<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 33-74868
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1998
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
---------------------
POST EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
Registration Statement
Under
THE SECURITIES ACT OF 1933
---------------------
H.D. VEST, INC.
(Exact name of registrant as specified in charter)
Texas 6210 75-2154244
(State or other jurisdiction (Standard Industrial (IRS Employer
of organization) Classification Code No.) Identification Number)
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
(Address of principal executive offices and principal place of business)
Registrant's telephone number, including area code (972) 863-6000
HERB D. VEST, CHAIRMAN
H.D. VEST, INC.
6333 NORTH STATE HIGHWAY 161
FOURTH FLOOR
IRVING, TEXAS 75038
(972) 870-6000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies of communications to:
Curtis Swinson
Malouf Lynch Jackson Kessler & Collins
A Professional Corporation
700 Preston Commons West
8117 Preston Road
Dallas, Texas 75225-6306
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: MAY 8, 1995
Calculation of Registration Fee
<TABLE>
<CAPTION>
=================================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Offering Price Per Aggregate Offering Registration Fee
Registered Unit Price (2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units consisting of:
Cash Equivalents $7,000,000 100% $7,000,000(1) $2,413.80
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $7,000,000 100% $7,000,000 $2,413.80
=================================================================================================================================
</TABLE>
(1) The Company estimates for the purposes of calculating the registration fee
that its Representatives will acquire through deferral of compensation
Units consisting of Cash Equivalents pursuant to a Deferred Compensation
Plan (see "Plan of Distribution") equal to $7,000,000.
(2) Before deducting estimated offering expenses payable by the Company of
$210,500.
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(b)
ITEM IN FORM S-1 CAPTION IN PROSPECTUS
- ---------------- ---------------------
Item 1 Forepart of the Registration
Statement and Outside Front Cover Page
of Prospectus......................... Outside Front Cover Page
Item 2 Inside Front and Outside Back
Cover Pages of Prospectus............. Inside Front Cover Page; Outside
Back Cover Page
Item 3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk
Factors, Selected Financial
Information
Item 4 Use of Proceeds....................... Use of Proceeds
Item 5 Determination of Offering Price....... Not Applicable
Item 6 Dilution.............................. Not Applicable
Item 7 Selling Security Holders.............. Not Applicable
Item 8 Plan of Distribution.................. Plan of Distribution
Item 9 Description of Securities
to be Registered...................... Description of Securities
Item 10 Interests of Named Experts and
Counsel............................... Not Applicable
Item 11 Information with Respect to the
Registrant
(a) Description of Business........... Business, Prospectus Summary
(b) Description of Property........... Property
(c) Legal Proceedings................. Legal Proceedings
(d) Market Price of and Dividends on
the Registrant's Common Equity
and Related Stockholder Matters... Risk Factors-Potential Future
Sales Pursuant to Rule 144;
Description of Securities
(e) Financial Statements.............. Consolidated Financial
Statements
(f) Selected Financial Data........... Selected Financial Information
(g) Supplementary Financial
Information....................... Not Applicable
(h) Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
(i) Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure.............. Not Applicable
(j) Directors and Executive Officers.. Management
(k) Executive Compensation............ Business; Management
(l) Security Ownership of Certain
Beneficial Owners and Management.. Principal Shareholders;
Certain Transactions
(m) Certain Relationships and Related
Transactions...................... Business; Management; Certain
Transactions
Item 12 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 33-74868
H.D. VEST, INC.
UNITS IN A NON-QUALIFIED DEFERRED COMPENSATION PLAN
EACH UNIT CONSISTS OF AN INTEREST IN A NONQUALIFIED UNFUNDED
DEFERRED COMPENSATION PLAN.
DEFERRED COMPENSATION PLAN
- --------------------------
H.D. Vest, Inc., (the "Company") is offering Units in its non-qualified,
unfunded deferred compensation plan (the "Plan"). These Units are offered solely
to Representatives of the Company in conjunction with the Company's
Representative non-qualified, unfunded, deferred compensation plan (the "Plan".)
"Representative" is defined as an independent contractor associated with the
Company or any of its subsidiaries, who is neither an employee nor officer of
the Company or any Subsidiary. All of the Units offered hereby will be
distributed through H.D. Vest Investment Securities, Inc. ("HDVIS") a wholly-
owned Subsidiary of the Company. See "Plan of Distribution."
The Units consist of the amounts deferred by Representatives pursuant to the
Plan as Cash Equivalents.
FOR CALIFORNIA RESIDENTS
- ------------------------
For California residents only, the offering of Units in the Plan is limited to
those persons certifying that they have (1) net income of at least $65,000 per
year combined with net assets of at least $250,000 exclusive of residence and
personal automobiles or (2) net assets of at least $500,000 exclusive of
residence and personal automobiles.
The Company's Common Stock is listed on the NASDAQ National Market tier of the
NASDAQ Stock Market under the symbol: HDVS. On December 31, 1997, the closing
price for the Company's Common Stock on the NASDAQ National Market System was
$4.88 See "Market Information."
THE SECURITIES IN THIS OFFERING ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION (SEE "RISK FACTORS" AND "BUSINESS").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Price to Public Underwriting Proceeds
Discounts to Company
And Commissions (3)(4)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Compensation Plan 100% $ 0.00 (3) $7,000,000
Units (1) (2)
- --------------------------------------------------------------------------------
Total:
Deferred Compensation Plan $7,000,000(2) $ 0.00 $7,000,000
Units (2)
================================================================================
</TABLE>
(1) Cash Equivalents as defined in Plan.
(2) The Company estimates the Representatives will defer Cash Equivalents in an
amount at least equal to $7,000,000.
(3) HDVIS, a subsidiary of the Company will participate in the offering as sole
selected dealer. As selected dealer, HDVIS will sell Units solely to
Representatives as defined in the first paragraph of this cover page of this
Prospectus pursuant to the Plan. The Company will not be compensated for
such sales. See "Plan of Distribution."
(4) Before deducting estimated offering expenses payable by the Company of
$210,500.
THE DATE OF THIS PROSPECTUS IS JANUARY , 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission. All of this
information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, 450 5th
Street, N.W., Washington, D.C. 20549 and at regional offices of the Securities
and Exchange Commission at Room 1204, 219 South Dearborn Street, Chicago,
Illinois 60604, and 75 Park Place, New York, New York 10007. The Commission
also maintains a website that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the commission at http:\\www.sec.gov.
<PAGE>
TABLE OF CONTENTS
Items Page Items Page
- ----- ---- ----- ----
Prospectus Summary........... 4 Competition.................. 38
Market Information........... 7 Employees.................... 38
Risk Factors................. 8 Property..................... 39
Selected Financial Management................... 40
Information................ 15 Directors and Officers..... 40
Management's Discussion and Remuneration of Directors
Analysis of Financial and Management.......... 44
Condition and Results of Certain Transactions......... 45
Operations................. 16 Issuance of Series A
Use of Proceeds.............. 23 Preferred Stock......... 45
Capitalization............... 24 Transactions with
Business..................... 24 Management.............. 45
Registered Security Ownership of
Representatives......... 25 Certain Beneficial Owners
Technical and Sales and Management.............. 53
Support Services........ 27 Principal Shareholders....... 54
Regional Support Shares Eligible for
System.................. 27 Future Sale................ 54
Educational Services....... 27 Description of
Representative Securities................. 56
Recruiting.............. 27 Plan of Distribution......... 58
Representative Transfer Agent &
Development............. 28 Registrar.................. 58
Representative Legal Proceedings............ 58
Systems................. 28 Legal Matters................ 59
Insurance Agency Experts...................... 59
Management Services..... 29 Additional Information....... 60
Investment Services........ 29 Report of Independent
Trading and Customer Public Accountants......... F-1
Service................. 29 Consolidated Financial
Representative Statements................. F-2
Licensing............... 30
Compliance and
Supervision............. 30
Professional Investment
Advisory Services......... 30
New Programs............... 31
Operations and Sources of
Revenue.................... 36
Trademarks................... 36
Dependence on a Single
Customer.................. 36
Government Regulation........ 37
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of some of the pertinent information contained in
this Prospectus. This summary is qualified in its entirety by the more detailed
information, financial statements and notes to financial statements appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety.
THE COMPANY
H.D. Vest, Inc. ("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, 1983 Registered Securities
Inc. "HDVIS" Broker-dealer
Products:
Mutual Funds
Unit Investment
Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 Registered Investment
"HDVAS" Advisor
Agent Licensing
Assistance
Money Management
Services
H.D. Vest Mortgage Services, Inc. 1989 Inactive Subsidiary
"HDVMS"
H.D. Vest Collateral Management 1988 Inactive Subsidiary
Company "HDVCMC"
H.D. Vest Business Valuation 1987 Inactive Subsidiary
Services, Inc. "HDVBVS"
H.D. Vest Corporate Finance, Inc. 1990 Inactive Subsidiary
"HDVCF"
The Company was established to meet the growing demand for professional
financial services, and to provide such services primarily through tax
professionals. The Company's management believes that the tax professional is
uniquely qualified to give confidential, professional financial advice and
implement financial plans due to the tax professional's knowledge of his or her
4
<PAGE>
clients' financial affairs. The Company offers the tax professional the means
to provide personalized financial services to the consumer while simultaneously
providing the tax professional with an additional source of income.
See "Business" for a more detailed description of the business activities of the
Company and its subsidiaries.
5
<PAGE>
THE OFFERING
DEFERRED COMPENSATION PLAN
- --------------------------
The Plan is an optional, non-qualified, unfunded, deferred compensation plan,
which is available exclusively to the Company's Representatives. (Capitalized
terms used herein are defined under the Plan [see "Plan of Distribution -
Representatives Deferred Compensation Plan"].) The Plan provides
Representatives an opportunity to forego receipt of Compensation on a pre-tax
basis for selected periods, thus postponing recognition of income otherwise
currently taxable, and subsequently receiving the deferred compensation plus a
Matching Contribution. At the end of each Deferral Period, the Deferral Amount
and the related Matching Contribution will be paid to the Participant.
Elections by Representatives under the Plan to defer portions of their
Compensation shall be made annually beginning with the Initial Enrollment Period
following the Effective Date. Compensation shall be deferred in accordance with
the Plan as earned. (See "Plan of Distribution - Representatives Deferred
Compensation Plan.")
SECURITIES OFFERED................ Units consisting of:Cash equivalents as
defined in the Plan. (See
"Description of Securities.")
SHARES OF COMMON STOCK OUTSTANDING
AT SEPTEMBER 30, 1997............. 5,423,341 shares (See "Capitalization" and
"Description of Securities.")
SHARES OF COMMON STOCK OUTSTANDING
AFTER THIS OFFERING............... 5,423,341 (1) (2)
NASDAQ - NMS LISTING.............. The Company's Common Stock is listed on the
NASDAQ -National Market tier of the NASDAQ
stock market under the trading symbol: HDVS.
(See "Market Information.")
(1) Assumes that the outstanding stock options, covering 423,454 shares, are
not exercised (see "Management - Stock Options").
(2) Assumes that the outstanding 250,067 shares of Series A Preferred Stock are
not converted into Common Shares (see "Certain Transactions - Issuance of
Series A Preferred Stock.")
6
<PAGE>
USE OF PROCEEDS
The Company intends to use the proceeds of this offering for certain new
programs in the following areas: Operating Improvements, Marketing Initiatives
and Representative Development Activities (see "Use of Proceeds" and "Business -
New Programs").
RISK FACTORS
An investment in the Company's securities is highly speculative due to the
absence of profitable operations in each of the years ended September 30, 1984,
1986, 1987, 1988, 1989, 1992 and 1994. Since the Company plans to use all
amounts deferred by Representatives pursuant to the Plan (including the proceeds
of this offering) for certain programs (see "Use of Proceeds," "Risk Factors,"
and "Business - New Programs"), the Company may incur losses due to these
expenditures. Also see "Risk Factors" for additional risk factors associated
with an investment in this offering.
MARKET INFORMATION
As of September 30, 1997 the Company's stock was listed on the NASDAQ National
Market tier of the NASDAQ Stock Market under the symbol: HDVS. The total
trading volume of the Company's stock for fiscal 1997 was 539,778. There can be
no assurance that a more active market will develop. The following table sets
forth the range of high and low closing bid prices of the Company's Common Stock
as reported by the NASDAQ National Market System during the periods indicated.
The prices set forth below represent prices between dealers, do not include
retail markups, markdowns, or commissions and do not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C> <C>
3 Months Ended 9/30/97 $5.50 $4.63
6/30/97 4.88 3.75
3/31/97 5.13 4.13
12/31/96 5.25 3.25
------------------------------------
9/30/96 5.50 2.63
6/30/96 3.88 2.75
3/31/96 3.00 1.88
12/31/95 3.00 1.88
------------------------------------
9/30/95 3.13 2.75
6/30/95 3.38 2.50
3/31/95 3.38 2.50
12/31/94 3.88 2.25
------------------------------------
</TABLE>
As of September 30, 1997, there were 677 holders of record of the Company's
common stock.
The NASDAQ NMS Qualification Standards require any company wishing to remain
listed to have net tangible assets of $4,000,000, public float of shares of
750,000 (which are shares not held directly or indirectly by any officer,
director or beneficial owner of more than 10% of the total shares outstanding),
market value of public
7
<PAGE>
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 in obtaining subsequent financing. In such event,
a stockholder might encounter difficulty in selling his or her common stock.
The Company has paid no dividends on its common stock since incorporation. The
Company intends to continue to devote a substantial portion of its earnings, if
any, to the growth and development of the Company. Any dividends in the future
will depend upon the Company's financial requirements and other factors.
RISK FACTORS
THE SECURITIES BEING OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. BEFORE MAKING AN INVESTMENT IN THE COMPANY, PROSPECTIVE
INVESTORS SHOULD GIVE CAREFUL ATTENTION TO THE FOLLOWING RISK FACTORS INHERENT
IN AND AFFECTING THE BUSINESS OF THE COMPANY.
1. LOSSES DUE TO EXPANSION OF OPERATIONS. Although the Company generated net
income in 1995, 1996, and 1997, it incurred losses in the years ended September
30, 1984, 1986, 1987, 1988, 1989, 1992, and 1994 of $1,831; $6,576; $1,816,777;
$1,085,206; $1,363,832; $3,187,347; and $369,901 respectively. These losses were
generated, in part, by recruiting and Representative development expenditures
during expansion of operations in these periods. The Company plans to continue
to devote available capital to these activities and to operating improvements
and marketing initiatives. Losses may be incurred in the future to the extent
that available capital is devoted to these expenditures (see "Use of Proceeds"
and "Business - New Programs"). The Company had Working Capital of $2,821,115
and $5,054,298, and a Shareholders' Investment of $5,001,533 and $7,048,561, as
of September 30, 1996 and September 30, 1997, respectively. (See "Selected
Financial Information.")
2. OBLIGATIONS UNDER THE REPRESENTATIVES DEFERRED COMPENSATION PLAN. Pursuant
to the terms of the Company's Representative Deferred Compensation Plan the
Company will be required to distribute to each participating Representative all
deferred amounts plus matching amounts equal to 30%, 60% or 100% of the amounts
deferred. The Company plans to utilize all deferred amounts for expenditures
under certain programs (see "Use of Proceeds" and "Business") and will not be
reserving any funds for the future obligations under the Plan. To the extent
that cash flow from operations is not sufficient to meet these obligations, the
Company may be unable to meet its future cash payment obligations under the
Plan.
8
<PAGE>
3. TAX TREATMENT. The Company has obtained an opinion from Arthur Andersen LLP
concluding that amounts deferred under the Plan will receive deferred tax
treatment and that such amounts plus Matching Contributions will be taxable as
received during the Distribution Period. This opinion will not be binding on the
Internal Revenue Service ("IRS"). If the IRS were to successfully challenge the
deferred tax treatment, then the individual participants would have to recognize
and report the deferral amounts as income in the year in which they were
deferred. If such an event occurred, the individual participants may be required
to recognize current and prior year tax liabilities related thereto.
4. ECONOMIC TRENDS. Prospective investors should understand that the Company's
revenues are directly affected by regional, national and international economic
and political considerations and broad trends in business and finance. Lower
trading volume could result in reduced commission revenues, therefore affecting
the profitability of the Company. As a result of these and other factors, a
number of broker-dealer firms have failed or otherwise ceased doing business
during the past several years. (See "Business.")
5. DEPENDENCE ON KEY PERSONNEL. The Company's success during the foreseeable
future will depend to a great extent on the experience, ability and continued
services of Herb D. Vest and other officers, directors and employees. If any of
these persons should become incapacitated or otherwise unavailable, the Company
would be required to seek a qualified replacement. The Company maintains key-
man life insurance policies of $3.0 million on Herb D. Vest. (See "Management.")
6. COMPETITION. The financial service industry is intensely competitive.
Many competitors have been in the business for many years and have substantially
greater financial resources than the Company. There is competition from other
broker-dealers for Representatives and the clients of Representatives. These
competitors offer similar products and services to the clients of the
Representatives. Other broker-dealers, financial planners and financial
institutions often have substantially greater resources and may have greater
operating efficiency than the Company. The existence and expansion of other
firms and of firms providing other financial services may adversely effect the
Company. In addition to competition, the Company's operations and its
profitability will depend upon a number of factors beyond the control of the
Company, including the general strength of the economy, legislative and
administrative changes and government regulations and policies. (See
"Competition.")
7. REGULATION. The securities, financial planning and insurance industries are
subject to extensive regulation on both federal and state levels. The SEC
regulates broker-dealers with respect to such matters as net capital
requirements, the holding of
9
<PAGE>
customers' credit balances and transactions in securities. Much of the
regulation of broker-dealers has been delegated to self-regulatory
organizations, principally the National Association of Securities Dealers
("NASD") and the national securities exchanges. Subject to SEC approval, these
self-regulatory organizations ("SRO's") adopt rules by which the SEC regulates
the industry. In addition, the SRO's conduct periodic examinations of member
broker-dealers. The principal purpose of regulation and discipline of broker-
dealers is the protection of customers and the securities markets rather than
the protection of creditors and shareholders of broker-dealers. Failure to
comply with such regulations or with any of the other laws, rules or regulations
of state, federal or industry authorities, primarily the NASD, could result in
censure, fine, suspension or expulsion, all of which would have a materially
adverse effect upon the Company. Financial planning and investment advisory
services are subject to regulation by the SEC on the federal level and most
states have similar regulations. The insurance industry is regulated at the
state level where insurance laws vary from state to state. (See "Regulation" and
"Legal Proceedings.")
8. EFFECT OF NET CAPITAL REQUIREMENTS. The SEC has stringent net capital
requirements applicable to the operation of broker-dealers in securities. A
significant operating loss or any extraordinary charge against net capital would
adversely affect the ability of HDVIS to expand its business or, depending upon
the magnitude of the loss or charge, require HDVIS to suspend activities pending
recovery of net capital. Failure to comply with these requirements would have a
material adverse effect upon the Company. The Securities and Exchange
Commission promulgated new regulations, which increased net capital
requirements. As a consequence, H.D. Vest Investment Securities, Inc. had an
increase in its minimum net capital requirements in fiscal years 1996 and 1997.
(See "Regulation.")
9. DIVIDENDS. The Company has paid no dividends on its Common Stock since
incorporation. The Company intends to continue to devote a substantial portion
of its earnings, if any, to the growth and development of the Company.
10. CONTROL BY CURRENT PRINCIPAL SHAREHOLDERS. Existing principal shareholders
of the Company own approximately 76% of the Common Stock outstanding and are in
a position to elect all the Company's directors and otherwise control the
Company. If Herb D. Vest converted his 166,667 shares of Class A Preferred
Stock, the principal shareholders would own approximately 77% of the common
stock outstanding.
11. POTENTIAL FUTURE SALES PURSUANT TO RULE 144. Of the 5,423,341 shares of
common stock outstanding as of September 30, 1997, 4,083,354 shares of common
stock are "restricted securities," as that term is defined in Rule 144 under the
Securities Act of 1933, as amended. Under this rule, a person (or persons whose
shares are aggregated) not affiliated with the issuer who has satisfied a one-
year holding period may, under
10
<PAGE>
certain circumstances, sell within a three-month period a number of shares which
does not exceed the greater of 1% of the shares outstanding or the average
weekly trading volume during the four calendar weeks prior to such sale. Rule
144 also permits, under certain circumstances, the sale of shares without any
quantity limitation by a person who is not an affiliate of the Company and who
has satisfied a two-year holding period. After a two-year holding period, if a
person is not an affiliate and has not been an affiliate for the last three
months, then the person can sell his shares without any restrictions applicable
to Rule 144. Herb D. Vest, the Chairman of the Board and Chief Executive Officer
of the Company, owns 2,442,008 shares, which are subject to Rule 144. Mr. Vest
acquired the majority of his shares in February 1987. Also, Barbara Vest, an
employee and Director of the Company owns 1,467,063 shares that are subject to
Rule 144. Future sales under Rule 144 may have a depressive effect on the price
of the Company's common stock. Herb D. Vest and Barbara Vest currently have
escrowed 20% of their stock with an independent escrow agent in order to meet
certain conditions required by the State of Texas under a previous S-18
registration statement. In addition, Herb D. Vest and Barbara Vest have pledged
portions of their remaining stock on outstanding lines of credit.
12. BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use
the proceeds from this offering for certain new programs in the areas of
operating improvements, marketing initiatives and Representative development
activities. Accordingly, the Company's management will have broad discretion as
to the application of such proceeds. (See "Use of Proceeds" and "Business-New
Programs.")
13. CONFLICTS OF INTEREST. Herb D. Vest, the principal common shareholder and
director of the Company, operates a sole proprietorship, H.D. Vest Insurance
Services ("HDVIns"), to which the Company provides certain management and other
services. To the extent that the Company renders such services to HDVIns for
which it is not compensated, such action could constitute a substantial conflict
of interest. Accordingly, HDVIns could receive an economic benefit that may not
be recognized by the Company. This could result in a direct benefit to Mr.
Vest, the sole proprietor of HDVIns.
14. ETHICS ISSUES AFFECTING CERTIFIED PUBLIC ACCOUNTANTS ("CPAS"). Currently,
23 boards of accountancy have regulations or laws prohibiting CPAs from
receiving commissions for the sale or referral of products or services to their
clients. Since 1988, approximately 23 states have changed their rules to allow
commission income by CPAs, and several other states have proposed rule changes.
In California and Louisiana, where commissions are prohibited, CPA
Representatives have been challenged by their state regulatory boards. There is
no assurance that the remaining states will change their rules. The growth of
the Company may be materially impacted in the event these rules remain
unchanged. (See "Business - H.D. Vest Representatives.")
11
<PAGE>
15. VOLATILITY OF STOCK PRICE. The stock market has from time to time
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. In addition, the Common
Stock, like the stock prices of many publicly traded financial services
companies, has been and may continue to be highly volatile. (See "Market
Information.")
16. INDEPENDENT CONTRACTOR STATUS. H.D. Vest Representatives are independent
contractors, rather than employees of the Company. Based on two Private Letter
Rulings, a test has been established to determine what the Internal Revenue
Service (IRS) considers to be the classification of individuals working for a
company. Based on these Private Letter Rulings and other applicable law, the
Company classifies H.D. Vest Representatives as independent contractors, rather
than employees of the Company. In the event that federal regulations or other
law governing worker classification should change, or that the IRS otherwise
determines that H.D. Vest Representatives are employees, the Company could be
subject to IRS withholding rules and be required to contribute Federal Social
Security and Medicare taxes on each Representative's behalf. In addition, the
Plan may then be subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). This could have a significant adverse affect on the
Company and its revenues, and could result in losses.
17. CONVERSION OF SERIES A PREFERRED STOCK. The holders of the Series A
Preferred Stock may at any time convert such shares to an equivalent number of
Common Stock shares. There are currently 250,067 shares of Preferred Stock
outstanding, of which Herb D. Vest owns 166,667 shares. (See "Certain
Transactions - Issuance of Series A Preferred Stock.")
18. LEGAL PROCEEDINGS. The Company is subject to legal proceedings and claims
which arise in the ordinary course of its business. If the Company were to lose
a material claim, it could have an adverse effect on the Company's results of
operations.
19. ECONOMIC CONDITIONS. Production for the Company's Representatives is lower
than that of Representatives of other independent broker-dealers.
In understanding this fact, management of the Company believes there are several
factors that should be considered.
o Representatives are primarily accountants/tax professionals that have
a difficult time overcoming the psychological barriers and long held
professional restrictions on selling products to their clients.
o Individuals typically have a full-time job and income when they become
Representatives of the Company. They add financial planning as a
part-time business and are frequently distracted by their ongoing
business which pays their expenses. Therefore, the Company has a
12
<PAGE>
significant challenge of motivation and focus to address with each
Representative.
o The Company has lost an average of 10% of its Representatives each
year for the last 5 years. The primary reasons for these
Representatives leaving are: 1) transfers to other broker-dealers and
2) non-producers who have chosen not to stay in the financial planning
business.
The Company has identified the following external factors that it believes have
more impact on Representatives' production than any internal factors that could
be controlled by the Company:
o Interest Rates: When interest rates are low clients are searching for
alternatives to their current investments (such as CDs). This puts
H.D. Vest Representatives in the unique position to assist their
clients in choosing alternative investments such as mutual funds.
o Taxes: Tax law changes provide the Representatives with special
challenges as well as opportunities. In the face of significant
change most clients are hesitant to make changes in their investments
and the Representative as their accountant is not as likely to pursue
this business as the typical full-time independent Representative.
Opportunities also exist for Representatives that the typical
independent representative does not have. When tax laws change the
accountant is the logical choice for clients to discuss potential
effects on their investments.
o Market Conditions: The Company's revenues are related to the strength
of the financial markets. Fluctuations in inflation and interest
rates have a direct correlation to the investments the public will use
in their search for a higher return. Significant stock market gains
and losses dramatically influence the performance of H.D. Vest
Representatives. In periods of market decline H.D. Vest
Representatives have historically been hesitant to advise their
clients regarding investment products.
o Legislation/Regulation: Legislative and regulatory policies and
actions affect the ability of the Company and its Representatives to
generate revenues and control costs. Legislation related to taxes,
qualified plans, insurance, tax credit elimination and the regulation
of the securities, financial planning, accounting and insurance
industries are the issues of most interest to the Company. Many of
the laws and regulations currently in place limit the ability of H.D.
Vest Representatives to service their clients effectively and
efficiently. One of the most important issues has been the CPA
commissions compensation issue
13
<PAGE>
whereby certain states have prohibited (via laws and regulations) CPAs
from accepting commissions as a form of compensation. The Company has
actively contested these regulations over the past 10 years. To the
extent that these issues are resolved in the Company's favor, they may
have a significant effect on production per Representative. The
Company has developed an alternative to the commissions compensation
issue through the development of the VestFlex, VestPremiere and
VestAdvisor fee-based programs.
o Competition: The Company's Representatives face competition for the
services they provide from the accounting, financial planning, stock
brokerage and insurance industries. The Company's Representatives are
not aggressive in overcoming this competition which puts them at a
disadvantage.
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The following summary of certain financial information relating to the Company
for the five years ended September 30, 1997, has been derived from the audited
financial statements of the Company. 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.
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $46,007,817 $50,287,196 $44,670,051 $67,509,222 $87,824,382
Net Income (Loss) 2,934,722 (369,901) 1,329,001 1,188,707 2,142,063
Income (Loss)/
Common Share 0.52 (0.09) 0.22 0.20 0.37
Ratio of Earnings to
Fixed Charges or
Coverage 7.98 (0.05) 4.08 4.03 5.52
Deficiency
</TABLE>
SUMMARY OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION:
<TABLE>
<CAPTION>
As of September 30,
--------------------
1993 1994 1995 1996 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $2,533,029 $ 1,012,016 $ 1,293,871 $ 2,821,115 $ 5,054,298
Total Assets 9,857,018 12,336,852 11,666,371 16,950,759 19,747,631
Long-Term Debt And
Capital
Leases(net of
current
maturities) 187,858 543,848 430,739 676,844 1,016,257
Total Liabilities 6,720,687 9,697,957 7,726,010 11,949,226 12,699,070
Shareholders'
Investment 3,136,331 2,638,895 3,940,361 5,001,533 7,048,561
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The main sources of liquidity and capital resources for the Company are cash
flows from operations and deferrals of compensation by Registered
Representatives. At September 30, 1997, the Company had working capital of
$5,054,298, an increase of $2,233,183 from the $2,821,115 of working capital at
September 30, 1996. The increase in working capital is primarily the result of
a 30% increase in total revenue for the year ended September 30, 1997, as well
as an increase of $576,022 in current year deferrals from the Representatives
Deferred Compensation Plan.
Cash provided by operating activities decreased by $3,040,514 to $740,271 for
the year ended September 30, 1997 compared to the year ended September 30, 1996.
The decrease in cash provided by operations is primarily due to the reduction of
Accounts Payable and Accrued Expenses, increases in Commission and Account
Receivables net of related Commission Expense, and additions to Prepaid Assets
during the year ended September 30, 1997.
Cash used for investing activities increased by $767,305 to $1,141,856 for the
year ended September 30, 1997. The increase is primarily due to purchases of
property and equipment made by the Company during fiscal 1997. These
expenditures were necessary to support current and projected operating levels of
the Company. Cash used for investing activities of $374,551 and $485,804 for the
years ended September 30, 1996 and 1995 included costs incurred for software
development, designed to improve the productivity of the Company and its
Representatives, and costs related to the formation of the Deferred Compensation
Plan. The Company incurred expenditures of $988,061, $315,179 and $95,145 for
furniture, fixtures and computer equipment for the years ended September 30,
1997, 1996 and 1995, respectively.
Cash provided by financing activities of $51,731 during the fiscal year ended
September 30, 1997 included net advances on the lines of credit to Mr. Vest and
Ms. Vest, payments for capital lease obligations and preferred stock dividends.
Net advances on lines of credit consist of advances to Mr. Vest of $285,714,
payments from Mr. Vest of $285,714, advances to Ms. Vest of $112,090 and
payments from Ms. Vest of $61,688. Cash provided by financing activities during
the fiscal year ended September 30, 1997 included amounts deferred by
Representatives under the Deferred Compensation Plan of $576,022. Cash used for
financing activities of $54,448 during the fiscal year ended September 30, 1996
include net advances on the lines of credit with Ms. Vest of $135,698, payments
for capital lease obligations and preferred stock dividends, offset by amounts
deferred by Representatives under the Deferred Compensation Plan of $518,286.
16
<PAGE>
Additionally, during 1997, the Company acquired, under various capital lease
agreements, telephone equipment and other property necessary to support the
current and projected operating levels of the Company.
Historically, the Company's growth has been financed through loans, private
placements of preferred and common stock, public offerings of common stock and
cash flows from operations. For the period from inception through September 30,
1997, amounts from these sources have been approximately $2.5 million, $2.6
million, $5.1 million and $8.7 million, respectively.
In July 1995, the Company began accepting contributions for the Deferred
Compensation Plan ("the Plan") for its Representatives. Pursuant to the Plan,
Representatives may forego current compensation, thereby postponing recognition
of income otherwise currently taxable, and subsequently receive the deferred
compensation plus a Company matching contribution, as defined in the Plan. As
of September 30, 1997 and 1996, approximately $1,167,000 and $591,000,
respectively, had been deferred under the Plan.
Matching contributions on amounts deferred under the Plan are accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants. Such increases in commission expense will have an
adverse effect on the net income of the Company. To the extent that
Representatives elect to defer receipt of compensation under the Plan, such
compensation will ultimately be paid to the participant in the form of cash. As
of September 30, 1997 and 1996, the Company had accrued matching contributions
of approximately $156,200 and $45,200, respectively.
The Company continually monitors the capital markets for opportunities to obtain
financing to meet its growth needs. Historically, the Company has significantly
increased its recruiting and development activities upon obtaining such
financing. The Company must expense all costs related to these activities.
Additionally, in periods of increased recruiting and development activities, the
Company has experienced higher general and administrative costs as overhead
increased to support the recruiting and development activities. Consequently,
the Company has recorded substantial expenses subsequent to obtaining financing
required to fund further growth. Should the Company obtain future financing to
fund its growth plans, it is likely the Company would record substantial
expenses in the periods subsequent to obtaining such financing.
17
<PAGE>
RESULTS OF OPERATIONS
REVENUES:
The Company's revenues for the years ended September 30, 1997, 1996, and 1995
were $87,824,382, $67,509,222, $44,670,051, respectively, a 30%, 51%, and -11%
change from the years ended September 30, 1996, 1995, and 1994, respectively.
Management believes that the increase in revenues in fiscal years ended 1997 and
1996 is due in part, to continued strength in the overall financial markets and
to the continued development of training and educational programs by the
Company. Management believes that revenues in 1995 were negatively impacted by
declining financial markets and rising interest rates that made interest-bearing
investments attractive to investors. The Company's revenues are related to the
strength of the financial markets. Inflation and interest rates have a direct
correlation to the investments the public will use in their search for a higher
return.
Commission revenue as a percentage of gross product sales, and as a percentage
of total revenues, has gradually declined since the Company's formation. This
decline is primarily due to an industry-wide reduction in commissions on
purchases of mutual funds and unit investment trusts. These products comprise
the majority of the revenues generated by HDVIS, the Company's main operating
subsidiary. To the extent that these commissions continue to decline, HDVIS
must increase its volume of products sold to maintain historical commission
revenue levels.
Due to the declining trend of commission revenue as a percentage of gross
product sales, the Company continues to devote significant resources to further
development of its fee-based programs. Portfolio management fees from these
programs were $11,070,632 for the year ended September 30, 1997, a 71% increase
over the year ended September 30, 1996. Portfolio fee revenue for the years
ended September 30, 1996 and 1995, were $6,480,537 and $3,219,574, respectively,
a 101% and 92% increase over the years ended September 30, 1995 and 1994,
respectively.
The reasons for changes in the Company's revenues in the years ended September
30, 1995, 1996, and 1997 are summarized in the following table:
18
<PAGE>
% Change for the Years Ended September 30,
as compared to Previous Years
------------------------------------------
Source of Revenue 1995 1996 1997
- -------------------------- -------- -------- ----
Mutual Fund and UITS (1) -17% +47% +21%
Variable Insurance
Products (2) +10% +81% +30%
Limited Partnership
Interests (3) -29% -36% -20%
Stocks, Bonds and
Options (1) -15% +43% +48%
Trading (8) - N/A +664%
Investment Advisory
and Portfolio
Management Fees (4) +92% +101% +71%
Facility and Service
Fees (5) +75% -24% +29%
Marketing and
Educational
Fees (6) -11% +43% +53%
Other (7) -47% -14% +34%
(1) Revenue increased in 1996 and 1997 due to continued strength in the
financial markets and to the continued increases in product sales resulting
in part from the growth of the number of Representatives. Other
contributing factors include the training programs provided by the Company
and stable or declining interest rates. Revenues in 1995 decreased due to
rising interest rates that made interest-bearing investments attractive to
investors.
(2) Revenues increased due to the increase in the number of Representatives
licensed to offer this product and market conditions that made this product
a more attractive investment.
(3) Revenues decreased due to a decline in demand for this type of product due
to changes in tax laws and the economic viability of these products.
(4) Revenues increased in part due to an increase in the number of
Representatives licensed to offer this product and the development of
additional fee-based services. The division has continued to grow with the
addition of new accounts and new services, VestFlex and VestAdvisor
Investment Programs. During 1995, 1996 and 1997, the Company has devoted
significant resources to further develop its fee-based programs.
(5) Facility and Service Fees increased in 1995 and 1997 due to an increase in
the resources available to support this product line. Fees in 1996
decreased due to a decline in resources available to support this product
line.
(6) Revenues in 1996 and 1997 increased due to increases in sales and the
expansion of the educational programs and seminars provided by the Company.
Product sponsors assist in the funding of the Company's educational
services. Revenues in 1995 decreased as a direct result of a sluggish
market, which reduced the receipts from product sponsors.
19
<PAGE>
(7) Effective November 15, 1989, the Company began charging a transaction fee
of $10.50 for each transaction processed by the Company, subject to certain
limitations. This policy was discontinued in the first quarter of fiscal
year 1995. Transaction fees for the years ended September 30, 1994, and
1995 were $845,436 and $64,586 respectively. The increase in 1997 is due to
increased interest income received by the Company from increased cash
reserves maintained during the year.
(8) Revenue from trading activities were $29,863 and $228,217 for the years
ended September 30, 1996 and 1997, respectively.
NET INCOME:
Net income for the year ended September 30, 1997 was $2,142,063 compared to net
income of $1,188,707 and $1,329,001 for the years ended September 30, 1996 and
1995, respectively.
General and administrative expenses for the years ended September 30, 1997 and
1996 were $19,394,200 and $16,072,510, respectively an increase of $3,321,690
and $5,261,618 from the prior years ended September 30, 1996 and 1995,
respectively. To meet increased service demands, the Company increased staffing
levels by 33%. The Company's total number of employees grew from 189 to 251,
with additions in the areas of financial planning support, advisory services,
trading, compliance, customer service, and information services. General and
administrative expenses include incentive compensation plans for executive
officers, senior managers, and employees. The Company's Representative base has
increased 16% from 4,471 in September 1995 to 5,197 in September 1997. This
increase as well as the continued strength in the financial markets over the
same period, are the primary reasons for the Company's staff build-up over the
past two years.
Management believes that the Company's investment in the training, development,
and support of its Representative base through proprietary education programs
has contributed to the increase in revenues experienced by the Company.
General and administrative expenses for the year ended September 30, 1995 were
$10,810,892, a decrease of $2,893,060 from the prior year total of $13,703,952.
A substantial amount of the Company's expenses are variable and controllable.
Therefore, as revenues declined during 1995, the Company was able to reduce
certain expenses to maintain its profitability. Additionally, the reduction in
general and administrative expenses for fiscal 1995 is partially due to a credit
to expense of $381,331 related to the cancellation of an officer's severance
agreement.
Included in general and administrative expense are costs related to an
arbitration award to a group of clients of a former Representative. Also
included in the increased expenses are amounts related to incentive compensation
plans for executive officers, senior managers and employees, and additional
administrative and operational staff necessary to support the
20
<PAGE>
Company's current and projected operating levels. The following table summarizes
the related charges to general and administrative expense related to this
matter. For a more detailed discussion see "Item 3. Legal Proceedings."
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1995 1996 1997
---------- ----------- --------
<S> <C> <C> <C>
Professional fees and other
Expenses $ 42,312 $ 665,937 $ 47,393
SEC sanction (150,000) - -
Receivable from bonding
Company - (250,000) -
Payments and arbitration
Awards to plaintiffs 452,292 1,700,000 121,035
--------- ---------- --------
$ 344,604 $2,115,937 $168,428
========= ========== ========
</TABLE>
The Representative development process is the cornerstone of the Company's
concept of providing the client with the most qualified professional
Representative available. The Company has made, and will continue to make,
significant investments in the development of programs to provide
Representatives with training designed to keep them apprised of financial
opportunities for their clients.
The Company requires its Representatives to obtain specific licenses, complete
training programs and follow prescribed procedures in adding financial planning
and implementation services to their practices.
The training and marketing programs offered by the Company to its
Representatives include software support such as an asset allocation and tax
form based investment analysis program, educational events such as RSS meetings
and marketing initiatives that include self-study kits and newsletters, and
various other regional and national meetings sponsored by the Company as well as
the sponsors of products sold by the Company's Representatives. Currently, the
Company holds two national training conferences annually.
Representative development costs for the year ended September 30, 1997 and 1996
were $7,485,266 and $6,506,014, respectively, an increase of $979,252 and
$1,979,377 over the prior years ended September 30, 1996 and 1995, respectively.
Representative development costs for the year ended September 30, 1995 were
$4,526,637, a decrease of $411,490 over the prior year.
At September 30, 1997, the Company has approximately 5,197 fully licensed
Representatives and approximately 1,073 Representatives in various stages of
licensing.
The Company recruits Representatives for its subsidiaries HDVIS and HDVAS and
other affiliated entities. Since its inception, the Company has developed a
recruiting process which it believes results in a larger network for
distribution of financial products and services. Based on its experience in
this area, the Company typically uses methods that have been proven to be the
most effective in the past. These methods include direct mail,
21
<PAGE>
recruiting seminars, telemarketing, trade shows, referral incentive programs,
trade publication advertising and various education events. The Company may
employ additional methods of recruiting in order to develop and determine the
effectiveness of such alternatives.
The Company's recruiting efforts for the years ended September 30, 1995, 1996,
and 1997 resulted in increases in new affiliates of 683, 722, and 1,815,
respectively.
Representative recruiting costs for the year ended September 30, 1997 and 1996,
were $1,677,594 and $773,909, respectively, an increase of $903,685 and $375,072
over the prior years ended September 30, 1996 and 1995, respectively.
Representative recruiting costs for the year ended September 30, 1995, were
$398,837, a decrease of $120,339 from the costs of $519,176 for the year ended
September 30, 1994. The increases in fiscal 1997 and 1996 are the result of
increased activities designed to find prospective Representatives.
The Company's Representatives include Certified Public Accountants ("CPA").
Currently, however, some state boards have regulations prohibiting CPAs from
receiving commissions for the sale or referral of products or services to their
clients. Since 1988, 23 states have changed their rules to allow commission
income by CPAs and several other states have proposed rule changes. CPA
Representatives have been challenged in Louisiana and California, where the
receipt of commissions by CPAs are prohibited. The Company has chosen to
vigorously support these Representatives. The Company has incurred legal costs
of approximately $156,000, $242,000 and $351,000 for the years ended September
30, 1995, 1996 and 1997, respectively, to support these Representatives.
22
<PAGE>
USE OF PROCEEDS
The net proceeds to be realized by the Company from the sale of Units consist of
an estimated $7,000,000 in Cash Equivalents. Deferrals by a Representative
pursuant to the Plan shall be made as such Compensation is earned. Accordingly,
the amount attributed to Cash Equivalents will be received by the Company over
an extended period of time. The Company anticipates that the net proceeds of
the offering will be used for certain new programs in the following areas: (i)
operating improvements, (ii) marketing initiatives and (iii) Representative
development activities (see "Business - New Programs"). As of September 30,
1997, the Company's Representatives had deferred $1,167,165 pursuant to the
Plan.
The following table represents the Company's estimate of the allocation of the
estimated proceeds of this offering that will be received over an extended
period of time. The Company may find it necessary or desirable to reallocate
the net proceeds among the described categories if its expectations regarding
general economic conditions and conditions in the financial service industry
should change (see "Business - New Programs"). If attractive opportunities
become available, or if circumstances indicate that it is imprudent or
impractical to follow the following estimated allocations, the Company may use
portions of the proceeds for other uses which may not be presently identifiable.
<TABLE>
<CAPTION>
Approximate Percent
Dollar Amount(1) of Net
---------------- --------
<S> <C> <C>
Operating Improvements (2) $4,000,000 57%
Marketing Initiatives (2) 900,000 13%
Representative Development
Activities (1) 2,100,000 30%
---------- ---
$7,000,000 100%
========== ===
</TABLE>
(1) The estimate by the Company is that Representatives will defer $7,000,000
as Cash Equivalents over an extended period of time.
(2) See "Business - New Programs"
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1997:
<TABLE>
<CAPTION>
Adjusted For
Actual at Deferral of
September 30, 1997 Cash Equivalents (2)
------------------ --------------------
<S> <C> <C>
Long Term Debt $1,323,375 $2,323,375
Shareholders' investment:
Preferred stock, $6 par value,
10,000,000 shares
Authorized; 250,067 issued 1,500,402 1,500,402
Common stock, $.05 par value,
100,000,000 shares authorized;
5,423,341 outstanding (1) 271,167 271,167
Additional paid-in capital 5,113,334 5,113,334
Retained Earnings 163,658 163,658
---------- ----------
Total shareholders' investment 7,048,561 7,048,561
---------- ----------
Total Capitalization $8,371,936 $9,371,936
========== ==========
</TABLE>
(1) Does not include up to 800,000 shares reserved for stock options (see
"Management - Stock Options").
(2) Assumes $1,000,000 of deferred compensation during the next twelve months
and $7,000,000 over the life of the Plan.
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 the outstanding shares of the following
subsidiaries.
24
<PAGE>
H.D. Vest, Inc.
d/b/a H.D. Vest Financial Services
Incorporated
Subsidiaries (TEXAS) Services
------------ ------------- --------
H.D. Vest Investment Securities, 1983 Registered Securities
Inc. "HDVIS" Broker-dealer
Products:
Mutual Funds
Unit Investment
Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 Registered Investment
"HDVAS" Advisor
Agent Licensing
Assistance
Money Management
Services
H.D. Vest Mortgage Services, Inc. 1989 Inactive Subsidiary
"HDVMS"
H.D. Vest Collateral Management 1988 Inactive Subsidiary
Company "HDVCMC"
H.D. Vest Business Valuation 1987 Inactive Subsidiary
Services, Inc. "HDVBVS"
H.D. Vest Corporate Finance, Inc. 1990 Inactive Subsidiary
"HDVCF"
The Company was established to meet the growing demand for professional
financial services, and to provide such services primarily through tax
professionals. The Company's management believes that the tax professional is
uniquely qualified to give confidential, professional financial advice and
implement financial plans due to the tax professional's knowledge of his or her
clients' financial affairs. The Company offers the tax professional the means
to provide personalized financial services to the consumer while simultaneously
providing the tax professional with an additional source of income.
REGISTERED REPRESENTATIVES
The Company utilizes a single Representative base to market its financial
service products. As of September 30, 1997, the Company's has approximately
5,197 fully licensed Representatives and approximately 1,073 Representatives in
various stages of the licensing process.
25
<PAGE>
H.D. VEST REGISTERED REPRESENTATIVE
DISTRIBUTION BY STATE AS OF SEPTEMBER 30, 1997
(map)
The following map illustrates the geographic location of the Company's
approximately 5,197 fully-licensed Representatives.
Alabama 28 Montana 14
Alaska 5 Nebraska 15
Arizona 156 Nevada 23
Arkansas 33 New Hampshire 15
California 719 New Jersey 168
Colorado 130 New Mexico 11
Connecticut 60 New York 297
Delaware 15 North Carolina 89
District of Columbia 10 North Dakota 15
Florida 312 Ohio 209
Georgia 92 Oklahoma 151
Hawaii 10 Oregon 40
Idaho 8 Pennsylvania 239
Illinois 190 Puerto Rico 1
Indiana 77 Rhode Island 16
Iowa 35 South Carolina 23
Kansas 40 South Dakota 8
Kentucky 29 Tennessee 50
Louisiana 89 Texas 827
Maine 30 Utah 31
Maryland 105 Vermont 17
Massachusetts 141 Virginia 87
Michigan 115 Washington 70
Minnesota 78 West Virginia 14
Mississippi 41 Wisconsin 128
Missouri 81 Wyoming 10
-----
Total 5,197
=====
26
<PAGE>
TECHNICAL SALES AND SUPPORT SERVICES
The Company has assembled staff experts in areas of individual and business
financial planning, including Certified Public Accountants, Certified Financial
Planners, Chartered Financial Analysts, Chartered Life Underwriters, Certified
Investment Management Analysts, Chartered Financial Consultants, Certified
Employee Benefits Specialists, Chartered Pension Consultants, Enrolled Agents,
Certified Management Accountants, American Institute of Certified Public
Accountants-Accredited Personal Financial Specialists, Lawyers and Pension and
Executive Compensation Certificate recipients. The Company's staff of financial
professionals provide financial planning and product information to H.D. Vest
Representatives who in turn assist their clients with their financial planning
needs. These services to clients include, but are not limited to, investment
and insurance planning and product selection, portfolio management, assistance
in establishment of employee benefit plans, and estate planning.
REGIONAL SUPPORT SYSTEM
The Company has developed a local support system designed to provide
Representatives assistance in all aspects of financial planning including sales
and marketing training, time management, practice management, financial
products, and case studies. The Regional Support System (RSS) also provides a
network for Representatives to consult with each other and analyze actual client
situations. This system operates on the philosophy that the Representatives
will learn from other Representatives who have successfully added financial
planning services to their practices.
Each RSS group is led by a successful H.D. Vest Representative. This
Representative has met specific criteria and attended training before beginning
to train fellow H.D. Vest Representatives. The Regional Support System is
divided into Mentor, Chapter and Summit teams determined by varying degrees of
Representative production.
EDUCATIONAL SERVICES
The Company's educational staff develops educational materials, programs and
seminars designed to enhance the technical skills and knowledge of
Representatives. Tools used to train and educate the Company's Representatives
and their clients include, but are not limited to, self-study courses,
newsletters, promotional pieces and software.
REPRESENTATIVE RECRUITING
The Company recruits Representatives for its subsidiaries HDVIS and HDVAS and an
affiliated insurance entity. Since its inception, the Company has developed a
recruiting process which the Company believes results in a larger network for
distribution of financial products and services. Based on its experience in
this area, the Company typically uses methods that have been proven to be the
most effective in the past. These methods
27
<PAGE>
include direct mail, recruiting seminars, telemarketing, trade shows, referral
incentive programs, trade publication advertising and various education events.
The Company may employ additional methods of recruiting in order to develop and
determine the effectiveness of such alternatives.
REPRESENTATIVE DEVELOPMENT
The Representative Development process is the cornerstone of the Company's
concept of providing the client with the most qualified professional
Representative available. The Company has made, and will continue to make,
significant investments in the development of programs to provide
Representatives with training designed to keep them apprised of financial
opportunities for their clients.
The Company requires its Representatives to obtain specific licenses, complete
training programs and follow prescribed procedures in adding financial planning
and implementation services to their practices.
The training and marketing programs offered by the Company to its
Representatives include software support such as an asset allocation and tax
form based investment analysis program, educational events such as the RSS
meetings and marketing initiatives including self-study kits and newsletters,
and various other regional and national meetings sponsored by the Company as
well as the sponsors of products sold by the Company's Representatives.
Currently, the Company holds two national training conferences annually.
REPRESENTATIVE SYSTEMS
The Information Services Division ("Division") provides computer support systems
for both the Company and its Representatives. The Division is responsible for
developing and writing programs and for maintaining the hardware that support
the Company's operations.
The Company recognizes that access to information, and the ability to process
that information quickly and accurately, must be a business priority. To that
end, the Company has developed an Intranet Site, Internet Site, and undertaken a
variety of other computer software and hardware improvement initiatives.
During fiscal 1997, the Company developed an Internet site that is accessible to
any World Wide Web user at www.hdvest.com. The Company's web site is primarily
an advertising and recruiting tool used by the Company to provide information
about itself to interested individuals. The Company intends to continually
expand the information available on this web site.
Also in fiscal 1997, the Company developed, for the sole use of its
Representative base, an Intranet site. The Company's Intranet site provides, to
licensed Representatives, a complete array of information and services primarily
for use in providing investment services to clients. Services provided, or to
be
28
<PAGE>
provided in the future, include access to information on client accounts, on-
line quotes, remote order entry capability, and access to the forms libraries of
mutual fund product sponsors. The Company intends to continually expand the
information available on, and capabilities of, the Intranet site.
The Company is currently developing a Representative Desktop. This computer
system will provide the Representative with an office management system that
will integrate with the Company's existing computer hardware and software.
INSURANCE AGENCY MANAGEMENT SERVICES
The Company provides management services to an affiliated insurance agency, H.D.
Vest Insurance Services. HDVIns 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
$551,379, $416,298 and $538,700 for the years ended September 30, 1995, 1996 and
1997, respectively. As of September 30, 1997, the Company had a receivable of
approximately $142,145 from HDVIns.
INVESTMENT SERVICES
H.D. Vest Investment Securities, Inc. is registered as a broker-dealer in all 50
states, the District of Columbia and the Commonwealth of Puerto Rico, and is the
investment products and trading subsidiary of the Company. HDVIS offers non-
proprietary investment products including mutual funds, unit investment trusts,
direct investments, stocks and bonds. HDVIS is a member of the National
Association of Securities Dealers, the Securities Investors Protection
Corporation, and the Securities Industry Association.
TRADING AND CUSTOMER SERVICE
Trading and customer services are provided by the Company to its Representatives
on an ongoing basis. The Company's trading room processes trades in mutual
funds, direct investments, unit investment trusts and individual securities. In
addition, the H.D. Vest Discount Brokerage Service allows investors to buy and
sell individual securities at discounted commission rates.
29
<PAGE>
The following table summarizes the number of securities transactions processed
by the Company:
Years Ended September 30,
-------------------------
1995 1996 1997
---- ---- ----
1,569,425 2,422,705 4,042,941
Customer accounts for trading of stocks and bonds and certain mutual fund and
direct participation programs are cleared on a fully disclosed basis through
National Financial Services Corporation, 161 Devonshire Street, Mail Stop D6,
Boston, Massachusetts 02110. National Financial Services Corporation, as the
clearing firm for HDVIS, maintains all stock, bond and option transactions of
HDVIS' customers on its own records. The majority of transactions involving
mutual funds and direct participation programs are handled directly with the
product distributors.
REPRESENTATIVE LICENSING
The Company provides step-by-step assistance to Representatives in obtaining
their securities, insurance and Registered Investment Advisor licenses,
including educational programs for exams and administrative processing through
the National Association of Securities Dealers, and the state agencies
supervising securities and insurance licensing.
COMPLIANCE AND SUPERVISION
The financial services industry is subject to extensive regulation on both the
federal and state levels, with which the Company and its subsidiaries must
comply (see "Government Regulation"). HDVIS and HDVAS must maintain current
registration with the applicable regulatory bodies.
The Company requires that all Representatives follow the Company's Compliance
and Supervisory Procedures. To that end, the Company's Compliance Department is
responsible for Representatives' compliance with rules of the regulatory bodies
that supervise the financial services industry. Due to the strict regulation of
the financial services industry by federal and state agencies, it is important
that the Company keep abreast of the activities of its Representatives and
internal staff. The Company's Compliance Department supervises the investing
activities of all Representatives.
PROFESSIONAL INVESTMENT ADVISORY SERVICES
H.D. Vest Advisory Services, Inc. ("HDVAS") conducts the investment advisory
activities of the Company. HDVAS, formed in 1987 as a Texas corporation, is
registered as an investment advisor with the Securities and Exchange Commission
and various state regulatory agencies and is a member of the Investment Company
Institute. The Company's Representatives can register as Investment Advisor
Representatives under HDVAS, giving them the
30
<PAGE>
capability of providing fee-based financial planning services to their clients.
HDVAS provides three fee-based services. The VestPremiere Investment Program is
designed for clients with a minimum $100,000 of currently investable assets, and
allows individual investors, foundations, endowments, retirement plans and
trusts to access comprehensive and independent consulting services that
historically were reserved for only large institutional investors. This service
helps investors to determine an appropriate asset allocation and to choose the
proper money managers to manage various portions of their investment portfolio.
A quarterly report is provided to each client detailing investment performance.
The VestFlex Investment Program is designed to provide clients with a minimum
$10,000 of investable assets with asset allocation and professional-monitoring
services. Individual investment objectives and risk tolerances are utilized to
select the optimal portfolio in order to meet the client's needs. Each
portfolio is invested in a family of mutual funds and diversified into different
asset classes. A quarterly report is provided to each client detailing
investment performance.
The Vest Advisor Investment Program accommodates clients with a minimum of
$25,000 of current investable assets. These investments are managed by the
client's Representative according to the portfolio goals established by the
client. Each client's investment is held in a single brokerage account. A
quarterly report is provided to each client detailing investment performance.
NEW PROGRAMS
The Company plans to use the proceeds of this offering as well as cash amounts
deferred under the Plan to undertake several new programs in the coming years in
an effort to improve the productivity of its Representatives and the efficiency
of the Company's corporate support staff. Such new programs will be implemented
at the discretion of the Company.
OPERATIONAL IMPROVEMENTS:
The Company is competing in an industry that is rapidly changing. In order to
effectively respond to the competition, the Company and its corporate support
staff and Representatives must evolve to meet these demands. The Company's goal
is to provide its staff with the training opportunities and the systems support
to meet this challenge.
Staff Training:
- ---------------
In order to achieve this goal the Company must continually assess and enhance
its employees' skills and effectiveness. With the changes in the financial
services industry, the Company's staff must learn new skills that will make it
more adaptable and flexible. In order to ensure that the Company's staff is
ready to meet the challenges afforded by working for a growth company in a fast-
paced industry, the Company will develop a comprehensive
31
<PAGE>
training and continuing education curriculum. Various training media will be
utilized for the delivery of the training programs, including audio, video,
self-study and computer-based training.
Corporate Integrated Systems:
- -----------------------------
In order to stay competitive in the financial services industry, the Company
must vastly improve its systems' capabilities. Because of the labor intensive
nature of the Company's business caused by increases in regulatory paperwork and
disclosure and pressure from Representatives regarding fees and payout, firms
that do not keep pace with technology advancements will be left behind by their
competition.
To the extent feasible due to current regulatory requirements, the Company's
goal is to electronically communicate with the Representatives, eliminating as
much mail, paper and telephone calls as possible. This affects every department
at the Company and every Representative and client in the field. The ability of
the Company to improve technological capabilities in a cost-effective manner
could significantly affect growth and profitability.
Over the coming years, the Company plans to make the following systems
improvements and enhancements:
o Improve analysis through development of systems.
o Improve telemarketing systems in Recruiting and Marketing.
o Develop software that integrates existing systems with outside product
information clearing houses to facilitate:
- Client account maintenance
- Transaction processing
- Cash Management
- Exchange of information regarding client accounts with major
product sponsors.
o Implement work flow management to improve staff efficiencies.
o Develop expert system for staff and Representatives providing them
access to information with 70% of expert ability.
Representative Integrated Systems:
- ----------------------------------
The Representatives have the same challenges that the Company faces in competing
in today's financial services industry. They require integrated systems to
effectively manage their practices. The Company must be on the leading edge of
providing the best systems available for the management of all areas of our
Representatives business. Over the coming years, the Company plans to develop
or improve Representative systems in the following areas:
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<PAGE>
o Communication software that not only allows direct communication with
the home office but also provides look-up capabilities for client
account information, commission status, customer service problem log
status and access to compliance and licensing information and
educational event registration.
o Develop integrated systems to support marketing and operations,
including contact management, tax preparation, marketing from the tax
return, financial planning integrated with tax preparation software
and investment monitoring and reporting.
o Develop programs for preparing client presentations.
MARKETING INITIATIVES:
The Company firmly believes that in order to achieve its objectives, it will
need to become well known by accounting and financial professionals as well as
by the public at large. The Company has developed several strategies to achieve
public awareness.
Book Publishing and Public Seminars:
- ------------------------------------
The Company has identified a series of financial planning oriented books to be
published for the general public. The Company has published two books, "Wealth:
How to Get It, How to Keep It" and "Wealth Workout", published in 1993 and 1995,
respectively. The Company will promote these books to Representatives,
Representatives' clients and to the general public. A media tour will help to
promote the books and a 1-800 number will be used to refer interested
individuals to a qualified H.D. Vest Representative. Additional books are
planned for the following topics:
o Investing for Small Businesses
o Investing for Young Adults
o Investing for Women
o Investing for Retirees
o Reference Manual on Financial Designations
The Company plans to actively promote these books to:
o Gain name recognition
o Promote H.D. Vest Representatives
o Educate the public
o Be perceived as different and unique in the industry
o Be perceived as experts in the industry
o Enhance recruiting efforts
Cooperative Advertising:
- ------------------------
Representatives who meet specific criteria and agree to adhere to certain
standard procedures will be invited to participate in the Company's future
cooperative advertising programs and will share in the cost of development,
testing and implementation of national, regional and local advertising
initiatives.
33
<PAGE>
Fee-Based Products and Services:
- --------------------------------
The Company believes that in order to attract and retain successful
Representatives, it must offer a variety of fee-based compensation programs in
addition to the commission-based products that now comprise the majority of its
revenues. In 1993 the VestFlex program was introduced. The program has been
well received by the Company's Representatives and is expected to expand over
the next five years to include:
o Flexible investing into specific mutual funds
o Portfolio consisting of mutual funds of more than one fund family
o Complete systemization of the processing of transactions and
simplification of paperwork
Additionally, in October 1995, the VestAdvisor Program was introduced. This
program accommodates clients with a minimum of $25,000 of current investment
assets.
Direct Marketing Programs:
- --------------------------
The Company plans to develop tested direct marketing programs for use by its
Representatives. These would include marketing letters, brochures, seminar
presentations and one-on-one client presentations and include complete training
on use and implementation of the programs.
Public Seminars:
- ----------------
The Company plans to develop and conduct public seminars to educate the public
on the importance of understanding basic financial principles.
REPRESENTATIVE DEVELOPMENT ACTIVITIES:
Support:
- --------
The accountant/tax professional Representative needs the support of the Company
to implement financial planning services into their existing tax practice.
o FIELD SUPPORT. The Company believes that an important element that is
currently missing from its support services is the availability of in-
field training and sales assistance for new Representatives and those
who need more personalized services than can be provided via the
telephone support of the home office. The Company believes that this
can be accomplished through the widespread implementation of the
Regional Support System ("RSS"). The RSS is a field support program
designed to train and support Representatives in the technical aspects
of financial planning, motivation and sales training, time and
practice management, financial products, and support in actual client
situations.
o TECHNICAL SUPPORT. The Company offers comprehensive Technical Support
services to its Representatives. These services include support in the
areas of
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<PAGE>
Retirement Planning, Investment Planning, Education Planning, Employee
Benefits, Tax Planning, Risk Management, Qualified Plans, Product
Selection, Bank Marketing Programs and Marketing Strategies. The
Company employs staff experts in every area who are dedicated to
providing technical information to its Representatives. The Company
believes that the addition of staff experts in Estate Planning,
Portfolio Management, Asset Allocation and Insurance are key to the
continued success of the Technical Support services.
o PRODUCT SUPPORT. Because of the large volume of product sales the
Company supplies to major product sponsors, it has been able to
negotiate personalized product support from the wholesaler teams of
the sponsors. The wholesalers are available to Representatives for
client presentations, seminar presentations and assistance in product
selection.
Training:
- ---------
The Company has done extensive research into the training necessary to
accomplish a successful and profitable transition for the tax professional to
provide financial planning services to his or her clients. The research has
shown that the basic needs for training fall into the following categories:
o Technical (identifying client needs)
o Product (choosing a product)
o Operations (processing paperwork)
o Sales (making the recommendation)
o Marketing (proven marketing techniques)
o Motivation (overcoming fears)
o Practice Management (transition to financial planning)
In June, 1994, the Company completed work on the first in its series of many
comprehensive, integrated training programs (the Rep Success Program). These
programs will utilize various training media in order to maximize the success of
the program.
In addition to providing top quality training programs to enhance the skills of
the Representatives, the Company plans to provide Continuing Professional
Education ("CPE") credit where available for CPAs, CFPs, EAs, CLUs, ChFCs and
other financial services designations.
35
<PAGE>
OPERATIONS AND SOURCES OF REVENUE
The Company and its subsidiaries operate primarily in a single industry segment:
securities brokerage and related financial services. The following table sets
forth the Company's total revenues by major source:
SUMMARY OF COMPANY'S SOURCES OF REVENUE
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Mutual Fund and UITs $30,611,062 $44,960,556 $54,222,732
Partnership Interests 198,910 126,945 101,885
Stocks, Bonds and Options 1,930,867 2,752,832 4,084,707
Insurance Products 4,286,916 7,753,815 10,098,858
Trading - 29,863 228,217
Marketing and Education
Fees 2,933,055 4,182,201 6,396,111
Portfolio Management Fees 3,219,574 6,480,537 11,070,632
Facility and Service Fees
from Affiliate 551,379 416,298 538,700
All Other 938,288 806,175 1,082,540
----------- ----------- -----------
Total Revenue $44,670,051 $67,509,222 $87,824,382
=========== =========== ===========
</TABLE>
The Company had assets of $11,666,371, $16,950,759 and $19,747,631 for the years
ended September 30, 1995, 1996 and 1997, respectively. The Company had net
income after tax of $1,329,001, $1,188,707 and $2,142,063 for the years ended
September 30, 1995, 1996 and 1997, respectively.
TRADEMARKS
The Company has trademarks, including H.D. Vest Financial Services, that protect
the Company against the unauthorized use of its corporate name and programs.
These trade names are valuable assets of the Company and unauthorized use of
these trade names are prosecuted as necessary to protect the Company's
interests.
DEPENDENCE ON A SINGLE CUSTOMER
No material part of the Company's consolidated commission revenues is originated
by a single Representative.
36
<PAGE>
GOVERNMENT REGULATION
H.D. VEST INVESTMENT SECURITIES, INC. - The securities industry in the United
States is subject to extensive regulation under federal and state laws. The SEC
is the federal agency charged with administration of the federal securities
laws. Much of the regulation of broker-dealers such as HDVIS, however, has been
delegated to self-regulatory organizations such as the NASD. The NASD conducts
periodic examinations of member broker-dealers. Securities firms are also
subject to regulation by state securities commissions in the states in which
they are registered. HDVIS is currently registered as a broker-dealer in all
fifty states, the District of Columbia and the Commonwealth of Puerto Rico.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, representative supervision, trade
practices among broker-dealers, capital structure of securities firms, record
keeping and the conduct of directors, officers and employees. Additional
legislation, changes in rules promulgated by the SEC and by self-regulatory
organizations, and changes in the interpretation of enforcement of existing laws
and rules often directly affect the method of operation and profitability of
broker-dealers. The SEC and the self-regulatory organizations may conduct
administrative proceedings that can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. The principal purpose
of regulations and discipline of broker-dealers is the protection of customers
and the securities markets rather than protection of creditors and stockholders
of broker-dealers (see "Item 3 Legal Proceedings").
HDVIS is a member of the Securities Investors Protection Corporation. SIPC
provides protection to customers (but not 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
37
<PAGE>
unique to the securities industry), financial restrictions are imposed
upon the Company which are more severe than those imposed on corporations
engaged in certain other types of business (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources"). HDVIS had net capital, required net capital and excess net capital
for the years ended September 30, 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net capital $1,449,906 $1,409,407 $1,992,987
---------- ---------- ----------
Required net capital 250,000 392,490 381,470
---------- ---------- ----------
Excess net capital $1,199,906 $1,016,917 $1,611,517
========== ========== ==========
</TABLE>
H.D. VEST ADVISORY SERVICES, INC. - The financial planning industry is subject
to federal regulation under the Investment Advisor Act of 1940, requiring those
providing fee-based investment advice to register with the SEC. Most states
also have registration and reporting requirements. HDVAS is registered as an
investment advisor with the SEC and 49 state regulatory agencies.
COMPETITION
There is intense competition in the brokerage and insurance industry from large,
diversified, well-capitalized brokerage firms, financial institutions and other
organizations. Retail financial service providers and other financial
institutions are investing substantial capital in advertising and direct
solicitation of customers to increase their market share. In many cases the
Company is competing directly with these organizations for the same market
share.
EMPLOYEES
At September 30, 1997, the Company employed 251 full-time employees who provide
support services to Representatives of the Company. To the extent that the
Company recruits additional Representatives, the number of employees would be
expected to increase proportionately during the fiscal year ending September 30,
1998.
Employees by Department
As of September 30, 1997
Marketing and Technical Support 97
Administration and Other 26
Operations 116
Educational Services 12
---
Total Employees 251
===
The majority of employees are college graduates and are securities licensed.
38
<PAGE>
PROPERTY
The Company occupies approximately 34,000 square feet of office space in Irving,
Texas, located at 433 East Las Colinas Blvd. The Company's lease expires in May
1998.
In August 1997, the Company entered into a ten-year operating lease agreement
under which the Company will occupy approximately 80,000 square feet of office
space in a new facility in Irving, Texas. The Company intends to relocate its
operations to the new facility by the end of January 1998.
39
<PAGE>
MANAGEMENT
The following table provides certain information about each of the Company's and
its subsidiaries' current members of the board of directors, officers and
directors of certain divisions of the Company as of September 30, 1997.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Herb D. Vest 53 Chairman of the Board of
Directors, President and
Chief Executive Officer
Barbara Vest 51 Member of Board of
Directors
Kenneth E. Reynolds 68 Member of Board of
Directors
Jack B. Strong 67 Member of Board of
Directors
Jerry M. Prater 55 Member of Board of
Directors
Phillip W. Mayer 55 Member of Board of
Directors
Lynn R. Neidermeier 44 Member of Board of
Directors
Roger Ochs 36 Marketing Director
Shannon A. Soefje 38 Senior Vice President
and
Corporate Secretary
W. Ted Sinclair 33 Vice President and Chief
Financial Officer
</TABLE>
DIRECTORS AND OFFICERS
HERB D. VEST, CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER. Prior to assuming his present position with the Company and HDVIS in
June 1983, Mr. Vest practiced public accounting and financial planning for ten
(10) years as the sole proprietor of Herb D. Vest, CPA. Prior to June 1983, Mr.
Vest was also registered with a National Association of Securities Dealers firm.
He was a principal with that firm and managed a branch office. Mr. Vest is a
Certified Public Accountant, Certified Management Accountant, Certified
Financial Planner, Chartered Financial Analyst, Certified Fund Specialist,
Certified Investment Management Analyst, Chartered Life Underwriter, Registered
Health Underwriter, Chartered Financial Consultant, Accredited Personal
Financial Specialist and Certified Employee Benefit Specialist. He holds
certificates in Pension and Executive Compensation and
40
<PAGE>
Estate Planning & Taxation. Mr. Vest holds a Bachelor of Science Degree in
Political Science and Masters of Science Degrees, in Taxation, Financial
Services and Management. He holds a Juris Doctorate and is licensed to practice
law in California. Mr. Vest holds a Doctorate in International Business
Administration. He is a National Association of Securities Dealers General
Securities Principal, Registered Options Principal, Municipal Securities
Principal, and Financial and Operations Principal. He is a licensed real estate
broker and licensed life, health and accident insurance agent as well as a
master fellow of the International Society for Philosophical Inquiry. Mr. Vest
is also a Registered Representative of Hartford Equity Sales which is located in
Dallas, Texas. Following graduation from college in 1966, Mr. Vest served as an
infantry officer in the U.S. Army, including two (2) tours of duty in Vietnam.
He has served as a lecturer at local colleges and universities including the
University of Texas at Arlington and the Seminar for Financial Analysts held at
the University of Windsor, Ontario. He is also a member of the American
Institute of Certified Public Accountants and the Texas Society of CPAs.
dditionally, Mr. Vest has written on international trade, taxation, portfolio
management and the financial services profession for such publications as Global
Custodian, Business Mexico, Personal Financial Planning, Accounting Today, CFP
Today, Real Estate Securities & Capital Markets, and The Dallas Business
Journal. In 1994, 1996 and 1997, Mr. Vest was voted among the 100 Most
Influential People in Accounting by Accounting Today Magazine.
BARBARA VEST, BOARD OF DIRECTORS, REPRESENTATIVE RELATIONS DIRECTOR. She has
been involved in every phase of developing the Company. Her responsibilities
include expanding the Company's Representative force and developing
Representative services. Ms. Vest was integrally involved in Herb Vest's
private CPA practice for ten years in Irving, Texas and was an independent
consultant to the Company until October 1996 when she was employed by the
Company as Representative Relations Director. She is qualified to 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
41
<PAGE>
Committee. He became a registered Representative of the Company in 1987 and
became a Director of the Company in fiscal year 1993.
JACK B. STRONG, BOARD OF DIRECTORS. He was elected to the Texas State Senate in
1962, where he served until his retirement in 1971. Since leaving the Senate, he
has served on various state committees, boards and commissions, including
chairing Lt. Governor Hobby's Blue Ribbon Committee on Ethics Reform, the
Regional Medical Program of Texas, and the Texas State Board of Education, and
currently serves on the Interstate Oil Compact Commission. Mr. Strong serves as
President of Texas-based General Equities, Inc. and Strongworth, Inc. From
January 1992 to January 1993, Mr. Strong served as an advisor to the Company's
Board. He has been a Director of the Company since fiscal year 1993.
JERRY M. PRATER, BOARD OF DIRECTORS. He has been a practicing Certified Public
Accountant since 1983. He has held positions with agencies of the U.S.
Department of Defense, Continental Electronics Mfg.Co., Hill & Wilkinson and
Quazon Corporation, prior to founding his own Dallas, Texas-based public
accounting practice in 1983. Mr. Prater was elected to the Board of Directors of
the Company in 1994.
PHILLIP W. MAYER, BOARD OF DIRECTORS. He has held a variety of command and
staff positions as an Infantry Officer in the United States Army prior to his
retirement in 1982. Mr. Mayer holds two master's degrees and was designated a
Certified Public Manager by the Arizona State University Advanced Public
Executive Program in 1990. Since 1985, he has worked in the corrections
profession as a Program Manager and Director of Staff Training. He currently
serves as a Staff Training Manager for the Santa Clara County Department of
Correction, San Jose, California. Mr. Mayer was elected to the Board of
Directors of the Company in 1994.
LYNN R. NIEDERMEIER, BOARD OF DIRECTORS. Ms. Niedermeier was an employee of the
Company from 1987 through 1993. During that time she was the Company's Vice
President of Marketing responsible for managing the Company's sales, marketing,
recruiting and educational programs. She was promoted to the position of
Executive Vice President in February 1993 and held that position until her
resignation in April 1994. In November 1994, Ms. Niedermeier rejoined the
Company as its President. In December 1995, Ms. Niedermeier resigned as
President. Ms. Niedermeier is a Certified Public Accountant and was a Manager
at Arthur Andersen, LLP prior to joining the Company. Ms. Niedermeier is a
former City Councilwoman for Grapevine, Texas. She was elected to the Company's
Board of Directors in 1994.
ROGER OCHS, MARKETING DIRECTOR. Mr. Ochs was employed by the Company in 1987 and
was promoted to Marketing Director in 1995. He is responsible for directing the
Company's Recruiting and Development, Field Support, Educational Services,
Marketing, Advisory Services and Financial Planning Support Departments. Mr.
Ochs previously served as Manager of the Technical Services Division, which
included Advisory Services, Retirement Services,
42
<PAGE>
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.
43
<PAGE>
REMUNERATION OF DIRECTORS AND MANAGEMENT
The following table sets forth all remuneration earned in salary and bonus in
the current year to the Chief Executive Officer, the highest paid members of the
Board of Directors, Officers and key Senior Managers each receiving in excess of
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Restricted All
Name & Principal Fiscal Stock Stock Other
Position Year Salary Bonus Awards Options Compensation
(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest 1997 $862,500 $1,869,497 - - $ 45,774
Chairman of the 1996 687,500 1,500,000 - - 21,996
Board of Directors, 1995 500,000 - - - 20,766
President and Chief
Executive Officer(2)
Barbara Vest 1997 $284,167 - - - $ 43,793
Director and Director 1996 - - - - 220,008
Of Representative 1995 - - - - 218,937
Relations(4)
Lynn R. Niedermeier 1997 - - - - $ 27,126
Director(3) 1996 - - - - 20,004
1995 $245,834 - $100,000 - 86,004
Roger Ochs 1997 $150,000 $ 155,791 - - -
Marketing Director 1996 136,045 125,000 - - -
1995 107,000 - - - -
Shannon Soefje (5) 1997 $135,000 $ 65,851 - - -
Senior Vice President 1996 125,500 62,500 - - -
And Corporate Secretary 1995 - - - - -
W. Ted Sinclair (5) 1997 $140,000 $ 73,753
Vice President and 1996 130,625 62,500 - - -
Chief
Financial Officer 1995 - - - - -
- --------------------------------------------------------------------------------------------
</TABLE>
(1) All officers are covered under a stock option plan (see "Management - Stock
Options" and "Certain Transactions - Stock Options").
(2) See Management Agreements for a description of the terms of Mr. Vest's
current management agreement.
(3) In December 1995, the officer resigned as President of the Company. She is a
member of the Board of Directors.
(4) Was employed by the Company in November 1996 as the Director of
Representative Relations.
(5) Compensation below disclosure requirement in prior years.
44
<PAGE>
CERTAIN TRANSACTIONS
ISSUANCE OF SERIES A PREFERRED STOCK
The Company issued 166,667 shares of non-voting Series A Convertible Preferred
Stock at a price of $6.00 in exchange for $1,000,002 in principal amount on a
note held by a Financial Services company. The price of the non-voting Series A
Convertible Preferred Stock was determined through consultation with RAF
Financial Corporation. This transaction was completed pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933 and was
effective September 30, 1991 (see "Certain Transactions - Loan Agreements"). In
August of 1997, Herb D. Vest, principal common shareholder, acquired these
shares in a private transaction.
The Company issued for cash 83,400 shares of non-voting Series A Preferred Stock
at a price of $6.00 per share, in exchange for $500,400, to a second Financial
Services company. This sale was effected pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933 and was effective
September 24, 1991.
TRANSACTIONS WITH MANAGEMENT
The terms of the transactions described below are as fair to the Company as
could have been made with unaffiliated parties where available and were approved
by the Company's independent and disinterested directors.
Future transactions between the Company and its affiliates will be approved by
the independent and disinterested directors and will be on terms no less
favorable than could be obtained from unaffiliated parties, where available.
MANAGEMENT AGREEMENTS
The Company has an agreement with Herb D. Vest for management services to the
Company and he participates in an Executive Officer's Compensation Plan. These
agreements provide for a management fee per year including an annual bonus based
on the Company's performance related to revenue and net income goals, additions
of Company affiliates and Fee Based Assets under Management, as established by
the Board of Directors. Effective January 1, 1997, Mr. Vest receives, as
management fees, a minimum of $900,000 plus bonus amounts pursuant to the
Executive Officer's Compensation Plan. The 30% increase in the Company's
revenues combined with positive earnings after consideration of the bonus, as
well as the other factors used to determine the bonus resulted in the payment of
$1,869,497 bonus under the Executive Officer's Compensation Plan in fiscal 1997.
The Company paid a bonus of $1,500,000 in fiscal 1996. No bonus was accrued or
paid under the Executive Officer's Compensation Plan for the fiscal year ended
September 30, 1995. Management fees under these agreements were $500,000,
$2,187,500 and $2,731,997 for the years ended September 30, 1995, 1996 and 1997,
respectively.
45
<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. Amounts paid to Ms. Vest during the years
ended September 30, 1995, 1996, and 1997 were $200,000, $200,000, and $300,384
respectively.
H.D. VEST INSURANCE SERVICES
H.D. Vest Insurance Services is a sole proprietorship owned by Herb D. Vest.
HDVIns general insurance agency appoints Representatives with various insurance
companies to enable them to sell insurance products to their clients. The
Company, in accordance with the terms of a facilities and services agreement,
provides certain management and other services to HDVIns and is paid a fee for
these services. The value of these services for fiscal year ended 1997 has been
determined based on the prorata portion of certain relevant expenses as a
percentage of HDVIns revenues to total consolidated revenues. To the extent the
Company renders services to HDVIns for which it is not compensated, such action
could constitute a conflict of interest since Mr. Vest is both the principal
common shareholder and Chairman of the Board of Directors of the Company. The
services provided to HDVIns by the Company are summarized below.
Management, accounting, referral data base, client tracking services,
solicitation, tracking of renewal policies of insurance, collection of premiums
and commissions, processing of insurance transactions, payment of salaries and
other expenses, cost of recruiting, training and reporting to agents and other
services as deemed appropriate by the Company. In accordance with this
agreement the Company has charged HDVIns $551,379, $416,298 and $538,700 for the
years ended September 30, 1995, 1996, and 1997 respectively, for facilities and
management services rendered.
LINES OF CREDIT
The Company has an agreement to provide Herb D. Vest a revolving line of
credit in an amount not to exceed $2,000,000, collateralized by a portion of Mr.
Vest's Company common stock. The terms of the agreement require an annual
payment to be made on November 30 of each year equal to one-seventh of the then
outstanding principal plus accrued interest. The final payment of all
outstanding principal and accrued interest shall be due and payable on or before
November 30, 2001. Under the agreement interest accrues on unpaid principal
balances at a rate of 11%. At September 30, 1997, Mr. Vest had drawn $2,000,000
in principal against the line of credit. The Company has recorded $190,039 of
accrued interest on this line at September 30, 1997.
The Company has an agreement to provide Barbara Vest a revolving line of credit
in an amount not to exceed $700,000, collateralized by a portion of Ms. Vest's
Company common stock. 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
46
<PAGE>
principal and accrued interest shall be due and payable on or before November
30, 2001. Under the agreement, interest accrues on unpaid principal balances at
a rate of 11%. At September 30, 1997, Ms. Vest had drawn $482,216 in principal
against the line of credit. The Company has recorded $45,679 of accrued interest
on this line at September 30, 1997.
SEVERANCE AGREEMENTS
During 1994, two Executive Vice Presidents resigned their positions with the
Company. The Company and these officers entered into severance agreements that
provided for the payment of severance to each officer of $16,667 per month and
continuing for 30 months, in exchange for an agreement restricting the use of
Company materials and information for a period of 48 months. In connection with
these agreements the Company charged $1,000,000 to general and administrative
expense during the fiscal year ended September 30, 1994.
During fiscal 1995, a former Executive Vice President rejoined the Company as
President. In connection with the officer's return, the Company and the officer
agreed to rescind the officer's severance agreement. During the first quarter
of fiscal 1995, the Company credited the then remaining unpaid severance of
$381,331 to general and administrative expenses. In December 1995, the officer
resigned as President of the Company. Under the officer's existing employment
agreement, the Company agreed to pay the former officer $16,600 per month until
October 1, 1996, in exchange for the former officer agreeing, among other
things, not to solicit clients of the Company's Representatives and not to
compete with the Company through that date.
EDUCATION COSTS
The Company maintains a formal policy for reimbursement of continuing education
expenses incurred by officers and employees. Employees are generally reimbursed
for expenses incurred in the pursuit of professional designations, undergraduate
degrees, graduate degrees or specialized training. The Company promotes
personal and professional growth of its employees in order to provide a
qualified staff to its Representatives.
401(k) RETIREMENT PLAN
In March 1993, the Company formed a 401(k)-retirement plan for eligible
employees. To be eligible for the 401(k)-retirement plan an employee must be
employed on a continuous full-time basis for one year and work a minimum of 40
hours per week. The Company matches contributions made by employees at a rate
of 20%, up to an annual limit of $1,848 per employee. Company contributions to
the 401(k)-retirement plan for the fiscal years ended September 30, 1995, 1996
and 1997 were $46,568, $55,077 and $87,776 respectively.
47
<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's Compensation Plan that it may change at
any time in its sole and absolute discretion.
Currently, to be eligible to participate in the Executive Officer's Compensation
Plan, an individual must be an executive employee of the Company, have completed
at least two full years of Company service, and be part of a select group of
management employees designated by the Company's Board of Directors. The
individual employee must also sign an Officer's Deferred Compensation Agreement
and an Officer Agreement as a condition precedent to becoming a participant in
the Executive Officer's Compensation Plan.
Under the Restricted Stock portion of the Executive Officer's Compensation Plan,
a number of shares of restricted stock is determined by the Chief Executive
Officer of the Company as allocable to a particular participant. This
restricted stock is credited to the participant's account and will be vested and
distributable upon the first to occur of the following events: (1) Long term
disability, death of the participant or attaining the preselected Deferral Date;
or (2) The date of a "change-in-control" of the Company (as that term is defined
in the Executive Officer's Compensation Plan). No stock was earned under the
Executive Officer's Compensation Plan for the fiscal year ended September 30,
1997. Under the Executive Officer's Compensation Plan, the Board of Directors
also annually sets three revenue goals - a threshold, target and maximum goal.
If attained, the revenue goals will generate a set cash bonus for the
participant, payable unless certain losses are also incurred.
In addition, bonus stock will be credited to participants' accounts in the form
of restricted stock on the basis of the Company's attaining three-year
cumulative revenue goals. Each year these goals are set by the Board of
Directors for the upcoming three years and are based in part on the previous
year's goals that consist of a threshold, a target and a maximum cumulative
revenue goal. Upon attaining one of these goals, bonus
48
<PAGE>
stock credited in the form of restricted stock to the participant's plan vests
and will become distributable only upon retirement, long term disability or
death of the participant, or the date of a "change-in-control" of the Company
(as that term is defined in the Executive Officer's Compensation Plan). No
awards were earned in 1995, 1996 or 1997.
STOCK OPTIONS
The Board of Directors of the Company adopted a Stock Option Plan as of October
1, 1987, in order to attract, retain, motivate and encourage stock ownership by
employees, officers and directors of the Company and its subsidiaries. The
Stock Option Plan is administered by a stock option committee ("Committee"),
appointed by the Chief Executive Officer, consisting of one to three members.
The members of the Committee shall be eligible to receive options under the
Stock Option Plan.
The Committee currently consists of one member, Herb D. Vest. Options granted
under the Stock Option Plan are not intended to qualify as Incentive Stock
Options under Section 422(a) of the Internal Revenue Code of 1986, as amended
from time to time. The Company has reserved up to 800,000 shares of its common
stock for options under the Stock Option Plan. The options must be paid in
cash, unless otherwise permitted by the Committee. The exercise price of any
options granted in the future will not be less than 100% of the fair market
value of the common stock on the date of grant.
The Committee, at the direction of the Chief Executive Officer, may amend,
modify or terminate the Stock Option Plan, provided however, no action of the
Committee, without approval of the Chief Executive Officer and the shareholders
of the Company may:
(a) Increase the total number of shares covered by the Stock Option Plan.
(b) Change the manner for determining the option price.
(c) Shorten the period that must lapse before options are eligible to be
exercised.
(d) Permit options to be granted which expire beyond the period provided in the
Stock Option Plan.
(e) Withdraw administration of the Stock Option Plan from the Committee.
(f) Permit granting of options at less than the option price.
Anti-dilution provisions in the Stock Option Plan provide for adjustment of the
Option exercise price and the number of shares of common stock issuable upon
exercise to prevent dilution of their value upon the occurrence of certain
events.
49
<PAGE>
Options covering 191,497 shares were granted at an option price of $8.50 per
share as of October 1, 1987 to employees; 95,454 of these options remain
outstanding as of September 30, 1997.
During 1992, options covering 460,000 shares were granted at an option price of
$5.00 per share to employees and certain advisors to the Company's Board of
Directors. 270,000 of these options remain outstanding as of September 30,
1997. In March 1997, Herb D. Vest, principal common shareholder, purchased
150,000 options from two former employees of the Company in a private
transaction. The options are included in the 260,000 outstanding options at
September 30, 1997.
In November 1992, the Company resolved that the independent directors are to
receive stock options for 2,000 shares of common stock to be exercisable at the
price of the common stock on the date of issuance and to be issued quarterly to
the independent directors. At September 30, 1997, 68,000 options have been
issued and remain outstanding.
As a result of the foregoing, options covering 397,752 shares of common stock,
with exercise prices ranging from $5.00 to $8.50 per share have been issued to
officers and Directors of the Company. The following table provides information
with respect to the named officers and Directors concerning the options
outstanding as of September 30, 1997:
Aggregated Option Exercises in Last Fiscal Year
End and Fiscal Year End Option Values
<TABLE>
<CAPTION>
==============================================================================================================
Number of Unexercised Value of Unexercised,
Shares Options Held At In-The-Money Options At
Acquired Fiscal Year End Fiscal Year End (1,2)
Through --------------- ---------------------
Name Options Value Exercisable Unexercisable Exercisable Unexercisable
Exercised Realized
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest - - 250,000 45,148 15,000 -
Barbara Vest - - - 45,148 - -
Wesley T. Sinclair - - - 1,456 - -
Jerry Prater - - 28,000 - 39,600 -
Phillip Mayer - - 28,000 - 39,600 -
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on September 30, 1997 and the exercise price of the options.
(2) The current fair market value of the stock at September 30, 1997 was below
the option exercise price.
50
<PAGE>
COMPENSATION OF DIRECTORS
The Company's Board of Directors holds formal and informal meetings throughout
the year with management and shareholders to discuss Company affairs.
The Company's Board of Directors has an Audit Committee. The function of the
Audit Committee is 1)to oversee the Company's system of internal control and the
financial reporting process; 2)to review the internal audit function; 3)to
approve the selection of the Company's independent accountants; and 4)to review
audit reports. The members of the Audit Committee during fiscal 1997 were Jerry
Prater, Jack Strong and Phillip Mayer.
The Company's Board of Directors has a Compensation Committee. The Function of
the Compensation Committee is to review, discuss and advise management and
officers of the Company regarding compensation and other employment benefits
afforded officers and employees of the Company. The current members of the
Compensation Committee are the members of the Board of Directors: Herb D. Vest,
Barbara Vest, Lynn R. Niedermeier, Jack Strong, Kenneth Reynolds, Jerry Prater
and Phillip Mayer.
Directors are reimbursed for travel and other expenses related to attendance at
Board and committee meetings. Total compensation to the Directors for the year
ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Name Title Compensation
- ---- ----- ------------
<S> <C> <C>
Herb D. Vest Chairman of the Board of Directors $45,774
Barbara Vest Director 27,126
Jack Strong Director and Member-Audit Committee 30,126
Kenneth Reynolds Director 27,126
Jerry Prater Director and Chairman of the Audit
Committee 31,626
Phillip Mayer Director and Member-Audit Committee 30,126
Lynn Niedermeier Director 27,126
</TABLE>
Also, independent Board members are entitled to receive quarterly stock options
for 2,000 shares of Common Stock, exercisable at the price of the Common Stock
on the date of issuance. Mr. Strong and Strongworth, Inc., an entity with which
Mr. Strong is affiliated, received approximately $30,000 in professional fees
for services performed for the Company.
51
<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's By-Laws contain certain indemnification provisions for its
officers and directors whereby each is to be indemnified to the fullest extent
permitted by Texas law for expenses and liabilities arising out of litigation by
reason of the fact that such person was an officer or director of the Company.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
52
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following information is furnished as of September 30, 1997, to indicate
beneficial ownership of more than 5% of the Company's Common Stock, as well as
beneficial ownership by each director and certain executives, individually and
directors of the Company, as a group, of shares of the Company's Common stock.
<TABLE>
<CAPTION>
# OF SHARES
OWNER BENEFICIALLY OWNED % OF SHARES
- --------------------- ------------------ -----------
<S> <C> <C>
Herb D. Vest (1)(2)(3) 3,028,440 52%
Barbara Vest (1) 1,499,301 28%
Jerry Prater (4) 30,000 *
Phillip Mayer (4) 28,000 *
Lynn R. Niedermeier 21,337 *
Shannon A. Soefje 1,339 *
Kenneth E. Reynolds 550 *
Jack B. Strong 100 *
W. Ted Sinclair 25 *
Roger Ochs 1,909 *
Officers and Directors
as a Group 4,609,092 78%
</TABLE>
* Less than one percent.
(1) Herb D. Vest and Barbara Vest currently have escrowed 20% of their stock,
with an independent escrow agent in order to meet certain conditions
required by the State of Texas under a previous Form S-18 registration
statement. In addition, Herb D. Vest and Barbara Vest have pledged portions
of their remaining stock on outstanding lines of credit.
(2) Includes 250,000 exercisable Common Stock Options with an exercise price of
$5.00.
(3) Includes 166,667 exercisable Convertible Series A Preferred Stock with an
exercise price of $6.00.
(4) Includes 28,000 exercisable Common Stock Options with an exercise price
ranging from $2.38 to $5.06.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Percent Shares Owned Percent
Shares Owned of Shares Upon Completion Of
Owner Before Offering ------ Of Offering (2) Shares
- ----- --------------- ---------------- --------
<S> <C> <C> <C> <C>
Herb D. Vest (1) (3) (4) (5) 2,611,773 48% 2,611,773 48%
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
Barbara Vest (1) (5) 1,499,301 28% 1,499,301 28%
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
Other Shareholders (3) 1,312,567 24% 1,312,567 24%
</TABLE>
(1) Herb D. Vest and Barbara Vest escrowed 20% of their stock, with an
independent escrow agent in order to meet certain conditions required by the
State of Texas under a previous Form S-18 registration statement. In
addition, Herb D. Vest and Barbara Vest have pledged portions of their
remaining stock on outstanding lines of credit.
(2) Assumes that the Stock Options are not exercised.
(3) Assumes that the holders of the 250,067 shares of Preferred Stock, including
166,667 shares held by Herb D. Vest, do not exercise their conversion
privileges.
(4) Not included in this number are options to purchase 100,000 shares of the
Common Stock of the Company, which are presently exercisable at an exercise
price of $5.00.
(5) Not included in this number are options to purchase 45,148 shares of the
Common Stock of the Company which are presently unexercisable at an exercise
price of $8.50.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 5,423,341 shares of common stock outstanding as of September 30, 1997,
4,083,354 shares of common stock are "restricted securities," as that term is
defined in Rule 144 under the Securities Act of 1933, as amended. Under this
rule, a person (or persons whose shares are aggregated) not affiliated with the
issuer who has satisfied a one-year holding period may, under certain
circumstances, sell within a three-month period a number of shares which does
not exceed the greater of 1% of the shares outstanding or the average weekly
trading volume during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of shares without any quantity
limitation by a person who is not an affiliate of the Company and who has
satisfied a two-year holding period. After a two-year holding period, if a
person is not an affiliate and has not been an affiliate for the last three
months, then the person can sell his shares without any restrictions applicable
to Rule 144. Herb D. Vest, the Chairman of the Board and Chief Executive Officer
of the Company, owns 2,442,008 shares, which are subject to Rule 144. Mr. Vest
acquired the majority of his shares in February 1987. Also, Barbara Vest, an
employee and Director of the Company owns 1,467,063 shares that are subject to
Rule 144. Future sales under Rule 144 may have a depressive effect on the price
of the Company's common stock. Herb D. Vest and Barbara Vest have 20% of their
stock escrowed with an
54
<PAGE>
independent escrow agent in order to meet certain conditions required by the
State of Texas under a previous S-18 registration statement. In addition, Herb
D. Vest and Barbara Vest have pledged portions of their stock to secure certain
lines of credit loans.
55
<PAGE>
DESCRIPTION OF SECURITIES
REPRESENTATIVES DEFERRED COMPENSATION PLAN
On January 20, 1994, the Board of Directors established the H.D. Vest
Representatives Deferred Compensation Plan ("the Plan" -capitalized terms used
in this section have specific meanings as defined in the Plan). The Plan is an
optional, non-qualified, unfunded, deferred compensation plan, which is
available exclusively to the Company's Representatives who are independent
contractors and neither employees nor officers of the Company. The Plan provides
Representatives an opportunity to defer receipt of Compensation on a pre-tax
basis for selected periods, thus postponing recognition of income otherwise
currently taxable, and subsequently receiving the deferred compensation plus a
Matching Contribution. At the end of each Deferral Period, the Deferral Amount
and the related Matching Contribution will be paid to the Participant.
DEFERRAL OPTIONS
- ----------------
Participants may defer up to one hundred percent (100%) of their Gross
Compensation and may elect to defer Compensation for one of three Deferral
Periods (36, 60 or 84 months). Amounts deferred by Participants and the
Company's Matching Contribution will ultimately be paid to the Participant
pursuant to the Plan in the form of cash.
PARTICIPATION
- -------------
Enrollment in the Plan is optional. The Initial Enrollment Period will be a
period of 60 days commencing January 1, 1998 or commencing three (3) days after
the effective date, whichever is later.
CHANGES IN ELECTIONS
- --------------------
The Annual Election Period is a 60 day period commencing January 1 of each year.
During the Election Period, Participants may prospectively adjust their Deferral
Amount and Deferral Period elections.
Deferral Amounts may be adjusted downward only during the Election Period.
Elections to increase Deferral Amounts may be made by written notice a minimum
of thirty (30) days prior to the beginning of each calendar quarter and are
effective on a prospective basis beginning the first Compensation Day of the
next calendar quarter.
DEFERRAL ACCOUNTS
- -----------------
Compensation payments are currently made to Representatives five business days
following the first and the fifteenth of each month. In accordance with the
Participant's Plan elections, the Company will credit each Participant's Account
with the amount of Cash Equivalents.
56
<PAGE>
DISTRIBUTIONS
- -------------
The distribution of each Deferral Amount and Matching Contribution will be made
on the 36th, 60th or 84th month anniversary of the deferral as determined by the
election in effect at the time of the deferral.
RIGHTS
- ------
All Accounts are unfunded and paid from the Company's general assets. As
general unsecured obligations, these accounts will be senior in rank to the
Common Stock listed on NASDAQ-NMS. Participants will have no right to receive
either the Deferral Amount or the Company's Matching Contribution until they are
paid the applicable Distribution. If the Representative's affiliation with the
Company terminates prior to the expiration of a Distribution Period, for reasons
other than death, Disability, or attaining age 65, the Representative will
forfeit all Company Matching Contributions.
The Company has obtained an opinion from Arthur Andersen LLP concluding that
amounts deferred under the Plan will receive deferred tax treatment and that
such amounts plus Matching Contributions will be taxable as received during the
Distribution Period. In the event of a successful challenge by the IRS, the
Company may choose to amend the Plan or terminate the Plan and refund all
Deferral Amounts without matching contributions.
57
<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby are being distributed exclusively by H.D. Vest
Investment Securities, Inc., a wholly owned subsidiary of the Company. No
selling discount, commissions, or other sales charges will be received by HDVIS
in connection with the sale of the securities being offered hereunder. A bona
fide market exists for the Company's Common Stock as of the effective date of
this prospectus and accordingly, pursuant to Schedule E of the Bylaws of the
NASD, (Schedule E) no independent underwriter is being utilized by the Company
in connection with this offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and registrar for the Common Stock is Harris Trust and
Savings Bank, whose physical address is 1601 Elm Street, CB39 Thanksgiving
Tower, Suite 2320, Dallas, Texas.
LEGAL PROCEEDINGS
In September 1997, litigation was initiated against the Company and H.D. Vest
Investment Securities, Inc. in regard to the activities of a former Registered
Representative. The plaintiffs seek recovery for alleged out-of-pocket losses
totaling $300,000. In addition, the plaintiffs seek recovery for treble and
punitive damages as well as recovery for pain and suffering. The Company
believes it has a defense against these claims and intends to vigorously defend
them. The Company is unable to determine the likelihood that additional material
claims arising from the Registered Representative's conduct will be made.
Although the Company believes that a defense to any additional claims exists,
and intends to vigorously defend such claims if necessary, a negative result in
multiple claims could have a material adverse impact on the Company.
In September 1997, the Company received notice of two claims against H.D. Vest
Investment Securities, Inc. in regard to the activities of a former Registered
Representative. It is unknown whether these claims, which together total
approximately $800,000, will proceed to litigation. The Company believes it has
a defense against these claims and intends to vigorously defend any lawsuit
filed as a result of the claims. The Company is unable to determine the
likelihood that additional material claims arising from the Registered
Representative's conduct will be made. Although the Company believes that a
defense to any additional claims exists, and intends to vigorously defend such
claims as necessary, a negative result in multiple claims could have a material
adverse impact on the Company.
During the fiscal year ended September 30, 1994, the Securities and Exchange
Commission began an investigation of H.D. Vest Investment Securities, Inc.,
relating to the activities of a former Registered Representative. In July 1995,
concurrent with an administrative proceeding instituted against HDVIS, the SEC
and HDVIS entered into a settlement agreement. Pursuant to the settlement
agreement, HDVIS (i) paid a monetary sanction of
58
<PAGE>
$50,000 and (ii) agreed to modify its supervisory and compliance procedures in
accordance with the recommendations of an independent consultant retained by the
Company.
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Registered Representative commenced a civil
action against HDVIS and the former Registered Representative alleging
violations of securities laws, fraud, conversion and related causes of action.
In June 1995, the Company paid for the benefit of the plaintiffs, approximately
$450,000 as reimbursement of what the Company believed to represent actual out-
of-pocket losses plus interest. Subsequently, this legal action was submitted to
binding arbitration before the NASD.
In September 1996, the arbitration panel awarded the plaintiffs approximately
$1.7 million of which approximately $475,000 represented recovery of alleged
economic losses. HDVIS appealed the award but nevertheless accrued and set aside
sufficient net capital to pay the $1.7 million award following the exhaustion of
all appeals. In this regard, the Company made a non-refundable contribution of
$1 million to increase the net capital of HDVIS pursuant to a previously
executed Facility and Services Agreement between the Company and HDVIS. A
fidelity bond issued in favor of HDVIS covered approximately $250,000 of the
plaintiff's out-of-pocket losses.
Following a denial of the Company's appeal to a Federal District Court, the
Company, in September 1997, ended its appeal attempts and paid the plaintiff's
award of approximately $1.7 million, thereby ending the litigation.
The Company is subject to other legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not
have a material adverse effect upon the financial position or results of
operations of the Company.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed upon
for the Company by Malouf Lynch Jackson Kessler & Collins, A Professional
Corporation, Dallas, Texas.
EXPERTS
The opinion regarding the deferred tax treatment of amounts deferred under the
Plan referred to in this prospectus and elsewhere in the Registration Statement
has been rendered by Arthur Andersen LLP, independent public accountants, and
has been referred to herein in reliance upon the authority of such firm as
experts in giving said opinion.
59
<PAGE>
The financial statements included in this prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the Securities
Act of 1933, as amended, with respect to the shares of Common Stock offered by
this Prospectus. For further information with respect to the Company and the
Common Stock, reference is made to such registration statement, including the
exhibits thereto and the financial statements filed as part thereof. Statements
contained in this Prospectus as to the content of any contracts or other
documents are necessarily incomplete, and in each instance reference is made to
the copy of such contract or other documents filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. Copies of these documents may be inspected by anyone without
charge at the public reference facilities maintained by the Commission at its
principal office located at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C., 20549. Copies of all such material may be obtained from the Public
Reference Section of the Commission upon payment of prescribed fees.
60
<PAGE>
Financial Statements and Supplementary Data
-------------------------------------------
INDEX
Page
----
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
Report of Arthur Andersen LLP, Independent F-1
Public Accountants
Consolidated Statements of Financial F-2 & F-3
Position - September 30, 1997 and 1996
Consolidated Statements of Operations - F-4
Three years ended September 30, 1997,
1996, and 1995
Consolidated Statements of Shareholders' F-5
Investment - Three years ended September 30,
1997, 1996, and 1995
Consolidated Statement of Cash Flows - F-6
Three years ended September 30,
1997, 1996, and 1995
Notes to Consolidated Financial Statements F-7
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Directors of H.D. Vest, Inc.:
We have audited the accompanying consolidated statements of financial position
of H.D. Vest, Inc. (a Texas Corporation) as of September 30, 1996 and 1997, and
the related consolidated statements of operations, shareholders' investment and
cash flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of H.D. Vest,
Inc. as of September 30, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1997 in conformity with generally accepted accounting principles.
Dallas, Texas,
November 12, 1997
F-1
<PAGE>
Page 1 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,734,846 $ 6,384,992
Commissions and accounts
receivable 4,509,419 6,642,200
Current portion - notes receivable
related parties 579,660 590,320
Deferred taxes 480,370 --
Receivable from affiliate 130,280 142,145
Prepaid expenses 91,377 503,738
----------- -----------
Total current assets 12,525,952 14,263,395
----------- -----------
Property and equipment, net of
accumulated depreciation
of $2,255,821 at 1996, and
$1,485,366 at 1997 1,673,472 2,755,457
Notes receivable - related parties,
net of current portion 2,084,411 2,127,613
Intangible and other assets, net of
accumulated amortization 666,924 601,166
----------- -----------
Total assets $16,950,759 $19,747,631
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-2
<PAGE>
Page 2 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 5,583,156 $ 3,930,651
Amounts due on clearing transactions 729,591 539,538
Commissions payable 3,317,096 4,738,908
Payable to officer and directors 74,994 --
------------ ------------
Total current liabilities 9,704,837 9,209,097
------------ ------------
Obligations under capital leases,
excluding current installments 676,844 1,016,257
Other noncurrent liabilities 636,435 1,323,375
Unearned revenue 931,110 1,150,341
Shareholders' investment:
Preferred stock, $6 par value;
10,000,000 shares authorized,
250,067 shares issued and outstanding
in both 1996 and 1997 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
5,423,341 outstanding at September 30,
1996 and 1997 271,167 271,167
Additional paid-in capital 5,080,834 5,113,334
Retained Earnings (Deficit) (1,850,870) 163,658
------------ ------------
Total shareholders'
investment 5,001,533 7,048,561
------------ ------------
Total liabilities and
shareholders' investment $ 16,950,759 $ 19,747,631
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
Revenues:
<S> <C> <C> <C>
Commissions $37,027,755 $55,624,011 $68,736,399
Portfolio management fees 3,219,574 6,480,537 11,070,632
Marketing and education fees 2,933,055 4,182,201 6,396,111
Facility and service fee
from affiliate 551,379 416,298 538,700
Other 938,288 806,175 1,082,540
----------- ----------- -----------
Total revenues 44,670,051 67,509,222 87,824,382
----------- ----------- -----------
Expenses:
Commissions 25,582,436 38,254,754 48,384,293
Portfolio management fee 1,739,748 4,109,284 7,375,367
General and administrative 10,810,892 16,072,510 19,394,200
Representative development 4,526,637 6,506,014 7,485,266
Representative recruiting 398,837 773,909 1,677,594
Interest 100,280 96,161 222,271
----------- ----------- -----------
Total expenses 43,158,830 65,812,632 84,538,991
----------- ----------- -----------
Net income before state
and federal income tax 1,511,221 1,696,590 3,285,391
Provision for state and federal
income tax 182,220 507,883 1,143,328
----------- ----------- -----------
Net income $ 1,329,001 $ 1,188,707 $ 2,142,063
=========== =========== ===========
Net income
per common share $ 0.22 $ 0.20 $ 0.37
=========== =========== ===========
Weighted average number of
common shares outstanding 5,406,337 5,423,341 5,423,341
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
SHARES OF STOCK
OUTSTANDING ADDITIONAL RETAINED
------------------------- PREFERRED COMMON PAID-IN EARNINGS
PREFERRED COMMON STOCK STOCK CAPITAL (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1994 250,067 5,392,287 $ 1,500,402 $ 269,614 $ 4,982,387 $(4,113,508) $ 2,638,895
Issuance of Common
Stock as Compensation -- 31,054 -- 1,553 98,447 -- 100,000
Preferred Dividends -- -- -- -- -- (127,535) (127,535)
Net Income -- -- -- -- -- 1,329,001 1,329,001
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1995 250,067 5,423,341 1,500,402 271,167 5,080,834 (2,912,042) 3,940,361
Preferred Dividends -- -- -- -- -- (127,535) (127,535)
Net Income -- -- -- -- -- 1,188,707 1,188,707
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1996 250,067 5,423,341 1,500,402 271,167 5,080,834 (1,850,870) 5,001,533
Capital Contribution -- -- -- -- 32,500 -- 32,500
Preferred Dividends -- -- -- -- -- (127,535) (127,535)
Net Income -- -- -- -- -- 2,142,063 2,142,063
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
September 30, 1997 250,067 5,423,341 $ 1,500,402 $ 271,167 $ 5,113,334 $ 163,658 $ 7,048,561
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,329,001 $ 1,188,707 $ 2,142,063
Reconciliation of net income to
net cash provided by operating activities
Depreciation and Amortization 850,941 901,093 933,014
Loss on Sale of Assets -- 120,716 21,564
Common stock issued as compensation 100,000 -- --
Changes in assets and liabilities
Commissions and accounts receivable 350,810 (1,179,550) (2,132,781)
Deferred tax -- (480,370) 480,370
Receivable from affiliate 53,611 (31,351) (11,865)
Prepaids and other assets 33,001 (72,702) (415,821)
Payable to officers and directors (205,400) (125,006) --
Accounts payable and accrued expenses (403,862) 2,414,075 (1,727,263)
Commissions payable (168,704) 1,094,661 1,421,812
Amounts due on clearing transactions (1,004,344) 60,404 (190,053)
Unearned revenue (149,385) (109,892) 219,231
----------- ----------- -----------
Net cash provided by operating
Activities 785,669 3,780,785 740,271
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other assets (390,659) (69,372) (211,645)
Purchases of property and equipment (95,145) (315,179) (988,061)
Proceeds from sale of assets -- 10,000 57,850
----------- ----------- -----------
Net cash used for
investing activities (485,804) (374,551) (1,141,856)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital Contribution -- -- 32,500
Preferred stock dividends (127,535) (127,535) (127,535)
Advances from deferred compensation plan 72,857 518,286 576,022
Advances on notes receivable to
related parties (2,073,497) (463,713) (397,804)
Payments on notes receivable from
related parties 1,238,092 338,017 347,402
Payments on notes payable and
capital lease obligations (219,962) (319,503) (378,854)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (1,110,045) (54,448) 51,731
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (810,180) 3,351,786 (349,854)
CASH AND CASH EQUIVALENTS,
beginning of year 4,193,240 3,383,060 6,734,846
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 3,383,060 $ 6,734,846 $ 6,384,992
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION - H.D. Vest, Inc. (the "Company") is a Texas corporation formed
in December 1986, to manage the various financial services divisions of the H.D.
Vest Financial Services group. Through its wholly-owned subsidiaries, the
Company provides financial services through tax and accounting professionals.
The Company's services are designed to assist in making individual tax and
accounting professionals financial service centers for their clients.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
(b) CASH AND CASH EQUIVALENTS - Included in cash and cash equivalents are cash
balances and highly liquid investments with an original maturity of three months
or less.
(c) COMMISSIONS AND ACCOUNTS RECEIVABLE - Commissions and Accounts Receivable is
stated net of certain allowances for doubtful accounts. The allowances at
September 30, 1996 and 1997 were $738,227 and $658,154.
(d) PROPERTY AND EQUIPMENT AND OTHER ASSETS - Property and equipment is stated
at cost and is depreciated by the straight-line method using estimated useful
lives ranging from five to six years. At September 30, 1996 and 1997, property
and equipment consisted of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Leasehold improvements $ 128,198 $ 145,081
Computer equipment 1,960,099 1,714,334
Furniture and fixtures 1,225,781 1,762,492
Telephone equipment 579,935 618,916
Other 35,280 --
Less accumulated depreciation (2,255,821) (1,485,366)
----------- -----------
Total property and equipment, net $ 1,673,472 $ 2,755,457
=========== ===========
</TABLE>
F-7
<PAGE>
Other assets consist primarily of capitalized software development costs and
training materials, as well as security deposits. Depreciable assets are stated
at cost and are amortized by the straight-line method using an estimated useful
life of five years. At September 30, 1996 and 1997, other assets and accumulated
amortization are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Other assets $ 1,457,260 $ 1,521,904
Accumulated amortization (790,336) (920,738)
----------- -----------
Total other assets, net $ 666,924 $ 601,166
=========== ===========
</TABLE>
(e) AMOUNTS DUE ON CLEARING TRANSACTIONS - The Company remits customer funds on
certain clearing transactions on a settlement date basis rather than on a trade
date basis. Under the settlement date basis of remittance, the Company holds
customer funds from the trade date until the time at which the trades are
cleared by the product sponsor (not to exceed three business days). During
fiscal 1995, an industry-wide regulatory action changed the clearing time from
five to three business days.
(f) REVENUE RECOGNITION - Commission revenue and related commission expense are
recognized on a trade date basis. The Company charges its Representatives
licensing renewal processing fees. These fees are unearned until the first
quarter of each fiscal year. Marketing and education fees are charged to various
product wholesalers, the Company's Registered Representatives, and new licensees
for Company-sponsored educational seminars and materials. Portfolio management
fees represent fee-based revenues and are recognized based on the value of
client investment balances during the period.
(g) REPRESENTATIVE DEVELOPMENT - Representative development expenses consist of
incremental salaries, office expenses, telephone expenses, educational events
and promotional expenses directly related to training Registered
Representatives.
(h) REPRESENTATIVE RECRUITING - Representative recruiting expenses represent the
incremental costs incurred by the Company to recruit potential Registered
Representatives. Recruiting expenses include certain salaries, office expenses,
referral incentive programs, advertising, direct mail and telemarketing
costs.
F-8
<PAGE>
(i) INCOME TAXES - Deferred income taxes are provided for temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Deferred taxes are recorded based upon enacted tax rates anticipated to
be in effect when the temporary differences are expected to reverse.
(j) NET INCOME PER COMMON SHARE - Net income per common share is based on the
weighted average number of shares issued and outstanding during each period
presented.
(k) SUPPLEMENTAL CASH FLOW INFORMATION - Cash interest payments for the years
ended September 30, 1995, 1996 and 1997 were $100,280, $96,161 and $222,271
respectively. Cash payments for federal income taxes for the years ended
September 30, 1996 and 1997 were $8,328 and $1,463,950 respectively. During the
fiscal years ended September 30, 1995, 1996 and 1997 the Company acquired assets
through capital leases amounting to $106,853, $690,191 and $828,949
respectively.
(l) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(m) PRIOR YEARS' STATEMENTS - Certain reclassifications have been made to prior
years' statements in order for the amounts to be comparable with the current
year presentation.
2) 401(k) RETIREMENT PLAN
In March 1993, the Company formed a 401(k) retirement plan for eligible
employees. To be eligible for the plan an employee must be employed on a
continuous full-time basis for one year and work a minimum of 40 hours per week.
The Company matches contributions made by employees at a rate of 20%, up to an
annual limit of $1,848 per employee. Company contributions to the plan for the
fiscal years ended September 30, 1995, 1996 and 1997 were $46,568, $55,077 and
$87,776 respectively.
F-9
<PAGE>
3) NOTES PAYABLE
In September 1997, the Company entered into a lease line of credit with a bank
under which the Company may borrow up to a maximum of $2,000,000. Each lease
will have a maturity of no greater than 5 years and will require level monthly
principal and interest payments set in accordance with the bank's lease matrix.
The collateral for each lease will be the equipment it finances.
In February 1997, the Company also renewed its line of credit with a bank for
$500,000. The line bears interest, payable monthly, at prime plus 1% (9.50% as
of September 30, 1997). Additionally, the Company's two largest shareholders
have pledged a portion of their holdings as collateral for the line. The line of
credit is intended for working capital purposes and expires February 1, 1998. At
September 30, 1997, no amount had been drawn against the line.
4) COMMITMENTS AND CONTINGENCIES
(a) LEASES - The Company leases its office space and certain office equipment
under lease agreements, which qualify as operating leases. The Company also
leases certain office equipment under certain lease agreements, which qualify as
capital leases. At September 30, 1996 and 1997 the capitalized basis of the
leases included in property and equipment was approximately $1,812,499 and
$1,592,226 and accumulated amortization applicable to the leased equipment was
approximately $795,091 and $903,144, respectively.
In August 1997, the Company entered into a ten year operating lease agreement
under which the Company will occupy approximately 80,000 square feet of office
space in a new facility in Irving, Texas. The Company intends to relocate its
operations to the new facility in January 1998.
Future minimum lease payments under operating lease commitments with initial or
noncancellable terms in excess of one year and under capital lease obligations
as of September 30, 1997, are as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ended September 30:
1998 $ 559,624 $2,492,176
1999 443,597 2,014,712
2000 341,502 1,808,054
2001 242,340 1,795,608
2002 151,357 1,795,608
---------- ----------
Total minimum lease payments 1,738,420 $9,906,158
==========
Less amount representing interest 281,636
----------
Present value of net minimum
capital lease payments 1,456,784
Less current installments
included in accounts payable 440,528
----------
Obligations under capital
leases, excluding current
installments $1,016,256
==========
</TABLE>
Rent expense for the years ended September 30, 1995, 1996 and 1997 was
approximately $594,756, $667,126 and $796,991 respectively.
(b) LITIGATION AND CONTINGENCIES - In September 1997, litigation was initiated
against the Company and H.D. Vest Investment Securities, Inc. in regard to the
activities of a former Registered Representative. The plaintiffs seek recovery
for alleged out-of-pocket losses totaling $300,000. In addition, the plaintiffs
seek recovery for treble and punitive damages as well as recovery for pain and
suffering. The Company believes it has a defense against this claim and intends
to vigorously defend them. The Company is currently unable to determine the
likelihood that additional material claims arising from the Registered
Representative's conduct will be made. Although the Company believes that a
defense to any additional claims exists, and intends to vigorously defend such
claims if necessary, a negative result in multiple claims could have a material
adverse impact on the Company.
F-11
<PAGE>
In September 1997, the Company received notice of two claims by purchasers of
investments against H.D. Vest Investment Securities, Inc. in regard to the
activities of a former Registered Representative. It is unknown whether these
claims, which together total approximately $800,000, will proceed to litigation.
The Company believes it has a defense against these claims and intends to
vigorously defend any lawsuit filed as a result of the claims. The Company is
currently unable to determine the likelihood that additional material claims
arising from the Registered Representative's conduct will be made. Although the
Company believes that a defense to any additional claims exists, and intends to
vigorously defend such claims as necessary, a negative result in multiple claims
could have a material adverse impact on the Company.
During the fiscal year ended September 30, 1994, the Securities and Exchange
Commission (SEC) began an investigation of the Company's wholly-owned
broker-dealer subsidiary, H.D. Vest Investment Securities, Inc. (HDVIS),
relating to the activities of a former Representative. In July 1995, concurrent
with an administrative proceeding instituted against HDVIS, the SEC and HDVIS
entered into a settlement agreement. Pursuant to the settlement agreement, HDVIS
(i) paid a monetary sanction of $50,000 and (ii) agreed to modify its
supervisory and compliance procedures in accordance with the recommendations of
an independent consultant retained by the Company.
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Representative commenced a civil action against
HDVIS and the former Representative alleging violations of securities laws,
fraud, conversion and related causes of action. This action was submitted to
binding arbitration before the NASD. Prior to the arbitration, the Company
voluntarily paid approximately $450,000 for the benefit of the clients which
amount the Company believes represented the clients' actual out-of-pocket
losses, plus interest. In September 1996, the arbitration panel awarded the
plaintiffs approximately $1.7 million of which approximately $475,000
represented recovery of alleged economic losses. HDVIS appealed the award, but
nonetheless accrued and set aside sufficient net capital to pay the $1.7 million
award following the exhaustion of appeals. In this regard the Company made a
non-refundable contribution of $1 million to the net capital of HDVIS pursuant
to a previously executed Facility and Services Agreement between the Company and
HDVIS.
F-12
<PAGE>
As a result of the award, the Company and HDVIS recorded a combined $1,450,000
charge to earnings. A fidelity bond issued in favor of HDVIS covered
approximately $250,000 of the total amounts paid to the clients. Following a
denial of the Company's appeal to a Federal District Court, the Company, in
September 1997, ended its appeal attempts and paid the plaintiff's award of
approximately $1.7 million, thereby ending the litigation.
The Company has incurred professional fees and other charges related to this
matter that have been included in general and administrative expenses as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Professional fees and other
Expenses $ 42,312 $ 665,937 $ 47,393
SEC sanction (150,000) -- --
Receivable from bonding
Company -- (250,000) --
Payments and arbitration
Awards to plaintiffs 452,292 1,700,000 121,035
----------- ----------- -----------
$ 344,604 $ 2,115,937 $ 168,428
=========== =========== ===========
</TABLE>
The Company is subject to other legal proceedings and claims, which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not
have a material adverse effect upon the financial position of the Company.
5) SEVERANCE AGREEMENTS
During 1994, two Executive Vice Presidents resigned their positions with the
Company. The Company and the officers entered into severance agreements that
provided for the payment of severance to each officer of $16,667 per month and
continuing for 30 months, in exchange for an agreement restricting the use of
Company materials and information for a period of 48 months. In connection with
these agreements the Company charged $1,000,000 to general and administrative
expense during the fiscal year ended September 30, 1994.
F-13
<PAGE>
During fiscal 1995, a former Executive Vice President rejoined the Company as
President. In connection with the officer's return, the Company and the officer
agreed to rescind the officer's severance agreement. During the first quarter of
fiscal 1995, the Company credited the then remaining unpaid severance of
$381,331 to general and administrative expenses. In December 1995, the officer
resigned as President of the Company. Under the officer's existing employment
agreement, the Company agreed to pay the former officer $16,600 per month until
October 1, 1996, in exchange for the former officer agreeing, among other
things, to not solicit clients of the Company's Representatives and to not
compete with the Company through that date.
The Company had related severance payable liabilities at September 30, 1996 and
1997 of $74,994 and $0, respectively.
6) SHAREHOLDERS' INVESTMENT
In September 1991, the Company issued 166,667 shares of non-voting Series A
Convertible Preferred Stock at a price of $6.00 in exchange for $1,000,002 in
principal amount on a note payable to a financial services company. The Company
issued an additional 83,400 shares on non-voting Series A Preferred Stock at a
price of $6.00 in exchange for $500,400 in cash to a second financial services
company. The Company's preferred stock pays a dividend at an annual rate of 8.5%
and is payable quarterly. The preferred stock is callable by the Company and
convertible by the preferred stockholder based on terms detailed in the offering
agreement. During each of fiscal 1995, 1996, and 1997, dividends of $127,535
($0.51 per share) were declared and paid.
In August 1997, Herb D. Vest, principal common shareholder, purchased 166,667
shares of the Company's outstanding non-voting Series A Convertible Preferred
Stock in a private transaction.
F-14
<PAGE>
7) NET CAPITAL REQUIREMENTS
The Company's main operating subsidiary, H.D. Vest Investment Securities, Inc.,
is subject to the Securities and Exchange Commission Uniform Net Capital Rule
(Rule 15c3-1), which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed 15 to 1. Minimum net capital can never be lower than
$250,000 or 6 2/3% of aggregate indebtedness, whichever is greater. HDVIS had
net capital, required net capital, and excess net capital for the years ended
September 30, 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net capital $1,449,906 $1,409,407 $1,992,987
Required net capital 250,000 392,490 381,470
---------- ---------- ----------
Excess net capital $1,199,906 $1,016,917 $1,611,517
========== ========== ==========
</TABLE>
8) RELATED-PARTY TRANSACTIONS
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. The agreement with Herb D. Vest provides
for a management fee per year plus an annual bonus based on the Company's
performance related to revenue and net income goals, additions of Company U4's
and Fee Based Assets under Management, as established by the Board of Directors.
Effective January 1, 1997, the Company increased the annual management fee due
to Mr. Vest to $900,000 from $750,000. The 30% increase in the Company's
revenues combined with positive earnings after consideration of the bonus, as
well as the other factors used to determine the bonus resulted in the payment of
$1,869,497 bonus under the plan in fiscal 1997. The Company paid a bonus of
$1,500,000 in fiscal 1996. No bonus was accrued or paid under the plan for the
fiscal year ended September 30, 1995. Management fees under these agreements
were $500,000, $2,187,500 and $2,731,997 for the years ended September 30, 1995,
1996 and 1997, respectively.
F-15
<PAGE>
The Company has an agreement to provide Herb Vest a revolving line of credit in
an amount not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement interest accrues on
unpaid principal balances at a rate of 11%. At September 30, 1997, Mr. Vest had
drawn $2,000,000 in principal against the line of credit. As of September 30,
1997, the Company has recorded $190,039 of accrued interest on this line.
The Company also had a consulting agreement with Ms. Barbara Vest through
October 1996. In November 1996, Ms. Vest was employed by the Company as its
Representative Relations Director, thereby terminating her consulting contract.
Amounts paid to Ms. Vest during the years ended September 30, 1995, 1996, and
1997, under these arrangements were $200,000, $200,000, and $300,834,
respectively.
The Company has an agreement to provide Barbara Vest a revolving line of credit
in an amount not to exceed $700,000, collateralized by Ms. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement, interest accrues on
unpaid principal balances at a rate of 11%. At September 30, 1997, Ms. Vest had
drawn $482,216 in principal against the line of credit. As of September 30,
1997, the Company has recorded $45,679 of accrued interest on this line.
F-16
<PAGE>
H.D. Vest Insurance Services is a sole proprietorship owned by Herb D. Vest.
HDVIns general insurance agency appoints Representatives with various insurance
companies to enable them to sell insurance products to their clients. The
Company, in accordance with the terms of a facilities and services agreement,
provides certain management and other services to HDVIns and is paid a fee for
these services. The value of these services for fiscal year ended 1997 has been
determined based on the prorata portion of certain relevant expenses as a
percentage of HDVIns revenues to total consolidated revenues. To the extent the
Company renders services to HDVIns for which it is not compensated, such action
could constitute a conflict of interest since Mr. Vest is both the principal
common shareholder and Chairman of the Board of Directors of the Company. The
services provided to HDVIns by the Company are summarized below.
Management, accounting, referral data base, client tracking services,
solicitation, tracking of renewal policies of insurance, collection of premiums
and commissions, processing of insurance transactions, payment of salaries and
other expenses, cost of recruiting, training and reporting to agents and other
services as deemed appropriate by the Company. In accordance with this agreement
the Company has charged HDVIns $551,379, $416,298 and $538,700 for the years
ended September 30, 1995, 1996, and 1997 respectively, for management services
rendered. As of September 30, 1997, the Company had a receivable of
approximately $142,145 from HDVIns.
In March 1997, Herb D. Vest, principal common shareholder, purchased options to
acquire 150,000 shares of common stock with an exercise price of $5.00 from two
former executive officers in a private transaction. Generally accepted
accounting principals require that equity transactions of this type involving an
entity's principal shareholder be recorded on the entity's financial statements.
Accordingly, the Company has recorded a capital contribution and general and
administrative expense of a like amount to reflect this transaction.
In August 1997, Herb D. Vest, principal common shareholder, purchased 166,667
shares of the Company's outstanding non-voting Series A Convertible Preferred
Stock in a private transaction.
F-17
<PAGE>
9) INCOME TAXES
Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 14,220 $ 692,741 $ 407,628
State 168,000 295,512 255,330
Deferred:
Federal -- (411,458) 411,458
State -- (68,912) 68,912
----------- ----------- -----------
$ 182,220 $ 507,883 $ 1,143,328
=========== =========== ===========
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
September 30,
----------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of
Federal 11.1 13.4 9.9
Fines and penalties (3.4) -- --
Other (3.5) 10.2 (9.1)
Alternative minimum
Taxes 0.9 (5.9) --
Reversal of deferred
tax asset valuation
allowance -- (6.0) --
Utilization of net
Operating loss
Carryforward (27.0) (15.8) --
------ ------ ------
Effective rate 12.1% 29.9% 34.8%
====== ====== ======
</TABLE>
F-18
<PAGE>
The following table presents the components of the net deferred tax asset:
<TABLE>
<CAPTION>
Deferred
October 1, Expense September 30,
1996 (BENEFIT) 1997
---- --------- ----
<S> <C> <C> <C>
Accrued severance $ 12,517 $ 12,517 $ --
Accrued judgement 392,760 392,760 --
Depreciation (47,039) 102,279 (149,318)
Unearned Revenue 39,434 39,434 --
Other 82,698 (66,620) 149,318
--------- --------- ---------
Net deferred tax
asset $ 480,370 $ 480,370 $ --
========= ========= =========
</TABLE>
The Company's tax effected net temporary differences result in a deferred tax
asset reflecting a benefit expected to be utilized in the future. As a result
of (i) the Company fully utilizing its previously existing tax credit and loss
carryforward and (ii) its ability to carry back future losses, if any, against
fiscal year 1996 taxable income, the Company reversed its deferred tax asset
valuation allowance in fiscal year 1996.
10) STOCK OPTION PLANS
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company adopted the disclosure provisions of SFAS No. 123. The
Company continues to apply the accounting provisions of APB Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations to
account for stock-based compensation. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
F-19
<PAGE>
The Company has a Nonqualified Stock Option Plan ("Nonqualified Plan"). The
Nonqualified Plan is for all employees, as defined in the Nonqualified Plan, and
the Company has reserved 800,000 shares of common stock for this plan. As of
September 30, 1997, 365,454 options are outstanding under the Nonqualified
Plan.
In 1992, the Company agreed to give two independent directors options to
purchase 2,000 shares of common stock each quarter. As of September 30, 1997,
68,000 options remain outstanding to independent directors.
A summary of the status of the Company's outstanding stock options as of
September 30, 1995, 1996, and 1997 and changes during the years then ended are
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
===============================================================================================================
EXERCISE EXERCISE EXERCISE
SHARES PRICE (1) SHARES PRICE(1) SHARES PRICE (1)
------ -------- ------ -------- ------ --------
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 544,372 $5.87 470,450 $5.63 407,454 $5.61
Granted 16,000 2.92 16,000 3.19 16,000 4.74
Exercised -- -- -- -- -- --
Expired and
cancelled (89,922) 6.66 (78,996) 5.18 -- --
Outstanding at
end of year 470,450 5.63 407,454 5.61 423,454 5.58
Exercisable at
end of year 34,000 3.74 62,000 3.62 328,000 4.73
Fair value of options granted $ 2.60 $ 3.82
===============================================================================================================
</TABLE>
1) weighted average per option granted.
The 423,454 options outstanding as of September 30, 1997 have exercise prices
between $2.38 and $8.50, with a weighted average exercise price of $5.58 and a
weighted average remaining contractual life of 10 years. 328,000 of these
options are exercisable with a weighted average exercise price of $4.73. The
remaining 95,454 unexercisable options have an exercise price of $8.50.
F-20
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997 for both the Nonqualified Plan and
Directors Plan.
1996 1997
---- ----
Risk free interest rate 6.62% 6.50%
Expected dividend yields - -
Expected lives in years 10 10
Expected volatility 68.83% 70.17%
Had compensation costs been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been recorded in the
following pro forma amounts:
<TABLE>
<S> <C> <C>
Net income - as reported $ 1,188,707 $ 2,142,063
Net income - pro forma 1,113,082 2,127,088
Earnings per share - as reported .20 .37
Earnings per share - pro forma .18 .37
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
11) DEFERRED COMPENSATION PLAN
In July 1995 the Company began accepting contributions to the Deferred
Compensation Plan ("the Plan") for its Representatives. Pursuant to the Plan,
Representatives may forego current compensation, thus postponing recognition of
income otherwise currently taxable, and subsequently receive the deferred
compensation plus a Company matching contribution as defined in the Plan.
Amounts deferred as of September 30, 1997 and 1996 were $1,167,165 and $591,143,
respectively, and are included in other noncurrent liabilities.
Matching contributions of amounts deferred under the Plan must be accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants.
F-21
<PAGE>
Such increases in commission expense will have an adverse effect on the net
income of the Company. To the extent that Representatives elect to defer receipt
of compensation under the Plan, such compensation will ultimately be paid to the
participant in the form of cash. Matching contributions accrued as of September
30, 1997 and 1996 approximated $156,200 and $45,200, respectively, and are
included in other noncurrent liabilities.
F-22
<PAGE>
- ------------------------------------
No dealer, salesman or other person
has been authorized in connection
with this offering to give any
information or to make any
representation other than that as
contained in this Prospectus and if
given or made such information or
representation must not be relied
upon as having been authorized by
the Company. This Prospectus does
not constitute an offer or
solicitation in any State or other
jurisdictions to any person to whom
it is unlawful to make such an offer
or solicitation in such State or
jurisdiction.
____________________________________
This Company, H.D. Vest, Inc., plans
to furnish annual reports including
audited financial statements, to the
shareholders. The Company will
issue unaudited interim reports to
its shareholders on a quarterly
basis.
- ------------------------------------
<PAGE>
--------------------------------------------------
Deferred Compensation Plan Units
H.D. Vest, Inc.
____________________________________
Offering Price: Market Value
____________________________________
_________________
Prospectus
_________________
January , 1998
H.D. Vest Investments
Securities, Inc.
6333 North State Highway 161
Irving, Texas 75038
(972) 870-6000
--------------------------------------------------
<PAGE>
H.D. VEST, INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses Of Issuance And Distribution (estimated).
- ------------------------------------------------------------------
<TABLE>
<S> <C>
a. SEC and NASD Filing Fee....... $ 10,000
b. Blue Sky Fees and Expenses.... 3,000
c. Printing and Engraving Costs.. 10,000
d. Legal Fees.................... 87,500
e. Accounting Fees............... 85,000
f. Miscellaneous................. 15,000
-------
Total......................... $210,500
</TABLE>
Item 14. Indemnification Of Directors And Officers.
- ----------------------------------------------------
The By-Laws of the Company and each of its subsidiaries contain provisions which
provide for the indemnification of directors, officers, and other employees or
agents of the Company properly appointed to serve in an official capacity who,
while acting in good faith, in the best interests of the Company and within the
scope of their offices, are or are threatened to be named a defendant or
respondent in a civil or criminal action. The extent of the indemnification is
limited to judgements, penalties, fines, settlements and reasonable expenses
actually incurred.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Item 15. Recent Sales Of Unregistered Securities.
- --------------------------------------------------
The Company issued 166,667 shares of Series A Preferred Stock at a price of
$6.00 in exchange for $1,000,002 in principal amount on the note held by Kemper
Financial Services, Inc. This transaction was completed pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933 and
was effective September 30, 1991.
The Company sold 83,400 shares of Series A Preferred Stock at a price of $6.00
per share to Oppenheimer Management Corp. This sale was effected pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933 and
was effective September 24, 1991.
The Company issued 22,800 shares of Common Stock, to certain officers of the
Company, as compensation for services to the
2
<PAGE>
Company through March 31, 1991. These shares were issued pursuant to an
exemption under Section 4(2) of the Securities Act of 1933 at a basis of $5.00
per share.
The Company sold Common Stock through a private offering under Regulation D and
Section 4(2) of the Securities Act of 1933. This Stock, therefore, has
restrictions on the ability to sell it for the next two (2) years. It was sold
to 14 accredited investors (as defined in the Securities Act of 1933 Section
2(15)) and 34 unaccredited investors. The private offering was closed out on
May 15, 1987, with a total of 113,600 shares sold at $5.00 per share net
proceeds to the Company. The shares were sold through the assistance of HDVIS
licensed registered Representatives and other registered selling agents.
At the initial capitalization of the Company, each outstanding share of HDVIS
was exchanged for four shares of the Company. The creation of the Company was
necessary in order to expand the services offered by the Company to its
Representatives.
Item 16. Exhibits
- ------------------
3.1 Articles of Incorporation and By-Laws (1)
3.2 First Articles of Amendment to the Articles of Incorporation of H.D.
Vest, Inc. (1)
3.3 Second Articles of Amendment of Articles of Incorporation of H.D.
Vest, Inc. (1)
5. Opinion Regarding Legality (1)
22. List of Subsidiaries (1)
24.1 Consent of Arthur Andersen LLP (2)
28.1 Specimen Common Stock Certificate (1)
28.2 Registered Representative Sales Agreement (1)
28.3 B Warrant Certificates (1)
28.4 B Warrant Agreements (1)
28.5 Non-Qualified Stock Option Plan (1)
28.6 Facilities and Services Agreement with H.D. Vest Insurance Services
(1)
28.7 Representative's Warrants to Purchase Common Stock (1)
28.8 Management Agreement with Herb D. Vest (1)
28.9 H.D. Vest Representatives Deferred Compensation Plan (2)
28.10 Opinion of Arthur Andersen, LLP regarding Federal Income Tax
Consequences (1)
28.11 Agreement for Line of Credit with Herb Vest and Barbara Vest (1)
(1) Previously filed.
(2) Amended herewith.
(3) New Exhibit.
Item 17. Undertakings
- ----------------------
Subject to the terms and conditions of Section 15 (d) of the Securities and
Exchange Act of 1934, the undersigned Registrant
3
<PAGE>
undertakes to file with the Securities and Exchange Commission such
supplementary and periodic information, documents and reports as may be
prescribed by any rule or regulation of the Commission heretofore or hereafter
duly adopted pursuant to authority conferred in that section.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes: (1) to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement, (i) to include any prospectus required by section 10(a)
(3) of the Securities Act of 1933, (ii) to reflect in the Prospectus any facts
or events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement, (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; (2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof; (3) to remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering; (4) and agrees that each such post-effective
amendment will comply with the applicable forms and rules and regulations in
effect at the time such post-effective amendment is filed; (5) and agrees that,
in the event it enters into any arrangements with third parties on terms
differing from those set forth herein, it will promptly file an appropriate
post-effective amendment setting forth the pertinent information.
4
<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: January 26, 1998 By:s/ Herb D. Vest
---------------------------------------
Herb D. Vest
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By:s/ Herb D. Vest By:s/ Barbara Vest
------------------------------ ---------------------------------------
Herb D. Vest Barbara Vest
Chairman of the Board, President Director
and Chief Executive Officer
By:s/ Kenneth E. Reynolds By:s/ Jack B. Strong
------------------------------ ---------------------------------------
Kenneth E. Reynolds Jack B. Strong
Director Director
By:s/ Jerry M. Prater By:s/ Phillip W. Mayer
------------------------------ ---------------------------------------
Jerry M. Prater Phillip W. Mayer
Director Director
By:s/ Lynn R. Niedermeier By:s/ Wesley Ted Sinclair
------------------------------ ---------------------------------------
Lynn R. Niedermeier Wesley Ted Sinclair
Director Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
5
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report on
the fiscal 1997, 1996, and 1995 consolidated financial statements of the Company
and to the use of our opinion dated December 15, 1994, regarding the deferred
tax treatment of amounts deferred under the Plan (and to all references to our
Firm) included in or made part of this registration statement.
Arthur Andersen LLP
Dallas, Texas,
January 26, 1998
<PAGE>
EXHIBIT 28.9
H.D. VEST, INC. REPRESENTATIVES'
DEFERRED COMPENSATION PLAN
<PAGE>
Section 1. INTRODUCTION
1.1 Establishment. H.D. Vest, Inc., a Texas Corporation, established the
-------------
Deferred Compensation Plan (the "Plan") for the Representatives of the Company
in March, 1995. The Plan provides (i) the opportunity for Participants to defer
part or all of their Cash Compensation through an effective tax mechanism and
(ii) the opportunity to receive an additional deferred Company Matching
contribution.
1.2 Purpose. The purpose of the Plan is to provide the Company's
-------
Representatives with the opportunity both to defer the receipt of compensation
on a pre-tax basis and to receive additional income in the form of the Company
Matching Contribution.
1.3 Effective Date. This Plan shall be effective upon the Effective Date
--------------
as defined below.
Section 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. The following capitalized words and phrases when used in
-----------
the Plan shall have the meanings set forth below:
A. "Account" means an account established for a Participant which
contains the Participant's Cash Equivalents and the Company's Matching
Contribution and which will be carried by the Company as a general
unsecured obligation senior in rank to Vest's stock listed on
NASDAQ/NMS.
B. "Administrative Committee" means the committee appointed by the Board
and serving pursuant to Section 7.
C. "Annual Election Period" means a sixty (60) day period commencing
January 1 of each year subject to the provisions of Section 3.2 and
3.3.
D. "Enrollment" means a Representative becomes enrolled as a Participant
in the Plan under Section 3.2 or 3.3.
E. "Board" means the Board of Directors of Vest.
F. "Cash" means money in the form of United States Currency or some
reasonable equivalent thereof.
-1-
<PAGE>
G. "Cash Equivalent" means a hypothetical Cash amount allocated to the
Participant's Account.
H. "Company" means H. D. Vest, Inc., and its subsidiaries.
I. "Company Matching Contribution" means an amount which the Company
credits as a Cash Equivalent to a Participant's Account pursuant to
the Plan.
J. "Compensation" means cash remuneration, including but not limited to
gross commissions, advisory or other fees or any other type of
remuneration, earned by and while a Representative of the
Company.
K. "Compensation Date" means the dates on which Net Compensation is paid
to Representatives, which currently occurs, twice a month, on the
fifth business day following the first and fifteenth of each month, or
such other dates the Company establishes to pay Net Compensation to
Representatives.
L. "Deferral Amount" means the amount of Net Compensation for each
Deferral Period which a Participant elects to defer under the
Plan.
M. "Deferral Period" means the period of time constituting a moving
number of aggregate and consecutive calendar months for which a
Participant elects under the Plan to delay receipt of any Deferral
Amount. Each Deferral Period begins on the last day of the Annual
Election Period and ends on the last day of the next consecutively
following 36th, 60th or 84th calendar month, depending on the number
of months established pursuant to Section 3.2, 3.3 or 5.1.
N. "Disability" means a determination by the Administrative Committee
that a Participant is unable because of illness, injury, accident or
other reason to perform substantially all of the acts which a
Representative normally performs and that such inability is likely to
continue for at least five consecutive months.
O. "Distribution Period" means the thirty-six (36), sixty (60) or eighty-
four (84) consecutive calendar months immediately following the end of
a Deferral Period. The duration of a Distribution Period shall be the
same number of consecutive calendar months as the Deferral Period
which it immediately follows.
-2-
<PAGE>
P. "Effective Date" means the first date in which a Registration
Statement filed with the Securities and Exchange Commission ("SEC")
becomes effective, any required state Registration Statement becomes
effective, and the Company's Board has approved the Plan.
Q. "Gross Compensation" means the total amount of a Participant's
Compensation, including advisory service fees, but excluding
compensation earned on the sales of certain insurance products through
H.D. Vest Insurance Services, unreduced by any amount.
R. "Initial Enrollment Period" means a sixty (60) day period commencing
January 1, 1998 or commencing three (3) days after the Effective Date,
whichever is later.
S. "Net Compensation" means Gross Compensation earned by and while a
Representative of the Company multiplied by the Participant's payout
rate (as defined in the applicable current H.D. Vest payout schedule)
and less any fees, expenses, or other amounts which reduce Gross
Compensation.
T. "Participant" means a Representative of the Company who elects to
participate in the Plan pursuant to Section 3.2 or 3.3, who satisfies
all requirements established by the Administrative Committee and who
designates a Deferral Amount and a Deferral Period pursuant to the
Plan. Participant does not include employees or officers of the
Company.
U. "Representative" means an independent contractor associated with the
Company through H.D. Vest Investment Securities, Inc. The Company
shall promptly inform the Administrative Committee if any individual
ceases to be a Representative. Representative does not include any
employee or officer of the Company.
V. "Vest" means H.D. Vest, Inc., a Texas Corporation.
2.2 Construction. Whenever any word is used herein in the singular form,
------------
it shall be construed as though it were also used in the plural form in all
cases where it would so apply. Headings of articles and sections are inserted
for convenience and reference, and they constitute no part of the Plan. Except
where otherwise indicated by the context, any masculine terminology herein shall
include the feminine and neuter. When the Plan requires or permits an act to
occur on a day and that day falls on a Saturday, Sunday, or Vest holiday, the
day for the act shall be the next business day.
-3-
<PAGE>
Section 3. ELIGIBILITY AND PARTICIPATION
3.1 General. All Participants may defer from a minimum of one percent
-------
(1%) to a maximum of one hundred percent (100%) of their Net Compensation and
may elect to defer Net Compensation for one of three Deferral Periods. The
Deferral Amount shall not exceed the Participant's Net Compensation.
3.2 Initial Enrollment: All Representatives shall have the opportunity to
------------------
enroll in the Plan during the Initial Enrollment Period. As such, they shall,
at that time, choose the Deferral Amount of their future Net Compensation earned
after the end of the Initial Enrollment Period and elect a Deferral Period from
the three Deferral Period Options. All such Deferral Amounts shall be allocated
to each Participant's Account as a Cash Equivalent beginning after the end of
the Initial Enrollment Period. After the Initial Enrollment Period, any
modification of any Deferral Amount or Deferral Period is governed by Sections
4 and 5.
3.3 Enrollment. Future Representatives. Representatives who join the
---------- ----------------------
Company after the Initial Enrollment Period shall not be eligible to become a
Participant until the Annual Election Period immediately following the date that
a Representative becomes affiliated with Company. However, no Representative
will be eligible to enroll in the Plan if, prior to an Annual Election period,
the Plan is not registered with the SEC or the Representative's state of
residence, if required, or the Board elects to terminate or suspend the Plan
pursuant to Section 7.3. Upon enrollment in the Plan, said Representative shall
be subject to the same terms as those who are Participants.
Section 4. ASPECTS OF DEFERRAL
4.1 Electing Deferral Amount. A Participant may elect a Deferral Amount
------------------------
and Deferral Period during each Annual Election Period by complying with the
Plan and all Administrative Committee requirements (including giving timely
written notice and properly completing all forms required by the Administrative
Committee). A Participant must specify the Deferral Amount as a specific
percentage, or dollar amount, of his total Net Compensation earned after an
Annual Election Period and during a Deferral Period. The Deferral Amount shall
not exceed the Participant's Net Compensation. Anyone who is no longer a
Representative shall no
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longer be entitled to elect any Deferral Amounts and Deferral Amounts shall
immediately stop.
4.2 Accounts. When a Participant has appropriately selected a Deferral
--------
Amount, the Administrative Committee shall establish or continue an Account on
the Company's books in the Participant's name. The Participant's Account is a
Cash Equivalent account.
4.3 Participant's Rights. Neither the Administrative Committee nor the
--------------------
Company shall be required to reserve or otherwise set aside funds for the
payment of any Cash Equivalents or other amounts credited to any Account. All
Accounts are unfunded accounts established under the Plan in the Participant's
name. Moreover, until a Participant actually receives a distribution of Cash
from his Account, the Participant maintains a position as a general creditor of
the Company as regards any Cash Equivalent or other amount credited to or to be
distributed from the Participant's Account and as regards any and all rights of
the Participant under the Plan. In addition, the Company shall not be required
to actually fund any Cash Equivalents or credit Cash to any Account until the
time for payment thereof during the Distribution Period. As general unsecured
obligations, Participant's account will be senior in rank to the Company's
Common Stock listed on NASDAQ/NMS. The Company has received an opinion letter
from Arthur Andersen LLP as to the federal income tax consequences to
Representatives of the Company who become Participants in the Plan. Each
Participant may request a copy of the opinion letter.
4.4 Time for Electing Deferral. Except as otherwise permitted in Section
--------------------------
3.2, 3.3 or 4.5, during each Annual Election Period, a Participant shall select
the (i) Deferral Amount and (ii) Deferral Period. Except as provided in Section
4.5, only one Deferral Amount can be selected for one Deferral Period during any
Annual Election Period. Any election so made shall remain in effect until the
next Annual Election Period and shall immediately cease if the Participant is no
longer an Representative.
4.5 Prospectively Increasing Deferral Amount. A Participant may elect to
----------------------------------------
increase future Deferral Amounts only pursuant to this Section. Any election to
increase the Deferral Amount may be made only on a calendar quarterly basis and
must be in writing and actually received by the Administrative Committee no
later than 30 days before the beginning of a calendar quarter. Any election to
increase prospectively the Deferral Amount shall begin on the first Compensation
Day of the next calendar quarter. Unless the Participant prospectively increases
the Deferral Amount under this Section 4.5, such an election shall remain in
effect until the next Annual Election Period or the Participant ceases to be a
Representative. Any such increase in the Deferral Amount elected
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shall be deferred for the same Deferral Period which applies to the other
Deferral Amount selected during the most recent preceding Initial Enrollment
Period or Annual Election Period during which the Participant elected a Deferral
Amount.
4.6 Irrevocable Selections. Once the Participant has selected a Deferral
----------------------
Amount and an Annual Deferral Period, he may not change that Deferral Period and
he may only change the Deferral Amount for the Deferral Period pursuant to
Section 4.5.
Section 5. DEFERRAL PERIODS AND COMPANY MATCHING CONTRIBUTIONS
5.1 Deferral Periods. Except as otherwise permitted in Sections 3.2 or
----------------
3.3, during an Annual Election Period, Participants shall select one of three
Deferral Periods:
Option No. 1 Deferral Amount deferred for thirty-six months (36
months).
Option No. 2 Deferral Amount deferred for sixty months (60
months).
Option No. 3 Deferral Amount deferred for eighty-four months (84
months).
5.2 Company Matching Contribution. Depending on the Deferral Period and
-----------------------------
Deferral Amount selected by the Participant, the Company shall allocate the
Company's Matching Contribution to the Participant's Account pursuant to Section
4.2. In addition, the Company may prior to any calendar year establish a
Matching Contribution for aggregate total Deferral Amount elected by all
Participants for such year. For the initial Plan year ending December 31, 1996,
the amount of the Company's Matching Contribution is determined as follows:
COMPANY MATCHING CONTRIBUTION
AS A PERCENTAGE OF THE DEFERRAL AMOUNT
--------------------------------------
DEFERRAL PERIOD COMPANY MATCHING
CONTRIBUTION CASH
Option 1: 36 Months 30%
Option 2: 60 Months 60%
Option 3: 84 Months 100%
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5.3 Forfeiture of Company Matching Contribution. Anyone who is no longer
-------------------------------------------
a Representative shall no longer receive any Company Matching Contributions.
Anyone who ceases being a Representative of the Company before the expiration of
the Deferral Period for any reason other than death, disability, or attaining
the age of 65, shall forfeit all of the Company's Matching Contributions for
which any Deferral Period has not expired. Forfeited Company Matching
Contributions shall revert to the Company. The Company shall distribute the
rest of the terminated Participant's Account, excluding all amounts attributable
to the Company's Matching Contributions, during the Distribution Period. A
disabled Participant or Participant attaining the age of 65 who ceases being a
Representative of the Company shall not forfeit the Company's Matching
Contribution unless the Participant becomes a registered representative of a
broker/dealer other than H.D. Vest Investment Securities, Inc. prior to the end
of the Participant's Deferral Period.
Section 6. DISTRIBUTION OF ACCOUNTS
6.1 Payment of Accounts. The Participant has no right to demand or
--------------------
receive any payment or distribution in kind or in Cash of any amount in a
Participant's Account until its payment is due during the Distribution Period.
All amounts credited to an Account shall be distributed as Cash. Subject to the
Plan, the Deferral Amounts and non-forfeited Company Matching Contributions
credited to a Participant's Account for each Deferral Period shall be
distributed to the Participant as follows:
Normal Representative Commissions are paid bi-monthly; therefore, the
payments of the Deferred Compensation and Matching Contributions will be
paid bi-monthly subsequent to the end of the Deferral Period. Consequently,
if a Representative elects to defer an amount of his or her bi-monthly
compensation for a period of 36 months, he or she will receive payment of
that Deferred Amount and matching contribution 37 months from the date of
the deferral. Each representative payroll period and Deferral Amount shall
be payable independently from one another under the Plan.
6.2 Payment to Deceased Participant's Estate. If a Participant dies
----------------------------------------
before all of his Account has been distributed to him, the amount remaining
shall be distributed at the Administrative Committee's discretion either (i) in
payments at the same times, and in the same manner, as were being paid to the
Participant before death or (ii) in accelerated payments to any
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extent that the Administrative Committee determines appropriate. Such
distribution shall be made to the beneficiary or beneficiaries determined under
Section 6.3.
6.3 Designation of Beneficiary. A Participant may designate a beneficiary
--------------------------
in a form provided, approved, and accepted by the Administrative Committee. In
the absence of such a form, all amounts remaining in a deceased Participant's
Account shall be distributed to the deceased Participant's estate.
6.4 Disabled Participants. If a Participant becomes disabled before all
---------------------
of his Account has been distributed to him, the amount remaining shall be
distributed at the Administrative Committee's discretion either (i) in payments
at the same times, and in the same manner, as were being paid to the Participant
before his disability or (ii) in accelerated payments to any extent that the
Administrative Committee determines appropriate.
Section 7. MISCELLANEOUS
7.1 Plan Administration. The members of the Administrative Committee
-------------------
shall be appointed by the Board and shall function pursuant to rules and
procedures approved or ratified by the Board. Any vacancy on the Administrative
Committee shall be filled by the Board.
7.2 Finality of Determinations. Sole and absolute authority and
--------------------------
discretion to apply, interpret and implement this Plan, including the
determination of any contested issues or claims arising under the Plan, shall be
vested in the Administrative Committee. By way of example, the Administrative
Committee shall assure that allocations to any Account are based on Net
Compensation actually earned by a Representative/Participant and may make any
increases or deductions in any Account to correct any erroneous amount of Net
Compensation, Deferral Amount or Company Matching Contribution. Any
determination by the Administrative Committee shall be final and binding for all
purposes and upon all interested persons and their heirs, successors and
personal representatives.
7.3 Amendment, Suspension, or Termination of the Plan. The Board may
-------------------------------------------------
amend, suspend or terminate the Plan in whole or in part at any time, provided
that such amendment, suspension or termination shall not adversely affect any
rights or obligations under the Plan with respect to amounts credited to the
Account of any Participant before the amendment, suspension or termination.
7.4 Limitations on Transfer. Participants shall have no right to any
-----------------------
amount credited to their Accounts except as set forth
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in the Plan. Neither such rights nor any amount credited to any Account may be
anticipated, assigned, alienated or transferred, except pursuant to Section 6.3.
Any attempt to alienate, sell, exchange, transfer, assign, pledge, hypothecate
or otherwise encumber or dispose of any such rights or amounts by a Participant,
the spouse of a Participant, or any other person shall be void and of no effect.
The foregoing limitations on transfer or assignment shall apply with equal force
and effect to any person who is designated or becomes a beneficiary pursuant to
Section 6.3.
7.5 Release. The Administrative Committee may require as a condition
-------
precedent before the distribution of any amount from any Account a complete
release and final settlement from the Participant and/or the Participant's
spouse, any beneficiary or either or any other person of all claims against the
Company, the Administrative Committee, the Plan or any other individual or
person.
7.6 Governing Law. The Plan and all agreements hereunder shall be
-------------
construed in accordance with and governed by the laws of the State of Texas.
Any elections to be made under this Plan shall be accepted and all actions to be
taken or payments under the Plan shall occur and be made at the Company's home
office located at 433 Las Colinas Boulevard, Third Floor, Irving, Texas, 75039,
or as such other location specified by the Administrative Committee. Because of
its terms and provisions, the Plan is not governed by the Employer Retirement
Income Security Act of 1974, as amended.
7.7 Statement of Account. A statement will be sent to each Participant as
--------------------
to his Account at least once each calendar year.
7.8 Expenses of Administration. All costs and expenses incurred in the
--------------------------
operation and administration of this Plan shall be borne by the Company.
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