<PAGE>
Filed Pursuant to Rule 424(b)(3)
File No. 33-74868
As Filed with the Securities and Exchange Commission on November 24, 1999
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
---------------------
POST EFFECTIVE AMENDMENT NO. 6
TO
FORM S-1
Registration Statement
Under
THE SECURITIES ACT OF 1933
--------------------
H.D. VEST, INC.
(Exact name of registrant as specified in charter)
Texas 6210 75-2154244
----- ---- ----------
(State or other jurisdiction (Standard Industrial (IRS Employer
of organization) Classification Code No.) Identification Number)
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
(Address of principal executive offices and principal place of business)
Registrant's telephone number, including area code (972) 870-6000
HERB D. VEST, CHAIRMAN
H.D. VEST, INC.
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
(972) 870-6000
(Name and address of agent for service)
Copies of communications to:
Curtis Swinson
Malouf Lynch Jackson & Swinson
A Professional Corporation
600 Preston Commons East
8115 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 Registered Offering Price Per Unit Aggregate Offering Registration Fee
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) H.D. Vest, Inc. 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 H.D. Vest, Inc.
of $250,000.
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(b)
<TABLE>
<CAPTION>
Item in Form S-1 Caption in Prospectus
- ---------------- ---------------------
<S> <C>
Item 1 Forepart of the Registration
Statement and Outside Front Cover Page
of Prospectus.................................. Outside Front Cover Page
Item 2 Inside Front and Outside Back
Cover Pages of Prospectus...................... Inside Front Cover Page; Outside
Back Cover Page
Item 3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors, Selected
Financial Information
Item 4 Use of Proceeds................................ Use of Proceeds
Item 5 Determination of Offering Price................ Not Applicable
Item 6 Dilution....................................... Not Applicable
Item 7 Selling Security Holders....................... Not Applicable
Item 8 Plan of Distribution........................... Plan of Distribution
Item 9 Description of Securities
to be Registered............................... Description of Securities
Item 10 Interests of Named Experts and Counsel......... Not Applicable
Item 11 Information with Respect to the Registrant
(a) Description of Business................. Business, Prospectus Summary
(b) Description of Property................. Property
(c) Legal Proceedings....................... Legal Proceedings
(d) Market Price of and Dividends on
the Registrant's 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
</TABLE>
<PAGE>
Filed Pursuant to Rule 424(b)(3)
File No. 33-74868
H. D. VEST, INC.
Units in a Non-qualified Deferred Compensation Plan
H.D. Vest, Inc. H.D. Vest, Inc. is offering Units in
6333 N. State Hwy. 161, 4th Floor its non-qualified, unfunded,
Irving, Texas 75038 deferred compensation plan. These
Units are offered solely to
representatives of H.D. Vest, Inc.
in conjunction with H.D. Vest Inc.'s
The Offering non-qualified, unfunded, deferred
compensation plan. Representative is
Unit Price Total defined as an independent contractor
---------- ----- associated with H.D. Vest, Inc. or
Representative Price Amount of $7,000,000 any of its subsidiaries, who is
Compensation neither an employee nor officer of
Deferred by H.D. Vest, Inc. or any subsidiary.
Representative
The Units consist of Compensation
amounts deferred by representatives
pursuant to the non-qualified,
unfunded, deferred compensation
plan offered by H.D. Vest, Inc.
Trading Symbol:
NASDAQ National Market - HDVS
_______________________________
This investment involves a high degree of risk. You should participate only if
you can afford a complete loss. See "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
_______________________________
November 24, 1999
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Items Page
- ----- ----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Market Information...................................................... 9
Selected Financial Information.......................................... 10
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 11
Use of Proceeds......................................................... 22
Capitalization.......................................................... 24
Business................................................................ 25
Available Information.............................................. 25
Reports Furnished.................................................. 26
Registered Representatives......................................... 27
Technology Development and Information Services.................... 28
Technical and Sales Support Services............................... 28
Regional Support System............................................ 28
Educational Services............................................... 29
Representative Recruiting.......................................... 29
Representative Development......................................... 30
Insurance Agency Management Services............................... 30
Investment Services................................................ 30
Trading and Customer Service....................................... 31
Representative Licensing........................................... 31
Compliance and Supervision......................................... 31
Professional Investment Advisory Services.......................... 32
New Programs....................................................... 32
Operations and Sources of Revenue....................................... 37
Trademarks.............................................................. 37
Dependence on a Single Customer......................................... 37
Government Regulation................................................... 38
Competition............................................................. 39
Employees............................................................... 39
Property................................................................ 40
Management.............................................................. 41
Directors and Officers............................................. 42
Remuneration of Directors and Management........................... 45
Certain Transactions.................................................... 45
Issuance of Series A Preferred Stock............................... 45
Transactions with Management....................................... 46
Security Ownership of Certain Beneficial Owners and Management.......... 54
Principal Shareholders.................................................. 55
Shares Eligible for Future Sale......................................... 55
Description of Securities............................................... 56
Plan of Distribution.................................................... 59
Transfer Agent & Registrar.............................................. 59
Legal Proceedings....................................................... 59
Legal Matters........................................................... 59
Experts................................................................. 59
Report of Independent Public Accountants................................ F-1
Consolidated Financial Statements....................................... F-2
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus. This
summary is not complete. This summary may not contain all of the information you
should consider before investing in Units in the non-qualified, unfunded,
deferred compensation plan. You should read the Prospectus in its entirety,
including the "Risk Factors" section, which is found on page 5 and the financial
statements and notes to those statements, which begin on page F-2.
The Company
H.D. Vest, Inc. is a financial services company. H.D. Vest, Inc. is organized
for the purpose of investing in financial services companies and providing
management services to such companies. H.D. Vest, Inc. also conducts operations
under the corporate assumed name of H.D. Vest Financial Services.
H.D. Vest, Inc. was established to meet the growing demand for professional
financial services. H.D. Vest, Inc. provides such services primarily through tax
professionals. H.D. Vest, Inc. 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. H.D. Vest, Inc. 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.
You should read the section entitled "Business" which is found on page 25 for a
more detailed description of the business activities of H.D. Vest, Inc.
When we refer to "Company", "we", "us" or "our" in this document, we mean H.D.
Vest, Inc., and all of its subsidiaries on a consolidated basis, unless the
context otherwise requires.
The Offering
Deferred Compensation Plan
- --------------------------
H.D. Vest, Inc. is making available exclusively to representatives of H.D. Vest,
Inc.'s subsidiary H.D. Vest Investment Securities, Inc., the optional right to
participate in a non-qualified, unfunded, deferred compensation plan. The
deferred compensation plan provides representatives an opportunity to forego
receipt of compensation payable to them on a pre-tax basis for selected periods
of time. By participating in the deferred compensation plan, a representative
defers recognition of income otherwise currently taxable. The representative
will subsequently receive the compensation that he or she deferred, plus a
contribution from H.D. Vest, Inc. At the end of the time period in which the
representative has deferred his or her compensation, the amount deferred and an
amount to be paid by H.D. Vest, Inc. will be paid to the representative.
An election by a representative to defer portions of his or her
3
<PAGE>
compensation shall be made annually, beginning with their initial enrollment
period. The compensation deferred by representatives will be deferred in
accordance with the deferred compensation plan once the compensation is earned
by the representative. You should review the section entitled "Description of
Securities" for a detailed discussion of the unfunded, deferred compensation
plan. "Description of Securities" is found on page 56 of the Prospectus.
Use of Proceeds
H.D. Vest, Inc. intends to use the proceeds of this offering for technology and
operating improvements, marketing initiatives and representative development
activities.
4
<PAGE>
RISK FACTORS
THE UNITS IN THE DEFERRED COMPENSATION PLAN INVOLVE A HIGH DEGREE OF RISK.
BEFORE MAKING AN INVESTMENT IN THE UNITS, AN INVESTOR SHOULD GIVE CAREFUL
ATTENTION TO THE FOLLOWING RISK FACTORS.
1. Deferred Compensation Plan Distributions. H.D. Vest, Inc. will be required to
distribute to each representative who participates in the deferred compensation
plan all deferred amounts plus amounts paid by H.D. Vest, Inc. equal to 41%,
85%, 151% or 305% of the amounts deferred depending on the deferral period
selected by a participant. H.D. Vest, Inc. plans to utilize all amounts deferred
by representatives. H.D. Vest, Inc. will not reserve any funds for the future
obligations owed to the representative under the deferred compensation plan.
H.D. Vest, Inc. may be unable to meet its future cash payment obligations owed
to the representative under the deferred compensation plan if cash flow from
operations is not sufficient.
2. Tax Treatment. Arthur Andersen LLP furnished H.D. Vest, Inc. an opinion
that the amounts deferred under the deferred compensation plan will receive
deferred tax treatment. Arthur Andersen LLP further stated that the deferred
amounts plus the H.D. Vest, Inc. payment will be taxable as received. This
opinion will not be binding on the Internal Revenue Service. If the Internal
Revenue Service were to successfully challenge the deferred tax treatment, then
a representative who participates will have to recognize and report the deferral
amounts as income in the year in which they were deferred. If such an event
occurred, a representative who defers compensation may be required to recognize
current and prior year tax liabilities, including any applicable penalties and
interest on amounts due.
3. Economic Conditions. Fee or commission production for H.D. Vest, Inc.'s
representatives is lower than that of representatives of other independent
broker-dealers.
In understanding this fact, H.D. Vest, Inc. believes there are several factors
that should be considered.
. Representatives are primarily accountants/tax professionals
that have a difficult time overcoming the psychological
barriers and long held professional restrictions on selling
products to their clients.
. Individuals typically have a full-time job and income when they become
representatives of H.D. Vest, Inc. They add financial planning as a
part-time business and are frequently distracted by their ongoing
business which pays their expenses. H.D. Vest, Inc. has a significant
challenge of motivation and focus to address with each
5
<PAGE>
representative.
. H.D. Vest, Inc. has lost an average of 13% 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.
H.D. Vest, Inc. has identified the following external factors that it believes
have more impact on representatives' production than any internal factors that
could be controlled by H.D. Vest, Inc.:
. Interest Rates: When interest rates are low, clients are searching for
alternatives to their current investments (such as Certificate of
Deposits). This puts representatives of H.D. Vest, Inc. in the unique
position to assist their clients in choosing alternative investments
such as mutual funds.
. Taxes: Tax law changes provide the representatives of H.D. Vest, Inc.
with special challenges as well as opportunities. In the face of
significant change most clients are hesitant to make changes in their
investments and the representative as their accountant is not as
likely to pursue this business as the typical full-time independent
representative. Opportunities also exist for representatives that the
typical independent representative does not have. When tax laws
change, the accountant is the logical choice for clients to discuss
potential effects on their investments.
. Market Conditions: H.D. Vest, Inc.'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
representatives of H.D. Vest, Inc. In periods of market decline,
representatives of H.D. Vest, Inc. have historically been hesitant to
advise their clients regarding investment products.
. Competition: Representatives of H.D. Vest, Inc. face competition for
the services they provide from the accounting, financial planning,
stock brokerage and insurance industries. Many of H.D. Vest, Inc.'s
Representatives are not aggressive in overcoming this competition
which puts them at a disadvantage.
These factors could adversely impact H.D. Vest, Inc.'s financial condition. If
the financial impact were severe, H.D. Vest, Inc. might not have funds available
to pay the deferred amounts owed to a representative.
6
<PAGE>
4. Competition. The financial service industry is intensely competitive. Many
competitors of H.D. Vest Investment Securities, Inc., a wholly-owned subsidiary
of H.D. Vest, Inc., have been in the business for many years and have
substantially greater financial resources than H.D. Vest, Inc. 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 H.D. Vest, Inc. The existence and expansion of
other firms and of firms providing other financial services may adversely effect
the profitability of H.D. Vest, Inc. In addition H.D. Vest, Inc.'s profitability
will depend upon a number of factors beyond the control of H.D. Vest, Inc.,
including legislative and administrative changes and government regulations and
policies. If H.D. Vest, Inc. is not profitable when the deferred amount is due
to be paid to the representative, there might not be funds available to pay the
representative.
5. Regulation. The securities, financial planning and insurance industries
are subject to extensive regulation on both federal and state levels. The
Securities and Exchange Commission regulates broker-dealers with respect to such
matters as net capital requirements, the holding of customers' credit balances
and transactions in securities. Much of the regulation of broker-dealers has
been delegated to self-regulatory organizations, principally the National
Association of Securities Dealers and the national securities exchanges. Failure
to comply with such regulations or with any laws, rules or regulations could
result in censure, fine, suspension or expulsion, all of which would have a
materially adverse financial effect upon H.D. Vest, Inc. If such an event were
to occur, H.D. Vest, Inc. might not have funds available to pay a representative
the deferred amount.
6. Ethics Issues Affecting Certified Public Accountants. Currently, 41
jurisdictions allow CPAs to receive commission-based compensation for the sale
of products and services. The remaining 10 jurisdictions have regulations or
laws which have been interpreted to preclude CPAs from receiving such
compensation. CPA Representatives have been challenged by administrative actions
of accountancy boards in Louisiana and California, where the receipt of
commissions by CPAs was formerly prohibited. The State of California enacted
legislation to allow CPAs to receive commissions effective January 1, 1999. The
State of Louisiana enacted legislation to allow CPAs to receive commissions
effective June 18, 1999. Litigation in Louisiana was settled following enactment
of the new law, but continues in California as a result of actions initiated
under the previously effective law. There is no assurance that the remaining
states will change their rules. The financial growth of H.D. Vest, Inc. may be
adversely impacted in the event these rules remain unchanged
7
<PAGE>
or should some states change their rules to prohibit commissions. In such event,
H.D. Vest, Inc. might not have sufficient funds to pay a representative his or
her deferred compensation.
7. Independent Contractor Status. Representatives of H.D. Vest, Inc. are
independent contractors, rather than employees of H.D. Vest, Inc. Based on two
Private Letter Rulings, a test has been established to determine what the
Internal Revenue Service considers to be the classification of individuals
working for a company. Based on these Private Letter Rulings and other
applicable law, H.D. Vest, Inc. classifies representatives of H.D. Vest, Inc. as
independent contractors, rather than employees of H.D. Vest, Inc. or its
subsidiaries. In the event that federal regulations or other law governing
worker classification should change, or that the Internal Revenue Service
otherwise determines that representatives of H.D. Vest, Inc. are employees, H.D.
Vest, Inc. or its subsidiaries could be subject to Internal Revenue Service
withholding rules and be required to contribute Federal Social Security and
Medicare taxes on each representative's behalf. In addition, the deferred
compensation plan may then be subject to the Employee Retirement Income Security
Act of 1974, as amended. A change in classification could have a significant
adverse affect on H.D. Vest, Inc. and its revenues, and could result in losses.
If losses were to occur, H.D. Vest, Inc. might not have funds available to pay
the deferred amount owed to the representative.
8
<PAGE>
MARKET INFORMATION
As of September 30, 1999 our stock was listed on the NASDAQ National Market tier
of the NASDAQ Stock Market under the symbol: HDVS. The total trading volume of
our stock for fiscal 1999 was 748,310 shares. There can be no assurance that a
more active market will develop. The prices set forth below represent prices
between dealers, do not include retail markups, markdowns, or commissions and do
not necessarily represent actual transactions.
High Low
---- ---
3 Months Ended 9/30/99 $5.75 $4.75
6/30/99 6.63 5.00
3/31/99 8.00 6.00
12/31/98 8.00 5.63
-------------------------------------
9/30/98 9.25 6.38
6/30/98 11.75 4.75
3/31/98 11.00 4.88
12/31/97 5.50 4.13
-------------------------------------
9/30/97 5.50 4.63
6/30/97 4.88 3.75
3/31/97 5.13 4.13
12/31/96 5.25 3.25
-------------------------------------
As of September 30, 1999, there were 596 holders of record of our common stock.
The NASDAQ NMS Qualification Standards require any company wishing to remain
listed to have net tangible assets of $4,000,000, public float of shares of
750,000 (which are shares not held directly or indirectly by any officer,
director or beneficial owner of more than 10% of the total shares outstanding),
market value of public float of $5,000,000, $1 minimum bid for outstanding
shares, 400 round lot shareholders and two market makers. As of September 30,
1999, there were 513 round lot holders of record of our common stock.
If we were subsequently delisted from the NASDAQ National Market System, such
delisting would materially limit the public market for our 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.
We have paid no dividends on our common stock since incorporation. We intend to
continue to devote our earnings, if any, to the
9
<PAGE>
growth and development of the Company. Any dividends in the future will depend
upon our financial requirements and other factors.
SELECTED FINANCIAL INFORMATION
The following summary of certain financial information relating to the Company
for the five years ended September 30, 1999 has been derived from our audited
financial statements. 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>
As of September 30,
-------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $150,222,771 $121,913,675 $87,469,296 $67,509,222 $44,670,051
Net Income (Loss) 1,187,011 1,427,312 2,142,063 1,188,707 1,329,001
Income (Loss)/Common Share 0.20 0.24 0.37 0.20 0.22
Ratio of Earnings to Fixed Charges
or Coverage Deficiency 3.21 3.52 5.52 4.03 4.08
</TABLE>
Summary of Consolidated Statements of Financial Position:
<TABLE>
<CAPTION>
As of September 30,
-------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 6,579,642 $ 5,392,094 $ 5,054,298 $ 2,821,115 $ 1,293,871
Total Assets 34,470,649 29,111,026 19,747,631 16,950,759 11,666,371
Capital Leases (net of current
maturities) 1,940,638 2,506,506 1,016,257 676,844 430,739
Total Liabilities 24,989,353 20,721,088 12,699,070 11,949,226 7,726,010
Shareholders' Equity 9,481,296 8,389,938 7,048,561 5,001,533 3,940,361
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are a provider of financial services through tax and accounting
professionals. Our services are designed to assist in making individual tax and
accounting professionals financial service centers for their clients. We believe
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.
During fiscal 2000, we intend to launch a new interactive financial planning Web
site providing comprehensive, integrated financial needs analysis and
appropriate investment information for consumers. The web site is intended to
promote brand awareness, provide lead generation for our Representatives and to
facilitate the marketing of financial products and services. It is anticipated
that the Web site will include, among other things, a tax planning organizer and
program allowing consumers to prepare their tax returns for free, retirement and
college funding calculators, debt management recommendations, insurance and risk
management information, links to our nationwide network of Representatives, and
product purchase and service options. In addition, a financial planning analysis
generated from tax return information will be provided to the consumer.
The following discussion and analysis provides information that we believe to be
relevant to understanding our consolidated financial condition and results of
operations. This discussion should be read in conjunction with our consolidated
financial statements and the related notes thereto.
11
<PAGE>
RESULTS OF OPERATIONS
REVENUES:
The following tables set forth for the periods indicated our revenues:
For the year ended September 30, 1999
---------------------------------------
Amount % change % of total
Commission $115,396,557 +21% 77%
Portfolio management fees 21,900,550 +28% 15%
Marketing and education fees 10,923,662 +37% 7%
Other 2,002,002 +31% 1%
------------ ----- -----
Total $150,222,771 +23% 100%
============ ===== =====
For the year ended September 30, 1998
---------------------------------------
Amount % change % of total
Commission $ 95,370,504 +39% 78%
Portfolio management fees 17,049,614 +54% 14%
Marketing and education fees 7,964,579 +13% 7%
Other 1,528,978 -6% 1%
------------ ----- -----
Totals $121,913,675 +38% 100%
============ ===== =====
For the year ended September 30, 1997
---------------------------------------
Amount % change % of total
Commission $ 68,736,399 +24% 78%
Portfolio management fees 11,070,632 +71% 13%
Marketing and education fees 7,041,025 +68% 7%
Other 1,621,240 +18% 2%
------------ ----- -----
Totals $ 88,469,296 +31% 100%
============ ===== =====
Our revenues for the years ended September 30, 1999, 1998, and 1997 were
$150,222,771, $121,913,675, $88,469,296, respectively, a 23%, 38%, and 31%
increase from the years ended September 30, 1998, 1997, and 1996, respectively.
We believe that the increase in revenues for the fiscal years is due to (i) the
continued strength in the overall financial markets, (ii) our commitment to fee-
based programs, (iii) the expansion of the Company's Representative force
through recruitment, and (iv) our continued development of programs to support
and educate Representatives.
12
<PAGE>
COMMISSION REVENUE
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
1999 % 1998 % 1997 %
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Commission Revenue
Mutual Fund and UITs(1) $ 85,503,458 +14% $75,302,440 +39% $54,222,732 +21%
Insurance Products (2) 17,850,301 +29% 13,785,487 +37% 10,098,858 +30%
Stocks, Bonds and (1)
Options 11,864,690 +98% 6,006,235 +47% 4,084,707 +48%
Partnership Interests 141,694 -19% 174,060 +71% 101,885 -20%
Trading 36,414 -64% 102,282 -55% 228,217 +664%
------------ ---- ----------- ---- ----------- ----
Total $115,396,557 +21% $95,370,504 +39% $68,736,399 +24%
============ ==== =========== ==== =========== ====
</TABLE>
(1) Revenue increased in the fiscal years 1999, 1998, and 1997 due to the
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 us and stable interest rates.
(2) Revenue 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.
PORTFOLIO MANAGEMENT FEE REVENUE
Portfolio Management fee revenue was $21,900,550, $17,049,614, and $11,070,632
for the years ended September 30, 1999, 1998 and 1997, respectively. This
represents a 28%, 54% and 71% increase in 1999, 1998, and 1997, respectively.
The increase is primarily due to the assets under management in our fee-based
programs. Total assets under management were $1.583 billion, $1.094 billion and
$.840 billion at September 30, 1999, 1998 and 1997. This represents a 45%, 30%
and 68% increase in 1999, 1998, and 1997, respectively. Fee-based programs
produce revenue based on quarterly charges to clients for the management of
their accounts. We hope to maximize revenue by making both fee-based and
commission-based services available to customers. We believe and expect that
market demand has and will cause fee-based services to grow at a greater rate
than commission-based services.
MARKETING AND EDUCATION FEE REVENUE
Marketing and education fee revenue was $10,923,662, $7,964,579 and $7,041,025
for the years ended September 30, 1999, 1998 and 1997, respectively. This
represents a 37%, 13% and 68% increase in 1999, 1998 and 1997, respectively.
Revenues in 1999, 1998 and 1997 increased due to increases in sales and the
expansion of the
13
<PAGE>
educational programs and seminars provided by us. Product sponsors assist in the
funding of our educational services.
OTHER REVENUE
Other revenue was $2,002,002, $1,528,978 and $1,621,240 for the years ended
September 30, 1999, 1998 and 1997, respectively. This represents a 31% and 18%
increase in 1999 and 1997, respectively, and a decline of 6% in 1998. The
increase in 1999 is due primarily to revenue generated from billings to
Representatives for expenses incurred by us related to compliance audits. The
related expenses are recorded in General and Administrative. These compliance
audits were recently required by the NASD. We provide management services to an
affiliated insurance agency, H.D. Vest Insurance Services(HDVIns). The decline
in 1998 is due to a decrease in the revenue from our catalog sales products as
well as a decrease in facility and service fee revenue due to a reduced
attractiveness of fixed insurance products offered by HDVIns. The increase in
1997 is due to increased interest income received by us from increased cash
reserves maintained during the year.
EXPENSES
COMMISSION EXPENSE
Commission expense was $84,822,640, $68,152,972 and $48,384,293 for the years
ended September 30, 1999, 1998 and 1997, respectively. This represents a 20%,
29% and 26% increase in 1999, 1998 and 1997, respectively. The matching expense
on the Company's deferred compensation Plan is included in commission expense.
As the Company increases participation in the Plan, commission expense will
increase at a faster rate than the related revenue. The increase in commission
expense during 1999 is due to (i) an increase in commission revenue of 21% from
the prior year and (ii) an increase in the payout ratio to 73% in 1999 from 71%
in 1998. The increase in the payout ratio is due to increased production by
Representatives at higher payout levels. We believe that in periods of short-
term economic fluctuations, established Representatives have an advantage over
less experienced Representatives in selling investment products. As we recruit
and train Representatives in lower payout categories, the revenue generated by
these Representatives will help to offset increased revenue by Representatives
in higher payout categories.
PORTFOLIO MANAGEMENT FEE EXPENSE
Portfolio management fee expense was $15,364,107, $11,263,669 and $7,375,367 for
the years ended September 30, 1999, 1998 and 1997, respectively. This represents
a 36%, 53% and 79% increase in 1999, 1998 and 1997, respectively. The increase
in Portfolio management fee expense during 1999 is due to (i) an increase in
portfolio management revenue of 28% from the prior year and (ii) an
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<PAGE>
increase in the payout ratio to 70% in 1999 from 66% in 1998. Similar to the
increase in commission expense above, the increase in the payout ratio is due to
increased production by Representatives at higher payout levels.
OPERATIONS EXPENSE
Operations expense was $10,719,749, $7,179,790 and $5,340,317 for the years
ended September 30, 1999, 1998 and 1997, respectively. This represents a 49%,
34% and 43% increase in 1999, 1998 and 1997, respectively. Operations expense
includes our mutual fund operations, customer service, licensing and compliance
departments. The increase is due in part to (i) increased Compliance expense,
(ii) increased noncapitalizable costs to improve our utilization of technology
and (iii) the implementation of a new mutual fund processing computer systems.
REPRESENTATIVE DEVELOPMENT EXPENSE
Representative development expense was $8,736,114, $7,521,719 and $6,466,956 for
the years ended September 30, 1999, 1998 and 1997, respectively. This represents
a 16%, 16% and 13% increase in 1999, 1998 and 1997, respectively. The increase
in Representative development costs is mainly due to increased participation by
Representatives and the expansion of staff necessary to support participation in
these programs. The increase in participation by Representatives and the related
costs is directly attributable to the increased recruitment of new
Representatives.
The Representative development process is the cornerstone of our concept of
providing the client with the most qualified professional Representative
available. We have 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.
We require our 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 us to our Representatives include software support such as an asset
allocation and tax return-based investment analysis program, educational events
such as Regional Support Systems meetings and marketing initiatives that include
self-study kits and newsletters, and various other regional and national
meetings sponsored by us as well as the sponsors of products sold by our
Representatives.
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<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense was $22,183,630, $21,182,001 and $14,784,092
for the years ended September 30, 1999, 1998 and 1997, respectively. This
represents a 5%, 43% and 17% increase in 1999, 1998 and 1997, respectively. The
increase for the year ended September 30, 1999 was driven by additional expenses
incurred to support our infrastructure, which was offset by a decrease in legal
costs within the year.
General and administrative expenses for the year ended September 30, 1998 were
$21,182,001, an increase of 43% from the prior year. Included in the increase of
general and administrative expenses were nonrecurring costs of approximately (i)
$826,000 for expenses related to claims and (ii) $572,000 associated with the
relocation of our corporate headquarters. Additionally, the increase in general
and administrative expenses was due, in part, to (i) $648,553 for the expansion
of HDVIS's compliance and supervision of Representatives, (ii) $750,959 in human
resource expense related to the Company's increase in staffing and employee
training programs and (iii) $707,427 in costs related to our mail fulfillment
operations.
REPRESENTATIVE RECRUITING EXPENSE
Representative recruiting expense was $3,083,830, $2,231,364 and $1,677,594 for
the years ended September 30, 1999, 1998 and 1997, respectively. This represents
a 38%, 33% and 117% increase in 1999, 1998 and 1997, respectively. The increase
in Representative recruiting expense during 1999 is due to (i) aggressive
recruiting goals for the fiscal year and (ii) use of additional methods of
recruiting that have not been utilized in the past.
We recruit Representatives for our subsidiaries HDVIS and HDVAS and other
affiliated entities. Since our inception, we have developed a recruiting process
which we believe results in a larger network for distribution of financial
products and services. Based on our experience in this area, we typically use
methods that have proven to be the most effective in the past. These methods
include direct mail, recruiting seminars, telemarketing, trade shows, referral
incentive programs, trade publication advertising and various education events.
We may employ additional methods of recruiting in order to develop and determine
the effectiveness of such alternatives.
At September 30, 1999, we have approximately 8,550 affiliates, of which 6,750
are fully licensed Representatives and approximately 1,800 Representatives are
in various stages of licensing. Our recruiting efforts for the years ended
September 30, 1999, 1998, and 1997 resulted in increases in new affiliates of
2,861, 2,227 and 1,815, respectively.
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<PAGE>
Our Representatives include Certified Public Accountants (CPA). Currently, 41
jurisdictions allow CPAs to receive commission-based compensation for the sale
of products and services. The remaining 10 jurisdictions have regulations or
laws which have been interpreted to preclude CPAs from receiving such
compensation. CPA Representatives have been challenged by administrative actions
of accountancy boards in Louisiana and California, where the receipt of
commissions by CPAs was formerly prohibited. The State of California enacted
legislation to allow CPAs to receive commissions effective January 1, 1999. The
State of Louisiana enacted legislation to allow CPAs to receive commissions
effective June 18, 1999. Litigation in Louisiana was settled following enactment
of the new law, but continues in California as a result of actions initiated
under the previously effective law. We have chosen to vigorously support these
Representatives. We have incurred legal costs of approximately $297,275,
$286,000 and $351,000 for the years ended September 30, 1999, 1998 and 1997,
respectively, in support of these Representatives.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense was $2,449,179, $1,431,617 and $933,015
for the years ended September 30, 1999, 1998 and 1997, respectively. This
represents a 71%, 53% and 4% increase in 1999, 1998 and 1997, respectively. The
increase is primarily driven by an increase in amortization and depreciation
expense caused by an increase in capitalizable software development and the
related computer hardware.
NET INCOME
Net income for the year ended September 30, 1999 was $1,187,011 compared to net
income of $1,427,312 and $2,142,063 for the years ended September 30, 1998 and
1997, respectively. This represents a 20% and 33% decrease in 1999 and 1998,
respectively, and a 80% increase in 1997. As noted above the decrease for fiscal
year 1999 is primarily due to an increase in commission expense, an increase in
costs to improve our technology and an increase in Representative Recruiting
expenses. The decrease in net income for fiscal 1998 was due to increased legal
and technology expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital at September 30, 1999 was $6,579,642 compared to net
working capital of $4,112,684 at September 30, 1998. The $2,466,958 or 60%
increase, for the year ended September 30, 1999, is primarily a result of (i)
strong cash flows provided by operations, (ii) proceeds from the Deferred
Compensation Plan for its Representatives and (iii) repayment of related party
notes receivable. Our primary uses of cash for the year were
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<PAGE>
attributable to (i) acquisition and internal development of computer software,
(ii) purchase and capital lease of property and equipment and (iii)
Representative recruiting cost.
During 1999 we dedicated much of our capital to the development of a new
information system infrastructure. We believe the improved information systems
will provide more capacity to manage our current growth and support future
growth. Approximately $1.3 million of our fiscal 1999 funding for information
systems and property and equipment came from operating and capital leases.
Historically, our 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, 1999, amounts
from these sources have been approximately $2.5 million, $2.6 million, $5.1
million and $18.2 million, respectively.
We have a Deferred Compensation Plan (the Plan) for our Representatives.
Pursuant to the Plan, Representatives may forego current compensation, and
subsequently receive the deferred compensation plus a Company matching
contribution, as defined in the Plan. In fiscal 2000, we expect to increase
participation and cash flow from the Plan by offering a higher matching
contribution and an extra deferral period to Representatives. The matching
percentages for the Plan year 2000 are equal to 41%, 85%, 151% or 305% for
periods of 36, 60, 84 or 120 months. As of September 30, 1999 and 1998,
approximately $3,450,000 and $2,385,000 respectively, had been deferred under
the Plan.
Matching contributions on amounts deferred under the Plan are accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, commission expense will increase in the years in which commissions
are earned and deferred by participants. Such increases in commission expense
will have an adverse effect on our net income. 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, 1999 and 1998, we had accrued matching contributions of
approximately $700,000 and $365,000, respectively. Accrued matching
contributions will be paid out over a maximum of seven years, however with the
addition of an extra deferral period this is expected to increase to ten years
during fiscal 2000. During 1999, we paid $84,110 to participants representing
deferred amounts and $22,324 representing matching contributions.
The implementation of a new back office system in fiscal 1999 has led to an
increase in customer funds held which in turn has increased our required net
capital. This system will increase both our net capital and required net capital
in current and future periods. Such increases could adversely affect available
cash.
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<PAGE>
Historically, we have significantly increased our recruiting and development
activities upon obtaining financing through the sale of stock or cash flows. We
expense all costs related to these activities. Additionally, in periods of
increased recruiting and development activities, we have experienced higher
general and administrative costs as overhead increased to support the recruiting
and development activities. Consequently, we have recorded substantial expenses
subsequent to obtaining financing required to fund further growth. Should we
obtain future financing to fund our growth plans, it is likely that we would
record substantial expenses in the periods subsequent to obtaining such
financing.
We believe that, in addition to external financial resources (primarily bank
leases); our cash flow is sufficient to maintain our current operations as well
as our continued growth plan. We continually monitor the capital markets for
opportunities to obtain financing to meet our growth needs.
Year 2000 Assessment
We recognize the need to ensure that our operations will not be adversely
impacted by "Year 2000" systems failures. Year 2000 issues arise because some
computer software and hardware products ("computer systems") were designed to
handle only a two-digit year, not a four-digit year (e.g., 1997 is seen by the
computer as "97"). When the year 2000 begins, these computer systems may
interpret "00" as the year 1900 and not 2000, and could either stop processing
date-related computations or process them incorrectly.
In order to minimize the impact of the Year 2000 on us, a Year 2000 plan has
been established for the evaluation and management of risks associated with
material Year 2000 issues. The plan includes a review of material computer
systems that we currently have in place, modification or replacement of such
systems if required, inquiry to third-party providers with whom we have material
business relationships as to their state of readiness for potential Year 2000
issues, and the development of contingency plans in the event material Year 2000
issues arise in our or third-party computer systems.
We have identified all mission-critical computer systems as of September 30,
1999 and completed our testing of those systems. During the fiscal year ended
September 30, 1998, we expended approximately $150,000 to address potential Year
2000 issues, exclusive of costs associated with previously scheduled
modifications or replacements unrelated to Year 2000 issues. We spent
approximately $150,000 for testing, modification and replacement of our computer
systems related to Year 2000 issues during the fiscal year ending September 30,
1999. We expect that future expenses incurred will continue to be financed from
internally generated funds.
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<PAGE>
Based on current and anticipated operating needs, many of our mission-critical
computer systems have recently been replaced with more technologically advanced
versions. Each new system has been reviewed for Year 2000 compliance. The
computer systems that have been or are in the process of being replaced,
include, but are not limited to, our investment processing system, accounting
system, human resources and payroll system, work station and network operating
systems, and systems used to communicate with our Representatives. The remaining
computer systems, including but not limited to phone equipment and general
office equipment, have been reviewed for Year 2000 compliance as part of the
overall plan for testing and modification discussed above. Telecommunication and
office automation systems that facilitate operations of our locations and
corporate headquarters, comprise our primary non-IT systems. We have assessed
the Year 2000 readiness of 100% of our non-IT systems and have completed
compliance testing to bring them into readiness.
In addition to reviewing our own computer systems, we have communicated with
material third-party providers, including but not limited to suppliers, product
sponsors, financial institutions, utilities, facility owners and other companies
with which we have material business relationships in order to assess these
companies' state of Year 2000 readiness. We have requested, among other things,
disclosure of the companies' plans for minimizing the impact of the Year 2000 on
their computer systems and us. As of September 30, 1999, we have not received
from any third-party provider with which a material business relationship exists
notice of a material Year 2000 issue or inability to address material Year 2000
issues prior to the Year 2000. We are generally not in a position to verify
whether third-party service providers are or will become Year 2000 ready apart
from such assurances. We have assumed non-responsive third parties will be non-
compliant for the purpose of risk assessment. We do not believe there has been
or will be a significant disruption of our business or our business due to our
Year 2000 remediation efforts.
We do not anticipate a material effect on business operations as a result of
Year 2000 computer system issues. As a precaution, however, we have developed a
contingency plan for business operations in the event material Year 2000 issues
arise in our or third-party computer systems. In the event material issues
arise, we are prepared to conduct business, particularly the processing of
investment transactions, utilizing manual processes and third-party, off-site,
computer systems and back-up data routinely archived by us. We anticipate that
the cost of conducting business utilizing our contingency plans would be higher
than conducting business utilizing current and anticipated operational plans,
although we are unable to estimate potential cost increases in this regard. We
believe our worst case scenario related to Year 2000 issues is scattered
interruptions of power and other services which would not interfere with our
business as
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<PAGE>
a whole. However, network-wide power outages at our locations for extended
periods of time could significantly interrupt the provision of service to our
customers and have a material adverse effect on our business operations.
In the event we receive notice from a material third-party provider as to a
potential Year 2000 issue affecting us, or a material Year 2000 issue arises as
to a third party, we anticipate minimizing potential business interruptions by
shifting mission-critical functions, including but not limited to products sold
or recommended by our subsidiaries, to third-party providers demonstrating Year
2000 compliance.
To the extent that we or third-party providers cannot correct material Year 2000
issues, and we are unable to efficiently conduct business in accordance with its
anticipated contingency plans, our operations could be negatively impacted.
The foregoing information is a Year 2000 readiness disclosure.
Forward-Looking Statements
The statements contained herein which are not historical fact are forward-
looking statements that are subject to risks and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. Words such as "believe," "expect," "anticipate," "intend," "aim,"
"will," and similar language, identify forward looking statements. The following
factors, among others, could affect our actual results and cause such results to
differ materially from those expressed in forward-looking statements: the
ability to access capital and financing on acceptable terms; heightened
competition; adverse publicity and news coverage regarding our company, products
or services; adverse results in litigation; changes in social and economic
conditions; changes in generally accepted accounting policies and practices, and
the application of such policies and practices to us; loss or retirement of key
executives, employees or technical personnel; our inability to attract and
retain experienced executives, employees or technical personnel; natural events
and acts of God such as earthquakes, fires and floods; changes in domestic or
foreign laws and regulations affecting our ability to conduct business in the
manner in which we currently conduct such business; and our ability and the
ability of third parties with whom we have material relationships to become year
2000 compliant.
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<PAGE>
USE OF PROCEEDS
The net proceeds to be realized by us 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 us over an extended
period of time. We anticipate that the net proceeds of the offering will be used
for certain new programs in the following areas: (i) technology and operating
improvements, (ii) marketing initiatives and (iii) Representative development
activities (see Business - New Programs). As of September 30, 1999, our
Representatives had deferred approximately $3,450,000 pursuant to the Plan.
The following table represents our estimate of the allocation of the estimated
proceeds of this offering that will be received over an extended period of time.
We 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, we may use portions of the proceeds for other uses which may not be
presently identifiable.
Approximate Percent
Dollar Amount(1) of Net
------------- ------
Technology & 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%
=========== ===
(1) Our estimate is that Representatives will defer $7,000,000 as Cash
Equivalents over an extended period of time.
(2) See "Business - New Programs"
As of September 30, 1999, the Registered Representatives have deferred
approximately $3,450,000 of compensation. Of this amount, $2,530,000 of the
deferred compensation proceeds was used for Corporate Integrated Systems and
$803,000 of the deferred compensation proceeds was used for Representative
Integrated Systems, which is discussed in Business - New Programs. At September
30, 1999, we have approximately $32,000 of unallocated deferred compensation
proceeds which will be allocated when identified projects are approved by our
management. We plan to allocate both the remaining balance of $32,000 and any
future deferred compensation in accordance with the allocation of the estimated
proceeds as outlined in the table above.
Beginning in July 1998, we began distributing deferred compensation to the
participants along with matching contributions. As of
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September 30, 1999, we have paid $84,110 to participants representing deferred
amounts and $22,324 representing matching contributions.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1999:
<TABLE>
<CAPTION>
Adjusted For
Actual at Deferral of
September 30, 1999 Cash Equivalents (2)
------------------ --------------------
<S> <C> <C>
Long term deferred compensation $ 3,940,356 $ 6,940,356
Shareholders' investment:
Preferred stock, $6 par value, 10,000,000 shares
Authorized; 250,067 issued &
outstanding 1,500,402 1,500,402
Common stock, $.05 par value,
100,000,000 shares authorized;
5,423,341 issued & outstanding (1) 271,167 271,167
Additional paid-in capital 5,154,934 5,154,934
Retained earnings 2,554,793 2,554,793
----------- -----------
Total shareholders' investment 9,481,296 9,481,296
----------- -----------
Total capitalization $13,421,652 $16,421,652
=========== ===========
</TABLE>
(1) Does not include up to 800,000 shares reserved for stock options (see
Management - Stock Options).
(2) Assumes $3,000,000 of deferred compensation
during the next twelve months and $7,000,000 over the life of the Plan.
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<PAGE>
BUSINESS
H.D. Vest, Inc. (the Company), founded by Herb D. Vest, was formed on December
17, 1986, as a Texas corporation. The Company also conducts operations under the
corporate assumed name of H.D. Vest Financial Services. 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. We own all the outstanding shares of the following
subsidiaries.
H.D. Vest, Inc.
d/b/a H.D. Vest Financial Services
<TABLE>
<CAPTION>
Incorporated
Subsidiaries (TEXAS) Services
------------ ------- --------
<S> <C> <C>
H.D. Vest Investment Securities, Inc. "HDVIS" 1983 Registered Securities
Broker-Dealer
Products:
Mutual Funds
Unit Investment Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. "HDVAS" 1987 Registered Investment
Advisor
Agent Licensing
Assistance
Money Management
Services
H.D. Vest Mortgage Services, Inc. "HDVMS" 1989 Inactive Subsidiary
H.D. Vest Collateral Management Company "HDVCMC" 1988 Inactive Subsidiary
H.D. Vest Business Valuation Services, Inc. "HDVBVS" 1987 Inactive Subsidiary
H.D. Vest Corporate Finance, Inc. "HDVCF" 1990 Inactive Subsidiary
</TABLE>
We were established to meet the growing demand for professional financial
services, and to provide such services primarily through tax professionals. We
believe 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. We offer 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.
We participate in various professional and industry organizations including but
not limited to: Securities Industry Association, Better Business Bureau of
Metropolican Dallas, Greater Dallas Chamber of Commerce, Greater Irving-Las
Colinas Chamber of Commerce, U.S.-Mexico Chamber of Commerce, Investment Company
Institute, National Association of Security Dealers, Inc., National Investment
Company Service Association, Securities Investor Protection Corporation,
International Association for Financial Planning, and Mortgage Bankers
Association of America.
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
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<PAGE>
Commission. All of this information may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at
Room 1024, 450 5th Street, N.W., Washington, D.C. 20549 and at regional offices
of the Securities and Exchange Commission at Room 1204, 219 South Dearborn
Street, Chicago, Illinois 60604, and 75 Park Place, New York, New York 10007.
The Commission also maintains a website that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http:\\www.sec.gov.
Reports Furnished
H.D. Vest, Inc. plans to furnish annual reports including audited financial
statements, to shareholders owning common stock. H.D. Vest, Inc. will issue
unaudited interim reports to shareholders owning common stock on a quarterly
basis.
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Registered Representatives
We utilize a Representative base to market our financial service products. As of
September 30, 1999, we have approximately 8,550 affiliates, of which
approximately 6,750 are fully licensed Representatives and approximately 1,800
are in various stages of the licensing process.
H.D. Vest Registered Representative
Distribution by State as of September 30, 1999
The following table identifies the geographic location of our approximately
6,750 fully-licensed Representatives.
Alabama 53 Montana 18
Alaska 17 Nebraska 23
Arizona 166 Nevada 32
Arkansas 46 New Hampshire 30
California 987 New Jersey 251
Colorado 140 New Mexico 17
Connecticut 92 New York 434
Delaware 17 North Carolina 130
District of Columbia 9 North Dakota 15
Florida 366 Ohio 252
Georgia 147 Oklahoma 159
Hawaii 17 Oregon 61
Idaho 19 Pennsylvania 363
Illinois 211 Puerto Rico 1
Indiana 88 Rhode Island 17
Iowa 56 South Carolina 55
Kansas 49 South Dakota 9
Kentucky 50 Tennessee 69
Louisiana 109 Texas 908
Maine 44 Utah 40
Maryland 144 Vermont 21
Massachusetts 167 Virginia 121
Michigan 152 Washington 97
Minnesota 114 West Virginia 29
Mississippi 62 Wisconsin 151
Missouri 107 Wyoming 18
-----
Total 6,750
=====
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Technology Development and Information Services
The Information Services Department is responsible for developing programs and
maintaining the hardware that supports our operations. To promote continuing
technology education and the importance of technology to our company, we
emphasize specialized education and training for our information technology
staff as well as for managers in other departments. We are a Microsoft Certified
Solutions Provider, and approximately two-thirds of our Information Services
department staff hold the Microsoft Certified Professional (MCP) designation.
The Information Services department also includes Microsoft Certified Solution
Engineers and Microsoft Certified Solution Developers. Many of our technology
staff hold multiple Microsoft certifications. In addition to our technology
staff, managers in other departments receive extensive training in one or more
areas of technology and information management.
During fiscal 1999, we upgraded our computer infratructure with faster computers
and a more stable network for information processing. The Information Services
Department also provided support for the implementation of a new transaction
processing system.
At the Representative level, the Information Services Department continued to
develop our internet/intranet site and other programs to support the
Representatives. Other programs developed to assist the Representatives include
a CD-ROM Resource Library, which provides reference materials and investment
transaction forms, the CD-ROM Financial Check-Up System that assists in
identifying clients needs, and the CD-ROM Representative Success Plan which
provides training on investment basics.
The Information Services Department also maintains our internet/intranet site
designed to facilitate the securities, advisory services and insurance business
of our Representatives. The site provides access to account information, stock
quotes, market news, and a venue for sharing marketing, business and product
ideas with other Representatives.
Technical and Sales Support Services
Our staff of financial professionals provide financial planning and investment
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. We provide technical and sales support to the Representatives via the
internet/intranet, telephone and other means. In order to provide these services
we have assembled staff experts in areas of individual and business financial
planning, including Certified Public Accountants, Certified Financial Planners,
Chartered Financial Analysts, Chartered Life Underwriters, Certified Investment
Management Analysts, Chartered Financial Consultants, Certified Employee
Benefits Specialists, Certified Pension Consultants, Enrolled Agents, Certified
Management Accountants, American Institute of Certified Public Accountants-
Personal Financial Specialists, Lawyers and Pension and Executive Compensation
Certificate recipients.
Regional Support System
We have 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. There were 685 meetings during fiscal 1999. The Regional Support System
also provides a network for Representatives to
28
<PAGE>
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 Regional Support System group is led by a successful H.D. Vest
Representative. This Representative has met specific criteria and attended our
training before beginning to train fellow Representatives. The Regional Support
System is divided into Mentor and Chapters determined by varying degrees of
Representative production.
Educational Services
We develop educational materials and seminars designed to enhance the technical
skills and knowledge of Representatives. The educational materials developed for
our Representatives and their clients include, but are not limited to training
videos, self study courses, computer-based training programs, newsletters and
promotional pieces. Our seminars include two national events, each offering
Representatives a full week of training, as well as other seminars such as the
"Tax Season Crash Course" which provides investment training prior to the tax
rush experienced by Representatives preparing tax returns for their clients.
During fiscal 1998 we introduced regional conferences to the seminar offering.
These conferences are located in cities across the country and are designed to
offer training on our internet/intranet site, computer software and technical
investment topics.
Representative Recruiting
At September 30, 1999, we have approximately 8,550 affiliates, of which
approximately 6,750 are fully licensed Representatives and approximately 1,800
Representatives are in various stages of licensing.
We recruit Representatives for our subsidiaries HDVIS and HDVAS and an
affiliated insurance entity. Since our inception, we have developed a recruiting
process which we believe results in a larger network for distribution of
financial products and services. Based on our experience in this area, we
typically use methods that have been the most effective in the past. These
methods include direct mail, recruiting seminars, telemarketing, trade shows,
referral incentive programs, trade publication advertising and various
educational events. We may employ additional methods of recruiting in order to
develop and determine the effectiveness of such alternatives.
29
<PAGE>
Representative Development
The Representative Development process is the cornerstone of our concept of
providing the client with the most qualified professional financial advisor
available. We have 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.
We require our 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 us to our Representatives include
software support such as an asset allocation and tax return-based investment
analysis program. The training and marketing programs also offer educational
events such as the Regional Support Systems meetings (described above) and
marketing initiatives including self-study kits, newsletters, and various other
regional and national meetings sponsored by us.
Insurance Agency Management Services
We provide management services to an affiliated insurance agency, H.D. Vest
Insurance Services (HDVIns). HDVIns represents a diversified spectrum of
national insurance companies offering life, health, disability, long-term care
and variable and fixed annuity products for both individuals and businesses. Our
Representatives are licensed through HDVIns to sell insurance products. Our
Representatives are paid a commission on such sales by HDVIns or HDVIS in
certain circumstances. We do not receive any portion of the fixed commissions
but we do receive a facility and service fee for management and other services
rendered by us. We receive all variable commissions through HDVIS. Variable
commission revenue was $17,850,301, $13,785,487, and $10,098,858 for the years
ended September 30, 1999, 1998 and 1997, respectively. We have charged HDVIns a
facility and service fee of $404,315, $493,604 and $538,700 for the years ended
September 30, 1999, 1998 and 1997, respectively. As of September 30, 1999, we
have a receivable of $275,390 from HDVIns.
Investment Services
H.D. Vest Investment Securities, Inc., formed in 1983 as a Texas Corporation, is
registered as a broker-dealer in all 50 states, the District of Columbia and the
Commonwealth of Puerto Rico, and is our investment products and trading
subsidiary. 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.
30
<PAGE>
Trading and Customer Service
We provide trading and customer services to our Representatives on an ongoing
basis. Our trading room processes trades in mutual funds, direct investments,
unit investment trusts and individual securities. In addition, our discount
brokerage service allows investors to buy and sell individual securities at
discounted commission rates.
The following table summarizes the number of securities transactions processed
by us:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
7,074,259 5,551,515 4,042,941
</TABLE>
We clear stock and bond trades and certain mutual fund and direct participation
programs, on a fully disclosed basis through National Financial Services
Corporation, 161 Devonshire Street, Mail Stop D6, Boston, Massachusetts 02110.
National Financial Services Corporation, as the clearing firm for HDVIS,
maintains all stock, bond and option transactions of HDVIS' customers on its own
records. However, the majority of transactions involving mutual funds and direct
participation programs are handled directly with the product distributors.
Representative Licensing
We provide 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 we must comply (see Government Regulation).
HDVIS and HDVAS must maintain current registration with the applicable
regulatory bodies.
We require that all Representatives follow our Compliance and Supervisory
Procedures. Our 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 we stay abreast of
the activities of our Representatives and internal staff. Our Compliance
Department supervises the investing activities of all Representatives.
31
<PAGE>
Professional Investment Advisory Services
H.D. Vest Advisory Services, Inc. conducts our investment advisory activities.
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. Our
Representatives can register as Investment Advisor Agents under HDVAS, giving
them the ability to provide fee-based financial planning services to their
clients.
HDVAS provides three fee-based services. The VestPremiere Investment Program is
designed for clients with a minimum $100,000 of investable assets, and allows
individual investors, foundations, endowments, retirement plans and trusts to
access comprehensive and independent consulting services that historically were
reserved for only large institutional investors. This service helps investors to
determine an appropriate asset allocation and to choose the proper money
managers to manage various portions of their investment portfolio. A quarterly
report is provided to each client detailing investment performance.
The VestFlex Investment Program is designed to provide clients with a minimum
$10,000 of investable assets with asset allocation and professional-monitoring
services. Individual investment objectives and risk tolerances are utilized to
select the optimal portfolio in order to meet the client's needs. Each portfolio
is invested in a family of mutual funds and diversified into different asset
classes. A quarterly report is provided to each client detailing investment
performance.
The Vest Advisor Investment Program accommodates clients with a minimum of
$25,000 of investable assets. These investments are managed by the client's
Representative according to the portfolio goals established by the client. Each
client's investment is held in a single brokerage account. A quarterly report is
provided to each client detailing investment performance.
New Programs
The Company plans to use the proceeds of this offering as well as cash amounts
deferred under the Plan to undertake several new programs in the coming years in
an effort to improve the productivity of its Representatives and the efficiency
of the Company's corporate support staff. Such new programs will be implemented
at the discretion of the Company.
Technology and Operational Improvements:
During fiscal 2000, we intend to launch a new interactive financial planning Web
site providing comprehensive, integrated financial needs analysis and
appropriate investment information for consumers. The web site is intended to
promote brand awareness, provide lead generation for our Representatives and to
32
<PAGE>
facilitate the marketing of financial products and services. It is anticipated
that the Web site will include, among other things, a tax planning organizer and
program allowing consumers to prepare their tax returns for free, retirement and
college funding calculators, debt management recommendations, insurance and risk
management information, links to our nationwide network of Representatives, and
product purchase and service options.
We are 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. Our goal is to
provide our staff with the training opportunities and the systems support to
meet this challenge.
Staff Training:
- --------------
In order to achieve this goal we must continually assess and enhance our
employees' skills and effectiveness. With the changes in the financial services
industry, our staff must learn new skills that will make them more adaptable and
flexible. In order to ensure that our staff is ready to meet the challenges
afforded by working for a growth company in a fast-paced industry, we are
developing a comprehensive training and continuing education curriculum. Various
training media will be utilized for the delivery of the training programs,
including audio, video, self-study and computer-based training.
Corporate Integrated Systems:
- ----------------------------
In order to stay competitive in the financial services industry, we must improve
its systems' capabilities. Because of the labor intensive nature of our 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, our 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. Our ability to improve
technological capabilities in a cost-effective manner could significantly affect
growth and profitability.
Over the coming years, we plan to make the following systems improvements and
enhancements:
. Improve analysis through development of systems.
. Improve telemarketing systems in Recruiting and Marketing.
. Develop software that integrates existing systems with outside
product information clearing houses to facilitate:
- Client account maintenance
33
<PAGE>
- Transaction processing
- Cash Management
- Exchange of information regarding client accounts with
major product sponsors.
. Implement work flow management to improve staff efficiencies.
. Develop expert system for staff and Representatives providing
them access to information with 70% of expert ability.
Representative Integrated Systems:
- ---------------------------------
The Representatives have the same challenges that we face in competing in
today's financial services industry. They require integrated systems to
effectively manage their practices. We must be on the leading edge of providing
the best systems available for the management of all areas of our
Representative's business. Over the coming years, we plan to develop or improve
Representative systems in the following areas:
. Communication software that not only allows direct communication
with the home office but also provides look-up capabilities for
client account information, commission status, customer service
problem log status and access to compliance and licensing
information and educational event registration.
. Develop integrated systems to support marketing and operations,
including contact management, tax preparation, marketing from the
tax return, financial planning integrated with tax preparation
software and investment monitoring and reporting.
. Develop programs for preparing client presentations.
Marketing Initiatives:
We firmly believe that in order to achieve our objectives, we will need to
become well-known by accounting and financial professionals as well as by the
public at large. We have developed several strategies to achieve public
awareness. We have recently engaged a public relations firm to raise this
awareness for us.
Book Publishing and Public Seminars:
- -----------------------------------
We have identified a series of financial planning oriented books to be published
for the general public. We have published two books, "Wealth: How to Get It, How
to Keep It" and "Wealth Workout", published in 1993 and 1995, respectively. We
promote these books to Representatives, Representatives' clients and to the
general public.
Cooperative Advertising:
- -----------------------
34
<PAGE>
Representatives who meet specific criteria and agree to adhere to certain
standard procedures will be invited to participate in our future cooperative
advertising programs and will share in the cost of development, testing and
implementation of national, regional and local advertising initiatives.
Fee-Based Products and Services:
- -------------------------------
We believe that in order to attract and retain successful Representatives, we
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
our Representatives and is expected to expand over the next five years to
include:
. Flexible investing into specific mutual funds
. Portfolio consisting of mutual funds of more than one fund family
. Complete systemization of the processing of transactions and
simplification of paperwork
Additionally, in October 1995, the VestAdvisor Program was introduced. This
program accommodates clients with a minimum of $25,000 of current investment
assets.
Direct Marketing Programs:
- -------------------------
We plan to develop tested direct marketing programs for use by our
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:
- ---------------
We plan to develop and conduct public seminars to educate the public on the
importance of understanding basic financial principles.
Representative Development Activities:
Support:
- -------
The accountant/tax professional Representative needs the support of the Company
to implement financial planning services into their existing tax practice.
. Field Support. We believe that an important element that is
currently missing from our 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. We believe
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
35
<PAGE>
and support Representatives in the technical aspects of financial
planning, motivation and sales training, time and practice
management, financial products, and support in actual client
situations.
. Technical Support. We offer comprehensive Technical Support
services to our Representatives. These services include support
in the areas of Retirement Planning, Investment Planning,
Education Planning, Employee Benefits, Tax Planning, Risk
Management, Qualified Plans, Product Selection, Bank Marketing
Programs and Marketing Strategies. We employ staff experts in
every area who are dedicated to providing technical information
to its Representatives. We believe that the addition of staff
experts in Estate Planning, Portfolio Management, Asset
Allocation and Insurance are key to the continued success of the
Technical Support services.
. Product Support. Because of the large volume of product sales we
supply to major product sponsors, we have 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:
- --------
We have done research into the training necessary to accomplish a successful and
profitable transition for the tax professional to provide financial planning
services to his or her clients. The research has shown that the basic needs for
training fall into the following categories:
. Technical (identifying client needs)
. Product (choosing a product)
. Operations (processing paperwork)
. Sales (making the recommendation)
. Marketing (proven marketing techniques)
. Motivation (overcoming fears)
. Practice Management (transition to financial planning)
In June 1994, we completed work on the first in our 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, we plan to provide Continuing Professional Education (CPE)
credit where available for CPAs, CFPs, EAs, CLUs, ChFCs and other financial
services designations.
36
<PAGE>
OPERATIONS AND SOURCES OF REVENUE
We have historically operated in a single industry segment: securities brokerage
and related financial services. The following table sets forth our total
revenues by major source:
Summary Of Company's Sources Of Revenue
<TABLE>
<CAPTION>
Year ending September 30,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Commission Revenue
Mutual Fund and UITs $ 85,503,458 $75,302,440 $54,222,732
Insurance Products 17,850,301 13,785,487 10,098,858
Stocks, Bonds and
Options 11,864,690 6,006,235 4,084,707
Partnership Interests 141,694 174,060 101,885
Trading 36,414 102,282 228,217
Portfolio Management fees 21,900,550 17,049,614 11,070,632
Marketing and Education
Fees 10,923,662 7,964,579 7,041,025
Facility and Service fees
From Affiliate 404,315 493,604 538,700
All Other 1,597,687 1,035,374 1,082,540
------------ ------------ -----------
Total Revenue $150,222,771 $121,913,675 $88,469,296
============ ============ ===========
</TABLE>
We had assets of $34,470,649 and $29,111,026 as of September 30, 1999 and 1998,
respectively. We had net income of $1,187,011, $1,427,312 and $2,142,063 for the
years ended September 30, 1999, 1998 and 1997, respectively.
TRADEMARKS
We have trademarks, including H.D. Vest Financial Services, that protect us
against the unauthorized use of our corporate name and programs. These trade
names are our valuable assets and unauthorized use of these trade names are
prosecuted as necessary to protect our interests.
DEPENDENCE ON A SINGLE CUSTOMER
No material part of our consolidated commission revenues is originated by a
single Representative or client.
37
<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, has been
delegated to self-regulatory organizations like the NASD. The NASD conducts
periodic examinations of member broker-dealers. Securities firms are also
subject to regulation by state securities commissions in the states in which
they are registered. HDVIS is currently registered as a broker-dealer in all 50
states, the District of Columbia and the Commonwealth of Puerto Rico.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, representative supervision, trade
practices among broker-dealers, capital structure of securities firms, record
keeping and the conduct of directors, officers and employees. Additional
legislation, changes in rules promulgated by the SEC and by self-regulatory
organizations, and changes in the interpretation of 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
38
<PAGE>
losses or capital rules, which are unique to the securities industry), financial
restrictions are imposed upon us 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, 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net capital $3,229,712 $2,134,772 $1,992,987
Required net capital 747,403 407,842 381,470
---------- ---------- ----------
Excess net capital $2,482,309 $1,726,930 $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 all 50 states, the District of Columbia, and
the Commonwealth of Puerto Rico.
COMPETITION
There is intense competition in the brokerage and insurance industry from large,
diversified, well-capitalized brokerage firms, financial institutions and other
organizations. Retail financial service providers and other financial
institutions are investing substantial capital in advertising and direct
solicitation of customers to increase their market share. In many cases we are
competing directly with these organizations for the same market share.
EMPLOYEES
At September 30, 1999, we employed 334 full-time employees who provide support
services to our Representatives. To the extent that we recruit additional
Representatives, the number of employees would be expected to increase during
the fiscal year ending September 30, 2000.
39
<PAGE>
Employees by Department
As of September 30, 1999
Marketing and Technical Support 130
Administration and Other 64
Operations 125
Educational Services 15
-----
Total Employees 334
=====
The majority of our employees are college graduates and are securities licensed.
PROPERTY
Our corporate headquarters occupy approximately 80,000 square feet of office
space in a facility located at 6333 North State Highway 161, Fourth Floor,
Irving, Texas 75038. Our lease expires in December 2007. We also occupy
approximately 32,000 square feet of space used for warehouse, mail fulfillment
and printing located at 3225 Premier Street, Suite 150, Irving, Texas
75063.
40
<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, 1999.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Herb D. Vest 55 Chairman of the Board of Directors
and Chief Executive Officer
Barbara Hancock 53 Board of Directors and
Representative Relations Director
Kenneth E. Reynolds 70 Board of Directors
Jack B. Strong 69 Board of Directors
Jerry M. Prater 57 Board of Directors
Phillip W. Mayer 57 Board of Directors
Kenneth R. Petree 56 Board of Directors
Roger C. Ochs 38 President
Shannon A. Soefje 40 Senior Vice President and Corporate
Secretary
W. Ted Sinclair 35 Vice President and Chief Financial
Officer
</TABLE>
41
<PAGE>
Directors and Officers
Herb D. Vest, Chairman of the Board of Directors, Chief Executive Officer. Prior
to assuming his present position with the Company and HDVIS in June 1983, Mr.
Vest practiced public accounting and financial planning for ten years as the
sole proprietor of Herb D. Vest, CPA. Prior to June 1983, Mr. Vest was also
registered with a National Association of Securities Dealers firm. Mr. Vest is a
Certified Public Accountant, Certified Management Accountant, Certified
Financial Planner, Chartered Financial Analyst, Certified Fund Specialist,
Certified Microsoft Professional, Master, Fellow Life Management Institute,
Chartered Life Underwriter, Registered Health Underwriter, Chartered Financial
Consultant, Accredited Personal Financial Specialist and Certified Employee
Benefit Specialist. He holds certificates in Pension and Executive Compensation
and Estate Planning & Taxation from The American College. Mr. Vest holds a
Bachelor of Science Degree in Political Science and three Masters of Science
Degrees, in Taxation, Financial Services and Management. He holds a Juris
Doctorate from an unaccredited law school and is licensed to practice law in
California. He holds an LLM from an accredited law school. 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 in three states and licensed
life, health and accident insurance agent in forty nine states. Mr. Vest is also
a licensed Property and Casualty Insurance Agent. Following graduation from
college in 1966, Mr. Vest served as an infantry officer in the U.S. Army,
including two tours of duty in Vietnam. He has served as a lecturer at local
colleges and universities including the University of Texas at Arlington and the
Seminar for Financial Analysts held at the University of Windsor, Ontario. He is
also a member of the American Institute of Certified Public Accountants, the
Texas Society of CPAs, American Bar Association, Association for Investment
Management and Research, Dallas Association of Investment Analysts, National
Association of Business Economists, World Future Society, Association of
International Accountants, the State Bar of California and Mensa. Additionally,
Mr. Vest has written on international trade, taxation, portfolio management and
the financial services profession for such publications as Global Custodian,
Business Mexico, Personal Financial Planning, Accounting Today, CFP Today, Real
Estate Securities & Capital Markets, and The Dallas Business Journal. Mr. Vest
has been voted among the 100 Most Influential People in Accounting by Accounting
Today magazine since 1994 and is the winner of an Ernst and Young Entrepreneur
of the Year Award in 1999. Mr. Vest has co-authored two books on personal
financial planning, "Wealth Workout" and "Wealth - How to get it, How to keep
it".
Barbara Hancock, 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. Hancock 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
42
<PAGE>
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. Hancock's speaking repertoire. Ms. Hancock 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. Hancock is also a member of the Texas Woman's Alliance
and Sales and Marketing Executives associations.
Kenneth E. Reynolds, Board of Directors. He started his Norman, Oklahoma-based
Certified Public Accounting practice in 1965. He is past Chairman of the
Personal Financial Planning Committee of the Oklahoma Society of CPAs and past
President of the Norman Chapter of the Oklahoma Society of CPAs. Also, Mr.
Reynolds serves on the Arthur Andersen LLP A-plus Tax User Advisory Committee.
He became a registered Representative of the Company in 1987 and became a
Director of the Company in fiscal year 1993.
Jack B. Strong, Board of Directors. Mr. Strong has been a practicing attorney
since 1952. 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. Mr. Prater 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.
43
<PAGE>
Kenneth R. Petree, Board of Directors. Mr. Petree is a Development Officer for
the Central, North, West and East Texas Regions for Bank United, Texas. He
currently serves on the Board of Directors and chairs the Loan and Discount
Committee for the Fort Worth Economic Development Corporation, a non-profit
entity. Mr. Petree has extensive experience in the banking industry and has held
executive positions with Overton Bank and Trust, N.A., and Irving National Bank.
Roger C. Ochs, President. Mr. Ochs was employed by the Company in 1987 and was
promoted to President in July of 1999. He had served as Marketing Director since
1995. He was responsible for directing the Company's Recruiting and Development,
Field Support, Educational Services, Marketing, Advisory Services and Financial
Planning Support departments. Mr. Ochs previously served as Manager of the
Technical Services Division, which included Advisory Services, Retirement
Services, Estate Planning Services and the Banking Division. He graduated from
Angelo State University with a bachelor of business administration, a master of
business administration from Trinity University and a juris doctor degree from
Southern Methodist University School of Law. He is licensed to practice law in
the state of Texas. He is a General Securities Representative, General
Securities Principal, Registered Options Principal, Municipal Securities
Principal, General Life Insurance Agent, Certified Financial Planner and a
Chartered Life Underwriter.
Shannon A. Soefje, Senior Vice President/Corporate Secretary. Ms. Soefje was
employed by the Company in 1990. In fiscal 1995, she was promoted to Senior Vice
President and is responsible for the management of corporate resources which
includes the strategic design and implementation of promotional campaigns and
the development of corporate and Representative marketing materials. She has
held other management positions in the Company including the following
departments: Operations, Compliance, Licensing, Recruiting and Research
departments. She graduated from Oklahoma City University with a Bachelor of
Science degree in business administration. Since 1977, Ms. Soefje has worked for
various investment firms. She is a Certified Funds Specialist, General
Securities Principal, Registered Options Principal, Municipal Securities
Principal and Financial and Operations Principal.
W. Ted Sinclair, Vice President/Chief Financial Officer. Mr. Sinclair was
employed by the Company in fiscal 1987 and was promoted to Vice President in
fiscal 1993. He is responsible for the financial management of the Company and
financial, tax and management reporting and budgeting. Mr. Sinclair previously
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
44
<PAGE>
Management Accountant, Certified Financial Planner, Certified Cash Manager and a
Certified Fund Specialist. He is a General Securities Principal, Registered
Options Principal, Municipal Securities Principal and Financial and Operations
Principal.
Remuneration of Directors and Management
The following table sets forth all remuneration earned in salary 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>
- ------------------------------------------------------------------------------------------------------------------------
Stock
Name & Principal Fiscal Restricted Options All Other
Position Year Salary Bonus Stock Awards (1) Compensation
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb D. Vest 1999 $900,000 $2,315,412 - - $53,700
Chairman of the 1998 900,000 2,340,148 - - 53,700
Board of Directors and 1997 862,500 1,869,497 - - 45,774
Chief Executive
Officer(2)
Barbara Hancock 1999 325,000 20,000 - - 29,500
Director and Director 1998 325,000 27,283 - - 29,500
Of Representative 1997 284,167 - - - 43,793
Relations
Roger C. Ochs 1999 209,615 289,641 - - -
President 1998 150,000 194,898 - - -
1997 150,000 155,791 - - -
Shannon A. Soefje 1999 140,000 90,111 - - -
Senior Vice President and 1998 140,000 90,952 - - -
Corporate Secretary 1997 135,500 65,851 - - -
W. Ted Sinclair 1999 160,000 102,984
Vice President and Chief 1998 145,000 90,952 - - -
Financial Officer 1997 140,000 75,753 - - -
</TABLE>
1) All officers are covered under a stock option plan (see Management -Stock
Options and Certain Transactions Stock Options). No goals have been set to
issue common stock options for fiscal years ending September 30, 1999, 1998
or 1997. No awards were earned in 1999, 1998 or 1997.
2) See Management Agreements for a description of the terms of Mr. Vest's
current management agreement.
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
45
<PAGE>
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. In January 1999, Herb D. Vest, principal common shareholder
acquired these shares in a private transaction.
Transactions with Management
The terms of the transactions described below are as fair to the Company as
could have been made with unaffiliated parties where available and were approved
by the Company's independent and disinterested directors.
Future transactions between the Company and its affiliates will be approved by
the independent and disinterested directors and will be on terms no less
favorable than could be obtained from unaffiliated parties, where available.
MANAGEMENT AGREEMENTS
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. The agreement with Herb D. Vest provides
for a management fee per year including an annual bonus based on the Company's
performance related to revenue and net income goals, additions of Company
affiliates and Fee Based Assets under Management, as established by the Board of
Directors. Effective January 1, 1997, the Company increased the annual
management fee due to Mr. Vest to $900,000 from $750,000. The 24% 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 a $2,315,412 bonus under the executive officer's compensation
plan in fiscal 1999. The Company paid a bonus of $2,340,148 and $1,869,497 in
fiscal 1998 and 1997, respectively. Management fees, including bonus, under
these agreements were $3,215,412, $3,240,148 and $2,731,997 for the years ended
September 30, 1999, 1998 and 1997, 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 1999 has been
determined based on the prorata portion of certain
46
<PAGE>
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 at fair market value, 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 as follows: 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. The Company receives all variable commissions through HDVIS. Variable
commission revenue was $17,850,301, $13,785,487, and $10,098,858 for the years
ended September 30, 1999, 1998 and 1997, respectively. In accordance with this
agreement the Company has charged HDVIns $404,315, $493,604 and $538,700 for the
years ended September 30, 1999, 1998, and 1997 respectively, for facilities and
management services rendered.
LINES OF CREDIT
The Company has an agreement to provide Herb D. Vest a revolving line of credit
in an amount not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement interest accrues on
unpaid principal balances at a rate of 11%. In June 1998, Mr. Vest repaid in
full the outstanding principal balance, together with the accrued interest, of
his revolving line of credit from the Company. At September 30, 1999, Mr. Vest
had no outstanding principal or accrued interest outstanding on this line.
The Company has an agreement to provide Barbara Hancock a revolving line of
credit in an amount not to exceed $700,000, collateralized by Ms. Hancock's
unrestricted Company common stock in an amount equal to the unadjusted current
balance of the line of credit based on the stock's current ask price. The terms
of the agreement require an annual payment to be made on November 30 of each
year equal to one-seventh of the then outstanding principal plus accrued
interest. The final payment of all outstanding principal and accrued interest
shall be due and payable on or before November 30, 2001. Under the agreement,
interest accrues on unpaid principal balances at a rate of 11%. In December
1998, Barbara Hancock repaid in full the outstanding principal balance, together
with the accrued interest, of her revolving line of credit from the Company. At
September 30, 1999, Ms. Hancock had no outstanding principal or accrued interest
outstanding on this line.
47
<PAGE>
EDUCATION COSTS
The Company maintains a formal policy for reimbursement of continuing education
expenses incurred by officers and employees. Employees are generally reimbursed
for expenses incurred in the pursuit of professional designations, Microsoft
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 Salary Savings Plan 401(k)-retirement plan
for eligible employees. Employees are eligible for participation on the
enrollment date following completion of six months of service with the Company
or, if later, the enrollment date after attaining age 21. Employees may
contribute up to 15 percent of their income, up to the annual maximum allowed by
law. On January 1, 1999 the Company began to match contributions made by
employees based upon full years of service; 20 percent match for less than 3
years of service, 40 percent match for 3 to 4 years service, and 60 percent for
5 or more years of service. Previously, the Company matched all employees at a
20 percent rate. The Company modified the plan to reward tenure among employees.
Company contributions to the 401(k) retirement plan for the fiscal years ended
September 30, 1999, 1998 and 1997 were $278,068, $106,042 and $87,776,
respectively.
48
<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 Officer's Compensation Plan is determined in the
sole and absolute discretion of the Company, which establishes eligibility
provisions of the executive officer compensation plan that it may change at any
time in its sole and absolute discretion.
Currently, to be eligible to participate in the Executive Officer's Compensation
Plan, an individual must be an executive employee of the Company, have completed
at least two full years of Company service, and be part of a select group of
management employees designated by the Company's Board of Directors. The
individual employee must also sign an Officer's Deferred Compensation Agreement
and an Officer Agreement as a condition precedent to becoming a participant in
the Executive Officer's Compensation Plan.
Under the Restricted Stock portion of the Executive Officer's Compensation Plan,
a number of shares of restricted stock are determined by the Chief Executive
Officer of the Company as allocable to a particular participant. This restricted
stock is credited to the participant's account and will be vested and
distributable upon the first to occur of the following events: (1) Long-term
disability, death of the participant or attaining the preselected Deferral Date;
or (2) The date of a "change-in-control" of the Company (as that term is defined
in the executive officer's deferred compensation plan). No stock was earned
under the Executive Officer's Compensation Plan for the fiscal year ended
September 30, 1999.
The Board of Directors annually sets goals, which, if attained, will generate a
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
49
<PAGE>
upcoming three years and are based in part on the previous year's goals that
consist of a threshold, a target and a maximum cumulative revenue goal. Upon
attaining one of these goals, bonus stock credited in the form of restricted
stock to the participant's plan vests and will become distributable only upon
retirement, long term disability or death of the participant, or the date of a
"change-in-control" of the Company (as that term is defined in the Executive
Officer's Compensation Plan). No goals have been set to issue common stock
options for fiscal years ending September 30, 1999, 1998 or 1997. No awards were
earned in 1999, 1998 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 of Common Stock subject to the Plan.
(b) Withdraw the administration of the Plan from the Committee; and provided
further, that no termination, amendment or modification of the Plan shall
in any manner affect an option theretofore granted under the Plan without
the consent of the optionee or permitted transferee of or successor to the
option.
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.
50
<PAGE>
As of September 30, 1999, options covering 299,948 shares issued from the Stock
Option Plan are outstanding. In March 1997, Herb D. Vest, principal common
shareholder, purchased 150,000 of such options from two former employees of the
company in a private transaction.
In addition to the Stock Option Plan, the Board of Directors has from time to
time approved the issuance of options to employees, independent directors, and
advisors to the company. In November 1992, the Board of Directors resolved that
independent directors elected to the Board be granted options for the purchase
of 2,000 shares of the company's common stock each quarter (a total of 8,000
shares for the year elected). The Board resolved to discontinue issuing such
options in June 1998. Options covering 64,000 shares of stock were issued to
independent directors. During fiscal year 1998, Herb D. Vest purchased these
options from the independent directors in private transactions. These 64,000
options remain outstanding as of September 30, 1999.
As a result of the foregoing, options covering 363,948 shares of common stock,
with exercise prices ranging from $2.38 to $8.50 per share, have been issued to
officer, directors and employees of the company, and remain outstanding at
September 30, 1999. The following table provides information with respect to
options issued to officers and directors that remain outstanding as of September
30, 1999:
Aggregated Option Exercises at September 30, 1999
and Option Values
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Number of Unexercised Value of Unexercised, In-The-Money
Acquired Options Held at Options at
Through September 30, 1999 September 30, 1999
------------------ ------------------
Name Options Value Exercisable Unexercisable Exercisable Unexercisable
Exercised Realized (1) (2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb D. Vest - - 359,148 - $63,600 -
Wesley T. Sinclair - - 1,456 - - -
</TABLE>
(1) Represents the difference between the closing price of the Company's
common stock on September 30, 1999 and the exercise price of the
options.
(2) The current fair market value of the stock at September 30, 1999 was
below the option exercise price.
51
<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 (i)to oversee the Company's system of internal control and
the financial reporting process; (ii)to review the internal audit function;
(iii)to approve the selection of the Company's independent accountants; and
(iv)to review audit reports. The members of the Audit Committee during fiscal
1999 were Jerry Prater, Jack Strong and Phillip Mayer.
The Company's Board of Directors has a Compensation Committee. The Function of
the Compensation Committee is to review, discuss and advise management and
officers of the Company regarding compensation and other employment benefits
afforded officers and employees of the Company. As of September 30, 1999, the
Compensation Committee are the members of the Board of Directors: Herb D. Vest,
Barbara Hancock, Kenneth R. Petree, 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, 1999 is as follows:
<TABLE>
<CAPTION>
Compensation
------------
Year Ended
----------
September 30,
-------------
Name Title 1999
---- ----- ----
<S> <C> <C>
Herb D. Vest Chairman of the Board of Directors $53,700
Barbara Hancock Director 29,500
Jack Strong Director and Member-Audit Committee 33,500
Kenneth Reynolds Director 29,500
Jerry Prater Director and Chairman of the
Audit Committee 35,500
Phillip Mayer Director and Member-Audit Committee 33,500
Kenneth Petree Director 29,500
</TABLE>
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 for the year ended September 30, 1999.
Effective November 1999, Jack Strong submitted and the Company accepted Mr.
Strong's resignation as a consultant to the Company pursuant to which the
Company's contract with Mr. Strong was terminated. Subsequent to November 1999,
Mr. Strong will be an independent member of the Company's Board of Directors.
On November 9, 1999, the Board created a Project Oversight Committee which will
be responsible for assisting the Board to oversee special projects of the
Company. Jack Strong was appointed a member and chairman of the committee. The
Board of Directors approved payment of $6,000 annually to the chairman of the
Project Oversight Committee.
52
<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.
53
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following information is furnished as of September 30, 1999, 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.
# OF SHARES
OWNER BENEFICIALLY OWNED % OF SHARES
- ---------------------- ------------------ -----------
Herb D. Vest 4,693,447 (1) 78%
Roger C. Ochs 2,911 *
Barbara Hancock 300 *
Kenneth E. Reynolds 550 *
Jack B. Strong 100 *
W. Ted Sinclair 1,481 *
Shannon A. Soefje 1,352 *
Officers and Directors
as a Group 4,700,141 78%
* Less than one percent.
(1) Includes 4,064,114 shares of Outstanding Common Stock, 314,000 Common
Stock Options with an exercise price ranging from $2.38 to $5.06,
45,148 Common Stock Options with an exercise price of $8.50, and
250,067 Exercisable Convertible Series A Preferred Stock with a
conversion rate of one preferred share for one share of common stock.
Ownership percentage excluding Common Stock Options and the Convertible
Series A Preferred Stock is 75%.
54
<PAGE>
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Percent Shares Owned Percent
Shares Owned of Upon Completion Of
Owner Before Offering Shares Of Offering (1) Shares
- ----- --------------- -------- --------------- -------
<S> <C> <C> <C> <C>
Herb D. Vest (2) (3) (4) 4,064,114 75% 4,064,114 75%
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
Other Shareholders (2) 1,359,227 25% 1,359,227 25%
</TABLE>
(1) Assumes that no stock options are exercised.
(2) Assumes that the holder of the 250,067 shares of Preferred Stock, by
Herb D. Vest, does not exercise his conversion privileges.
(3) Not included in this number are options to purchase 314,000 shares of
the Common Stock of the Company, which are presently exercisable at an
exercise price ranging from $2.38 to $5.06.
(4) Not included in this number are options to purchase 45,148 shares of
the Common Stock of the Company which are presently exercisable at an
exercise price of $8.50.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 5,423,341 shares of common stock outstanding as of September 30, 1999,
4,055,154 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 one-year holding period. After a one-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 3,985,194 shares, which are subject to Rule 144. Future
sales under Rule 144 may have a depressive effect on the price of the Company's
common stock.
55
<PAGE>
DESCRIPTION OF SECURITIES
Representatives Deferred Compensation Plan
In March 1995, the Board of Directors established the H.D. Vest Representatives
Deferred Compensation Plan ("the Plan" capitalized terms used in this section
have specific meanings as defined in the Plan). The Plan is an optional,
non-qualified, unfunded, deferred compensation plan which is available
exclusively to the Company's Representatives who are independent contractors and
neither employees nor officers of the Company. The Plan provides Representatives
an opportunity to defer receipt of Compensation on a pre-tax basis for selected
periods, thus postponing recognition of income otherwise currently taxable, and
subsequently receiving the deferred compensation plus a Matching Contribution.
At the end of each Deferral Period, the Deferral Amount and the related Matching
Contribution will be paid to the Participant.
Deferral Options
- ----------------
Participants may defer up to one hundred percent (100%) of their Net
Compensation and may elect to defer Net Compensation for one of four Deferral
Periods (36, 60, 84 or 120 months). Amounts deferred by Participants and the
Company's Matching Contribution will ultimately be paid to the Participant
pursuant to the Plan in the form of cash.
Participation
- -------------
Enrollment in the Plan is optional. The Initial Enrollment Period will be a
period of 60 days commencing January 1 of each year the Plan is made available
or commencing three days after the Effective Date, whichever is later.
Changes In Elections
- --------------------
The Annual Election Period is a 60 day period commencing January 1 of each year.
Representatives who become affiliated with the Company subsequent to the Initial
Enrollment Period shall not be eligible to become a Participant until the next
Initial Enrollment Period, if any, following the date that such Representative
becomes affiliated with the Company.
Elections to increase Deferral Amounts may be made by written notice a minimum
of thirty (30) days prior to the beginning of each calendar quarter and are
effective on a prospective basis beginning the first Compensation Date of the
next calendar quarter. A Compensation Date is the fifth business day following
the first and fifteenth of each month (or such other dates the Company
establishes) on which Net Compensation is paid to Representatives.
56
<PAGE>
Elections to decrease Deferral Amounts can only be made in the annual election
period.
Deferral Accounts
- -----------------
In accordance with the Participant's Plan elections, the Administrative
Committee of the Plan will credit each Participant's Account with the amount of
Cash Equivalents. A Cash Equivalent is a hypothetical cash amount.
Matching Contributions
- ----------------------
Depending on the Deferral Period and Deferral Amount selected by the
Participant, the Company shall allocate a Matching Contribution to such
Participant's Account. A Matching Contribution is an amount which the Company
credits as a Cash Equivalent to a Participant's Account. Prior to any calendar
year, the Company may establish a Matching Contribution for aggregate total
Deferral Amounts elected by all Participants for such year.
Pursuant to the Plan, 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.
Distributions
- -------------
The distribution of each Deferral Amount and Matching Contribution will be made
on the 36th, 60th, 84th or 120th month anniversary of the deferral as determined
by the election in effect at the time of the deferral. The duration of such
Distribution Period shall be the same number of consecutive calendar months as
the Deferral Period which it immediately follows.
Rights
- ------
All Accounts are unfunded and paid from the Company's general assets. As general
unsecured obligations, these accounts will be senior in rank to the Common Stock
listed on NASDAQ-NMS. Participants maintain a position as general creditors of
the Company with respect to their Accounts and will have no right to receive
either the Deferral Amount or the Company's Matching
57
<PAGE>
Contribution until they are paid the applicable Distribution.
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.
58
<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby are being distributed exclusively by H.D. Vest
Investment Securities, Inc., a wholly-owned subsidiary of the Company. No
selling discount, commissions, or other sales charges will be received by HDVIS
in connection with the sale of the securities being offered hereunder. A bona
fide market exists for the Company's Common Stock as of the effective date of
this prospectus and accordingly, pursuant to Schedule E of the Bylaws of the
NASD, (Schedule E) no independent underwriter is being utilized by the Company
in connection with this offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and registrar for the Common Stock is Harris Trust and
Savings Bank, whose physical address is 1601 Elm Street, CB39 Thanksgiving
Tower, Suite 2320, Dallas, Texas.
LEGAL PROCEEDINGS
Beginning in September 1997, claims were made and litigation was initiated
against us, in regard to the activities of a former Registered Representative.
As of September 30, 1998, claims of approximately $990,000 were alleged against
the company or its subsidiaries in regard to this matter. During fiscal year
1998, we paid approximately $260,000 in settlement of a portion of these claims,
and paid an additional $45,000 in settlement of several unasserted claims
related to the same matter. During the fiscal year ended September 30, 1999, we
paid approximately $637,000 to settle pending claims and paid approximately
$52,000 to settle unasserted claims arising from this matter.
We are subject to other legal proceedings and claims that have arisen in the
ordinary course of business and have not been finally adjudicated. We believe,
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.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed upon
for the Company by Malouf Lynch Jackson & Swinson, 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
59
<PAGE>
to herein in reliance upon the authority of such firm as experts in giving said
opinion.
The financial statements included in this prospectus and elsewhere in the
Registration Statement, to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP, independent public accountants
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
60
<PAGE>
Financial Statements and Supplementary Data
-------------------------------------------
Index
Page
----
For the years ended September 30, 1999, 1998, and 1997
Report of Independent Public Accountants F-1
Consolidated Statements of Financial F-2 & F-3
Position - September 30, 1999 and 1998
Consolidated Statements of Operations - F-4
Three years ended September 30, 1999,
1998, and 1997
Consolidated Statements of Shareholders' F-5
Investment - Three years ended September 30,
1999 1998, and 1997
Consolidated Statement of Cash Flows - F-6
Three years ended September 30,
1999, 1998, and 1997
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, 1999 and
1998, and the related consolidated statements of operations, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 1999. 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, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1999 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
November 9, 1999
F-1
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,918,613 $ 9,204,362
Commissions and accounts
receivable 10,857,090 9,201,486
Current portion - notes receivable
related parties - 97,159
Receivable from affiliate 275,390 138,496
Prepaid expenses 1,025,506 739,061
------------ ------------
Total current assets 24,076,599 19,380,564
------------ ------------
Property and equipment, net of
accumulated depreciation
of $3,997,687 and $2,194,457
at September 30, 1999 and 1998,
respectively 6,713,270 6,313,281
Notes receivable - related parties,
net of current portion - 349,409
Intangible and other assets, net of
accumulated amortization 3,680,780 3,067,772
------------ ------------
Total assets $ 34,470,649 $ 29,111,026
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-2
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
September 30,
----------------------------
1999 1998
------------- ------------
Current liabilities:
Accounts payable and accrued expenses $ 5,406,058 $ 8,679,663
Amounts due on clearing transactions 2,952,533 469,462
Unearned revenue 2,063,112 1,279,410
Commissions payable 7,075,254 4,839,345
------------- ------------
Total current liabilities 17,496,957 15,267,880
------------- ------------
Obligations under capital leases,
excluding current installments 1,940,638 2,506,506
Other noncurrent liabilities 5,551,758 2,946,702
Shareholders' investment:
Preferred stock, $6 par value;
10,000,000 shares authorized,
250,067 shares issued and outstanding
in both 1999 and 1998 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
5,423,341 outstanding at September 30,
1999 and 1998 271,167 271,167
Additional paid-in capital 5,154,934 5,154,934
Retained earnings 2,554,793 1,463,435
------------- ------------
Total shareholders' investment 9,481,296 8,389,938
------------- ------------
Total liabilities and
shareholders' investment $ 34,470,649 $ 29,111,026
============= ============
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Commissions $115,396,557 $ 95,370,504 $ 68,736,399
Portfolio management fees 21,900,550 17,049,614 11,070,632
Marketing and education fees 10,923,662 7,964,579 7,041,025
Facility and service fee
from affiliate 404,315 493,604 538,700
Other 1,597,687 1,035,374 1,082,540
------------ ------------ ------------
Total revenues 150,222,771 121,913,675 88,469,296
------------ ------------ ------------
Expenses:
Commissions 84,822,640 68,152,972 48,384,293
Portfolio management fees 15,364,107 11,263,669 7,375,367
General and administrative 22,183,630 21,182,001 14,784,092
Operations 10,719,749 7,179,790 5,340,317
Representative development 8,736,114 7,521,719 6,466,956
Representative recruiting 3,083,830 2,231,364 1,677,594
Amortization and depreciation 2,449,179 1,431,617 933,015
Interest 359,899 294,981 222,271
------------ ------------ ------------
Total expenses 147,719,148 119,258,113 85,183,905
------------ ------------ ------------
Net income before state
and federal income tax 2,503,623 2,655,562 3,285,391
Provision for state and federal
income tax 1,316,612 1,228,250 1,143,328
------------ ------------ ------------
Net income $ 1,187,011 $ 1,427,312 $ 2,142,063
============ ============ ============
Net income
per common share-basic $ 0.20 $ 0.24 $ 0.37
============ ============ ============
Net income
per common share-dilutive $ 0.20 $ 0.24 $ 0.37
============ ============ ============
Weighted average number of
common shares outstanding 5,423,341 5,423,341 5,423,341
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Shares of Stock Additional Retained
Outstanding Preferred Common Paid-in Earnings
-----------
Preferred Common Stock Stock Capital (Deficit) Total
--------- ---------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1996 250,067 5,423,341 $ 1,500,402 $ 271,167 $ 5,080,834 $(1,850,870) $ 5,001,533
Capital Contribution - - - - 32,500 - 32,500
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 2,142,063 2,142,063
--------- ---------- ----------- --------- ----------- ----------- -----------
Balance at
September 30, 1997 250,067 5,423,341 1,500,402 271,167 5,113,334 163,658 7,048,561
Capital Contribution - - - - 41,600 - 41,600
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 1,427,312 1,427,312
--------- ---------- ----------- --------- ----------- ----------- -----------
Balance at
September 30, 1998 250,067 5,423,341 1,500,402 271,167 5,154,934 1,463,435 8,389,938
Preferred Dividends - - - - - (95,653) (95,653)
Net Income - - - - - 1,187,011 1,187,011
--------- ---------- ----------- --------- ----------- ----------- -----------
Balance at
September 30, 1999 250,067 5,423,341 $ 1,500,402 $ 271,167 $ 5,154,934 $ 2,554,793 $ 9,481,296
========= ========== =========== ========= =========== =========== ===========
</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,
-----------------------------------------------------
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,187,011 $ 1,427,312 $ 2,142,063
Reconciliation of net income to
net cash provided by operating activities
Amortization and depreciation 2,438,339 1,431,617 933,014
Loss on sale of assets 10,840 282,783 21,564
Non-cash compensation expense - 41,600 32,500
Deferred rent 137,628 285,083 -
Changes in assets and liabilities
Commissions and accounts receivable (1,655,604) (2,559,286) (2,132,781)
Deferred tax liability 509,107 679,586 480,370
Receivable from affiliate (136,894) 3,649 (11,865)
Prepaid expenses (286,445) (235,323) (415,821)
Accounts payable and accrued expenses (2,811,239) 3,011,066 (1,727,263)
Commissions payable 2,235,909 150,222 1,421,812
Amounts due on clearing transactions 2,483,071 (70,076) (190,053)
Unearned revenue 783,702 129,069 219,231
------------ ------------ -------------
Net cash provided by operating
activities 4,895,425 4,577,302 772,771
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Costs to acquire/develop software (1,882,678) (2,200,982) -
Additions to other assets (87,108) (11,580) (211,645)
Purchases of property and equipment (627,706) (2,355,885) (988,061)
Proceeds from sale of assets - 48,670 57,850
------------ ------------ -------------
Net cash used for
investing activities (2,597,492) (4,519,777) (1,141,856)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (95,653) (127,535) (127,535)
Advances from deferred compensation plan 1,409,025 1,438,317 576,022
Payments on deferred compensation plan (93,322) (13,112) -
Advances on notes receivable to
related parties - (485,670) (397,804)
Collection on notes receivable from
related parties 446,568 2,757,035 347,402
Payments on notes payable and
capital lease obligations (1,250,300) (807,190) (378,854)
------------ ------------ -------------
Net cash provided by
financing activities 416,318 2,761,845 19,231
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,714,251 2,819,370 (349,854)
CASH AND CASH EQUIVALENTS,
beginning of year 9,204,362 6,384,992 6,734,846
------------ ------------ -------------
CASH AND CASH EQUIVALENTS,
end of year $ 11,918,613 $ 9,204,362 $ 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, 1999 and 1998 were approximately $1,200,000 and $810,000,
respectively.
(d) Property and Equipment - Property and equipment is stated at cost and is
depreciated by the straight-line method using estimated useful lives ranging
from five to six years. At September 30, 1999 and 1998, property and equipment
consisted of:
September 30,
---------------------------
1999 1998
------------ -----------
Leasehold improvements $ 917,340 $ 908,448
Computer equipment 4,887,903 3,089,547
Furniture and fixtures 3,835,498 3,697,377
Telephone equipment 1,070,216 812,366
Less accumulated depreciation (3,997,687) (2,194,457)
------------ -----------
Total property and equipment, net $ 6,713,270 $ 6,313,281
============ ===========
F-7
<PAGE>
(e) Intangible and Other Assets - Costs incurred to develop/acquire these
assets are stated at cost and where applicable are amortized by the straight-
line method using an estimated useful life of five years. At September 30, 1999
and 1998, intangible and other assets and accumulated amortization are as
follows:
September 30,
-----------------------------
1999 1998
----------- ----------
Software Development $ 4,535,355 $3,575,554
Other assets 687,080 398,764
Accumulated amortization (1,541,655) (906,546)
----------- ----------
Total other assets, net $ 3,680,780 $3,067,772
=========== ==========
(f) Long-lived Assets - The Company periodically evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful lives
of its long-lived assets may warrant revision or that the remaining balance of
an asset may not be recoverable. The assessment of possible impairment is based
on the ability to recover the carrying amount of the asset from expected future
cash flows on an undiscounted basis. If the assessment indicates that the
carrying amount of the asset exceeds the undiscounted cash flows an impairment
has occurred. The impairment is calculated as the total by which the carrying
amount of the asset exceeds its fair value. The fair value of long-lived assets
is estimated based on quoted market prices, if available, or the expected total
value of cash flows, on a discounted basis. No adjustments have been made to the
carrying amounts of the Company's assets due to impairment.
(g) Amounts Due on Clearing Transactions - The Company remits customer
investment 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). See Note 7 for additional discussion.
(h) Revenue Recognition - Commission revenue and related commission expense are
recognized on a trade date basis. The Company charges its Representatives
licensing renewal processing fees, which are unearned until the first quarter of
each fiscal year. Marketing and education fees are charged to various product
wholesalers, the Company's Registered Representatives, and new licensees for
Company-sponsored educational seminars and materials. Portfolio management fees
represent fee-based revenues and are recognized based on the value of client
investment balances during the period.
F-8
<PAGE>
(i) Representative Development - Representative development expenses consist of
incremental salaries, office expenses, telephone expenses, educational events
and promotional expenses directly related to training Registered
Representatives.
(j) 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.
(k) Income Taxes - Deferred income taxes are provided for temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts. Deferred taxes are recorded based upon enacted tax rates anticipated to
be in effect when the temporary differences are expected to reverse.
(l) Supplemental Cash Flow Information - Cash interest payments for the years
ended September 30, 1999, 1998 and 1997 were $293,425, $294,016 and $222,271
respectively. Cash payments for federal income taxes for the years ended
September 30, 1999 and 1998 were $282,000 and $1,187,265 respectively. During
the fiscal years ended September 30, 1999, 1998 and 1997 the Company acquired
assets through capital leases amounting to $788,053, $3,219,053 and $828,949
respectively.
(m) 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 reported period.
Actual results could differ from those estimates.
(n) 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.
(o) Segment Reporting - In June 1997, Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), was issued. The statement changes standards for the
way public companies identify and report operating segments in interim and
annual financial statements. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company has determined that it
operates one line of business (Securities
F-9
<PAGE>
Brokerage and related Financial Services) located in a single geographic area
(Texas). Therefore, SFAS 131 has no effect on the Company's financial
statements.
(2) 401(k) Retirement Plan
In March 1993, the Company formed a Salary Savings Plan 401(k) retirement plan
for eligible employees. Employees are eligible for participation on the
enrollment date following completion of six months of service with the Company
or, if later, the enrollment date after attaining age 21. Employees may
contribute up to 15 percent of their income, up to the annual maximum allowed by
law. On January 1, 1999 the Company began to match contributions made by
employees based upon full years service; 20 percent match for less than 3 years
of service, 40 percent match for 3 to 4 years service, and 60 percent for 5
or more years of service. Previously, the Company matched all employees at a 20
percent rate. The Company modified the plan to reward tenure among employees.
Company contributions to the 401(k) retirement plan for the fiscal years ended
September 30, 1999, 1998 and 1997 were $278,068, $106,042 and $87,776
respectively.
(3) Financing Arrangements
In September 1997, the Company entered into a lease line of credit with a bank
under which the Company may finance leases up to an arrangement amount of
$2,000,000. Each lease will have a maturity of no greater than 5 years and will
require level monthly principal and interest payments set in accordance with the
bank's lease matrix, as defined. The collateral for each lease will be the
equipment it finances. At September 30, 1999 the Company had $346,155 unused on
the lease line.
In February 1998, the Company also renewed its line of credit with a bank for
$1,000,000. The line of credit bears interest, payable monthly, at prime plus
1/2% (8.75% as of September 30, 1999). Additionally, the Company's two largest
shareholders have pledged a portion of their holdings as collateral for the line
of credit. At September 30, 1999, no amount had been drawn against the line of
credit.
4) Earnings Per Share
Basic earnings per share (basic EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding.
The number of shares used to compute basic EPS for the years ended
September 30, 1999 and 1998 was 5,423,341.
F-10
<PAGE>
Diluted earnings per share (diluted EPS) is computed similarly to the
computation of basic EPS except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential dilutive common shares had been issued. The number of shares used to
compute diluted EPS for the years ended September 30, 1999 and 1998 were
5,488,398 and 5,537,762, respectively.
Options to purchase 53,948 shares of common stock at prices ranging from $7.63
to $8.50 per share were outstanding during the fiscal year ended September 30,
1999. Options to purchase 95,454 shares of common stock at $8.50 per share were
outstanding during the year ended September 30, 1998. These options were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of outstanding common shares.
There were 250,067 shares of convertible preferred stock outstanding during the
year ended September 30, 1999 and 1998 not included in the computation of
diluted EPS because the conversion had an anti-dilutive effect of EPS.
5) Commitments and Contingencies
(a) Leases - The Company leases its office space and certain office equipment
under lease agreements, which qualify as operating leases. The Company also
leases certain office equipment under certain lease agreements, which qualify as
capital leases. At September 30, 1999 and 1998 the capitalized basis of the
leases included in property and equipment was approximately $5,869,047 and
$5,136,889 and accumulated amortization applicable to the leased equipment was
approximately $2,382,733 and $1,288,933, respectively. Future minimum
lease payments under operating lease commitments with initial or noncancellable
terms in excess of one year and under capital lease obligations as of September
30, 1999, are as follows:
F-11
<PAGE>
Capital Operating
Leases Leases
---------- ----------
Year ended September 30:
2000 $1,638,606 $ 2,312,116
2001 1,021,440 2,109,728
2002 738,359 1,991,444
2003 169,563 1,857,361
2004 - 1,795,608
thereafter - 5,835,725
---------- ----------
Total minimum lease payments 3,567,968 $15,901,982
===========
Less amount representing interest 326,108
----------
Present value of net minimum
capital lease payments 3,241,860
Less current installments
included in accounts payable 1,301,222
----------
Obligations under capital
leases, excluding current
installments $1,940,638
==========
Rent expense for the years ended September 30, 1999, 1998 and 1997 was
approximately $1,930,768, $2,149,893 and $796,991, respectively.
Subsequent to September 30, 1999, the company signed a 5-year agreement to lease
additional space.
(b) Litigation and Contingencies - Beginning in September 1997, claims were
made and litigation was initiated against the Company, in regard to the
activities of a former Registered Representative. As of September 30, 1998,
claims of approximately $990,000 were alleged against the Company or its
subsidiaries in regard to this matter. During fiscal year 1998, the Company paid
approximately $260,000 in settlement of a portion of these claims, and paid an
additional $45,000 in settlement of several unasserted claims related to the
same matter. During the fiscal year ended September 30, 1999, the Company paid
approximately $637,000 to settle pending claims and paid approximately $52,000
to settle unasserted claims arising from this matter.
The Company is subject to other legal proceedings and claims that have arisen in
the ordinary course of business and have not been finally adjudicated. The
Company believes, based on the advise 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.
F-12
<PAGE>
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. In fiscal 1999 dividends of $95,653 ($0.38 per share) were declared
and paid. During each of fiscal 1998 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. On December 31, 1998, Herb D. Vest, principle
common shareholder, entered into an agreement to purchase 83,400 shares of the
Company's outstanding Non-voting Series A Convertible Preferred Stock in a
private transaction. This transaction was completed on January 7, 1999. As a
result of this transaction, Herb D. Vest now owns 250,067 shares of the
Company's Non-voting Series A Convertible Preferred Stock.
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, 1999, 1998 and 1997 as follows:
1999 1998 1997
---------- ---------- ----------
Net capital $3,229,712 $2,134,772 $1,992,987
Required net capital 747,403 407,842 381,470
---------- ---------- ----------
Excess net capital $2,482,309 $1,726,930 $1,611,517
========== ========== ==========
F-13
<PAGE>
To the extent that technology increases the amount of client funds held, the
Company's required net capital will increase incrementally.
8) Related-Party Transactions
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. The agreement with Herb D. Vest provides
for a management fee per year including an annual bonus based on the Company's
performance related to revenue and net income goals, additions of Company U4's
and Fee Based Assets under Management, as established by the Board of
Directors. Effective January 1, 1997, the Company increased the annual
management fee due to Mr. Vest to $900,000 from $750,000. The 24% increase in
the Company's revenues combined with positive earnings after consideration of
the bonus, as well as the other factors used to determine the bonus resulted in
the payment of $2,315,412 bonus under the plan in fiscal 1999. The Company paid
bonuses of $2,340,148 in fiscal 1998 and $1,869,497 in fiscal 1997. Management
fees under these agreements were $3,215,412, $3,240,148 and $2,731,997 for the
years ended September 30, 1999, 1998 and 1997, respectively.
Herb D. Vest, Chairman of the Board of Directors and Chief Executive Officer of
H.D. Vest, Inc. (the Company), purchased approximately 1.4 million shares of
the Company's common stock from Barbara Hancock, the Company's Executive Manager
of Representative Relations and a member of the Board of Directors. With the
acquisition (completed during April 1999), Mr. Vest owns over 4 million of
approximately 5.4 million currently outstanding shares, or approximately 75% of
the Company's issued and outstanding common stock.
The Company has an agreement to provide Herb D. Vest a revolving line of credit
in an amount not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of
the line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement interest accrues on
unpaid principal balances at a rate of 11%. As of September 30, 1998, Herb D.
Vest had reduced to zero the outstanding principal balance, together with the
accrued interest, of his revolving line of credit from the Company.
The Company also had a consulting agreement with Ms. Barbara Hancock through
October 1996. In November 1996, Mrs. Hancock was employed by the Company as its
Representative Relations Director, thereby
F-14
<PAGE>
terminating her consulting contract. Amounts paid to Mrs. Hancock during the
years ended September 30, 1999, 1998, and 1997, under these arrangements were
approximately $325,000, $325,000, and $300,000, respectively.
The Company has an agreement to provide Barbara Hancock a revolving line of
credit in an amount not to exceed $700,000, collateralized by Mrs. Hancock's
unrestricted Company common stock in an amount equal to the unadjusted current
balance of the line of credit based on the stock's current ask price. The terms
of the agreement require an annual payment to be made on November 30 of each
year equal to one-seventh of the then outstanding principal plus accrued
interest. The final payment of all outstanding principal and accrued interest
shall be due and payable on or before November 30, 2001. Under the agreement,
interest accrues on unpaid principal balances at a rate of 11%. In December
1998, Barbara Hancock, reduced to zero the outstanding principal balance,
together with the accrued interest, of her revolving line of credit from the
Company. At September 30, 1999, Mrs. Hancock had no outstanding principal or
accrued interest due on this line.
H.D. Vest Insurance Services (HDVIns) is a sole proprietorship owned by
Herb D. Vest. HDVIns 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 1999 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 at fair
market value, 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 as
follows: 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. The Company receives all variable
commissions through HDVIS. Variable commission revenue was $17,850,301,
$13,785,487, and $10,098,858 for the years ended September 30, 1999, 1998 and
1997, respectively. In accordance with this agreement the Company has charged
HDVIns $404,315, $493,604 and $538,700 for the years ended September 30, 1999,
1998, and 1997 respectively, for management services rendered. As of September
30,
F-15
<PAGE>
1999, the Company had a receivable of approximately $275,390 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. In June 1998, Herb D. Vest,
principal common shareholder, purchased options to acquire 64,000 shares of the
Company's restricted common stock with exercise prices between $2.38 and $7.63
from two directors of the Company's Board of Directors. Generally accepted
accounting principles required that equity transactions of this type involving
an entity's principal shareholder be recorded on the entity's financial
statements. Accordingly, the Company has recorded a capital contribution, net of
tax effect, and expense of a like amount to reflect this transaction.
F-16
<PAGE>
9) Income Taxes
Income tax expense consisted of the following components:
September 30,
-----------------------------------------------------
1999 1998 1997
------------ ------------- -------------
Current:
Federal $ 718,035 $ 419,389 $ 407,628
State 89,471 129,275 255,330
Deferred:
Federal 277,008 643,619 411,458
State 232,098 35,967 68,912
------------ ------------- -------------
$ 1,316,612 $ 1,228,250 $ 1,143,328
============ ============= =============
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
September 30,
-----------------------------------------------------
1999 1998 1997
-------- -------- --------
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of
Federal 8.4 7.5 9.9
Other 10.2 5.1 (9.1)
-----------------------------------------------------
Effective rate 52.6% 46.6% 34.8%
=====================================================
The following table presents the components of the net deferred tax liability:
Deferred
October 1, Expense September 30,
1998 (Benefit) 1999
------------ ------------- -------------
Research and development (779,070) 484,304 (1,263,374)
Depreciation (215,485) (62,152) (153,333)
Unearned revenue 82,557 82,557 -
Other 232,412 4,397 228,015
------------ ------------- -------------
Net deferred tax
liability $ (679,586) $ 509,106 $ (1,188,692)
============ ============= =============
The deferred tax liability is included in other noncurrent liabilities in the
financial statements.
F-17
<PAGE>
10) Stock Option Plans
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company adopted the
disclosure provisions of SFAS No. 123. The Company continues to apply the
accounting provisions of APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for stock-based compensation.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock.
The Company has a Nonqualified Stock Option Plan (the Nonqualified Plan). The
Nonqualified Plan is for all employees, as defined in the Nonqualified Plan, and
the Company has reserved 800,000 shares of common stock for this plan. As of
September 30, 1999, 375,948 options are outstanding under the Nonqualified Plan.
A summary of the status of the Company's outstanding stock options as of
September 30, 1999, 1998, and 1997 and changes during the years then ended are
as follows:
<TABLE>
<CAPTION>
1999 1998 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 431,454 $ 5.59 423,454 $ 5.58 407,454 $ 5.61
Granted - - 8,000 6.26 16,000 4.74
Exercised - - - - - -
Expired and
cancelled 55,506 - - - - -
Outstanding at
end of year 375,948 5.25 431,454 5.59 423,454 5.58
Exercisable at
end of year 326,000 4.76 336,000 4.61 328,000 4.73
Fair value of
options granted - - $4.93 - $3.82 -
- --------------------------------------------------------------------------------
</TABLE>
1) Weighted average per option granted.
The 375,948 options outstanding as of September 30, 1999 have exercise prices
between $2.38 and $8.50, with a weighted average exercise price of $5.25 and a
weighted average remaining contractual life of 10
F-18
<PAGE>
years. 326,000 of these options are exercisable with a weighted average
exercise price of $4.76. The remaining 49,948 unexercisable options have an
exercise price of $8.50.
On October 13, 1999, The Board of Directors resolved to issue to Herb D. Vest
from the Nonqualified Stock Option Plan options for the purchase of 220,000
shares of the Company's common stock exercisable at a strike price of $20 per
share for a period of three years from the date of issuance.
On November 8, 1999, the Board of Directors approved the issue of stock options
to certain employees and officers. The options granted to these employees and
officers allow for the purchase, collectively, of up to 348,000 total shares of
the Company's common stock at an exercise price of $6.00 per share.
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:
1999 1998 1997
---- ---- ----
Net income - as reported $1,187,011 $1,427,312 $2,142,063
Net income - pro forma 1,187,011 1,387,872 2,127,088
Earnings per share - as reported .20 .24 .37
Earnings per share - pro forma .20 .23 .37
Because the method prescribed by SFAS No. 123 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.
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 1999 and 1998 for both the Nonqualified Plan and
Directors Plan.
1999 1998 1997
---- ---- ----
Risk free interest rate 5.86% 5.86% 6.50%
Expected dividend yields - - -
Expected lives in years 10 10 10
Expected volatility 66.77% 66.77% 70.17%
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, 1999 and 1998 were approximately $3,450,000
and $2,390,000, respectively, and are included in other noncurrent liabilities
and accrued expenses. As of September 30, 1999 the Company had paid $84,110 to
participants representing deferred amounts and $22,324 representing matching
contributions.
Matching contributions of amounts deferred under the Plan must be accrued as
additional commission expense on a straight-line basis
F-19
<PAGE>
from the period deferred until the Representative is paid the deferral amount
and matching contribution. Accordingly, participation in the Plan by
Representatives will have the effect of increasing commission expense in the
years in which commissions are earned and deferred by participants. Such
increases in commission expense will have an adverse effect on the net income of
the Company. To the extent that Representatives elect to defer receipt of
compensation under the Plan, such compensation will ultimately be paid to the
participant in the form of cash. Matching contributions accrued as of September
30, 1999 and 1998 approximated $700,000 and $360,000, respectively, and are
included in other noncurrent liabilities.
F-20
<PAGE>
- -------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized in connection with this
offering to give any information or to make any representation other than that
as contained in this Prospectus and if given or made such information or
representation must not be relied upon as having been authorized by the Company.
This Prospectus does not constitute an offer or solicitation in any State or
other jurisdictions to any person to whom it is unlawful to make such an offer
or solicitation in such State or jurisdiction.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Deferred Compensation Plan Units
H.D. Vest, Inc.
- -------------------------------------------------------------------------------
Offering Price: Market Value
- --------------------------------------------------------------------------------
-----------------
Prospectus
-----------------
November 23, 1999
- ------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------
a. SEC and NASD Filing Fee . . . . . . . . . . $ 10,000
b. Blue Sky Fees and Expenses . . . . . . . . 3,000
c. Printing and Engraving Costs . . . . . . . 10,000
d. Legal Fees . . . . . . . . . . . . . . . . 102,000
e. Accounting Fees . . . . . . . . . . . . . . 100,000
f. Miscellaneous . . . . . . . . . . . . . . . 25,000
-------
Total . . . . . . . . . . . . . . . . . . . $ 250,000
Item 14. Indemnification Of Directors And Officers.
- ----------------------------------------------------
The By-Laws of the Company and each of its subsidiaries contain provisions which
provide for the indemnification of directors, officers, and other employees or
agents of the Company properly appointed to serve in an official capacity who,
while acting in good faith, in the best interests of the Company and within the
scope of their offices, are or are threatened to be named a defendant or
respondent in a civil or criminal action. The extent of the indemnification is
limited to judgements, penalties, fines, settlements and reasonable expenses
actually incurred.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Item 15. Recent Sales Of Unregistered Securities.
- --------------------------------------------------
The Company issued 166,667 shares of Series A Preferred Stock at a price of
$6.00 in exchange for $1,000,002 in principal amount on the note held by Kemper
Financial Services, Inc. This transaction was completed pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933 and was
effective September 30, 1991. In August of 1997, Herb D. Vest, principal common
shareholder, acquired these shares in a private transaction.
The Company sold 83,400 shares of Series A Preferred Stock at a price of $6.00
per share to Oppenheimer Management Corp. This sale was effected pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933 and
was effective September 24, 1991.
The Company issued 22,800 shares of Common Stock, to certain officers of the
Company, as compensation for services to the
1
<PAGE>
Company through March 31, 1991. These shares were issued pursuant to an
exemption under Section 4(2) of the Securities Act of 1933 at a basis of $5.00
per share.
The Company sold Common Stock through a private offering under Regulation D and
Section 4(2) of the Securities Act of 1933. This Stock, therefore, has
restrictions on the ability to sell it for the next two (2) years. It was sold
to 14 accredited investors (as defined in the Securities Act of 1933 Section
2(15)) and 34 unaccredited investors. The private offering was closed out on May
15, 1987, with a total of 113,600 shares sold at $5.00 per share net proceeds to
the Company. The shares were sold through the assistance of HDVIS licensed
registered Representatives and other registered selling agents.
At the initial capitalization of the Company, each outstanding share of HDVIS
was exchanged for four shares of the Company. The creation of the Company was
necessary in order to expand the services offered by the Company to its
Representatives.
Item 16. Exhibits
- --------------------
3.1 Articles of Incorporation and By-Laws (1)
3.2 First Articles of Amendment to the Articles of Incorporation of
H.D. Vest, Inc. (1)
3.3 Second Articles of Amendment of Articles of Incorporation of
H.D. Vest, Inc. (1)
5. Opinion Regarding Legality (1)
22. List of Subsidiaries (1)
24.1 Consent of Arthur Andersen LLP (2)
28.1 Specimen Common Stock Certificate (1)
28.2 Registered Representative Sales Agreement (1)
28.3 B Warrant Certificates (1)
28.4 B Warrant Agreements (1)
28.5 Non-Qualified Stock Option Plan (1)
28.6 Facilities and Services Agreement with H.D. Vest Insurance
Services (1)
28.7 Representative's Warrants to Purchase Common Stock (1)
28.8 Management Agreement with Herb D. Vest (1)
28.9 H.D. Vest Representatives Deferred Compensation Plan (2)
28.10 Opinion of Arthur Andersen, LLP regarding Federal Income Tax
Consequences (1)
28.11 Agreement for Line of Credit with Herb Vest and Barbara Hancock (1)
(1) Previously filed.
(2) Amended herewith.
(3) New Exhibit.
Item 17. Undertakings
- ----------------------
Subject to the terms and conditions of Section 15 (d) of the Securities and
Exchange Act of 1934, the undersigned Registrant
2
<PAGE>
undertakes to file with the Securities and Exchange Commission such
supplementary and periodic information, documents and reports as may be
prescribed by any rule or regulation of the Commission heretofore or hereafter
duly adopted pursuant to authority conferred in that section.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes: (1) to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement, (i) to include any prospectus required by section 10(a)
(3) of the Securities Act of 1933, (ii) to reflect in the Prospectus any facts
or events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement, (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; (2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof; (3) to remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering; (4) and agrees that each such post-effective
amendment will comply with the applicable forms and rules and regulations in
effect at the time such post-effective amendment is filed; (5) and agrees that,
in the event it enters into any arrangements with third parties on terms
differing from those set forth herein, it will promptly file an appropriate
post-effective amendment setting forth the pertinent information.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
H.D. VEST, INC.
------------------
(Registrant)
Date: November 24, 1999 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 Hancock
-------------------------- ------------------------------
Herb D. Vest Barbara Hancock
Chairman of the Board and Chief Director
Executive Officer
By: /s/ Kenneth E. Reynolds By: /s/ Jack B. Strong
-------------------------- ------------------------------
Kenneth E. Reynolds Jack B. Strong
Director Director
By: /s/ Jerry M. Prater By: /s/ Phillip W. Mayer
---------------------------- -----------------------------
Jerry M. Prater Phillip W. Mayer
Director Director
By: /s/ Kenneth R. Petree By: /s/ Wesley Ted Sinclair
---------------------------- ------------------------------
Kenneth R. Petree Wesley Ted Sinclair
Director Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
4
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report on
the fiscal 1999, 1998, and 1997 consolidated financial statements of the
Company and to the use of our opinion dated November 9, 1999 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,
November 23, 1999
<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, 84th, or 120th 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), eighty-
four (84), or one hundred twenty (120) consecutive calendar months
immediately following the end of a Deferral Period. The duration of a
Distribution Period shall be the same number of consecutive calendar
months as the Deferral Period which it immediately follows.
-2-
<PAGE>
P. "Effective Date" means the first date in which a Registration
Statement filed with the Securities and Exchange Commission ("SEC")
becomes effective, any required state Registration Statement becomes
effective, and the Company's Board has approved the Plan.
Q. "Gross Compensation" means the total amount of a Participant's
Compensation, including advisory service fees, but excluding
compensation earned on the sales of certain insurance products through
H.D. Vest Insurance Services, unreduced by any amount.
R. "Initial Enrollment Period" means a sixty (60) day period commencing
January 1 of each year the Plan is made available, or commencing three
(3) days after the Effective Date, whichever is later.
S. "Net Compensation" means Gross Compensation earned by and while a
Representative of the Company multiplied by the Participant's payout
rate (as defined in the applicable current H.D. Vest payout schedule)
and less any fees, expenses, or other amounts which reduce Gross
Compensation.
T. "Participant" means a Representative of the Company who elects to
participate in the Plan pursuant to Section 3.2 or 3.3, who satisfies
all requirements established by the Administrative Committee and who
designates a Deferral Amount and a Deferral Period pursuant to the
Plan. Participant does not include employees or officers of the
Company.
U. "Representative" means an independent contractor associated with the
Company through H.D. Vest Investment Securities, Inc. The Company
shall promptly inform the Administrative Committee if any individual
ceases to be a Representative. Representative does not include any
employee or officer of the Company.
V. "Vest" means H.D. Vest, Inc., a Texas Corporation.
2.2 Construction. Whenever any word is used herein in the singular form,
------------
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 four 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 four Deferral Period Options. All such Deferral Amounts shall be allocated
to each Participant's Account as a Cash Equivalent beginning after the end of
the Initial Enrollment Period. After the Initial Enrollment Period, any
modification of any Deferral Amount or Deferral Period is governed by Sections 4
and 5.
3.3 Enrollment- Future Representatives. Representatives who join the
----------- ----------------------
Company after the Initial Enrollment Period shall not be eligible to become a
Participant until the next Initial Enrollment Period, if any, immediately
following the date that a Representative becomes affiliated with the Company.
However, no Representative will be eligible to enroll in the Plan if, prior to
an Initial Enrollment Period, the Plan is not registered with the SEC or the
Representative's state of residence, if required, or the Board elects to
terminate or suspend the Plan pursuant to Section 7.3. Upon enrollment in the
Plan, said Representative shall be subject to the same terms as those who are
Participants.
Section 4. Aspects of Deferral
4.1 Electing Deferral Amount. A Participant may elect a Deferral Amount
------------------------
and Deferral Period during each Annual Election Period by complying with the
Plan and all Administrative Committee requirements (including giving timely
written notice and properly completing all forms required by the Administrative
Committee). A Participant must specify the Deferral Amount as a specific
percentage, or dollar amount, of his total Net Compensation earned after an
Annual Election Period and during a Deferral Period. The Deferral Amount shall
not exceed the Participant's Net Compensation. Anyone who is no longer a
Representative shall no longer be entitled to elect any Deferral Amounts and
Deferral Amounts shall immediately stop.
4.2 Accounts. When a Participant has appropriately selected a Deferral
--------
Amount, the Administrative Committee shall establish or continue an Account on
the Company's books in the
-4-
<PAGE>
Participant's name. The Participant's Account is a Cash Equivalent account.
4.3 Participant's Rights. Neither the Administrative Committee nor the
--------------------
Company shall be required to reserve or otherwise set aside funds for the
payment of any Cash Equivalents or other amounts credited to any Account. All
Accounts are unfunded accounts established under the Plan in the Participant's
name. Moreover, until a Participant actually receives a distribution of Cash
from his Account, the Participant maintains a position as a general creditor of
the Company as regards any Cash Equivalent or other amount credited to or to be
distributed from the Participant's Account and as regards any and all rights of
the Participant under the Plan. In addition, the Company shall not be required
to actually fund any Cash Equivalents or credit Cash to any Account until the
time for payment thereof during the Distribution Period. As general unsecured
obligations, Participant's account will be senior in rank to the Company's
Common Stock listed on NASDAQ/NMS. The Company has received an opinion letter
from Arthur Andersen LLP as to the federal income tax consequences to
Representatives of the Company who become Participants in the Plan. Each
Participant may request a copy of the opinion letter.
4.4 Time for Electing Deferral. Except as otherwise permitted in Section
--------------------------
3.2, 3.3 or 4.5, during each Annual Election Period, a Participant shall select
the (i) Deferral Amount and (ii) Deferral Period. Except as provided in Section
4.5, only one Deferral Amount can be selected for one Deferral Period during any
Annual Election Period. Any election so made shall remain in effect until the
next Annual Election Period and shall immediately cease if the Participant is no
longer a Representative.
4.5 Prospectively Increasing Deferral Amount. A Participant may elect to
----------------------------------------
increase future Deferral Amounts only pursuant to this Section. Any election to
increase the Deferral Amount may be made only on a calendar quarterly basis and
must be in writing and actually received by the Administrative Committee no
later than 30 days before the beginning of a calendar quarter. Any election to
increase prospectively the Deferral Amount shall begin on the first Compensation
Day of the next calendar quarter. Unless the Participant prospectively increases
the Deferral Amount under this Section 4.5, such an election shall remain in
effect until the next Annual Election Period or the Participant ceases to be a
Representative. Any such increase in the Deferral Amount elected shall be
deferred for the same Deferral Period which applies to the other Deferral Amount
selected during the most recent preceding Initial Enrollment Period or Annual
Election Period during which the Participant elected a Deferral Amount.
-5-
<PAGE>
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 four
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).
Option No. 4 Deferral Amount deferred for one hundred twenty months
(120 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 Plan year ending December 31, 2000, 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 41%
Option 2: 60 Months 85%
Option 3: 84 Months 151%
Option 4: 120 Months 305%
-6-
<PAGE>
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
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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
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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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<PAGE>
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
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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
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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
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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
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amount credited to their Accounts except as set forth
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<PAGE>
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
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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
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construed in accordance with and governed by the laws of the State of Texas. Any
elections to be made under this Plan shall be accepted and all actions to be
taken or payments under the Plan shall occur and be made at the Company's home
office located at 6333 North State Highway 161, Fourth Floor, Irving, Texas,
75038, or as such other location specified by the Administrative Committee.
Because of its terms and provisions, the Plan is not governed by the Employer
Retirement Income Security Act of 1974, as amended.
7.7 Statement of Account. A statement will be sent to each Participant as
--------------------
to his Account at least once each calendar year.
7.8 Expenses of Administration. All costs and expenses incurred in the
--------------------------
operation and administration of this Plan shall be borne by the Company.
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