<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, 1999
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, Irving, Texas 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 December 31,
1999: 5,423,341.
1
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H.D. VEST, INC.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information (Unaudited) Page(s)
--------------------- -------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Position - December 31,
1999 and September 30, 1999 3-4
Consolidated Statements of Operations - Three Months Ended
December 31, 1999 and December 31, 1998 5
Consolidated Statements of Cash Flows - Three Months Ended
December 31, 1999 and December 31, 1998 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-12
PART II. Other Information
-----------------
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote
of Shareholders 13
Item 5. Other Information 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
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Part I. Financial Information
------------------------------
Item 1. Financial Statements(Unaudited)
----------------------------------------
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,057,609 $11,918,613
Commissions and accounts
receivable 12,109,742 10,857,090
Receivable from affiliate 424,303 275,390
Notes receivable-
related parties 150,000 -
Prepaid and other assets 2,192,990 1,025,506
----------- -----------
Total current assets 26,934,644 24,076,599
----------- -----------
Property and equipment, net
of accumulated depreciation
of $4,508,387 at December 31,
1999 and $3,997,687 at
September 30, 1999 7,746,679 6,713,270
Intangible and other assets 3,744,806 3,680,780
----------- -----------
$38,426,129 $34,470,649
=========== ===========
</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
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $ 5,959,453 $ 5,406,058
Amounts due on clearing
transactions 2,059,543 2,952,533
Unearned Revenue 2,244,720 2,063,112
Commissions payable 8,112,960 7,075,254
----------- -----------
Total current liabilities 18,376,676 17,496,957
----------- -----------
Obligations under capital leases,
excluding current installments 2,576,195 1,940,638
Other noncurrent liabilities 6,131,578 5,551,758
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 5,154,934 5,154,934
Retained earnings 4,415,177 2,554,793
----------- -----------
Total shareholders' investment 11,341,680 9,481,296
----------- -----------
$38,426,129 $34,470,649
=========== ============
</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 December 31,
-------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Revenues:
Commissions $31,606,014 $25,680,480
Portfolio management fees 6,245,976 4,719,528
Marketing and education fees 5,401,632 3,693,435
Facility and service fee from
affiliate 175,000 170,628
Interest and other 481,803 271,316
----------- -----------
Total revenues 43,910,425 34,535,387
----------- -----------
Expenses:
Commissions 23,749,404 19,112,178
Portfolio management fees 4,424,834 3,288,635
General and administrative 4,623,535 5,226,369
Operations 3,965,395 2,919,026
Representative development 2,741,239 2,450,238
Representative recruiting 257,033 617,892
Amortization and depreciation 807,658 511,750
Interest 73,569 94,642
----------- -----------
Total expenses 40,642,667 34,220,730
----------- -----------
Income before taxes 3,267,758 314,657
Income taxes 1,375,490 135,303
----------- -----------
Net income $ 1,892,268 $ 179,354
=========== ===========
Net income per common
share-basic and diluted $ 0.34 $ 0.03
=========== ===========
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,
---------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,892,268 $ 179,354
Noncash items included in income:
Depreciation and amortization 807,658 511,750
Deferred tax liability 263,588 -
Loss on disposal of assets 18,709 937
Deferred rent 34,407 -
Changes in assets and liabilities:
Commissions and accounts receivable (1,252,652) 1,359,684
Receivable from affiliate (148,913) (92,317)
Prepaid and other assets (1,167,484) 56,028
Accounts payable and accrued expenses 170,158 (2,780,225)
Amounts due on clearing transactions (892,990) (328,023)
Commissions payable 1,037,706 1,427,147
Unearned revenues 181,608 (1,232,638)
----------- -----------
Net cash provided by (used for)
operating activities 944,063 (898,303)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (238,286) (104,212)
Costs to acquire/develop software (359,283) (564,816)
Additions to Intangible and other assets - (37,294)
----------- -----------
Net cash used for investing activities (597,569) (706,322)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (31,884) (31,884)
Proceeds from deferred compensation plan 349,482 379,755
Payments on deferred compensation plan (19,684) (20,211)
Advances on notes receivable
-related parties (150,000) -
Payments received on notes receivable
-related parties - 446,568
Payments on capital lease
obligations (355,412) (267,543)
----------- -----------
Net cash provided by (used for)
financing activities (207,498) 506,685
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 138,996 (1,097,940)
CASH AND CASH EQUIVALENTS,
September 30, 1999 and 1998 11,918,613 9,204,362
----------- -----------
CASH AND CASH EQUIVALENTS,
December 31, 1999 and 1998 $12,057,609 $ 8,106,422
=========== ===========
</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 H.D. Vest's (the Company) annual report
on Form 10-K for the year ended September 30, 1999. 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, 1999, and
September 30, 1999, the results of operations for the three month periods ended
December 31, 1999 and 1998 and the cash flows for the three month periods ended
December 31, 1999 and 1998. Results of operations for the interim period ended
December 31, 1999, are not necessarily indicative of the results that may be
expected for the year ended September 30, 2000. 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, 1999.
Certain reclassifications have been made to prior year's statements in order for
the amounts to be comparable with the current year presentation.
2) Earnings Per Share
Basic earnings per share (basic EPS) is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding.
The number of shares used to compute basic EPS for the three months ended
December 31, 1999 and 1998, was 5,423,341. Diluted earnings per share (diluted
EPS) is computed similarly to the computation of basic EPS except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential dilutive common shares that would
had been issued. The number of shares used to compute diluted EPS for the three
months ended December 31, 1999 and 1998 was 5,499,030 and 5,711,674,
respectively.
Options to purchase 273,948 shares of common stock at prices ranging from $7.63
to $20.00 per share were outstanding during the three months ended December 31,
1999. The total options outstanding at December 31, 1999 were 931,948. Options
to purchase 53,948 shares of common stock at prices ranging from $7.63 to $8.50
per share were outstanding during the three months ended December 31, 1998.
These options were not included in the computation of diluted EPS because
7
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the options' exercise price was greater than the average market price of
outstanding common shares.
There were 250,067 shares of Non voting Series A Convertible Preferred Stock
outstanding during the three months ended December 31, 1999 and 1998, that were
not included in the number of shares used to compute diluted EPS for the period
because the conversion had an anti-dilutive effect on EPS.
3) Commitments and Contingencies
The Company is subject to other legal proceedings and claims that have
arisen in the ordinary course of business and have not been finally adjudicated.
The Company believes, based on the advice of legal counsel responsible for
such matters, that these actions, when finally concluded and determined, will
not have a material adverse effect upon the financial position of the Company.
4) Related Parties
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. Previously, the agreement with Mr. Vest
provides for a management fee per year plus an annual bonus based on the
Company's performance related to revenue and net income goals, additions of
Company U4's and Fee Based Assets under Management, as established by the Board
of Directors. In January 2000, Herb D. Vest and the Company agreed to remove the
bonus provision from Mr. Vest's management agreement for the fiscal year ending
September 30, 2000. The agreement also provides that Mr. Vest is permitted to
request and receive advances on future management fees based on estimated future
operations. At December 31, 1999, Mr. Vest had received $900,000 under this
agreement, consisting of $225,000 in management fees related to the three months
ended December 31, 1999 and advances totaling $675,000 (recorded in Prepaid and
other assets). Bonuses paid under the plan for the fiscal years ended September
30, 1999, 1998 and 1997 were $2,315,412, $2,320,148 and $1,869,497,
respectively.
The Company has an agreement to provide Herb D. Vest a revolving line of credit
in an amount not to exceed $2,000,000, collateralized by Mr. Vest's Company
common stock in an amount equal to the unadjusted current balance of the line of
credit based on the stock's current ask price. Under the agreement interest
accrues on unpaid principal balances at an annual rate of 11%. At December 31,
1999, Mr. Vest had drawn $150,000 in principal against the line of credit. As of
December 31, 1999, we have recorded $45 of accrued interest on this line which
is included in Interest and other income. Subsequent to December 31, 1999, all
principal and interest was repaid by Mr. Vest.
5) Web-Based Fees
During the quarter ended December 31, 1999, the Company invited selected
Representatives to participate in the Company's new website initiative. Each
Representative that elected to participate in the website initiative will have
their individual profile included on the
8
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website and will be eligible for new tax and financial services referrals
obtained from the website. As part of the website initiative the Company charged
each Representative that elected to participate in the program, a fee of $950 to
help offset the costs associated with the promotion and development of the
website. Each Representative that elected to participate in the website
initiative prior to December 31, 1999, has the option to drop out of the program
on October 1, 2000 and receive a full refund of the $950 fee plus interest. As
of December 31, 1999, approximately 2,600 Representatives have been included in
the website initiative. For the quarter ending December 31, 1999, the Company
used the proceeds of these fees to offset $750,000 in expenses associated with
the promotion and development of the website. The remainder has been reserved
for future expense offsets and for potential refund requests.
6) Segment Reporting
In December 1999, The Company established H.D. Vest Technology Services, Inc.
("HDVTI") a wholly owned subsidiary of the Company. The sole purpose of this
entity is to record the cost and related revenues generated from the new website
initiative; however, as of December 31, 1999, HDVTI does not represent a
reportable segment as defined by Statement of Financial Accounting Standards No.
133.
7) Stock Options
In October 1999, pursuant to the Stock Option Plan, the Board of Directors
approved the issue of options for the purchase of 220,000 shares of the
Company's common stock to Herb D. Vest, CEO and principal common shareholder,
exercisable at a strike price of $20 per share for a period of three years from
the date of issuance.
In November 1999, pursuant to the Stock Option Plan, the Company issued to Roger
C. Ochs, president, options for the purchase of 80,000 shares of the Company's
common stock and also issued a total of 80,000 shares (collectively) to three
other employees of the Company. Also in November 1999, the Company, pursuant to
approval by the Board of Directors, issued options for the purchase of a total
of 180,000 shares (collectively) of the Company's common stock to certain
employees of the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations
Revenues
The Company's revenues for the three months ended December 31, 1999, were
$43,910,425, a 27% increase over the Company's revenues for the three months
ended December 31, 1998. Management believes that the increase in revenues is
due in part to the continued strength in overall financial markets. Management
believes the Company's ability to maintain or increase revenues is due in part
to the Company's commitment to training Representatives in diversification and
long-term investment activities. In addition, Management believes that the
number of Representatives and their experience in the financial planning and
sales industry directly impact revenues.
Due to the declining industry-wide trend of commission revenue as a percentage
of gross product sales, the Company has continued to devote resources to the
development of its fee-based programs. Fee-based programs produce revenue based
on quarterly charges to clients for the management of their accounts, whereas
commission-based services produce revenue based primarily on one-time front-end
sales charges for the purchase of products. Some clients may prefer fee-based
programs as opposed to more traditional commission-based services. For the three
months ended December 31, 1999, portfolio management fees from these programs
were $6,245,976, a 32% increase from the three months ended December 31, 1998.
Net Income
The Company had net income of $1,892,268 for the three months ended December 31,
1999, compared to net income of $179,354 for the three months ended December 31,
1998.
Net income for the three months ended December 31, 1999, increased from the
prior year due in part to (i) continued revenue growth, (ii) a reduction in
Representative recruiting expense, (iii) a reduction in systems implementation
expenses and (iv) reduced management fees to Herb Vest. Commission and portfolio
management fee expense increased at a faster rate than the related revenue due
primarily to Representatives moving into higher payout categories as well as
increased production from Representatives in higher payout categories.
Management believes that in periods of short-term economic fluctuations,
established Representatives have an advantage over less experienced
Representatives in selling investment products. As the Company recruits and
trains Representatives in lower payout categories, the revenue generated by
these Representatives will help to offset increased revenue by Representatives
in higher payout categories.
Operations costs for the three months ended December 31, 1999 were $3,965,395 a
36% increase compared to the prior year. The increase in
10
<PAGE>
operations costs is mainly due to an increase in the cost of licensing
Representatives. Operations expense is also impacted by additional costs
required by the new back office system.
Representative development costs for the three months ended December 31, 1999
were $2,741,239, a 12% increase compared to the prior year. The increase in
Representative development costs is mainly due to increased participation by
Representatives and the expansion of staff necessary to support participation in
these programs. The increase in participation by Representatives and the related
costs is directly attributable to the increased recruitment of new
Representatives in prior years. As additional Representatives are recruited, the
Company expects participation and the related costs in development programs to
continue to increase.
General and administrative expenses decreased 12% to $4,623,535 for the three
months ended December 31, 1999, compared to the prior year. The reduction in
expense is related in part to cost containment activities conducted by the
Company's management and a reduction in the fees related to Mr. Vest's
management agreement. In January 2000, Herb D. Vest and the Company agreed to
remove the bonus provision from Mr. Vest's management agreement for the fiscal
year ending September 30, 2000.
Representative recruiting costs for the three months ended December 31, 1999,
were $257,033, a 58% decrease compared to the prior year. The reduction in
recruiting costs is the result of a decreased focus on Representative recruiting
efforts. 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
impacted negatively.
Certain sections of this Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking statements that
involve a number of risks and uncertainties. In addition to the factors
described above, among other factors that could cause actual results to differ
materially include: drastic changes in market conditions; effects of new
technology; interest rates; the Year 2000 compliance and readiness of the
Company's suppliers and service providers; changes in the availability of
prospective representatives; and the risks described from time to time in the
Company's SEC reports, including but not limited to the report on Form 10-K for
the year ended September 30, 1998.
Liquidity and Capital Resources
At December 31, 1999, the Company had net working capital of $8,557,968 compared
to net working capital of $6,579,642 at September 30, 1999. The $1,978,326
increase is primarily a result of the net income for the period ending December
31, 1999. The increased net income is in part due to the reduction in systems
implementation expense and reduced Representative recruiting costs compared to
the period ended December 31, 1998.
We are launching a new interactive financial planning Web site providing
comprehensive, integrated financial needs analysis and
11
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appropriate investment information for consumers. The web site is intended to
promote brand awareness, provide lead generation for our Representatives and to
facilitate the marketing of financial products and services. It is anticipated
that the Web site will include, among other things, a tax planning organizer and
program allowing consumers to prepare their tax returns free of charge,
retirement and college funding calculators, debt management recommendations,
insurance and risk management information, links to our nationwide network of
Representatives, and product purchase and service options. In addition, a
financial planning analysis generated from tax return information will be
provided to the consumer.
During the first three months of fiscal 2000, the Company dedicated much of its
capital to the development and promotion of a new interactive financial planning
Web site and to costs incurred for the ongoing implementation of other computer
systems related to its operating and marketing efforts. These other operating
systems include the Company's new Representative contact management system and
enhancements to the Company's internet site. Management believes that this
dedication to information systems will provide the Company with more capacity to
manage its current growth, support future growth and will lead to an increase in
efficiency.
We continually monitor the capital markets for opportunities to obtain financing
to meet our growth needs. To the extent that funds are available, we would
accelerate the development and promotion of our web site. Other funds would be
utilized for recruiting, development and other general business purposes. We are
required to expense many of the costs related to these items. Should we obtain
future financing to fund our growth plans, it is likely that we would record
substantial expenses in the periods during and subsequent to obtaining such
financing.
12
<PAGE>
PART II OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
- --------------------------
We are subject to other legal proceedings and claims that have arisen in the
ordinary course of business and have not been finally adjudicated. We believe,
based on the advice of legal counsel responsible for such matters, that these
actions, when finally concluded and determined, will not have a material adverse
effect upon the financial position of the company.
Item 4. Submission of Matters to a Vote of Shareholders
- --------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
We recognize the need to ensure that our operations will not be adversely
impacted by "Year 2000" systems failures. Year 2000 issues arise because some
computer software and hardware products ("computer systems") were designed to
handle only a two-digit year, not a four-digit year (e.g., 1997 is seen by the
computer as "97"). These computer systems may have interpreted "00" as the year
1900 and not 2000, and could have either stopped processing date-related
computations or processed them incorrectly.
In order to minimize the impact of the Year 2000 on us, a Year 2000 plan was
established for the evaluation and management of risks associated with material
Year 2000 issues. The plan included a review of material computer systems that
we currently have in place, modification or replacement of such systems if
required, inquiry to third-party providers with whom we have material business
relationships as to their state of readiness for potential Year 2000 issues, and
the development of contingency plans in the event material Year 2000 issues
arise in our or third-party computer systems.
We have not experienced any major issues relating to the Year 2000. We have
continued to monitor and review all relevant systems within the Company as well
as third-party providers for any relevant issues.
We spent approximately $300,000 for testing, modification and replacement of our
computer systems related to Year 2000 issues as of September 30, 1999. For the
quarter ended December 31, 1999, we spent approximately $90,000 for testing,
modification and replacement of our computer systems related to Year 2000
issues. We expect that future expenses incurred, if any will continue to be
financed from internally generated funds.
13
<PAGE>
To the extent that we or third-party providers cannot correct material Year 2000
issues, and we are unable to efficiently conduct business in accordance with
anticipated contingency plans, our operations could be negatively impacted.
The foregoing information is a Year 2000 readiness disclosure.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
No reports of Form 8-K were filed during the quarter ended December 31, 1999.
14
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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: January 20, 2000 By: /s/ Herb D. Vest
---------------------------
Herb D. Vest
Chief Executive Officer,
Chairman of the Board
Date: January 20, 2000 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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,057,609
<RECEIVABLES> 12,109,742
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 7,746,679
<TOTAL-ASSETS> 38,426,129
<SHORT-TERM> 0
<PAYABLES> 5,959,453
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 8,707,773
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 9,570,111
<TOTAL-LIABILITY-AND-EQUITY> 38,426,129
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 181,575
<COMMISSIONS> 31,606,014
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 6,245,976
<INTEREST-EXPENSE> 73,569
<COMPENSATION> 4,505,424
<INCOME-PRETAX> 3,267,758
<INCOME-PRE-EXTRAORDINARY> 1,892,268
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,892,268
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
</TABLE>
