UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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
Indicate by check mark whether the registrant (1) has filed all documents and
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 [ ]
The number of outstanding shares of the registrant's common stock, $0.001 par
value, as of September 30, 2000 was 64,058,948 shares.
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WADE COOK FINANCIAL CORPORATION
Form 10-Q
Index
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Page
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PART I -- FINANCIAL INFORMATION...........................................................................1
Item 1: Financial Statements.............................................................................1
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................................9
Item 3: Quantitative and Qualitative Disclosures About Market Risk......................................16
PART II -- OTHER INFORMATION...........................................................................16
Item 1. Legal Proceedings...............................................................................16
Item 2. Changes in Securities...........................................................................18
Item 3. Defaults Upon Senior Securities.................................................................18
Item 4. Submission of Matters to a Vote of Security Holders.............................................18
Item 5. Other Information...............................................................................18
Item 6. Exhibits and Reports on Form 8-K................................................................20
Signatures...............................................................................................21
</TABLE>
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PART I -- FINANCIAL INFORMATION
Item 1: Financial Statements
Wade Cook Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
(in thousands) September 30, 2000 December 31, 1999
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<S> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $ 702 $ 1,854
Marketable securities 528 1,914
Receivables, trade 1,641 1,212
Inventory 2,239 2,597
Notes receivables, Employees, Current Portion 112 119
Receivables, related parties 62 124
Deferred tax assets 456 456
Income tax refund receivable 1,690 1,199
Notes receivable 362 362
Prepaid 321 363
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Total current assets 8,113 10,200
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Property, plant and equipment, net of depreciation 11,430 12,098
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Goodwill, net of amortization 2,073 2,140
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Other assets:
Other investments 5,177 4,213
Deposits 12 23
Notes receivable - employees 2,056 2,361
Notes receivable 2,050 2,050
Due from related parties 11 520
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Total other assets 9,307 9,167
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Total assets $ 30,923 $ 33,605
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1
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<TABLE>
(in thousands) September 30, 2000 December 31, 1999
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<S> <C> <C>
Liabilities and Shareholders' Equity:
Current liabilities:
Current portion of long-term debt 141 730
Accounts payable and accrued expenses 5,596 7,530
Margin loans in investment accounts 153 179
Payroll and other accrued taxes 145 134
Accrued income taxes 0 108
Deferred tax liabilities 0 0
Deferred revenue 1,709 2,441
Payables, related parties 0 1,867
------------------- ------------------
Total current liabilities 7,744 12,989
Long-term liabilities:
Long-term debt, deferred revenue 857 372
Long-term debt, including long-term notes to related 5,531 3,455
parties
------------------- ------------------
Total long-term liabilities 6,388 3,827
Total liabilities 14,132 16,816
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Minority interest 403 404
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Shareholders' Equity
Preferred stock - -
Common stock 64 64
Paid-in capital 5,342 4,845
Prepaid advertising (170) (170)
Unearned Compensation 0 (56)
Retained Earnings 11,625 12,239
------------------- ------------------
16,861 16,922
Less: common stock in treasury at cost: (473) (537)
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Total shareholders' equity 16,388 16,385
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Total liabilities, minority interest, and stockholders'
Equity $ 30,923 $ 33,605
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</TABLE>
2
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Wade Cook Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
For the Three Months Ended For the Nine Months Ended
---------------------------------- -----------------------------------
(in thousands, except per share data) September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue, net of returns and discounts $ 12,253 $ 18,655 $ 47,174 $ 70,703
------------- ------------- ------------- -------------
Costs and expenses:
Cost of revenue 5,448 7,441 16,654 31,108
Selling, general and administrative 7,029 13,201 31,291 42,174
------------- ------------- ------------- -------------
Total operating costs 12,477 20,642 47,945 73,282
------------- ------------- ------------- -------------
Income from operations (224) (1,987) (771) (2,579)
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Other income (expense):
Interest and dividends 102 142 224 291
Gain (loss) on Marketable (128) (41) (1,566) 1,046
securities
Interest expense (106) (401) (333) (1,163)
Gain on Non-Marketable Securities 15 18 69 87
Other 524 960 1,311 2,697
------------- ------------- ------------- -------------
Total other income (expenses) 407 678 (295) 2,958
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Income before income taxes 183 (1,309) (1,066) 379
------------- ------------- ------------- -------------
Provision for income taxes (tax 63 (444) (332) 165
benefits)
Minority Interest (3) (25) (3) 11
------------- ------------- ------------- -------------
Income from continuing operations $ 123 $ (890) $ (731) $ 225
------------- ------------- ------------- -------------
Net income $ 123 $ (890) $ (731) $ 225
============= ============= ============= =============
Earnings per share
Income from continuing operations $ - $ - $ - $ -
Income from discontinuing - - - -
operations
Income during phase-out period - - - -
------------- ------------- ------------- -------------
Net income $ $ 57,964 $ $ 64,144
============= ============= ============= =============
Weighted average number of shares
</TABLE>
3
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Wade Cook Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
Nine Months Ended
------------------------------------------------
(in thousands) September 30, 2000 September 30, 1999
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<S> <C> <C>
Cash provided by (used in) operations ($440) ($1,082)
Cash provided by (used in) investing activities (994) 2,954
Cash used in financing activities: 282 (3,403)
Net (payments) borrowings
------------------ ------------------
Net increase (decrease) in cash $(1,152) ($1,531)
================== ==================
</TABLE>
4
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Wade Cook Financial Corporation and Subsidiaries
Notes to Interim Financial Statements
September 30, 2000
1. Basis for Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
six-month period ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. For
further information, refer to "Factors Affecting Future Results," and to
the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
2. Earnings per Share
Basic earnings per share are computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding during the period.
3. Discontinued Operations
In June 1998, the Company, through SMILe, entered into a Stock
Purchase/Licensing Agreement pursuant to which it divested its interest in
Entity Planners, Inc. ("EPI") in exchange for $250,000. Under the Licensing
portion of the Agreement, the Company entered into a five year licensing
agreement pursuant to which the Company was entitled to receive up to an
aggregate of $17,470,000 in licensing fees. Berry, Childers, & Associates
was the purchaser of EPI.
4. Licensing Agreement
After the sale of EPI to Berry, Childers, and Associates, EPI was
subsequently sold to the Anderson Law Group, P.C. ("ALG"). In June of 1999,
the five year licensing agreement with EPI was mutually terminated by the
parties and the Company entered into a temporary licensing arrangement with
EPI. Under the temporary licensing arrangement, the Company receives
payments in the form of marketing fees equal to 35% of EPI's gross
proceeds. The Company currently conducts business in association with EPI
under the terms of the temporary licensing arrangement.
5. Contingencies
The Company is subject to various legal proceedings and claims, which were
discussed in detail in the 1999 Form 10K, and other documents previously
filed with the Securities and Exchange Commission. The Company is also
subject to certain other legal proceedings and claims which have arisen in
the ordinary course of business and which have not been fully adjudicated.
The results of the Company's legal proceedings cannot be predicted with
certainty. Although management does not presently anticipate liability
related to many of the legal proceedings and claims would have a material
adverse effect on its financial condition or result of operations, it has
not yet made an estimate of its potential exposure in several pending
proceedings and investigations or determined the impact of adverse results
in such matters on its financial statements.
5
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6. 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 five business segments: Seminars, Product
Sales, Pager Services, Travel Services, and Other. The Seminar segment
primarily conducts educational seminars on strategies for trading in the
stock market and buying and selling real estate. The Product Sales segment
includes the publishing and distribution of books, videotapes, audio tapes,
and written materials designed to teach various trading and cash flow
strategies for trading in the stock market, asset protection and
accumulation techniques. The Pager Services segment produces the IQ Pager,
which provides subscribers with paging services for stock related
information. The Travel Service segment is a travel agency that is also in
the business of selling travel agent training kits. The Other segment
includes retail book sales, interest in real estate ventures, and an
inter-company advertising agency.
Until December 31, 1999, the Company maintained a Hotel segment due to its
participation in the management and operation of a number of hotels.
However, during 1999 the Company disposed of its interests in such hotels,
and thereby ended its active involvement in the hospitality industry.
Although the Company retains minority interests in three hotels, the
Company no longer maintains separate Hotel segment accounting. Presently,
the remaining minority hotel interests are accounted for under Other
Investments.
Information on the Company's business segments for the three months ended
September 30,
<TABLE>
(in thousands) 2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net revenues and sales
Seminars $11,094 $ 8,147 $22,925
Product sales 1,913 7,817 5,243
Hotels - 1,151 821
Pager service 465 371 478
Travel service 349 683 538
Other 484 1,134 1,595
Less: inter-company sales (2,052) (648) (1,018)
-------------- -------------- --------------
$12,253 $18,655 $30,582
============== ============== ==============
</TABLE>
6
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<TABLE>
(in thousands) 2000 1999 1998
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<S> <C> <C> <C>
Cost of sales
Seminars $5,406 $4,467 $11,285
Product sales 1,483 4,259 3,249
Hotels - 478 386
Pager service 89 187 105
Travel service - 22 28
Other 251 1,055 899
Less: inter-company sales (1,781) (3,027) (4,130)
-------------- -------------- --------------
$5,448 $7,441 $11,822
============== ============== ==============
Operating income
Seminars $260 $(1,435) $2,565
Product sales (499) (1,076) 132
Hotels - 711 98
Pager service 255 187 291
Travel service (225) (88) 27
Other (15) (58) (404)
Less: inter-company sales - (228) (387)
-------------- -------------- --------------
$(224) $(1,987) $2,322
============== ============== ==============
</TABLE>
Information on the Company's business segments for the nine months ended
September 30,
<TABLE>
(in thousands) 2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net revenues and sales
Seminars $39,515 $42,989 $62,442
Product sales 7,178 20,614 18,130
Hotels - 2,964 1,702
Pager service 991 1,332 2,564
Travel service 1,484 1,945 1,838
Other 1,891 4,210 6,898
Less: inter-company sales (3,885) (3,351) (5,082)
------------------ ------------------- -----------------
$47,174 $70,703 $88,492
================== =================== =================
</TABLE>
7
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<TABLE>
(in thousands) 2000 1999 1998
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<S> <C> <C> <C>
Cost of sales
Seminars $14,721 $18,816 $26,053
Product sales 4,006 11,082 7,973
Hotels - 1,185 812
Pager service 286 277 375
Travel service - 37 61
Other 1,113 3,139 5,228
Less: inter-company sales (3,472) (3,428) (6,416)
-------------- -------------- --------------
$16,654 $31,108 $34,086
============== ============== ==============
Operating income
Seminars $(62) $(1,438) $3,225
Product sales (807) (1,572) 336
Hotels - 238 82
Pager service 387 835 1,799
Travel service (237) 87 286
Other (52) (661) (251)
Less: inter-company sales - (68) (1,049)
-------------- -------------- --------------
$(771) $(2,579) $4,428
============== ============== ==============
Net Identifiable assets
Seminars $ - $ - $ -
Product sales 1,914 4,340 2,916
Hotels - 13,775 7,076
Pager service 1,222 1,685 1,363
Travel service 858 57 -
Other 1,233 1,609 1,345
-------------- -------------- --------------
Segmented assets 5,227 21,466 12,700
Corporate assets 11,977 10,336 9,840
-------------- -------------- --------------
Total identifiable assets $17,204 $31,802 $22,540
============== ============== ==============
</TABLE>
8. Subsequent Events
None
8
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 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, the effect that recent volatility in the
stock market and world economic conditions may have on the interest of customers
in the Company's seminars, products and services and on the Company's own
investments, the level of resources that may be required by the consumer redress
program, the Company's ability to manage its growth and to integrate recent
acquisitions, fluctuations in the commercial real estate market, the significant
contribution to and influence on the management of the Company by Mr. Cook, the
possibility of adverse outcomes in pending or threatened litigation and
government investigations involving the Company, the possible effects of adverse
publicity arising from government investigations on the interest of customers in
the Company's financial education services and products, consequences associated
with the Company's failure to pay state and federal income tax when due, 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, including the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999. Investors are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revision to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events. 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 forward-looking statement within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act.
General
Wade Cook Financial Corporation is a holding company that, through its
operating subsidiary, Stock Market Institute of Learning ("SMILe", formerly
known as Wade Cook Seminars, Inc.), conducts financial education seminars and
produces and sells related video and audio tapes, books and other written
materials. The Company's core business is financial education, through its
seminar and publishing concerns. These core businesses are complemented by a
financial information pager service, and a subscription-based web site that
provides stock market information and that illustrates the strategies taught in
the Company's seminars and publications.
SMILe hosts the Wealth Information Network ("WIN"), a stock market
education source that allows subscribers to log on and obtain information
related to the stock market at http://www.wadecook.com. Two of the Company's
operating subsidiaries, Left Coast Advertising, Inc., and Lighthouse Publishing
Group, Inc., conduct advertising and publishing services respectively.
In 1998, the Company disposed of the business Entity Planners, Inc.
("EPI"), an entity formation business. Berry, Childers, and Associates was the
purchaser. In connection with the sale of EPI, the Company granted a five year
license to the purchasers of EPI to use certain intellectual property. After the
sale of EPI
9
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to Berry, Childers, and Associates, EPI was subsequently sold to the Anderson
Law Group, P.C. ("ALG"). In June of 1999, the five year licensing agreement with
EPI was mutually terminated by the parties and the Company entered into a
temporary licensing arrangement with EPI. Under the temporary licensing
arrangement, the Company receives payments in the form of marketing fees equal
to 35% of EPI's gross proceeds. The Company currently conducts business in
association with EPI under the terms of the temporary licensing arrangement.
In the third quarter of 1999, in order to reduce costs, the Company
restructured its Seminar segment by reducing the number of locations where
Company seminars were held. As a result of restructuring, the Company now
regularly visits only 25 of the larger urban areas.
The Company regularly evaluates other acquisition and investment
opportunities, and additional cash resources may be devoted to pursuing such
opportunities. In the fourth quarter of 1999, the Company, through SMILe,
executed agreements to invest in Surfbuzz.com, Inc. The Company purchased
450,000 shares of Surfbuzz.com, Inc. common stock for $450,000 through a private
placement. In January 2000, the Company purchased an additional 100,000 shares
of Surfbuzz.com, Inc. common stock for an additional $100,000. During such time,
the Company also executed agreements to invest in 80,000 shares of E-automate,
Inc. for $240,000 and 125,000 shares of Ceristar, Inc. for $250,000. The
investments were accounted for using the cost method. In May of 2000, the
Company was informed by the management of Surfbuzz.com, Inc., that Surfbuzz.com,
Inc. was a defendant of a patent infringement suit with respect to technology
used in the operation of that business. As a result of the patent infringement
suit, operations at Surfbuzz.com, Inc. have been halted. Currently, the Company
is assessing its options in the matter.
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. In May 1999, the Company sold its majority interest in the Fairfield
Inn in Provo, Utah for $800,000. The Company received $600,000 of the purchase
price in the form of cash, debt assumption, and the payment of management fees.
The remainder of the purchase price was paid in the form of a parcel of
undeveloped land appraised at $200,000 which is located in Temp View Quail
Valley Drive, Provo, Utah. During December 1999, the Company sold its majority
hotel interests in the Bestwestern Macarren House, the Four Points by Sheraton,
St. George, and the Airport Ramada Suites. The Company sold the three hotels for
a total sales price of $12,700,000, of which $9,890,000 represented debt assumed
by the buyer. As a result of the sale of these hotel interests, the Company is
no longer actively engaged in the hospitality industry, and does not maintain
separate Hotel Segment accounting.
The Company retains minority interests in the Hampton Inn/Fairfield Inn in
Murray, UT, Woods Cross Fairfield Inn in Woods Cross, UT, and the Park City
Hampton Inn & Suites in Park City, UT. The minority interests, which are 12%,
7%, and 4% respectively, are held through the Company's ownership interest in
Western States Lodging.
Liquidity and Capital Resources
At September 30, 2000, the Company had current assets and current
liabilities in the amounts of $8.1 million and $7.7 million, respectively,
resulting in a working capital surplus of $400,000. The working capital deficit
at December 31, 1999 was $2.8 million. The primary reasons for the decrease in
the working capital deficit was the payment of accounts payable and other
similar obligations and the conversion of $1.8 million in current payables, to
related parties including entities controlled by Mr. Cook, into long-term debt.
Current liabilities at September 30, 2000, include $1.7 million in deferred
revenue, which results primarily from revenues from seminars not yet attended,
prepayments for future pager services from Information Quest and/or
subscriptions to the WIN web-site. The Company has not made estimated tax
payments with respect to the year 2000 income taxes, and does not presently
expect any penalties in this regard.
The market value of the Company's marketable securities decreased by $1.4
million from $1.9 million at December 31, 1999 to $500,000 at September 30,
2000, due primarily to the continuing effects of a general
10
<PAGE>
downturn in the securities market during the second fiscal quarter of 1999,
which resulted in a reduction in the over-all net worth of securities and
options held in the Company's brokerage accounts. Inventory decreased by
$400,000 from $2.6 million at December 31, 1999 to $2.2 million at September 30,
2000 primarily as a result of the Company's write-off of obsolete items, and
increased demand for existing products and promotional materials stored as
inventory at the Company's distribution center. Company inventory includes
tapes, cassettes, manuals and books published by the Company, various related
marketing materials, supplies and other assorted items. At September 30, 2000
the Company also had current receivables from related parties in the amount of
$172,000 consisting primarily 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 has been from the operation of its
educational seminars and sales of related tapes, books and other materials. The
Company does not have an established bank line of credit. There was a net income
from continuing operations of $100,000 for the three months ended September 30,
2000, compared to a loss of ($900,000) as to the three months ended September
30, 1999. For the nine months ended September 2000, the Company experienced a
loss from continuing operations of ($700,000) compared to a gain of $200,000 for
the nine months ended September 30, 1999. The Company's improvement to net
income for the three months ended September 30, 2000, is primarily attributable
to management's continuing implementation of cost controls, restructuring of the
Seminars segment, stricter cost controls, and the more efficient use of existing
Company resources.
Cash in the amount of $2.7 million was used toward debt repayment for the
nine months ended September 30, 2000, compared with $3.4 million for the same
period of 1999. This reduction in comparable debt repayment is primarily
attributable to the elimination obligations associated with the Company's
discontinued Hotel segment.
In addition to cash received from its own operations, the Company is
entitled to receive payments under a temporary marketing arrangement with ALG,
the current owner of EPI, which provides for payments to the Company equal to
35% of EPI's gross proceeds. The agreement may be terminated at any time.
Receipt of these payments may, as a practical matter, be dependent on the
success of the business in the hands of ALG. To date, ALG has made all payments
when due.
Other investments increased by $1 million from $4.2 million at December 31,
1999 to $5.2 million at September 30, 2000, due to the purchase of stock in
three private companies: Ceristar, Inc, E-automate, Inc. and Surfbuzz.com, Inc.
See the Company's report on Form 10-Q for the period ended March 31, 2000 for a
more complete description of these investments.
The Company's Other investments include the following:
Investment
Description of Investment (in thousands)
-------------------------------------------------------------
Oil and gas properties $691
Hotel and motel investments 601
Investments in undeveloped land 1,971
Private companies -- Various industries 1,914
------------------
Total non-marketable investments $5,177
==================
11
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The Company has tried to focus on its core and currently owned businesses,
the repayment of debt and making additional expenditures to fund existing
operations, including advertising in the nine months ended September 30, 2000.
Cash flow from operations, which has historically been the Company's principal
source of cash for working capital. During the quarter ended September 30, 2000,
the Company's experienced a net decrease in cash from operations of ($1.2)
million. The decrease during the nine months ended September 30, 2000 is
principally due to expenditures on investing activities, and because a number of
the Company's operating segments consumed more cash than they produced. However,
cash flow showed an improvement of $600,000 over the second quarter of the year
2000, from ($1.8) million for ended June 30, 2000 to ($1.2) million for the
quarter ended September 30, 2000.
The Company continues to fund existing subsidiaries and investments in
anticipation of future revenues. The Company's practice of using available cash
to fund its subsidiaries and investments, its working capital deficit and the
fact that the Company's seminar business has not generated cash as in the past
have resulted in constraints on liquidity, including failure to pay some
obligations as they have come due. The Company has in some cases not paid
accounts payable and refunds in a timely manner. However, as of September 30,
2000, the Company had approximately $5.6 million in accounts payable, a decrease
of $1.9 million from the $7.5 million in accounts payable due as of December 31,
1999.
The Company may be required to generate cash for working capital purposes
from its non-marketable investments or other assets. If it seeks to do so, it
may not be able to liquidate investments in a timely manner, or in a manner that
would allow the Company to realize the full value of the investments or assets
involved. Failure to generate adequate cash resources for working capital could
require the Company to cut back operations, delay or cancel expansion and
development projects, default on contracts, forfeit valuable rights for
non-payment or non-performance and cause the Company to be unable to meet
obligations.
The Company has been a party to various government investigations and legal
proceedings. See Part II, Item 1 of this report for descriptions of these
proceedings, as well as other public documents filed with the Securities and
Exchange Commission. The Company has not yet made an estimate of its potential
exposure in those proceedings/investigations which are still remaining, nor has
the Company determined the impact of adverse results in such matters on its
financial statements.* The outcome of these matters is difficult to predict and
subject to uncertainty, and the legal fees and other costs involved may be
material.* Adverse publicity resulting from these matters may be negatively
affecting the Company's business, and further adverse publicity could have
further negative effects.* Were the Company found to be liable in certain of
these proceedings, the liability could be material. Any such result could
materially adversely affect the Company's financial condition or results of
operations.*
The Company has resolved a number of legal proceedings and investigations
previously reported on public documents filed with the Securities and Exchange
Commission, namely investigations by the Federal Trade Commission ("FTC"),
Washington Department of Financial Institutions, and the Consumer Affairs
Divisions of 14 states. Pursuant to a resolution of these proceedings, the
Company has entered into individual agreements (the "Agreements") with the FTC
and 14 states, the terms of which relate to the Company's future advertising
practices and the implementation of a consumer redress program. As a result of
these Agreements, the State of Texas and California have agreed to drop their
current lawsuits involving the Company, and the Department of Financial
Institutions for the State of Washington has ended its four year investigation
of the Company without finding any wrongdoing ("without any specific finding of
fact or law"). See Item 5 Other Information, contained in this report, for a
more complete description of these proceedings. Under the consumer redress
portion of the Agreements, the Company will be responsible for refunding to a
limited number of former customers money paid to attend the Company's seminar
the "Wall Street Workshop(TM)". Currently, the Company is compiling a list of
customers potentially eligible to receive the individual questionnaires that
will be used to provide the basis for evaluating refund requests. At this time,
the Company cannot fully estimate what effect the consumer redress program will
have on the Company's operations or financial results. However, the consumer
redress program may potentially expose the Company to significant liability for
refunds to consumers. The need to satisfy these obligations could require the
Company to defer satisfying other obligations or to cut back its operations to
conserve cash. This could have a material adverse effect on the Company's
operations and financial results.
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Results of Operations
Three Months Ended September 30, 2000 Compared with the Three Months Ended
September 30, 1999
Revenue. Revenue from continuing operations was $12.3 million for the
quarter ended September 30, 2000, compared with $18.7 in the third quarter of
1999. The decrease of $6.4 million is primarily attributable to lower sales in
the Company's Product Sales, Travel, and Other segments, and the elimination of
the Hotel segment and the closing of certain retail sales locations at the end
of 1999. The Company is evaluating whether its business may be seasonal with
demand for the Company's products and services slowing during the summer months
as well as at the year end. Additionally, the Company believes that recent
turbulence in the equities markets, the effects of inflationary fears, and the
third quarter slow down in the growth of the U.S. economy may have had a
negative impact on the Company's sales in the third quarter. During the third
quarter of 2000, sales in Seminar segment increased by $3 million from $8.1
million third quarter of 1999 to $11.1 million for a comparable period in 2000.
This increase was a result of greater demand for the Company's existing and
newly developed seminars, and more focused advertising efforts. Revenues from
product sales decreased by $5.9 million from $7.8 million during the third
quarter of 1999 to $1.9 million during a comparable period in 2000. The decrease
in Product Sales is primarily due to reduced demand for existing titles promoted
by the Company's publishing subsidiaries, the closing of several of the
Company's retail locations, negative press coverage, and restructuring of the
Seminar segment where the Company's products are marketed and sold.
The Company discontinued the operation of its Hotel segment as of December
31, 1999 and as a result did not realize revenue in that Segment during the
third quarter of 2000. Revenue in the pager segment increased by $100,000 from
$400,000 for the quarter ended September 30, 1999 to $500,000 for the quarter
ended September 30, 2000. The increase in Pager revenue resulted from increased
attendance at in the Seminars Segment where the Pager products are primarily
sold and marketed.
Revenue from the Company's Travel segment decreased by $400,000 from
$700,000 the quarter ended September 30, 1999 to $300,000 for the comparable
period of 2000. The decrease is attributable to reduced travel bookings.
Revenues in the Other segment, consisting primarily of the Company's real estate
development operations, retail sales locations, and advertising agency,
decreased by $600,000 from $1.1 million the quarter ended September 30, 1999 to
$500,000 during the comparable period in 2000. The decrease in Other revenues is
principally due to a restructuring of the Other segment which resulted in the
elimination of six retail store locations.
Cost of Revenue. Cost of revenue decreased by $2 million from $7.4 million
for the quarter ended September 30, 1999 to $5.4 million in the quarter ended
September 30, 2000. This decrease in cost of revenue is primarily due to
management's continued implementation of cost controls, restructuring of the
Company's Seminar segment, the discontinuance of unprofitable ventures and
segments, the more efficient use of existing Company resources, and a lower
volume of sales in the Company's operating segments.
Cost of revenue attributable to the Company's Seminar segment increased by
$900,000 from $4.5 million for the quarter ended September 30, 1999 to $5.4
million for the comparable quarter in 2000 primarily due to the increased costs
associated with higher volume sales in that segment. Cost of Product Sales
decreased by $2.8 million from $4.3 million for the quarter ended September 30,
1999 to $1.5 million for the comparable period of 2000, primarily due to
management's continued implementation of cost controls, restructuring of the
Company's Seminar Segment, the discontinuance of unprofitable ventures and
segments, the more efficient use of existing Company resources, and a lower
volume of sales in the Company's Product Sales Segment.
The Company discontinued the operation of its Hotel segment as of December
31, 1999 and as a result did not incur any costs in that Segment during the
third quarter of 2000. The cost of revenue for the Pager services segment
decreased by $100,000 from $200,000 for the quarter ended September 30, 1999 to
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$100,000 for the quarter ended September 30, 2000 due a reduction in development
expenditures, reduced employee overhead, reduction in inventory, and use of
leased pagers. The change in the cost of revenue for the Travel Service segment
was insignificant for the quarter ended September 30, 2000. The Other segment
cost of revenue decreased by $700,000 from $1 million for the quarter ended
September 30, 1999 to $300,000 for the comparable period in 2000. The decrease
is primarily due to restructuring in the Other segment which resulted in the
elimination of six retail sales locations.
Selling, General and Administrative Expenses. Selling, general and
administrative costs for the three months ended September 30, 2000 were $7
million compared with $13.2 million in the comparable period in 1999. The
decrease of $6.2 million is primarily attributable to the continued
implementation of cost controls by management, more efficient use of Company
resources, and a reduction in certain legal and accounting expenses.
Operating Income. The Company's use of cash in operations improved by $1.8
million from ($2.0) million for the quarter ended September 30, 1999 to
($200,000) for the quarter ended September 30, 2000. This improvement is the
principal result of the Seminar and Pager Segments generating greater operating
income than previous quarters, less cash being consumed in the Product Sales
Segment, and the elimination of the Hotel segment and six retail sales locations
at the end fiscal 1999.
Cash used in the operation of the Seminar segment improved by $1.7 million
from ($1.4) million for the quarter ended September 30, 1999 to $300,000 for a
comparable period in 2000. Much of this improvement was attributable to greater
sales, more efficient use of existing resources, the continued implementation of
cost controls, budgeting, and restructuring in the Seminar segment. Operating
income in the Product Sales segment improved by $600,000 from ($1.1) million for
the quarter ended September 30, 1999 to ($500,000) for the comparable period in
2000. The improvement is primarily attributable to more efficient use of
existing resources, the continued implementation of cost controls, budgeting,
and restructuring in the Seminar segment.
The Company discontinued the operation of its Hotel segment as of December
31, 1999 and as a result did not experience any gain or loss in operation for
that Segment during the third quarter of 2000. Operating income in the Pager
segment improved by $100,000 from $200,000 in the quarter ended September 30,
1999 to $300,000 for the quarter ended September 30, 2000, primarily due to
reduced expenses and increased sales. The Travel Services segment's consumption
of operating income increased by $100,000 from ($100,000) for the quarter ended
September 30, 1999 to ($200,000) for a comparable period in 2000. The increase
is primarily attributable to continued expenditures made by the Company to
develop Travel segments compliment of services, related advertising expenses,
and reduced sales. Operating income generated in the Other segment did not
significantly change for the three month comparison ended September 30.
Other Income (Expenses). Total other income was $400,000 for the three
months ended September 30, 2000, compared with income of $700,000 for the
comparable period in 1999. The decrease is primarily attributable to losses
incurred on the Company's marketable securities. However, the Company's Other
Income experienced a $1.8 million improvement from the ($1.4) million loss
reported for the three months ended June 30, 2000. During the quarter ending
September 30, 2000, the Company experienced a realized and unrealized loss on
the trading of securities in the amount of ($100,000) compared with a loss of
($50,000) in a comparable period of 1999. The losses on the Company's marketable
securities are due primarily to the continuing effects of an over-all downturn
in the equities market that began during the second quarter of 2000, and the
slow down of the U.S. economy reported in the third fiscal quarter. The Company
records its investment in trading securities in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and therefore, adjusts marketable securities to
market value, thereby reflecting changes in market value through the income
statement in the current period.
The Company experienced gain from continuing operations for the quarter
ending September 30, 2000 of $100,000, compared with loss of ($900,000) for the
comparable period in 1999. The Company has not made any tax payments at this
time due to the net operating losses.
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Nine Months Ended June 30, 2000 Compared with the Nine Months Ended June 30,
1999
Revenue. Revenue from continuing operations was $47.1 million for the nine
months ended September 30, 2000, compared with $70.7 million as of September 30,
1999. The decrease of $23.6 million is primarily attributable to lower sales in
the Company's Seminars, Product Sales, Travel, and Other Segments, and the
elimination of the Hotel segment and the closing of certain retail locations at
the end of 1999. The Company is evaluating whether its business may be seasonal
with demand for the Company's products and services slowing during the summer
months, as well as at the year end. Additionally, the Company believes that
recent turbulence in the equities markets, the effects of inflationary fears,
and the third quarter slow down in the growth of the U.S. economy may have had a
negative impact on the Company's sales during the third quarter. During the
first nine months of 2000, sales in the Seminar segment decreased by $3.5
million from $43.0 million in the first nine months of 1999 to $39.5 million in
2000. This decrease was a result of restructuring of the Seminar segment which
resulted in a reduction of the over-all number of seminars presented, volatility
in the stock market, negative press coverage, and to some extent the saturation
of the Company's services in certain markets. Revenues from product sales
decreased by $13.4 million from $20.6 million in the first nine months of 1999
to $7.2 million during the first nine months of 2000. The decrease in Product
Sales is primarily due to reduced demand for existing titles promoted by the
Company's publishing subsidiaries, the closing of several of the Company's
retail locations, negative press coverage, and restructuring of the Seminar
segment where the Company's products are marketed and sold.
The Company discontinued the operation of its Hotel segment as of December
31, 1999 and as a result did not realize revenue in that Segment during the
first nine months of 2000. Revenue in the pager segment decreased by $300,000
from $1.3 million at September 30, 1999 to $1 million for the comparable period
of 2000. The decrease in pager revenue resulted primarily from a reduced demand
for one-way paging technology, reduced renewal rates, and restructuring of the
Seminar segment where the Pager products are marketed and sold. Although the
Pager Segment reported an overall decline in revenues for the nine month period,
for the three month period ended September 30 Pager revenues showed improvement
(See the Three Months discussion above for a more complete discussion).
Revenue from the Company's Travel segment decreased by $400,000 from $1.9
million at September 30, 1999 to $1.5 million at September 30, 2000. The
decrease is primarily attributable reduced travel bookings. The Other segment,
consisting primarily of the Company's real estate development operations, retail
sales locations, and advertising agency, decreased by $2.3 million from $4.2
million at September 30, 1999 to $1.9 million during the comparable period in
2000. The decrease in revenues is principally due to a restructuring of the
Other segment which resulted in the elimination of six retail store locations.
Cost of Revenue. Cost of revenue decreased by $14.4 million from $31.1
million for the nine months ended September 30, 1999 to $16.7 million for the
nine months ended of September 30, 2000. This decrease in cost of revenue is
primarily due to management's continued implementation of cost controls,
restructuring of the Company's Seminar segment, the discontinuance of
unprofitable ventures and segments, the more efficient use of existing Company
resources, and a lower volume of sales in the Company's operating segments.
Cost of revenue attributable to the Company's Seminar segment decreased by
$4.1 million from $18.8 million for the nine months ended September 30, 1999 to
$14.7 million for the comparable quarter in 2000, primarily due to management's
continued implementation of cost controls, restructuring of the Company's
Seminar segment, the discontinuance of unprofitable ventures and segments, the
more efficient use of existing Company resources, and a lower volume of sales in
the Company's Seminar segment. Cost of Product Sales decreased by $7.1 from
$11.1 million for the nine months ended September 30, 1999 to $4 million for the
comparable period of 2000 primarily due to the same factors discussed with
respect to the Seminar segment.
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The Company discontinued the operation of its Hotel segment as of December
31, 1999 and as a result did not incur any costs in that Segment during the
first nine months of 2000. The cost of revenue for the Pager and Travel segments
did not show significant change for the comparative nine month periods ending
September 30. The Other segment cost of revenue decreased by $2 million from
$3.1 million for the nine months ended September 30, 1999 to $1.1 for the nine
months ended September 30, 2000. The decrease is primarily due to restructuring
in the Other segment which resulted in the elimination of six retail sales
locations.
Selling, General and Administrative Expenses. Selling, general and
administrative costs for the nine months ended September 30, 2000 were $31.3
million compared with $42.2 million in the comparable period in 1999. The
decrease of $10.9 million in such costs is primarily attributable to the
continued implementation of cost controls by management, more efficient use of
Company resources, and a reduction in certain legal and accounting expenses.
Operating Income. The Company's operating income improved by $1.8 from
($2.5) million for the period ended September 30, 1999 to ($800,000) for the
period ended September 30, 2000. The improvement in operating income is the
principal result of a decrease in the amount of cash being consumed in the
operation of the Seminar, Products Sales, and Other segments, the contribution
of Operating Income from the Pager Segment, combined with the elimination of the
Hotel segment and the closing of certain retail locations at the end of 1999.
Operating income used by the Seminar segment improved by $1.3 million from
($1.4) million for the period ended September 30, 1999 to ($100,000) at
September 30, 2000. This improvement is primarily attributable to increased
sales, more efficient use of existing resources, the implementation of cost
controls, and budgeting. Operating income attributable to the Product Sales
segment improved by $800,000 from ($1.6) for the period ended September 30, 1999
to ($800,000) for the period ended September 30, 2000. The improvement is
primarily the result of more efficient use of existing resources, management's
continued implementation of cost controls, and budgeting.
The Company discontinued the operation of its Hotel segment as of December
31, 1999 and as a result did not experience any gain or loss in operation for
that Segment during the first nine months of 2000. Operating income in the Pager
segment decreased by $400,000 from $800,000 in the nine months ended September
30, 1999 to $400,000 for the nine months ended September 30, 2000, primarily due
to an over-all reduction in sales from prior comparable periods combined with
research and development costs. Although the Pager Segment reported an overall
decline in operating income for the nine month period ending September 30, the
Pager Segment showed an improvement in operating income for the three month
period ended September 30 (See the Three Months discussion above for a more
complete explanation). The Travel segment's consumption of operating income
increased by $300,00o from $100,000 for the nine months ended September 30, 1999
to ($200,000) for the nine months ended September 30, 2000. The increase is
primarily attributable to continued expenditures made by the Company to develop
Travel segments compliment of services, related advertising expenses, and
reduced sales. Operating income in the Other segment improved by $600,000 from
($700,000) for the nine months ended September 30, 1999 to ($100,000) for the
nine months ended September 30, 2000. The improvement is primarily due to
restructuring which resulted in the elimination of six retail locations.
Other Income (Expenses). Total other expense was ($300,000) for the nine
months ended September 30, 2000, compared with $3.0 million in income for a
comparable period in 1999. The decrease is primarily attributable to losses
incurred on the Company's marketable securities. During the period ending
September 30, 2000, the Company experienced a realized and unrealized loss on
the trading of securities in the amount of ($1.6) million compared with a gain
of $1.0 million in a comparable period of 1999. The losses on the Company's
marketable securities are due primarily to the continuing effects of an over-all
downturn in the equities market that began during the second quarter of 2000,
and the slow down of the U.S. economy reported in the third fiscal quarter. The
Company records its investment in trading securities in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for
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<PAGE>
Certain Investments in Debt and Equity Securities, and therefore, adjusts
marketable securities to market value, thereby reflecting changes in market
value through the income statement in the current period.
The Company experienced loss from operations for the nine months ended
September 30, 2000 of ($700,000), compared with income of $200,000 for the
comparable period in 1999. The Company has not made any tax payments at this
time due to the net operating losses.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates affecting the return on
its notes receiveable 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 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 investments in 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 limited default, market and
reinvestment risk.
PART II -- OTHER INFORMATION
Item 1. 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 as to which there were material developments during the period since the
last report:
Hewlett Packard Company vs. Wade Cook Financial Corporation. Hewlett
Packard lawsuit settled and dismissed. On April 16, 2000, the Hewlett Packard
Company ("HP") filed a complaint in the King County Superior Court of the State
of Washington, claiming under-payment for services rendered. The Company counter
claimed, alleging HP failed to provide the full compliment of services agreed to
under a planned SAP implementation. On September 30, 2000, the Company and HP
entered into a confidential Settlement Agreement. In November 2000, King County
Superior Court for the State of Washington dismissed the lawsuit with prejudice.
State of California vs. Wade Cook Financial Corporation, Wade Cook
Seminars, Inc., etc al. State of California lawsuit settled and to be dismissed.
On January 11, 1999, a civil complaint was filed against the Company in the
Superior Court of the State of California. The complaint alleged violations of
sections 1678.20 through 1693 of the California Civil Code. In November 2000,
the Company entered into a voluntary settlement agreement with the State of
California pursuant to which this lawsuit shall be dismissed. The Company
continues to deny all allegations contained in the State of California's
complaint filed on January 11, 1999. For additional information concerning the
resolution of this lawsuit, please see Management's Discussion and Analysis of
Financial Condition and Results of Operation above, and Item 5. Other
Information contained in this report.
State of Texas vs. Wade B. Cook and Wade Cook Seminars, Inc. State of Texas
lawsuit settled and to be dismissed. On May 1, 1998, the Attorney General of
Texas filed a lawsuit against the Company in the District Court of Bexar County,
Texas. The complaint alleged violation of the Texas' Deceptive Trade Practices -
Consumer Protection Act. In November 2000, the Company entered into a voluntary
settlement agreement with the State of Texas pursuant to which this lawsuit
shall be dismissed. The Company continues to deny all allegations contained in
the complaint filed on May 1, 1998. For additional information concerning the
resolution of this lawsuit, please see the Management's Discussion and Analysis
of Financial Condition and Results of Operation above, and Item 5. Other
Information contained in this report.
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Investigation by the State of Washington, Securities Division.
Investigation by the State of Washington ended. Since September 1996, the
Washington State Department of Financial Institutions ("DFI"), Securities
Division has been investigating the Company. The state's investigation was
performed pursuant to RCW 21.20.370 and 21.20.700. On September 7, 1999, the
Company brought suit against the State of Washington for declaratory and
injunctive relief to either compel legal action or to end the State's
investigation. DFI shortly thereafter joined existing negotiations between the
Company, the Federal Trade Commission, and the Consumer Affairs divisions of
fourteen individual states, including the Consumer Affairs Division for the
State of Washington. On October 5, 2000, DFI ended its four year investigation
of the Company without any specific finding as to law or fact. For additional
information concerning the resolution of this lawsuit, please see Management's
Discussion and Analysis of Financial Condition and Results of Operation above,
and Item 5. Other Information contained in this report.
Federal Trade Commission. Investigation by the Federal Trade Commission
("FTC") ended. On September 16, 1999, representatives of the Company met with
staff from the FTC. The meeting was called to discuss alleged acts by the
Company and others under the various provisions of the federal consumer laws. On
October 4, 2000, the Company ended the FTC's investigation by entering into a
voluntary Consent Decree with the FTC. The Company continues to deny that it has
violated any federal consumer statutes. For additional information concerning
the resolution of this lawsuit, please see Management's Discussion and Analysis
of Financial Condition and Results of Operation above, and Item 5. Other
Information contained in this report.
State Attorneys General Investigations. Investigations by the various
states ended. From 1998 through August of the year 2000, various Attorneys
General from 14 states commenced investigations of the Company. The state
investigations focused on the Company's consumer practices under the consumer
laws of the 14 states. These state investigations were conducted in concert with
the FTC's investigation as outlined immediately above. Between October 5 and
November 14 of the year 2000, the Company ended these investigations by entering
into voluntary individualized settlement agreements with the various states. The
Company denies that it has violated any of the relevant state consumer laws. The
participating States are as follows: Alaska, Arizona, California, Idaho,
Illinois, Kansas, Missouri, New Mexico, North Carolina, Oklahoma, Oregon,
Pennsylvania, Texas, Washington. For additional information concerning the
resolution of this lawsuit, please see Management's Discussion and Analysis of
Financial Condition and Results of Operation above, and Item 5. Other
Information contained in this report.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On October 4, 2000, the Company entered into a voluntary Consent Decree
(the "Order") with the Federal Trade Commission (the "FTC") resolving the FTC's
investigation of the Company. On October 13, 2000, the Order was entered in the
U.S. District Court Western District of Washington at Seattle. The FTC had been
investigating alleged acts by the Company under the federal consumer laws.
Concurrently with FTC investigation, the state Attorneys General for fourteen
states (the "States") had similar investigations underway pursuant to the
consumer laws of their respective jurisdictions. The States coordinated their
investigative efforts with the FTC.
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The States have agreed to enter into individual voluntary Consent Decrees
(the "State Orders") with the Company, which are in substance, individualized
adaptations of the Order with slight procedural variations according to state
law. However, the State Orders do contain several additional concessions. First,
the Company is responsible for posting an "actual and hypothetical trade"
disclaimer, similar to the disclaimer discussed below, in connection with the
Wealth Information Network ("WIN") and the presentation of the Company's
seminars. WIN is a Bulletin Board System where illustrative trades are placed in
order to display stock market strategies taught by the Company. With respect to
WIN, the Company agreed to post the disclaimer on the cover page of its WIN
service web site and at stock market seminars where a specific stock trade is
discussed. Second, the State Orders include similar provisions that clarify the
potential class of persons eligible to receive refunds with respect to each
individual states' residents. Third, the Company has voluntarily agreed to make
payments totaling $400,000 to the various states for consumer education. The
States have agreed these voluntary payments do not constitute a penalty.
The participating States are as follows: Alaska, Arizona, California,
Idaho, Illinois, Kansas, Missouri, New Mexico, North Carolina, Oklahoma, Oregon,
Pennsylvania, Texas, Washington. In addition, the states of California and Texas
have agreed to drop their respective lawsuits against the Company for alleged
violations of consumer statutes. In connection with the State Order with the
State of Washington, the Department of Financial Institutions for the State of
Washington has also agreed to end its four-year investigation of the Company for
alleged violations of the State's securities laws and the Wade Cook Financial
Corporation has agreed to dismiss its lawsuit against the State of Washington.
See the Company's report on Form 10-Q for the period ended September 30, 1999
for a more complete description of these lawsuits.
The FTC Order primarily addresses our advertising practices and establishes
a method for consumer redress in limited situations. Other requirements in the
Order cover issues such as record retention and the duties of businesses
controlled by the Company. While the FTC Order and the State Orders regulate
certain aspects of the Company's advertising and provide for a limited number of
customer refunds, the Orders do not limit, regulate or otherwise effect the sale
of the Company's products or services. Furthermore, the Orders do not place
prohibitions on the Company's marketing and promotional efforts; instead, the
Orders simply require the Company to alert consumers to the risks inherent in
the stock market.
Advertising
The Order provides that the Company must include appropriate disclaimers to
accompany future representations in advertising and promotional materials
designed to sell stock market seminars ("Covered Advertising"). The requirement
does not extend to "books, print, electronic, video and audio publications and
instructional seminars published or presented by the [Company] and sold
primarily for wholesale or retail...[.]" The Order requires the disclaimers to
be clearly and prominently displayed. The disclaimers are needed only when a
specific condition is met. The Order requires disclaimers for three types of
statements: rates of return, actual and hypothetical trades, and testimonials.
The rate of return disclaimer will accompany qualifying statements made in
Covered Advertising materials regarding (i) the Company's success in using its
trading strategies, or (ii) the success attainable by consumers using Company
trading strategies. Actual and hypothetical trade disclaimers will accompany
descriptions of qualifying actual or hypothetical trades used in Covered
Adverting, and likewise, Covered Advertising containing qualifying testimonials
will include testimonial disclaimers. Generally, these disclaimers, where
relevant, will provide appropriate rates of return, language alerting consumers
that actual results may vary from those depicted, and/or language that such
results may not be indicative of overall trading success.
Consumer Redress
The Order outlines the circumstances under which former customers are
entitled to a refund of some or all of the fees paid to attend the Wall Street
Workshop(TM) ("WSWS"). WSWS is a seminar presented by the Company that
introduces attendees to the basics of the stock market, and teaches them
strategies for trading.
The consumer redress program is self-administered and is governed by the
Order. Pursuant to the terms of the Order, within sixty (60) days following the
Court's entry of the Order, the Company must conduct an
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investigation of its customer records and identify those persons who have paid
to attend the WSWS but did not attend, and who have requested refunds and have
not already received a refund or otherwise had their claim resolved. Upon
identification of those consumers, the Company must issue them customer refunds
and release of claim forms.
The Company must also begin to issue a "Proof of Claim" form to customers
eligible for potential refunds (the "Claimant"). A Claimant is defined by the
following characteristics: (1) paid to attend the WSWS on or after January 1,
1997 and before January 1, 2000; (2) did not thereafter pay for attending any
other event offered by the Company or affiliated parties, and (3) has not
already received a refund of the WSWS fees. A person qualifying as a Claimant is
not guaranteed the right to a refund. Refunds remain subject to additional
limitations and exclusions.
In order to be considered for a refund, Claimants must submit their
completed Proof of Claim forms within ninety (90) days. Upon receipt of the
returned Proof of Claim, the Company has thirty (30) days from the date of the
return postmark to evaluate the person's claim and, if valid, send the
appropriate refund with a release of claim form. The Company's evaluation of
individual refunds is based on the Claimant's answers to questions contained in
the Proof of Claim, and an assessment of the validity of those answers.
Failure by a Claimant to meet the above guidelines will result in a
forfeiture of his or her rights under the Order. Upon satisfaction of payment in
the situations above, the Company will be released of all further obligations to
the former customer under the Order.
Periodically, the Company must provide an affidavit attesting to its
continuing compliance with FTC order. The Company will also provide a
confidential list of persons receiving refunds under the consumer redress
program, and a list of all "Claimants" regardless of whether a refund was
actually issued. These lists will be kept strictly confidential per the terms of
the Order. Under the Order, the FTC retains the right to inspect the original
records relating to the consumer redress program.
If the Company fails to meet its financial obligations under the Order or
cure, Mr. Wade Cook will become responsible for the required payment(s).
Repurchase of Company Common Stock.
On February 16, 2000, the Board of Directors authorized the repurchase of
up to two million shares of the Company's common stock in the open market on or
before December 31, 2000. On June 8, 2000, the Company was authorized to
repurchase up to one million additional shares or its common stock during a
period ending on June 8, 2001. The repurchase of Company shares is being
conducted in accordance with Rule 10b-18 under the Exchange Act. Currently, the
Company has repurchased 299,000 shares of stock on the open market for $71,525.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.47 Promissory Note in favor of Never Ending
Wealth LP dated September 30, 2000
27.1 Financial Data Schedule
99.1 Consent Decree between the Federal Trade
Commission, as plaintiff, and the Company,
as defendant, entered with the U.S.
District Court, Western District of
Washington on October 13, 2000.
(Confidential treatment has been requested
as to certain portions of this exhibit.
Omitted portions have been filed
separately with the Securities and Exchange
Commission.)
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WADE COOK FINANCIAL CORPORATION
November 10, 2000 /s/ Wade B. Cook
---------------------------------------------
Wade B. Cook, Chief Executive Officer
November 10, 2000 /s/ Cynthia Britten
---------------------------------------------
Cynthia C. Britten, Chief Financial Officer,
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.47 Promissory Note in favor of Never Ending Wealth LP dated
September 30, 2000
27.1 Financial Data Schedule
99.1 Consent Decree between the Federal Trade Commission, as
plaintiff, and the Company, as defendant, entered with the
U.S. District Court, Western District of Washington on
October 13, 2000. (Confidential treatment has been requested
as to certain portions of this exhibit. Omitted portions
have been filed separately with the Securities and Exchange
Commission.)
