<PAGE>
Filed Pursuant to Rule 424(b)(3)
File No. 33-74868
As Filed with the Securities and Exchange Commission on September 29, 2000
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
---------------------
POST-EFFECTIVE AMENDMENT NO. 7
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 Registered Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Offering Price Per Unit Aggregate Offering Registration Fee
Price (2)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units consisting of: $7,000,000 100% $7,000,000(1) $2,413.80
Cash Equivalents
-----------------------------------------------------------------------------------------------------------------------------
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) Quantitative and Qualitative
Disclosures About Market Risk.................. Quantitative and Qualitative Disclosures About Market Risk
(k) Directors and Executive Officers............... Management
(l) Executive Compensation......................... Business; Management
(m) Security Ownership of Certain
Beneficial Owners and Management............... Principal Shareholders;
Certain Transactions
(n) 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
6333 N. State Hwy. 161, 4th Floor in its non-qualified, unfunded,
Irving, Texas 75038 deferred compensation plan. These
Units are offered solely to
representatives of H.D. Vest, Inc.
The Offering in conjunction with H.D. Vest
Inc.'s non-qualified, unfunded,
Unit Price Total deferred compensation plan.
---------- -----
Representative is defined as an
Representative Amount of $7,000,000 independent contractor associated
Price Compensation with H.D. Vest, Inc. or any of
Deferred by its subsidiaries, who is neither
Representative an employee nor officer of H.D.
Vest, Inc. or any subsidiary.
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.
_____________________________
September 29, 2000
<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
Quantitative and Qualitative
Disclosures About Market
Risk............................................... 25
Use of Proceeds...................................... 26
Capitalization....................................... 27
Business............................................. 28
Available Information.............................. 29
Reports Furnished.................................. 29
Registered
Representatives................................. 30
Technology Development
and Information
Services........................................ 31
Technical and Sales
Support Services................................ 31
Regional Support
System.......................................... 32
Educational Services............................... 32
Representative
Recruiting...................................... 32
Representative
Development..................................... 33
Insurance Agency
Management Services............................. 33
Investment Services................................ 34
Trading and Customer
Service......................................... 34
Representative
Licensing....................................... 35
Compliance and
Supervision..................................... 35
Professional Investment
Advisory Services............................... 35
New Programs....................................... 36
Operations and Sources of
Revenue............................................ 41
Trademarks........................................... 42
Dependence on a Single
Customer.......................................... 42
Government Regulation................................ 43
Competition.......................................... 45
Employees............................................ 45
Property............................................. 45
Management........................................... 46
Directors and Officers............................. 47
Remuneration of Directors
and Management.................................. 50
Certain Transactions................................. 51
Issuance of Series A
Preferred Stock................................. 51
Transactions with
Management...................................... 51
Security Ownership of Certain Beneficial Owners and
Management......................................... 59
Principal Shareholders............................... 60
Shares Eligible for
Future Sale........................................ 60
Description of
Securities......................................... 61
Plan of Distribution................................. 63
Transfer Agent &
Registrar.......................................... 64
Legal Proceedings.................................... 64
Legal Matters........................................ 64
Experts.............................................. 64
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. It
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 28 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 indicates otherwise.
The Offering
Deferred Compensation Plan
--------------------------
H.D. Vest, Inc. is making available exclusively to registered 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 for which the
representative has deferred his or her compensation, the amount
3
<PAGE>
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 compensation
shall be made during the 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 as well as the amended Deferred
Compensation Plan document at Exhibit 28.9. "Description of Securities" is found
on page 61 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 representative.
5
<PAGE>
. H.D. Vest, Inc. has lost an average of 13% of its representatives each
year for the 5 years ended September 30, 1999. 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 make 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. Many of H.D. Vest's
representatives are CPAs. Currently, 44 jurisdictions allow CPAs to receive
commission-based compensation for the sale of products or services. The
remaining 7 jurisdictions have regulations or laws which have been interpreted
to preclude CPAs from receiving such compensation. Some of our CPA
representatives have been challenged in administrative actions brought by
accountancy boards in various states where the receipt of commissions was
previously or is currently prohibited. While we are currently aware of no
material litigation involving our CPA representatives, there is no assurance
that the remaining states will change their rules and that future administrative
actions will not be brought against our representatives.
7
<PAGE>
The financial growth of H.D. Vest, Inc. may be adversely impacted in the event
that rules prohibiting commissions remain unchanged or should rules currently
allowing CPAs to receive commissions be changed to prohibit such activity. 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. or its
subsidiaries. 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. NASDAQ Listing. 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.
9. Company Debt. In June 2000 we entered into a loan agreement with Bank One
Bank. We presently have borrowed $8,000,000 pursuant to the terms of the loan
agreement. Each of our subsidiaries have guaranteed this loan agreement and our
assets have been pledged as collateral. The loan agreement requires that we
maintain certain financial ratios and comply with other loan covenants. If
economic conditions change, such change could impede our ability to continue to
meet our various loan covenants and financial requirements. If we were unable
to maintain these financial conditions or loan covenants, an event of default
would occur under the loan agreement. In such event, the lender would be able
to take our collateral such as equipment, furniture, fixtures and other assets
and apply the proceeds from such assets towards payment of the loan. If such an
event were to occur, our operations would be severely impacted.
8
<PAGE>
MARKET INFORMATION
As of June 30, 2000, 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. The total trading volume of our stock
for the three and nine month periods ending June 30, 2000 were 144,882 and
938,382, respectively. 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.
3 Months Ended High Low
-------------- ---- ---
6/30/00 $ 8.00 $ 5.50
3/31/00 10.13 5.50
12/31/99 9.19 4.63
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 June 30, 2000, there were 557 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 2 market makers. As of June 30, 2000,
there were 465 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 growth and development of the
Company. Any dividends in the future will depend upon our financial requirements
and other factors.
9
<PAGE>
SELECTED FINANCIAL INFORMATION
The following summary of selected financial information as of and for the
periods ended June 30, 2000 has been derived from our unaudited financial
statements contained elsewhere in this document. 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>
For the three months ended For the nine months ended
-------------------------- -------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenues $52,452,334 $39,767,096 $148,071,730 $109,597,454
Net Income (Loss) 642,232 (202,180) 355,346 (167,278)
Income (Loss)/Common Share 0.11 (0.04) 0.04 (0.05)
Ratio of Earnings to Fixed 4.23 0.83 1.53 0.96
Charges or Coverage Deficiency
<CAPTION>
For the year ended 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 3.21 3.52 5.52 4.03 4.08
Charges or Coverage Deficiency
Summary of Consolidated Statements of Financial Position:
As of June
30, 2000
(unaudited)
--------------------------------------------------------------
Working Capital 12,070,927
Total Assets 49,183,542
Capital Leases (net of current maturities) 2,484,761
Total Liabilities 39,474,437
Shareholders' Equity 9,709,105
<CAPTION>
As of September 30,
-------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 6,579,642 $ 4,112,684 $ 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 launched 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. The Web site has acquired
approximately 330,000 registered users and during the 2000 tax season over
260,000 tax returns were completed online.
During fiscal 2001, we plan to develop this Web site to become a personal
financial portal for our clients. Furthermore, we intend to pilot financial
planning centers located in the Affiliates' office which would utilize
interactive presentations to arrive at solutions to client's financial planning
needs.
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 our revenues for the periods indicated:
<TABLE>
For the three months ended June 30, 2000 (unaudited)
----------------------------------------------------
<CAPTION>
Amount % change % of total
<S> <C> <C> <C>
Commission $41,324,776 31% 79%
Portfolio management fees 7,591,104 34% 14%
Marketing and education fees 3,004,083 30% 6%
Other 532,371 100% 1%
----------- ---
Total $52,452,334 32% 100%
=========== === ===
</TABLE>
<TABLE>
For the three months ended June 30, 1999 (unaudited)
----------------------------------------------------
<CAPTION>
Amount % change % of total
<S> <C> <C> <C>
Commission $31,500,294 11% 79%
Portfolio management fees 5,682,221 24% 14%
Marketing and education fees 2,317,827 27% 6%
Other 266,124 (27)% 1%
----------- ---
Totals $39,767,096 13% 100%
=========== ==== ===
</TABLE>
<TABLE>
For the nine months ended June 30, 2000 (unaudited)
---------------------------------------------------
<CAPTION>
Amount % change % of total
<S> <C> <C> <C>
Commission $114,935,907 36% 78%
Portfolio management fees 20,160,823 28% 14%
Marketing and education fees 11,083,645 36% 7%
Other 1,891,355 79% 1%
------------ ---
Totals $148,071,730 35% 100%
============ == ===
</TABLE>
<TABLE>
For the nine months ended June 30, 1999 (unaudited)
---------------------------------------------------
<CAPTION>
Amount % change % of total
<S> <C> <C> <C>
Commission $ 84,582,969 21% 77%
Portfolio management fees 15,780,151 31% 14%
Marketing and education fees 8,176,798 33% 8%
Other 1,057,536 (18)% 1%
------------ ---
Totals $109,597,454 23% 100%
============ ==== ===
</TABLE>
Management believes that the increase in revenues is due in part to the
continued strength in overall financial markets. Management believes the
Company's ability to maintain or increase revenues in periods of short-term
market fluctuation is due in part to the Company's commitment to training
Representatives in
12
<PAGE>
diversification and long-term investment activities. In addition, Management
believes that the number of Representatives and their experience in the
financial planning and sales industry directly impacts revenues.
The following tables set forth our revenues for the periods indicated:
For the year ended September 30, 1999
-------------------------------------
<TABLE>
<CAPTION>
Amount % change % of total
<S> <C> <C> <C>
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%
============ == ===
</TABLE>
For the year ended September 30, 1998
-------------------------------------
<TABLE>
<CAPTION>
Amount % change % of total
<S> <C> <C> <C>
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%
============ === ===
</TABLE>
For the year ended September 30, 1997
-------------------------------------
<TABLE>
<CAPTION>
Amount % change % of total
<S> <C> <C> <C>
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%
=========== == ===
</TABLE>
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.
13
<PAGE>
COMMISSION REVENUE
Commission revenue for the three months ended June 30, 2000 was $41,324,776, an
increase of 31% from the three months ended June 30, 1999. Commission revenue
for the nine months ended June 30, 2000 was $114,935,907, an increase of 36%
from the nine months ended June 30, 1999. We believe that this increase is due
in part to the continued strength in overall financial markets and continued
training and development of Representatives.
<TABLE>
<CAPTION>
For the three months ended
--------------------------
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) % change (unaudited) % change
----------- -------- ------------ --------
<S> <C> <C> <C> <C>
Commission Revenue
Mutual Fund and UITs(1) $30,256,359 24% $24,358,071 6%
Insurance Products (2) 6,942,320 69% 4,099,945 1%
Stocks, Bonds and 4,077,179 36% 2,994,413 124%
Options (1)
Partnership Interests 27,770 (23)% 35,830 (39)%
Trading 21,148 67% 12,665 44%
----------- -----------
Total $41,324,776 31% $31,500,924 11%
=========== ==== =========== ====
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
-------------------------
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) % change (unaudited) % change
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Commission Revenue
Mutual Fund and UITs(1) $ 81,215,833 29% $62,912,487 12%
Insurance Products (2) 19,913,859 58% 12,595,571 27%
Stocks, Bonds and 13,640,173 53% 8,938,722 135%
Options (1)
Partnership Interests 110,110 4% 106,360 (10)%
Trading 55,932 88% 29,829 (68)%
------------ -----------
Total $114,935,907 36% $84,582,969 21%
============ == =========== ====
</TABLE>
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
1999 % change 1998 % change 1997 % change
---- -------- ---- --------- ---- --------
<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 17,850,301 29% 13,785,487 37% 10,098,858 30%
Products (2)
Stocks, Bonds and 48%
Options (1) 11,864,690 98% 6,006,235 47% 4,084,707
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 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.
14
<PAGE>
PORTFOLIO MANAGEMENT FEE REVENUE
For the three months ended June 30, 2000, portfolio management fees were
$7,591,104, a 34% increase from the three months ended June 30, 1999. For the
nine months ended June 30, 2000, portfolio management fees were $20,160,823, a
28% increase from the nine months ended June 30, 1999.
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 in portfolio management fee revenue is primarily due to the growth
of assets under management in our fee-based programs. Total assets under
management were $2.013 billion, $1.583 billion, $1.094 billion and $.840 billion
at June 30, 2000, September 30, 1999, 1998 and 1997, respectively. This
represents a 27%, 45%, 30% and 68% increase in the nine months ended June 30,
2000 and the fiscal years 1999, 1998, and 1997, respectively.
Due to the declining industry-wide trend of commission revenue as a percentage
of gross product sales, the Company has continued to devote resources to the
development of its fee-based programs. Fee-based programs produce revenue based
on quarterly charges to clients for the management of their accounts, whereas
commission-based services produce revenue based primarily on one-time front-end
sales charges for the purchase of products. Some clients may prefer fee-based
programs as opposed to more traditional commission-based services. 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 $3,004,083 for the three months ended
June 30, 2000, a 30% increase from the three months ended June 30, 1999.
Marketing and education fee revenue was $11,083,645 for the nine months ended
June 30, 2000, a 36% increase from the nine months ended June 30, 1999.
Revenues for the period increased due to increased sales and increased
attendance at our National Conference in November 1999.
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 educational programs and seminars provided by us. Product
sponsors assist in the funding of our educational services.
15
<PAGE>
OTHER REVENUE
Other revenue was $532,371 for the three months ended June 30, 2000, a 100%
increase from the three months ended June 30, 1999. Other revenue was $1,891,355
for the nine months ended June 30, 2000, a 79% increase from the nine months
ended June 30, 1999. The increase in Other revenue for the period primarily
relates to revenue generated from billings to Representatives for expenses
incurred by us related to compliance audits.
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 Expense. The NASD
recently required these compliance audits. We provide management services to an
affiliated insurance agency, H.D. Vest Insurance Agency (f/k/a 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 $30,523,049 for the three months ended June 30, 2000, a
33% increase from the three months ended June 30, 1999. Commission expense was
$84,957,696 for the nine months ended June 30, 2000, a 36% increase from the
nine months ended June 30, 1999. Commission expense increased at a faster rate
than commission revenue for the three and nine months ended June 30, 2000, due
to increased production by Representatives in higher payout categories.
Representative payout categories are based upon their rolling twelve-month gross
sales. During the quarter, market indices fluctuated. Management believes that
in periods of short-term economic fluctuations, established Representatives have
an advantage over less experienced Representatives in selling investment
products.
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,
16
<PAGE>
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 expense was $5,525,020 for the three months ended June 30,
2000, a 40% increase from the three months ended June 30, 1999. Portfolio
management expense was $14,802,423 for the nine months ended June 30, 2000, a
34% increase from the nine months ended June 30, 1999. Portfolio management fee
expense increased at a faster rate than the related revenue due primarily to
Representatives moving into higher payout categories as well as increased
production from Representatives in higher payout categories. During the
quarter, market indices fluctuated. Management believes that in periods of
short-term economic fluctuations, established Representatives have an advantage
over less experienced Representatives in selling investment products.
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
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 costs for the three months ended June 30, 2000 were $2,935,085 an 18%
increase compared to the prior year. Operations costs for the nine months ended
June 30, 2000 were $9,691,379 a 21% increase compared to the prior year. The
increase in operations costs is mainly due to an increase in the cost of
licensing Representatives. Operations expense also increased due to additional
costs required by the new back office system.
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
17
<PAGE>
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 costs for the three months ended June 30, 2000 were
$2,985,967, a 17% increase compared to the prior year. Representative
development costs for the nine months ended June 30, 2000 were $7,620,146, a 16%
increase compared to the prior year.
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.
18
<PAGE>
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.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses increased 3% to $6,103,861 for the three
months ended June 30, 2000, compared to the prior year. The three month increase
in general and administrative expenses is primarily due to increased investments
in technology and increased personnel cost. These increases were offset to some
degree by the reduction in fees related to Mr. Vest's management agreement.
General and administrative expenses decreased 2% to $16,986,062 for the nine
months ended June 30, 2000, compared to the prior year. The same factors listed
above are responsible for the decrease in general and administrative
expenses.
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 the compliance and supervision of Representatives by H.D. Vest Investment
Securities Inc., (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.
19
<PAGE>
REPRESENTATIVE RECRUITING EXPENSE
Representative recruiting costs for the three months ended June 30, 2000, were
$180,632, an 84% decrease compared to the prior year. Representative recruiting
costs for the nine months ended June 30, 2000, were $585,418, a 74% decrease
compared to the prior year. The reduction in recruiting costs is the result of a
decreased focus on Representative recruiting efforts. To the extent that the
Company decides in the future to devote significant resources to rapidly expand
its Representative base through aggressive recruiting activities, future
profitability would likely be negatively impacted.
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 H.D. Vest Investment Securities
Inc. (HDVIS) and H.D. Vest Advisory Services, Inc. (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 June 30, 2000, we have approximately 7,450 affiliates, of which 6,350 are
fully licensed Representatives and approximately 1,100 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.
Many of H.D. Vest's representatives are CPAs. Currently, 44 jurisdictions allow
CPAs to receive commission-based compensation for the sale of products or
services. The remaining 7 jurisdictions have regulations or laws which have been
interpreted to preclude CPAs from receiving such compensation. Some of our CPA
representatives have been challenged in administrative actions brought by
accountancy boards in various states where the receipt of commissions was
previously or is currently prohibited. While we are currently aware of no
material litigation involving our CPA representatives, there is no assurance
that the remaining states will change their rules and that future administrative
actions will not be brought against
20
<PAGE>
our representatives. The financial growth of H.D. Vest, Inc. may be adversely
impacted in the event that rules prohibiting commissions remain unchanged or
should rules currently allowing CPAs to receive commissions be changed to
prohibit such activity. In such event, H.D. Vest, Inc. might not have sufficient
funds to pay a representative his or her deferred compensation.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense was $1,054,809 for the three months ended
June 30, 2000, a 55% increase from the three months ended June 30, 1999.
Amortization and depreciation expense was $2,839,971 for the nine months ended
June 30, 2000, a 64% increase from the nine months ended June 30, 1999.
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 three and nine months ended June 30, 2000 was $642,232 and
355,346, respectively, compared to net losses of $202,180 and $167,278 for the
three and nine months ended June 30, 1999, respectively. These increases from
the prior year were in spite of significant investments in the Company's website
initiative and was driven primarily by the above mentioned increase in revenues.
The investment in the website includes advertising and public relations expense
of approximately $9 million for the nine months and over $1 million for the
three months. 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. The Web site includes, among other things, a tax planning
organizer and program allowing consumers to prepare their tax returns free of
charge, retirement and college funding calculators, debt management
recommendations, insurance and risk management information, links to our
nationwide network of Representatives, and access to on-line strategic partners
products and services and options. In addition, a financial planning analysis, a
customized monthly newsletter, and tax updates are provided to the consumers
generated from tax return information.
21
<PAGE>
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
At June 30, 2000, the Company had net working capital of $12,070,927 compared to
net working capital of $6,579,642 at September 30, 1999. The $5,491,285 increase
is primarily a result of the Company entering into a term loan agreement with a
bank for $8 million. The Company repaid the outstanding line of credit of $3
million with the proceeds. The new note bears interest, at prime plus 2% (11.5%
as of June 30, 2000) and matures June 29, 2002. Principal and interest payments
are due monthly under the term loan agreement. Also, net income for the nine
months ended June 30, 2000 was $355,346.
During the first nine months of fiscal 2000, the Company dedicated much of its
capital to the development and promotion of a new interactive financial planning
website and to costs incurred for the ongoing implementation of other computer
systems related to its operating and marketing efforts. These other operating
systems include the Company's new Representative contact management system,
enhancements to the Company's internet site, a back office system
implementation, and providing more technology tools for Representative use.
Management believes that this dedication to information systems will provide the
Company with more capacity to manage its current growth, support future growth
and will lead to an increase in efficiency.
The Company continually monitors the capital markets for opportunities to obtain
financing to meet Company growth needs. To the extent that funds are available,
the Company would accelerate the development and promotion of the Company's e-
commerce strategy. Other funds would be utilized for recruiting, development
and other general business purposes. The Company is required to expense many of
the costs related to these items. Should the Company obtain future financing to
fund these growth plans, it is likely that it would record substantial expenses
in the periods during and subsequent to obtaining such financing.
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
22
<PAGE>
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 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. 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 June 30, 2000, approximately $4,700,000 had been deferred under
the Plan. 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 June 30, 2000, we had accrued matching contributions of approximately
$1,067,000. 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 ten years. During the
nine months ended June 30, 2000, we paid $66,756 to participants representing
deferred amounts and $17,630 representing matching contributions. During 1999,
we paid $84,110 to participants representing deferred amounts and $22,324
representing matching contributions.
23
<PAGE>
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.
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 was
established for the evaluation and management of risks associated with material
Year 2000 issues. The plan included 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.
24
<PAGE>
We have not experienced any major issues relating to the Year 2000. We have
continued to monitor and review all relevant systems within the Company as well
as third-party providers for any relevant issues.
We spent approximately $300,000 for testing, modification and replacement of our
computer systems related to Year 2000 issues as of September 30, 1999. For the
quarter ended December 31, 1999, we spent approximately $90,000 for testing,
modification and replacement of our computer systems related to Year 2000
issues. We expect that future expenses incurred, if any will continue to be
financed from internally generated funds.
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; and changes in domestic
or foreign laws and regulations affecting our ability to conduct business in the
manner in which we currently conduct such business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to market risk related to changes in U.S. prime interest rates.
No derivatives are currently used to alter the interest rate characteristics of
our debt instrument.
With respect to our interest-bearing liabilities, approximately $8 million of
long-term debt at June 30, 2000 is subject to variable rates of interest. Based
on a hypothetical 1.5% increase in interest rates, the potential annualized
losses in
25
<PAGE>
future pretax earnings would be a maximum of $120,000. The impact of such a
change in interest rates on the carrying value of long-term debt would not be
significant. The estimated changes to interest expense and the fair value of
long-term debt are determined considering the impact of hypothetical interest
rates on our borrowing cost and long-term debt balances. These analyses do not
consider the effects, if any, of the potential changes in our credit ratings or
the overall level of economic activity. Further, in the event of a change of
significant magnitude, management would expect to take actions intended to
further mitigate its exposure to such change.
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) operating improvements,
(ii) marketing initiatives and (iii) Representative development activities (see
Business - New Programs). As of June 30, 2000, our Representatives had deferred
approximately $4,700,000 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.
<TABLE>
<CAPTION>
Approximate Percent
Dollar Amount(1) of Net
------------- ------
<S> <C> <C>
Technology & Operating Improvements (2) $ 4,100,000 59%
Marketing Initiatives (2) 1,000,000 14%
Representative Development
Activities (1) 1,900,000 27%
------------ ----
$ 7,000,000 100%
============ ====
</TABLE>
(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"
26
<PAGE>
As of June 30, 2000, the Registered Representatives have deferred approximately
$4,700,000 of compensation. Of this amount, approximately $3,800,000 of the
deferred compensation proceeds was used for technology and operation
improvements and $900,000 of the deferred compensation proceeds was used for
marketing initiatives. We plan to allocate 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 June 30, 2000, we have
paid $150,866 to participants representing deferred amounts and $39,954
representing matching contributions.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
2000:
<TABLE>
<CAPTION>
Adjusted For
Actual at Deferral of
June 30, 2000 Cash Equivalents (2)
------------------------------ ---------------------------
<S> <C> <C>
Deferred compensation (3) $ 4,680,976 $ 7,000,000
Deferred compensation match (4) 1,067,495 1,067,495
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 2,782,602 2,782,602
-------------- -------------
Total shareholders' investment 9,709,105 9,709,105
-------------- -------------
Total capitalization $ 15,457,576 $ 17,776,600
============== =============
</TABLE>
(1) Does not include up to 800,000 shares reserved for stock options (see
Management - Stock Options).
(2) Assumes approximately $2,300, 000 of deferred compensation during the next
twelve months and $7,000,000 over the life of the Plan.
(3) Includes short-term deferred compensation of $226,000.
(4) Includes short-term deferred compensation match of $77,000.
27
<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 Technology Services, Inc. "HDVTI" 1999 Internet and Technology 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,
28
<PAGE>
Better Business Bureau, Greater Dallas Chamber of Commerce, Las Colinas/Irving
Chamber of Commerce, U.S.-Mexico Chamber of Commerce, International Association
of Financial Planners, Mortgage Bankers Association, American Property-Casualty
Association and American Realty Association.
Available Information
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission. All of this information
may be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 5th Street, N.W.,
Washington, D.C. 20549 and at regional offices of the Securities and Exchange
Commission at Room 1204, 219 South Dearborn Street, Chicago, Illinois 60604, and
75 Park Place, New York, New York 10007. The Commission also maintains a website
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at http:\\www.sec.gov.
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.
29
<PAGE>
Registered Representatives
We utilize a Representative base to market our financial service products. At
June 30, 2000, we have approximately 7,450 affiliates, of which approximately
6,350 are fully licensed Representatives and approximately 1,100 are in various
stages of the licensing process.
H.D. Vest Registered Representative
Distribution by State as of June 30, 2000
The following table identifies the geographic location of our approximately
6,350 fully-licensed Representatives.
<TABLE>
<S> <C> <C> <C>
Alabama 51 Montana 19
Alaska 13 Nebraska 21
Arizona 160 Nevada 36
Arkansas 50 New Hampshire 28
California 931 New Jersey 254
Colorado 129 New Mexico 18
Connecticut 85 New York 419
Delaware 19 North Carolina 116
District of Columbia 8 North Dakota 14
Florida 318 Ohio 230
Georgia 139 Oklahoma 150
Hawaii 14 Oregon 60
Idaho 21 Pennsylvania 352
Illinois 187 Puerto Rico 1
Indiana 89 Rhode Island 20
Iowa 55 South Carolina 59
Kansas 50 South Dakota 7
Kentucky 49 Tennessee 58
Louisiana 113 Texas 829
Maine 42 Utah 46
Maryland 127 Vermont 27
Massachusetts 153 Virginia 107
Michigan 147 Washington 98
Minnesota 101 West Virginia 29
Mississippi 54 Wisconsin 131
Missouri 99 Wyoming 17
-----
Total 6,350
=====
</TABLE>
30
<PAGE>
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.
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 provides 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.
31
<PAGE>
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 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 June 30, 2000, we have approximately 7,450 affiliates, of which approximately
6,350 are fully licensed Representatives and approximately 1,100 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
32
<PAGE>
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.
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 Agency (f/k/a 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.
For the three months ended June 30, 2000 we had variable commission revenue of
$6,942,320, a 69% increase from the three months ended June 30, 1999. For the
nine months ended June 30, 2000 we had variable commission revenue of
$19,913,859, a 58% increase from the nine months ended June 30, 1999. Variable
commission revenue was $17,850,301, $13,785,487, and $10,098,858 for the years
ended September 30, 1999, 1998 and 1997,
33
<PAGE>
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 June 30, 2000, we have a receivable of $459,553 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.
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>
Three Months Ended June 30
---------------------------
<S> <C> <C>
2000 1999
---- ----
2,373,372 1,830,059
Nine Months Ended June 30,
--------------------------
2000 1999
---- ----
6,574,968 5,143,590
Fiscal Years Ended September 30,
--------------------------------
1999 1998 1997
---- ---- ----
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.
34
<PAGE>
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.
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
35
<PAGE>
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 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 launched 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. The Web site has acquired
approximately 330,000 registered users and during the 2000 tax season over
260,000 tax returns were completed online.
During fiscal 2001, we plan to develop this Web site to become a high-touch,
highly informational, personal financial portal for its clients. Furthermore,
we intend to pilot financial planning centers located in the Affiliates' office
which would utilize interactive presentations to arrive at solutions to client's
financial planning needs.
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 its 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 its
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
36
<PAGE>
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
- 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
37
<PAGE>
the management of all areas of our Representative's business. Over the
coming years, we plan to develop or improve Representative's 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
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.
38
<PAGE>
Fee-Based Products and Services
We believe that in order to attract and retain successful Representatives, it
must offer a variety of fee-based compensation programs in addition to the
commission-based products that now comprise the majority of its revenues. In
1993 the VestFlex program was introduced. The program has been well received by
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 its support services is the availability of in-field
training and sales assistance for new Representatives and those who
need more personalized services than can be provided via the telephone
support of the home office. 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 and
support Representatives in the technical aspects of financial
planning, motivation and sales training, time and practice management,
financial products, and
39
<PAGE>
support in actual client situations.
. Technical Support. We offer comprehensive Technical Support services
to its Representatives. These services include support in the areas of
Retirement Planning, Investment Planning, Education Planning, Employee
Benefits, Tax Planning, Risk Management, Qualified Plans, Product
Selection, Bank Marketing Programs and Marketing Strategies. 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, it has been able to negotiate
personalized product support from the wholesaler teams of the
sponsors. The wholesalers are available to Representatives for client
presentations, seminar presentations and assistance in product
selection.
Training
We have done extensive research into the training necessary to accomplish a
successful and profitable transition for the tax professional to provide
financial planning services to his or her clients. The research has shown that
the basic needs for training fall into the following categories:
. Technical (identifying client needs)
. Product (choosing a product)
. Operations (processing paperwork)
. Sales (making the recommendation)
. Marketing (proven marketing techniques)
. Motivation (overcoming fears)
. Practice Management (transition to financial planning)
In June 1994, 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.
40
<PAGE>
OPERATIONS AND SOURCES OF REVENUE
We have historically operated in a single industry segment: securities
brokerage and related financial services. Effective January 2000, H.D. Vest
Technology Services, Inc. ("HDVTI"), a wholly owned subsidiary of the Company
became a reportable segment as defined by SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". H.D. Vest's core business
is in the business of financial services, organized for the purpose of
investing in financial service companies and providing management services to
such companies as well as other entities. H.D. Vest does not track assets by
operating segments. Consequently, we have not disclosed assets by operating
segments. The following table sets forth our total revenues by major
source:
Summary Of Company's Sources Of Revenue
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-----------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commission Revenue
Mutual Fund and UITs $30,256,359 $ 24,358,071 $ 81,215,833 $ 62,912,487
Insurance Products 6,942,320 4,099,945 19,913,859 12,595,571
Stocks, Bonds and Options 4,077,179 2,994,413 13,640,173 8,938,722
Partnership Interests 27,770 35,830 110,110 106,360
Trading 21,148 12,665 55,932 29,829
Portfolio Management Fees 7,591,104 5,682,221 20,160,823 15,780,151
Marketing and Education Fees 3,004,083 2,317,827 11,083,645 8,176,798
Facility and Service Fees from 29,000 25,573 329,528 304,315
Affiliate
All Other 503,371 240,551 1,561,827 753,221
----------- ------------ ------------ ------------
Total Revenue $52,452,334 $ 39,767,096 $148,071,730 $109,597,454
=========== ============ ============ ============
</TABLE>
We had assets of $49,183,542 and $34,470,649 as of June 30, 2000 and September
30, 1999, respectively. We had net income of $642,232 and a net loss of
$202,180 for the three months ended June 30, 2000 and 1999, respectively and
net income of $355,346 and a net loss of $167,278 for the nine months ended
June 30, 2000 and 1999, respectively.
41
<PAGE>
<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
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 valuable assets of ours and unauthorized use of these trade names is
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.
42
<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
43
<PAGE>
example, through operating 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 as of June
30, 2000 and 1999 as follows:
June 30, 2000 June 30, 1999
----------------- -----------------
Net capital $4,964,078 $2,637,102
Required net capital 885,547 484,648
--------------------------------------
Excess net capital $4,078,531 $2,152,454
--------------------------------------
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
---------- ---------- ----------
$2,482,309 $1,726,930 $1,611,517
Excess net capital ---------- ---------- ----------
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.
44
<PAGE>
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 June 30, 2000, we employed 340 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.
Employees by Department
As of June 30, 2000
Marketing and Technical Support 149
Administration and Other 60
Operations 116
Educational Services 15
---
Total Employees 340
===
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.
45
<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 June 30, 2000.
<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 54 Board of Directors and
Representative
Relations Director
Kenneth E. Reynolds 71 Board of Directors
Jack B. Strong 70 Board of Directors
Jerry M. Prater 57 Board of Directors
Phillip W. Mayer 58 Board of Directors
Kenneth R. Petree 57 Board of Directors
Roger C. Ochs 38 President
W. Ted Sinclair 36 Vice President and Chief
Financial Officer
Bredt Norwood 36 General Counsel and
Corporate Secretary
</TABLE>
46
<PAGE>
Directors and Officers
Herb D. Vest, Chairman of the Board of Directors, President and Chief Executive
Officer. Prior to assuming his present position with the Company and HDVIS in
June 1983, Mr. Vest practiced public accounting and financial planning for ten
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, 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 and a Masters of
Business Administration degree. 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 co-authored
two books on personal financial planning, "Wealth Workout" and "Wealth - How to
get it, How to keep it".
47
<PAGE>
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. Vest was integrally involved in Herb Vest's
private CPA practice for ten years in Irving, Texas and was an independent
consultant to the Company until October 1996 when she was employed by the
Company as Representative Relations Director. She is qualified to speak on many
facets of practice development for the tax and financial professional. Image
building, goal setting, referral development and employee training are just a
few of the topics in Ms. Vest's speaking repertoire. She is also a featured
columnist for Accounting Today. Ms. Vest is active in many national and local
professional organizations and is a dedicated Company Representative for the
community and political affairs. She holds a master's degree from Texas Tech
University and is a member of Mensa. She holds a real estate license, a Group I
Life Insurance license, and is a NASD General Securities Principal. Ms. Vest is
also a member of the Texas Woman's Alliance and Sales and Marketing Executives
associations.
Kenneth E. Reynolds, Board of Directors. He started his Norman, Oklahoma-based
Certified Public Accounting practice in 1965. He is past Chairman of the
Personal Financial Planning Committee of the Oklahoma Society of CPAs and past
President of the Norman Chapter of the Oklahoma Society of CPAs. Also, Mr.
Reynolds serves on the Arthur Andersen LLP A-plus Tax User Advisory Committee.
He became a registered Representative of the Company in 1987 and became a
Director of the Company in fiscal year 1993.
Jack B. Strong, Board of Directors. Mr. Strong has been a practicing attorney
since 1952. Mr. Strong was elected to the Texas State Senate in 1962, where he
served until his retirement in 1971. Since leaving the Senate, he has served on
various state committees, boards and commissions, including chairing Lt.
Governor Hobby's Blue Ribbon Committee on Ethics Reform, the Regional Medical
Program of Texas, and the Texas State Board of Education, and currently serves
on the Interstate Oil Compact Commission. Mr. Strong serves as President of
Texas-based General Equities, Inc. and Strongworth, Inc. From January 1992 to
January 1993, Mr. Strong served as an advisor to the Company's Board. He has
been a Director of the Company since fiscal year 1993.
Jerry M. Prater, Board of Directors. He has been a practicing Certified Public
Accountant since 1983. He has held positions with agencies of the U.S.
Department of Defense, Continental Electronics Mfg. Co., Hill & Wilkinson and
Quazon Corporation, prior to founding his own Dallas, Texas-based public
accounting practice in 1983. Mr. Prater was elected to the Board of Directors of
the Company in 1994.
48
<PAGE>
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.
Kenneth R. Petree, Board of Directors. Mr. Petree is a Development Officer for
the Central, North, West and East Texas Regions for Bank United, Texas. He
currently serves on the Board of Directors and chairs the Loan and Discount
Committee for the Fort Worth Economic Development Corporation, a non-profit
entity. Mr. Petree has extensive experience in the banking industry and has held
executive positions with Overton Bank and Trust, N.A., and Irving National Bank.
Mr. Petree was appointed to the Board of Directors to complete the term of Ms.
Niedermeier.
Roger 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.
W. Ted Sinclair, Vice President/Chief Financial Officer. Mr. Sinclair was
employed by the Company in fiscal 1987 and was promoted to Vice President in
fiscal 1993. He is responsible for the financial management of the Company and
financial, tax and management reporting and budgeting. Mr. Sinclair previously
served as Controller and was responsible for coordinating and controlling all
financial reporting and tax activities. He graduated from the University of
North Texas with a Bachelor of Science degree in Accounting. He is a Certified
Public Accountant, Certified Management Accountant, Certified Financial Planner,
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.
49
<PAGE>
Bredt Norwood, General Counsel and Corporate Secretary. Mr. Norwood was
employed by the Company in fiscal 1994. Mr. Norwood advises the firm on
corporate legal matters and litigation, manages the company's in-house and
outside counsel, and oversees the company's involvement in government and
regulatory affairs. He holds an undergraduate degree in government from the
University of Texas at Austin and a juris doctor degree from Southern Methodist
University School of Law.
Remuneration of Directors and Management
The following table sets forth all remuneration earned in salary and bonus in
the current year to the Chief Executive Officer, the highest paid members of the
Board of Directors, Officers and key Senior Managers each receiving in excess of
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Name & Principal Fiscal Restricted Stock All Other
Position Year Salary Bonus Stock Awards Options(1) Compensation
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb D. Vest 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 (3) 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.
3) Effective February 2, 2000, the Company accepted the resignation of Shannon
A. Soefje as Senior Vice President and Corporate Secretary.
50
<PAGE>
CERTAIN TRANSACTIONS
Issuance of Series A Preferred Stock
The Company issued 166,667 shares of non-voting Series A Convertible Preferred
Stock at a price of $6.00 in exchange for $1,000,002 in principal amount on a
note held by a Financial Services company. The price of the non-voting Series A
Convertible Preferred Stock was determined through consultation with RAF
Financial Corporation. This transaction was completed pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933 and was
effective September 30, 1991 (see Certain Transactions - Loan Agreements). In
August of 1997, Herb D. Vest, principal common shareholder, acquired these
shares in a private transaction.
The Company issued for cash 83,400 shares of non-voting Series A Preferred Stock
at a price of $6.00 per share, in exchange for $500,400, to a second Financial
Services company. This sale was effected pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933 and was effective
September 24, 1991. 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
51
<PAGE>
$3,215,412, $3,240,148 and $2,731,997 for the years ended September 30, 1999,
1998 and 1997, respectively.
In January 2000, Herb D. Vest and the Company agreed to remove the bonus
provision from Mr. Vest's management agreement for the fiscal year ending
September 30, 2000. The agreement also provides that Mr. Vest is permitted to
request and receive advances on future management fees based on estimated future
operations. At June 30, 2000, Mr. Vest had received $900,000 under this
agreement, consisting of $675,000 in management fees related to the nine months
ended June 30, 2000 and advances totaling $225,000 (recorded in Prepaid and
other assets).
H.D. Vest Insurance Agency
H.D. Vest Insurance Agency (f/k/a H.D. Vest Insurance Services) (HDVIns) is
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 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. For the
three months ended June 30, 2000 we had variable commission revenue of
$6,942,320, a 69% increase from the three months ended June 30, 1999. For the
nine months ended June 30, 2000 we had variable commission revenue of
$19,913,859, a 58% increase from the nine months ended June 30, 1999. 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 $29,000 and $329,528 for the three and
nine months ended June 30, 2000, respectively, and $25,573 and $304,315 for the
three and nine months ended June 30, 1999, respectively, for facilities and
management services rendered. For the years ended September 30, 1999, 1998, and
1997 the Company charged HDVIns $404,315, $493,604 and $416,298, respectively,
for these services. As of June 30, 2000, the Company had a receivable of
$459,553 from HDVIns for these services.
52
<PAGE>
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 June 30, 2000, Mr. Vest had
no outstanding principal or accrued interest on this line. At September 1,
2000, Mr. Vest had $550,000 in outstanding principal and $3,834 in outstanding
interest 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 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, Mrs. Hancock repaid in full the outstanding principal balance, together
with the accrued interest, of her revolving line of credit from the Company. At
June 30, 2000, Mrs. Hancock had no outstanding principal or accrued interest
outstanding on this line.
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
53
<PAGE>
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 three months ended June 30, 2000 and 1999 were $112,171 and
$92,541, respectively. Company contributions to the 401(k) retirement plan for
the nine months ended June 30, 2000 and 1999 were $313,803 and $202,717,
respectively. 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.
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
54
<PAGE>
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 included.
In addition, bonus stock will be credited to participants' accounts in the form
of restricted stock on the basis of the Company's attaining three-year
cumulative revenue goals. Each year these goals are set by the Board of
Directors for the upcoming three years and are based in part on the previous
year's goals that consist of a threshold, a target and a maximum cumulative
revenue goal. Upon attaining one of these goals, bonus stock credited in the
form of restricted stock to the participant's plan vests and will become
distributable only upon retirement, long term disability or death of the
participant, or the date of a "change-in-control" of the Company (as that term
is defined in the Executive Officer's Compensation Plan). No goals have been
set to issue common stock options for fiscal years ending September 30, 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.
55
<PAGE>
The Committee, at the direction of the Chief Executive Officer, may amend,
modify or terminate the Stock Option Plan, provided however, no action of the
Committee, without approval of the Chief Executive Officer and the shareholders
of the Company may:
(a) Increase the total number of shares 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.
As of June 30, 2000, options covering 679,948 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. Options
covering 160,000 shares of stock were issued to certain employees of the Company
in November 1999. These 224,000 options remain outstanding as of June 30,
2000.
56
<PAGE>
As a result of the foregoing, options covering 903,948 shares of common stock,
with exercise prices ranging from $2.38 to $20.00 per share, have been issued to
officer, directors and employees of the company, and remain outstanding. The
following table provides information with respect to options issued to officers
and directors that remain outstanding as of June 30, 2000:
Aggregated Option Exercises at June 30, 2000
and Option Values
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised, In-
Acquired Options Held at The-Money Options at
Through June 30, 2000 June 30, 2000
------------- -------------
Name Options Value Exercisable Unexercisable Exercisable Unexercisable
Exercised Realized (1) (2)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb D. Vest - - 579,148 - $599,600 -
Roger Ochs - - 80,000 - - $55,040
Wesley T. Sinclair - - 1,456 - - -
Bredt Norwood - - 20,000 - - $13,760
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on June 30, 2000 and the exercise price of the options.
(2) The current fair market value of the stock at June 30, 2000 was below the
option exercise price.
Compensation of Directors
The Company's Board of Directors holds formal and informal meetings throughout
the year with management and shareholders to discuss Company affairs.
The Company's Board of Directors has an Audit Committee. The function of the
Audit Committee is (i)to oversee the Company's system of internal control and
the financial reporting process; (ii)to review the internal audit function;
(iii)to approve the selection of the Company's independent accountants; and
(iv)to review audit reports. The members of the Audit Committee during fiscal
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.
57
<PAGE>
Directors are reimbursed for travel and other expenses related to attendance at
Board and committee meetings. Total compensation to the Directors for the year
ended September 30, 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.
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.
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.
58
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following information is furnished as of June 30, 2000, to indicate
beneficial ownership of more than 5% of the Company's Common Stock, as well as
beneficial ownership by each director and certain executives, individually and
directors of the Company, as a group, of shares of the Company's Common
stock.
<TABLE>
<CAPTION>
# OF SHARES
OWNER BENEFICIALLY OWNED % OF SHARES
--------------------- ------------------ -----------
<S> <C> <C>
Herb D. Vest 4,390,181 (1) 81%
Roger C. Ochs 82,961 (2) *
Barbara Hancock 300 *
Kenneth E. Reynolds 550 *
Jack B. Strong 100 *
Kenneth R. Petree 1,265
W. Ted Sinclair 1,481 *
R. Bredt Norwood 20,746 (3) *
Officers and Directors
as a Group 4,497,584 83%
</TABLE>
* Less than one percent.
(1) Includes 3,560,966 of Outstanding Common Stock, 314,000 Common Stock
Options with an exercise price ranging from $2.38 to $7.63, 45,148 Common
Stock Options with an exercise price of $8.50, 220,000 Common Stock Options
with an exercise price of $20, 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 66%.
(2) Includes 80,000 Common Stock Options with an exercise price of $6.00
(3) Includes 20,000 Common Stock Options with an exercise price of $6.00
59
<PAGE>
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares Owned Percent
Shares Owned Percent of Upon Completion Of
Owner Before Offering Shares Of Offering (1) Shares
----- --------------- ------ ---------------- ------
<S> <C> <C> <C> <C>
Herb D. Vest (2) (3) (4) 3,560,966 66% 3,560,966 66%
6333 North State Highway 161
Fourth Floor
Irving, Texas 75038
Matthew Vest 97,335 2% 97,335 2%
Daniel Vest 97,334 2% 97,334 2%
Other Shareholders (2) 1,667,706 30% 1,667,706 30%
</TABLE>
(1) Assumes that no stock options are exercised.
(2) Assumes that the holders of the 250,067 shares of Preferred Stock, by Herb
D. Vest, do not exercise their conversion privileges.
(3) Not included in this number are options to purchase 314,000 shares of the
Common Stock of the Company, which are presently exercisable at an exercise
price ranging from $2.38 to $5.06.
(4) Not included in this number are options to purchase 45,148 shares of the
Common Stock of the Company which are presently exercisable at an exercise
price of $8.50 and 220,000 shares of the Common Stock of the Company which
are currently exercisable at an exercise price of $20.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 5,423,341 shares of common stock outstanding as of June 30, 2000,
4,045,154 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 3,397,259 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.
60
<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
All representatives shall have the opportunity to enroll in the Plan during the
Enrollment Period or Annual Election Period pursuant to procedures established
by the Administrative Committee. Participants shall, at that time, choose the
Deferral Amount of their future Net Compensation earned after the Enrollment
Period or Annual Election 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. An election of the Deferral Amount
and Deferral Period during the Enrollment Period shall begin on the first
Compensation Date that occurs following (30) days subsequent to the
Participant's Enrollment during the Enrollment Period. An election of the
Deferral Amount and Deferral Period during the Annual Election Period shall
begin on the first Compensation Date that occurs with respect to Net
Compensation earned after the end of the Annual Election Period.
The Enrollment Period is the period of time commencing on the Effective Date and
concluding on the earliest of (i) the expiration of 16 months, (ii) the
conclusion of the securities offering comprising the Plan, and (iii) the
Effective Date of any amendment to the securities offering comprising the Plan,
or such other date determined by the Administrative Committee or Board.
An election to increase the Deferral Amount may be made during the Enrollment
Period and must be in writing pursuant to procedures established by the
Administrative Committee. Any election to increase prospectively the Deferral
Amount shall begin on the first Compensation Date that occurs following thirty
(30) days subsequent to the Company's receipt of the written request to increase
the Deferral Amount in accordance with procedures established by the
Administrative Committee. Unless
61
<PAGE>
the Participant prospectively increases the Deferral Amount, such an election
shall remain in effect until the next Annual Election Period, the Participant
ceases to be a Representative or the Plan is terminated. 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 Enrollment Period or
most recent Annual Election Period during which the Participant elected a
Deferral Amount.
Changes In Elections
A Participant may elect to decrease future Deferral Amounts during the Annual
Election Period only. Any such decrease in the Deferral Amount shall become
effective on the first Compensation Date with respect to Net Compensation earned
subsequent to the end of the Annual Election Period.
The Annual Election Period is a period from November 1 to December 31.
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.
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
62
<PAGE>
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. or its successor or assign 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 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.
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.
63
<PAGE>
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
On April 27, 2000, the Company was notified of a claim brought by clients of a
former Registered Representative against H.D. Vest Investment Securities, Inc.,
alleging actual damages of approximately $450,000 arising from alleged conduct
of the Representative. The Company is reviewing the claim and is unable at this
time to determine what, if any, potential liability the Company may have in
regard to 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 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.
64
<PAGE>
Financial Statements and Supplementary Data
-------------------------------------------
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
For the three and nine months ended June 30, 2000
and 1999 (unaudited)
Consolidated Statements of Financial F-21 & F-22
Position - June 30, 2000 (Unaudited)
and September 30, 1999
Consolidated Statements of Operations - F-23
Three months ended June 30, 2000
and June 30, 1999 (Unaudited)
Consolidated Statements of Operations - F-24
Nine months ended June 30, 2000
and June 30, 1999 (Unaudited)
Consolidated Statement of Cash Flows - F-25
Nine months ended September 30,
2000 and 1999 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) F-26
</TABLE>
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Directors of H.D. Vest, Inc.:
We have audited the accompanying consolidated statements of financial
position of H.D. Vest, Inc. (a Texas Corporation) as of September 30, 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.
/s/ 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
----------- -----------
24,076,599 19,380,564
Total current assets ----------- -----------
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
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ===========
</TABLE>
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
Outstanding Additional Retained
------------------------- Preferred Common Paid-in Earnings
Preferred Common Stock Stock Capital (Deficit) Total
------------ --------- ---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 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:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
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
=========== ==========
</TABLE>
(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 reporting 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 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.
(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 on EPS.
5) Commitments and Contingencies
(a) Leases - The Company leases its office space and certain office equipment
under lease agreements, which qualify as operating leases. The Company also
leases certain office equipment under certain lease agreements, which qualify as
capital leases. At September 30, 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>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- -----------
<S> <C> <C>
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
==========
</TABLE>
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 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.
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:
<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>
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
F-15
<PAGE>
services rendered. As of September 30, 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 require that equity transactions of this type involving an
entity's principal shareholder be recorded on the entity's financial statements.
Accordingly, the Company has recorded a capital contribution, net of tax effect,
and expense of a like amount to reflect this transaction.
F-16
<PAGE>
9) Income Taxes
Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
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%
=================================
</TABLE>
The following table presents the components of the net deferred tax liability:
<TABLE>
<CAPTION>
Deferred
October 1, Expense September 30,
1998 (Benefit) 1999
----------- ------------ -------------
<S> <C> <C> <C>
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)
========= ======== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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
F-19
<PAGE>
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 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>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
-------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,168,386 $ 11,918,613
Commissions and accounts receivable 13,975,885 10,857,090
Receivable from affiliate 459,553 275,390
Prepaid and other assets 1,641,198 1,025,506
-------------- ---------------
Total current assets 36,245,022 24,076,599
-------------- ---------------
Property and equipment, net of accumulated
depreciation of $5,728,982 at June 30,
2000 and $3,997,687 at September 30, 1999 8,552,849 6,713,270
Intangible and other assets 4,385,671 3,680,780
-------------- ---------------
$ 49,183,542 $ 34,470,649
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-21
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------ ---------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 7,357,541 $ 5,406,058
Amounts due on clearing transactions 3,116,233 2,952,533
Unearned revenue 1,814,435 2,063,112
Commissions payable 9,219,220 7,075,254
Note payable-current 2,666,666 -
------------ ---------------
Total current liabilities 24,174,095 17,496,957
------------ ---------------
Obligations under capital leases,
Excluding current installments 2,484,761 1,940,638
5,333,334 -
Note payable-long-term
Other non-current liabilities 7,482,247 5,551,758
Shareholders' investment:
Preferred stock, $6 par value;
250,067 shares outstanding 1,500,402 1,500,402
Common Stock, $.05 par value;
100,000,000 shares authorized;
5,423,341 issued and outstanding 271,167 271,167
Additional paid-in capital 5,154,934 5,154,934
Retained earnings 2,782,602 2,554,793
------------ ---------------
Total shareholders' investment 9,709,105 9,481,296
------------ ---------------
$ 49,183,542 $ 34,470,649
============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-22
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Commissions $41,324,776 $31,500,924
Portfolio management fees 7,591,104 5,682,221
Marketing and education fees 3,004,083 2,317,827
Facility and service fee from
affiliate 29,000 25,573
Interest and other 503,371 240,551
----------- -----------
Total revenues 52,452,334 39,767,096
----------- -----------
Expenses:
Commissions 30,523,049 22,988,682
Portfolio management fees 5,525,020 3,939,091
General and administrative 6,103,861 5,936,528
Operations 2,935,085 2,493,102
Website development and promotion 1,773,470 -
Representative development 2,985,967 2,542,331
Representative recruiting 180,632 1,115,630
Amortization and depreciation 1,054,809 678,714
Interest 187,864 75,554
----------- -----------
Total expenses 51,269,757 39,769,632
----------- -----------
Income/(Loss) before taxes 1,182,577 (2,536)
Income taxes 540,345 199,644
----------- -----------
Net income/(loss) $ 642,232 $ (202,180)
=========== ===========
Net income/(loss) per common share
basic and diluted $ 0.11 $ (0.04)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-23
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Commissions $114,935,907 $ 84,582,969
Portfolio management fees 20,160,823 15,780,151
Marketing and education fees 11,083,645 8,176,798
Facility and service fee from
affiliate 329,528 304,315
Interest and other 1,561,827 753,221
------------ ------------
Total revenues 148,071,730 109,597,454
------------ ------------
Expenses:
Commissions 84,957,696 62,384,252
Portfolio management fees 14,802,423 11,068,533
General and administrative 16,986,062 17,319,127
Operations 9,691,379 8,002,977
Website development and promotion 9,439,149 -
Representative development 7,620,146 6,542,352
Representative recruiting 585,418 2,209,149
Amortization and depreciation 2,839,971 1,730,357
Interest 359,944 274,389
------------ ------------
Total expenses 147,282,188 109,531,136
------------ ------------
Income before taxes 789,542 66,318
Income taxes 434,196 233,596
------------ ------------
Net income/(loss) $ 355,346 $ (167,278)
============ ============
Net income/(loss) per common share
basic and diluted $ 0.04 $ (0.05)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-24
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 355,346 $ (167,278)
Noncash items included in income/(loss):
Amortization and depreciation 2,839,971 1,730,327
Deferred tax provision 382,238 774,927
Loss on disposal of assets 27,447 6,792
Deferred rent 43,293 103,221
Changes in assets and liabilities:
Commissions and accounts receivable (3,118,795) 666,459
Receivable from affiliate (184,163) (85,302)
Prepaid and other assets (615,692) (279,781)
Accounts payable and accrued expenses 1,157,085 (3,073,601)
Amounts due on clearing transactions 163,700 (232,895)
Commissions payable 2,143,967 1,686,558
Unearned revenues (248,677) (624,617)
----------- -----------
Net cash provided by
operating activities 2,945,720 504,810
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,148,760) (308,725)
Costs to acquire/develop software (1,453,239) (1,632,920)
Additions to intangible and other assets (319,393) (2,200)
----------- -----------
Net cash used in investing activities (2,921,392) (1,943,845)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (127,537) (95,652)
Proceeds from deferred compensation plan 1,787,776 1,092,957
Proceeds from note payable 8,000,000 -
Payments on deferred compensation plan (87,966) (139,934)
Payments received on notes receivable
related parties - 446,568
Payments on capital lease obligations (1,346,828) (900,120)
----------- -----------
Net cash provided by financing activities 8,225,445 403,819
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,249,773 (1,035,216)
CASH AND CASH EQUIVALENTS,
September 30, 1999 and 1998 11,918,613 9,204,362
----------- -----------
CASH AND CASH EQUIVALENTS,
June 30, 2000 and 1999 $20,168,386 $ 8,169,146
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-25
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) Basis of Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements,"
and accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. The
financial statements have been prepared in conformity with the accounting
principles and practices as disclosed in the Company's annual report on Form 10-
K for the year ended September 30, 1999. In the opinion of management, these
interim financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position as of June 30, 2000, and September 30, 1999, the results of
operations for the three and nine month periods ended June 30, 2000 and 1999,
and the cash flows for the nine month periods ended June 30, 2000 and 1999.
Results of operations for the interim period ended June 30, 2000, are not
necessarily indicative of the results that may be expected for the year ended
September 30, 2000. For additional information, refer to the consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended September 30, 1999.
Certain reclassifications have been made to prior year's statements in order for
the amounts to be comparable with the current year presentation.
2) 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 three and nine months
ended June 30, 2000 and 1999, was 5,423,341. Diluted earnings per share (diluted
EPS) is computed similarly to the computation of basic EPS except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential dilutive common shares had been
issued. The number of shares used to compute diluted EPS for the three and nine
months ended June 30, 2000 were 5,540,037 and 5,575,057 respectively. The number
of shares used to compute diluted EPS for the three and nine months ended June
30, 1999 was 5,423,341.
F-26
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The total number of options outstanding at June 30, 2000 was 903,948. Options to
purchase 273,948 shares of common stock at prices ranging from $7.63 to $20.00
per share were outstanding during the three and nine months ended June 30, 2000
and 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. The total number of options outstanding at June 30, 1999 was 385,948.
Options to purchase 53,948 shares of common stock at prices ranging from $7.63
to $8.50 per share were outstanding during the three and nine months ended June
30, 1999 and 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 Non-voting Series A Convertible Preferred Stock
outstanding during the three and nine months ended June 30, 2000 and 1999, that
were not included in the number of shares used to compute diluted EPS for the
period because the conversion had an anti-dilutive effect on EPS.
3) Commitments and Contingencies
On April 27, 2000, the Company was notified of a claim brought by clients of a
former Registered Representative against H.D. Vest Investment Securities, Inc.,
alleging actual damages of approximately $450,000 arising from alleged conduct
of the Representative. The Company is reviewing the claim, which has not yet
resulted in litigation, and is unable at this time to determine what, if any,
potential liability the Company may have in regard to this matter.
The Company is subject to other legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not
have a material adverse effect upon the financial position of the Company.
F-27
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4) Related Parties
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. Previously, the agreement with Mr. Vest
provided for a management fee per year plus an annual bonus based on the
Company's performance related to revenue and net income goals, additions of
Company U4's and Fee Based Assets under Management, as established by the Board
of Directors. In January 2000, Herb D. Vest and the Company agreed to remove
the bonus provision from Mr. Vest's management agreement for the fiscal year
ending September 30, 2000. The agreement also provides that Mr. Vest is
permitted to request and receive advances on future management fees based on
estimated future operations. At June 30, 2000, Mr. Vest had received $900,000
under this agreement, consisting of $675,000 in management fees related to the
nine months ended June 30, 2000 and advances totaling $225,000 (recorded in
Prepaid and other assets). Bonuses paid under the plan for the fiscal years
ended September 30, 1999, 1998 and 1997 were $2,315,412, $2,320,148 and
$1,869,497, respectively.
The Company has an agreement to provide Herb D. Vest a revolving line of credit
in an amount not to exceed $2,000,000, collateralized by Mr. Vest's 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. Under the agreement interest
accrues on unpaid principal balances at an annual rate of 11%. During the
quarter ended June 30, 2000, Mr. Vest at various dates drew down a total of
$250,000 against the line. On June 30, Mr. Vest repaid the full amount plus
interest of $5,539. At June 30, 2000, Mr. Vest had no outstanding principal or
accrued interest outstanding on this line.
The Company, pursuant to a facilities and services agreement, provides certain
management and other services to an insurance agency (HDVIns) owned by Mr. Vest,
and is paid a fee for these services. The value of these services for the three
and nine months ended June 30, 2000 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. Effective January 1, 2000,
Mr. Vest converted his sole proprietorship into 13 different insurance agencies.
The Company entered into a new facilities and services agreement with the
insurance agencies under the same material terms and conditions as those
contained in the agreement with the sole proprietorship described previously.
F-28
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5) Financing Arrangements
On June 29, 2000 the Company entered into a term loan agreement with a bank for
$8 million. The new term loan bears interest at prime plus 2% (11.5% as of June
30, 2000) and matures June 29, 2002. Principal and interest payments are due on
this term loan monthly. The Company used a portion of the proceeds to repay its
$3 million line of credit on this date.
6) Web Based Fees
During the nine months ended June 30, 2000, the Company invited selected
Representatives to participate in the Company's new website initiative. Each
Representative that elected to participate in the website initiative has their
individual profile included on the website and is eligible for new tax and
financial services referrals obtained from the website. As part of the website
initiative the Company charged each Representative that elected to participate
in the program, a fee of $950 to help offset the costs associated with the
promotion and development of the website. Each Representative that elected to
participate in the website initiative prior to December 31, 1999, has the option
to drop out of the program on October 1, 2000 and receive a full refund of the
$950 fee plus interest. As of June 30, 2000, approximately 2,100 Representatives
have been included in the website initiative. For the nine months ended June 30,
2000, the Company recognized $650,000 of these fees. The remainder has been
reserved for potential refund requests.
7) Segment Reporting
Effective January 2000, H.D. Vest Technology Services, Inc. ("HDVTI"), a wholly
owned subsidiary of the Company became a reportable segment as defined by SFAS
131, "Disclosures about Segments of an Enterprise and Related Information".
H.D. Vest's Core business ("Core") is in the business of financial services,
organized for the purpose of investing in financial service companies and
providing management services to such companies as well as other entities. H.D.
Vest does not track assets by operating segments. Consequently, we have not
disclosed assets by operating segments. For internal and external management
reporting purposes all amounts have been restated to be effective as of October
1, 1999. The following unaudited results are separated by operating segment for
the three and nine months ended June 30, 2000:
F-29
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Core HDVTI Consolidated
----------------------------------------
<S> <C> <C> <C>
Revenues $52,442,315 $ 10,019 $52,452,334
Expenses 49,282,683 1,987,074 51,269,757
----------- ------------ -----------
Net income (loss)
before taxes 3,159,632 (1,977,055) 1,182,577
----------- ------------ -----------
Income taxes 1,421,834 (881,489) 540,345
----------- ------------ -----------
Net income (loss) $ 1,737,798 $ (1,095,565) $ 642,232
=========== ============ ===========
</TABLE>
FOR THE NINE MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Core HDVTI Consolidated
------------- ------------ -------------
<S> <C> <C> <C>
Revenues $148,049,675 $ 22,055 $148,071,730
Expenses 137,430,997 9,851,191 147,282,188
------------ ------------ ------------
Net income (loss)
before taxes 10,618,678 (9,829,136) 789,542
------------ ------------ ------------
Income taxes 4,778,405 (4,344,209) 434,196
------------ ------------ ------------
Net income (loss) $ 5,840,273 $ (5,484,927) $ 355,346
============ ============ ============
</TABLE>
F-30
<PAGE>
____________________________________ ____________________________________
No dealer, salesman or other person
has been authorized in connection Deferred Compensation Plan Units
with this offering to give any
information or to make any
representation other than that as H.D. Vest, Inc.
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 persons to whom
it is unlawful to make such an offer
or solicitation in such State or
jurisdiction.
------------------------------------ ____________________________________
Offering Price: Market Value
____________________________________
_________________
Prospectus
_________________
September 29, 2000
____________________________________
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 (2)
28.11 Agreement for Line of Credit with Herb Vest and Barbara Hancock (1)
(1) Previously filed.
(2) Amended herewith.
Item 17. Undertakings
----------------------
Subject to the terms and conditions of Section 15 (d) of the Securities and
Exchange Act of 1934, the undersigned Registrant undertakes to file with the
Securities and Exchange Commission
2
<PAGE>
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: September 29, 2000
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
