<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 31,1996
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 (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 January 31,
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--December 31, 1996 and
September 30, 1996 3-4
Consolidated Statements of Operations--
Three Months Ended December 31, 1996 and
December 31, 1995 5
Consolidated Statements of Cash Flows--
Three Months Ended December 31, 1996 and
December 31, 1995 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-11
PART II. Other Information
-----------------
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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,
1996 1996
(Unaudited)
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,178,020 $ 6,734,846
Commissions and accounts
receivable 4,053,902 4,509,419
Notes receivable - related parties 376,593 579,660
Deferred taxes 226,118 480,370
Receivable from affiliate 164,807 130,280
Prepaid expenses 105,877 91,377
--------- ----------
Total current assets 12,105,317 12,525,952
----------- ----------
Property and equipment, net
of accumulated depreciation
of $2,391,669 at December 31,
1996, and $2,255,821 at September
30, 1996 1,568,266 1,673,472
Notes receivable - related parties 2,127,613 2,084,411
Other assets 635,136 666,924
------------ -----------
$16,436,332 $16,950,759
=========== ===========
</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,
1996 1996
(Unaudited)
------------- --------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $ 4,722,424 $ 5,583,156
Amounts due on clearing
transactions 692,791 729,591
Commissions payable 3,493,223 3,317,096
Payable to officer and directors 24,994 74,994
----------- -----------
Total current liabilities 8,933,432 9,704,837
----------- -----------
Obligations under capital leases,
excluding current installments 598,025 676,844
Other noncurrent liabilities 770,697 636,435
Unearned revenues 230,000 931,110
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 (948,225) (1,850,870)
----------- ----------
Total shareholders' investment 5,904,178 5,001,533
----------- -----------
$16,436,332 $ 16,950,759
=========== ============
</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,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Commissions $ 13,857,480 $10,638,298
Portfolio management fees 2,343,272 1,268,428
Marketing and education fees 2,089,759 1,389,753
Interest 166,748 106,234
Other 270,198 214,886
----------- -----------
Total revenues 18,727,457 13,617,599
----------- -----------
Expenses:
Commissions 9,749,645 7,296,958
Portfolio management fees 1,319,287 667,638
General and administrative 3,954,971 2,720,882
Representative development 1,728,924 1,658,717
Representative recruiting 316,503 112,373
Interest 19,899 17,699
----------- -----------
Total expenses 17,089,229 12,474,267
----------- -----------
Net income before taxes 1,638,228 1,143,332
Income taxes 703,699 136,802
----------- -----------
Net income $ 934,529 $ 1,006,530
=========== ===========
Net income per common shae $ .17 $ .18
=========== ===========
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
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H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
---------------------------------
1996 1995
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 934,529 $1,006,530
Noncash items included in income -
Depreciation and amortization 202,078 208,738
Deferred tax provision 254,252 -
Net changes in certain working
capital and other components
Commissions and accounts receivable 455,517 111,188
Receivable from affiliate (34,527) (103,478)
Prepaid and other assets 195,768 157,241
Payable to officers and directors (50,000) -
Amounts due on clearing transactions (36,800) (30,379)
Accounts payable and accrued expenses (829,464) (764,420)
Commissions payable 176,127 285,638
Unearned revenues (701,110) (759,586)
---------- ----------
Net cash provided by
operating activities 566,370 111,472
---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (30,641) (19,209)
Additions to other assets (34,443) (10,899)
---------- ----------
Net cash used for
investing activities (65,084) (30,108)
---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Preferred stock dividends (31,884) (31,884)
Proceeds from deferred compensation plan 113,761 134,890
Advances on notes receivable
-related parties (397,805) (338,714)
Payments on notes receivable
-related parties 347,402 328,016
Payments on capital lease
obligations (89,586) (45,882)
---------- ----------
Net cash provided by (used for)
financing activities (58,112) 46,426
---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 443,174 127,790
CASH AND CASH EQUIVALENTS,
September 30, 1996 and 1995 6,734,846 3,383,060
---------- ----------
CASH AND CASH EQUIVALENTS,
December 31, 1996 and 1995 $7,178,020 $3,510,850
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
6
<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 December 31, 1996 and September 30, 1996, the results
of operations for the three month periods ended December 31, 1996 and 1995, and
the cash flows for the three month periods ended December 31, 1996 and 1995.
Results of operations for the interim period ended December 31, 1996, 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 (majority shareholder) for
management services to the Company. The agreement, as amended in January 1997,
allows for a management fee of $900,000 per fiscal year plus an annual bonus
based on the Company's performance related to revenue, net income and other
goals, as established by the Board of Directors.
7
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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 $550,000. The line of credit is intended
to finance the acquisition of computers and other information system-related
assets. The line bears interest, payable monthly, based upon the U.S. Treasury
Note Index which was 6.06% as of December 31, 1996. The line is secured by
property acquired with proceeds from the line, as well as a $250,000 Certificate
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 line. As of
December 31, 1996, no amount had been drawn on the line.
8
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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, 1996, the Company had net working capital of $3,171,885, an
increase of $350,770 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 increased to $566,370 for the
three months ended December 31, 1996, compared to $111,472 during the three
months ended December 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 $30,641 and $19,209 for the three months ended December 31, 1996 and
1995, respectively. Additionally, the Company invested $34,443 and $10,899 for
software development during the three months ended December 31, 1996 and 1995,
respectively.
Cash used for financing activities during the three months ended December 31,
1996 was $58,112 compared to cash provided by financing activities of $46,426
during the three months ended December 31, 1995. The increase in the use of cash
is the result of a $43,704 increase in payments for capital lease obligations, a
$39,705 increase of net advances on the lines of credit with Mr. Vest and Ms.
Vest, and a $21,129 reduction of proceeds from the Deferred Compensation Plan.
9
<PAGE>
Results of Operations
Revenues-
The Company's revenues for the three months ended December 31, 1996, were
$18,727,457, a 38% increase over the three months ended December 31, 1995.
Revenues are directly related to the number of Representatives and their
experience in the financial planning and sales industry. Additionally, 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
$2,343,272 for the three months ended December 31, 1996, a 85% increase over the
three months ended December 31, 1995. 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 will be 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 for the three months ended December 31, 1996, was $934,529, a
decrease of $72,001 compared to net income of $1,006,530 for the three months
ended December 31, 1995.
Income tax expense increased by $566,897 to $703,699 for the three months ended
December 31, 1996, compared to $136,802 for the three months ended December 31,
1995. This increase was the result of the full utilization of the Company's net
operating loss carryforward and other tax credits available in the prior year.
General and administrative expenses increased by $1,234,089 to $3,954,971 for
the three months ended December 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 December 31, 1996,
were $1,728,924, a 4% increase over development costs of $1,658,717 for the
three months ended December 31, 1995.
10
<PAGE>
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 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 Scholarship program for children of H.D. Vest investment
clients.
Representative recruiting costs for the three months ended December 31, 1996,
were $316,503, a 182% increase compared to recruiting costs of $112,373 for the
three months ended December 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.
11
<PAGE>
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, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
12
<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: February 4, 1997 By: s\ Herb D. Vest
-------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: February 4, 1997 By: s\ Wesley Ted Sinclair
-------------------------
Wesley Ted Sinclair
Chief Financial Officer,
Vice President (Principal
Financial and Accounting
Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,178,020
<RECEIVABLES> 6,949,033
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 2,203,402
<TOTAL-ASSETS> 16,436,332
<SHORT-TERM> 0
<PAYABLES> 8,933,432
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 1,598,722
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 4,132,609
<TOTAL-LIABILITY-AND-EQUITY> 16,436,332
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 13,857,480
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 2,343,272
<INTEREST-EXPENSE> 19,899
<COMPENSATION> 11,068,932
<INCOME-PRETAX> 1,638,228
<INCOME-PRE-EXTRAORDINARY> 1,638,228
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 934,529
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
