<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, 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)
6333 North State Highway 161, Fourth Floor, Irving, TX 75038
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (972) 870-6000
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,
1998: 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--December 31, 1997 and
September 30, 1997 3-4
Consolidated Statements of Operations--
Three Months Ended December 31, 1997 and
December 31, 1996 5
Consolidated Statements of Cash Flows--
Three Months Ended December 31, 1997 and
December 31, 1996 6
Notes to Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-13
PART II. Other Information
-----------------
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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,
1997 1997
(Unaudited)
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,045,185 $ 6,384,992
Commissions and accounts
receivable 6,325,999 6,642,200
Notes receivable - related parties 365,754 590,320
Receivable from affiliate 418,212 142,145
Prepaid expenses 571,619 503,738
----------- -----------
Total current assets 12,726,769 14,263,395
----------- -----------
Property and equipment, net
of accumulated depreciation
of $1,287,104 at December 31,
1997, and $1,485,366 at September
30, 1997 2,662,518 2,755,457
Notes receivable - related parties 2,063,694 2,127,613
Other assets 1,207,584 601,166
----------- -----------
$18,660,565 $19,747,631
=========== ===========
</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,
1997 1997
(Unaudited)
----------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $3,258,358 $ 3,930,651
Amounts due on clearing
transactions 462,839 539,538
Commissions payable 4,542,388 4,738,908
---------- -----------
Total current liabilities 8,263,585 9,209,097
---------- -----------
Obligations under capital leases,
excluding current installments 1,142,273 1,016,257
Other noncurrent liabilities 1,558,857 1,323,375
Unearned revenues 112,315 1,150,341
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 5,113,334 5,113,334
Retained earnings 698,632 163,658
---------- -----------
Total shareholders' investment 7,583,535 7,048,561
---------- -----------
$18,660,565 $19,747,631
=========== ===========
</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,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Commissions $19,369,198 $13,887,594
Portfolio management fees 3,613,388 2,343,272
Marketing and education fees 2,531,371 2,059,645
Interest and other 612,016 436,946
----------- -----------
Total revenues 26,125,973 18,727,457
----------- -----------
Expenses:
Commissions 13,641,029 9,622,023
Portfolio management fees 2,340,369 1,446,908
General and administrative 6,320,478 3,954,972
Representative development 2,337,219 1,729,542
Representative recruiting 554,396 315,885
Interest 38,507 19,899
----------- -----------
Total expenses 25,231,998 17,089,229
----------- -----------
Net income before taxes 893,975 1,638,228
Income taxes 327,117 703,699
----------- -----------
Net income $ 566,858 $ 934,529
=========== ===========
Net income per common share $ .10 $ .17
=========== ===========
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 CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------
1997 1996
------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 566,858 $ 934,529
Reconciliation of net income to
net cash provided by operating activities:
Depreciation and amortization 250,954 202,078
Deferred tax provision - 254,252
Loss on sale of assets 38,072 -
Changes in assets and liabilities:
Commissions and accounts receivable 376,201 455,517
Receivable from affiliate (276,067) (34,527)
Prepaid and other assets (67,881) 195,768
Payable to officers and directors 63,939 (50,000)
Amounts due on clearing transactions (76,699) (36,800)
Accounts payable and accrued expenses (136,200) (829,464)
Commissions payable (196,520) 176,127
Unearned revenues (1,038,026) (701,110)
----------- ---------
Net cash provided by (used for)
operating activities (495,369) 566,370
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (71,524) (30,641)
Additions to software development (564,613) (10,900)
Additions to other assets (82,512) (23,543)
Proceeds from sale of assets 5,317 -
----------- ----------
Net cash used for investing activities (713,332) (65,084)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (31,884) (31,884)
Proceeds from deferred compensation plan 235,482 113,761
Advances on notes receivable-related parties (421,653) (397,805)
Payments on notes receivable-related parties 646,199 347,402
Payments on capital lease obligations (559,250) (89,586)
----------- ----------
Net cash used for financing activities (131,106) (58,112)
----------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,339,807) 443,174
CASH AND CASH EQUIVALENTS,
September 30, 1997 and 1996 6,384,992 6,734,846
----------- ----------
CASH AND CASH EQUIVALENTS,
December 31, 1997 and 1996 $5,045,185 $7,178,020
=========== ==========
</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, 1997. 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, 1997 and September 30, 1997, the results
of operations for the three month periods ended December 31, 1997 and 1996, and
the cash flows for the three month periods ended December 31, 1997 and 1996.
Results of operations for the interim period ended December 31, 1997, are not
necessarily indicative of the results that may be expected for the year ended
September 30, 1998. 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, 1997.
Certain reclassifications have been made to prior years' statements in order for
the amounts to be comparable with the current year presentation.
7
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2) Earnings per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings per Share"(EPS). SFAS No. 128 requires
replacement of "primary" EPS with "basic" EPS and "fully diluted" EPS with
"diluted" EPS. SFAS No. 128 requires previously reported EPS to be restated.
The adoption of SFAS No. 128 did not affect the Company's previously reported
EPS. The following tables show the calculation of basic and diluted EPS for the
three months ended December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
For the Three Months Ended Income Shares Per-Share
December 31, 1997 (Numerator) (Denominator) Amount
- ------------------------------- -------------- ---------------- ----------
<S> <C> <C> <C>
Net Income $566,858
Less: Preferred Dividend (31,884)
--------
Basic EPS:
Income available to Common
Stockholders 534,974 5,423,341 $0.10
-----------
Effect of Dilutive Securities:
Options 25,457
-------- ---------
Diluted EPS:
Income available to Common
Stockholders $534,974 5,448,798 $0.10
-------- --------- -----------
</TABLE>
Options to purchase 95,454 shares of common stock at $8.50 per share were
outstanding during the three months ended December 31, 1997 but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of outstanding common shares.
250,067 shares of Convertible Preferred Stock was also outstanding during the
three months ended December 31, 1997 but were not included in the computation of
diluted EPS because the options' original purchase price is greater that the
average market price of outstanding common shares.
8
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended Income Shares Per-Share
December 31, 1996 (Numerator) (Denominator) Amount
- ------------------------------- -------------- ---------------- ---------
<S> <C> <C> <C>
Net Income $934,529
Less: Preferred Dividend (31,884)
--------
Basic EPS:
Income available to Common
Stockholders 902,645 5,423,341 $0.17
-----------
Effect of Dilutive Securities:
Options 11,440
-------- ---------
Diluted EPS:
Income available to Common
Stockholders $902,645 5,434,781 $0.17
-------- --------- -----------
</TABLE>
Options to purchase 373,454 shares of common stock at prices ranging from $4.38
to $8.50 per share were outstanding during the three months ended December 31,
1996 but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of outstanding
common shares.
250,067 shares of Convertible Preferred Stock was also outstanding during the
three months ended December 31, 1996 but were not included in the computation of
diluted EPS because the options' original purchase price is greater that the
average market price of outstanding common shares.
3) Commitments and Contingencies
Litigation and Contingencies - In September 1997, litigation was initiated
against the Company and its subsidiary, H.D. Vest Investment Securities, Inc.,
in regard to the activities of a former Registered Representative. As of
December 31, 1997, the plaintiffs seek recovery for alleged out-of-pocket losses
totaling $450,000. The plaintiffs also seek recovery for treble and punitive
damages as well as recovery for pain and suffering. The Company believes it has
a defense against these claims and intends to vigorously defend them. The
Company is currently unable to determine the likelihood that additional material
claims arising from the Registered Representative's conduct will be made.
Although the Company believes that a defense to any additional claims exists,
and intends to vigorously defend such claims if necessary, a negative result in
multiple claims could have a material adverse impact on the Company.
9
<PAGE>
4) Subsequent Events
Subsequent to December 31, 1997 the Company moved its corporate headquarters to
6333 North State Highway 161, Fourth Floor, Irving, Texas 75038. Included in
general and administrative expenses for the three months ended December 31, 1997
is approximately $450,000 related to the accrual of unexpired lease commitments
and the write off of abandoned assets (primarily leasehold improvements).
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Liquidity and Capital Resources
The main source of liquidity and capital resources for the Company are cash
flows from operations and deferrals of compensation by Registered
Representatives. At December 31, 1997, the Company had net working capital of
$4,463,184, a decrease of $591,114 from the $5,054,298 of working capital at
September 30, 1997. The decrease in working capital is primarily the result of
the Company's focus on upgrading information systems, hosting its national
education convention in December and relocating its corporate headquarters.
The Company's cash flows used for operating activities was $495,369 for the
three months ended December 31, 1997, compared to net cash provided by operating
activities of $566,370 during the three months ended December 31, 1996. The
primary reasons for the usage of cash flow in operating activities is the
increase in costs related to new systems implementation, increases in education
costs related to the Company's national education convention and costs
associated with the relocation of the corporate headquarters.
Cash used for investing activities for the purchase of property and equipment
included costs incurred for furniture, fixtures and computer equipment. These
costs were $71,524 and $30,641 for the three months ended December 31, 1997 and
1996, respectively. Furniture , fixtures and computer equipment expenditures
increased due to the Company's corporate relocation and to their focus on
upgrading information processing equipment. The Company also capitalized
$564,613 and $34,443 for software development investments during the three
months ended December 31, 1997 and 1996, respectively. Software development has
increased due to the Company's growth and focus on upgrading information
processing capabilities.
Cash used for financing activities during the three months ended December 31,
1997 was $131,106 compared to cash used for financing activities of $58,112
during the three months ended December 31, 1996. The increase of net cash used
for financing activity is primarily the results of net receipts from related
parties of $224,546 for the three months ended December 31, 1997 compared to net
advances to related parties of $50,403 for the three months ended December 31,
1996. Proceeds from deferred compensation also increased to $235,482 for the
three months ended December 31, 1997 compared to proceed from deferred
compensation of $113,761 for the three months ended December 31, 1996.
Offsetting the positive cashflow from net receipts from related parties and
proceed from deferred compensation are the payments of lease obligations of
$559,250 for the three months ended December 31, 1997 compared to payments of
lease obligations of $89,586 for the three months ended December 31, 1996.
11
<PAGE>
Results of Operations
Revenues-
The Company's revenues for the three months ended December 31, 1997, were
$26,125,973, a 40% increase over the three months ended December 31, 1996.
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 Company's commitment to train
representatives in diversification and long-term investing activities.
Due to the declining trend of commission revenue as a percentage of gross
product sales, the Company has continued to devote resources to the continued
development of its fee-based programs. Portfolio management fees were
$3,613,388 for the three months ended December 31, 1997, a 54% increase over the
three months ended December 31, 1996. As Representatives switch client
investment strategies from front-end sales charge investments (i.e., mutual
funds) to fee-based investments, ongoing portfolio management fees will replace
commission revenue. 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 for the three months ended December 31, 1997, was $566,858, a
decrease of $367,671 compared to net income of $934,529 for the three months
ended December 31, 1996.
General and administrative expenses increased by $2,365,506 to $6,320,478 for
the three months ended December 31, 1997, compared to the same period for the
prior year. This increase is due to costs associated with the relocation of the
Company's corporate headquarters, including the accrual of unexpired lease
commitments and the write off of abandoned assets (primarily leasehold
improvements). The Company's continued expansion of the operations division and
increased technology investment also contributed to the increase.
Representative development costs for the three months ended December 31, 1997,
were $2,337,219, a 35% increase related to development costs of $1,729,542 for
the three months ended December 31, 1996. This increase in Representative
development
12
<PAGE>
costs is the result of the Company's focus on the development of programs to
educate the Company's Representatives as well as the expansion of staff
necessary to support participation in these programs. Increased costs associated
with the Company's national education convention and the introduction of the
Representative mentoring program also contributed to the increased
Representative development costs.
Representative recruiting costs for the three months ended December 31, 1997,
were $554,396, a 76% increase compared to recruiting costs of $315,885 for the
three months ended December 31, 1996. 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.
13
<PAGE>
PART II OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
In September 1997, litigation was initiated against the Company and H.D. Vest
Investment Securities, Inc. in regard to the activities of a former Registered
Representative. The plaintiffs seek recovery for alleged out-of-pocket losses
totaling $450,000. In addition, the plaintiffs seek recovery for treble and
punitive damages as well as recovery for pain and suffering. The Company
believes it has a defense against these claims and intends to vigorously defend
them. The Company is currently unable to determine the likelihood that
additional material claims arising from the Registered Representative's conduct
will be made. Although the Company believes that a defense to any additional
claims exists, and intends to vigorously defend such claims if necessary, a
negative result in multiple claims could have a material adverse impact on the
Company.
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, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
Exhibit:
27.1 Financial Data Schedule for the three months ended December 31, 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: February 13, 1998 By: s\ Herb D. Vest
------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: February 13, 1998 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 THE
CONSOLIDATED FINANCIAL STATEMENTS OF H.D. VEST, INC. FORM 10-Q 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-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,045,185
<RECEIVABLES> 9,173,659
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 3,870,102
<TOTAL-ASSETS> 18,660,565
<SHORT-TERM> 0
<PAYABLES> 8,263,585
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 2,813,445
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 5,811,966
<TOTAL-LIABILITY-AND-EQUITY> 18,660,565
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 162,655
<COMMISSIONS> 19,369,198
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 3,613,388
<INTEREST-EXPENSE> 38,507
<COMPENSATION> 4,358,858
<INCOME-PRETAX> 893,975
<INCOME-PRE-EXTRAORDINARY> 893,975
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 566,858
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
