>
<CAPTION>
Summary of Consolidated Statements of Operations
Fiscal Years Ended 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)
Net Income
(Loss)Common
share $ .24 $ .37 $ .20 $ .22 $ (.09)
Cash Dividends
Declared per
common share $ - $ - $ - $ - $ -
</TABLE>
<TABLE>
<CAPTION>
Summary of Consolidated Statements
of Financial Position
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
Notes Payable
and Obligations
under 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>
19
<PAGE>
Item 7. 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 Deferred Compensation 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 deferred compensation 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 Deferred
Compensation Plan (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
20
<PAGE>
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 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.
21
<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 are 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.
22
<PAGE>
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 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:
% Change for the Years Ended September 30,
as compared to Previous Years
----------------------------------------
Source of Revenue 1998 1997 1996
- ------------------------- -------- -------- ---------
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%
(1) Revenue 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.
23
<PAGE>
(4) Revenue 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
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.
24
<PAGE>
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 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 increase 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 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
25
<PAGE>
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 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
26
<PAGE>
those indicated by forward-looking statements made from time to time in news
releases, reports, proxy statements, registration statements and other written
communications (including the preceding sections of this Management's Discussion
and Analysis), as well as oral statements made from time to time by
representatives of the Company. Except for historical information, matters
discussed in such oral and written communications are forward-looking statements
that involve risks and uncertainties, including but not limited to general
business conditions, the impact of competition, the seasonality of the Company's
business, taxes, inflation, and governmental regulations.
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 associated with previously scheduled modifications or replacements
unrelated to Year 2000 issues. The Company anticipates spending approximately
$100,000 for
27
<PAGE>
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
28
<PAGE>
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 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.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index
Page(s)
-------
Report of Independent Public Accountants F-1
Consolidated Statements of Financial
Position - September 30, 1998 and 1997 F-2 & F-3
Consolidated Statements of Operations -
Three years ended September 30, 1998 F-4
Consolidated Statements of Shareholders'
Investment - Three years ended September 30, 1998 F-5
Consolidated Statements of Cash Flows -
Three years ended September 30, 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-21
30
<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 acepted 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
September 30,
-------------------------
1998 1997
----------- -----------
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
=========== ===========
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
September 30,
--------------------------
1998 1997
------------ ------------
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
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
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
============ =========== ===========
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
Outstanding Additional Retained
-------------------------- Preferred Common Paid-in Earnings
Preferred Common Stock Stock Capital (Deficit) Total
--------------- --------- ----------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 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:
September 30,
--------------------------
1998 1997
------------ ------------
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
=========== ===========
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:
September 30,
------------------------
1998 1997
------------ ----------
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
========== =========
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:
Capital Operating
Leases Leases
---------- -----------
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
==========
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.
While the Company believes it has defenses against pending claims, in order to
avoid anticipated costs of trial and to minimize the possibility of additional
losses, the Company anticipates settling such 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.
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 intends to vigorously defend such claims if necessary, a negative
result in multiple claims could have a material adverse impact on the Company.
In September 1997, the Company received notice of two claims 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:
1998 1997 1996
---------- ---------- ----------
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
========== ========== ==========
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:
September 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
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
========== ========== =========
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
September 30,
---------------------------------
1998 1997 1996
---- ---- ----
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%
=================================
The following table presents the components of the net deferred tax liability:
Deferred
October 1, Expense September 30,
1997 (Benefit) 1998
----------- ---------- --------------
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)
========== ======== =========
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:
1998 1997 1996
---- ---- ----
===============================================================================
Exercise Exercise Exercise
Shares price (1) Shares price (1) Shares price (1)
------ --------- ------ --------- ------ ---------
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
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>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
31
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table provides certain information about each of the Company's and
its subsidiaries' current members of the Board of Directors, officers and
directors of certain divisions of the Company as of September 30, 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.
32
<PAGE>
KEY EMPLOYEES
HERB D. VEST, CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER. Prior to assuming his present position with the Company and HDVIS in
June 1983, Mr. Vest practiced public accounting and financial planning for ten
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.
33
<PAGE>
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 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,
34
<PAGE>
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 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
35
<PAGE>
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
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.
36
<PAGE>
11. Executive Compensation
The following table sets forth all remuneration earned in salary and bonus in
the current year to the Chief Executive Officer, the highest paid members of
the Board of Directors, Officers and key Senior Managers each receiving in
excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
- -----------------------------------------------------------------------------------------------------------
Restricted All
Name & Principal Fiscal Stock Stock Other
Position Year Salary Bonus Awards Options Compensation
(1)
- -----------------------------------------------------------------------------------------------------------
<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.
37
<PAGE>
EXECUTIVE OFFICER COMPENSATION PLAN
During April 1994, the Board of Directors of the Company adopted an Executive
Officer's Compensation Plan. The purpose of the Executive Officers Compensation
Plan is to provide additional compensation to a select group of management
employees of the Company in order to motivate and retain them, as well as to
provide them an incentive to guide the Company in attaining higher revenue
goals. The Company will provide this additional compensation under the
Executive Officer's Compensation Plan in the form of salary, restricted stock,
incentive cash and restricted stock bonuses, as well as severance and change-in-
control benefits.
As an unfunded plan of deferred compensation, it is administered by the Chief
Executive Officer of the Company, who is presently Herb D. Vest. Eligibility to
participate in the Executive Officers Compensation Plan is determined in the
sole and absolute discretion of the Company, which establishes eligibility
provisions of the executive officer compensation plan that it may change at any
time in its sole and absolute discretion.
Currently, to be eligible to participate in the Executive Officer's Compensation
Plan, an individual must be an executive employee of the Company, have completed
at least two full years of Company service, and be part of a select group of
management employees designated by the Company's Board of Directors. The
individual employee must also sign an Officer's Deferred Compensation Agreement
and an Officer Agreement as a condition precedent to becoming a participant in
the Executive Officer's Compensation Plan.
Under the Restricted Stock portion of the Executive Officer's Compensation Plan,
a number of shares of restricted stock 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
38
<PAGE>
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 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:
39
<PAGE>
(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 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.
40
<PAGE>
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:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
End and Fiscal Year End Option Values
- ------------------------------------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised, In-
Shares Options Held At The-Money Options at Fiscal
Acquired Fiscal Year End Year End
Through --------------- --------
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.
41
<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 Directors $53,700
Barbara Vest Director 29,500
Jack Strong Director and Member-Audit Committee 33,500
Kenneth Reynolds Director 29,500
Jerry Prater Director and Chairman of the Audit Committee 35,500
Phillip Mayer Director and Member-Audit Committee 33,500
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.
42
<PAGE>
Item 12. 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%.
43
<PAGE>
Item 13. Certain Relationships and Related Transactions
MANAGEMENT AGREEMENTS
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. The agreement with Herb D. Vest
provides for a management fee per year plus an annual bonus based on the
Company's performance related to revenue and net income goals, additions of
Company affiliates and Fee Based Assets under Management, as established by the
Board of Directors. Effective January 1, 1997, the Company increased the annual
management fee due to Mr. Vest to $900,000 from $750,000. The 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 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
44
<PAGE>
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 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.
45
<PAGE>
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.
46
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) 1. Index to Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Investment
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule I - Amounts Receivable from Related Parties
3. Exhibits
Exhibit
- -------
Number Exhibit
- ------ ----------------------
3.1 Articles of Incorporation and Bylaws *
3.2 Second Articles of Amendment to Articles
of Incorporation +
10.1 Non-Qualified Stock Option Plan *
10.2 Facilities and Service Agreement with H.D. Vest
Insurance Services *
10.3 Registered Representative Sales Agreement +
10.4 Management Agreement with Herb D. Vest +
10.5 Management Agreement with Barbara H. Vest *
10.6 Termination Agreement with Barbara H. Vest +
47
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.7 Line of Credit Agreement with Herb D. Vest o
10.8 Line of Credit Agreement with Barbara Vest o
22 Subsidiaries of the Registrant
</TABLE>
* Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1988.
+ Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1991.
O Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1994.
b) Reports on Form 8-K (None).
48
<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, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:s/ Herb D. Vest By:s/ Barbara Vest
--------------------------- ---------------------------
Herb D. Vest Barbara Vest
Chairman of the Board, President Director
and Chief Executive Officer
By:s/ Phillip W. Mayer By:s/ Kenneth R. Petree
---------------------------- -------------------------
Phillip W. Mayer Kenneth R. Petree
Director Director
By:s/ Wesley Ted Sinclair By:s/ Jerry M. Prater
--------------------------- ---------------------------
Wesley Ted Sinclair Jerry M. Prater
CFO and Vice President Director
(Principal Financial and
Accounting Officer)
By:s/ Kenneth E. Reynolds By:s/ Jack B. Strong
--------------------------- ----------------------------
Kenneth E. Reynolds Jack B. Strong
Director Director
49
