Item 1. Business - -----------------
(a) General Development of Business -------------------------------
H.D. Vest, Inc. (Company), founded by Herb D. Vest, was formed on December 17, 1986, as a Texas corporation. The Company is a financial services company, organized for the purpose of investing in financial service companies and providing management services to such companies as well as other entities. The Company also conducts operations under the corporate assumed name of H.D. Vest Financial Services. When we refer to "Company", "we", "us" or "our" in this document, we mean H.D. Vest, Inc., and all of its subsidiaries on a consolidated basis, unless the context otherwise requires. We own all outstanding shares of the following subsidiaries:
H.D. Vest, Inc. d/b/a H.D. Vest Financial Services
Incorporated Subsidiaries (TEXAS) Services ------------ ------- --------
H.D. Vest Investment Securities, Inc. 1983 Registered Securities "HDVIS" Broker-dealer Products: Mutual Funds Unit Investment Trusts Limited Partnerships Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 Registered Investment "HDVAS" Advisor Agent Licensing Assistance Money Management Services
H.D. Vest Mortgage Services, Inc. 1989 Inactive Subsidiary "HDVMS"
H.D. Vest Collateral Management Company 1988 Inactive Subsidiary "HDVCMC"
H.D. Vest Business Valuation Services, Inc. 1987 Inactive Subsidiary "HDVBVS"
H.D. Vest Corporate Finance, Inc. 1990 Inactive Subsidiary "HDVCF"
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 for their customers due to their knowledge of their 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 recruit tax professionals to become affiliated with our subsidiaries HDVIS and HDVAS, and an affiliated insurance entity, in order to maintain and expand a network for providing financial services. Representatives registered with us include CPAs, CFPs, Enrolled Agents (EA), CFAs, tax attorneys, and other tax professionals. Many hold state or national offices in CPA societies, EA organizations and public accounting societies.
Our subsidiary HDVIS is a securities broker-dealer, registered with the Securities and Exchange Commission (SEC) and securities regulatory commissions in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico. HDVIS is a member of the National Association of Securities Dealers (NASD), Securities Investors Protection Corporation (SIPC) and the Securities Industry Association (SIA). HDVIS' Representatives are primarily tax professionals located throughout the United States who provide their clients with a wide range of financial services consisting of such investments as mutual funds, unit investment trusts, limited partnership interests, stocks and bonds. We utilize the HDVIS Representative base to market services provided by our other subsidiaries and an affiliated insurance entity.
Our subsidiary HDVAS is an investment advisor registered 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 Representatives under HDVAS. HDVAS has developed proprietary fee-based services, which give its Representatives the capability of providing fee-based money management services to their clients.
We participate in various professional and industry organizations including but not limited to: Securities Industry Association, Better Business Bureau of Metropolitan Dallas, Greater Dallas Chamber of Commerce, Greater Irving-Las Colinas Chamber of Commerce, U.S.-Mexico Chamber of Commerce, International Association for Financial Planning,
Mortgage Bankers Association of America, Investment Company Institute, National Association of Securities Dealers, Inc., National Investment Company Service and Securties Investor Protection Corporation.
(b) Financial Information About Industry Segments ---------------------------------------------
We have historically operated in a single industry segment: securities brokerage and related financial services. The following table sets forth our total revenues by major source:
SUMMARY OF COMPANY'S SOURCES OF REVENUE
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.
(c) Narrative Description of Business ---------------------------------
THE REGISTRANT AND ITS SUBSIDIARIES
We conduct our business under our corporate name and under the assumed name of H.D. Vest Financial Services. Through our business divisions and nationwide network of Representatives, we provide a comprehensive package of financial services and products.
The various services provided by us are as follows and are discussed in more detail on the pages that follow:
Entity Name: Service Performed ------------ -----------------
H.D. Vest, Inc. Technology Development and Information Services, Technical and Sales Support Services, Regional Support System, Educational Services, Representative Recruiting, Representative Development, Insurance Agency Management Services.
H.D. Vest Investment Securities, Inc. Investment Services, Trading and Customer Service, Representative Licensing, Compliance and Supervision Services.
H.D. Vest Advisory Services, Inc. Professional Investment Advisory Services
H.D. Vest Mortgage Services, Inc. Inactive Subsidiary
H.D. Vest Collateral Management Company, Inc. Inactive Subsidiary
H.D. Vest Business Valuation Services, Inc. Inactive Subsidiary
H.D. Vest Corporate Finance, Inc. Inactive Subsidiary
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 hold the Microsoft Certified Professional (MCP) designation. The Information Services department also includes Microsoft Certified Solution Engineers and Microsoft Certified Solution Developers. Many of our technology staff hold multiple Microsoft certifications. In addition to our technology staff,
managers in other departments receive extensive training in one or more areas of technology and information management.
During fiscal 1999, we upgraded our computer infrastructure with faster computers and a more stable network for information processing. The Information Services Department also provided support for the implementation of a new transaction processing system.
At the Representative level, the Information Services Department continued to develop our internet/intranet site and other programs to support the Representatives. Other programs developed to assist the Representatives include a CD-ROM Resource Library, which provides reference materials and investment transaction forms, the CD-ROM Financial Check-Up System that assists in identifying clients needs, and the CD-ROM Representative Success Plan which provides training on investment basics.
The Information Services Department also maintains our internet/intranet site designed to facilitate the securities, advisory services and insurance business of our Representatives. The site provides access to account information, stock quotes, market news, and a venue for sharing marketing, business and product ideas with other Representatives.
TECHNICAL AND SALES SUPPORT SERVICES
Our staff of financial professionals provide financial planning and investment information to H.D. Vest Representatives who in turn assist their clients with their financial planning needs. These services to clients include, but are not limited to, investment and insurance planning and product selection, portfolio management, assistance in establishment of employee benefit plans, and estate planning. We provide technical and sales support to the Representatives via the internet/intranet, telephone and other means. In order to provide these services we have assembled staff experts in areas of individual and business financial planning, including Certified Public Accountants, Certified Financial Planners, Chartered Financial Analysts, Chartered Life Underwriters, Certified Investment Management Analysts, Chartered Financial Consultants, Certified Employee Benefits Specialists, Certified Pension Consultants, Enrolled Agents, Certified Management Accountants, American Institute of Certified Public Accountants Personal Financial Specialists, Lawyers and Pension and Executive Compensation Certificate recipients.
REGIONAL SUPPORT SYSTEM
We have developed a local support system designed to provide Representatives assistance in all aspects of financial planning including sales and marketing training, time management, practice management, financial products, and case studies. The program training is facilitated with monthly meetings held across the country between the months of May and December. 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 specified criteria and attended our training prior to training fellow Representatives. The Regional Support System is divided into Mentor and Chapters determined by varying degrees of Representative production.
EDUCATIONAL SERVICES
We develop educational materials and seminars designed to enhance the technical skills and knowledge of Representatives. The educational materials developed for our Representatives and their clients include, but are not limited to training videos, self study courses, computer based training programs, newsletters and promotional pieces. Our seminars include two national events, each offering Representatives a full week of training, as well as other seminars such as the "Tax Season Crash Course" which provides investment training prior to the tax rush experienced by Representatives preparing tax returns for their clients.
During fiscal 1998 we introduced regional conferences to the seminar offering. These conferences are located in cities across the country and are designed to offer training on our internet/intranet site, computer software and technical investment topics.
REPRESENTATIVE RECRUITING
At September 30, 1999, we have approximately 8,550 affiliates, of which approximately 6,750 are fully licensed Representatives and approximately 1,800 Representatives are in various stages of licensing.
We recruit Representatives for our subsidiaries HDVIS and HDVAS and an affiliated insurance entity. Since our inception, we have developed a recruiting process which we believe results in a larger network for distribution of financial products and services. Based on our experience in this area, we typically use methods that have been the most effective in the past. These methods include direct mail, recruiting seminars, telemarketing, trade shows, referral incentive programs, trade publication advertising and various educational events. We may employ additional methods of recruiting in order to develop and determine the effectiveness of such alternatives.
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 System meetings (described above) and marketing initiatives including self-study kits, newsletters, and various other regional and national meetings sponsored by us.
INSURANCE AGENCY MANAGEMENT SERVICES
We provide management services to an affiliated insurance agency, H.D. Vest Insurance Services(HDVIns). HDVIns represents a diversified spectrum of national insurance companies offering life, health, disability, long-term care and variable and fixed annuity products for both individuals and businesses. Our Representatives are licensed through HDVIns to sell insurance products. Our Representatives are paid a commission on such sales by HDVIns or HDVIS in certain circumstances. We do not receive any portion of the fixed commissions but do receive a facility and service fee for management and other services rendered by us. We do receive all variable commissions through HDVIS. Variable commission revenue was $17,850,301, $13,785,487, and $10,098,858 for the years ended September 30, 1999, 1998 and 1997, respectively. We have charged HDVIns a facility and service fee of $404,315, $493,604 and $538,700 for the years ended September 30, 1999, 1998 and 1997, respectively. As of September 30, 1999, we had a receivable of $275,390 from HDVIns.
INVESTMENT SERVICES
H.D. Vest Investment Securities, Inc., formed in 1983 as a Texas Corporation, is registered as a broker-dealer in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico, and is our investment products and trading subsidiary. HDVIS offers for sale 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, and 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 the Company:
Fiscal Years Ended September 30, -------------------------------- 1999 1998 1997 ---- ---- ----
7,074,259 5,551,515 4,042,941
We clear stock and bond trades and certain mutual fund and direct participation programs, on a fully disclosed basis, through National Financial Services Corporation, 161 Devonshire Street, Mail Stop D6, Boston, Massachusetts 02110. National Financial Services Corporation, as the clearing firm for HDVIS, maintains all stock, bond and option transactions of HDVIS' customers on its own records. However, the majority of transactions involving mutual funds and direct participation programs are handled directly with the product distributors.
REPRESENTATIVE LICENSING
We provide step-by-step assistance to Representatives in obtaining their securities, insurance and Registered Investment Advisor licenses, including educational programs for exams and administrative processing through the National Association of
Securities Dealers, and the state agencies supervising securities and insurance licensing.
COMPLIANCE AND SUPERVISION
The financial services industry is subject to extensive regulation on both the federal and state levels, with which we must comply (see Government Regulation). HDVIS and HDVAS must maintain current registration with the applicable regulatory bodies.
We require that all Representatives follow our Compliance and Supervisory Procedures. Our Compliance Department is responsible for Representatives' compliance with rules of the regulatory bodies that supervise the financial services industry. Due to the strict regulation of the financial services industry by federal and state agencies, it is important that we stay abreast of the activities of our Representatives and internal staff. Our Compliance Department uses activities such as transaction reviews and on-site audits to supervise 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
objectives and risk tolerances are utilized to select the optimal portfolio in order to meet the client's needs. Each portfolio is invested in a family of mutual funds and diversified into different asset classes. A quarterly report is provided to each client detailing investment performance.
The Vest Advisor Investment Program accommodates clients with a minimum of $25,000 of investable assets. These investments are managed by the client's Representative according to the portfolio goals established by the client. Each client's investment is held in a single brokerage account. A quarterly report is provided to each client detailing investment performance.
TRADEMARKS
We have trademarks, including H.D. Vest Financial Services, that protect us against the unauthorized use of our corporate name and programs. These trade names are our valuable assets and unauthorized use of these trade names are prosecuted as necessary to protect our interests.
GOVERNMENT REGULATION
H.D. Vest Investment Securities, Inc. - The securities industry in the United States is subject to extensive regulation under federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. Much of the regulation of broker-dealers, such as HDVIS, has been delegated to self-regulatory organizations like the NASD. The NASD conducts periodic examinations of member broker-dealers. Securities firms are also subject to regulation by state securities commissions in the states in which they are registered. HDVIS is currently registered as a broker-dealer in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico.
The regulations to which broker-dealers are subject cover all aspects of the securities business, including sales methods, representative supervision, trade practices among broker-dealers, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations, and changes in the interpretation of enforcement of existing laws and rules often directly affect the method of operation and profitability of broker-dealers. The SEC and the self-regulatory organizations may conduct administrative proceedings that can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. The principal purpose of regulations and discipline of broker-dealers is the protection of customers and the securities markets rather than protection of creditors and stockholders of broker-dealers (see Item 3 Legal Proceedings).
HDVIS is a member of the Securities Investors Protection Corporation. SIPC provides protection to customers (but not shareholders) if a SIPC member fails financially. Customers (not including investors in the stock of the Company) of HDVIS that have securities and/or cash on deposit with HDVIS, would be protected up to a maximum of $500,000, including up to $100,000 on claims for cash.
HDVIS is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. Minimum net capital can never be lower than $250,000 or 6 2/3% of aggregate indebtedness, as defined, whichever is greater. In computing net capital under the Uniform Net Capital Rule, various adjustments are made to net worth to exclude assets which are not readily convertible into cash and to conservatively state other assets, such as a firm's position in the securities that it holds in its own account. To that end, a deduction is made against the market value of such securities to reflect the possibility of a market decline prior to their disposition. For each dollar that net capital is reduced, by means of such deductions or otherwise (for example, through operating losses or capital rules, which are unique to the securities industry), financial restrictions are imposed upon us which are more severe than those imposed on corporations engaged in certain other types of business (see Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources).
HDVIS had net capital, required net capital and excess net capital for the years ended September 30, 1999, 1998 and 1997 as follows:
1999 1998 1997 ----- ---- ----
Net capital $3,229,712 $2,134,772 $1,992,987
Required net capital 747,403 407,842 381,470 ---------- ---------- -----------
Excess net capital $2,482,309 $1,726,930 $1,611,517 ========== ========== ==========
H.D. Vest Advisory Services, Inc. - The financial planning industry is subject to federal regulation under the Investment Advisers Act of 1940, requiring those providing fee-based investment advice to register with the SEC. Most states also have registration and reporting requirements. HDVAS is registered as an investment advisor with the SEC and all 50 states, the District of Columbia, and the Commonwealth of Puerto Rico.
DEPENDENCE ON A SINGLE CUSTOMER
No material part of our consolidated commission revenues is originated by a single Representative or client.
COMPETITION
There is intense competition in the brokerage and insurance industry from large, diversified, well-capitalized brokerage firms, financial institutions and other organizations. Retail oriented financial service providers and other financial institutions are investing substantial funds in advertising and direct solicitation of customers to increase their market share, and in many cases we are directly competing with such organizations for the same market share.
EMPLOYEES
At September 30, 1999, we employed 334 full-time employees who provide support services to our Representatives. To the extent that we recruit additional Representatives, the number of employees would be expected to increase during the fiscal year ending September 30, 2000.
EMPLOYEES BY DEPARTMENT As of September 30, 1999
Marketing and Technical Support 130 Administration and Other 64 Operations 125 Educational Services 15 --- Total Employees 334 ===
The majority of employees are college graduates and are securities licensed.
Item 2.
Item 2. Description of 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.
Item 3.
Item 3. Legal Proceedings - --------------------------
Beginning in September 1997, claims were made and litigation was initiated against us, in regard to the activities of a former Registered Representative. As of September 30, 1998, claims of approximately $990,000 were alleged against the company or its subsidiaries in regard to this matter. During fiscal year 1998, we paid approximately $260,000 in settlement of a portion of these claims, and paid an additional $45,000 in settlement of several unasserted claims related to the same matter. During the fiscal year ended September 30,1999, we paid approximately $637,000 to settle pending claims and paid approximately $52,000 to settle unasserted claims arising from this matter.
We are subject to other legal proceedings and claims that have arisen in the ordinary course of business and have not been finally adjudicated. We believe, based on the advice of legal counsel responsible for such matters, that these actions, when finally concluded and determined, will not have a material adverse effect upon the financial position of the company.
Item 4.
Item 4. Submission of Matters to a Vote of Shareholders - -------------------------------------------------------- NONE
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------
As of September 30, 1999 our stock was listed on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol: HDVS. The total trading volume of the Company's stock for fiscal 1999 was 748,310 shares. There can be no assurance that a more active market will develop. The following table sets forth the range of high and low closing bid prices of our Common Stock as reported by the NASDAQ National Market System during the periods indicated. The prices set forth below represent prices between dealers, do not include retail markups, markdowns, or commissions and do not necessarily represent actual transactions.
High Low ---- --- 3 Months Ended 9/30/99 $5.75 $4.75 6/30/99 6.63 5.00 3/31/99 8.00 6.00 12/31/98 8.00 5.63 ------------------------------------- 9/30/98 9.25 6.38 6/30/98 11.75 4.75 3/31/98 11.00 4.88 12/31/97 5.50 4.13 ------------------------------------- 9/30/97 5.50 4.63 6/30/97 4.88 3.75 3/31/97 5.13 4.13 12/31/96 5.25 3.25 -------------------------------------
As of September 30, 1999, there were 596 holders of record of our common stock.
The NASDAQ NMS Qualification Standards require any company wishing to remain listed to have net tangible assets of $4,000,000, public float of shares of 750,000 (which are shares not held directly or indirectly by any officer, director or beneficial owner of more than 10% of the total shares outstanding), market value of public float of $5,000,000, $1 minimum bid for outstanding shares, 400 round lot shareholders and two market makers. As of September 30, 1999, there were 513 round lot holders of record of our common stock.
If we were subsequently delisted from the NASDAQ National Market System, such delisting would materially limit the public market
for our common stock through loss of news coverage, possible decline in share price and possible difficulty in obtaining subsequent financing. In such event, a stockholder might encounter difficulty in selling his or her common stock.
We have paid no dividends on our common stock since incorporation. We intend to continue to devote our earnings, if any, to the growth and development of the Company. Any dividends in the future will depend upon our financial requirements and other factors.
POTENTIAl FUTURE SALES PURSUANT TO RULE 144
Of the 5,423,341 shares of common stock outstanding as of September 30, 1999, 4,055,154 shares of common stock are "restricted securities," as that term is defined in Rule 144 under the Securities Act of 1933, as amended. Under this rule, a person (or persons whose shares are aggregated) not affiliated with the issuer who has satisfied a one-year holding period may, under certain circumstances, sell within a three-month period a number of shares which does not exceed the greater of 1% of the shares outstanding or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares without any quantity limitation by a person who is not an affiliate of the Company and who has satisfied a one-year holding period. After a one year holding period, if a person is not an affiliate and has not been an affiliate for the last three months, then the person can sell his shares without any restrictions applicable to Rule 144. Herb D. Vest, the Chairman of the Board and Chief Executive Officer of the Company, owns 3,985,194 shares, which are subject to Rule 144. Future sales under Rule 144 may have a depressive effect on the price of our common stock.
Item 6.
Item 6. Selected Financial Data - ---------------------------------
The following summary of certain financial information relating to the Company for the five years ended September 30, 1999, has been derived from the audited financial statements of the Company.
Such information should be read in conjunction with the Consolidated Financial Statements and the report thereon of Arthur Andersen LLP, independent public accountants, located elsewhere in this document.
Summary of Consolidated Statements of Operations Fiscal Years Ended September 30,
Summary of Consolidated Statements of Financial Position As of September 30,
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - -------------
GENERAL
We are a provider of financial services through tax and accounting professionals. Our services are designed to assist in making individual tax and accounting professionals financial service centers for their clients. We believe that the tax professional is uniquely qualified to give confidential professional financial advice and implement financial plans due to the tax professional's knowledge of his or her clients' financial affairs.
During fiscal 2000, we intend to launch a new interactive financial planning Web site providing comprehensive, integrated financial needs analysis and appropriate investment information for consumers. The web site is intended to promote brand awareness, provide lead generation for our Representatives and to facilitate the marketing of financial products and services. It is anticipated that the Web site will include, among other things, a tax planning organizer and program allowing consumers to prepare their tax returns for free, retirement and college funding calculators, debt management recommendations, insurance and risk management information, links to our nationwide network of Representatives, and product purchase and service options. In addition, a financial planning analysis generated from tax return information will be provided to the consumer.
The following discussion and analysis provides information that we believe to be relevant to understanding our consolidated financial condition and results of operations. This discussion should be
read in conjunction with our consolidated financial statements and the related notes thereto.
RESULTS OF OPERATIONS
REVENUES:
The following tables set forth our revenues for the periods indicated:
For the year ended September 30, 1999 ------------------------------------- Amount % change % of total Commission $115,396,557 +21% 77% Portfolio management Fees 21,900,550 +28% 15% Marketing and education 10,923,662 +37% 7% Fees Other 2,002,002 +31% 1% ------------ ---- ---
Totals $150,222,771 +23% 100% ============ ==== ===
For the year ended September 30, 1998 ------------------------------------- Amount % change % of total Commission $95,370,504 +39% 78% Portfolio management Fees 17,049,614 +54% 14% Marketing and education 7,964,579 +13% 7% Fees Other 1,528,978 -6% 1% ----------- --- ---
Totals $121,913,675 +38% 100% ============ === ===
For the year ended September 30, 1997 ------------------------------------- Amount % change % of total Commission $68,736,399 +24% 78% Portfolio management fees 11,070,632 +71% 13% Marketing and education 7,041,025 +68% 7% fees Other 1,621,240 +18% 2% ----------- ---- ---
Totals $88,469,296 +31% 100% =========== ==== ===
Our revenues for the years ended September 30, 1999, 1998, and 1997 were $150,222,771, $121,913,675 and $88,469,296, respectively, a 23%, 38%, and 31% increase from the years ended September 30, 1998, 1997, and 1996, respectively. We believe that the increase in revenues for the fiscal years is due to (i) the continued strength in the overall financial markets, (ii) our commitment to fee- based programs, (iii) the expansion of our Representative
force through recruitment, and (iv) our continued development of programs to support and educate Representatives.
COMMISSION REVENUE
(1) Revenue increased in the fiscal years 1999, 1998, and 1997 due to the continued strength in the financial markets and to the continued increases in product sales resulting in part from the growth of the number of Representatives. Other contributing factors include the training programs provided by us and stable interest rates. (2) Revenue increased due to the increase in the number of Representatives licensed to offer this product and market conditions that made this product a more attractive investment.
PORTFOLIO MANAGEMENT FEE REVENUE
Portfolio management fee revenue was $21,900,550, $17,049,614, and $11,070,632 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 28%, 54% and 71% increase in 1999, 1998, and 1997, respectively. The increase is primarily due to the assets under management in our fee-based programs. Total assets under management were $1.583 billion, $1.094 billion and $.840 billion at September 30, 1999, 1998 and 1997. This represents a 45%, 30% and 68% increase in 1999, 1998, and 1997, respectively. Fee-based programs produce revenue based on quarterly charges to clients for the management of their accounts. We hope to maximize revenue by making both fee-based and commission-based services available to customers. We believe and expect that market demand has and will cause fee-based services to grow at a greater rate than commission-based services.
MARKETING AND EDUCATION FEE REVENUE
Marketing and education fee revenue was $10,923,662, $7,964,579 and $7,041,025 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 37%, 13% and 68% increase in 1999, 1998 and 1997, respectively. Revenues in 1999, 1998 and 1997 increased due to increases in sales and the expansion of the educational programs and seminars provided by us. Product sponsors assist in the funding of our educational services.
OTHER REVENUE
Other revenue was $2,002,002, $1,528,978 and $1,621,240 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 31% and 18% increase in 1999 and 1997, respectively, and a decline of 6% in 1998. The increase in 1999 is due primarily to revenue generated from billings to Representatives for expenses incurred by us related to compliance audits. The related expenses are recorded in General and Administrative. These compliance audits were recently required by the NASD. The decline in 1998 is due to a decrease in the revenue from our catalog sales products as well as a decrease in facility and service fee revenue due to a reduced attractiveness of fixed insurance products offered by HDVIns. The increase in 1997 is due to increased interest income received by us from increased cash reserves maintained during the year.
EXPENSES
COMMISSION EXPENSE
Commission expense was $84,822,640, $68,152,972 and $48,384,293 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 20%, 29% and 26% increase in 1999, 1998 and 1997, respectively. The matching expense on the Company's deferred compensation Plan is included in commission expense. As the Company increases participation in the Plan, commission expense will increase at a faster rate than the related revenue. The increase in commission expense during 1999 is due to (i) an increase in commission revenue of 21% from the prior year and (ii) an increase in the payout ratio to 73% in 1999 from 71% in 1998. The increase in the payout ratio is due to increased production by Representatives at higher payout levels. We believe that in periods of short-term economic fluctuations, established Representatives have an advantage over less experienced Representatives in selling investment products. As we recruit
and train Representatives in lower payout categories, the revenue generated by these Representatives will help to offset increased revenue by Representatives in higher payout categories.
PORTFOLIO MANAGEMENT FEE EXPENSE
Portfolio management fee expense was $15,364,107, $11,263,669 and $7,375,367 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 36%, 53% and 79% increase in 1999, 1998 and 1997, respectively. The increase in Portfolio management fee expense during 1999 is due to (i) an increase in portfolio management revenue of 28% from the prior year and (ii) an increase in the payout ratio to 70% in 1999 from 66% in 1998. Similar to the increase in commission expense above, the increase in the payout ratio is due to increased production by Representatives at higher payout levels.
OPERATIONS EXPENSE
Operations expense was $10,719,749, $7,179,790 and $5,340,317 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 49%, 34% and 43% increase in 1999, 1998 and 1997, respectively. Operations expense includes our mutual fund operations, customer service, licensing and compliance departments. The increase is due in part to (i) increased Compliance expense, (ii) increased noncapitalizable costs to improve our utilization of technology and (iii) the implementations of a new mutual fund processing computer systems.
REPRESENTATIVE DEVELOPMENT EXPENSE
Representative development expense was $8,736,114, $7,521,719 and $6,466,956 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 16%, 16% and 13% increase in 1999, 1998 and 1997, respectively. The increase in Representative development costs is mainly due to increased participation by Representatives and the expansion of staff necessary to support participation in these programs. The increase in participation by Representatives and the related costs is directly attributable to the increased recruitment of new Representatives.
The Representative development process is the cornerstone of our concept of providing the client with the most qualified
professional Representative available. We have made, and will continue to make, significant investments in the development of programs to provide Representatives with training designed to keep them apprised of financial opportunities for their clients.
We require our Representatives to obtain specific licenses, complete training programs and follow prescribed procedures in adding financial planning and implementation services to their practices. The training and marketing programs offered by us to our Representatives include software support such as an asset allocation and tax return-based investment analysis program, educational events such as Regional Support Systems meetings and marketing initiatives that include self-study kits and newsletters, and various other regional and national meetings sponsored by us as well as the sponsors of products sold by our Representatives.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense was $22,183,630, $21,182,001 and $14,784,092 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 5%, 43% and 17% increase in 1999, 1998 and 1997, respectively. The increase in 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 (ii) $572,000 associated with the relocation of our corporate headquarters. Additionally, the increase in general and administrative expenses was due, in part, to $750,959 in human resource expense related to our increase in staffing and employee training programs and $707,427 in costs related to our mail fulfillment operations.
REPRESENTATIVE RECRUITING EXPENSE
Representative recruiting expense was $3,083,830, $2,231,364 and $1,677,594 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 38%, 33% and 117% increase in 1999, 1998 and 1997, respectively. The increase in Representative recruiting expense during 1999 is due to (i) aggressive recruiting
goals for the fiscal year and (ii) use of additional methods of recruiting that have not been utilized in the past.
We recruit Representatives for our subsidiaries HDVIS and HDVAS and other affiliated entities. Since our inception, we have developed a recruiting process which we believe results in a larger network for distribution of financial products and services. Based on our experience in this area, we typically use methods that have proven to be the most effective in the past. These methods include direct mail, recruiting seminars, telemarketing, trade shows, referral incentive programs, trade publication advertising and various education events. We may employ additional methods of recruiting in order to develop and determine the effectiveness of such alternatives.
At September 30, 1999, we have approximately 8,550 affiliates, of which 6,750 are fully licensed Representatives and approximately 1,800 Representatives are in various stages of licensing. Our recruiting efforts for the years ended September 30, 1999, 1998, and 1997 resulted in increases in new affiliates of 2,861, 2,227 and 1,815, respectively.
Our Representatives include Certified Public Accountants (CPA). Currently, 41 jurisdictions allow CPAs to receive commission-based compensation for the sale of products and services. The remaining 10 jurisdictions have regulations or laws which have been interpreted to preclude CPAs from receiving such compensation. CPA Representatives have been challenged by administrative actions of accountancy boards in Louisiana and California, where the receipt of commissions by CPAs was formerly prohibited. The State of California enacted legislation to allow CPAs to receive commissions effective January 1, 1999. The State of Louisiana enacted legislation to allow CPAs to receive commissions effective June 18, 1999. Litigation in Louisiana was settled following enactment of the new law, but continues in California as a result of actions initiated under the previously effective law. We have chosen to vigorously support these Representatives. We have incurred legal costs of approximately $297,275, $286,000 and $351,000 for the years ended September 30, 1999, 1998 and 1997, respectively, in support of these Representatives.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation expense was $2,449,179, $1,431,617 and $933,015 for the years ended September 30, 1999, 1998 and 1997, respectively. This represents a 71%, 53% and 4% increase in 1999, 1998 and 1997, respectively. The increase is primarily driven by an increase in amortization and depreciation expense caused by an increase in capitalizable software development and the related computer hardware.
NET INCOME
Net income for the year ended September 30, 1999 was $1,187,011 compared to net income of $1,427,312 and $2,142,063 for the years ended September 30, 1998 and 1997, respectively. This represents a 20% and 33% decrease in 1999 and 1998, respectively, and a 80% increase in 1997. As noted above the decrease for fiscal year 1999 is primarily due to an increase in commission expense, an increase in costs to improve our technology and an increase in Representative Recruiting expenses. The decrease in net income for fiscal 1998 was due to increased legal and technology expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital at September 30, 1999 was $6,579,642 compared to net working capital of $4,112,684 at September 30, 1998. The $2,466,958 or 60% increase, for the year ended September 30, 1999, is primarily a result of (i) strong cash flows provided by operations, (ii) proceeds from the Deferred Compensation Plan for its Representatives and (iii) repayment of related party notes receivable. Our primary uses of cash for the year were 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 us more capacity to manage our current growth and support future growth. Approximately $1.3 million of our fiscal 1999 funding for information systems and property and equipment came from operating and capital leases.
Historically, our growth has been financed through loans, private placements of preferred and common stock, public offerings of common stock and cash flows from operations. For the period from
inception through September 30, 1999, amounts from these sources have been approximately $2.5 million, $2.6 million, $5.1 million and $18.2 million, respectively.
We have a Deferred Compensation Plan (the Plan) for our Representatives. Pursuant to the Plan, Representatives may forego current compensation, and subsequently receive the deferred compensation plus a Company matching contribution, as defined in the Plan. In fiscal 2000, we expect to increase participation and cash flow from the Plan by offering a higher matching contribution and an extra deferral period to Representatives. The matching percentages for the Plan year 2000 are equal to 41%, 85%, 151% or 305% for periods of 36, 60, 84 or 120 months. As of September 30, 1999 and 1998, approximately $3,450,000 and $2,390,000 respectively, had been deferred under the Plan.
Matching contributions on amounts deferred under the Plan are accrued as additional commission expense on a straight-line basis from the period deferred until the Representative is paid the deferral amount and matching contribution. Accordingly, commission expense will increase in the years in which commissions are earned and deferred by participants. Such increases in commission expense will have an adverse effect on our net income. To the extent that Representatives elect to defer receipt of compensation under the Plan, such compensation will ultimately be paid to the participant in the form of cash. As of September 30, 1999 and 1998, we had accrued matching contributions of approximately $700,000 and $360,000, respectively. Accrued matching contributions will be paid out over a maximum of seven years, however with the addition of an extra deferral period this is expected to increase to ten years during fiscal 2000. During 1999, we paid $84,110 to participants representing deferred amounts and $22,324 representing matching contributions.
The implementation of a new back office system in fiscal 1999 has led to an increase in customer funds held which in turn has increased our required net capital. This system will increase both our net capital and required net capital in current and future periods. Such increases could adversely affect available cash.
Historically, we have significantly increased our recruiting and development activities upon obtaining financing through the sale of stock or cash flows. We expense all costs related to these activities. Additionally, in periods of increased recruiting and development activities, we have experienced higher general and administrative costs as overhead increased to support the recruiting and development activities. Consequently, we have
recorded substantial expenses subsequent to obtaining financing required to fund further growth. Should we obtain future financing to fund our growth plans, it is likely that we would record substantial expenses in the periods subsequent to obtaining such financing.
We believe that, in addition to external financial resources (primarily bank leases); our cash flow is sufficient to maintain our current operations as well as our continued growth plan. We continually monitor the capital markets for opportunities to obtain financing to meet our growth needs.
Year 2000 Assessment
We recognize the need to ensure that our operations will not be adversely impacted by "Year 2000" systems failures. Year 2000 issues arise because some computer software and hardware products ("computer systems") were designed to handle only a two-digit year, not a four-digit year (e.g., 1997 is seen by the computer as "97"). When the year 2000 begins, these computer systems may interpret "00" as the year 1900 and not 2000, and could either stop processing date-related computations or process them incorrectly.
In order to minimize the impact of the Year 2000 on us, a Year 2000 plan has been established for the evaluation and management of risks associated with material Year 2000 issues. The plan includes a review of material computer systems that we currently have in place, modification or replacement of such systems if required, inquiry to third-party providers with whom we have material business relationships as to their state of readiness for potential Year 2000 issues, and the development of contingency plans in the event material Year 2000 issues arise in our or third-party computer systems.
We have identified all mission-critical computer systems as of September 30, 1999 and completed our testing of those systems. During the fiscal year ended September 30, 1998, we expended approximately $150,000 to address potential Year 2000 issues, exclusive of costs associated with previously scheduled modifications or replacements unrelated to Year 2000 issues. We spent approximately $150,000 for testing, modification and replacement of our computer systems related to Year 2000 issues during the fiscal year ending September 30, 1999. We expect that future expenses incurred will continue to be financed from internally generated funds.
Based on current and anticipated operating needs, many of our mission-critical computer systems have recently been replaced with more technologically advanced versions. Each new system has been reviewed for Year 2000 compliance. The computer systems that have been or are in the process of being replaced, include, but are not limited to, our investment processing system, accounting system, human resources and payroll system, work station and network operating systems, and systems used to communicate with our Representatives. The remaining computer systems, including but not limited to phone equipment and general office equipment, have been reviewed for Year 2000 compliance as part of the overall plan for testing and modification discussed above. Telecommunication and office automation systems that facilitate operations of our locations and corporate headquarters, comprise our primary non-IT systems. We have assessed the Year 2000 readiness of 100% of our non-IT systems and have completed compliance testing to bring them into readiness.
In addition to reviewing our own computer systems, we have communicated with material third-party providers, including but not limited to suppliers, product sponsors, financial institutions, utilities, facility owners and other companies with which we have material business relationships in order to assess these companies' state of Year 2000 readiness. We have requested, among other things, disclosure of the companies' plans for minimizing the impact of the Year 2000 on their computer systems and us. As of September 30, 1999, we have not received from any third-party provider with which a material business relationship exists notice of a material Year 2000 issue or inability to address material Year 2000 issues prior to the Year 2000. We are generally not in a position to verify whether third-party service providers are or will become Year 2000 ready apart from such assurances. We have assumed non-responsive third parties will be non- compliant for the purpose of risk assessment. We do not believe there has been or will be a significant disruption of our business due to our Year 2000 remediation efforts.
We do not anticipate a material effect on business operations as a result of Year 2000 computer system issues. As a precaution, however, we have developed a contingency plan for business operations in the event material Year 2000 issues arise in our or third-party computer systems. In the event material issues arise, we are prepared to conduct business, particularly the
processing of investment transactions, utilizing manual processes and third- party, off-site, computer systems and back-up data routinely archived by us. We anticipate that the cost of conducting business utilizing our contingency plans would be higher than conducting business utilizing current and anticipated operational plans, although we are unable to estimate potential cost increases in this regard. We believe our worst case scenario related to Year 2000 issues is scattered interruptions of power and other services which would not interfere with our business as a whole. However, network-wide power outages at our locations for extended periods of time could significantly interrupt the provision of service to our customers and have a material adverse effect on our business operations.
In the event we receive notice from a material third-party provider as to a potential Year 2000 issue affecting us, or a material Year 2000 issue arises as to a third party, we anticipate minimizing potential business interruptions by shifting mission-critical functions, including but not limited to products sold or recommended by our subsidiaries, to third-party providers demonstrating Year 2000 compliance.
To the extent that we or third-party providers cannot correct material Year 2000 issues, and we are unable to efficiently conduct business in accordance with its anticipated contingency plans, our operations could be negatively impacted.
The foregoing information is a Year 2000 readiness disclosure.
Forward-Looking Statements
The statements contained herein which are not historical fact are forward- looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Words such as "believe," "expect," "anticipate," "intend," "aim," "will," and similar language, identify forward looking statements. The following factors, among others, could affect our actual results and cause such results to differ materially from those expressed in forward-looking statements: the ability to access capital and financing on acceptable terms; heightened competition; adverse publicity and news coverage regarding our
company, products or services; adverse results in litigation; changes in social and economic conditions; changes in generally accepted accounting policies and practices, and the application of such policies and practices to us; loss or retirement of key executives, employees or technical personnel; our inability to attract and retain experienced executives, employees or technical personnel; natural events and acts of God such as earthquakes, fires and floods; changes in domestic or foreign laws and regulations affecting our ability to conduct business in the manner in which we currently conduct such business; and our ability and the ability of third parties with whom we have material relationships to become year 2000 compliant.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
Index Page(s) -------
Report of Independent Public Accountants
Consolidated Statements of Financial Position - September 30, 1999 and 1998 &
Consolidated Statements of Operations - Three years ended September 30, 1999
Consolidated Statements of Shareholders' Investment - Three years ended September 30, 1999
Consolidated Statements of Cash Flows - Three years ended September 30, 1999
Notes to Consolidated Financial Statements -
Report of Independent Public Accountants
To the Shareholders and Directors of H.D. Vest, Inc.:
We have audited the accompanying consolidated statements of financial position of H.D. Vest, Inc. (a Texas Corporation) as of September 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of H.D. Vest, Inc. as of September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas, November 9, 1999
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
The accompanying notes are an integral part of these consolidated financial statements
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
September 30, ---------------------------- 1999 1998 ------------- ------------ Current liabilities: Accounts payable and accrued expenses $ 5,406,058 $ 8,679,663 Amounts due on clearing transactions 2,952,533 469,462 Unearned revenue 2,063,112 1,279,410 Commissions payable 7,075,254 4,839,345 ------------- ------------
Total current liabilities 17,496,957 15,267,880 ------------- ------------
Obligations under capital leases, excluding current installments 1,940,638 2,506,506
Other noncurrent liabilities 5,551,758 2,946,702
Shareholders' investment: Preferred stock, $6 par value; 10,000,000 shares authorized, 250,067 shares issued and outstanding in both 1999 and 1998 1,500,402 1,500,402 Common stock, $.05 par value; 100,000,000 shares authorized, 5,423,341 outstanding at September 30, 1999 and 1998 271,167 271,167 Additional paid-in capital 5,154,934 5,154,934 Retained earnings 2,554,793 1,463,435 ------------- ------------
Total shareholders' investment 9,481,296 8,389,938 ------------- ------------
Total liabilities and shareholders' investment $ 34,470,649 $ 29,111,026 ============= ============
The accompanying notes are an integral part of these consolidated financial statements
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues: Commissions $115,396,557 $ 95,370,504 $ 68,736,399 Portfolio management fees 21,900,550 17,049,614 11,070,632 Marketing and education fees 10,923,662 7,964,579 7,041,025 Facility and service fee from affiliate 404,315 493,604 538,700 Other 1,597,687 1,035,374 1,082,540 ------------ ------------ ------------
Total revenues 150,222,771 121,913,675 88,469,296 ------------ ------------ ------------
Expenses: Commissions 84,822,640 68,152,972 48,384,293 Portfolio management fees 15,364,107 11,263,669 7,375,367 General and administrative 22,183,630 21,182,001 14,784,092 Operations 10,719,749 7,179,790 5,340,317 Representative development 8,736,114 7,521,719 6,466,956 Representative recruiting 3,083,830 2,231,364 1,677,594 Amortization and depreciation 2,449,179 1,431,617 933,015 Interest 359,899 294,981 222,271 ------------ ------------ ------------
Total expenses 147,719,148 119,258,113 85,183,905 ------------ ------------ ------------
Net income before state and federal income tax 2,503,623 2,655,562 3,285,391
Provision for state and federal income tax 1,316,612 1,228,250 1,143,328 ------------ ------------ ------------
Net income $ 1,187,011 $ 1,427,312 $ 2,142,063 ============ ============ ============
Net income per common share-basic $ 0.20 $ 0.24 $ 0.37 ============ ============ ============
Net income per common share-dilutive $ 0.20 $ 0.24 $ 0.37 ============ ============ ============
Weighted average number of common shares outstanding 5,423,341 5,423,341 5,423,341 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998, AND 1997
The accompanying notes are an integral part of these consolidated financial statements
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Organization and Summary of Significant Accounting Policies
(a) Organization - H.D. Vest, Inc. (the Company) is a Texas corporation formed in December 1986, to manage the various financial services divisions of the H.D. Vest Financial Services group. Through its wholly-owned subsidiaries, the Company provides financial services through tax and accounting professionals. The Company's services are designed to assist in making individual tax and accounting professionals financial service centers for their clients.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated.
(b) Cash and Cash Equivalents - Included in cash and cash equivalents are cash balances and highly liquid investments with an original maturity of three months or less.
(c) Commissions and Accounts Receivable - Commissions and accounts receivable is stated net of certain allowances for doubtful accounts. The allowances at September 30, 1999 and 1998 were approximately $1,200,000 and $810,000, respectively.
(d) Property and Equipment - Property and equipment is stated at cost and is depreciated by the straight-line method using estimated useful lives ranging from five to six years. At September 30, 1999 and 1998, property and equipment consisted of:
September 30, --------------------------- 1999 1998 ------------ ----------- Leasehold improvements $ 917,340 $ 908,448 Computer equipment 4,887,903 3,089,547 Furniture and fixtures 3,835,498 3,697,377 Telephone equipment 1,070,216 812,366 Less accumulated depreciation (3,997,687) (2,194,457) ------------ ----------- Total property and equipment, net $ 6,713,270 $ 6,313,281 ============ ===========
(e) Intangible and Other Assets - Costs incurred to develop/acquire these assets are stated at cost and where applicable are amortized by the straight- line method using an estimated useful life of five years. At September 30, 1999 and 1998, intangible and other assets and accumulated amortization are as follows:
September 30, ----------------------------- 1999 1998 ----------- ---------- Software Development $ 4,535,355 $3,575,554 Other assets 687,080 398,764 Accumulated amortization (1,541,655) (906,546) ----------- ---------- Total other assets, net $ 3,680,780 $3,067,772 =========== ==========
(f) Long-lived Assets - The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of its long-lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying amount of the asset from expected future cash flows on an undiscounted basis. If the assessment indicates that the carrying amount of the asset exceeds the undiscounted cash flows an impairment has occurred. The impairment is calculated as the total by which the carrying amount of the asset exceeds its fair value. The fair value of long-lived assets is estimated based on quoted market prices, if available, or the expected total value of cash flows, on a discounted basis. No adjustments have been made to the carrying amounts of the Company's assets due to impairment.
(g) Amounts Due on Clearing Transactions - The Company remits customer investment funds on certain clearing transactions on a settlement date basis rather than on a trade date basis. Under the settlement date basis of remittance, the Company holds customer funds from the trade date until the time at which the trades are cleared by the product sponsor (not to exceed three business days). See Note 7 for additional discussion.
(h) Revenue Recognition - Commission revenue and related commission expense are recognized on a trade date basis. The Company charges its Representatives licensing renewal processing fees, which are unearned until the first quarter of each fiscal year. Marketing and education fees are charged to various product wholesalers, the Company's Registered Representatives, and new licensees for Company-sponsored educational seminars and materials. Portfolio management fees represent fee-based revenues and are recognized based on the value of client investment balances during the period.
(i) Representative Development - Representative development expenses consist of incremental salaries, office expenses, telephone expenses, educational events and promotional expenses directly related to training Registered Representatives.
(j) Representative Recruiting - Representative recruiting expenses represent the incremental costs incurred by the Company to recruit potential Registered Representatives. Recruiting expenses include certain salaries, office expenses, referral incentive programs, advertising, direct mail and telemarketing costs.
(k) Income Taxes - Deferred income taxes are provided for temporary differences between the tax basis of assets and liabilities and their financial reporting amounts. Deferred taxes are recorded based upon enacted tax rates anticipated to be in effect when the temporary differences are expected to reverse.
(l) Supplemental Cash Flow Information - Cash interest payments for the years ended September 30, 1999, 1998 and 1997 were $293,425, $294,016 and $222,271 respectively. Cash payments for federal income taxes for the years ended September 30, 1999 and 1998 were $282,000 and $1,187,265 respectively. During the fiscal years ended September 30, 1999, 1998 and 1997 the Company acquired assets through capital leases amounting to $788,053, $3,219,053 and $828,949 respectively.
(m) Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
(n) Prior Years' Statements - Certain reclassifications have been made to prior years' statements in order for the amounts to be comparable with the current year presentation.
(o) Segment Reporting - In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), was issued. The statement changes standards for the way public companies identify and report operating segments in interim and annual financial statements. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. The Company has determined that it operates one line of business (Securities
Brokerage and related Financial Services) located in a single geographic area (Texas). Therefore, SFAS 131 has no effect on the Company's financial statements.
(2) 401(k) Retirement Plan
In March 1993, the Company formed a Salary Savings Plan 401(k) retirement plan for eligible employees. Employees are eligible for participation on the enrollment date following completion of six months of service with the Company or, if later, the enrollment date after attaining age 21. Employees may contribute up to 15 percent of their income, up to the annual maximum allowed by law. On January 1, 1999 the Company began to match contributions made by employees based upon full years service; 20 percent match for less than 3 years of service, 40 percent match for 3 to 4 years service, and 60 percent for 5 or more years of service. Previously, the Company matched all employees at a 20 percent rate. The Company modified the plan to reward tenure among employees. Company contributions to the 401(k) retirement plan for the fiscal years ended September 30, 1999, 1998 and 1997 were $278,068, $106,042 and $87,776 respectively.
(3) Financing Arrangements
In September 1997, the Company entered into a lease line of credit with a bank under which the Company may finance leases up to an arrangement amount of $2,000,000. Each lease will have a maturity of no greater than 5 years and will require level monthly principal and interest payments set in accordance with the bank's lease matrix, as defined. The collateral for each lease will be the equipment it finances. At September 30, 1999 the Company had $346,155 unused on the lease line.
In February 1998, the Company also renewed its line of credit with a bank for $1,000,000. The line of credit bears interest, payable monthly, at prime plus 1/2% (8.75% as of September 30, 1999). Additionally, the Company's two largest shareholders have pledged a portion of their holdings as collateral for the line of credit. At September 30, 1999, no amount had been drawn against the line of credit.
4) Earnings Per Share
Basic earnings per share (basic EPS) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. The number of shares used to compute basic EPS for the years ended September 30, 1999 and 1998 was 5,423,341.
Diluted earnings per share (diluted EPS) is computed similarly to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential dilutive common shares had been issued. The number of shares used to compute diluted EPS for the years ended September 30, 1999 and 1998 were 5,488,398 and 5,537,762, respectively.
Options to purchase 53,948 shares of common stock at prices ranging from $7.63 to $8.50 per share were outstanding during the fiscal year ended September 30, 1999. Options to purchase 95,454 shares of common stock at $8.50 per share were outstanding during the year ended September 30, 1998. These options were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of outstanding common shares.
There were 250,067 shares of convertible preferred stock outstanding during the year ended September 30, 1999 and 1998 not included in the computation of diluted EPS because the conversion had an anti-dilutive effect of EPS.
5) Commitments and Contingencies
(a) Leases - The Company leases its office space and certain office equipment under lease agreements, which qualify as operating leases. The Company also leases certain office equipment under certain lease agreements, which qualify as capital leases. At September 30, 1999 and 1998 the capitalized basis of the leases included in property and equipment was approximately $5,869,047 and $5,136,889 and accumulated amortization applicable to the leased equipment was approximately $2,382,733 and $1,288,933, respectively. Future minimum lease payments under operating lease commitments with initial or noncancellable terms in excess of one year and under capital lease obligations as of September 30, 1999, are as follows:
Capital Operating Leases Leases ---------- ---------- Year ended September 30: 2000 $1,638,606 $ 2,312,116 2001 1,021,440 2,109,728 2002 738,359 1,991,444 2003 169,563 1,857,361 2004 - 1,795,608 thereafter - 5,835,725 ---------- ----------
Total minimum lease payments 3,567,968 $15,901,982 =========== Less amount representing interest 326,108 ---------- Present value of net minimum capital lease payments 3,241,860 Less current installments included in accounts payable 1,301,222 ---------- Obligations under capital leases, excluding current installments $1,940,638 ==========
Rent expense for the years ended September 30, 1999, 1998 and 1997 was approximately $1,930,768, $2,149,893 and $796,991, respectively.
Subsequent to September 30, 1999, the Company signed a 5 year agreement to lease additional space.
(b) Litigation and Contingencies - Beginning in September 1997, claims were made and litigation was initiated against the Company, in regard to the activities of a former Registered Representative. As of September 30, 1998, claims of approximately $990,000 were alleged against the Company or its subsidiaries in regard to this matter. During fiscal year 1998, the Company paid approximately $260,000 in settlement of a portion of these claims, and paid an additional $45,000 in settlement of several unasserted claims related to the same matter. During the fiscal year ended September 30, 1999, the Company paid approximately $637,000 to settle pending claims and paid approximately $52,000 to settle unasserted claims arising from this matter.
The Company is subject to other legal proceedings and claims that have arisen in the ordinary course of business and have not been finally adjudicated. The Company believes, based on the advise of legal counsel responsible for such matters, that these actions, when finally concluded and determined, will not have a material adverse effect upon the financial position of the Company.
6) Shareholders' Investment
In September 1991, the Company issued 166,667 shares of non-voting Series A Convertible Preferred Stock at a price of $6.00 in exchange for $1,000,002 in principal amount on a note payable to a financial services company. The Company issued an additional 83,400 shares on non-voting Series A Preferred Stock at a price of $6.00 in exchange for $500,400 in cash to a second financial services company. The Company's preferred stock pays a dividend at an annual rate of 8.5% and is payable quarterly. The preferred stock is callable by the Company and convertible by the preferred stockholder based on terms detailed in the offering agreement. In fiscal 1999 dividends of $95,653 ($0.38 per share) were declared and paid. During each of fiscal 1998 and 1997 dividends of $127,535 ($0.51 per share) were declared and paid.
In August 1997, Herb D. Vest, principal common shareholder, purchased 166,667 shares of the Company's outstanding non-voting Series A Convertible Preferred Stock in a private transaction. On December 31, 1998, Herb D. Vest, principle common shareholder, entered into an agreement to purchase 83,400 shares of the Company's outstanding Non-voting Series A Convertible Preferred Stock in a private transaction. This transaction was completed on January 7, 1999. As a result of this transaction, Herb D. Vest now owns 250,067 shares of the Company's Non-voting Series A Convertible Preferred Stock.
7) Net Capital Requirements
The Company's main operating subsidiary, H.D. Vest Investment Securities, Inc., is subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. Minimum net capital can never be lower than $250,000 or 6 2/3% of aggregate indebtedness, whichever is greater. HDVIS had net capital, required net capital, and excess net capital for the years ended September 30, 1999, 1998 and 1997 as follows:
1999 1998 1997 ---------- ---------- ---------- Net capital $3,229,712 $2,134,772 $1,992,987 Required net capital 747,403 407,842 381,470 ---------- ---------- ----------
Excess net capital $2,482,309 $1,726,930 $1,611,517 ========== ========== ==========
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, Ms. Hancock was employed by the Company as its Representative Relations Director, thereby
terminating her consulting contract. Amounts paid to Mrs. Hancock during the years ended September 30, 1999, 1998, and 1997, under these arrangements were approximately $325,000, $325,000, and $300,000, respectively.
The Company has an agreement to provide Barbara Hancock a revolving line of credit in an amount not to exceed $700,000, collateralized by Mrs. Hancock's unrestricted Company common stock in an amount equal to the unadjusted current balance of the line of credit based on the stock's current ask price. The terms of the agreement require an annual payment to be made on November 30 of each year equal to one-seventh of the then outstanding principal plus accrued interest. The final payment of all outstanding principal and accrued interest shall be due and payable on or before November 30, 2001. Under the agreement, interest accrues on unpaid principal balances at a rate of 11%. In December 1998, Barbara Hancock, reduced to zero the outstanding principal balance, together with the accrued interest, of her revolving line of credit from the Company. At September 30, 1999, Mrs. Hancock had no outstanding principal or accrued interest due on this line.
H.D. Vest Insurance Services (HDVIns) is a sole proprietorship owned by Herb D. Vest. HDVIns appoints Representatives with various insurance companies to enable them to sell insurance products to their clients. The Company, in accordance with the terms of a facilities and services agreement, provides certain management and other services to HDVIns and is paid a fee for these services. The value of these services for fiscal year ended 1999 has been determined based on the prorata portion of certain relevant expenses as a percentage of HDVIns revenues to total consolidated revenues. To the extent the Company renders services to HDVIns for which it is not compensated at fair market value, such action could constitute a conflict of interest since Mr. Vest is both the principal common shareholder and Chairman of the Board of Directors of the Company. The services provided to HDVIns by the Company are summarized as follows: management, accounting, referral data base, client tracking services, solicitation, tracking of renewal policies of insurance, collection of premiums and commissions, processing of insurance transactions, payment of salaries and other expenses, cost of recruiting, training and reporting to agents and other services as deemed appropriate by the Company. The Company receives all variable commissions through HDVIS. Variable commission revenue was $17,850,301, $13,785,487, and $10,098,858 for the years ended September 30, 1999, 1998 and 1997, respectively. In accordance with this agreement the Company has charged HDVIns $404,315, $493,604 and $538,700 for the years ended September 30, 1999, 1998, and 1997 respectively, for management services rendered. As of September 30,
1999, the Company had a receivable of approximately $275,390 from HDVIns.
In March 1997, Herb D. Vest, principal common shareholder, purchased options to acquire 150,000 shares of common stock with an exercise price of $5.00 from two former executive officers in a private transaction. In June 1998, Herb D. Vest, principal common shareholder, purchased options to acquire 64,000 shares of the Company's restricted common stock with exercise prices between $2.38 and $7.63 from two directors of the Company's Board of Directors. Generally accepted accounting principles required that equity transactions of this type involving an entity's principal shareholder be recorded on the entity's financial statements. Accordingly, the Company has recorded a capital contribution, net of tax effect, and expense of a like amount to reflect this transaction.
9) Income Taxes
Income tax expense consisted of the following components:
September 30, ----------------------------------------------------- 1999 1998 1997 ------------ ------------- ------------- Current: Federal $ 718,035 $ 419,389 $ 407,628 State 89,471 129,275 255,330
Deferred: Federal 277,008 643,619 411,458 State 232,098 35,967 68,912 ------------ ------------- ------------- $ 1,316,612 $ 1,228,250 $ 1,143,328 ============ ============= =============
The effective income tax rate differs from the statutory federal income tax rate for the following reasons:
September 30, ----------------------------------------------------- 1999 1998 1997 -------- -------- -------- Statutory rate 34.0% 34.0% 34.0% State taxes, net of Federal 8.4 7.5 9.9 Other 10.2 5.1 (9.1) -----------------------------------------------------
Effective rate 52.6% 46.6% 34.8% =====================================================
The following table presents the components of the net deferred tax liability:
Deferred October 1, Expense September 30, 1998 (Benefit) 1999 ------------ ------------- -------------
Research and development (779,070) 484,304 (1,263,374) Depreciation (215,485) (62,152) (153,333) Unearned revenue 82,557 82,557 - Other 232,412 4,397 228,015 ------------ ------------- ------------- Net deferred tax liability $ (679,586) $ 509,106 $ (1,188,692) ============ ============= =============
The deferred tax liability is included in other noncurrent liabilities in the financial statements.
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:
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
years. 326,000 of these options are exercisable with a weighted average exercise price of $4.76. The remaining 49,948 unexercisable options have an exercise price of $8.50.
On October 13, 1999, The Board of Directors resolved to issue to Herb D. Vest from the Nonqualified Stock Option Plan options for the purchase of 220,000 shares of the Company's common stock exercisable at a strike price of $20 per share for a period of three years from the date of issuance.
On November 8, 1999, the Board of Directors approved the issue of stock options to certain employees and officers. The options granted to these employees and officers allow for the purchase, collectively, of up to 348,000 total shares of the Company's common stock at an exercise price of $6.00 per share.
Had compensation costs been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been recorded in the following pro forma amounts:
1999 1998 1997 ---- ---- ---- Net income - as reported $1,187,011 $1,427,312 $2,142,063 Net income - pro forma 1,187,011 1,387,872 2,127,088 Earnings per share - as reported .20 .24 .37 Earnings per share - pro forma .20 .23 .37
Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999 and 1998 for both the Nonqualified Plan and Directors Plan.
1999 1998 1997 ---- ---- ---- Risk free interest rate 5.86% 5.86% 6.50% Expected dividend yields - - - Expected lives in years 10 10 10 Expected volatility 66.77% 66.77% 70.17%
11) Deferred Compensation Plan
In July 1995 the Company began accepting contributions to the Deferred Compensation Plan (the Plan) for its Representatives. Pursuant to the Plan, Representatives may forego current compensation, thus postponing recognition of income otherwise currently taxable, and subsequently receive the deferred compensation plus a Company matching contribution as defined in the Plan.
Amounts deferred as of September 30, 1999 and 1998 were approximately $3,450,000 and $2,390,000, respectively, and are included in other noncurrent liabilities and accrued expenses. As of September 30, 1999 the Company had paid $84,110 to participants representing deferred amounts and $22,324 representing matching contributions.
Matching contributions of amounts deferred under the Plan must be accrued as additional commission expense on a straight-line basis
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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosures - ---------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The following table provides certain information about each of the Company's and its subsidiaries' current members of the Board of Directors, officers and directors of certain divisions of the Company as of September 30, 1999.
Name Age Position with the Company ---- --- -------------------------
Herb D. Vest 55 Chairman of the Board of Directors and Chief Executive Officer
Barbara Hancock 53 Board of Directors and Representative Relations Director
Kenneth E. Reynolds 70 Board of Directors
Jack B. Strong 69 Board of Directors
Jerry M. Prater 57 Board of Directors
Phillip W. Mayer 57 Board of Directors
Kenneth R. Petree 56 Board of Directors
Roger Ochs 38 President
Shannon A. Soefje 40 Senior Vice President and Corporate Secretary
Ted Sinclair 35 Vice President and Chief Financial Officer
KEY EMPLOYEES
Herb D. Vest, Chairman of the Board of Directors 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, Master, Fellow Life Management Institute, Chartered Life Underwriter, Registered Health Underwriter, Chartered Financial Consultant, Accredited Personal Financial Specialist and Certified Employee Benefit Specialist. He holds certificates in Pension and Executive Compensation and Estate Planning & Taxation from The American College. Mr. Vest holds a Bachelor of Science Degree in Political Science and three Masters of Science Degrees, in Taxation, Financial Services and Management. He holds a Juris Doctorate from an unaccredited law school and is licensed to practice law in California. He holds an LLM from an accredited law school. Mr. Vest holds a Doctorate in International Business Administration. He is a National Association of Securities Dealers General Securities Principal, Registered Options Principal, Municipal Securities Principal, and Financial and Operations Principal. He is a licensed real estate broker in three states and licensed life, health and accident insurance agent in forty nine states. Mr. Vest is also a licensed Property and Casualty Insurance Agent. Following graduation from college in 1966, Mr. Vest served as an infantry officer in the U.S. Army, including two tours of duty in Vietnam. He has served as a lecturer at local colleges and universities including the University of Texas at Arlington and the Seminar for Financial Analysts held at the University of Windsor, Ontario. He is also a member of the American Institute of Certified Public Accountants, the Texas Society of CPAs, American Bar Association, Association for Investment Management and Research, Dallas Association of Investment Analysts, National Association of Business Economists, World Future Society, Association of International Accountants, the State Bar of California and Mensa. Additionally, Mr. Vest has written on international trade, taxation, portfolio management and the financial services profession for such publications as Global Custodian, Business Mexico, Personal Financial Planning, Accounting Today, CFP Today, Real Estate Securities & Capital Markets, and The Dallas Business Journal. Mr. Vest has been voted among the 100 Most Influential People in Accounting by Accounting Today magazine since 1994 and is the winner of an Ernst and Young Entrepreneur of the Year Award in 1999. Mr. Vest has co-authored two books, "Wealth Workout" and "Wealth - How to get it. How to keep it".
Barbara Hancock, Board of Directors, Representative Relations Director. She has been involved in every phase of developing the Company. Her responsibilities include expanding the Company's Representative force and developing Representative services. Mrs. Hancock was integrally involved in Herb Vest's private CPA practice for ten years in Irving, Texas and was an independent consultant to the Company until October 1996 when she was employed by the Company 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 Mrs. Hancock's speaking repertoire. Mrs. Hancock is active in many national and local professional organizations and is a dedicated Company Representative for the community and political affairs. She holds a master's degree from Texas Tech University and is a member of Mensa. She holds a real estate license, a Group I Life Insurance license, and is a NASD General Securities Principal. Mrs. Hancock is also a member of the Texas Woman's Alliance and Sales and Marketing Executives associations.
Kenneth E. Reynolds, Board of Directors. He started his Norman, Oklahoma-based Certified Public Accounting practice in 1965. He is past Chairman of the Personal Financial Planning Committee of the Oklahoma Society of CPAs and past President of the Norman Chapter of the Oklahoma Society of CPAs. Also, Mr. Reynolds serves on the Arthur Andersen LLP A-plus Tax User Advisory Committee. He became a registered Representative of the Company in 1987 and became a Director of the Company in fiscal year 1993.
Jack B. Strong, Board of Directors. Mr. Strong has been a practicing attorney since 1952. He was elected to the Texas State Senate in 1962, where he served until his retirement in 1971. Since leaving the Senate, he has served on various state committees, boards and commissions, including chairing Lt. Governor Hobby's Blue Ribbon Committee on Ethics Reform, the Regional Medical Program of Texas, and the Texas State Board of Education, and currently serves on the Interstate Oil Compact Commission. Mr. Strong serves as President of Texas-based General Equities, Inc. and Strongworth, Inc. From January 1992 to January 1993, Mr. Strong served as an advisor to the Company's Board. He has been a Director of the Company since fiscal year 1993.
Jerry M. Prater, Board of Directors. He has been a practicing Certified Public Accountant since 1983. He has held positions with agencies of the U.S. Department of Defense, Continental Electronics Mfg. Co., Hill & Wilkinson and Quazon Corporation,
prior to founding his own Dallas, Texas-based public accounting practice in 1983. Mr. Prater was elected to the Board of Directors of the Company in 1994.
Phillip W. Mayer, Board of Directors. He has held a variety of command and staff positions as an Infantry Officer in the United States Army prior to his retirement in 1982. Mr. Mayer holds two master's degrees and was designated a Certified Public Manager by the Arizona State University Advanced Public Executive Program in 1990. Since 1985, he has worked in the corrections profession as a Program Manager and Director of Staff Training. He currently serves as a Staff Training Manager for the Santa Clara County Department of Correction, San Jose, California. Mr. Mayer was elected to the Board of Directors of the Company in 1994.
Kenneth R. Petree, Board of Directors. Mr. Petree is a Development Officer for the Central, North, West and East Texas Regions for Bank United, Texas. He currently serves on the Board of Directors and chairs the Loan and Discount Committee for the Fort Worth Economic Development Corporation, a non-profit entity. Mr. Petree has extensive experience in the banking industry and has held executive positions with Overton Bank and Trust, N.A., and Irving National Bank.
Roger Ochs, President. Mr. Ochs was employed by the Company in 1987 and was promoted to President in July of 1999. He had served as Marketing Director since 1995. He was responsible for directing the Company's Recruiting and Development, Field Support, Educational Services, Marketing, Advisory Services and Financial Planning Support departments. Mr. Ochs previously served as Manager of the Technical Services Division, which included Advisory Services, Retirement Services, Estate Planning Services and the Banking Division. He graduated from Angelo State University with a bachelor of business administration, a master of business administration from Trinity University and a juris doctor degree from Southern Methodist University School of Law. He is licensed to practice law in the state of Texas. He is a General Securities Representative, General Securities Principal, Registered Options Principal, Municipal Securities Principal, General Life Insurance Agent, Certified Financial Planner and a Chartered Life Underwriter.
Shannon A. Soefje, Senior Vice President/Corporate Secretary. Ms. Soefje was employed by the Company in 1990. In fiscal 1995, she was promoted to Senior Vice President and is responsible for the
management of corporate resources which includes the strategic design and implementation of promotional campaigns and the development of corporate and Representative marketing materials. She has held other management positions in the Company including the following departments: Operations, Compliance, Licensing, Recruiting and Research departments. She graduated from Oklahoma City University with a Bachelor of Science degree in business administration. Since 1977, Ms. Soefje has worked for various investment firms. She is a Certified Funds Specialist, General Securities Principal, Registered Options Principal, Municipal Securities Principal and Financial and Operations Principal.
W. Ted Sinclair, Vice President/Chief Financial Officer. Mr. Sinclair was employed by the Company in fiscal 1987 and was promoted to Vice President in fiscal 1993. He is responsible for the financial management of the Company and financial, tax and management reporting and budgeting. Mr. Sinclair previously served as Controller and was responsible for coordinating and controlling all financial reporting and tax activities. He graduated from the University of North Texas with a Bachelor of Science degree in Accounting. He is a Certified Public Accountant, Certified 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.
11. Executive Compensation - ---------------------------
The following table sets forth all remuneration earned in salary and bonus in the current year to the Chief Executive Officer, the highest paid members of the Board of Directors, Officers and key Senior Managers each receiving in excess of $100,000.
Summary Compensation Table
1) All officers are covered under a bonus stock 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.
Executive Officer Compensation Plan
During April 1994, the Board of Directors of the Company adopted an Executive Officer's Compensation Plan. The purpose of the Executive Officers Compensation Plan is to provide additional compensation to a select group of management employees of the Company in order to motivate and retain them, as well as to provide them an incentive to guide the Company in attaining higher revenue goals. The Company will provide this additional compensation under the Executive Officer's Compensation Plan in the form of salary, restricted stock, incentive cash and restricted stock bonuses, as well as severance and change-in-control benefits.
As an unfunded plan of deferred compensation, it is administered by the Chief Executive Officer of the Company, who is presently Herb D. Vest. Eligibility to participate in the Executive Officers Compensation Plan is determined in the sole and absolute discretion of the Company, which establishes eligibility provisions of the executive officer compensation plan that it may change at any time in its sole and absolute discretion.
Currently, to be eligible to participate in the Executive Officer's Compensation Plan, an individual must be an executive employee of the Company, have completed at least two full years of Company service, and be part of a select group of management employees designated by the Company's Board of Directors. The individual employee must also sign an Officer's Deferred Compensation Agreement and an Officer Agreement as a condition precedent to becoming a participant in the Executive Officer's Compensation Plan.
Under the Restricted Stock portion of the Executive Officer's Compensation Plan, a number of shares of restricted stock are determined by the Chief Executive Officer of the Company as allocable to a particular participant. This restricted stock is credited to the participant's account and will be vested and distributable upon the first to occur of the following events: (1) Long term disability, death of the participant or attaining the preselected Deferral Date; or (2) The date of a "change-in-control" of the Company (as that term is defined in the executive officer's deferred compensation plan). No stock was earned under the Executive Officer's Compensation Plan for the
fiscal year ended September 30, 1999.
The Board of Directors annually sets goals, which, if attained, will generate a cash bonus for the participant payable unless certain losses are also incurred.
In addition, bonus stock will be credited to participants' accounts in the form of restricted stock on the basis of the Company's attaining three-year cumulative revenue goals. Each year these goals are set by the Board of Directors for the upcoming three years and are based in part on the previous year's goals that consist of a threshold, a target and a maximum cumulative revenue goal. Upon attaining one of these goals, bonus stock credited in the form of restricted stock to the participant's plan vests and will become distributable only upon retirement, long term disability or death of the participant, or the date of a "change-in-control" of the Company (as that term is defined in the Executive Officer's Compensation Plan). No goals have been set to issue common stock options for fiscal years ending September 30, 1999, 1998 or 1997. No awards were earned in 1999, 1998 or 1997.
STOCK OPTIONS
The Board of Directors of the Company adopted a Stock Option Plan as of October 1, 1987, in order to attract, retain, motivate and encourage stock ownership by employees, officers and directors of the Company and its subsidiaries. The Stock Option Plan is administered by a stock option committee (Committee), appointed by the Chief Executive Officer, consisting of one to three members. The members of the Committee shall be eligible to receive options under the Stock Option Plan.
The Committee currently consists of one member, Herb D. Vest. Options granted under the Stock Option Plan are not intended to qualify as Incentive Stock Options under Section 422(a) of the Internal Revenue Code of 1986, as amended from time to time. The Company has reserved up to 800,000 shares of its common stock for options under the Stock Option Plan. The options must be paid in cash, unless otherwise permitted by the Committee. The exercise price of any options granted in the future will not be less than 100% of the fair market value of the common stock on the date of grant.
The Committee, at the direction of the Chief Executive Officer, may amend, modify or terminate the Stock Option Plan, provided however, no action of the Committee, without approval of the Chief Executive Officer and the shareholders of the Company may:
(a) Increase the total number of shares of Common Stock subject to the Plan.
(b) Withdraw the administration of the Plan from the Committee; and provided further, that no termination, amendment or modification of the Plan shall in any manner affect and 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.
Options covering 191,497 shares were granted at an option price of $8.50 per share as of October 1, 1987 to employees; 49,948 of these options remain outstanding as of September 30, 1999.
As of September 30, 1999, options covering 299,948 shares issued from the Stock Option Plan are outstanding. In March 1997, Herb D. Vest, principal common shareholder, purchased 150,000 of such options from two former employees of the company in a private transaction.
In addition to the Stock Option Plan, the Board of Directors has from time to time approved the issuance of options to employees, independent directors, and advisors to the company. In November 1992, the Board of Directors resolved that independent directors elected to the Board be granted options for the purchase of 2,000 shares of the company's common stock each quarter (a total of 8,000 shares for the year elected). The Board resolved to discontinue issuing such options in June 1998. Options covering 64,000 shares of stock were issued to independent directors. During fiscal year 1998, Herb D. Vest purchased these options from the independent directors in private transactions. These 64,000 options remain outstanding as of September 30, 1999.
As a result of the foregoing, options covering 363,948 shares of common stock, with exercise prices ranging from $2.38 to $8.50 per share, have been issued to officer, directors and
employees of the company, and remain outstanding at September 30, 1999. The following table provides information with respect to options issued to officers and directors that remain outstanding as of September 30, 1999:
Aggregated Option Exercises in Last Fiscal Year End and Fiscal Year End Option Values
(1) Represents the difference between the closing price of the Company's common stock on September 30, 1999 and the exercise price of the options.
(2) The current fair market value of the stock at September 30, 1999 was below the option exercise price.
COMPENSATION OF DIRECTORS
The Company's Board of Directors holds formal and informal meetings throughout the year with management and shareholders to discuss Company affairs.
The Company's Board of Directors has an Audit Committee. The function of the Audit Committee is (i)to oversee the Company's system of internal control and the financial reporting process; (ii)to review the internal audit function; (iii)to approve the selection of the Company's independent accountants; and (iv)to review audit reports. The members of the Audit Committee during fiscal 1999 were Jerry Prater, Jack Strong and Phillip Mayer.
The Company's Board of Directors has a Compensation Committee. The Function of the Compensation Committee is to review, discuss and advise management and officers of the Company regarding compensation and other employment benefits afforded officers and employees of the Company. As of September 30, 1999, the Compensation Committee are the members of the Board of Directors: Herb D. Vest, Barbara Hancock, Kenneth R. Petree, Jack Strong, Kenneth Reynolds, Jerry Prater and Phillip Mayer.
Directors are reimbursed for travel and other expenses related to attendance at Board and committee meetings. Total
compensation to the Directors for the year ended September 30, 1999 is as follows:
Name Title Compensation ---- ----- ------------
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
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 in fiscal 1999.
Effective November 1999, Jack Strong submitted and the Company accepted Mr. Strong's resignation as a consultant to the Company pursuant to which the Company's contract with Mr. Strong was terminated. Subsequent to November 1999, Mr. Strong will be an independent member of the Company's Board of Directors.
On November 9, 1999, the Board created a Project Oversight Committee which will be responsible for assisting the Board to oversee special projects of the Company. Jack Strong was appointed a member and chairman of the committee. The Board of Directors approved payment of $6,000 annually to the chairman of the Project Oversight Committee.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- --------------------------------------------------------------
The following information is furnished as of September 30, 1999, to indicate beneficial ownership of more than 5% of the Company's Common Stock, as well as beneficial ownership by each director and certain executives, individually and directors of the Company, as a group, of shares of the Company's Common stock.
# OF SHARES OWNER BENEFICIALLY OWNED % OF SHARES ----- ------------------ ----------- Herb D. Vest 4,693,447 (1) 78%
Roger Ochs 2,911 *
Kenneth E. Reynolds 550 *
Jack B. Strong 100 *
W. Ted Sinclair 1,481 *
Shannon A. Soefje 1,352 *
Barbara Hancock 300 *
Officers and Directors as a Group 4,700,141 78%
* Less than one percent. (1) Includes 4,064,114 of Outstanding Common Stock, 314,000 Common Stock Options with an exercise price ranging from $2.38 to $5.06, 45,148 Common Stock Options with an exercise price of $8.50, and 250,067 Exercisable Convertible Series A Preferred Stock with a conversion rate of one preferred share for one share of common stock. Ownership percentage excluding Common Stock Options and the Convertible Series A Preferred Stock is 75%.
Item 13.
Item 13. Certain Relationships and Related Transactions - ------- ----------------------------------------------
MANAGEMENT AGREEMENTS
The Company has an agreement with Herb D. Vest (principal common shareholder) for management services to the Company. The agreement with Herb D. Vest provides for a management fee per year 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 $2,315,412 bonus under the executive officer's compensation plan in fiscal 1999. The Company paid a bonus of $2,340,148 and $1,869,497 in fiscal 1998 and 1997, respectively. Management fees, including bonus, under these agreements were $3,215,412, $3,240,148 and $2,731,997 for the years ended September 30, 1999, 1998 and 1997, respectively.
H.D. VEST INSURANCE SERVICES
H.D. Vest Insurance Services is a sole proprietorship owned by Herb D. Vest. HDVIns general insurance agency appoints Representatives with various insurance companies to enable them to sell insurance products to their clients. The Company, in accordance with the terms of a facilities and services agreement, provides certain management and other services to HDVIns and is paid a fee for these services. The value of these services for fiscal year ended 1999 has been determined based on the prorata portion of certain relevant expenses as a percentage of HDVIns revenues to total consolidated revenues. To the extent the Company renders services to HDVIns for which it is not compensated at fair market value, such action could constitute a conflict of interest since Mr. Vest is both the principal common shareholder and Chairman of the Board of Directors of the Company. The services provided to HDVIns by the Company are summarized as follows: management, accounting, referral data base, client tracking services, solicitation, tracking of renewal policies of insurance, collection of premiums and commissions, processing of insurance transactions, payment of salaries and other expenses, cost of recruiting, training and reporting to agents and other services as deemed appropriate by the Company. The Company receives all variable commissions through HDVIS. Variable commission revenue was $17,850,301,
$13,785,487, and $10,098,858 for the years ended September 30, 1999, 1998 and 1997, respectively. In accordance with this agreement the Company has charged HDVIns $404,315, $493,604 and $538,700 for the years ended September 30, 1999, 1998, and 1997 respectively, for facilities and management services rendered.
LINES OF CREDIT
The Company has an agreement to provide Herb D. Vest a revolving line of credit in an amount not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted Company common stock in an amount equal to the unadjusted current balance of the line of credit based on the stock's current ask price. The terms of the agreement require an annual payment to be made on November 30 of each year equal to one-seventh of the then outstanding principal plus accrued interest. The final payment of all outstanding principal and accrued interest shall be due and payable on or before November 30, 2001. Under the agreement interest accrues on unpaid principal balances at a rate of 11%. In June 1998, Mr. Vest repaid in full the outstanding principal balance, together with the accrued interest, of his revolving line of credit from the Company. At September 30, 1999, Mr. Vest had no outstanding principal or accrued interest outstanding on this line.
The Company has an agreement to provide Barbara Hancock a revolving line of credit in an amount not to exceed $700,000, collateralized by Ms. Hancock's unrestricted Company common stock in an amount equal to the unadjusted current balance of the line of credit based on the stock's current ask price. The terms of the agreement require an annual payment to be made on November 30 of each year equal to one-seventh of the then outstanding principal plus accrued interest. The final payment of all outstanding principal and accrued interest shall be due and payable on or before November 30, 2001. Under the agreement, interest accrues on unpaid principal balances at a rate of 11%. In December 1998, Barbara Hancock repaid in full the outstanding principal balance, together with the accrued interest, of her revolving line of credit from the Company. At September 30, 1999, Ms. Hancock had no outstanding principal or accrued interest outstanding on this line.
EDUCATION COSTS
The Company maintains a formal policy for reimbursement of continuing education expenses incurred by officers and employees. Employees are generally reimbursed for expenses incurred in the
pursuit of professional designations, Microsoft designations, undergraduate degrees, graduate degrees or specialized training. The Company promotes personal and professional growth of its employees in order to provide a qualified staff to its Representatives.
401(k) RETIREMENT PLAN
In March 1993, the Company formed a Salary Savings Plan 401(k)-retirement plan for eligible employees. Employees are eligible for participation on the enrollment date following completion of six months of service with the Company or, if later, the enrollment date after attaining age 21. Employees may contribute up to 15 percent of their income, up to the annual maximum allowed by law. On January 1, 1999 the Company began to match contributions made by employees based upon full years of service; 20 percent match for less than 3 years of service, 40 percent match for 3 to 4 years service, and 60 percent for 5 or more years of service. Previously, the Company matched all employees at a 20 percent rate. The Company modified the plan to reward tenure among employees. Company contributions to the 401(k) retirement plan for the fiscal years ended September 30, 1999, 1998 and 1997 were $278,068, $106,042 and $87,776 respectively.
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------- ----------------------------------------------------------------
a) 1. Index to Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Investment
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule I - Amounts Receivable from Related Parties
3. Exhibits
Exhibit ------- Number Exhibit ------ -------
3.1 Articles of Incorporation and Bylaws *
3.2 Second Articles of Amendment to Articles of Incorporation +
10.1 Non-Qualified Stock Option Plan *
10.2 Facilities and Service Agreement with H.D. Vest Insurance Services *
10.3 Registered Representative Sales Agreement +
10.4 Management Agreement with Herb D. Vest +
10.5 Management Agreement with Barbara Hancock *
10.6 Termination Agreement with Barbara Hancock +
10.7 Line of Credit Agreement with Herb D. Vest o
10.8 Line of Credit Agreement with Barbara Hancock o
22 Subsidiaries of the Registrant
* Incorporated by reference from the annual report filed on Form 10-K for the fiscal year ended September 30, 1988.
+ Incorporated by reference from the annual report filed on Form 10-K for the fiscal year ended September 30, 1991.
O Incorporated by reference from the annual report filed on Form 10-K for the fiscal year ended September 30, 1994.
b) Reports on Form 8-K (None).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
H.D. VEST, INC. --------------- (Registrant)
Date: November 24, 1999 By: /s/ Herb D.Vest --------------------------- Herb D. Vest Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Herb D. Vest By: /s/ Barbara Hancock ---------------------------------- ------------------------------------ Herb D. Vest Barbara Hancock Chairman of the Board Director and Chief Executive Officer
By: /s/ Phillip W. Mayer By: /s/ Kenneth R. Petree ---------------------------------- ----------------------------------- Phillip W. Mayer Kenneth R. Petree Director Director
By: /s/ Wesley Ted Sinclair By: /s/ Jerry M. Prater ---------------------------------- ----------------------------------- Wesley Ted Sinclair Jerry M. Prater CFO and Vice President Director (Principal Financial and Accounting Officer)
By: /s/ Kenneth E. Reynolds By: /s/ Jack B. Strong ---------------------------------- ------------------------------------ Kenneth E. Reynolds Jack B. Strong Director