<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 March 31, 1996
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 April 30,
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--March 31, 1996 and
September 30, 1995 3-4
Consolidated Statements of Operations--
Three Months Ended March 31, 1996 and
March 31, 1995 5
Consolidated Statements of Operations--
Six Months Ended March 31, 1996 and
March 31, 1995 6
Consolidated Statements of Cash Flows--
Six Months Ended March 31, 1996 and
March 31, 1995 7
Notes to Consolidated Financial Statements 8-9
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>
March 31, September 30,
1996 1995
(Unaudited)
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,808,998 $3,383,060
Commissions and accounts
receivable 3,780,042 3,329,869
Receivable from affiliate 179,836 98,929
Notes receivable - related parties 436,110 522,178
Prepaid expenses 207,543 56,773
----------- ----------
Total current assets 10,412,529 7,390,809
----------- ----------
Property and equipment, net
of accumulated depreciation
of $2,188,079 at March 31 ,1996,
and $1,924,547 at September
30, 1995 1,666,041 1,289,111
Notes receivable - related parties 2,094,411 1,978,099
Other assets 872,959 1,008,352
----------- ----------
$15,045,940 $11,666,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
(Unaudited)
----------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $ 2,670,130 $ 3,005,316
Amounts due on clearing
transactions 1,935,007 669,187
Commissions payable 3,553,922 2,222,435
Payable to officers and directors 174,994 200,000
----------- -----------
Total current liabilities 8,334,053 6,096,938
----------- -----------
Obligations under capital leases,
excluding current installments 819,203 430,739
Other noncurrent liabilities 352,137 157,331
Unearned revenues 142,109 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 (1,453,965) (2,912,042)
----------- -----------
Total shareholders' investment 5,398,438 3,940,361
----------- -----------
$15,045,940 $11,666,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
4
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Commissions $13,431,475 $ 8,737,098
Portfolio management fees 1,424,395 739,951
Marketing and education fees 882,593 831,336
Interest 97,888 83,493
Other 188,857 218,366
----------- -----------
Total revenues 16,025,208 10,610,244
----------- -----------
Expenses:
Commissions 9,376,839 6,050,056
Portfolio management fees 791,798 404,949
General and administrative 3,817,803 2,912,248
Representative development 1,327,400 852,134
Representative recruiting 119,135 44,231
Interest 28,746 18,231
----------- -----------
Total expenses 15,461,721 10,281,849
----------- -----------
Net income before taxes 563,487 328,395
Income taxes 48,172 -
----------- -----------
Net income $ 515,315 $ 328,395
=========== ===========
Net income per common share $.09 $.06
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,401,366
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
5
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Commissions $24,069,773 $17,225,384
Portfolio management fees 2,692,823 1,405,887
Marketing and education fees 2,272,346 2,033,440
Interest 204,122 164,894
Other 403,743 684,565
----------- -----------
Total revenues 29,642,807 21,514,170
----------- -----------
Expenses:
Commissions 16,673,797 11,915,778
Portfolio management fees 1,459,436 769,242
General and administrative 6,538,685 5,107,291
Representative development 2,986,117 2,106,014
Representative recruiting 231,508 100,740
Interest 46,445 34,202
----------- -----------
Total expenses 27,935,988 20,033,267
----------- -----------
Net income before taxes 1,706,819 1,480,903
Income taxes 184,974 111,925
----------- -----------
Net income $ 1,521,845 $ 1,368,978
=========== ===========
Net income per common share $.27 $.24
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,397,320
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
6
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,521,845 $ 1,368,978
Noncash items included in income -
Depreciation and Amortization 430,766 376,734
Common stock award - 40,000
Net changes in certain working
capital and other components
Commissions and accounts receivable (450,173) 409,656
Receivable from affiliate (80,907) (128,835)
Prepaid expenses (150,770) 24,803
Payable to officers and directors (25,006) (203,566)
Amounts due on clearing transactions 1,265,820 (81,419)
Accounts payable and accrued expenses (140,380) (681,856)
Commissions payable 1,331,487 34,829
Unearned revenues (898,893) (872,971)
---------- -----------
Net cash provided by operating
activities 2,803,789 286,353
---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (76,497) (54,656)
Other assets (31,841) (224,291)
---------- -----------
Net cash used for
investing activities (108,338) (278,947)
---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Preferred stock dividends (63,768) (63,768)
Advances on notes receivable
-related parties (595,639) (2,336,381)
Payments on notes receivable
-related parties 565,395 1,570,792
Payments on capital lease
obligations (175,501) (87,790)
---------- -----------
Net cash used for
financing activities (269,513) (917,147)
---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,425,938 (909,741)
CASH AND CASH EQUIVALENTS,
September 30, 1995 and 1994 3,383,060 4,193,240
---------- -----------
CASH AND CASH EQUIVALENTS,
March 31, 1996 and 1995 $5,808,998 $ 3,283,499
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
7
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) Basis of Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements",
and accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. The
financial statements have been prepared in conformity with the accounting
principles and practices as disclosed in the Company's Annual Report on Form 10-
K for the year ended September 30, 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 March 31, 1996 and September 30, 1995, the results of
operations for the three and six month periods ended March 31, 1996 and 1995,
and the cash flows for the six month periods ended March 31, 1996 and 1995.
Results of operations for the interim period ended March 31, 1996, 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) 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 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-
8
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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 March 31, 1996, 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.
3) 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 January 1996,
allows for a management fee of $750,000 per fiscal year plus an annual bonus
based on the Company's performance related to revenue and net income goals
established by the Board of Directors.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Liquidity and Capital Resources
At March 31, 1996, the Company had net working capital of $2,078,476, an
increase of $784,605 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 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
fiscal year 1995.
The Company's cash flows provided by operations increased to $2,803,789 for the
six months ended March 31, 1996, compared to $286,353 during the six months
ended March 31, 1995. The increase in cash provided by operations for the
period is primarily the result of an increase in commission and fee based
revenues.
Cash used for investing activities for the purchase of property and equipment
included costs incurred for furniture, fixtures and computer equipment. These
costs were $76,497 and $54,656 for the six months ended March 31, 1996 and 1995,
respectively. For the six months ended March 31, 1996, the Company invested
$31,841 in other assets for software development activities. The additions to
other assets of $224,291 during the six months ended March 31, 1995, included
the increase in miscellaneous deposits and assets, development of training
programs for Representatives and software development costs.
Cash used for financing activities of $269,513 during the six months ended
March 31, 1996, included payments by Mr. Vest on his line of credit, including
principal and interest, of $512,447, advances and accrued interest on his line
of credit of $398,434, payments by Ms. Howard-Vest on her line of credit
including, principal and interest, of $52,948, advances and accrued interest on
her line of credit of $197,205, payments on capital lease obligations of
$175,501 and preferred stock dividends of $63,768. Cash used for financing
activities of $917,147 during the six months ended March 31, 1995 included
payments for capital lease obligations, preferred stock dividends and net
advances on the lines of credit with Mr. Vest and Ms. Howard-Vest.
Additionally, during the six months ended March 31, 1996, the Company acquired
property and equipment under various capital lease arrangements in the amount of
$563,965. These assets included computer and phone equipment necessary to
support the current and projected operating levels of the Company.
10
<PAGE>
Results of Operations
Revenues-
The Company's revenues for the three months ended March 31, 1996, were
$16,025,208, a 51% increase over the three months ended March 31, 1995.
Revenues for the six months ended March 31, 1996, were $29,642,807, a 38%
increase over the six months ended March 31, 1995. Revenues are directly
related to the number of 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 fiscal
year 1995.
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 $1,424,395 for the three months ended March 31, 1996, a 92%
increase over the three months ended March 31, 1995. Portfolio management fees
were $2,692,823 for the six months ended March 31, 1996, a 92% increase over the
six months ended March 31, 1995. 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 March 31, 1996, was $515,315, an increase
of $186,920 compared to net income of $328,395 for the three months ended March
31, 1995. Net income for the six months ended March 31, 1996, was $1,521,845,
an increase of $152,867 compared to net income of $1,368,978 for the six months
ended March 31, 1995. Net income for the six month period was relatively
unchanged from the comparable period as the increase in revenues (net of any
related commissions) was offset by increases in general and administrative and
Representative development expenses. The increase in operating expenses is
partially attributable to additional staffing required to support current and
anticipated transaction volume, and Company incentive compensation programs.
General and administrative expenses increased by $905,555 to $3,817,803 for the
three months ended March 31, 1996, compared to the same period for the prior
year. General and administrative
11
<PAGE>
expenses increased by $1,431,394 to $6,538,685 for the six months ended March
31, 1996, compared to the same period for the prior year. This increase is due
to amounts accrued under incentive compensation plans for executive officers,
senior managers, and employees, current year management fees to Mr. Vest, and
additional administrative and operational staff to support current and
projected operating levels.
Representative development costs for the three months ended March 31, 1996,
were $1,327,400, a 56% increase over development costs of $852,134 for the three
months ended March 31, 1995. Representative development costs for the six months
ended March 31, 1996, were $2,986,117, a 42% increase over development costs of
$2,106,014 for the six months ended March 31, 1995. This increase in
Representative development costs is the result of programs developed to educate
the Company's Representatives as well as the expansion of staff necessary to
support participation in these programs. 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 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.
12
<PAGE>
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.
Representative recruiting costs for the three months ended March 31, 1996, were
$119,135, a 169% increase compared to recruiting costs of $44,231 for the three
months ended March 31, 1995. Representative recruiting costs for the six months
ended March 31, 1996, were $231,508, a 130% increase compared to recruiting
costs of $100,740 for the six months ended March 31, 1995. This increase in
recruiting cost is the result of an increase in direct mail and other recruiting
methods used 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 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 March 31, 1996.
13
<PAGE>
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: May 9, 1996 By: s\ Herb D. Vest
-------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: May 9, 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 5,808,998
<RECEIVABLES> 6,490,399
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 2,539,000
<TOTAL-ASSETS> 15,045,940
<SHORT-TERM> 0
<PAYABLES> 8,334,053
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 1,171,340
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 3,626,869
<TOTAL-LIABILITY-AND-EQUITY> 15,045,940
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 24,069,773
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 2,692,823
<INTEREST-EXPENSE> 46,445
<COMPENSATION> 18,133,233
<INCOME-PRETAX> 1,706,819
<INCOME-PRE-EXTRAORDINARY> 1,521,845
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,521,845
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
