<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, 1997
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 (972) 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,
1997: 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, 1997 and
September 30, 1996 3-4
Consolidated Statements of Operations--
Three Months Ended March 31, 1997 and
March 31, 1996 5
Consolidated Statements of Operations--
Six Months Ended March 31, 1997 and
March 31, 1996 6
Consolidated Statements of Cash Flows--
Six Months Ended March 31, 1997 and
March 31, 1996 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,
1997 1996
(Unaudited)
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,070,794 $ 6,484,846
Short term investments 500,000 250,000
Commissions and accounts
receivable 4,415,127 4,509,419
Notes receivable-
related parties 445,131 579,660
Deferred taxes 56,616 480,370
Receivable from affiliate 20,519 130,280
Prepaid expenses 256,354 91,377
----------- -----------
Total current assets 13,764,541 12,525,952
----------- -----------
Property and equipment, net
of accumulated depreciation
of $2,386,637 at March 31,
1997, and $2,255,821 at September
30, 1996 1,700,830 1,673,472
Notes receivable - related parties 2,127,613 2,084,411
Other assets 604,184 666,924
----------- -----------
$18,197,168 $16,950,759
=========== ===========
</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,
1997 1996
(Unaudited)
----------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $ 4,514,956 $ 5,583,156
Amounts due on clearing
transactions 1,342,319 729,591
Commissions payable 4,264,862 3,317,096
Payable to officer and directors - 74,994
----------- -----------
Total current liabilities 10,122,137 9,704,837
----------- -----------
Obligations under capital leases,
excluding current installments 624,241 676,844
Other noncurrent liabilities 946,043 636,435
Unearned revenues 181,906 931,110
Shareholders' investment:
Preferred stock, $6 par value;
250,067 shares outstanding 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized;
5,423,341 issued and outstanding 271,167 271,167
Additional paid-in capital 5,080,834 5,080,834
Deficit (529,562) (1,850,870)
----------- -----------
Total shareholders' investment 6,322,841 5,001,533
----------- -----------
$18,197,168 $16,950,759
=========== ===========
</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,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Commissions $16,866,381 $13,431,475
Portfolio management fees 2,689,246 1,424,395
Marketing and education fees 946,918 882,593
Interest 172,437 97,888
Other 159,246 188,857
----------- -----------
Total revenues 20,834,228 16,025,208
----------- -----------
Expenses:
Commissions 12,029,051 9,376,839
Portfolio management fees 1,541,791 791,798
General and administrative 4,633,274 3,817,803
Representative development 1,470,358 1,341,400
Representative recruiting 168,624 105,135
Interest 21,939 28,746
----------- -----------
Total expenses 19,865,037 15,461,721
----------- -----------
Net income before taxes 969,191 563,487
Income taxes 518,644 48,172
----------- -----------
Net income $ 450,547 $ 515,315
=========== ===========
Net income per common share $ .08 $ .09
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,423,341
=========== ===========
</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,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Commissions $30,723,861 $24,069,773
Portfolio management fees 5,032,518 2,692,823
Marketing and education fees 3,036,677 2,272,346
Interest 339,185 204,122
Other 429,444 403,743
----------- -----------
Total revenues 39,561,685 29,642,807
----------- -----------
Expenses:
Commissions 21,778,696 16,673,797
Portfolio management fees 2,861,078 1,459,436
General and administrative 8,588,245 6,538,685
Representative development 3,199,282 3,000,117
Representative recruiting 485,127 217,508
Interest 41,838 46,445
----------- -----------
Total expenses 36,954,266 27,935,988
----------- -----------
Net income before taxes 2,607,419 1,706,819
Income taxes 1,222,343 184,974
----------- -----------
Net income $ 1,385,076 $ 1,521,845
=========== ===========
Net income per common share $ .24 $ .27
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,423,341
=========== ===========
</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,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,385,076 $1,521,845
Noncash items included in income -
Depreciation and amortization 410,811 430,768
Loss on sale of assets 11,029 -
Deferred tax provision 423,754 -
Net changes in certain working
capital and other components
Commissions and accounts receivable 94,292 (450,173)
Receivable from affiliate 109,761 (80,907)
Prepaid and other assets (23,247) (45,316)
Payable to officers and directors (74,994) (25,006)
Amounts due on clearing transactions 612,728 1,265,820
Accounts payable and accrued expenses (1,012,693) (450,490)
Commissions payable 947,766 1,331,487
Unearned revenues (749,204) (898,893)
----------- ----------
Net cash provided by
operating activities 2,135,079 2,599,135
----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (210,152) (76,498)
Purchases of short term investments (250,000) -
Proceeds from sale of assets 40,098 -
Additions to other assets (71,264) (31,842)
----------- ----------
Net cash used for
investing activities (491,318) (108,340)
----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Preferred stock dividends (63,768) (63,768)
Proceeds from deferred compensation plan 264,577 265,088
Advances on notes receivable
-related parties (397,805) (463,714)
Payments on notes receivable
-related parties 347,402 328,016
Payments on capital lease
obligations (208,219) (130,479)
----------- ----------
Net cash used for
financing activities (57,813) (64,857)
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,585,948 2,425,938
CASH AND CASH EQUIVALENTS,
September 30, 1996 and 1995 6,484,846 3,383,060
----------- ----------
CASH AND CASH EQUIVALENTS,
March 31, 1997 and 1996 $ 8,070,794 $5,808,998
=========== ==========
</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, 1996. 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, 1997 and September 30, 1996, the results of
operations for the three and six month periods ended March 31, 1997 and 1996 and
the cash flows for the six-month periods ended March 31, 1997 and 1996. Results
of operations for the interim period ended March 31, 1997, are not necessarily
indicative of the results that may be expected for the year ended September 30,
1997. 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, 1996.
Certain reclassifications have been made to prior years' statements in order for
the amounts to be comparable with the current year presentation.
2) Related-Party Transactions
The Company has an agreement with Herb D. Vest (primary shareholder) for
management services to the Company. In return for such services, Mr. Vest
receives management fees, including an annual bonus based on the Company's
performance related to revenue, net income and other goals, as established by
the Board of Directors. Effective January 1997, the Company increased the base
management fee due to Mr. Vest to $900,000 from $750,000 per fiscal year.
8
<PAGE>
3) Notes Payable
The Company has entered into a lease line of credit with a bank under which the
Company may borrow up to a maximum of $1,000,000. The lease line of credit is
intended to finance the acquisition of computers and other assets related to
information systems. The lease line bears interest, payable monthly, based upon
the U.S. Treasury Note Index on the day of the advance. The lease line is
secured by the underlying leased equipment as well as a certificate of deposit
held by H.D. Vest Investment Securities, Inc. In addition, the lease line is
cross-collateralized with the Company's operating line of credit. As of March
31, 1997, approximately $270,000 of assets have been acquired through the lease
line.
The Company has entered into an operating line of credit with a bank under which
the Company may borrow up to a maximum of $1,000,000. The operating line of
credit is intended for working capital purposes and expires February 1, 1998.
The operating line bears interest, payable monthly, at prime plus 1%. The
operating line is secured by certificates of deposit held by H.D. Vest
Investment Securities, Inc. Additionally, the Company's two largest shareholders
have pledged a portion of their personal holdings of the Company's common stock
as collateral for the operating line. As of March 31, 1997, no amount is
outstanding on the operating line.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Liquidity and Capital Resources
At March 31, 1997, the Company had net working capital of $3,642,404, an
increase of $821,289 over the $2,821,115 of working capital at September 30,
1996. 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 continuation of Representative development programs.
The Company's cash flows provided by operations decreased to $2,135,079 for the
six months ended March 31, 1997, compared to $2,599,135 during the six months
ended March 31, 1996. This decrease is primarily due to the elimination of the
Company's net operating loss carryforwards, which were fully utilized during the
1996 fiscal year, resulting in an approximately $800,000 increase in tax
accruals and payments for the six months ended March 31, 1997 as compared to the
same period in the prior year. This decrease is partially offset by the
continued increase in cash flows from 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 $210,152 and $76,498 for the six months ended March 31, 1997 and
1996, respectively. The Company also purchased a $250,000 certificate of
deposit during the six months ended March 31, 1997, which is pledged against the
lease line of credit and the operating line of credit. Additionally, the Company
invested $71,264 and $31,842 for software development and other miscellaneous
assets during the six months ended March 31, 1997 and 1996, respectively.
Cash used for financing activities during the six months ended March 31, 1997
decreased $7,044 to $57,813 compared to $64,857 during the six months ended
March 31, 1996. The decrease in the use of cash is primarily the result of a
$77,740 increase in payments for capital lease obligations and a $85,295
increase in net payments on the lines of credit with Mr. Vest and Ms. Vest.
Additionally, during the six months ended March 31, 1997, the Company acquired
property and equipment under various lease arrangements in the amount of
$145,140. These assets are being utilized 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, 1997, were
$20,834,228, a 30% increase over the Company's revenues for three months ended
March 31, 1996. Revenues for the six months ended March 31, 1997 were
$39,561,685, a 33% increase over revenues for the six months ended March 31,
1996. 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 continuation of Representative development
programs.
Due to the declining trend of commission revenue as a percentage of gross
product sales, the Company has continued to devote resources to the further
development of its fee-based programs. Portfolio management fees were
$2,689,246 for the three months ended March 31, 1997, an 89% increase over
portfolio management fees for the three months ended March 31, 1996. Portfolio
management fees were $5,032,518 for the six months ended March 31, 1997, an 87%
increase over portfolio management fees for the six months ended March 31, 1996.
As Representatives switch client investment strategies from front-end sales
charge investments (i.e., mutual funds) to fee-based investments, commission
revenue will be replaced by ongoing portfolio management fees. Although this
investment strategy eliminates commission revenues at the time of the original
transaction, the Company has the potential to earn greater revenues from
continued portfolio management fees. Portfolio management fees are earned
quarterly on client funds that remain invested in fee-based programs, compared
to the one-time front-end sales charge on mutual fund investments.
Net Income
Net income before tax for the three months ended March 31, 1997 was $969,191, an
increase of $405,704 compared to $563,487 for the three months ended March 31,
1996. Net income before tax for the six months ended March 31, 1997 was
$2,607,419, an increase of $900,600 compared to $1,706,819 for the six months
ended March 31, 1996.
Net income for the three months ended March 31, 1997, was $450,547, a decrease
of $64,768 compared to net income of $515,315 for the three months ended March
31, 1996. Net income for the six months ended March 31, 1997 was $1,385,076, a
decrease of $136,769 compared to net income of $1,521,845 for the six months
ended March 31, 1996. Net income for the six-month period was relatively
unchanged from the comparable period in the prior year as the increase in
revenues (net of any related commissions) was offset by increases in income tax
accruals due to the elimination of the Company's net operating loss
carryforwards, as well as increases in general and
11
<PAGE>
administrative expense resulting from increased staffing levels necessary to
support current and expected operating levels.
Income tax expense increased by $470,472 to $518,644 for the three months ended
March 31, 1997, compared to $48,172 for the three months ended March 31, 1996.
Income tax expense increased by $1,037,369 to $1,222,343 for the six months
ended March 31, 1997, compared to $184,974 for the six months ended March 31,
1996. This increase was the result of the full utilization of the Company's
net operating loss carrforwards and other tax credits available in 1996.
General and administrative expenses increased by $815,471 to $4,633,274 for the
three months ended March 31, 1997, compared to the same period for the prior
year. General and administrative expenses increased by $2,049,560 to $8,588,245
for the six months ended March 31, 1997, compared to the same period the prior
year. This increase is primarily due to a 27% increase in administrative and
operational staff for the six months ended March 31, 1997 compared to the six
months ended March 31, 1996. The increase in staff is needed to support current
and projected operating levels of the Company.
Representative development costs for the three months ended March 31, 1997 were
$1,470,358, a 10% increase over development costs of $1,341,400 for the three
months ended March 31, 1996. Representative development costs for the six months
ended March 31, 1997 were $3,199,282, a 7% increase over development costs of
$3,000,117 for the six months ended March 31, 1996. This increase in
Representative development costs is the result of the continuation 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 Mentor Teams (for
Representatives seeking to achieve $25,000 in 12-month rolling gross
revenues), Chapters (which are similar to the Mentor 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 Mentor team
meetings are held throughout the year.
12
<PAGE>
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 Herb D. Vest Scholarship Program for H.D. Vest investment clients or
immediate family members of clients.
Representative recruiting costs for the three months ended March 31, 1997 were
$168,624, a 60% increase compared to recruiting costs of $105,135 for the three
months ended March 31, 1996. Representative recruiting costs for the six months
ended March 31, 1997 were $485,127, a 123% increase compared to recruiting costs
of $217,508 for the six months ended March 31, 1996. This increase in recruiting
costs is the result of increases in direct mail and other recruiting methods
used to find prospective Representatives. The Company's recruiting efforts
generated a 128% increase in new affiliates for the six months ended March 31,
1997 compared to the six months ended March 31, 1996. The Company expects
additional affiliates throughout fiscal year ended September 30, 1997 from these
recruiting efforts due to the timing of the Company's recruiting process. 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 on Form 10-K for the
fiscal year ended September 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
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 7, 1997 By: /s/ Herb D. Vest
-----------------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: May 7, 1997 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-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 8,070,794
<RECEIVABLES> 7,065,006
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 500,000
<PP&E> 2,305,014
<TOTAL-ASSETS> 18,197,168
<SHORT-TERM> 0
<PAYABLES> 10,122,137
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 1,752,190
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 4,551,272
<TOTAL-LIABILITY-AND-EQUITY> 18,197,168
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 30,723,861
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 5,032,518
<INTEREST-EXPENSE> 0
<COMPENSATION> 24,639,774
<INCOME-PRETAX> 2,607,419
<INCOME-PRE-EXTRAORDINARY> 2,607,419
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,385,076
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
