<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 June 30, 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 July 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--June 30, 1996 and
September 30, 1995 3-4
Consolidated Statements of Operations--
Three Months Ended June 30, 1996 and
June 30, 1995 5
Consolidated Statements of Operations--
Nine Months Ended June 30, 1996 and
June 30, 1995 6
Consolidated Statements of Cash Flows--
Nine Months Ended June 30, 1996 and
June 30, 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>
June 30, September 30,
1996 1995
(Unaudited)
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,903,981 $3,383,060
Commissions and accounts
receivable 4,193,532 3,329,869
Receivable from affiliate 100,558 98,929
Notes receivable - related parties 507,141 522,178
Prepaid expenses 270,222 56,773
----------- ----------
Total current assets 10,975,434 7,390,809
----------- ----------
Property and equipment, net
of accumulated depreciation
of $2,105,682 at June 30, 1996,
and $1,924,547 at September
30, 1995 1,646,895 1,289,111
Notes receivable - related parties 2,094,411 1,978,099
Other assets 822,350 1,008,352
----------- ----------
$15,539,090 $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>
June 30, September 30,
1996 1995
(Unaudited)
------------- --------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $3,101,528 $ 3,005,316
Amounts due on clearing
transactions 1,066,503 669,187
Commissions payable 3,675,526 2,222,435
Payable to officers and directors 124,994 200,000
---------- -----------
Total current liabilities 7,968,551 6,096,938
---------- -----------
Obligations under capital leases,
excluding current installments 677,485 430,739
Other noncurrent liabilities 508,349 157,331
Unearned revenues 140,000 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 (607,698) (2,912,042)
---------- -----------
Total shareholders' investment 6,244,705 3,940,361
---------- -----------
$15,539,090 $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 June 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Commissions $17,432,517 $ 9,353,968
Portfolio management fees 1,799,663 834,376
Marketing and education fees 832,219 446,654
Interest 151,924 89,945
Other 143,636 300,914
----------- -----------
Total revenues 20,359,959 11,025,857
----------- -----------
Expenses:
Commissions 12,164,039 6,422,096
Portfolio management fees 993,676 454,394
General and administrative 4,009,724 2,501,796
Representative development 1,831,437 1,194,536
Representative recruiting 264,994 184,774
Interest 22,481 17,550
----------- -----------
Total expenses 19,286,351 10,775,146
----------- -----------
Net income before taxes 1,073,608 250,711
Income taxes 195,457 -
----------- -----------
Net income $ 878,151 $ 250,711
=========== ===========
Net income per common share $.15 $.04
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,410,407
=========== ===========
</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 OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Commissions $41,502,290 $26,579,352
Portfolio management fees 4,492,486 2,240,263
Marketing and education fees 3,104,565 2,480,094
Interest 356,046 254,839
Other 547,379 985,479
----------- -----------
Total revenues 50,002,766 32,540,027
----------- -----------
Expenses:
Commissions 28,837,836 18,337,874
Portfolio management fees 2,453,112 1,223,636
General and administrative 10,548,409 7,609,087
Representative development 4,817,554 3,300,550
Representative recruiting 496,502 285,514
Interest 68,926 51,752
----------- -----------
Total expenses 47,222,339 30,808,413
----------- -----------
Net income before taxes 2,780,427 1,731,614
Income taxes 380,431 111,925
----------- -----------
Net income $ 2,399,996 $ 1,619,689
=========== ===========
Net income per common share $.42 $.28
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,401,683
=========== ===========
</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>
Nine Months Ended June 30,
--------------------------
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,399,996 $ 1,619,689
Noncash items included in income -
Depreciation and Amortization 664,419 567,954
Common stock award - 70,000
Net changes in certain working
capital and other components
Commissions and accounts receivable (863,663) 1,287,536
Receivable from affiliate (1,629) (81,883)
Prepaid expenses (213,449) (62,756)
Payable to officers and directors (75,006) (203,566)
Amounts due on clearing transactions 397,316 (580,876)
Accounts payable and accrued expenses 447,230 (926,188)
Commissions payable 1,453,091 (266,346)
Unearned revenues (901,002) (905,971)
---------- -----------
Net cash provided by operating
activities 3,307,303 517,593
---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (168,768) (69,076)
Other assets (66,321) (442,260)
---------- -----------
Net cash used for
investing activities (235,089) (511,336)
---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Preferred stock dividends (95,652) (95,652)
Advances on notes receivable
-related parties (666,670) (2,489,247)
Payments on notes receivable
-related parties 565,395 1,580,192
Payments on capital lease
obligations (354,366) (131,456)
---------- -----------
Net cash used for
financing activities (551,293) (1,136,163)
---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,520,921 (1,129,906)
CASH AND CASH EQUIVALENTS,
September 30, 1995 and 1994 3,383,060 4,193,240
---------- -----------
CASH AND CASH EQUIVALENTS,
June 30, 1996 and 1995 $5,903,981 $ 3,063,334
========== ===========
</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 June 30, 1996 and September 30, 1995, the results of
operations for the three and nine month periods ended June 30, 1996 and 1995,
and the cash flows for the nine month periods ended June 30, 1996 and 1995.
Results of operations for the interim period ended June 30, 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 June 30,
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 June 30, 1996, the Company had net working capital of $3,006,883, an increase
of $1,713,012 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 training and educational programs put in place during fiscal year
1995.
The Company's cash flows provided by operations increased to $3,307,303 for the
nine months ended June 30, 1996, compared to $517,593 during the nine months
ended June 30, 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 $168,768 and $69,076 for the nine months ended June 30, 1996 and
1995, respectively. For the nine months ended June 30, 1996, the Company
invested $66,321 in miscellaneous assets and software development costs. The
additions to other assets of $442,260 during the nine months ended June 30,
1995, included an increase in miscellaneous assets, development of training
programs for Representatives and software development costs.
Cash used for financing activities of $551,293 during the nine months ended June
30, 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 $457,061, 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 $209,609, payments on capital lease obligations of
$354,366 and preferred stock dividends of $95,652. Cash used for financing
activities of $1,136,163 during the nine months ended June 30, 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 nine months ended June 30, 1996, the Company acquired
property and equipment under various capital lease arrangements in the amount of
$601,112. 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 June 30, 1996, were
$20,359,959, a 85% increase over the three months ended June 30, 1995. Revenues
for the nine months ended June 30, 1996, were $50,002,766, a 54% increase over
the nine months ended June 30, 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 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 $1,799,663 for the three months ended June 30, 1996, a 116%
increase over the three months ended June 30, 1995. Portfolio management fees
for the nine months ended June 30, 1996, were $4,492,486, a 101% increase over
the nine months ended June 30, 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 June 30, 1996, was $878,151, an increase
of $627,440 compared to net income of $250,711 for the three months ended June
30, 1995. Net income for the nine months ended June 30, 1996, was $2,399,996,
an increase of $780,307 compared to net income of $1,619,689 for the nine months
ended March 31, 1995. Net income for the nine month period rose substantially
from the comparable period as the incremental increase in revenues (net of any
related commissions) offset the 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 $1,507,928 to $4,009,724 for
the three months ended June 30, 1996, compared to the same period for the prior
year. General and administrative
11
<PAGE>
expenses increased by $2,939,322 to $10,548,409 for the nine months ended June
30, 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 June 30, 1996, were
$1,831,437, a 53% increase over development costs of $1,194,536 for the three
months ended June 30, 1995. Representative development costs for the nine months
ended June 30, 1996, were $4,817,554, a 46% increase over development costs of
$3,300,550 for the nine months ended June 30, 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 June 30, 1996, were
$264,994, a 43% increase compared to recruiting costs of $184,774 for the three
months ended June 30, 1995. Representative recruiting costs for the nine months
ended June 30, 1996, were $496,502, a 74% increase compared to recruiting costs
of $285,514 for the nine months ended June 30, 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 June 30, 1996.
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: July 31, 1996 By: s\ Herb D. Vest
------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: July 31, 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 5,903,981
<RECEIVABLES> 6,895,642
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 2,469,245
<TOTAL-ASSETS> 15,539,090
<SHORT-TERM> 0
<PAYABLES> 7,968,551
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 1,185,834
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 4,473,136
<TOTAL-LIABILITY-AND-EQUITY> 15,539,090
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 41,502,290
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 4,492,486
<INTEREST-EXPENSE> 68,926
<COMPENSATION> 31,290,948
<INCOME-PRETAX> 2,780,427
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,399,996
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
