<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d)
- --- of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1995
or
Transition Report Pursuant to Section 13 or 15 (d)
- --- of the Securities Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File No. 0-19614
H.D. VEST, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2154244
- -------------------------------- -------------------
(State or other jurisdiction of (IRS Employer ID.)
incorporation or organization)
433 E. Las Colinas Blvd., Third Floor, Irving, Texas 75039
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (214) 863-6000
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such requirements for the
past 90 days.
Yes X No
----- -----
Number of shares of the registrant's Common Stock outstanding as of January 31,
1996: 5,423,341.
1
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H.D. VEST, INC.
INDEX
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial
Position--December 31, 1995 and
September 30, 1995 3-4
Consolidated Statements of Operations--
Three Months Ended December 31, 1995 and
December 31, 1994 5
Consolidated Statements of Cash Flows--
Three Months Ended December 31, 1995 and
December 31, 1994 6
Notes to Consolidated Financial
Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-13
PART II. Other Information
-----------------
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
(Unaudited)
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,510,850 $ 3,383,060
Commissions and accounts
receivable 3,218,681 3,329,869
Receivable from affiliate 202,407 98,929
Notes receivable - related parties 352,773 522,178
Prepaid expenses 70,466 56,773
----------- -----------
Total current assets 7,355,177 7,390,809
----------- -----------
Property and equipment, net
of accumulated depreciation
of $2,050,023 at December 31,
1995, and $1,924,547 at September
30, 1995 1,182,843 1,289,111
Notes receivable - related parties 1,987,268 1,978,099
Other assets 935,990 1,008,352
----------- -----------
$11,461,278 $11,666,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
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H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
(Unaudited)
------------ -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $ 2,302,300 $ 3,005,316
Amounts due on clearing
transactions 638,808 669,187
Commissions payable 2,508,073 2,222,435
Payable to officers and directors 200,000 200,000
----------- -----------
Total current liabilities 5,649,181 6,096,938
----------- -----------
Obligations under capital leases,
excluding current installments 377,895 430,739
Other noncurrent liabilities 237,779 157,331
Unearned revenues 281,416 1,041,002
Shareholders' investment:
Preferred stock, $6 par value;
250,067 shares outstanding 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
and 5,423,341 outstanding 271,167 271,167
Additional paid-in capital 5,080,834 5,080,834
Deficit (1,937,396) (2,912,042)
----------- -----------
Total shareholders' investment 4,915,007 3,940,361
----------- -----------
$11,461,278 $11,666,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
4
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H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1995 1994
--------------- --------------
<S> <C> <C>
Revenues:
Commissions $10,638,298 $ 8,488,286
Portfolio management fees 1,268,428 665,936
Marketing and education fees 1,389,753 1,202,104
Interest 106,234 81,401
Other 214,886 466,199
----------- -----------
Total revenues 13,617,599 10,903,926
----------- -----------
Expenses:
Commissions and Portfolio fees 7,964,596 6,230,015
General and administrative 2,720,882 2,195,043
Representative development 1,658,717 1,253,880
Representative recruiting 112,373 56,509
Interest 17,699 15,971
----------- -----------
Total expenses 12,474,267 9,751,418
----------- -----------
Net income before taxes 1,143,332 1,152,508
Income taxes 136,802 111,925
----------- -----------
Net income $ 1,006,530 $ 1,040,583
=========== ===========
Net income per common share $.18 $.19
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,393,275
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
5
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H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1995 1994
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,006,530 $1,040,583
Noncash items included in income -
Depreciation 125,476 124,976
Common stock award - 10,000
Net changes in certain working
capital and other components
Commissions and accounts receivable 111,188 746,133
Receivable from affiliate (103,478) (167,101)
Prepaid expenses (13,693) 34,899
Payable to officers and directors - (203,567)
Amounts due on clearing transactions (30,379) 804,543
Accounts payable and accrued expenses (622,568) (610,615)
Commissions payable 285,638 (215,879)
Unearned revenues (759,586) (738,971)
---------- ----------
Net cash provided by (used for)
operating activities (872) 825,001
---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (19,208) (17,758)
Other assets 72,362 (15,021)
---------- ----------
Net cash provided by (used for)
investing activities 53,154 (32,779)
---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Preferred stock dividends (31,884) (31,884)
Payments (Advances) on notes receivable
-related parties 160,236 (444,430)
Payments on notes payable and
capital lease obligations (52,844) (42,999)
---------- ----------
Net cash provided by (used for)
financing activities 75,508 (519,313)
---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 127,790 272,909
CASH AND CASH EQUIVALENTS,
September 30, 1995 and 1994 3,383,060 4,193,240
---------- ----------
CASH AND CASH EQUIVALENTS,
December 31, 1995 and 1994 $3,510,850 $4,466,149
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
6
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H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) Basis of Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements",
and accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. The
financial statements have been prepared in conformity with the accounting
principles and practices as disclosed in the Company's Annual Report on Form 10-
K for the year ended September 30, 1995. In the opinion of management, these
interim financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position as of December 31, 1995 and September 30, 1995, the results
of operations for the three month periods ended December 31, 1995 and 1994, and
the cash flows for the three month periods ended December 31, 1995 and 1994.
Results of operations for the interim period ended December 31, 1995, are not
necessarily indicative of the results that may be expected for the year ended
September 30, 1996. For additional information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1995.
2) Officer Agreements
Subsequent to September 1994, a former officer rejoined the Company as
President. In connection with the officer's return, the Company and the officer
agreed to rescind the officer's severance agreement. In December 1994, the
Company credited the then remaining unpaid severance of $381,331 to general and
administrative expenses. In December 1995, the officer resigned as President of
the Company. Under the officer's existing employment agreement, the Company
agreed to pay the former officer $16,600 per month until October 1, 1996, in
exchange for the former officer agreeing, among other things, to not solicit
clients of the Company's Representatives and to not compete with the Company
through that date.
3) Contingencies
During the fiscal year ended September 30, 1994, the Securities and Exchange
Commission (SEC) began an investigation of the Company's wholly-owned broker-
dealer subsidiary, H.D. Vest Investment Securities, Inc. (HDVIS), relating to
the activities of
7
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a former Representative. In July 1995, concurrent with an administrative
proceeding instituted against HDVIS, the SEC and HDVIS entered into a settlement
agreement. Pursuant to the settlement agreement, HDVIS (i)paid a monetary
sanction of $50,000 and (ii)agreed to modify its supervisory and compliance
procedures in accordance with the recommendations of an independent consultant
retained by the Company.
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Representative commenced a civil action against
HDVIS and the former Representative alleging violations of securities laws,
fraud, conversion and related causes of action. In June 1995, the Company paid
for the benefit of the plaintiffs approximately $450,000 as reimbursement of
what the Company believes represents actual out-of-pocket losses, plus interest.
The Company believes a fidelity bond issued in favor of HDVIS will cover actual
out-of-pocket losses, up to an aggregate of $250,000 incurred by the plaintiffs.
The plaintiffs seek an additional amount of actual and punitive damages, some of
which they allege are related to their actual economic losses. HDVIS is
vigorously contesting the plaintiffs' right to recover any of these additional
alleged damages. Included in accounts payable and accrued expenses at December
31, 1995, is a reserve of approximately $107,000, net of the fidelity bond,
related to legal expenses incurred and costs associated with expert consultants
retained in connection with this matter.
4) Related-Party Transactions
The Company has an agreement with Herb D. Vest (majority shareholder) for
management services to the Company. The agreement as amended in April 1994,
allows for a management fee of $500,000 per year plus an annual bonus based on
the Company's performance related to revenue and net income goals established by
the Board of Directors. As of December 31, 1995, Mr. Vest has received $500,000
as management fees under this agreement. The Company has expensed the entire
amount of his management fees to general and administrative expenses in the
quarter ended December 31, 1995.
During fiscal 1994, the Company entered into agreements to provide Herb D. Vest
and Barbara Howard-Vest revolving lines of credit in an amount not to exceed
$2,000,000 and $700,000, respectively. These lines of credit are collateralized
by the individuals' unrestricted Company stock. The terms of the agreements
require that full payment of all outstanding principle and interest be made on
or before November 30, 2001. The agreements bear interest on unpaid principle
balances at an annual rate of 11%. At December 31, 1995, Herb D. Vest and
Barbara Howard-Vest had outstanding balances of approximately $2,000,000 and
$306,813 in principal, plus $17,738 and $5,490 of accrued interest,
respectively.
8
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5) Deferred Compensation Plan
In July 1995 the Company began accepting contributions for the Deferred
Compensation Plan ("the Plan") for its Representatives. Pursuant to the Plan,
Representatives may forego current compensation, thus postponing recognition of
income otherwise currently taxable, and subsequently are eligible to receive the
deferred compensation plus a Company matching contribution as defined in the
Plan. Amounts deferred as of December 31, 1995 were approximately $208,000.
Matching contributions of amounts deferred under the Plan are accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants. Such increases in commission expense will have an
adverse effect on the net income of the Company. To the extent that
Representatives elect to defer receipt of compensation under the Plan, the
Company is obligated ultimately to pay such compensation to the participant in
the form of cash. Matching contributions accrued as of December 31, 1995 were
approximated $4,000.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Liquidity and Capital Resources
At December 31, 1995, the Company had net working capital of $1,705,996, an
increase of $412,125 from the $1,293,871 of working capital at September 30,
1995. The increase in working capital is primarily the result of an increase in
commission and fee-based revenues.
The Company's cash flows used for operations of $872 for the three months ended
December 31, 1995, decreased $825,873 compared to cash flows provided by
operations of $825,001 during the three months ended December 31, 1994. The
decrease in cash provided by operations for the three months ended December 31,
1995 is primarily the result of payments of accounts payable and accrued
expenses during the period. The increase in cash provided by operations for the
three months ended December 31, 1994 is the result of an increase in portfolio
management fees and reductions in general and administrative expenses during the
period.
Cash used for investing activities for the purchase of property and equipment
included costs incurred for furniture, fixtures and computer equipment. These
costs were $19,208 and $17,758 for the three months ended December 31, 1995 and
1994, respectively. The reductions to other assets of $72,362 during the three
months ended December 31, 1995 includes development of training programs for
Representatives and software development costs of $10,900, net of amortization
of $83,262. The additions to other assets of $15,021 during the three months
ended December 31, 1994, include the development of training programs for
Representatives, book development costs and software development costs of
$281,470, net of amortization of $266,449.
Cash provided by financing activities of $75,508 during the three months ended
December 31, 1995, included net payments by Mr. Vest on his line of credit of
$168,617 and net advances to Ms. Howard-Vest on her line of credit of $8,381,
payments for capital lease obligations of $52,844 and preferred stock dividends
of $31,884. Cash used for financing activities of $519,313 during the three
months ended December 31, 1994 included payments for capital lease obligations,
preferred stock dividends and net advances on the lines of credit with Mr. Vest
and Ms. Howard-Vest.
Results of Operations
Revenues-
The Company's revenues for the three months ended December 31, 1995, were
$13,617,599, a 25% increase over the three months ended December 31, 1994.
Revenues are directly related to the number of
10
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Representatives and their experience in the financial planning and sales
industry. The Company believes that the increase in revenues is due in part, to
continued strength in overall financial markets and to the development of new
training and educational programs put in place during the fourth quarter of
fiscal year 1995 and the first quarter of fiscal year 1996.
During the current fiscal year, the Company has continued to devote significant
resources to the further development of its fee based programs. Portfolio
management fees were $1,268,428 for the three months ended December 31, 1995, a
90% increase over the three months ended December 31, 1994. As Representatives
switch client investment strategies from commission-based investments to fee-
based investments, commission revenue will be replaced by portfolio management
fees. The Company believes that in the short term, the decrease in commission
revenues will be greater than the increase in portfolio management fees.
However, portfolio management fees will be earned continuously on client funds
that remain invested in fee-based programs, compared to the one-time front-end
sales charge on most commission-based investments.
Net Income -
Net income for the three months ended December 31, 1995, was $1,006,530, a
decrease of $34,053 compared to net income of $1,040,583 for the three months
ended December 31, 1994. Net income for the current period was relatively
unchanged from the comparable period as the increase in revenues (net of any
related commissions) were offset by increased general and administrative
expenses and Representative development expenses.
General and administrative expenses increased by $525,839 to $2,720,882 for the
three months ended December 31, 1995, compared to the same period for the prior
year. The increase is in part due to the reversal of $381,331 of severance
expense during the three months ended December 31, 1994, payments of management
fees to Mr. Vest during the three months ended December 31, 1995, as well as
measures taken by the Company to expand the Company's operations and compliance
staff to meet the growing business needs of the Company's Representatives.
Representative development costs for the three months ended December 31, 1995,
were $1,658,717, a 32% increase over development costs of $1,253,880 for the
three months ended December 31, 1994. This increase in Representative
development costs is a result of programs developed to improve support to the
Company's Representative base. The Company believes that the increase in
revenues is due in part, to training and educational programs, such as:
Regional Support System (RSS)
-----------------------------
The RSS program is designed to provide Representatives with local support
in all aspects of financial planning including
11
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sales and marketing training, and time and practice management. Each RSS
group is led by an H.D. Vest Representative. The RSS program is built
around Foundation Teams(for Representatives seeking to achieve $25,000 in
12-month rolling gross revenues), Chapters (which are similar to the
Foundation Teams except that they are held in larger workshop formats) and
Summit Teams (for Representatives above the $25,000 12-month rolling gross
revenue threshold). Each Chapter conducts monthly workshops from May
through January, while Foundation team meetings are held throughout the
year.
Summit Group
------------
All Representatives with 12-month rolling gross revenues greater than
$25,000 are members of a Summit team. Summit members will have the
opportunity to attend regional conferences designed specifically for the
more advanced technical needs of higher producing Representatives. Summit
meetings give Representatives the opportunity to network and share ideas
with each other.
Total Client Commitment (TCC) program
-------------------------------------
The TCC program reflects the Company's belief that H.D. Vest
Representatives have a continuing obligation to provide comprehensive,
knowledge-based services to their clients in a professional and ethical
manner. To support the Representatives in fulfilling this obligation, the
Company is providing a wide range of educational opportunities including
newsletters, audiotapes, direct marketing programs, conference registration
fees and success training. Additional programs include Client Appreciation
Week, Client Service Awards, and the H.D. Vest Merit Scholarship program
for children of H.D. Vest investment clients.
Annual National Conference
--------------------------
The National Conference held in December 1995, was the largest conference
to date for the Company. Over 1,000 of the Company's Representatives and
Affiliates were able to attend this four day event. The National Conference
provides a forum for the Company's Representatives and product sponsors to
share sales ideas and innovations that are vital to the financial planning
industry. The conference also provides numerous training and educational
seminars designed to gain insight on products and services available as
well as valuable sales and motivational techniques.
Representative recruiting costs for the three months ended December 31, 1995,
were $112,373, compared to recruiting costs of $56,509 for the three months
ended December 31, 1994. This increase in recruiting cost is the result of an
increased use of direct mail to find prospective Representatives. To the extent
that the Company decides in the future to devote significant resources to
rapidly expand its Representative base through
12
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aggressive recruiting activities, future profitability would likely be
negatively impacted.
PART II OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Reference is made to Item 3 of the Company's Annual Report to Shareholders on
form 10-K for the fiscal year ended September 30, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
No reports on form 8-K were filed during the quarter ended December 31, 1995.
13
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
H. D. VEST, INC.
-----------------------------
(Registrant)
Date: February 13, 1996 By: s\ Herb D. Vest
---------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: February 13, 1996 By: s\ Wesley Ted Sinclair
---------------------------
Wesley Ted Sinclair
Chief Financial Officer,
Vice President (Principal
Financial and Accounting
Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,510,850
<RECEIVABLES> 5,761,129
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 2,118,833
<TOTAL-ASSETS> 11,461,278
<SHORT-TERM> 0
<PAYABLES> 5,649,181
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 615,674
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 3,143,438
<TOTAL-LIABILITY-AND-EQUITY> 11,461,278
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 106,234
<COMMISSIONS> 10,638,298
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1,268,428
<INTEREST-EXPENSE> 17,699
<COMPENSATION> 7,964,596
<INCOME-PRETAX> 1,143,332
<INCOME-PRE-EXTRAORDINARY> 1,006,530
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,006,530
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>