<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, 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 August 11,
1997: 5,423,341.
1
<PAGE>
H.D. VEST, INC.
INDEX
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--
June 30, 1997 and September 30, 1996 3-4
Consolidated Statements of Operations--Three Months
Ended June 30, 1997 and June 30, 1996 5
Consolidated Statements of Operations--Nine Months Ended
June 30, 1997 and June 30, 1996 6
Consolidated Statements of Cash Flows--Nine Months Ended
June 30, 1997 and June 30, 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 14
Item 4. Submission of Matters to a Vote of Shareholders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
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,
1997 1996
(Unaudited)
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,742,884 $ 6,484,846
Short term investments 500,000 250,000
Commissions and accounts
receivable 4,893,146 4,509,419
Notes receivable-
related parties 516,335 579,660
Deferred taxes 460,172 480,370
Receivable from affiliate 116,520 130,280
Prepaid expenses 437,900 91,377
---------- -----------
Total current assets 14,666,957 12,525,952
---------- -----------
Property and equipment, net
of accumulated depreciation
of $2,557,637 at June 30,
1997, and $2,255,821 at September
30, 1996 2,745,308 1,673,472
Notes receivable - related parties 2,127,613 2,084,411
Other assets 598,386 666,924
---------- -----------
$20,138,264 $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>
June 30, September 30,
1997 1996
(Unaudited)
----------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $ 5,736,950 $ 5,583,156
Amounts due on clearing
transactions 821,932 729,591
Commissions payable 4,138,697 3,317,096
Payable to officer and directors - 74,994
----------- -----------
Total current liabilities 10,697,579 9,704,837
----------- -----------
Obligations under capital leases,
excluding current installments 1,157,572 676,844
Other noncurrent liabilities 1,128,562 636,435
Unearned revenues 420,401 931,110
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 (118,253) (1,850,870)
----------- -----------
Total shareholders' investment 6,734,150 5,001,533
----------- -----------
$20,138,264 $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 June 30,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues:
Commissions $18,706,258 $17,432,517
Portfolio management fees 2,783,414 1,799,663
Marketing and education fees 1,342,379 832,219
Interest 193,815 151,924
Other 245,758 143,636
----------- -----------
Total revenues 23,271,624 20,359,959
----------- -----------
Expenses:
Commissions 13,261,119 12,164,039
Portfolio management fees 1,616,647 993,676
General and administrative 4,723,267 4,009,724
Representative development 2,186,553 1,831,437
Representative recruiting 656,745 264,994
Interest 15,343 22,481
----------- -----------
Total expenses 22,459,674 19,286,351
----------- -----------
Income before taxes 811,950 1,073,608
Income taxes 368,757 195,457
----------- -----------
Net income $ 443,193 $ 878,151
=========== ===========
Net income per common share $ .08 $ .15
=========== ===========
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>
Nine Months Ended June 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Commissions $49,430,119 $41,502,290
Portfolio management fees 7,815,932 4,492,486
Marketing and education fees 4,379,056 3,104,565
Interest 533,000 356,046
Other 675,202 547,379
----------- -----------
Total revenues 62,833,309 50,002,766
----------- -----------
Expenses:
Commissions 35,039,815 28,837,836
Portfolio management fees 4,477,725 2,453,112
General and administrative 13,311,512 10,548,409
Representative development 5,385,835 4,817,554
Representative recruiting 1,141,872 496,502
Interest 57,181 68,926
----------- -----------
Total expenses 59,413,940 47,222,339
----------- -----------
Income before taxes 3,419,369 2,780,427
Income taxes 1,591,100 380,431
----------- -----------
Net income $ 1,828,269 $ 2,399,996
=========== ===========
Net income per common share $ .32 $ .42
=========== ===========
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>
Nine Months Ended June 30,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,828,269 $2,399,996
Noncash items included in income -
Depreciation and amortization 652,232 664,417
Loss on sale of assets 11,830 48,776
Deferred tax provision 20,198 -
Net changes in certain working
capital and other components
Commissions and accounts receivable (383,727) (863,663)
Receivable from affiliate 13,760 (1,629)
Prepaid and other assets (275,997) (179,026)
Payable to officers and directors (74,994) (75,006)
Amounts due on clearing transactions 92,341 397,316
Accounts payable and accrued expenses 129,062 (83,230)
Commissions payable 821,601 1,453,091
Unearned revenues (510,709) (901,002)
----------- ----------
Net cash provided by
operating activities 2,323,866 2,860,040
----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (714,730) (227,543)
Purchases of short term investments (250,000) -
Proceeds from sale of assets 40,098 10,000
Additions to other assets (135,887) (66,321)
----------- ----------
Net cash used for
investing activities (1,060,519) (283,864)
----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Preferred stock dividends (95,652) (95,652)
Proceeds from deferred compensation plan 416,875 407,920
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 (276,129) (231,825)
----------- ----------
Net cash used for
financing activities (5,309) (55,255)
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,258,038 2,520,921
CASH AND CASH EQUIVALENTS,
September 30, 1996 and 1995 6,484,846 3,383,060
----------- ----------
CASH AND CASH EQUIVALENTS,
June 30, 1997 and 1996 $ 7,742,884 $5,903,981
=========== ==========
</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 June 30, 1997 and September 30, 1996, the results of
operations for the three and nine month periods ended June 30, 1997 and 1996 and
the cash flows for the nine-month periods ended June 30, 1997 and 1996. Results
of operations for the interim period ended June 30, 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.
The Company is required to adopt Statement of Financial Accounting Standards No.
128 Earnings per Share (SFAS 128) in fiscal 1998. SFAS 128 requires replacement
of "primary" earnings per share with "basic" earnings per share and "fully
diluted" earnings per share with "diluted" earnings per share. Had SFAS 128 been
in effect for the three months and nine months ended June 30, 1997, reported
earnings per share would not be different from those reported in the
accompanying interim financial statements.
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. As of June 30, 1997, approximately
$270,000 of assets have been acquired through the lease line.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Liquidity and Capital Resources
At June 30, 1997, the Company had net working capital of $3,969,378, an increase
of $1,148,263 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 recruiting and development programs.
The Company's cash flows provided by operations decreased to $2,323,866 for the
nine months ended June 30, 1997, compared to $2,860,040 during the nine months
ended June 30, 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 $820,000 increase in tax
payments for the nine months ended June 30, 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 $714,730 and $227,543 for the nine months ended June 30, 1997 and
1996, respectively. The Company also purchased a $250,000 certificate of
deposit during the nine months ended June 30, 1997, which is pledged against the
lease line of credit and the operating line of credit. Additionally, the Company
invested $135,887 and $66,321 for software development and other miscellaneous
assets during the nine months ended June 30, 1997 and 1996, respectively.
Cash used for financing activities during the nine months ended June 30, 1997
decreased $49,964 to $5,309 compared to $55,255 during the nine months ended
June 30, 1996. The decrease in the use of cash is primarily the result of a
$44,304 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 nine months ended June 30, 1997, the Company acquired
property and equipment under various lease arrangements in the amount of
$856,841. 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 June 30, 1997, were
$23,271,624, a 14% increase over the Company's revenues for three months ended
June 30, 1996. Revenues for the nine months ended June 30, 1997 were
$62,833,309, a 26% increase over revenues for the nine months ended June 30,
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 recruiting and
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
$2,783,414 for the three months ended June 30, 1997, a 55% increase over
portfolio management fees for the three months ended June 30, 1996. Portfolio
management fees were $7,815,932 for the nine months ended June 30, 1997, a 74%
increase over portfolio management fees for the nine months ended June 30, 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
Income before tax for the three months ended June 30, 1997 was $811,950, a
decrease of $261,658 compared to $1,073,608 for the three months ended June 30,
1996. Income before tax for the nine months ended June 30, 1997 was $3,419,369,
an increase of $638,942 compared to $2,780,427 for the nine months ended June
30, 1996.
Net income for the three months ended June 30, 1997, was $443,193, a decrease of
$434,958 compared to net income of $878,151 for the three months ended June 30,
1996. Net income for the nine months ended June 30, 1997 was $1,828,269, a
decrease of $571,727 compared to net income of $2,399,996 for the nine months
ended June 30, 1996. Net income for the nine-month period decreased 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
11
<PAGE>
carryforwards, as well as increases in general and administrative expense
resulting from increased staffing levels necessary to support current and
expected operating levels.
Income tax expense increased by $173,300 to $368,757 for the three months ended
June 30, 1997, compared to $195,457 for the three months ended June 30, 1996.
Income tax expense increased by $1,210,669 to $1,591,100 for the nine months
ended June 30, 1997, compared to $380,431 for the nine months ended June 30,
1996. This increase was the result of the full utilization of the Company's
net operating loss carryforwards and other tax credits available in 1996.
General and administrative expenses increased by $713,543 to $4,723,267 for the
three months ended June 30, 1997, compared to the same period for the prior
year. General and administrative expenses increased by $2,763,103 to
$13,311,512 for the nine months ended June 30, 1997, compared to the same period
the prior year. This increase is primarily due to a 38% increase in
administrative and operational staff for the nine months ended June 30, 1997
compared to the nine months ended June 30, 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 June 30, 1997 were
$2,186,553, a 19% increase over development costs of $1,831,437 for the three
months ended June 30, 1996. Representative development costs for the nine months
ended June 30, 1997 were $5,385,835, a 12% increase over development costs of
$4,817,554 for the nine months ended June 30, 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 June 30, 1997 were
$656,745, a 148% increase compared to recruiting costs of $264,994 for the three
months ended June 30, 1996. Representative recruiting costs for the nine months
ended June 30, 1997 were $1,141,872, a 130% increase compared to recruiting
costs of $496,502 for the nine months ended June 30, 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 132% increase in new affiliates for the nine months ended
June 30, 1997 compared to the nine months ended June 30, 1996. The Company
expects additional affiliates throughout the fiscal year ending 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.
13
<PAGE>
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 4. Submission of Matters to a Vote of Shareholders
- --------------------------------------------------------
The annual meeting of shareholders of the Company was held on May 30, 1997 at
the Washington Hilton and Towers in Washington, DC. Matters voted on and
approved by the Company's Shareholders at the meeting included the re-election
of Herb D. Vest as Chairman of the Board of Directors, the re-election of
Barbara Vest, Kenneth E. Reynolds, Jack B. Strong, Jerry M. Prater, Phillip W.
Mayer and Lynn R. Niedermeier as Directors of the Company. Additionally brought
to a vote at this meeting was the approval of Arthur Andersen LLP as the
Company's independent public accountants for the ensuing year. Below is a list
of the items brought to a vote at the annual shareholder meeting and the
distribution of votes.
Matter Voted Voted For Voted Against Abstained Non-vote
- ------------ -------- ------------- --------- --------
Directors
Herb D. Vest 5,012,456 - 51,915 358,970
Barbara Vest 5,011,156 - 53,215 358,970
Jack B. Strong 5,011,556 - 52,815 358,970
Kenneth E. Reynolds 5,011,181 - 53,190 358,970
Jerry M. Prater 5,015,356 - 49,015 358,970
Phillip W. Mayer 5,012,856 - 51,515 358,970
Lynn R. Niedermeier 5,007,531 - 56,840 358,970
Independent Auditors 5,048,086 11,475 4,810 358,970
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
14
<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: August 12, 1997 By: /s/ Herb D. Vest
--------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: August 12, 1997 By: /s/ Wesley Ted Sinclair
--------------------------
Wesley Ted Sinclair
Chief Financial Officer,
Vice President (Principal
Financial and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
______________________________ AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,742,884
<RECEIVABLES> 8,551,686
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 500,000
<PP&E> 3,343,694
<TOTAL-ASSETS> 20,138,264
<SHORT-TERM> 0
<PAYABLES> 10,697,579
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 2,706,535
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 4,962,581
<TOTAL-LIABILITY-AND-EQUITY> 20,138,264
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 49,430,119
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 7,815,932
<INTEREST-EXPENSE> 0
<COMPENSATION> 39,517,540
<INCOME-PRETAX> 3,419,369
<INCOME-PRE-EXTRAORDINARY> 3,419,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,828,269
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
