UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
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 number 000-29342
WADE COOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 91-1772094
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
14675 Interurban Avenue South
Seattle, Washington 98168
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 901-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ----
Aggregate market value of the Registrant's Common Stock held by
non-affiliates as of April 22, 1999 was approximately $ 10,852,903. The number
of shares of the Registrant's Common Stock outstanding as of December 31, 1998
was 64,383,730.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
(Note: This report amends the Registrant's report on Form 10-K
originally filed on March 31, 1999)
Exhibit Index Appears at Page 34.
<PAGE>
Note Regarding Forward Looking Information
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any
statements that express or involve discussions with respect to predictions,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, using words and phrases such as "expects,"
"believe," "believes," "plans," "anticipate," "anticipates," "is anticipated,"
or stating that certain actions, events or results "will," "may," "should," or
"can" be taken, occur or be achieved) are not statements of historical fact and
may be "forward-looking statements." Forward-looking statements are based on
expectations, estimates and projections of the Company's management at the time
the statements are made that involve a number of risks and uncertainties which
could cause actual results or events to differ materially from those anticipated
by the Company. Such risks and uncertainties include, but are not limited to,
the Company's working capital deficiency and liquidity constraints, the effect
that volatility in the stock market may have on the interest of customers in the
Company's seminars, products and services and on the Company's own investments,
the Company's ability to manage its growth and to integrate recent acquisitions,
fluctuations in the commercial real estate market, risks of the hotel business
and failure of recently acquired hotel properties to perform as expected, the
control of the management of the Company by Wade B. Cook, the Company's CEO, the
possibility of adverse outcomes in pending or threatened litigation and
regulatory investigations and actions involving the Company, consequences
associated with the Company's policy of committing available cash to additional
investments, lack of liquidity in the Company's investments and other risks and
uncertainties discussed herein and those detailed in the Company's other
Securities and Exchange Commission filings. Investors are cautioned not to place
undue reliance on forward-looking statements, which reflect management's
analysis, estimates and opinions as of the date hereof. The Company undertakes
no obligation to update forward-looking statements if circumstances, or
management's analysis, estimates or opinions should change. For the convenience
of the reader, the Company has attempted to identify forward-looking statements
contained in this report with an asterisk (*). However, the omission of an
asterisk should not be presumed to mean that a statement is not a
forward-looking statement within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act.
Item 1. Business
Overview
Wade Cook Financial Corporation (formerly known as Profit Financial Corp.) is a
Nevada holding company. Unless the context otherwise requires, the terms "WCFC"
and "the Company" refer to Wade Cook Financial Corporation and its consolidated
subsidiaries. Prior to December 1997, the Company was incorporated in the state
of Utah. The Company's most significant subsidiary is Wade Cook Seminars, Inc.
("WCSI") through which the Company conducts educational business seminars,
produces and sells video and audio tapes and distributes books and other written
materials focusing on financial and personal wealth creation strategies. In
addition, the Company has several publishing subsidiaries that publish books and
other written materials relating to personal finance, inspirational themes and
other topics. The Company also provides subscription Internet access and paging
services and maintains an investment information network on the Internet. The
Company owns interests in hotels and holds interests in marketable securities,
real estate, gold, oil and gas, and other venture capital partnerships and
private companies. The Company's principal executive offices are located at
14675 Interurban Avenue South, Seattle, Washington 98168-4664, and its telephone
number at that address is (206) 901-3000.
Acquisition of Wade Cook Seminars, Inc. In 1995, the Company acquired all the
issued and outstanding capital stock of WCSI (formerly known as United Support
Association, Inc.), a corporation controlled by Wade B. Cook, in exchange for a
controlling interest in the Company. The transaction was accounted for as a
reverse acquisition. As a result, the Company became the parent company of WCSI
and the historical financial results of WCSI became the historical financial
results of the Company.
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Other Acquisitions.
In August 1997, the Company acquired Worldwide Publishers, Inc. ("Worldwide"), a
publisher of inspirational and childrens' books, Origin Book Sales, Inc.
("Origin"), a seller of books, audio cassettes, art and software and the
exclusive distributor for Worldwide ("Worldwide"); Gold Leaf Press, Inc. ("Gold
Leaf"), a publisher of fiction and non-fiction books; and Ideal Travel Concepts,
Inc. ("Ideal"), a provider of travel related services and travel agent training.
The aggregate consideration in these acquisitions consisted of a cancellation of
$275,000 in indebtedness to the Company and 423,294 shares of the Company's
common stock.
Also in August 1997, the Company acquired an aggregate of 769,231 shares
(approximately 5.1%) of the common stock of Interjet Net Corporation, a
wireless, high speed Internet access provider, for a total purchase price of
$1,500,000.
In January 1998, the Company acquired Quantum Marketing, Inc. ("Quantum"), a
corporation that provides local marketing of WCSI products and services. The
Company acquired all the issued and outstanding capital stock of Quantum in
exchange for 45,000 shares of the Company's common stock for a deemed purchase
price of $189,000.
In January 1998, the Company was assigned all interests in Information Quest,
Inc. ("IQ"), a corporation that markets a paging service that provides
subscribers with up to date stock market and financial information. The Company
received all the issued and outstanding capital stock of IQ in exchange for
45,000 shares of the Company's common stock for a deemed purchase price of
$188,000.
During 1998, the Company acquired majority interests in several hotel properties
located in the western United States in exchange for cash, and in some cases, in
exchange for relinquishing or reducing certain interests in other properties.
See "Business - Hotels and Commercial Real Estate." Reference is made to Notes
Q, R and S of the Notes to Financial Statements included in Item 14 of this
report for further information concerning the above acquisitions.
In August 1998, the Company acquired a fifty percent (50%) interest in Standard
American Oil Company for a total purchase price of $750,000. Standard is engaged
in the business of developing and marketing asphalt patching products.
In addition, during 1998, the Company made minority investments in two oil
wells.
Sale of Entity Planners, Inc.
In June 1998, the Company, through WCSI entered into a Stock Purchase/Licensing
Agreement pursuant to which it divested its interest in Entity Planners, Inc.
("EPI") in exchange for $250,000. EPI has a licensing agreement with the Company
pursuant to which the Company is entitled to receive up to an aggregate of
$17,470,000 in licensing fees through the year 2003.
Strategy
The Company provides financial education and information to the growing number
of individual investors in the U.S. According to the United States Federal
Reserve, the value of household corporate equities holdings has increased from
$903 billion in 1980 to $4.78 trillion in 1996. The Company believes this is due
both to population increases within the United States and to the recent growth
in the market value of corporate securities. The Company has positioned itself
to benefit from these trends.
The majority of the Company's programs, products and services are based on the
financial and investment strategies of its founder, Wade B. Cook. Mr. Cook has
developed these programs and products based on his belief that people want to
learn how to: (a) increase their wealth by increasing their cash flow; (b)
minimize their federal and state income taxes; (c) use entities, such as Nevada
corporations, family limited partnerships, living trusts, qualified pensions,
and charitable remainder trusts, to protect their assets; (d)
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retire with sufficient income from their assets to maintain a comfortable
standard of living; and (e) pass on their accumulated wealth and assets to their
loved ones without the complexities of probate.
The Company will seek to expand market share for its existing products and
services and to create new products and services that complement and extend
existing lines, while diversifying its business.* The Company also will seek to
improve its bottom line by reducing overhead, using existing distribution
channels and enhancing customer service.* In order to accomplish these
objectives, the Company has initiated a strategic plan consisting of the
following elements:
o Making strategic acquisitions and divestitures to extend product lines
that complement the Company's core business of financial education;
o Developing new products and services;
o Acquiring licenses for additional books, audio tapes, seminars, video
tapes and other intellectual property from Mr. Cook and others in
order to expand the scope of financial education available to
customers of the Company;
o Diversifying the authors and seminar leaders promoted by the Company
in order to offer students a choice of investment strategies, styles
and philosophies; and
o Making more efficient use of administrative resources.*
The Company intends to expand its core business of marketing and presenting
financial education seminars.* The Company has also recently begun providing
subscription Internet access and pager services. The Company believes that these
businesses provide good opportunities for growth and complement the Company's
core business of financial education.*
In 1997 and 1998, with the view to diversifying its asset base, the Company
acquired interests in several hotel properties in the western United States. The
Company believes that these properties lend stability to its business while
offering potential for long-term growth.
Business Segments and Principal Subsidiaries
The Company's core business is financial education, which it conducts through
its seminar and publishing concerns. This core business is complemented by
bookstores and education centers that focus on financial education, a pager
service that provides up-to-date financial information and a subscription-based
web site, the Wealth Information Network ("WIN"), that provides additional
information about the strategies taught in the Company's seminars and
publications.
The following table shows, for the years ended 1998, 1997 and 1996, the
percentage of revenues derived from each business segment in which the Company
operates:
Business Segment 1998 1997 1996
---------------- ---- ---- ----
Seminars 65% 65% 64%
Product Sales (1) 18% 31% 36%
Travel Services 5% 4% -
Hotels (2) 3% - -
Pager Services (2) 8% - -
Other (2) (3) 1% - -
---------------
(1) Includes WIN
(2) Represents revenues of a business segment of the Company acquired in 1998.
(3) Consists principally of sales from retail bookstores
The Company's principal subsidiaries are engaged in the following activities:
o Financial education seminars;
o Publishing;
o Retail;
o Commercial real estate;
o Various non-real estate investments; and
o Support services.
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At December 31, 1998, the Company's wholly-owned subsidiaries were:
<TABLE>
State of
Corporate Name (1) Principal Business Incorporation
- ------------------ ------------------ -------------
<S> <C> <C>
Wade Cook Seminars, Inc. Financial Education Seminars Nevada
Lighthouse Publishing Group, Inc. Publishing Nevada
Left Coast Advertising, Inc. Support Services Nevada
Bountiful Investment Group, Inc. Commercial Real Estate Nevada
Ideal Travel Concepts, Inc. Support Services Nevada
Origin Book Sales, Inc. Publishing Utah
Worldwide Publishers, Inc. Publishing Utah
Gold Leaf Press, Inc. Publishing Nevada
Get Ahead Bookstores, Inc. Retail (bookstores) Nevada
Quantum Marketing, Inc. (2) Support Services Nevada
Information Quest, Inc. Retail (pagers) Nevada
American Newsletter Co., Inc. (2) Publishing Nevada
Unlimited Potential, Inc. (2) Commercial Real Estate Nevada
Hotel Associates Management #1, Inc. (2) Commercial Real Estate Nevada
American Publisher's Network, Inc. (2) Publishing Nevada
Forward Thinking Group, Inc. (2) Retail Sales Nevada
Money Works, Inc. (2) Support Services Nevada
Entity Planners International, Inc. (2) Commercial Real Estate Nevada
Wade Cook Financial Education Centers, Inc. Retail (education centers) Nevada
Winvest Centers, Inc. (2) Retail Sales Nevada
Wade Cook Financial Education Network (2) Publishing Nevada
Semper Financial Corporation (2) Financial Education Seminars Nevada
- -------------------------------------
</TABLE>
(1) Information in the table does not include entities in which the Company
owns a partial interest. These entities are:
(a) Airport Lodging Associates, L.L.C., a limited liability company in
which WCSI is a 25% member;
(b) Evergreen Lodging L.P., a limited partnership in which WCSI owns a 65%
limited partnership interest and in which an affiliate Wade B. Cook is
General Partner;
(c) FSS L.P., a limited partnership in which Unlimited Potential, Inc. has
a 2% interest and is the General Partner;
(d) Interurban Land Project L.P., a limited partnership in which Entity
Planners International, Inc. has 100% interest and is General Partner;
(e) Reno F.I.S., L.P., a limited partnership in which Unlimited Potential
Inc. has a 2% limited partnership interest and is the General Partner,
and in which Hotel Associate Management #1, Inc. is a 50% owner and a
limited partner;
(f) Rising Tide L.P., a limited partnership, in which Entity Planners
International, Inc. has a 1% interest and is the General Partner and
in which Bountiful Investment Group, Inc. has a 99% limited
partnership interest;
(g) Seattle-Tacoma Executive Properties, L.P., a limited partnership in
which Entity Planners International, Inc. owns a 100% interest and is
the General Partner; and
(h) Sherlock Home Builders, L.P., a limited partnership in which Entity
Planners International, Inc. own a 100% interest and is the General
Partner and which owns the building that serves as the Company's
principal office.
(2) No financial activity in 1998, although activities were carried out in the
names of certain of these corporations by WCSI or other WCFC entities.
Financial Education Seminar Businesses
Wade Cook Seminars, Inc.
Wade Cook Seminars, Inc. creates, designs, produces, owns, markets and sponsors
a variety of seminars, clinics, and workshops focused on educating customers on
various financial techniques and strategies. WCSI also produces and sells audio
tapes and video tapes and distributes books and other materials designed to
reinforce and complement the ideas taught in the educational seminars.
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In 1998, WCSI conducted 3,737 seminars in over 379 cities across the United
States. The subject matter of these events generally falls into four basic
categories:
o stock market investment strategies;
o real estate investment strategies;
o options investment strategies; and
o general investment strategies.
The stock market investment strategy seminars include the following:
o The Financial Clinic is a three-hour seminar explaining the financial
education products and services offered by WCSI and providing an
introduction to strategies for investing in the stock market. The
typical attendance fee for the seminar ranges from $22 to $33.
o The Wall Street Workshop ("WSWS") is a two-day seminar which teaches
investors the strategies set forth in Mr. Cook's books, "Wall Street
Money Machine" and "Stock Market Miracles." WSWS students are taught
basic stock market terminology, strategies for choosing brokerage
firms and traditional stock market strategies. The workshop features
instruction, demonstration of strategies and extensive practice
through "paper trades." The typical attendance fee for the seminar
ranges from $695 to $5,695 depending on the seminar options chosen by
the attendee.
o Youth Wall Street is a version of the Wall Street Workshop for
teenagers focusing on teaching teens how the financial markets work,
and how they can experience the market themselves through making
trades on paper. Admission to Youth Wall Street is offered free to
high school business clubs and similar groups as a community service
by the Company. Attendance is also free for children 18 years old and
under who are accompanied by a paying adult. Otherwise, the typical
attendance fee for this seminar is $1,295.
o Fortify Your Income ("FYI") is a half-day seminar which reviews
strategies taught at the Wall Street Workshop and is offered as a free
refresher course to WSWS graduates. If not taken as a refresher
course, the typical attendance fee for this seminar is $2,995.
o The Next Step is a two day seminar for participants who have attended
the WSWS. The Next Step presents advanced stock market strategies in a
forum that allows students to actively participate. The typical
attendance fee for this seminar is $1,495.
The Company maintains several brokerage accounts which it uses during its
seminars to make trades based on its financial strategies. These trades are then
posted on the Company's subscription internet service, the Wealth Information
Network, along with a brief description of the strategy used and the reason for
making the trade. Although the Company uses its best efforts to make profitable
trades in these brokerage accounts, the primary purpose of these trades is
educational.
The real estate investment strategy seminars include the following:
o Building Perpetual Income is a three-hour workshop which summarizes
cash-flow strategies related to the real estate market. The workshop
introduces Real Estate Bootcamp and is typically offered free of
charge to allow prospective customers to become familiar with the
WCSI's real estate strategies.
o Real Estate Bootcamp is a two and one-half day event which provides a
detailed analysis of the strategies outlined in Mr. Cook's book "Real
Estate Money Machine." The class often takes a field trip to various
local sites in an effort to familiarize students with the types of
real estate available on the market. The typical attendance fee for
this seminar ranges from $3,495 to $4,495.
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o The Real Estate One Day Workshop is an event which teaches students
the general strategies outlined in Mr. Cook's book "Real Estate Money
Machine." Students are taught strategies for identifying real estate
investments and methods of turning real estate into cash-flow
investments. The Real Estate One Day Workshop costs between $995 and
$1,495 depending on the availability of discounts at the time of
payment.
The options seminars are focused on option trading and investing. The coursework
includes two workshops:
o High Octane Options Performance Seminar ("HOOPS) is a one day event
discussing options trading created and introduced by speaker Steve
Wirrick. The typical attendance fee for this seminar is $995.
o The Options Bootcamp is a two day seminar created by Steve Wirrick.
The Options Bootcamp expands upon the information presented in Mr.
Wirrick's HOOPS workshop and features a tour of the Option Exchange in
Chicago as a part of the class. The typical attendance fee for this
seminar is $995.
The general investment strategy seminars are a series of individual one-day
seminars on a variety of investment topics that complement the stock market and
real estate seminars. These seminars have a typical attendance fee of $995 and
include:
o The One Minute Commute is a one day event teaching strategies for
investing and choosing brokers.
o Supercharge Otherwise Average Returns is a one day event that teaches
strategies for making covered calls.
o The Day Trader is an event offered to teach day trading strategies.
o High Impact Trading ("HIT") is a one day event that teaches the
psychology the stock market.
The Company sometimes engages in promotions that permit students to attend
seminars and other events without charge or at a reduced rate. The Company also
packages all of the above seminars in multi-day seminar packages under the title
"Cook University." The typical attendance fee for Cook University varies from
$695 - $12,295 depending on nature and content of the seminar package purchased.
Seminar Leaders. As of March 25, 1999, there were approximately 60 independent
contractors providing professional speaking services for WCSI. WCSI has an
extensive speaker training program that provides speakers with training to
enhance the value they provide their students. Typically speaker candidates are
drawn from the ranks of WCSI students. The most promising candidates are then
selected to tour with more experienced speakers to learn by observation and to
gradually take on responsibilities as "second speakers." In addition,
experienced speaker trainers conduct two-day, monthly workshops to allow
speakers to hone their skills on an ongoing basis. In order to protect WCSI's
intellectual property, the contracts between the WCSI and the speakers generally
contain non-compete clauses.
Products marketed by WCSI. WCSI's seminars and programs are supplemented by
audio tapes, video tapes, books and other printed material that are licensed to
WCSI. These materials provide students with reinforcement of the concepts,
strategies and philosophies that are taught in the WCSI seminars.
The books promoted and marketed by WCSI include best-selling books written by
Wade Cook such as "The Wall Street Money Machine," "Stock Market Miracles,"
"Bear Market Baloney," and "Business Buy the Bible." WCSI also distributes a
wide range of books and publications written by Mr. Cook on a variety
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of investment and business topics. The books are primarily distributed through
sales at the seminars, product catalogues, the Company's own bookstores and
other third-party bookstores.
The audio tapes promoted and sold by WCSI and authored by Wade B. Cook include
the multi-media audio-tape seminars "Financial Fortress Home Study" and "Zero to
Zillions." In addition, WCSI sells single tapes that generally address the ideas
and concepts taught in its seminars. Mr. Cook is the primary speaker in each of
these tapes. From time to time, WCSI distributes free "update tapes" as a tool
to support students' continuing education, market new WCSI products and maintain
a strong connection with the WCSI customer base.
The videotapes promoted and sold by WCSI include the multi-tape video versions
of WCSI's seminars Wall Street Workshop and The Next Step, as well as
single-tape videos on a variety of investment topics.
Sales and Marketing. The WCSI creates interest and demand for its programs,
products and services through a mix of radio and television advertising, direct
mail, Internet marketing, flyers, sports promotions and billboard advertising.
The WCSI sales organization includes more than 130 representatives who respond
to customer inquiries via phone, e-mail, Internet web-site, and facsimile.
Furthermore, the sales force is trained to follow up with existing clients and
to promote new products and services.
o Radio advertising is WCSI's primary means of promoting its seminars.
Radio spots are supplemented by radio infomercials which typically
promote a financial seminar being held in the local market and use a
toll-free telephone number.
o Television advertising is used on a limited basis to attract interest
in attending the Company's financial clinics and to create name
awareness.
o Direct mail marketing is used by WCSI to market its full complement of
products, programs and services to its customer list of over 922,000
individuals. These marketing campaigns, in addition to the flyers and
brochures distributed WCSI in public venues, are developed by the
WCSI's centralized marketing department.
o Internet marketing became an important aspect of WCSI's marketing
program in 1998, with a focus on its Internet web site at
http://wadecook.com. The site contains information about the WCSI's
programs, products and services, some of which potential customers may
purchase online. In addition, subscribers to the Company's Wealth
Information Network may access WIN through the web site. In the
future, the WCSI intends to expand the list of items available for
purchase on its web site.*
o Sport promotion was an important aspect of WCSI's marketing efforts in
1998 and included sponsorship programs with various NFL teams, the
Seattle SuperSonics, the Seattle Mariners, the Utah Jazz, the
Minnesota Timberwolves and golf tournaments in key markets. WCSI
gained visibility, as well as the opportunity to promote services with
giveaways of books, audio tapes and other promotional materials.
o Flyers and billboard advertising is used by WCSI to market its
financial seminars. Typically, flyers are placed in community centers
and other public places a few weeks prior to the date of the seminar.
The Company's billboard advertising is primarily focused in the
Seattle and Tacoma, Washington markets.
In addition to the foregoing, the Company believes that a significant amount of
its seminar business is attributable to "word of mouth" advertising by its
seminar students.
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Semper Financial Corporation
In 1999, Semper Financial began offering multi-day, regional financial education
conventions to WCSI students and others interested in investing. The multi-day
conventions feature a broad cross-section of WCSI's seminar speakers and topics
to allow prospective students to experience the wide variety of products and
seminars offered by WCSI.
Entity Planners, Inc.
Entity Planners, Inc. ("EPI") was a wholly-owned subsidiary of the Company that
offered a number of seminars explaining the use of entities to protect assets
and minimize tax burdens. EPI also offered entity structuring services. In June
1998, the Company sold its interest in EPI. See "Business - Overview - Sale of
Entity Planners, Inc."
Publishing Businesses
The WCFC publishing subsidiaries focus their offerings in the following areas:
business, finance, self-improvement, religious and spiritual and general
interest non-fiction.
Lighthouse Publishing Group, Inc.
Lighthouse is engaged in the business of producing and publishing books, and to
a limited extent, audio and video tapes. Publications by Lighthouse generally
concern topics such as business, finance, real estate and self improvement. Many
of the current books published by Lighthouse are authored by Mr. Cook and have
appeared on various best seller lists. Lighthouse carries additional authors
including John J. Childers, Jr., Dave Hebert, John Huddleston, Bob Eldridge and
Renee Knapp. Lighthouse intends to retain more authors and to expand into new
categories of interest in 1999.*
Worldwide Publishers, Inc.
Worldwide is engaged in the publishing business under the identifying publishing
insignias Aspen Books and Buckeroo Books. Aspen Books publishes religious books
or books with spiritual emphasis targeted primarily to members of The Church of
Jesus Christ of Latter-day Saints. Buckeroo Books publishes primarily childrens'
books.
Origin Book Sales, Inc.
Origin is a book distribution company that sells books on consignment and sells
books, audio cassettes, art, and software in the retail market. Origin primarily
distributes products for Worldwide and is the exclusive distributor of
Worldwide's products.
Gold Leaf Press, Inc.
Gold Leaf publishes non-fiction books in the inspirational, self-help and
parenting categories, as well as some fiction.
Information Services
Wealth Information Network ("WIN")
The Company operates WIN, a subscription online service which can be accessed
via the internet 24 hours a day. WIN provides detailed information illustrating
trading techniques taught by the Company, its subsidiaries and by Mr. Cook
personally using the investment strategies discussed in "Wall Street Money
Machine" and "Stock Market Miracles." WIN also provides stock information and
updates on the Company's programs and products, including a schedule of events
and seminars provided by WCSI.
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Information Quest, Inc.
IQ operates a subscription paging service that uses standard pagers to
distribute up-to-the minute stock quotes and other financial information to
customers. The paging services are marketed principally to students of WCSI as
an additional tool for their investing activities. In addition, IQ recently
began offering subscriptions to an authorized Internet service provider called
"IQ Connect."
Retail Locations
Wade Cook Financial Education Centers, Inc. ("WCFEC")
The Company, through WCFEC, operates educational centers that house the WINvest
Centers (online resource centers used by WCSI students), Get Ahead Bookstores
(see below) and sales facilities for the sale of WCSI products. The centers also
serve as "community centers" to help keep WCSI students connected with the
Company and with one another. The first Wade Cook Financial Education Center was
established in 1997 in Tacoma. Since that time the Company has expanded the
education centers to Santa Ana, California and Seattle, Washington. The Company
intends to open additional centers during 1999.*
Get Ahead Bookstores, Inc. ("Get Ahead").
Get Ahead Bookstores, Inc. operates three bookstores that are housed within the
Wade Cook Financial Education Centers at the Seattle, Tacoma and Santa Ana
sites. Get Ahead is a retail outlet for books, audio cassettes, and video
recordings primarily related to finance, education, investments, and personal
development.
Hotels and Commercial Real Estate
The following table lists the hotel properties held in WCFC entities:
<TABLE>
Property Rooms Location Manager % owned
- -------- ----- -------- ------- -------
<S> <C> <C> <C> <C>
Best Western McCarran House 202 Sparks, NV Zion's Management Co. 100%
Four Points by Sheraton, St. George 200 St. George, UT Zion's Management Co. 100%
Airport Ramada Suites 59 Salt Lake City, UT Zion's Management Co. 75%
Fairfield Inn 72 Provo, UT Zion's Management Co. 49%
Hampton Inn/Fairfield Inn 81 Murray, UT Western States Lodging 16%
Woods Cross Fairfield Inn 88 Woods Cross, UT Western States Lodging 7%
Park City Hampton Inn & Suites 65 Park City, UT Western States Lodging 4%
</TABLE>
In addition to the ownership of the hotel properties, WCSI entities also hold,
for investment purposes, the following parcels of real estate:
o A 65% interest in a limited partnership that owns an undeveloped lot
at 7200 South in Salt Lake City, Utah.
o A 100% interest in an undeveloped lot located in Reno, Nevada.
Currently, the land is under a contract for sale.
o A 67% interest in an undeveloped lot located at 215 West 1300 South in
Orem, Utah.
Support Services
Ideal Travel Concepts, Inc.
Ideal provides travel related services including domestic and international
airline reservations, car rental reservations, tour packages, and cruises. The
Company is Ideal's primary client. In addition, Ideal also
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offers travel agent training packages for independent travel agents. During the
past five years, over 15,000 people have ordered Ideal's travel agent training
packages.
Left Coast Advertising, Inc.
Left Coast is engaged in the business of producing and placing advertising using
various media; including, radio, television, newspapers and magazines. Left
Coast was formed to allow WCFC to take the agency commission on media purchases
on behalf of WCFC. Left Coast is a fully licensed advertising agency whose only
client is the Company and the Company's subsidiaries.
Competition
The financial educational seminar industry is highly competitive. The market in
which the Company operates is fragmented and decentralized with low barriers to
entry. The Company's competitors include other companies and individuals who
promote and conduct seminars and provide products on topics relating to
investments, financial planning and personal wealth management. Some of our
competitors in the financial educational seminar market include Robbins Research
International and Online Investor Advantage. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or alliances of such competitors, or that competitive pressures
faced by the Company will not materially adversely affect its business,
operating results and financial condition.
Intellectual Property
The Company regards its seminars, products, trademarks, trade symbols and other
materials as proprietary and relies primarily on a combination of statutory and
common law protections, such as copyrights, trademarks and trade secrets to
protect its interests in such proprietary materials. While many of the product
and trade names are common terms and do not afford the Company maximum copyright
protection, the Company has taken several steps to maximize the copyright
protection available to it. For example, the Company trains its marketing staff
to consistently use all the applicable trademark symbols. Additionally, the
Company adopts an aggressive litigation stance in protecting its intellectual
property rights where warranted. The Company also relies on employee and
third-party non-competition and non-disclosure agreements and other methods of
protecting proprietary rights in order to safeguard the Company's intellectual
property.
The Company has an Open Ended Product Agreement with Wade B. Cook which expires
June 30, 2000. Pursuant to the terms of this agreement, the Company has a
non-exclusive license with Mr. Cook to produce, market and sell licensed
products and intellectual property in exchange for payment of a royalty to Mr.
Cook equal to ten percent (10%) of gross sales of the licensed products. The
license also grants the Company the right to use Mr. Cook's name, likeness,
identity, trademarks and trade symbols. The agreement is open-ended in that it
allows for future products developed by Mr. Cook to be licensed under the same
terms and conditions upon the execution of a "License Order." Royalties are paid
to Mr. Cook on a quarterly basis under the terms of the agreement; however, as
CEO of the Company, Mr. Cook is authorized to set Company policy which allows
him to take draws against royalties in amounts which he determines reasonable.
In such cases, the royalties owing under the license are then reconciled
quarterly with the draws Mr. Cook has taken. The Company does not have a
contract which gives it the first right to license or otherwise obtain the right
to produce, market or sell any future products developed by Mr. Cook.
Employees
As of April 22, 1999, the Company had 448 employees, including 332 full-time
employees, 116 part-time employees, and approximately 60 independent
contractors. None of the Company's employees is represented by a labor union,
and the Company believes its employee relations to be good.
11
<PAGE>
Risk Factors
Corporate Control By Wade B. Cook
Wade B. Cook is the founder, majority shareholder, Chairman of the Board,
President, and Treasurer of the Company. Laura Cook, Mr. Cook's wife, is the
Secretary of the Company and is also a member of the Board of Directors. Several
of Mr. Cook's relatives work at the Company. Mr. Cook maintains control over
many aspects of the Company including, but not limited to, setting corporate
policy, determining strategic direction, determining the acquisition or sale of
assets by the Company, setting the material terms of such acquisitions and
determining the material provisions of many of the Company contracts. Mr. Cook
provides input on every product and seminar sponsored by the Company. Mr. Cook
also directs most marketing efforts of the Company and has significant influence
over the management of the Company. Mr. Cook will continue influence the
policies and procedures of the Company and will be in a position to determine
the outcome of corporate actions requiring stockholder approval, including the
election of directors, the adoption of amendments to the Company's corporate
documents, the approval of mergers and the sale of the Company assets. In 1989,
the state of Arizona issued and administrative order concluding that Mr. Cook
had violated various provisions of the Arizona securities laws. Mr. Cook and his
affiliated entities to paid a civil penalty of $150,000, reimbursed shareholders
$390,000 and agreed to cease and desist the allegedly fraudulent conduct. This
matter has been concluded and all fines have been paid.
Dependence on Wade B. Cook
The Company's business is highly dependent on the continuing effective
involvement of Mr. Cook. Mr. Cook personally directs most aspects of the
Company's business. The Company has a non-exclusive license which expires June
30, 2000 to use Mr. Cook's products, intellectual property, name, image,
identity, trademarks and trade symbols which are featured prominently in many of
the Company's services and products. Mr. Cook is not prohibited from competing
with the Company or granting licenses to competitors. See "Business -
Intellectual Property." The business of the Company would be materially
adversely affected if Mr. Cook's services were not available to the Company, or
if Mr. Cook should compete with the Company or grant licenses or other
assistance to competitors.
Working Capital Deficiency, Liquidity Constraints
At December 31, 1998, the Company had current assets of $11,998,000 and current
liabilities of $28,602,000, resulting in a working capital deficit of
$16,604,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources." The Company's
principal source of cash has been from its investment seminars and its sale of
books, tapes and other materials focused on business strategies, financial
planning and personal wealth management. Cash provided by operations increased
from $14.0 million in 1997 to $15.2 million in 1998. This increase reflected
increases in accounts and royalties payable, and a reduction in deposits, and
proceeds from the sale of trading securities.
The Company's policy of using available cash to acquire developing businesses
and non-marketable investments and its working capital deficit have resulted in
cash shortages and constraints on the Company's liquidity.
The Company has significant cash commitments in 1999, including a significant
obligation to pay income taxes from prior years. Cash flow from operations has
not been and is not expected to be sufficient to satisfy the Company's cash
requirements. If the Company is required to generate cash from its
non-marketable investments to satisfy its current obligations, it may not be
able to liquidate investments in a timely manner or in a manner that allows it
to receive the full value of the investments. Failure to generate adequate cash
resources could require the Company to cut back operations, delay expansion or
development projects, or cause the Company to be unable to meet its obligations
when due.
12
<PAGE>
Legal Proceedings and Governmental Investigations
The Company is party to various legal proceedings and governmental
investigations. See Part I, Item 3 of this report. Although the Company does not
presently expect material liability in any of these matters, the outcome of such
matters is difficult to predict and subject to uncertainty, and the legal fees
and other costs involved are likely to be material. If the Company were found
liable in certain of these legal proceedings, the amount of liability could be
material.* In addition, if the Company were to be found to have violated certain
consumer protection statutes or other laws, the Company could be required to pay
material penalties or to refund money paid by seminar attendees within the
jurisdictions involved. The Company could also be required to cease doing
business in certain jurisdictions or to significantly change the manner in which
its business is conducted in such jurisdictions. Any such result could have a
material adverse effect on the Company's financial condition and results of
operations. Jurisdictions in which litigation or investigations relating to the
Company's business practices are in progress include California and Washington
which accounted for 16% and 6%, respectively, of the Company's seminar sales in
1998.
Risks of Hotel Business
During 1997 and 1998, the Company began acquiring interests in hotel properties,
and it currently owns interests in seven hotels. See "Business - Hotels and
Commercial Real Estate." The Company has no prior experience in owning or
managing hotels. The Company's hotel business has not performed as well as the
Company anticipated, and it has suffered losses. There can be no assurance that
the hotels will become profitable in the future. In addition, acquisition and
renovation of hotel properties and losses of the hotel business have required
and are likely to continue to require, cash infusions which adversely affect the
Company's working capital.*
Effect of Securities Market Conditions on the Company's Business
The Company believes that increased public interest in investing, particularly
in the securities markets, has contributed significantly to the success of its
business. The securities markets have experienced substantial volatility in
recent periods. A sharp drop or sustained or gradual decline in securities
prices or other developments in the securities markets could cause individual
investors to be less inclined to invest in the securities markets, which would
be likely to result in reduced interest in the Company's seminars and related
products and services. Declines in the securities markets could also adversely
affect the value of the Company's investment portfolio.
Management of Growth and Integration of Acquisitions
The Company's business has grown significantly in terms of revenue, number of
employees and scope of activities in which it engages. During 1997, the Company
acquired Worldwide, Origin, Gold Leaf and Ideal, and during 1998, the Company
acquired Get Ahead (retail bookstores), Quantum (local sales and marketing
offices) and IQ (distribution of paging devices that distributed stock market
data). The Company also has acquired interests in seven hotels. The Company has
also invested in private companies in the oil and gas business and other
businesses, some of which require continuing attention from the Company's
management. Some of the acquired businesses and investments have not performed
as well as expected by the Company. Growth has placed significant strains on the
Company's management, accounting, financial and other resources and systems, and
on its cash resources and working capital. Failure to manage successfully the
growth in size and scope of the Company's business and to successfully integrate
and manage the Company's recently acquired businesses could have a material
adverse effect on the Company's results of operations and financial condition.
Tax Deficiencies
Current liabilities at December 31, 1998 include $4,969,000 in taxes payable,
which includes approximately $3.2 million in delinquent payments on 1997 federal
and state taxes, including penalties and interest. The Company has not made
estimated tax payments on 1998 income taxes. The accrued liability does not
include penalties and interest, which may be material. Tax authorities have the
power to
13
<PAGE>
commence legal proceedings, assert tax liens and take other actions to collect
delinquent taxes, together with interest and penalties. The taking of any such
action would have a material adverse effect on the Company's business and
financial condition.
Item 2. - Properties
The Company owns and occupies a 63,000 square foot building in Seattle,
Washington which houses its corporate headquarters. The building is subject to a
first mortgage, secured by the building and surrounding property, in the
aggregate amount of $ $746,000 at December 31, 1998.
In addition, subsidiaries of the Company occupy the following commercial
properties:
o WCSI leases 32,776 square feet in Algona, Washington for its shipping
and warehouse operations. The lease expires December 31, 2003.
o WCSI also leases warehouse property in Tukwila, Washington which it
currently subleases to a third party. The lease expires on April 30,
2000.
o Origin leases an additional 24,048 square feet of office and warehouse
space located in Salt Lake City, Utah. The lease expires on September
30, 2004.
o WCFEC leases approximately 10,000 square feet of office space in Gig
Harbor, Washington. The lease expires on July 7, 2001.
o WCFEC owns an office building in Santa Ana, California. The building
and surrounding land are subject to a first mortgage in the aggregate
amount of $383,000 at December 31, 1998.
o In 1998, Company owned a building in Memphis, Tennessee that housed
the offices of Ideal. The building and surrounding land were subject
to a first mortgage in the aggregate amount of $1.5 million at
December 31, 1998. On February 22, 1999, the Company sold the building
for an aggregate price of $1,434,000. The Company has no further
obligations under the mortgage.
The Company also owns or has majority interests in certain hotel properties and
other commercial real property as follows:
o 100% interest in the Best Western McCarran House hotel in Sparks,
Nevada. The hotel is subject to a mortgage, secured by the land and
building, in the aggregate amount of $4.8 million dollars in notes
payable as of December 31, 1998.
o 100% interest in the Four Points by Sheraton hotel in St. George,
Utah. The hotel is subject to a mortgage, secured by the land and
building, in the aggregate amount of $3.0 million at December 31,
1998.
o 75% interest in the Airport Ramada Ltd., Suites in Salt Lake City
Utah. The hotel is subject to a mortgage, secured by the land and
building, in the aggregate amount of $1.8 million at December 31,
1998.
In addition to the foregoing, the Company, through various subsidiaries and
other entities, also holds minority interests in certain other hotel properties
and raw land. See "Business - Hotels and Commercial Real Estate."
14
<PAGE>
Item 3. Legal Proceedings
The following is a description of previously unreported material threatened or
pending legal proceedings and updated information regarding previously reported
material threatened or pending legal proceedings to which the Company or any of
its subsidiaries is a party or which any of their properties is subject:
Litigation with ART and ITEX. On February 4, 1998, the Company filed a complaint
against Associated Reciprocal Traders, Ltd. ("ART") and its parent corporation
ITEX, in the Superior Court of King County in the state of Washington. In the
complaint, the Company alleged that ITEX/ART breached the terms of an agreement
dated December 29, 1995 between the Company and ITEX/ART (the "Advertising
Agreement") by not providing the Company $500,000 worth of media credits for
radio advertising. On the same day, ITEX/ART filed a lawsuit against the Company
alleging that the Company had failed to deliver an aggregate of 1,800,000 shares
of the Company to ART as required under the Advertising Agreement and seeking to
lift the stop transfer order placed on the shares by the Company. In July 1998,
the Court issued a preliminary ruling stating that the Company is not required
to deliver stock certificates to ITEX/ART and may refuse to allow the stock to
be sold until the issue of whether or not ITEX/ART has breached the contract is
decided. A trial date has been set for June 21, 1999.
Wade Cook Seminars, Inc. v. Anthony Robbins, Options Management, Inc., Charles
Mellon, and Robbins Research International, Inc. On October 4, 1996, WCSI and
Mr. Cook filed a complaint in the Superior Court of King County in the state of
Washington against Charles Mellon, Anthony Robbins, Robbins Management, Inc.,
and Robbins Research International, Inc. seeking damages and injunctive relief
for unfair competition, misappropriation of trade secrets, breach of a
non-compete agreement and inducement to breach the non-compete agreement. WCSI
and Mr. Cook were granted a voluntary dismissal without prejudice on the claims
relating to the non-compete agreement. On November 26, 1997, the unfair
competition and misappropriation of trade secrets claims were dismissed. On
April 12, 1999, the Washington State Court of Appeals reversed the trial court's
dismissal of the trade secrets and unfair competition claims and remanded the
case for further proceedings.
Wade B. Cook v. Anthony Robbins, Robbins Research International, Inc. and
Charles Mellon. On June 18, 1997, the Company filed a copyright infringement
suit on behalf of Mr. Cook in the United States District Court, Western District
of Washington, against Tony Robbins and Robbins' Research International, Inc.
seeking damages and injunctive relief. On October 1, 1998, the defendants were
ordered to pay damages in the amount of $655,900. On December 16, 1998, the
United States District Court for the Western District of Washington filed an
order vacating the damages awarded in favor of Mr. Cook. Mr. Cook has appealed
the order to vacate judgement.
State of Texas v. Wade B. Cook and Wade Cook Seminars, Inc. On May 1, 1998, the
Attorney General of Texas filed a lawsuit in the District Court of Bexar County,
Texas. The state of Texas contends that the Company has engaged in false,
deceptive and misleading acts and practices in the course of trade and commerce
as defined in the Texas Deceptive Trade Practices-Consumer Protection Act.
Specifically, the state of Texas contends that the Company's sales contracts
fail to have the statutorily required notice of the three day right to cancel.
The petition seeks a temporary injunction, restitution and penalties against the
Company. The Company currently provides its customers seven days to cancel all
sales contracts. The Company believes that it has not intentionally engaged in
false, deceptive and misleading business and has retained local counsel to
contest this lawsuit. The Company has not yet made an estimate of its potential
exposure or determined the impact on its financial statements and has not made
provisions for losses, if any.
Texas Unauthorized Practice of Law Committee. In March 1998, the District 4
Subcommittee of the Unauthorized Practice of Law Committee in the state of Texas
sent a request to WCSI (f/k/a United Support Association) and two former
employees of the Company asking that the parties sign an agreement to
voluntarily cease and desist in activities which may constitute the unauthorized
practice of law in Texas. The Committee alleged that WCSI offered to set up
Nevada corporations, Living Trusts, Keogh Plans and Corporate Pension Plans,
Family Limited Partnerships, Massachusetts Business Trusts, and Charitable
Remainder Trusts. The Committee further alleged that WCSI advised clients about
legal structuring, legal advantages and legal strategies associated with such
entities, and provided specific proposals for structuring
15
<PAGE>
an individual's assets and businesses. WCSI declined to enter into a voluntary
agreement to cease and desist on behalf of the former employees named in the
request because they no longer work for WCSI. The Company has subsequently
divested EPI, that portion of its business associated with the activities
specified in the request and, in any event, does not believe that such
activities constitute the unauthorized practice of law in Texas.
Wade Cook Financial Corporation, et al. vs. Publishers Distribution Center,
Inc., et al. On September 17, 1998, the Company filed a lawsuit against
Publishers Distribution Center, Inc. ("PDC"), a Utah Corporation, and William
Beutler, Cora Beutler, and Scott Beutler, as individuals, in the United States
District Court, District of Utah, Central Division. Shortly after filing a
complaint in the United States District Court, the Company dismissed that action
and refiled its complaint in Third Judicial District Court, Salt Lake County in
the state of Utah. The complaint alleges fraud and negligent misrepresentation
relating to the Company's attempted purchase of PDC and requests restitution in
the amount of $420,000 in addition to other relief. PDC has filed counterclaims
against the Company alleging fraud, breach of fiduciary duty and conversion. No
trial date has been set.
Attorney General for the State of Illinois. In July of 1998, the Illinois
Attorney General's Consumer Fraud Division initiated a formal investigation to
determine whether the Company has engaged in unlawful practices in the state of
Illinois. To date, the Illinois Attorney General has only issued a Civil
Investigative Demand, requesting specific information and Company records, to
which the Company has responded. The Company does not believe that it has
engaged in any unlawful activities in the state of Illinois and is cooperating
fully with the Illinois Attorney General's investigation.
State of California vs. Wade Cook Financial Corporation, Wade Cook Seminars,
Inc., Entity Planners, Inc., Information Quest, Inc., Money Chef, Inc., and Wade
B. Cook. On January 11, 1999, a civil suit was filed in the Superior Court of
the state of California by the California State Attorney General's office
alleging violations of Sections 1678.20 through 1693 of the California Civil
Code. The Attorney General alleges that the Company: (1) made or caused to be
made and disseminated untrue or misleading statements in violation of the
California Business and Professions Code; and (2) engaged in unlawful and unfair
or fraudulent practices and unfair, deceptive and untrue or misleading
advertising. The suit seeks: (1) an injunction against the Company from directly
or indirectly engaging in the alleged unlawful behavior, (2) disgorgement of
money or property acquired in violation of state or federal law; (3) a penalty
of $2,500 for each violation, but in any event not less than four million
dollars ($4,000,000) in the aggregate, (4) imposition of a constructive trust on
the money or property acquired in violation of state and federal law; (5)
payment of court costs. The Company intends to defend itself in this matter.*
The Company has not yet made an estimate of its potential exposure or determined
the impact on its financial statements and has not made provisions for losses,
if any.
Investigation by the U.S. Securities and Exchange Commission. In 1997, the
Company was advised by the Securities and Exchange Commission ("SEC") that it
was the subject of an investigation, In the Matter of Wade Cook Seminars, Inc.,
pursuant to which the SEC is investigating possible violations of Sections 5(a),
5(c) and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule
10b-5 thereunder, and Sections 203(a) and 206(1) and (2) of the Investment
Advisers Act. The Company's legal counsel responded to the SEC's requests for
documents and other information in late 1997. Since that time, the Company has
not received any contact with the SEC regarding the investigation or its status.
No enforcement action has been taken, and the SEC has advised the Company that
the inquiry should not be construed as an adverse reflection on the merits of
the securities involved or on any person or entity.
Investigation by the State of Washington, Securities Division. Since September
1996, the Washington State Department of Financial Institutions, Securities
Division has been investigating Mr. Cook, WCSI, and the Company. The Company has
been informed that the investigation is being performed pursuant to RCW
21.20.370 and 21.20.700. Although no civil or criminal charges have been brought
and the Company does not believe that it or its officers or directors have
violated applicable laws, no assurance can be given that enforcement proceedings
will not be brought against the Company, or its officers or directors, or as to
the outcome of any investigations by the State Attorney General.*
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<PAGE>
State Attorneys General Investigations. In March 1999, the Attorneys General of
nine states opened investigations to determine whether the Company has engaged
in business and advertising practices that violate such states' consumer
protection laws and regulations. The Company does not believe that it has
engaged in any unlawful activities in any of the states and is cooperating fully
with each state's investigation. Although no civil or criminal charges have been
brought, and the Company does not believe that it or its officers or directors
have violated applicable laws, no assurance can be given that enforcement
proceedings will not be brought against the Company, or its officers or
directors, or as to the outcome of any proceedings that are brought.*
Himmelman and Love vs. Wade Cook Seminars, Inc., et al. On February 26, 1999,
two former employees of Wade Cook Seminars, Inc. filed a complaint with the
Pierce County Superior Court of the state of Washington alleging sexual
harassment, retaliatory discharge and defamation. Although no specific damages
are alleged, the plaintiffs request lost income, pain and suffering, emotional
distress, court costs, reasonable attorney fees, and punitive damages. The
Company believes that it has not engaged in any unlawful practices and intends
to defend itself in this matter.* The Company has not yet made an estimate of
potential exposure or determined the impact on its financial statements and has
not made provisions for losses, if any.
Hewlett Packard Company vs. Wade Cook Financial Corporation. On April 16, 1999
the Hewlett Packard Company ("HP") filed a complaint in the King County
Superior Court of the State of Washington claiming $642,000 in damages. HP
alleges that it has not received full payment under a consulting services
contract with the Company. The Company is currently assessing the validity of
the claim. The Company has not yet made an estimate of its potential exposure or
determined the impact on its financial statement and has not made provisions for
losses, if any.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity And Related Stockholder Matters
Price Range of Common Shares
The Company's Common Stock has been traded on the OTC Bulletin Board under the
symbol "WADE" since August 11, 1997. Prior to that time, the Company's Common
Stock was quoted under the stock symbol "PFNL" in the over-the counter-market.
The following table sets forth, for the periods indicated, the high and low bid
quotations for the Company's Common Stock on the relevant markets. The
quotations reflect inter-dealer prices which may include retail markups,
markdowns or commissions and may not reflect actual transactions.
<TABLE>
OTC Bulletin Board Over-The-Counter Market
---------------------------- ----------------------------
High Low High Low
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
1997
First Quarter......................... - - 0.47 0.22
Second Quarter........................ - - 0.66 0.29
Third Quarter (1)..................... 4.63 0.54 - -
Fourth Quarter........................ 5.15 2.54 - -
1998
First Quarter......................... 4.19 2.53 - -
Second Quarter........................ 2.81 0.97 - -
Third Quarter......................... 1.66 0.72 - -
Fourth Quarter........................ 1.06 0.37 - -
</TABLE>
- -----------------
(1) The Company's Common Shares began trading on the OTC Bulletin Board and
ceased trading in the Over-The-Counter Market on August 11, 1997.
(2) Prices reported reflect a 3 for 1 stock split effective September 15, 1997,
and a 3 for 1 stock split effective December 23, 1997.
As of December 31, 1998 the Company had approximately 11,308 shareholders of
record (including nominees and brokers holding street accounts. As of April 22,
1999, the last sale price for the Company's Common Stock on the OTC Bulletin
Board was $0.47 per share.
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will pay dividends in the foreseeable future. The Company
intends to continue to retain earnings, if any, to expand and develop its
business.
Recent Sales Of Unregistered Securities
The issuance of shares of unregistered Common Stock disclosed below were made
during 1998 in reliance primarily on the exemption from registration of
securities contained in Section 4(2) of the Securities Act of 1933 and
applicable provisions of state securities laws, and not previously reported.
On April 7, 1998, the Company issued 1,000 shares Common Stock to Gloria
Ducoulombier at $4.00 per share.
On June 22, 1998, the Company issued 660 shares of Common Stock to Sally McCarty
at $3.00 per share.
On July 1998, the Company issued an aggregate of 350 shares of Common Stock to
14 employees of the Company as a mid-year bonus.
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<PAGE>
Item 6. Selected Financial Data.
The following selected consolidated financial data of the Company is qualified
in its entirety by reference to and should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this report. The consolidated statements of operations data for the
years ended December 31, 1998 and 1997 and the consolidated balance sheet data
at December 31, 1998 and 1997 are derived from and are qualified by reference to
the Company's audited consolidated financial statements which were audited by
Miller and Co. The consolidated financial data from prior years is unaudited.
<TABLE>
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 118,207 $ 93,343 $ 37,008 $ 6,504 $ 1,973
Cost of sales $ 56,763 $ 39,492 $ 14,460 $ 2,877 $ 862
------------- ------------- ------------- ------------- -------------
Gross profit $ 61,444 $ 53,851 $ 22,548 $ 3,627 $ 1,111
Operating expenses $ 57,890 $ 39,309 $ 18,178 $ 3,333 $ 1,134
------------- ------------- ------------- ------------- -------------
Income from operations $ 3,554 $ 14,542 $ 4,370 $ 294 $ (23)
Other income (expenses) $ 1,656 $ (706) $ (74) $ (55) $ (181)
------------- ------------- ------------- ------------- -------------
Income from continuing operations $ 5,210 $ 13,836 $ 4,296 $ 239 $ (204)
------------- ------------- ------------- ------------- -------------
Income from Continuing Operations Data
Income (loss) before income taxes,
minority interest, and acquired
operations as reported $ 5,210 $ 13,836 $ 4,296 $ 239 $ (204)
Provision (benefit) for income taxes $ 2,346 $ 5,579 $ 1,452 $ 171 $ (8)
Minority interest in loss of subsidiary $ 127 $ 21 $ - $ - $ -
============= ============= ============= ============= =============
Net income (loss) $ 2,991 $ 8,278 $ 2,844 $ 68 $ (196)
============= ============= ============= ============= =============
</TABLE>
<TABLE>
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Per Share Data:
Income (loss) from continuing $ 0.05 $ 0.13 $ 0.05 - -
operations per share
Weighted average shares outstanding 63,888 63,363 59,610 57,585 57,585
Consolidated Balance Sheet Data:
Total assets $ 58,698 $ 41,404 $ 16,938 $ 2,283 $ 206
Total debt, including current portion 38,075 24,649 12,618 1,458 134
------------- ------------- ------------- ------------- -------------
Shareholders' equity $ 20,623 $ 16,755 $ 4,320 $ 825 $ 72
============= ============= ============= ============= =============
</TABLE>
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes and trends related to the
financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto included elsewhere in
this Form 10-K.
Overview
WCFC is a holding company that, through its wholly owned subsidiary WCSI,
conducts educational business seminars, produces and sells video and audio
tapes, and distributes books and other written materials focusing on investment
strategies and personal wealth creation. The Company's core business is
financial education, through its seminar and publishing concerns. These core
businesses are complemented by bookstores that focus on financial education, a
pager service that provides stock quotes and other financial information, a
subscription-based web site that provides stock market information and that
illustrates the strategies taught in the Company's seminars and publications and
a travel-related service provider.
During 1997, the Company acquired Ideal, which provides travel agent services to
the Company and markets services to travel agents. Also during 1997, the Company
expanded its publishing activities by acquiring three small publishing and book
distribution businesses, Worldwide, Gold Leaf and Origin, that publish and
market in areas outside of the Company's traditional focus of financial
education.
In January 1998, the Company acquired interests of employees of the Company in
businesses created to market materials and services associated with the
Company's financial education business - IQ, Get Ahead and Quantum. During the
quarter ended September 30, 1998, the Company disposed of the business of Entity
Planners, Inc. ("EPI"), its entity formation business. The buyer paid $250,000
to the Company for the stock of EPI, and agreed to pay up to $17.5 million to
the Company in royalty payments based on future sales of the business. The
Company accounts for EPI as a discontinued business operation.
In addition to pursuing its core businesses, the Company has made a variety of
investments in real estate, hotels, oil and gas projects and other venture
capital limited partnerships and private companies and in marketable securities.
In 1997, the Company formed Bountiful Investment Group ("BIG") to manage its
real estate and hotel investments, and embarked on a strategy of acquiring
larger stakes in hotel projects. See Part I, Item 1, "Business - Hotels and
Commercial Real Estate." During 1998, the Company acquired Best Western McCarran
House in Sparks, Nevada and the Four Points by Sheraton Inn in St. George, Utah
and increased its 25% interest in the Airport Ramada Suites in Salt Lake City,
Utah to a 75% interest. The financial results of each of these properties is
consolidated in the Company's financial statements from the date the majority
ownership was acquired. The Company's hotels required greater than anticipated
renovation and upgrading to secure favorable hotel chain affiliations, and have
not performed as well as the Company anticipated prior to their acquisition. The
hotels experienced losses in 1998, and it is uncertain whether they will be
profitable in the future.
Although the Company has been profitable in the past, prior to 1998 principally
as the result of activities of WCSI and, in 1998, principally as a result of the
pager and travel segments, it has experienced dramatic growth, acquired or
established new businesses, increased general and administrative expenses, and
made investments in hotel and other projects outside the traditional business of
WCSI which have reduced profits in recent periods. In addition, revenue from
product sales and revenue per seminar conducted by WCSI have been lower in
recent periods than in comparable periods in the past. The Company cannot
predict the effect that world economic conditions or stock market volatility
will have on the interest of investors in the seminars and other products and
services of WCSI, or on WCSI's revenue or profits. There can be no assurance
that the Company's operation will be profitable in the future.
20
<PAGE>
The following tables set forth the net sales, cost of sales and operating income
of the continuing operations of each of the business segments for the years
ended December 31, 1998, 1997, and 1996:
<TABLE>
(in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Revenue
Seminars $ 78,191 $60,759 $23,817
Product Sales 20,696 29,386 13,191
Hotels 3,336 - -
Pager Service 8,427 - -
Travel Service 5,874 3,198 -
Other 1,683 - -
Totals $118,207 $93,343 $37,008
Costs of Revenue
Seminars $ 35,842 $19,319 $ 8,074
Product Sales 12,457 17,210 6,386
Hotels 4,100 - -
Pager Service 525 - -
Travel Service 3,562 2,963 -
Other 277 - -
Totals $ 56,763 $39,492 $14,460
Operating Income
Seminars $ 483 $10,907 $ 2,406
Product Sales 813 3,538 1,964
Hotels (267) - -
Pager Service 2,494 - -
Travel Service 508 97 -
Other (477) - -
Totals $ 3,554 $14,542 $ 4,370
</TABLE>
Results of Operations
Year ended December 31, 1998 compared with year ended December 31, 1997
Revenue. Revenue increased by 27% from $93.3 million in 1997 to $118.2 million
in 1998. Revenue from seminars increased from $60.8 million in 1997 to $78.2
million in 1998. The increase is due in part to the fact that WCSI changed its
fiscal year in 1997 and 1997 results include only eleven months of WCSI's
operations. The Company held 3,737 seminars in 1998 compared to 2,416 in 1997,
an increase of 55%. However, revenue generated per seminar decreased from
$25,150 per seminar in 1997 to $21,000 per seminar in 1998, due to a reduction
in participants per seminar.
Books and other product sales decreased by $8.7 million, or 30.6%, from $29.4
million in 1997 to $20.7 million in 1998 due to the reduced demand for titles
that were published in 1997 combined with the production of fewer new titles in
1998. In addition, product sales for 1997 included $1.4 million in commissions
from the sale of pagers, whereas the pager business is accounted for as a
separate segment in 1998 with revenue of $8.4 million after the Company acquired
it in January 1998. Product sales also include WIN subscription revenues which
decreased from $4.0 million in 1997 to $2.8 million in 1998, as more subscribers
paid the renewal rate of $1,995 per year rather than the new subscriber rate of
$2,995, and free WIN subscriptions were offered as promotions in connection with
seminar sales. The results of
21
<PAGE>
operations of hotels were reported on a consolidated basis in 1998 for the first
time, as the Company acquired majority interests, and resulted in 1998 revenues
of $3.3 million.
Travel related services increased by $2.7 million from $3.2 million in 1997 to
$5.9 million in 1998. Other revenues (consisting of principally sales from
Company bookstores) were $1.7 million in 1998, as the businesses generating
these revenues were established or acquired in 1998.
Costs of Revenue. Costs of revenue increased by $17.3 million, or 44%, from 1997
to 1998. Cost of conducting seminars, which consist largely of royalties,
speaker fees, cost of meeting rooms and travel increased by 85% from $19.3
million in 1997 to $35.8 million in 1998, due to an increase in the number of
seminars held and increased logistics costs of staging seminars. Royalties to
Mr. Cook related to continuing operations were $8.0 million in 1998 and $10.0
million in 1997. Mr. Cook agreed to a $2.0 million reduction in royalties for
the quarter ended September 30, 1998.
Cost of product sales decreased 28% from $17.2 million in 1997 to $12.4 million
in 1998, reflecting lower product sales. Cost of sales in the pager segment,
consisting principally of pager service fees were $525,000. Cost of sales in the
hotel businesses, consisting principally of payroll and supplies, were $4.1
million. Travel service costs increased by $600,000 or 29% in 1998, reflecting
increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 47% from $39.3 million in 1997 to $57.9
million in 1998, principally due to increases of approximately $6.0 million in
advertising expense and approximately $6.0 million in employee compensation and
benefits. The great majority of the increase was attributable to the seminar and
product segments.
Operating Income. Increases in selling, general and administrative expenses were
principally in the seminar and product sales segments, resulting in 1998
operating income in these segments of $483,000 and $813,000, respectively,
compared with $11.0 million and $3.5 million in 1997. Operating income from the
pager and travel service segments increased from $97,000 in 1997 to over $3.0
million in 1998.
Other Income and Expense. Other income and expense consist principally of
royalty income, securities trading, interest income and expense and losses on
private company investments. In 1998, other income amounted to $1.7 million
compared to a loss of $706,000 in 1998. The principal reasons for the
improvement were $1.6 million in royalties received from the business of EPI
after its sale and a gain of $837,000 on trading of securities compared with a
loss of $806,000 in 1997, which were offset in part by an increase of $1.1
million in interest expense due to increased borrowings, principally to fund
hotel acquisitions.
Income Taxes. The provision for income taxes of $2.3 million and $5.6 million
for the years ended 1998 and 1997, respectively, reflect taxes payable in
respect of profitable operations. The Company's effective tax rates have
historically differed from the federal statutory rate primarily because of
certain deferred revenues, unrealized gains and losses on trading securities,
accelerated depreciation and state taxes.
As a result of the foregoing, income from continuing operations was $3.0
million, or $.05 per share in 1998, compared with $8.2 million, or $.13 per
share, in 1997. Income from discontinued operations, including EPI's income
prior to its sale and gain on the sale, was $763,000, or $0.01 per share, in
1998 compared with $714,000, or $0.01 per share, in 1997.
Year ended December 31, 1997 compared with year ended December 31, 1996
Revenue. Revenue from continuing operations for the year ended December 31, 1997
were $93.3 million as compared to revenues of $37.0 million for the year ended
December 31, 1996. Results for 1997 include the results of WCSI for only eleven
months due to a change in WCSI's fiscal year end from January 31 to December 31.
Revenues grew significantly due to several factors, including a substantial
increase in marketing, and the fact that several books authored by Mr. Cook
appeared on the New York Times Business Best Seller list, resulting in greater
recognition for Mr. Cook in the investment education market. Seminar sales grew
from $23.8 million in 1996 to $60.8 million in 1997, an increase of 137%. Book
and
22
<PAGE>
product sales rose from $13.2 million in 1996 to $29.4 million in 1997, an
increase of 123%. Businesses acquired in 1997 contributed $6.0 million to the
increase in revenue.
Costs of Revenue. Costs of revenue increased from $14.5 million to $39.5
million, an increase of 178%, due primarily to a corresponding overall growth in
revenues. The costs to conduct the seminars increased from $8.0 million in 1996
to $19.3 million in 1997, an increase of 137%. Costs of product sales grew from
$6.4 million in 1996 to $17.2 million in 1997, an increase of 183%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by over $21 million to $39.3 million in 1997
from $18.2 million in 1996 or 115%. The increase was attributable to increases
in compensation and benefits ($7 million in 1996 compared to $16 million in
1997), and advertising ($6 million in 1996 compared to over $16 million in
1997), reflecting the increased size and scope of the Company's business.
Other Income and Expense. For the year ended December 31, 1997, the Company's
net other income/expense was an expense of $706,000 as compared to $74,000 in
1996. The increase in expense was due to the costs associated with the purchase
of the Company's headquarters building coupled with a net investment loss of
over $800,000 in trading securities. The net investment loss can be attributed
to the losses incurred in the brokerage accounts used by seminar instructors to
make demonstration trades as well as a downturn in the stock and securities
markets at the end of 1997.
Operating Income. Operating income increased from $4.3 million in 1996 to $14.5
million in 1997, an increase of $10.2 million or 237%. The increase was due to
the Company's achieving revenue growth, while maintaining high profit margins on
both seminar and product sales revenues as well as taking advantage of the
economies of scale in the distribution, travel, and publishing areas.
The provision for income taxes of $5.6 million and $1.5 million for years 1997
and 1996, respectively reflect taxes payable in respect of profitable
operations. The Company's effective tax rates differed from the federal
statutory rate primarily because of certain deferred revenues, unrealized loss
on trading securities, accelerated depreciation and state taxes.
As a result of the foregoing, income from continuing operations increased from
$2.8 million, or $.05 per share, in 1996 to $8.3 million, or $.13 per share, in
1997. Income from discontinued operations was $714,000, or $.01 per share in
1997, compared with $221,000 in 1996.
Liquidity and Capital Resources
At December 31, 1998, the Company had current assets of $12.0 million and
current liabilities of $28.6 million, resulting in a working capital deficit of
$16.6 million. The working capital deficit at December 31, 1997 was $11.0
million. Current liabilities at December 31, 1998 include $5.7 million in
deferred revenue, which results principally from payments received from persons
who have signed up and paid in advance for future pager services, subscriptions
to the WIN website or to attend seminars not yet held. Current liabilities at
December 31, 1998 also include $5.0 million in taxes payable, which includes
approximately $2.7 million in delinquent payments owed on 1997 state and federal
taxes. The Company has not made estimated tax payments with respect to income
taxes in 1998.
Mr. Wade B. Cook, the Company's largest shareholder and CEO, agreed to a
reduction of $2.0 million in royalties for the quarter ended September 30, 1998,
to assist with the Company's cash flow requirements. At December 31, 1998, the
Company had payables to related parties of $3.1 million, which represent
principally royalties owed to Mr. Cook and which were net of the reduction
agreed to by Mr.
Cook.
The market value of the Company's marketable securities decreased from $6.1
million at December 31, 1997 and $4.4 million at June 30, 1998 to $2.9 million
at December 31, 1998, due to sales of securities. Inventory increased from $1.3
million at December 31, 1997 to $3.7 million at December 31, 1998 due
principally to increases in inventory to support expanded product lines,
including products of subsidiaries acquired in the fourth quarter of 1997. At
December 31, 1998 the Company also had receivables from
23
<PAGE>
related parties of $2.9 million consisting principally of term loans to
employees and directors, the majority of which are secured by mortgages on real
property.
The Company's principal source of cash in the past has been from the operation
of its investment seminars and sales of tapes, books and other materials focused
on business strategies and financial and personal wealth management. The Company
does not have an established bank line of credit. Cash provided by operations
increased by $1.3 million in 1998. This increase reflected increases in accounts
and royalties payable, and a reduction in deposits and proceeds from the sale of
trading securities.
Cash generated from financing activities, principally borrowing, was $7.1
million in 1998, compared with $485,000 in 1997, as the Company borrowed funds
in connection with its investment in hotel activities.
In addition to cash received from its own operations, the Company is entitled to
receive payment under its license agreement with Entity Planners Inc.("EPI")
based on a percentage of sales, but not less than $35,539 per week which
represents the minimum weekly payment due ($40,385) less 12% payable to Mr. Cook
personally pursuant to a prior understanding between Mr. Cook and the Company.
See Part I, Item 1 of this report. Receipt of these payments may, as a practical
matter, be dependent on the success of the business in the hands of the buyers.
The Company continues to use cash to acquire interests in hotel properties and
other businesses. See "Overview" and Part I, Item 1 of this report. Use of cash
for these purposes has significantly exceeded cash generated by operations.Net
cash used in investment was $21.0 million in 1998, compared with $14.5 million
in 1997. Property and equipment increased from $10.4 million at December 31,
1997 to $29.2 million at December 31, 1998, reflecting principally hotel
activities, and non-marketable investments increased from $7.3 million at
December 31, 1997 to $9.5 million at December 31, 1998, due principally to
additional minority investments in other developing businesses.
The Company's board of directors has approved the repurchase of up to one
million shares of common stock, and during 1998 the Company repurchased 251,000
shares for an aggregate of approximately $537,000. The Company presently has no
plans to repurchase any additional shares of its common stock.*
The Company has formed and acquired new businesses, has continued to fund these
businesses in anticipation of future revenues, and has continued its policy of
committing available cash to new businesses and other investments. The Company's
policy of using available cash to acquire developing businesses, hotels and
non-marketable investments and its working capital deficit have resulted in
constraints on liquidity, including failure to pay tax obligations when due. The
Company has significant cash commitments and requirements in future periods,
including its unpaid taxes and other current payables, $4.7 million in current
maturities of long-term debt at December 31, 1998, and $581,000 in lease
payments accruing during 1999. In March 1999, the Company was obligated to make
a $895,000 payment on the long-term loan assumed by the Company in connection
with the acquisition by the Company of the Best Western McCarran House in
Sparks, Nevada. The Company renegotiated the debt and paid $600,000 plus accrued
interest and a 4% late fee, and is obligated to pay the lender an additional
$295,000 on April 10, 1999.
Under the terms of a contract with the Hewlett Packard Company ("HP"), the
Company agreed to pay HP for the development of an inter-office communications
network. The Company has since discontinued HP's services under the contract. At
December 31, 1998, the Company had incurred expenses under the contract of
approximately $795,000.
The Company also anticipates spending up to $1.0 million in 1999 for
improvements to its hotel properties, but this amount could be exceeded.*
The Company regularly evaluates other acquisition and investment opportunities,
and additional cash resources may be devoted to pursuing such opportunities.
24
<PAGE>
If the Company is required to generate cash for working capital purposes from
its properties and non-marketable investments, it may not be able to liquidate
these assets in a timely manner, or in a manner that allows the Company to
realize the full value of the assets. Failure to generate adequate cash
resources for working capital could require the Company to cut back operations,
delay or cancel expansion and development projects, dispose of properties,
businesses or investments on unfavorable terms or cause the Company to be unable
to meet obligations.*
The Company is a party to various government investigations and legal
proceedings. See Part I, Item 3, of this report. The legal fees and other costs
involved may be material.* If the Company were found to be liable in certain of
these proceedings, the liability could be material.* In addition, if government
agencies charge the Company with violation of certain consumer protection or
other laws and establish such violations, they could seek to require the Company
to pay material penalties or to refund money paid to the Company by seminar
attendees within their jurisdiction, and to cease doing business in the
jurisdiction or significantly change the manner in which the Company's business
is conducted. Any such result could materially adversely affect the Company's
financial condition or results of operations.
Year 2000
Many computer systems experience problems handling dates in and beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is currently
assessing both the readiness of its internal computer systems, software and
embedded chips for handling the year 2000. The Company intends to complete this
testing process of all significant applications and systems by June 1999.* The
Company expects to implement successfully any systems and programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on the Company's results of operations
or financial condition.* The Company does not have any contingency plans with
respect to year 2000 issues. There can be no assurance, however, that there will
not be a delay in, or increased costs associated with, the implementation of
such changes, and the Company's inability to implement such changes could have
an adverse effect on future results of operations or financial condition. The
Company is also assessing and addressing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and other vendors. The
Company's reliance on suppliers and vendors, and therefore, on the proper
functioning of their information systems and software, means that their failure
to address year 2000 issues could have a material impact on the Company's
operations and financial results. However, the potential impact and related
costs are not known at this time. The Company can give no guarantee that the
systems of other companies upon which the Company relies will be converted on
time or that failure to convert by another company would not have a material
adverse affect on the Company.
The Company's Year 2000 remediation plan focuses on: internal systems, including
personal computing, facilities and business systems, and third-party
considerations, such as suppliers and other vendors. The tasks common to each of
these areas are (i) the identification and assessment of Year 2000 issues, (ii)
assessment of remediation required, (iii) prioritization of risk, (iv)
remediation and testing and (v) contingency planning.
Internal Systems
The Company's compliance team has evaluated significant internal personal
computing and business systems that are critical to the ongoing operation of the
Company and in the process of identifying the computer hardware and software
upgrades and replacements necessary to make such systems Year 2000 compliant.
Such upgrades and replacements are expected to be completed by the end of the
second quarter of 1999.
Suppliers and Vendors
The Company's business operations are, to some extent, dependent on the Year
2000 readiness of infrastructure suppliers such as banking, communications,
transportation and other services. In this environment, there will likely be
instances of failure that could cause disruptions in business processes.*
25
<PAGE>
The likelihood and effects of such failures in infrastructure systems and the
supply chain cannot be estimated.
Costs
The total cost of the Company's Year 2000 Plan is not material to the Company's
financial condition. The estimated total cost of the Plan is expected to be
under $10,000 and is being funded through operating cash flow.* As at December
31, 1998, the Company had incurred approximately less than $5,000 in costs
related to its Year 2000 identification, assessment, remediation and testing
efforts. The major portion of the remaining amount of the estimate is expected
to have been incurred by the end of the second quarter of 1999 when the
Company's Year 2000 compliance efforts are expected to be completed, with the
balance expended thereafter to monitor the compliance process. None of the
Company's other projects have been delayed or deferred as a result of the
implementation of the Year 2000 Compliance Plan.
Risks
To date, the Company has not incurred, and does not expect to incur, material
costs to review and remedy Year 2000 compliance problems.* However, there can be
no assurance that the systems or products of other entities, including the
Company's suppliers on which the Company relies and disruptions in the economy
generally resulting from Year 2000, will not have a material adverse effect on
the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See Note M to the Company's audited financial statements included under Item 14
of this report, which is incorporated herein by this reference.
The Company is exposed to changes in interest rates affecting the return on its
notes receivable and investments. In the normal course of business, the Company
employs established policies and procedures to manage its exposure to
fluctuations in interest rates.
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's investments and notes receivables. The Company has
not used derivative financial instruments in its investment portfolio. The
Company places their investment with enterprises with which it has majority
control and thus limits the amount of credit exposure to any one issuer. The
Company protects and preserves its invested funds by limiting default, market
and reinvestment risk.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the financial statements listed under the heading "(a)(1)
Financial Statements" of Item 14 herein, which financial statements are
incorporated herein by reference in response to this Item 8.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
26
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
As of April 26, 1999, the Company's directors, executive officers and key
employees are as follows:
<TABLE>
Name Age Position
- ---- --- --------
<S> <C> <C>
Wade B. Cook 49 Chairman, Chief Executive Officer, President and
Acting Treasurer
Richard Smith 42 Chief Financial Officer
Carl Sanders 56 Vice President, Business Development
Bruce Couch 50 Vice President, Operations
Laura M. Cook 46 Secretary and Director
Robin Anderson 35 Sales Manager and Director
Joel Black 44 Director
Nick Dettman 54 Director
Robert T. Hondel 56 Director
Janice Leysath 43 Director
Greg Maxwell 46 Director
Angela Pirtle 37 Director
Dan Wagner 38 Director
John Lang (1) 49 Director
</TABLE>
(1) Mr. Lang has been nominated to be elected to a newly-created position on
the Board of Directors at the Company's 1999 annual meeting.
Wade B. Cook, 49, is the Chairman of the Board, CEO, President and acting
Treasurer of the Company and has occupied at least one of those positions since
June 1995. Mr. Cook serves as an officer of the Company at the pleasure of the
Board of Directors, and his term as a director expires in 2001. Since 1989, Mr.
Cook also has served as Treasurer and President of Wade Cook Seminars ("WCSI"),
a wholly-owned subsidiary of the Company. Since the end of 1998, Mr. Cook has
also served as the President and Treasurer of the majority of the Company's
wholly-owned subsidiaries. Mr. Cook has authored numerous books, tapes, and
videos relating to finance, real estate, the stock market and asset protection.
Furthermore, Mr. Cook actively participates in the activities of the Company,
often providing his services as a speaker or trainer, or guiding the development
of educational products on investing and personal wealth management. Mr. Cook is
the spouse of Laura M. Cook, the Corporate Secretary and a Director of the
Company. Mr. Cook has not been employed outside the scope of the Company in the
past five years. In 1989, the state of Arizona issued a civil administrative
order concluding that Mr. Cook had violated various provisions of the Arizona
securities laws. Mr. Cook and his affiliated entities paid a civil penalty of
$150,000, reimbursed stockholders $390,000 and agreed to cease and desist the
allegedly fraudulent conduct. This matter has been concluded and all fines have
been paid.
Richard Smith, 42, has served as the Company's Chief Financial Officer since
March 1999 and serves at the pleasure of the Board of Directors. During the past
three years, Mr. Smith has worked as an independent consultant, assisting
companies in the areas of internal audit, cost control and asset protection.
Prior to that time, Mr. Smith served for eight years as the Director of Internal
Audit for Egghead Software. Mr. Smith received a bachelor of arts degree in
Political Science from Brigham Young University in 1985.
27
<PAGE>
Carl Sanders, 56, joined the Company in November 1997 and currently is the Vice
President of Business Development. Mr. Sanders serves at the pleasure of the
Board of Directors. For the past 26 years, Mr. Sanders has worked in the field
of personal security, most notably as the Manager of Corporate Security at
Alaska Airlines, Inc. in Seattle, Washington and as a Secret Service Agent in
Los Angeles, California. Mr. Sanders attended California State University at
Long Beach where he received a bachelors degree in Sociology.
Bruce Couch, 50, joined the Company in June 1998 and currently is the Vice
President of Operations. Mr. Couch serves at the pleasure of the Board of
Directors. From January 1998 to June 1998, Mr. Couch served as a marketing
consultant to the Company. From 1992 to 1997, Mr. Couch worked at Florida
Marketing International, Inc., a marketing firm, as the Vice President of
Marketing. Mr. Couch attended Utah State University in Logan, Utah where he
received a bachelors degree in Marketing.
Laura M. Cook, 46, is the Corporate Secretary of the Company and has been a
member of the Board of Directors of the Company since 1995. Mrs. Cook serves as
an officer of the Company at the pleasure of the Board of Directors, and her
term as a director expires in 2001. Additionally, Mrs. Cook serves as the
Corporate Secretary for the majority of the Company's wholly-owned subsidiaries
and has previously served as an operational manager for various affiliates of
the Company. Mrs. Cook is the spouse of Wade B. Cook, the Company's CEO,
President, acting Treasurer and Chairman of the Company's Board of Directors.
Mrs. Cook's expertise over the past 15 years has been concentrated in managing
accounting systems.
Robin Anderson, 35, has been a Director since 1997 and is the Sales Manager for
the Company. Ms. Anderson's term as a director expires in 2000. Ms. Anderson has
been with the Company since 1994 and is the niece of Robert Hondel. In December
1997, Ms. Anderson filed for personal bankruptcy under Chapter 13 of the United
States Bankruptcy Code. Ms. Anderson's bankruptcy proceeding was dismissed in
1998 and all outstanding claims have been satisfied.
Joel Black, 44, was appointed to the Company's Board of Directors in March 1999.
Mr. Black's term as a director expires in 2000. From 1995 to the present, Mr.
Black has served as the Chief Executive Officer for Education Leadership
Dynamics, Inc., a privately held corporation that specializes in providing
speaker services for Wade Cook Seminars, Inc., operating wilderness exploration
programs, running a private high school and providing consulting services. Since
1986, Mr. Black has also been employed as a teacher in the Enumclaw, Washington
School District. Mr. Black received dual bachelor degrees from Brigham Young
University in 1979 and 1980, a Masters of Outdoor Management and Recreation from
Brigham Young in 1981 and a doctorate in educational psychology from Purdue
University in 1984.
Nick Dettman, 54, has been a director of the Company since 1997. If not
re-elected, Mr. Dettman's term as a director will expire at the Company's 1999
annual meeting of stockholders. He has been a pilot for Delta Airlines over 30
years and is also the owner and operator of Kalowai Plantation, an orchid ranch
in Kauai, Hawaii.
Robert T. Hondel, 56, has been a director of the Company since 1997 and is
President of both Quantum Marketing, Inc. and Wade Cook Financial Education
Centers, Inc., wholly-owned subsidiaries of the Company. Mr. Hondel's term as a
director expires in 2000. Prior to that time, Mr. Hondel spent 18 years as the
Director and President of the Knapp College of Business in Tacoma, Washington.
Mr. Hondel is the uncle of Robin Anderson.
Janice Leysath, 43, was appointed to the Company's Board of Directors in March
1999. Ms. Layseth's term as a director expires in 2001. Ms. Leysath has
previously served on numerous civic and charitable boards and committees in Las
Vegas, Nevada, including the American Heart Association Board, the Elementary
Education Committee and the Heritage Museum Committee. From 1993 to 1995, Ms.
Leysath served as the Public Relations/Marketing Director for the Heart
Institute of Nevada and as the Business Manager for Desert Cardiology. Ms.
Leysath currently runs her own medical claims processing business.
28
<PAGE>
Greg Maxwell, 46, was appointed to the Company's Board of Directors in April
1999 and, if not re-elected, Mr. Maxwell's term as a director will expire at the
Company's 1999 annual meeting of stockholders. Since 1989, Mr. Maxwell has been
a pilot for United Airlines and, prior to that time, was a registered
representative for a registered broker/dealer in Dallas, Texas and a licensed
real estate broker. Mr. Maxwell earned a bachelors degree in Occupational
Education (Aviation) from Southern Illinois University.
Angela Pirtle, 37, was appointed to the Company's Board of Directors in March
1999 and, if not re-elected, her term will expire at the Company's 1999 annual
meeting of stockholders. During the past five years, Ms. Pirtle has worked as a
licensed real estate broker in San Diego, California.
Dan Wagner, 38, was appointed to the Company's Board of Directors in April 1999.
Mr. Wagner's term as a director expires in 2000. From 1995 to 1998, Mr. Wagner
served as a seminar speaker for T.P. Management, a private corporation which
provides speaking services for the Company. Prior to 1995, Mr. Wagner worked as
a delivery person.
John Lang, 49, has not previously served as a director of the Company and has
been nominated for election to the Board of Directors at the Company's 1999
annual meeting of stockholders. For the past 25 years, Mr. Lang has served as
the Chief Executive Officer of Pinnacle Group L.L.C., a golf course development
company located in Scottsdale, Arizona. Mr. Lang is also a trustee for the
Pinnacle Foundation, a nonprofit foundation and handles the development, sales,
marketing and property management for the Racquet Club at Scottsdale Ranch,
Arizona. In addition, Mr. Lang serves on the Board of Directors for Phoenix
Seminary. Mr. Lang received a bachelors degree in Philosophy from Roanoke
College, Salem, Virginia.
Section 16(a) Beneficial Ownership Reporting Compliance
The federal securities laws require the Company's directors and executive
officers, and persons who own more than ten percent of the Company's common
stock to file with the Securities and Exchange commission initial reports of
ownership and reports of changes in ownership of any securities of the Company.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required during the fiscal year ended December 31, 1998, all of the Company's
directors, executive officers and greater-than-ten percent beneficial owners
made all required filings on a timely basis, except as set forth below:
(1) Robert T. Hondel failed to file a Form 4 in 1998 with respect to
45,000 shares of common stock acquired on September 9, 1998. Mr.
Hondel has subsequently filed a Form 5 reporting the transaction.
(2) Wade B. Cook was late in filing a Form 5 with respect to 4,000 shares
of common stock acquired on October 1, 1998, 10,000 shares of common
stock acquired on October 2, 1998 and 50,000 shares of common stock
acquired on December 30, 1998.
(3) Richard Smith was late in filing his Form 3 covering 500 shares of
Company common stock owned by him.
29
<PAGE>
Item 11. Executive Compensation Summary Of Cash And Certain Other Compensation
Summary Compensation Table
The table below shows, for the last three fiscal years, compensation paid to the
Company's Chief Executive Officer and the three most highly paid executive
officers serving at fiscal year end whose total compensation exceeded $100,000.
We refer to all these officers as the "Named Executive Officers."
<TABLE>
Annual Compensation
----------------------------------------------------------------------
Fiscal Salary Bonus Other Annual
Name and Principal Position Year ($) ($) Compensation ($)
- ------------------------------------ ------- ------------------------ --------------------- --------------------
<S> <C> <C> <C> <C>
Wade B. Cook
Chairman, President and Chief 1998 245,000 - 7,489,000(1)
Executive Officer............... 1997 238,000 7,500 9,997,000(1)
1996 91,000 - 4,366,000(1)
Eric Marler (2)
Chief Financial Officer and 1998 - - 126,000(3)
Director........................ 1997 N/A - -
1996 N/A - -
Robert Hondel
President of Wade Cook Financial 1998 110,000 - 11,000(4)
Education Centers and Director... 1997 112,000 - 81,000
1996 180,000 - -
Robin Anderson
Director of Sales, Wade Cook 1998 59,000 500 81,000(5)
Seminars, Inc. and Director..... 1997 91,000 - -
1996 77,000 - -
</TABLE>
(1) Represents royalties accrued by Mr. Cook for the licensing of certain
intellectual property rights to the Company. See Item 13. "Certain Relationships
and Related Transactions." (2) Prior to 1998, Mr. Marler was not employed by the
Company. Mr. Marler resigned as the Chief Financial Officer of the Company
during the first quarter of 1999. (3) Represents amounts paid to Mr. Marler as
an independent contractor, including payments relating to his membership on the
Board of Directors and his position as the Company's Chief Financial Officer.
(4) Represents commissions paid to Mr. Hondel. (5) Represents amounts paid to
Ms. Anderson for commissions, vacation pay, holiday pay and other employee
benefits.
1997 Stock Incentive Plan
The Company's 1997 Stock Incentive Plan (the "Plan") provides for the granting
of stock bonuses, stock options, stock appreciation rights, phantom stock and
other stock-based awards. The Plan is administered by the Board of Directors
which has the right to grant awards to eligible participants and to determine
the terms and conditions of such grants, including, but not limited to, the
vesting schedule and exercise price of the awards. All directors, officers,
consultants and other employees are eligible to receive awards under the Plan.
Option Grants In The Last Fiscal Year
During the fiscal year ended December 31, 1998, no options were granted to any
of the Named Executive Officers.
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
During the last fiscal year, none of the Named Executive Officers held options
to purchase shares of the Company's common stock.
30
<PAGE>
Compensation of Directors
The directors of the Company were compensated during the last fiscal year as
follows:
<TABLE>
<S> <C>
Annual retainer as a director..................................................... $ 10,000
Annual retainer for membership on a standing committee............................ $ 2,400
Annual retainer as Chair of a standing committee.................................. $ 1,200
Reimbursement for all reasonable expenses incurred in attending Board
or committee meetings............................................................ Variable
</TABLE>
In addition, each director is eligible to participate in the Company's 1997
Incentive Stock Plan. See "--1997 Stock Incentive Plan."
Employment Agreements
The Company has entered into an employment agreement with Mr. Cook, effective as
of July 1, 1997, pursuant to which Mr. Cook serves as the Company's Chief
Executive Officer and President. The agreement provides for a three-year term in
which Mr. Cook will receive an annual base salary of $240,000 for the year ended
June 30, 1998, $265,000 for the year ended June 30, 1999 and $290,000 in for the
year ended June 30, 2000. Under the terms of the agreement, Mr. Cook may receive
additional bonuses for work as approved by the Board of Directors. To date, no
such bonuses have been requested or approved. In addition, Mr. Cook is entitled
to reimbursement for reasonable travel and business entertainment expenses
authorized by the Company, as well as certain fringe benefits. See Item 13.
"Certain Relationships and Related Transactions."
Compensation Committee Interlocks And Insider Participation
Laura Cook, Robert Hondel and John Childers served as members of the
Compensation Committee in 1998. Also during 1998:
1. Mrs. Cook served as the Corporate Secretary of the Company;
2. The Company issued 45,000 shares of its common stock to Mr. Hondel in
connection with the assignment of all rights and interests in Quantum
Marketing, Inc. ("Quantum");
3. Mr. Hondel served as the chief executive officer of Quantum, a
wholly-owned subsidiary of the Company; and
4. Mr. Childers received $258,301 from the Company in exchange for
speaker training services.
31
<PAGE>
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth information, as of April 22, 1999, regarding the
beneficial ownership of the Company's common stock by any person known to the
Company to be the beneficial owner of more than five percent of the outstanding
common stock, by directors and certain executive officers, and by all directors
and executive officers of the Company as a group.
<TABLE>
Amount and Nature of
Beneficial Ownership of Percent of
Name and Address (1) Common Stock(2) Class
- ------------------------------------------------------- ---------------------------- -------------
<S> <C> <C>
Wade B. Cook(3)..................................... 40,785,185 63.3%
Laura M. Cook(3).................................... 40,785,185 63.3%
Robert T. Hondel.................................... 201,310 *
Nick Dettman........................................ 180,000 *
Robin Anderson...................................... 19,140 *
Joel Black(4)....................................... 25 *
Janice Leysath...................................... 5,000 *
Angela Pirtle....................................... -- *
Greg Maxwell........................................ -- *
Dan Wagner.......................................... 1,285 *
All current directors and executive officers as a
group (13 persons).................................. 41,292,445 64.1%
- -------------------------
</TABLE>
* Represents less than 1%.
(1) Unless otherwise indicated, the address for each beneficial owner is c/o
Wade Cook Financial Corporation, 14675 Interurban Avenue South, Seattle,
Washington 98168-4664.
(2) Based on an aggregate of 64,383,730 shares outstanding as of April 22,
1999.
(3) Includes (a) 8,517,745 shares of Common Stock owned of record by Mr. Cook
directly; (b) 166,100 shares of Common Stock held in the name of Mr. Cook's
individual retirement account; (c) 800,000 shares held by the Wade Cook
Family Trust; (d) 1,309,200 shares held by corporations controlled by Mr.
Cook; (e) 295,000 shares held by a trust for Wade and Laura Cook's minor
children and (f) 29,697,140 shares owned by Wade B. Cook and Laura M. Cook
Family Trust.
(4) Represents 25 shares held by a company controlled by Mr. Black.
Item 13. Certain Relationships and Related Transactions.
On March 20, 1998, Mr. Cook and the Company entered into an Open-ended Product
Agreement providing for the non-exclusive license by Mr. Cook of certain
intellectual property rights to the Company. The license provides Mr. Cook with
a ten percent (10%) royalty on gross sales of licensed products. The Open Ended
Product Agreement was amended on November 13, 1998 to provide that Mr. Cook may
waive royalties due under the agreement in his sole discretion. During the
fiscal year ended December 31, 1998, the total royalties payable to Mr. Cook
under the agreement were $7,338,000. In September 1998, Mr. Cook agreed to a
$2.0 million reduction in royalties in order to assist with the Company's cash
flow requirements.
On March 2, 1999, Mr. Cook and the Company entered into a Publishing Agreement,
effective February 1, 1996, which gives the Company certain rights to promote
and sell materials authored by Mr. Cook. Under the terms of the Publishing
Agreement, Mr. Cook is entitled to receive a ten percent (10%) royalty on the
gross revenues attributable to the sale of published materials. In 1998,
$151,000 was paid under the contract.
On September 9, 1998, the Company issued 45,000 shares of restricted common
stock to Mr. Hondel, a director of the Company, in exchange for the assignment
of all of Mr. Hondel's rights and interests in Quantum Marketing, Inc. pursuant
to the terms of a Share Exchange Agreement dated January 1, 1998.
32
<PAGE>
In October 1998, the Company made a loan of $150,000 to Eric Marler, a director
and the Chief Financial Officer of the Company, to facilitate Mr. Marler's
purchase of a vacant lot for residential development. Upon his resignation as a
director and as Chief Financial Officer in the first quarter of 1999, Mr. Marler
conveyed the property to Sherlock Homes, a wholly-owned subsidiary of the
Company, in full satisfaction of the loan amount.
During 1998, the Company paid $117,468 to Cascade Management Associates, LP, a
limited partnership controlled by Mr. Marler, for speaker services.
During 1998, the Company paid an aggregate of $1,353,489 to companies controlled
by Scott Scheuerman, Mr. Cook's brother-in-law, primarily as vendors of
business, office support and registered agent services provided to the Company's
customers.
During 1998, the Company paid $258,301 to John V. Childers, a director of the
Company during 1998, for speaker training services.
During 1998, a company controlled by Mr. Cook made payments of principal and
interest on eight outstanding promissory notes to certain wholly-owned
subsidiaries of the Company. The aggregate principal amounts of the notes when
issued was $1,000,000, and the interests rates ranged from 16.075% to 18.389%
per annum. During 1998 companies controlled by Mr. Cook paid $118,581 in
principal and $151,550 in interest payments on the notes. As of March 15, 1999,
the aggregate principal amount outstanding under the notes was $772,714.
During 1998, the Company paid a total of $1,069,358 in legal fees relating to
litigation involving intellectual property owned by Mr. Cook and licensed to the
Company. Of this amount $604,043 was allocated to Mr. Cook and offset against
royalties payable to Mr. Cook pursuant to the Open-ended Product Agreement.
During 1998, the Company paid salaries and other compensation to its executive
officers as set forth under Item 11. "Executive Compensation."
Part IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
(i) Consolidated Balance Sheets at December 31, 1997 and 1998
(ii) Consolidated Statements of Income and Retained Earnings for the
years ending December 31, 1996, 1997 and 1998
(iii)Consolidated Statements of Changes in Shareholders' Equity
(iv) Consolidated Cash Flow Statements
(v) Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Not required.
33
<PAGE>
3. Exhibits
Exhibit No. Description
----------- -----------
2.1(Infinity) Stock Purchase Agreement dated June 30, 1998, by and among
the Company, Entity Planners, Inc., and Berry, Childers &
Associates, L.L.C.
2.2(Infinity) Amendment to Stock Purchase Agreement dated September 30,
1998 by and among the Company, Entity Planners Inc. and
Berry, Childers & Associates, L.L.C.
2.3* Purchase and Sale Agreement, dated July 4, 1996, between
United Support Association and Seller
2.4* All Inclusive Trust Deed dated March 8, 1997, for the
purchase and assumption of certain real-estate by Rising
Tide, LTD from East Bay Lodging Association, LTD
2.5** Share Exchange Agreement, dated January 1, 1998, between
Wade Cook Financial Corporation and Information Quest, Inc.
2.6** Stock Purchase Agreement, dated August 8, 1997, between
Profit Financial Corporation and Curtis A. Taylor and
Stanley J. Zenk regarding Worldwide Acquisition.
2.7** Stock Purchase Agreement, dated August 1, 1997, between Wade
Cook Financial Corporation and John V. Childers, Sr., Brenda
Childers, Tracy Allan Childers and John V. Childers, Jr.
regarding Ideal Acquisition.
2.8** Share Exchange Agreement, dated August 15, 1997, between
Profit Financial Corporation and Gold Leaf Press, Inc.
2.9** Share Exchange Agreement, dated August 15, 1997, between
Profit Financial Corporation and Origin Book Sales, Inc.
2.10*** Assignment and Assumption of Interest, Consent Agreement,
Memorandum of Terms re: Airport Hotel Partners, L.L.C.
2.11*** Limited Liability Company Interest Purchase Agreement re:
Woods Cross Hotel Partners, L.C. dated November 29, 1997
2.12*** Limited Liability Company Interest Purchase Agreement with
exhibits re: Park City Hotel Partners, L.C. dated February
4, 1997
2.13*** Memorandum of Terms, Assignment and Assumption of Interest,
Warranty Deed re: Airport Lodging Associates, L.L.C.
2.14**** Share Exchange Agreement , dated January 1, 1998, between
WCFC & Quantum Marketing, Inc.
2.15**** Stock Assignment Agreement dated January 1, 1998, between
WCFC & Glendon H. Sypher
3.1** Articles of Incorporation of Wade Cook Financial Corporation
3.2** Bylaws of Wade Cook Financial Corporation
34
<PAGE>
Exhibit No. Description
----------- -----------
4.1** Form of Wade Cook Financial Corporation's Common Stock
Certificate
10.1**(Function) 1997 Stock Incentive Plan of Wade Cook Financial Corporation
10.2** Form of Indemnification Agreement of Wade Cook Financial
Corporation
10.3* Product Agreement, dated June 25, 1997, and effective as of
July 1, 1997, among Wade Cook Seminars, Inc., Money Chef,
Inc., and Wade B. Cook
10.4* Agreement dated February 1, 1996, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.5* Amended Agreement, dated June 26, 1997, between Wade B. Cook
and Lighthouse Publishing Group, Inc.
10.6* Agreement Dated January 1, 1997, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.7* Amended Agreement dated June 26, 1997, between Wade B. Cook
and Lighthouse Publishing Group, Inc.
10.8* Agreement dated March 1, 1997, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.9* Agreement dated May 1, 1997, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.10*(Function) Employment Agreement dated June 26, 1997, by and between
Wade Cook Seminars, Inc., and Wade B. Cook
10.11* Commercial Lease dated June 25, 1997, by and between Wade
Cook Seminars, Inc. and U.S.A. Corporate Services, Inc.
10.12* Agreement dated November 1, 1996, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.13* Secured Loan Agreement and Promissory Note (Secured) between
U.S.A., Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.14** Open-Ended Product Agreement, dated March 20, 1998, between
Wade Cook Financial Corporation and Wade B. Cook
10.15*** Product Agreement, dated March 23, 1998, between Planet
Cash, Inc., Steven Allyn Wirrick and Wade Cook Financial
Corporation
10.16*** Stock Assignment Agreement, dated January 1, 1998, between
Get Ahead Bookstores, Inc., Glendon H. Sypher and Wade Cook
Financial Corporation
10.17** Product Agreement, dated March 23, 1998, between Wade Cook
Financial Corporation, Information Quest, Inc. and Thomas
Cloward
35
<PAGE>
Exhibit No. Description
----------- -----------
10.18** Share Exchange Agreement, dated September 12, 1997, between
Profit Financial Corporation and Applied Voice Recognition,
Inc.
10.19** Publishing Agreement, effective October 1, 1997 and signed
January 12, 1998, between Lighthouse Publishing Group, Inc.
and Wade B. Cook
10.20** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated May 23, 1997,
between USA/Wade Cook Seminars, Inc. and Newstart Centre,
Inc.
10.21** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated June 20, 1997,
between Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.22** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated July 25, 1997,
between Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.23** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated August 22, 1997,
between Information Quest, Inc. and Newstart Centre, Inc.
10.24** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents, dated October 9, 1997,
between Information Quest, Inc. and Newstart Centre, Inc.
10.25** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents, dated October 9, 1997,
between Left Coast Advertising, Inc. and Newstart Centre,
Inc.
10.26** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents dated August 19, 1997,
between Left Coast Advertising, Inc. and Newstart Centre,
Inc.
10.27*** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents, dated January 20, 1998,
between Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.28** Secured Promissory Note, dated July 31, 1997, between Wade
Cook Seminars, Inc. and Robert and Meda Hondel
10.29*** Secured Promissory Note, dated June 18, 1997, between Paul
and Laurie Cook and Wade Cook Seminars, Inc.
10.30*** Secured Promissory Note, dated January 1, 1998, between Paul
and Laurie Cook and Wade Cook Seminars, Inc.
10.31*** Warranty Deed, Articles of Organization re: Red Rock Lodging
Associates
10.32**** Contract for Sale of Real Estate dated January 20, 1998 by
and between Ideal Travel Concepts, Inc. and/or assigns and
Kenneth B. Lenoir
36
<PAGE>
Exhibit No. Description
----------- -----------
10.33(Infinity) Exclusive Product License Agreement dated June 30, 1998 by
and between Wade B. Cook, and Entity Planners, Inc.
10.34(Infinity) Exclusive Product License Agreement dated June 30, 1998 by
and between Wade Cook Financial Corporation, and Entity
Planners, Inc.
10.35(Infinity) Open Ended Product Agreement between the Company and Wade
Cook dated March 20, 1998
10.36(Infinity) Amendment to the Open Ended Product Agreement dated November
13, 1998 by and between the Company and Wade Cook
10.37# Assignment and Assumption of Interest dated August 22, 1996
by and between Zion's Management and Development Co.,
Airport Lodging Associates L.C. and Wade Cook Seminars, Inc.
10.38# Real Estate Purchase Contract dated August 22, 1997 (St.
George Hilton)
10.39# Addendum No. 1/Counteroffer to Real Estate Purchase Contract
dated August 1997 (St. George Hilton
10.40# Real Estate Lease dated July 16, 1998 between Origin Book
Sales, Inc. and California Avenue Associates, LLC.
10.41# Form of Speaker Agreement
10.42# Agreement dated December 11, 1998 between THH Ventures L.C.
and the Company
11.1# Statement of Computation of Per Share Earnings
16.1** Letter re: Change in Certifying Accountant
21.1# List of Wade Cook Financial Corporation Subsidiaries
27.1# Financial Data Schedule - December 31, 1998
- -------------------------------------
* Previously filed as an exhibit to the Company's registration statement
on Form 10 filed with the SEC on April 30, 1997, as amended on June
29, 1997 and September 24, 1997
** Previously filed as an exhibit to the Company's Form 10-K filed with
the SEC on March 31, 1998
*** Previously filed as an exhibit to the Company's Form 10-K/A filed with
the SEC on July 20, 1998
**** Previously filed as an exhibit to the Company's Form 10-Q filed with
the SEC on August 8, 1998
(Infinity) Previously filed as an exhibit to the Company's Form 10-Q filed
with the SEC on November 16, 1998
(Function) This document has been identified as a management contract or
compensatory plan or arrangement.
# Previously filed as an exhibit to the Company's Form 10-K filed with
the SEC on March 31, 1999
(b) Repots on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 1998.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Wade Cook Financial Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
April 29, 1999.
Wade Cook Financial Corporation
/s/ Wade B. Cook
By: ------------------------------------
Wade B. Cook, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed by the following persons on behalf of Wade Cook Financial
Corporation in the capacities and on the dates indicated.
<TABLE>
Signature Title Date
<S> <C> <C>
/s/ Wade B. Cook Chief Executive Officer, Director April __, 1999
- --------------------------- (principal executive officer)
Wade B. Cook
/s/ Richard Smith Chief Financial Officer April __, 1999
- --------------------------- (chief accounting officer)
Richard Smith
- --------------------------- Director/Secretary April __, 1999
Laura Cook
Director April __, 1999
- ---------------------------
Robert Hondel
/s/ Robin Anderson Director April __, 1999
- ---------------------------
Robin Anderson
Director April __, 1999
- ---------------------------
Nicolas Dettman
/s/ Joel Black
- --------------------------- Director April __, 1999
Joel Black
/s/ Janice Leysath Director April __, 1999
- ---------------------------
Janice Leysath
/s/ Dan Wagner Director April __, 1999
- ---------------------------
Dan Wagner
</TABLE>
38
<PAGE>
Tel: (310)576-6880 MILLER AND CO.
Fac: (310)576-6881 CERTIFIED PUBLIC ACCOUNTANTS MEMBERS OF
EMAIL: milco@ 501 SANTA MONICA BOULEVARD S.E.C. PRACTICE
ix.netcom.com SECOND FLOOR SECTION OF THE
SANTA MONICA, CALIFORNIA 90401 AMERICAN INSTITUTE
OF CERTIFIED PUBLIC
ACCOUNTANTS
Established 1949
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wade Cook Financial Corporation and Subsidiaries
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Wade Cook
Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1998, 1997, and 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wade
Cook Financial Corporation and subsidiaries as of December 31, 1998 and 1997,
and the results of their consolidated operations and their consolidated cash
flows for the years ended December 31, 1998, 1997, and 1996 in conformity with
generally accepted accounting principles.
As discussed in Note-H to the financial statements, the Company has restated its
1996 earnings per share.
/s/ Miller and Co.
Certified Public Accountants
Santa Monica, California
February 26, 1999
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<TABLE>
December 31,
(in thousands) --------------------------------------
CURRENT ASSETS NOTES 1998 1997
- -------------- ------------ ----------------- -----------------
<S> <C> <C> <C>
Cash and cash equivalents A $ 1,742 $ 540
Marketable securities A,C 2,870 6,163
Trade and credit card receivables B 3,112 3,283
Inventory A 3,743 1,312
Due from related parties B,F 65 750
Notes receivable - employees, current portion B,F 112 243
Prepaid expenses 354 236
Deferred tax asset A - 251
----------------- -----------------
TOTAL CURRENT ASSETS 11,998 12,778
----------------- -----------------
PROPERTY AND EQUIPMENT A,D,Q 29,203 10,425
- ---------------------- ----------------- -----------------
GOODWILL A 3,061 2,638
- -------- ----------------- -----------------
OTHER ASSETS
Non-marketable investments A,L 9,493 7,331
Other investments 255 247
Deposits E 152 4,093
Notes receivable - employees B,F 2,920 3,293
Due from related parties B,F 1,616 599
----------------- -----------------
TOTAL OTHER ASSETS 14,436 15,563
----------------- -----------------
TOTAL ASSETS $58,698 $41,404
------------ ================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. See accompanying independent auditors' report.
-2-
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
December 31,
-------------------------------------
CURRENT LIABILITIES NOTES 1998 1997
- ------------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
Current portion of long-term debt G $ 4,667 $ 1,445
Book overdrafts E - 2,156
Accounts payable and accrued expenses 9,198 6,451
Margin loans in investment accounts L 146 2,767
Payroll and other taxes withheld and accrued 163 163
Income taxes payable A,O 4,969 5,254
Deferred tax liability 642 -
Deferred revenue A 5,662 4,764
Due to related parties F 3,110 783
Notes payable to officer G 45 45
---------------- -----------------
TOTAL CURRENT LIABILITIES 28,602 23,828
LONG -TERM DEBT G 9,473 821
---------------- ----------------
TOTAL LIABILITIES 38,075 24,649
---------------- -----------------
COMMITMENTS & CONTINGENCIES N,T,U
MINORITY INTEREST 936 688
---------------- ----------------
SHAREHOLDERS' EQUITY
Preferred stock, 5,000,000 shares authorized at $10 par
value, none issued and outstanding - -
Common stock, 140,000,000 shares authorized at $0.01 par,
value 64,345,630 shares and 64,245,923 shares outstanding
as of, December 31, 1998 and 1997, respectively H 644 642
Paid-in capital 4,093 3,692
Prepaid advertising I (500) (500)
Retained earnings 15,987 12,233
---------------- -----------------
20,224 16,067
---------------- -----------------
Less: treasury stock at cost H
(251,000 shares) 537 -
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 19,687 16,067
---------------- ---------------
TOTAL LIABILITIES, MINORITY INTEREST,
AND SHAREHOLDERS' EQUITY $ 58,698 $ 41,404
================ ================
</TABLE>
-3-
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
-------------------------------------------------------
<TABLE>
Years Ended
----------------------------------------------------------
December 31,
---------------------------------------------------------
(in thousands, except share data) NOTES 1998 1997 1996
- --------------------------------- --------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
REVENUES, NET OF RETURNS AND DISCOUNTS P $ 118,207 $ 93,343 $ 37,008
COSTS OF REVENUES P
Royalties to related party 7,976 9,997 3,968
Speaker fees to related party 378 167 131
Other costs of revenues 48,409 29,328 10,361
---------------- ----------------- ----------------
TOTAL COSTS OF REVENUES 56,763 39,492 14,460
----------------- ---------------- ----------------
GROSS PROFIT 61,444 53,851 22,548
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 57,890 39,309 18,178
----------------- ---------------- ----------------
INCOME FROM OPERATIONS 3,554 14,542 4,370
----------------- ---------------- ----------------
OTHER INCOME (EXPENSE) G
Dividends and interest 624 385 60
Gain (loss) on trading securities A,C 837 (804) 93
Other income 386 128 58
Loss on non-marketable investments (435) (106) -
Loss on disposition of fixed assets - - (22)
Licensing fees V 1,697 - -
Interest expense (1,453) (309) (263)
----------------- ---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) 1,656 (706) (74)
----------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 5,210 13,836 4,296
PROVISION FOR INCOME TAXES O 2,346 5,579 1,452
----------------- ---------------- ----------------
INCOME BEFORE MINORITY INTEREST 2,864 8,257 2,844
MINORITY INTEREST 127 21 -
----------------- ---------------- ----------------
INCOME FROM CONTINUING OPERATIONS
2,991 8,278 2,844
----------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. See accompanying independent auditors' report.
-4-
<PAGE>
<TABLE>
Years Ended
----------------------------------------------------------
December 31,
----------------------------------------------------------
(in thousands, except share data) NOTES 1998 1997 1996
- --------------------------------- --------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
DISCONTINUED OPERATIONS V
Income from operations of Entity
Planners, Inc., to be disposed of (net
of income taxes of $315,000 in 1998,
$484,000 in 1997, and $149,000 in 1996) 585 714 221
Operating income of Entity Planners, Inc.,
during phase-out period (net of income tax
of $8,280 in 1998) 15 - -
Gain on disposal of Entity Planners, Inc.
(net of income tax of $87,500 in 1998) 163 - -
----------------- ---------------- ----------------
INCOME FROM DISCONTINUED
OPERATIONS 763 714 221
----------------- ---------------- ----------------
NET INCOME $ 3,754 $ 8,992 $3,065
================ ================= ================
EARNINGS PER SHARE A
Income from continuing operations $ .05 $ .13 $ .05
Income from discontinued operations .01 .01 -
Income during phase-out period - - -
Gain on disposal - - -
----------------- ---------------- ----------------
Net income $ .06 $ 14 $ .05
================ ================= ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 63,888 63,363 $59,610
================ ================= ================
</TABLE>
-5-
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
<TABLE>
Class A
Common Stock
----------------------
Additional Retained Total
Paid-in Earnings Prepaid Treasury Shareholders
(in thousands) Shares Amount Capital (Deficit) Advertising Stock Equity
- -------------- --------- --------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances - December 31, 1996
as restated, Note X 6,681 $ 67 $ 894 $3,241 $ (500) - $ 3,702
Issuance of restricted stock
in exchange for finders' fees
relating to purchase of interest
in Fairfield Inn, Provo, Utah 10 .1 34 34
Issuance of restricted stock 11 .1 32 32
Issuance of restricted stock in
exchange for finders' fees
relating to purchase of interest
in Hampton Inn & Suites,
Park City, Utah 4 .4 52 52
Issuance of restricted stock
for 12% interest in 45th
South Hotel Partners, LC 10 .1 60 60
Authorized but unissued
restricted Stock in exchange for
stock of Ideal Travel Concepts,
Inc., at August 1, 1997 358 4 2,146
Issuance of restricted stock in
exchange for the common stock
of Origin Book Sales, Inc. at
August 27, 1997 30 - 196 196
Issuance of restricted stock in
exchange for the common stock
of Gold Leaf Press, Inc. at
August 27, 1997 8 .08 51 51
Issuance of restricted stock 20 - 32 32
Effect of 3 for 1 stock split 14,265 143 (143)
Issuance of restricted shares
in Exchange for 7% interest in
Wood Cross Hotel Partners, LC 12 .1 119 119
Issuance of restricted stock 2 .02 8 8
Effect of 3 for 1 stock split 42,821 428 (428)
Authorized but unissued
restricted stock for employee
bonus 14 .1 -
Return of stock sale profits by 633 633
officer (Note B)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements See accompanying independent auditors' report.
-6-
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
<TABLE>
Class A
Common Stock
----------------------
Additional Retained Total
Paid-in Earnings Prepaid Treasury Shareholders
Shares Amount Capital (Deficit) Advertising Stock Equity
--------- --------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Collection of subscription
Receivable 6 6
Net Income for year ended
December 31, 1997 8,992 8,992
--------- --------- ----------- ----------- ----------- ----------- ------------
Balances - December 31, 1997 64,246 $ 643 $ 3,692 $ 12,233 $ (500) $ - $16,067
--------- --------- ----------- ----------- ----------- ----------- ------------
Issuance of restricted common
stock in exchange for the
common stock of Information
Quest, Inc. at January 1, 1998 45 .5 188 189
Issuance of restricted common
stock in exchange for the
common stock of Quantum
Marketing, Inc. at January 1, 45 .5 188 189
1998
Issuance of restricted common
stock in exchange for all of
the common stock of
Convenience Specialty Stores,
Inc. (OTC BB: CSVC) at April 10 - 25 25
23, 1998
Common stock purchased and
held in treasury at December 537 (537)
31, 1998
Net income for the year ended
December 31, 1998 3,754 3,754
--------- --------- ----------- ----------- ----------- ----------- ------------
64,346 $ 644 $ 4,093 $ 15,987 $ (500) $ 537 $19,687
========= ========= =========== =========== =========== =========== ============
</TABLE>
-7-
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
---------------------------------
<TABLE>
Years Ended
December 31,
----------------------------------------------------------
(in thousands) 1998 1997 1996
- -------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,754 $ 8,992 $ 3,065
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,958 1,287 345
(Gains) losses on trading securities (684) 804 (93)
Losses on disposition of fixed assets - - 22
Loss on investment in non-marketable securities 443 106 -
Purchases of trading securities (24,963) (20,806) (11,290)
Proceeds from sale of trading securities 26,942 19,319 9,035
Changes in assets and liabilities: net of effects of acquisitions:
Receivables 171 (2,423) (3,250)
Inventory (2,431) (582) (350)
Prepaid expenses (118) (143) (141)
Deferred taxes 893 532 (776)
Deposits 3,941 (4,058) -
Due from related parties (332) - -
Accounts payable and accrued expenses 2,747 8,536 475
Payroll and other taxes withheld and accrued - (688) 693
Income taxes payable (285) 3,178 1,981
Deferred revenue 898 (396) 4,809
Due to related party - 118 -
Royalties payable 2,327 172 (136)
----------------- ---------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,261 13,948 4,389
----------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable from employees and officers 504 (1,571) -
Capital expenditures (18,926) (4,157) (4,729)
Purchase of non-marketable investments (2,162) (6,286) -
Subsidiary's investment 139 (769) (88)
Return of subsidiary's investment 248 - 800
Payment for purchase of companies, net of cash acquired (423) (1,748) -
----------------- ----------------
NET CASH USED FOR INVESTING ACTIVITIES (20,620) (14,531) (4,017)
----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subsidiary's minority interest - 70 321
Payment of book overdrafts (2,156) - -
Long-term borrowings 11,875 - -
Repayment on short-term borrowings (2,621) (292) (193)
Issuance of common stock - 72 108
Collection on subscription receivables and
return of stock profits by officer - 638 -
Purchase of treasury stock (537) - -
----------------- ---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,561 488 236
----------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH 1,202 (95) 608
CASH, beginning of year 540 635 27
----------------- ---------------- -----------------
CASH, end of year $ 1,742 $ 540 $ 635
================= ================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements See accompanying independent auditors' report.
-8-
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
------------------------------------------
Business
Wade Cook Financial Corporation (WCFC), or Company, is the legal
successor to Profit Financial Corporation (PFC), a holding
company, whose principal operating subsidiaries include:
Wade Cook Seminars, Inc. (WCS), (formerly known as United Support
Association, Inc.) - WCS conducts educational investment and
business seminars and produces video tapes, audio tapes, and
written materials designed to teach various investment and
cash flow strategies for investing in the stock market,
asset protection and asset accumulation techniques or
strategies. WCS also hosts a subscriber internet service,
Wealth Information Network (WIN), which allows subscribers
to log on for information related to the stock market.
Lighthouse Publishing Group, Inc. (Lighthouse) - publishes books
on investment, financial and motivational topics.
Left Coast Advertising, Inc. (Left Coast) - is an advertising
agency, with only inter-company sales.
Origin Book Sales, Inc. (Origin) - is a book distributor.
Worldwide Publishers, Inc. (Worldwide) - is a book publisher.
Gold Leaf Press, Inc. (Gold Leaf) - is a book publisher.
IdealTravel Concepts, Inc. (Ideal) - is a travel agency, also in
the business of selling travel agent training kits.
Bountiful Investment Group, Inc. - owns interest in real estate
ventures, primarily hotels.
In 1998, the Company acquired the following business enterprises
(Note R):
Information Quest, Inc. (IQ) - the producer of the IQ Pager,
which provides subscribers with paging services for stock
related information.
Quantum Marketing Inc. (Quantum) - which provides local marketing
through its website on the internet and retail centers
located in Tacoma and Seattle, Washington and Santa Ana,
California. The retail centers also provide consumers with
online terminals with access to stock market information
through the WIN.
Get Ahead Bookstores, Inc. - a retail distributor of financial
education, personal development, and inspirational products,
including books, audio tapes, and video tapes located in the
Quantum education centers.
Copyrights
The copyrights to most seminars, video and audio tapes, and
written materials are now owned by Wade B. Cook, a related party.
As used hereafter, "Company" refers to Wade Cook Financial
Corporation and its consolidated subsidiaries.
10
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
------------------------------------------
Accounting principles and consolidation policy
The accompanying consolidated financial statements include the
accounts of Wade Cook Financial Corporation and its
majority-owned subsidiaries. WCS had a fiscal year end of January
31, and the balances as of January 31, 1997 have been used to
prepare the consolidated financial statements as of December 31,
1996. In 1997, WCS changed its fiscal year end to December 31,
and the balances as of December 31, 1997 do not include activity
for the month of January 31, 1997 or January 31, 1998. All
significant inter-company transactions and balances have been
eliminated in the consolidation.
During 1997, WCFC acquired Ideal, Origin, Worldwide, and Gold
Leaf and during 1998, WCFC acquired IQ, Quantum, and Get Ahead
Bookstores, the purchase method of accounting was used for all
acquisitions (see Note R and S). The consolidated financial
statements include the activity of each identified acquisition
from the date of acquisition through December 31, 1998 and 1997.
All significant inter-company transactions and balances have been
eliminated in the consolidation.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and related notes to
financial statements. Changes in such estimates may affect
amounts reported in future periods.
Cash and cash equivalents
The Company considers highly liquid investments with the original
maturity of three months or less to be cash and cash equivalents.
Included in these amounts are money market funds of $124,000, and
$50,000 as of December 31, 1998 and 1997, respectively.
Marketable securities
Brokerage accounts are used by seminar instructors during the
seminars to demonstrate how to buy and sell securities using a
broker. Marketable securities consist mainly of stocks and
options. They have been categorized as trading securities and, as
a result, are stated at market value. All changes in trading
securities' fair values are reported in earnings as they occur.
Realized gains and losses on the sale of securities are
determined using the specific-identification method.
Inventory
Inventory, which consists primarily of finished goods, is valued
at the lower of cost or market. Cost is determined using the
first-in, first-out method
Property and equipment
Property and equipment are stated at cost. Depreciation is
computed using straight-line and accelerated methods over the
estimated useful lives of the related assets for both financial
reporting and tax reporting purposes. Leasehold improvements are
amortized using the straight-line method over the shorter of the
estimated life of the asset or the remaining term of the lease.
Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized. When property and
equipment are sold or otherwise disposed of, the asset account
and related accumulated depreciation account are relieved, and
any gain or loss is included in operations
11
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (continued)
------------------------------------------
Property and equipment (continued)
The Company evaluates impairment of long-lived assets in
accordance with the Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be disposed of. SFAS 121 requires the
Company to assess whether an asset (or group of assets) that will
continue to be used is impaired and needs to be adjusted. Other
long-lived assets to be disposed of (either by sale or
abandonment unrelated to the disposal of a business segment)
should be written down to fair value less the cost to sell such
assets.
Intangible
In 1998 and 1997 acquisitions (Note R) resulted in the Company
recording goodwill, which represents the excess of the cost of
the assets purchased over their fair value. Amortization is
computed using the straight-line method over the estimated useful
life of the intangible asset or 40 years, whichever is shorter.
Non-marketable Investments
If the Company owns less than 20% of the investee, the Company
accounts for non-marketable investments using the cost method.
The Company uses the equity method when the investment represents
ownership between 20% and 50%.
Revenue recognition
Revenues for seminars are recognized when services are rendered.
Subscription revenues for WIN (Wealth Information Network)
membership generally are received for up to one year in advance
and are recorded and presented in the financial statements as
deferred revenue until earned. Although a typical subscription
binds the subscriber to prepay, the subscription term begins when
the customer receives his logon code. The deferred revenues are
recognized on a monthly basis over the term of the contract.
If a subscriber cancels within the first twelve months of the
service period, any remaining unearned subscription revenue will
be recognized into income at the time of the cancellation because
the subscription is a binding nonrefundable contract.
IQ sells pager services in twelve or twenty-four month contract
subscriptions, but receives the revenue in advance, which is
presented in the financial statements as deferred revenue until
earned. The deferred revenues are recognized on a monthly basis
over the term of the contract.
Other revenues are recognized when finished products are shipped
to customers or services have been rendered.
Advertising costs
Advertising costs are expensed when incurred. Advertising costs
amounted to $19.230 million, $13.685 million, and $6.095 million
for the years ended December 31, 1998, 1997 and 1996,
respectively.
12
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note A - Summary of Significant Accounting Policies (continued)
------------------------------------------
Income taxes
Income taxes are provided for tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes. Deferred taxes are recognized
for differences between the basis of assets and liabilities for
financial statement and income tax purposes.
As of December 31, 1998, the Company owed the United States
treasury $2.701 million in income taxes and accrued penalties and
interest on unpaid income taxes for the year ended December 31,
1997. In addition, the Company owed various state governments
$481,000 in unpaid taxes and accrued penalties and interest, also
on unpaid taxes for the year ended December 31, 1997. The Company
has not made any estimated tax payments on income earned in the
year ended December 31, 1998, and no provision for this
underpayment penalty has been made.
Barter transactions
The Company is accounting for barter credits in accordance with
APB Opinion No. 29, Accounting for Non-monetary Transactions, and
EITF issue No. 93-11, Accounting for Barter Transactions,
involving barter credits which presumes that the fair value of
the non-monetary asset exchanged is more clearly evident than the
fair value of the barter credit received, and that the barter
credit should be reported at the fair value of the non-monetary
asset exchanged.
The Company purchased radio airtime advertising in exchange for
common stock. The transaction is discussed in Note I.
Earnings per share
The Company accounts for earnings per share in accordance with
FASB No. 128. Earnings per share are based on the weighted
average number of shares of common stock and common stock
equivalents outstanding during each year.
Reclassification of Financial Statement Presentation
Certain reclassifications have been made to the 1997 and 1996
financial statements to conform to the 1998 financial statement
presentation. Such reclassifications had no effect on net income
as previously reported.
New Accounting Pronouncements
The Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants (AICPA) issued
in March 1998, Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use, which provides guidance on accounting for the costs of
computer software developed or obtained for internal use. In
1998, the Company began installation of a company-wide software
program, SAP. The Company has contracted with an outside
engineering firm for the installation, implementation, and
training. As of December 31, 1998, the Company has spent $795,000
and estimates that an additional $1.205 million will be required
to have the computer system operating. As of December 31, 1998,
the progress payments on the installation phase are classified as
a fixed asset, with no depreciation being taken. Once the
software performs in its intended use, the Company will begin
depreciating.
13
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note A - Summary of Significant Accounting Policies (continued)
------------------------------------------
New Accounting Pronouncements (continued)
The AICPA in April 1998, issued SOP 98-5, Reporting on the Costs
of Start-up Activities, which provides guidance on the financial
reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be expense
as incurred. In 1998, the Company adopted SOP 98-5, and does not
believe that it had a material effect on its financial statements
or disclosures.
The Financial Accounting Standards Board (FASB) in February of
1999, issued an exposure draft (ED) of a proposed Statement of
Financial Accounting Standards (SFAS), Consolidated Financial
Statements: Purpose and Policy. The Company believes that the
proposed accounting standards will not have a material effect on
the consolidated financial statements.
Note B - Receivables
Following is a summary of receivables:
<TABLE>
December 31, December 31,
(in thousands) 1998 1997
-------------- ----------------- -----------------
<S> <C> <C>
Trade and credit card receivables $3,112 $3,242
Notes receivable - employees 3,032 3,536
Due from related parties 1,681 1,349
Other - 41
================= =================
Total $7,825 $8,168
================= =================
</TABLE>
An allowance for uncollectible accounts is maintained, and at
December 31, 1998 and 1997, the allowance amounted to $629,000
and $58,000, respectively. Amounts reported on the balance sheet
are shown net of the allowance.
Note C - Marketable Securities
The net unrealized gain (loss) in trading securities that has
been included in earnings during the period amounted to $684,000,
$(755,000), and $93,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
14
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note D - Property and Equipment
The following is a summary of property and equipment:
<TABLE>
December 31, December 31,
(in thousands) 1998 1997
-------------- ----------------- -----------------
<S> <C> <C>
Land $ 532 $ 532
Land - hotels 2,906 -
Building 8,723 6,022
Building - hotels 9,190 -
Equipment 5,307 2,447
Automobiles 1,634 1,280
Furniture and fixtures 3,704 1,774
----------------- -----------------
31,996 12,055
Less: Accumulated depreciation (3,295) (1,630)
Less: Accumulated depreciation - hotels (293) -
----------------- -----------------
28,408 10,425
Software installation in progress 795 -
----------------- -----------------
Total $ 29,203 $ 10,425
================= =================
</TABLE>
Depreciation expense charged to operations was $1.958 million,
$1.269 million, and $345,000 in December 31, 1998, 1997, and
1996, respectively.
Note E- Deposits and Book Overdrafts
Deposits as of December 31, 1998 and 1997 amounted to $152,000
and $4.093 million, respectively. Deposits represent the
following:
<TABLE>
December 31,
-------------------------------------
Description 1998 1997
-----------
---------------- -----------------
<S> <C> <C>
Held by credit card processors $50 $ 2,050
Held for purchase of hotel - 1,913
Purchase of AVRI equipment - 120
Held for security on buildings 24 10
Held in escrow accounts 78 -
================ =================
Totals $ 152 $ 4,093
</TABLE>
Book overdrafts as of December 31, 1998 and 1997, amounted to
none and $2.156 million, respectively. Under the Company's cash
management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes
and are classified as "book overdrafts" on the balance sheet.
15
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note F - Related Party Transactions
The Company entered into a product agreement with Wade B. Cook,
to obtain the rights to promote and sponsor seminars, entity
formation services (discontinued in June 1998) and products owned
and controlled by Wade B. Cook for a royalty. Royalty expenses
totaled $7.976 million, $9.997 million, and $3.968 million for
the years-ended December 31, 1998, 1997, and 1996, respectively.
As of December 31, 1998 and 1997, accrued royalties were $2.989
million and none, respectively.
In 1998, the Company renegotiated its product agreement with Wade
B. Cook, under the new terms of the agreement, Mr. Cook did not
receive any third quarter royalties. Under the previous
agreement, Mr. Cook would have received $2.037 million in
royalties. In addition, during for the year ended December 31,
1998, Mr. Cook and the Board of Directors agreed that Mr. Cook
would repay the Company amounts paid on his behalf for legal
expenses, totaling $642,000.
The Company obtained services from seminar speakers provided by
companies owned by officers of the Company. Total speaker fees
paid to such companies totaled $378,000, $167,000, and $131,000
for the years ended December 31, 1998, 1997, and 1996. There were
no additional amounts due to such companies as of December 31,
1998 and 1997.
Due from related parties represent advances to the following:
<TABLE>
December 31, 1998 December 31, 1997
-------------------------- ------------------------
(in thousands) Non- Non-
Related Parties Relationship Current Current Current Current
------------------- -------------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Newstart 50% owned and controlled
Centre, Inc. by President/CEO of WCFC
or his affiliates $ 60 808 $ 43 $ 599
Get Ahead Prior to 1998, majority
Bookstores stockholder was an
employee of WCFC - - 156 -
Quantum Marketing Prior to 1998, majority
stockholder was a
director of WCFC - - 525 -
Crossroads General partner is
President/CEO of WCFC - 250 - -
Five Star General partner is
Consulting, Inc. President/CEO of WCFC
- 38 25 -
Related Associated with WCFC
Individuals 5 520 1 -
============ ========== ========== ==========
Total $ 65 $ 1,616 $ 750 $ 599
============ ========== ========== ==========
</TABLE>
16
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note F - Related Party Transactions (continued)
Due to related parties consists of the following:
<TABLE>
December 31, December 31,
(in thousands) Relationship 1998 1997
-------------------------- ----------------------------- ----------------- ----------------
<S> <C> <C> <C>
Wade B. Cook President/CEO of WCFC $ 3,110 $ -
Information Quest, Inc. Prior to 1998, majority
stockholder was employee of
WCFC - 683
Board of Directors
advances Directors of WCFC - 100
----------------- ----------------
Total $ 3,110 $ 783
================= ================
</TABLE>
The company has various notes receivable from employees and
officers. Original maturity dates are from 12 months to 360
months. Annual interest rates range from none stated to 12%. The
manner of settlement is by salary deduction or payment. The
majority of notes receivable are secured by real property or
personal property. The Company evaluates notes receivables in
accordance with Statement of Financial Accounting Standards No
114, Accounting by Creditors for Impairment of a Loan. Statement
No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate. Statement No. 118, Income
Recognition and Disclosures, amends Statement No. 114 to allow a
creditor to use existing methods for recognizing interest income
on an impaired loan. At December 31, 1998 and 1997, reductions in
the notes receivable of $243,000 and $287,000, respectively, were
recorded to reflect impaired notes. Substantially all of the
reductions were from unsecured receivables from employees who are
no longer with the company. Future cash flow was not expected,
due to the uncertainty of repayment.
At December 31, 1998 and 1997, due from employees amounted to
$3.032 million and $3.536 million, respectively, of which,
$112,000 and $243,000, respectively, has been classified as
current. Amounts due from employees represent loans both secured
and unsecured:
(in thousands) December 31, December 31, 1997
Loan 1998 1997
---------------- ---------------- ------------------
Secured $ 2,909 $ 3,098
Unsecured 123 438
Total $ 3,032 $ 3,536
================ ==================
For the years ended December 31, 1998 and 1997, interest income
resulting from the employee note receivables were $270,000 and
$200,000, respectively. Interest income is calculated by
multiplying the outstanding balance of unimpaired loans with
their respective interest rate. Interest income is not calculated
on impaired loans.
17
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
Note G- Long-Term Debt
December 31,
(in thousands, except in descriptions) 1998 1997
-------------------------------------- ----------------- ----------------
<S> <C> <C>
Mortgage payable (Seattle, WA), secured by land and
building, due in monthly installments of principal
and interest of $100,000 from September 1, 1997 to
February 1, 1999, and $555,682 on March 1, 1999,
including interest at 9% per annum $ 746 $ 1,825
Real estate contract payable (Seattle, WA), secured
by land and building, payable in monthly
installments of $2,157, including interest at 7%
per annum, with an original maturity date of
September 1, 1998 340 340
Mortgage payable, secured by land and building
(Memphis, TN), due in monthly installments of principal
and interest of $13,380 from April 1, 1998 through
January 1, 2016, including interest of 11% per annum
(See Note X) 1,053 -
Note payable, secured by land (Best Western McCarran
House, Sparks, NV), with interest only monthly payments
of $6,250, at 15% per annum, with principal due June 1,
1999 500 -
Note payable, secured by land (72 South, Salt Lake City, UT),
due October 1, 1999, due in one payment of principal with
quarterly payments of accrued interest beginning January 1,
1999 at 10.5% per annum
450 -
Note payable, secured by land and building (Best Western
McCarran House, Sparks, NV), due June 30, 2011, in monthly
installments of principal and interest of $30,514, with
interest at 10% per annum, and with a balloon payment of
$2 million on June 30, 2001 3,437 -
Note payable, secured by land and building (Best Western
McCarran House, Sparks, NV), due March 10, 1999, with
monthly interest payments at 10% per annum (see Note X) 895 -
Mortgage payable, secured by land and building (Airport
Ramada Suites, Salt Lake City, UT), due in December 2003,
in monthly installments of principal and interest of $18,470,
with an initial interest rate of 10.35% per annum 1,817 -
</TABLE>
18
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note G- Long-Term Debt (continued)
<TABLE>
December 31,
--------------------------------------
(in thousands, except in descriptions) 1998 1997
-------------------------------------- ----------------- ----------------
<S> <C> <C>
Mortgage payable, secured by land and building (Four
Points by Sheraton, St. George, Utah), due February 1,
2023, in monthly installments of principal and interest
of $24,084, at 11.0% per annum 2,967 -
Mortgage payable, secured by land and building (Santa
Ana, CA), due March 2000, in monthly installments of
principal and interest of $28,719, at 8.0% per annum 409 -
Various secured notes payable, at market rates of interest
ranging from 6.9% to 19.05% per annum, with due dates
ranging from June 1999 to December 31, 2003 1,526 101
Unsecured note payable to related party originally due
October 15, 1996, at 10% per annum, due on demand 45 45
----------------- ----------------
Total Long Term Debt 14,185 2,311
Less: Current maturities
Others (4,667) (1,445)
related parties - -
officer (45) (45)
----------------- ----------------
Net Long Term Debt $ 9,473 $ 821
================= ================
</TABLE>
The following are maturities of long-term debt for each of the
next five years:
1999 $ 4,712
2000 949
2001 2,825
2002 771
2003 661
Thereafter 4,267
-----------------
Total $ 14,185
=================
19
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note H - Shareholders' Equity
The Company did not declare or pay any dividends for the years
shown in these financial statements.
On August 13, 1997, and December 10, 1997, the Board of Directors
declared three-for-one stock splits on the Company's common
stock, effected in the form of a stock dividend to the
shareholders of record on September 1, 1997 and December 19,
1997, respectively. The number of shares issued at September 1,
1997 and December 19, 1997, after giving effect to the stock
split were 21.397 million and 64.232 million common shares,
respectively, (7.132 million and 21.411 million common shares
before the split, respectively). On August 6, 1996, the Board of
Directors declared a two-for-one stock split on the Company's
common stock, effected in the form of a stock dividend to
shareholders of record on July 15, 1996. The number of shares
issued at September 10, 1996, after giving effect to the split
was 6.650 million common shares (3.325 million common shares
before the split). The effects of the stock splits are accounted
for in all share and per share data included in these
consolidated financial statements.
The Company has corrected its comparative weighted average number
of common shares outstanding from 26.575 million to 59.610
million for 1996. Earnings per share changed from $0.12 to $0.05
in 1996.
In compliance with the Company's plans to re-acquire up to one
million shares of its own common stock, the Company purchased
251,000 shares at a cost of $537,000. The re-acquired shares are
classified as treasury stock and are stated using the cost
method. The shares have not been retired and therefore are still
considered outstanding.
Returns of stock sale profits by officer
In connection with the purchase and sale of stock in 1997, it was
determined that certain transactions required the return to the
Company of profits made on such transactions. In that regard,
$633,000 has been returned to the Company by its officer.
Note I - Prepaid Advertising
In 1995, the Company entered into an agreement with Associated
Reciprocal Traders, Ltd. (ART) to purchase from ART 20,000
Investor Relations-Advertising-Infomercial radio air time spots,
priced at $25 per ad spot, per station, for a sum total of
$500,000. In payment of the foregoing, the Company issued 100,000
shares of common stock to ART on September 10, 1996. The prepaid
advertising is shown as a reduction of shareholders' equity
rather than as an asset (Note H).
Note J - Concentration of Risks
Cash in banks, based on bank balances, exceeded federally insured
limits by $799,000 and $187,000 at December 31, 1998 and 1997,
respectively. Receivables from four credit card companies
aggregated approximately $880,000 and $487,693 at December 31,
1998 and 1997, respectively. The Company invests excess cash in
marketable securities. Marketable securities are carried at fair
market value, which amounted to $2.870 million and $6.163 million
as of December 31, 1998, and
20
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note J - Concentration of Risks (continued)
1997, and accounted for 5% and 15% of the Company's consolidated
assets as of December 31, 1998 and 1997, respectively.
The following table shows the percentage of revenues:
1998 1997 1996
---- ---- ----
Seminars 65% 65% 64%
Product sales 18% 31% 36%
Travel services 5% 4% -
Hotel revenue 3% - -
Pager services 8% - -
Pager services 1% - -
The following table shows the states from which the Company
derived over 10% of its seminar revenues:
1998 1997 1996
---- ---- ----
California 16% 15% 15%
Washington 6% 9% 13%
Florida 10% 10% 8%
Historically, the Company's success has been reliant upon the
success of Wade B. Cook and the products and seminars under his
control. Mr. Cook's products and seminars account for the vast
majority of the revenue of the Company, as well as, the majority
of the new products and seminars that have been created.
Currently, the Company is attempting to diversify through
acquisitions and the signing of new authors, however, in the
foreseeable future, the ability of the Company to continue to
generate similar revenue and profitable operations is reliant on
maintaining a licensing agreement with Mr. Cook.
Note K - Stock Incentive Plan
The Company's 1997 Incentive Stock Plan (Plan) provides for the
granting of stock, restricted stock, phantom stock, stock
appreciation rights both stand-alone and tandem (SAR's), stock
options, and other stock-based awards, including Incentive Stock
Options (ISO's). The Plan is to be administered by the Board of
Directors (Board). Under the terms of the Plan, plan administers
have the right to grant awards to eligible recipients and to
determine the terms and conditions of award agreements. Eligible
participants will be directors, officers, consultants and other
employees of the Company.
The maximum number of shares of Company stock reserved for
issuance under the plan is 1,000,000 shares. Such shares may be
authorized but unissued Company stock or authorized and issued
Company stock held in the Company's treasury. The Board has the
authority to determine the expiration date of each option,
provided that no ISO will be exercisable more than 10 years after
the date of grant. At December 31, 1998 and 1997, no stock was
issued under the provisions of the stock incentive plan.
21
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note K - Stock Incentive Plan (continued)
The Board may grant common stock as a bonus. The Board may
suspend, terminate or amend the Plan at any time, provided
however, that stockholder approval will be required if and to the
extent the Board determines that such approval is appropriate for
purposes of satisfying Section 422 of the Internal Revenue Code
of 1986.
As of December 31, 1998, no form of stocks have been granted or
approved by the Plan administrators; therefore, shareholders'
equity has not been adjusted for any possible future
distributions associated with this Plan. In addition, earnings
per share and weighted average common shares outstanding do not
reflect any possible future distributions.
Note L - Non-Marketable Investments
Non-marketable investments consist of investments in venture
capital partnerships and private companies, primarily comprised
of hotel/motel properties and other real estate investments. The
estimated non-marketable investments approximated the carrying
amount at December 31, 1998 and 1997. The fair values of
investments in venture capital partnerships and private companies
were estimated based on financial condition and operating
results, or other pertinent information. No dividends were
received from non-marketable investments during the years shown.
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of in 1995. The
Company recorded a non-cash pre-tax charge of $226,000 for the
year ending December 31, 1998 to write-down the carrying value of
an investment in a private company. The Company considers the
investment to have no market value.
Non-marketable investments consist of the following:
December 31, December 31,
(in thousands) 1998 1997
-------------- -------------- --------------
Cost method
Oil and gas $ 1,325 $ 650
Hotels/motels 784 1,177
Real estate 4,961 1,386
Private companies 750 1,250
---------------- --------------
7,820 4,463
---------------- --------------
Equity method
Hotels/motels 933 2,563
Real estate - 305
Private companies 740 -
---------------- --------------
1,673 2,868
---------------- --------------
Total $ 9,493 $ 7,331
================ ==============
22
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note L - Non-Marketable Investments (continued)
Investments in private companies in 1998, include: a privately
held computer software company ($750,000), an inactive public
company ($150,000), and a concrete repair business ($590,000).
Private companies in 1997, include: a privately held computer
software company ($750,000) and a wireless reseller company
($500,000), which was included in marketable securities in 1998.
Equity investments are shown net of their share of income and
losses for the year ended December 31, 1998 and 1997.
Accumulation deficit during the development stage was not
material in 1998 and 1997.
Note M - Disclosures About Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures About Fair Value of Financial Instruments, as part of
a continuing process by the FASB to improve information regarding
financial instruments. The following methods and assumptions were
used to estimate the fair value of each class of financial
instruments:
<TABLE>
<S> <C>
Cash and cash equivalents - The carrying amount of cash and cash equivalents
approximates its fair value.
Notes receivable
from Employees and Officers - The carrying amount of notes receivable approximated its fair value.
Marketable securities - The fair value of marketable securities were estimated based on quotes
obtained from brokers for those instruments.
Non-Marketable Investments - The fair value of non-marketable investments is determined by
financial positions of the investee companies and market
conditions.
Margin loans in investment
accounts - The carrying amount of margin loans approximates its fair value.
Long-Term Debt - The fair values of the Company's long-term debt either
approximates fair value or estimates using discounted cash flow
analyses based on the Company's current incremental borrowing
rates for similar types of borrowing arrangements.
</TABLE>
23
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note M - Disclosures About Fair Value of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
1998 1997
------------------------- ---------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,742 $ 1,742 $ 540 $ 540
Marketable securities 2,870 2,870 6,163 6,163
Receivables from employees and
officers 3,032 3,032 3,536 3,536
Non-marketable investments 9,493 9,493 7,331 7,331
Margin loans in investment
accounts 146 146 2,767 2,767
Long-term debt 9,473 9,473 821 821
</TABLE>
The carrying amounts in the table are included in the balance
sheet under the indicated captions, except for notes receivable
which has several components on the balance sheet.
Note N - Lease and Other Commitments
Operating lease commitments are primarily for the Company's
shipping warehouse and equipment rentals. Rental expense amounted
to $498,000, $135,000, and $295,000 for the years-ended December
31, 1998, 1997, and 1996, respectively.
Future minimum rental commitments are as follows:
(in thousands)
1999 $ 581
2000 506
2001 453
2002 441
2003 404
Thereafter 155
----------------
Total $ 2,540
================
The Company entered into an employment agreement in June 1997
with Wade Cook, the president and CEO of the Company. The
agreement provided for a minimum salary of $240,000 for the
first year, $265,000 for the second year, and $290,000 for the
final year of the agreement. Cook will be paid in accordance
with the Company's standard method of payment for executives.
Cook may receive additional bonuses for work as approved by the
Board of Directors.
The Company is committed to purchase 8,000 additional units from
Applied Voice Recognition, Inc. at $60.00 per unit (voice
recognition software), but no time limit is provided for in the
agreement. There is a minimum purchase requirement of 2,000
units per order and payment is due in advance of shipment.
24
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note N - Lease and Other Commitments (continued)
The Company is committed to make renovations and improvements to
its hotel properties at an estimated $1 million to remain in
compliance with hotel franchisers.
The Company will incur an estimated, additional $1.2 million for
the remaining installation, implementation, and training in order
to have the SAP software performing to the Company's
expectations. Management is assessing the situation to determine
if the additional costs are warranted. If management decides to
abandon the project, the Company will expense the cost of the
software ($250 thousand) and the implementation costs already
incurred of $795 thousand.
Note O - Income Taxes
Provisions for income taxes in the consolidated statements of
income consist of the following components:
<TABLE>
Years ended December 31,
----------------------------------------------------------
(in thousands) 1998 1997 1996
-------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Current
Federal $3,219 $ 4,660 $ 2,322
States 180 458 55
----------------- ----------------- -----------------
3,399 5,118 2,377
----------------- ----------------- -----------------
Deferred
Federal (550) 945 (776)
State (92) - -
----------------- ----------------- -----------------
(642) 945 (776)
----------------- ----------------- -----------------
Total income taxes $2,757 $ 6,063 $ 1,601
================= ================= =================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
(in thousands) December 31,
-------------------------------------
Deferred tax assets: 1998 1997
-------------------- ---------------- -----------------
<S> <C> <C>
Unrealized (gain) loss on trading
securities $ (309) $254
State income tax - 160
---------------- -----------------
Total deferred tax assets (309) 414
---------------- -----------------
Deferred tax liabilities:
Accelerated depreciation (187) 70
Deferred revenues 1,109
State income tax 29 93
---------------- -----------------
Total deferred liabilities 951 163
---------------- -----------------
Net Deferred tax asset (liability) $ (642) $251
================ =================
</TABLE>
25
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note O - Income Taxes (continued)
The reconciliation of the effective income tax rate to the
Federal statutory rate is as follows:
<TABLE>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
Unrealized loss on trading securities (9.1) 6.2 1.7
Deferred revenues 23.1 - 17.3
Accelerated depreciation (5.4) (1.3)
(1.3)
Capitalized interest - - (1.3)
State income tax 1.4 .4 .4
========= ========== ==========
Effective income tax rate 45.0% 40.3% 51.8%
========= ========== ==========
</TABLE>
Note P - Revenues and Other Cost of Revenues
<TABLE>
(in thousands) Pager Travel
Seminar Product Service Hotel Related
Revenue Sales Fees Income Service Other Total
--------- --------- ------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenues, net of returns
and discounts $ 78,191 $ 20,696 $ 8,427 $ 3,336 $ 5,874 $ 1,683 $ 118,207
--------- --------- ------- ------- -------- ---------- -----------
Royalties to related party 6,521 1,290 - - - 165 7,976
Speaker fees to related
party 378 - - - - - 378
Other costs of revenues 28,943 11,167 525 4,100 3,562 112 48,409
--------- --------- ------- ------- -------- ---------- ----------
Total cost of revenues 35,842 12,457 525 4,100 3,562 277 56,763
--------- --------- ------- ------- -------- ---------- ----------
Gross Profit $ 42,349 $ 8,239 $ 7,902 $ (764) $ 2,312 $ 1,406 $ 61,444
========= ========= ======= ======= ======== ========== ==========
Year ended December 31, 1997:
Revenues, net of returns
And discounts $60,759 $29,386 $ - $ - $3,198 $ - $ 93,343
--------- --------- ------- ------- -------- ---------- ----------
Royalties to related party 6,559 3,438 - - - - 9,997
Speaker fees to related
party 155 12 - - - - 167
Other costs of revenues 12,605 13,760 - - 2,963 - 29,328
--------- --------- ------- ------- -------- ---------- ----------
Total cost of revenues 19,319 17,210 - - 2,963 39,492
--------- --------- ------- ------- -------- ---------- ----------
Gross Profit $ 41,440 $ 12,176 $ - $ - $ 235 $ - $ 53,851
========= ========= ======== ======== ========= ========= ===========
Year ended December 31, 1996:
Revenues, net of returns
And discounts $23,817 $13,191 $ - $ - $ - $ - $ 37,008
--------- --------- ------- ------- -------- ---------- ----------
Royalties to related party 2,907 1,061 - - - - 3,968
Speaker fees to related
party 131 - - - - - 131
Other costs of revenues 5,036 5,325 - - - - 10,361
Total costs revenues 8,074 6,386 - - - - 14,460
--------- --------- ------- ------- -------- ---------- ----------
Gross Profit $ 15,743 $6,805 $ - $ - $ - $ - $ 22,548
========= ========= ======== ======== ========= ======== ===========
</TABLE>
26
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note Q - Supplementary Disclosure of Cash Flow Information
The Company paid $1.453 million, $309,000, and $263,000 in
interest, and $2.750 million, $2.485 million, and $1.000 million
for income taxes for the years ended December 31, 1998, 1997, and
1996, respectively.
The Company purchased a three-story commercial building in July
1996, and relocated in January 1997. The $3.300 million purchase
was financed with a $2.550 million mortgage with an interest rate
of 9% per annum, and a down payment of $750,000. See Note G for
more information regarding the debt.
In 1998, the Company purchased three operating hotels. On March
11, 1998, the Company purchased the Best Western McCarran House F
in Sparks, Nevada. The purchase price was $5.25 million, which
included a $990,000 down payment and an assumption of promissory
notes totaling $4.260 million. See Note G for more information
regarding the debt.
In 1998, the Company purchased an operating hotel in St. George,
Utah. The purchase price was $4.659 million. The down payment of
$1.569 million was paid for in two installments: $769,000 and
$800,000 in 1998 and 1997, respectively. In the acquisition, the
Company assumed promissory notes totaling $3.090 million (Note G)
and recorded land, building, and equipment totaling $4.182
million.
In September 1997, the Company acquires its first 25% interest of
the Airport Ramada Suites, in Salt Lake City, Utah, with a cash
deposit of $250,000. In June and September 1998, the Company
acquired an additional 25% each transaction in trades of other
hotel property interests; bringing the Company's ownership to
75%. Once majority ownership was obtained, the Company recorded
land, building, and equipment of $2.763 million and notes payable
of $2.294 million (Note G).
In April 1998, through its wholly owned subsidiary, Bountiful
Investment Group, the Company purchased an office building in
Memphis, Tennessee. The $1.425 million purchase was financed with
a $1.068 million mortgage and a down payment of $357,000. See
Note G for more information regarding the debt.
Note R - Acquisitions
During 1998, the Company completed the acquisition of Information
Quest (IQ), Quantum Marketing, Inc. (Quantum), and Get Ahead
Bookstores, Inc.
In January 1998, the Company acquired IQ, a Nevada corporation,
and the producer of the IQ Pager, which provides subscribers with
paging service for stock related information. WCFC exchanged
45,000 shares of restricted common stock for 50,000 shares of IQ,
representing all of the issued and outstanding shares of IQ. On
the date of acquisition, the market value of the stock issued was
$188,000. The acquisition was accounted for as a purchase,
resulting in assets of $1,961 million, liabilities assumed of
$1,835 million, and goodwill of $126,000.
In January 1998, the Company acquired Quantum, a Nevada
Corporation. WCFC exchanged 45,000 shares of restricted common
stock for 24 million shares of Quantum, representing all of the
issue
27
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note R - Acquisitions (continued)
and outstanding capital stock of Quantum. On the date of
acquisition, the market value of the stock issued was $189,000.
The acquisition was accounted for as a purchase, resulting in
goodwill of $189,000.
In January 1998, WCFC acquired Get Ahead Bookstores, a Nevada
corporation, a retail distributor of financial education,
personal development, and inspirational products, including
books, audio tapes, and video tapes, located in Quantum's
financial education centers. WCFC paid $1.00 for an assignment of
all interest, rights, and claims in Get Ahead Bookstores.
At December 31, 1998 and 1997, goodwill was $3.166 million and
$2.664 million, and accumulated amortization was $105,000 and
$26,000, recording net goodwill of $3.061 million and $2.638
million, respectively.
Note S - Pro-Forms Financial Statements
The following pro-forma information is presented for the years
ended December 31, 1998, 1997, and 1996, as if the IQ, Quantum,
and Get Ahead Bookstores, as described in Note R; and the
acquisition of three hotel properties as described in Note Q, had
been combined as of the beginning of the period. All amounts
represent historical values without acquisition adjustments as
described in Note R.
Amounts in thousands
Fiscal year ended December 31, 1998 (unaudited)
<TABLE>
Hotel-
Get Hotel - Hotel- Best
Balance Sheet Ahead Ramada St. Western
Book- Salt Lake George, Sparks,
WCFC IQ Quantum Stores City, Utah Utah Nevada Total
--------- -------- -------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets $ 42,687 $ 3,904 $ - $ 305 2,729 $ 3,537 $ 5,535 $ 58,697
Liabilities 25,598 1,339 - 287 2,624 3,286 4,940 38,074
Stockholders
equity 17,089 2,565 - 18 104 251 595 20,622
Income
Statement
Revenues 111,249 3,226 - 178 818 1,215 1,611 118,293
Expenses 109,725 724 - 234 922 1,466 2,206 115,277
--------- -------- -------- --------- ---------- ---------- --------- ----------
Income from
continuing
operations $ 1,524 $ 2,502 $ - $ (56) $ (104) $ (251) $ (595) $ 3,020
========= ======== ======== ========= =========== ========= ======== ==========
</TABLE>
28
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note S - Pro-Forms Financial Statements (continued)
Amounts in thousands
Fiscal year ended December 31, 1997 (unaudited)
<TABLE>
Hotel-
Get Hotel - Hotel- Best
Balance Sheet Ahead Ramada St. Western
Book- Salt Lake George, Sparks,
WCFC IQ Quantum Stores City, Utah Utah Nevada Total
--------- -------- -------- --------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets $ 41,404 $ 473 $ - $ - $ 2,602 $ 4,371 $ 5,433 $ 54,283
Liabilities 24,649 169 - - 2,283 3,108 4,479 34,688
Stockholders
equity 16,755 304 - - 319 1,263 954 19,595
Income
Statement
Revenues 93,343 1,725 - - 18 N/A N/A 95,086
Expenses 85,065 1,418 - - 249 N/A N/A 86,732
--------- -------- -------- --------- ---------- ---------- --------- ----------
Income from
continuing
operations $ 8,278 $ 307 $ - $ - $ (231) N/A N/A $ 8,354
========= ======== ======== ========= =========== ========= ======== ==========
</TABLE>
Display of pro-forma information for the year ended December 31,
1996 has been omitted, since none of the acquired ventures had
begun operations. Income statement amounts, for the year ended
December 31, 1997, was not available for the hotels in Sparks,
Nevada or St. George, Utah. Pro-forma financial information is
shown after adjustments for discontinued operations.
Note T - Pending Litigation
On September 16, 1996, Wade Cook Seminars, Inc. v. Mellon,
Charles E. and Robbins Research International, Inc., et al., was
filed, for breach of non-compete contract. The court in a partial
summary judgment dismissed this claim on November 26, 1997.
Defendants subsequently made a motion for an award of attorney's
fees of approximately $71,000, which was denied in January 1998.
Both the order of dismissal and the denial of the award of
attorney's fees have been appealed.
On February 4, 1998, a claim was filed by WCFC against Associated
Reciprocal Traders, Ltd. (ART), in the King County Superior Court
based on a dispute over the ownership of 100,000 restricted
shares of WADE stock (now 1,800,000 shares) issued pursuant to a
Media for Stock Agreement dated December 29, 1995. On the same
day, ART filed a complaint against the Company, based on
substantially the same claims. A motion has been granted to
consolidate the two claims. In July 1998, the Court issued a
preliminary ruling stating that the Company is not required to
deliver the stock certificates to ART and may refuse to allow the
stock to be sold until the issue of whether or not ART has
breached the contract is decided. A trial date has been set for
June 21, 1999. The Company has not yet determined any impact on
its financial statements and no provision for losses has been
made.
On January 11, 1999, a civil suit was filed in the Superior Court
of the state of California by the California State Attorney
General's office alleging violations of Section 1678.20 through
1693 of the California Civil Code. The Attorney General alleges
that the Company: (1) made or caused to be
29
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note T - Pending Litigation (continued)
made and disseminated untrue or misleading statements in
violation of the California Business and Professional Code; and
(2) engaged in unlawful and unfair or fraudulent practices and
unfair, deceptive and untrue or misleading advertising. The suit
seeks (1) an injunction against the Company from directly or
indirectly engaging in the alleged unlawful behavior; (2)
disgorgement of money or property acquired in violation of state
or federal law; (3) a penalty of $2,500 for each violation, but
in any event not less than four million dollars ($4,000,000) in
the aggregate; (4) imposition of a constructive trust on the
money or property acquired in violation of state and federal law;
(5) payment of court costs. The Company has not yet determined
any impact on its financial statements and no provision for
losses has been made.
On March 1, 1999, the Attorneys General of eight states opened
investigations to determine whether the Company has engaged in
business and advertising practices that violate such states'
consumer protection laws and regulations. The Company does not
believe that it has engaged in any unlawful activities in any of
the states and is cooperating fully with each state's
investigation. Although no civil or criminal charges have been
brought, and the Company does not believe that it or its officers
or directors have violated applicable laws, no assurance can be
given that enforcement proceedings will not be brought against
the Company, or its officers or directors, or as to the outcome
of any proceedings that are brought.
Note U - Legal Proceedings
In March 1998, the District 4 Subcommittee of the Unauthorized
Practice of Law Committee in the state of Texas sent a request to
WCSI and two former employees of the Company asking that the
parties sign an agreement to voluntarily cease and desist in the
activities which may constitute the unauthorized practice of law
in Texas. The committee alleged that WCSI offered to set up
Nevada corporations, Living Trusts, Keogh Plans, and Corporate
Pension Plans, Family Limited Partnerships, Massachusetts
Business Trust, and Charitable Remainder Trusts. The committee
further alleged that the Company advised clients about legal
structuring, legal advantages and legal strategies associated
with such entities, and provided specific proposals of
structuring an individual's assets and businesses. The Company
declined to enter into a voluntary cease and desist on behalf of
the former employees named in the request because they no longer
work for the Company. In 1998, the Company divested that portion
of its business associated with the activities specified in the
request. The Company has not yet determined any impact on its
financial statements and no provision for losses has been made.
On May 1, 1998, the Attorney General of Texas filed a lawsuit in
the District Court of Bexar County, Texas contending that the
Company has engaged in false, deceptive and misleading acts and
practices in the course of trade and commerce as defined in the
Texas Deceptive Trade Practices-Consumer Protection Act.
Specifically, the state of Texas contends that the company's
sales contracts fail to have the statutorily required notice of
the three day right to cancel. The Company has not yet determined
any impact on its financial statements and no provision for
losses was made.
30
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note U - Legal Proceedings (continued)
In September 1998, the Company filed a lawsuit against Publishers
Distribution Center, Inc. (PDC), a Utah Corporation, and William
Beutler, Cora Beutler, and Scott Beutler, as individuals, in the
Third Judicial District Court, Salt Lake County in the state of
Utah. The complaint alleges fraud and negligent misrepresentation
relating to the Company's attempted purchase of PDC and requests
restitution in the amount of $420,000, in addition to other
relief. PDC has filed counter claims against the company alleging
fraud, breach of fiduciary duty and conversion. No trial date has
been set, and the Company has not yet determined any impact on
its financial statements and no provision for losses has been
made.
In July 1998, the Illinois Attorney General's Consumer Fraud
Division initiated a formal investigation to determine whether
the Company has engaged in unlawful practices in the state of
Illinois. To date, the Attorney General has issued a Civil
Investigative Demand, requesting specific information and Company
records. The Company has not yet determined any impact on its
financial statements and no provision for losses has been made.
On December 30, 1998, a class action lawsuit was instituted in
the District Court, in the county of Denver, in the state of
Colorado against the Company, WCSI, and Wade B. Cook, an
individual, officer, director, and majority stockholder of the
Company. The plaintiffs' class consists of nine Colorado
residents who allege that the defendants participated in the
following unlawful practices: (a) deceptive and misleading trade
practices in violation of Colorado Revised Statues (CRS) section
6-1-105 (1);(b) securities fraud in violation of CRS section
11-51-501(1)(a);(c) common law fraud and conspiracy in connection
therewith; and (d) negligent misrepresentation. The plaintiffs
seek actual damages, including treble damages where appropriate,
court costs and reasonable attorney fees; exemplary damages; and
interest. The plaintiffs have requested a jury trial on all
issues of fact. The Company has not yet determined any impact on
its financial statements and no provision for losses has been
made.
Note V - Discontinued Operations
On June 15, 1998, the Company adopted a formal plan to sell
Entity Planners, Inc. (EPI), a wholly owned subsidiary of WCFC.
On June 30, 1998, the Company sold the stock of EPI, the holder
of a five year licensing agreement with the Company enabling it
to provide entity structuring services relating to the topic of
asset protection, estate planning, and tax reduction. EPI was
sold to a newly formed company by principals who have been
involved in the production, selling, and marketing of products
and seminars for the Company. The stock of EPI was sold for
$250,000.
Operating results of EPI for the year ended December 31, 1998 are
shown separately in the accompanying income statement. The income
statement for the years ended December 31, 1997 and 1996 have
been restated and operating results of EPI are also shown
separately.
As a result of the sale of EPI, the licensing agreement between
the Company and EPI was transferred to the new owners of EPI. The
agreement provides for aggregate licensing fees of $17.720
million payable with future cash flows of the business
transferred. The payment schedule requires, on a
31
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note V - Discontinued Operations (continued)
weekly basis, the remittance of an amount ranging from 70% to 75%
of net sales or 30% of gross sales, whichever greater, for a
period of five years. Total licensing revenue for the year ended
December 31, 1998 was $1.697 million. At the end of five years,
the licensing agreement can be renewed at the option of EPI.
Note W - Segment Reporting
During 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which
establishes standards for the way that companies report
information about operating segments, based on the approach that
management utilizes to organize the segments for management
reporting and decision making.
The Company operates through six business segments: seminars,
product sales, hotels, pager services, travel services, and
other. The seminar segment conducts educational investment and
business seminars. The product sales includes the publishing and
distribution of video tapes, audio tapes, and written materials
designed to teach various investment and cash flow strategies for
investing in the stock market, asset protection and asset
accumulation techniques or strategies. The hotel segment includes
the ownership of operating hotels. The pager services segment
produces the IQ Pager, which provides subscribers with paging
services for stock related information. The travel service is a
travel agency that is also in the business of selling travel
agent training kit. The other segment includes retail book sales,
interest in real estate ventures, and an inter-company
advertising agency.
Information on the Company's business segments for the years
ended December 31,
<TABLE>
(in thousands) 1998 1997 1996
-------------- -------------- ------------- -------------
<S> <C> <C> <C>
Net revenues and sales
Seminars $ 78,191 $ 60,759 $ 23,817
Product sales 20,696 29,386 13,191
Hotels 3,336 - -
Pager service 8,427 - -
Travel service 9,533 3,198 -
Other 8,576 4,302 -
Less: inter-company sales (10,552) (4,302) -
-------------- ------------- -------------
$ 118,207 $ 93,343 $ 37,008
============== ============= =============
</TABLE>
32
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
Note W - Segment Reporting (continued)
(in thousands) 1998 1997 1996
-------------- -------------- ------------- -------------
<S> <C> <C> <C>
Operating income
Seminars $ 483 $ 10,907 $ 2,406
Product sales 813 3,538 1,964
Hotels (267) - -
Pager services 2,494 - -
Travel services 508 97 -
Other 254 - -
Less: inter-company profit (731) - -
-------------- ------------- -------------
3,554 14,542 4,370
Other income (expense) 1,656 (706) (74)
-------------- ------------- -------------
Income from continuing operations
before income taxes $ 5,210 $ 13,836 $ 4,296
============== ============= =============
Identifiable assets
Seminars $ - $ - $ -
Product sales 487 - -
Hotels 13,482 - -
Pager services 1,521 - -
Travel services 18 18 -
-------------- ------------- -------------
Segmented assets 15,508 18 -
Corporate assets 17,283 12,037 7,898
-------------- ------------- -------------
Total identifiable assets 32,791 12,055 7,898
-------------- ------------- -------------
Accumulated depreciation and
Amortization
Seminars - - -
Product sales 264 - -
Hotels 293 - -
Pager services 257 - -
Travel services 1 - -
-------------- ------------- -------------
Segmented asset depreciation and
Amortization 815 - -
Corporate asset depreciation and
Amortization 2,773 1,630 361
-------------- ------------- -------------
Total accumulated depreciation and
amortization 3,588 1,630 361
-------------- ------------- -------------
Net identifiable assets $ 29,203 $ 10,425 $ 7,537
============== ============= =============
</TABLE>
33
See accompanying independent auditors' report.
<PAGE>
WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note W - Segment Reporting (continued)
<TABLE>
(in thousands) 1998 1997 1996
-------------- -------------- ------------- -------------
<S> <C> <C> <C>
Capital expenditures
Seminars $ - $ - $ -
Product sales 487 - -
Hotels 13,482 - -
Pager services 1,521 - -
Travel services - - -
-------------- ------------- -------------
Total segment expenditures 15,490 - -
Corporate expenditures 5,246 4,157 4,729
============== ============= =============
Total capital expenditures $ 20,736 $ 4,157 $ 4,729
============== ============= =============
</TABLE>
In all material respects, the Company accounts for inter-company
sales and transfers as if the sales or transfers were to third
parties for purposes of reporting on the business segment
information. Identifiable assets are those assets used in a
segment's operation. Corporate assets consist of certain
non-current assets used by multiple segments. Discontinued
operations have not been included in the calculation of segmented
information. In arriving at operating income, certain expenses
were allocated based on the Company's policy for allocating
expenses.
Substantially all of the Company's sales are domestic, See Note J
for a summary of material domestic sales. All of the Company's
assets are located within the continental United States. No
customer accounted for greater than 10% of the Company's
revenues. No vendor accounted for more than 10% of the Company's
expenses.
Note X - Subsequent Events
On March 10, 1999, the Company had a note payable become due in
the amount of $895,000, which was secured by the Best Western
McCarran House. The Company renegotiated this payment in an
agreement with the creditor, whereby, the Company paid $600,000,
including interest of $8,000 on March 10, 1999 and agreed to pay
the remaining $295,000 no later than April 10, 1999. As a result
of the late payment, the Company must pay a 4% late fee as
prescribed in the loan documents.
On February 22, 1999, the Company sold the office building which
it had purchased on April 14, 1998. The building was located in
Memphis, Tennessee and served as the main office for Ideal Travel
Concepts, Inc (Ideal). The purchase price of the building was
$1.425 million and the sales price was $1.434 million. Ideal will
continue to operate in one of the suites of the building under an
operating lease.
See accompanying independent auditors' report
34
<PAGE>
Exhibit No. Description
- ----------- -----------
2.1(Infinity) Stock Purchase Agreement dated June 30, 1998, by and among
the Company, Entity Planners, Inc., and Berry, Childers &
Associates, L.L.C.
2.2(Infinity) Amendment to Stock Purchase Agreement dated September 30,
1998 by and among the Company, Entity Planners Inc. and
Berry, Childers & Associates, L.L.C.
2.3* Purchase and Sale Agreement, dated July 4, 1996, between
United Support Association and Seller
2.4* All Inclusive Trust Deed dated March 8, 1997, for the
purchase and assumption of certain real-estate by Rising
Tide, LTD from East Bay Lodging Association, LTD
2.5** Share Exchange Agreement, dated January 1, 1998, between
Wade Cook Financial Corporation and Information Quest, Inc.
2.6** Stock Purchase Agreement, dated August 8, 1997, between
Profit Financial Corporation and Curtis A. Taylor and
Stanley J. Zenk regarding Worldwide Acquisition.
2.7** Stock Purchase Agreement, dated August 1, 1997, between Wade
Cook Financial Corporation and John V. Childers, Sr., Brenda
Childers, Tracy Allan Childers and John V. Childers, Jr.
regarding Ideal Acquisition.
2.8** Share Exchange Agreement, dated August 15, 1997, between
Profit Financial Corporation and Gold Leaf Press, Inc.
2.9** Share Exchange Agreement, dated August 15, 1997, between
Profit Financial Corporation and Origin Book Sales, Inc.
2.10*** Assignment and Assumption of Interest, Consent Agreement,
Memorandum of Terms re: Airport Hotel Partners, L.L.C.
2.11*** Limited Liability Company Interest Purchase Agreement re:
Woods Cross Hotel Partners, L.C. dated November 29, 1997
2.12*** Limited Liability Company Interest Purchase Agreement with
exhibits re: Park City Hotel Partners, L.C. dated February
4, 1997
2.13*** Memorandum of Terms, Assignment and Assumption of Interest,
Warranty Deed re: Airport Lodging Associates, L.L.C.
2.14**** Share Exchange Agreement, dated January 1, 1998, between
WCFC & Quantum Marketing, Inc.
2.15**** Stock Assignment Agreement dated January 1, 1998, between
WCFC & Glendon H. Sypher
3.1** Articles of Incorporation of Wade Cook Financial Corporation
3.2** Bylaws of Wade Cook Financial Corporation
4.1** Form of Wade Cook Financial Corporation's Common Stock
Certificate 10.1**(Function) 1997 Stock Incentive Plan of
Wade Cook Financial Corporation
10.2** Form of Indemnification Agreement of Wade Cook Financial
Corporation
10.3* Product Agreement, dated June 25, 1997, and effective as of
July 1, 1997, among Wade Cook Seminars, Inc., Money Chef,
Inc., and Wade B. Cook
10.4* Agreement dated February 1, 1996, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.5* Amended Agreement, dated June 26, 1997, between Wade B. Cook
and Lighthouse Publishing Group, Inc.
10.6* Agreement Dated January 1, 1997, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
<PAGE>
Exhibit No. Description
- ----------- -----------
10.7* Amended Agreement dated June 26, 1997, between Wade B. Cook
and Lighthouse Publishing Group, Inc.
10.8* Agreement dated March 1, 1997, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.9* Agreement dated May 1, 1997, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.10*(Function) Employment Agreement dated June 26, 1997, by and between
Wade Cook Seminars, Inc., and Wade B. Cook
10.11* Commercial Lease dated June 25, 1997, by and between Wade
Cook Seminars, Inc. and U.S.A. Corporate Services, Inc.
10.12* Agreement dated November 1, 1996, between Wade B. Cook and
Lighthouse Publishing Group, Inc.
10.13* Secured Loan Agreement and Promissory Note (Secured) between
U.S.A., Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.14** Open-Ended Product Agreement, dated March 20, 1998, between
Wade Cook Financial Corporation and Wade B. Cook
10.15*** Product Agreement, dated March 23, 1998, between Planet
Cash, Inc., Steven Allyn Wirrick and Wade Cook Financial
Corporation
10.16*** Stock Assignment Agreement, dated January 1, 1998, between
Get Ahead Bookstores, Inc., Glendon H. Sypher and Wade Cook
Financial Corporation
10.17** Product Agreement, dated March 23, 1998, between Wade Cook
Financial Corporation, Information Quest, Inc. and Thomas
Cloward
10.18** Share Exchange Agreement, dated September 12, 1997, between
Profit Financial Corporation and Applied Voice Recognition,
Inc.
10.19** Publishing Agreement, effective October 1, 1997 and signed
January 12, 1998, between Lighthouse Publishing Group, Inc.
and Wade B. Cook
10.20** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated May 23, 1997,
between USA/Wade Cook Seminars, Inc. and Newstart Centre,
Inc.
10.21** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated June 20, 1997,
between Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.22** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated July 25, 1997,
between Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.23** Secured Loan Agreement, Promissory Note, and Certificate of
Delivery and Receipt of Documents, dated August 22, 1997,
between Information Quest, Inc. and Newstart Centre, Inc.
10.24** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents, dated October 9, 1997,
between Information Quest, Inc. and Newstart Centre, Inc.
10.25** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents, dated October 9, 1997,
between Left Coast Advertising, Inc. and Newstart Centre,
Inc.
<PAGE>
Exhibit No. Description
- ----------- -----------
10.26** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents dated August 19, 1997,
between Left Coast Advertising, Inc. and Newstart Centre,
Inc.
10.27*** Secured Loan Agreement, Promissory Note and Certificate of
Delivery and Receipt of Documents, dated January 20, 1998,
between Wade Cook Seminars, Inc. and Newstart Centre, Inc.
10.28** Secured Promissory Note, dated July 31, 1997, between Wade
Cook Seminars, Inc. and Robert and Meda Hondel
10.29*** Secured Promissory Note, dated June 18, 1997, between Paul
and Laurie Cook and Wade Cook Seminars, Inc.
10.30*** Secured Promissory Note, dated January 1, 1998, between Paul
and Laurie Cook and Wade Cook Seminars, Inc.
10.31*** Warranty Deed, Articles of Organization re: Red Rock Lodging
Associates
10.32**** Contract for Sale of Real Estate dated January 20, 1998 by
and between Ideal Travel Concepts, Inc. and/or assigns and
Kenneth B. Lenoir
10.33(Infinity) Exclusive Product License Agreement dated June 30, 1998 by
and between Wade B. Cook, and Entity Planners, Inc.
10.34(Infinity) Exclusive Product License Agreement dated June 30, 1998 by
and between Wade Cook Financial Corporation, and Entity
Planners, Inc.
10.35(Infinity) Open Ended Product Agreement between the Company and Wade
Cook dated March 20, 1998
10.36(Infinity) Amendment to the Open Ended Product Agreement dated November
13, 1998 by and between the Company and Wade Cook
10.37 Assignment and Assumption of Interest dated August 22, 1996
by and between Zion's Management and Development Co.,
Airport Lodging Associates L.C. and Wade Cook Seminars, Inc.
10.38 Real Estate Purchase Contract dated August 22, 1997 (St.
George Hilton)
10.39 Addendum No. 1/Counteroffer to Real Estate Purchase Contract
dated August 1997 (St. George Hilton
10.40 Real Estate Lease dated July 16, 1998 between Origin Book
Sales, Inc. and California Avenue Associates, LLC.
10.41 Form of Speaker Agreement
10.42 Agreement dated December 11, 1998 between THH Ventures L.C.
and the Company
10.43 Purchase Agreement dated February 28, 1998 between Ki Hong
Kim, Hoo Hyung Kim and Zions Management and Development
11.1 Statement of Computation of Per Share Earnings
16.1** Letter re: Change in Certifying Accountant
21.1 List of Wade Cook Financial Corporation Subsidiaries
<PAGE>
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule - December 31, 1998
* Previously filed as an exhibit to the Company's registration statement on
Form 10 filed with the SEC on April 30, 1997, as amended on June 29, 1997
and September 24, 1997
** Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 31, 1998
*** Previously filed as an exhibit to the Company's Form 10-K/A filed with the
SEC on July 20, 1998
**** Previously filed as an exhibit to the Company's Form 10-Q filed with the
SEC on August 8, 1998
(Infinity) Previously filed as an exhibit to the Company's Form 10-Q filed with
the SEC on November 16, 1998
(Function) This document has been identified as a management contract or
compensatory plan or arrangement.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 1,742
<SECURITIES> 2,870
<RECEIVABLES> 3,112
<ALLOWANCES> 0
<INVENTORY> 3,743
<CURRENT-ASSETS> 11,998
<PP&E> 29,203
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,698
<CURRENT-LIABILITIES> 28,602
<BONDS> 9,473
0
0
<COMMON> 644
<OTHER-SE> 19,043
<TOTAL-LIABILITY-AND-EQUITY> 58,698
<SALES> 0
<TOTAL-REVENUES> 118,207
<CGS> 56,763
<TOTAL-COSTS> 56,763
<OTHER-EXPENSES> 57,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,453
<INCOME-PRETAX> 5,210
<INCOME-TAX> 2,346
<INCOME-CONTINUING> 2,991
<DISCONTINUED> 763
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,754
<EPS-PRIMARY> .059
<EPS-DILUTED> .059
</TABLE>
