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 March 31, 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 March 31, 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..........14
Item 3: Quantitative and Qualitative Disclosures About Market Risk.....................................14
PART II -- OTHER INFORMATION..........................................................................14
Item 1. Legal Proceedings..............................................................................14
Item 2. Changes in Securities..........................................................................14
Item 3. Defaults Upon Senior Securities................................................................14
Item 4. Submission of Matters to a Vote of Security Holders............................................14
Item 5. Other Information..............................................................................14
Item 6. Exhibits and Reports on Form 8-K...............................................................15
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PART I -- FINANCIAL INFORMATION
Item 1: Financial Statements
Wade Cook Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
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(in thousands) March 31, 2000 December 31, 1999
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Assets:
Current Assets:
Cash and cash equivalents $841 $1,854
Marketable securities 2,847 1,914
Receivables, trade 1,276 1,212
Inventory 2,984 2,597
Notes receivables 362 362
Receivables, related parties 238 243
Deferred tax assets 300 456
Income tax refund receivable 1,199 1,199
Prepaid 291 363
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Total current assets 10,338 10,200
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Property, plant and equipment, net of depreciation 11,658 12,098
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Goodwill, net of amortization 2,073 2,140
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Other assets:
Other investments 5,187 4,213
Deposits 23 23
Notes receivable - employees 2,164 2,361
Notes receivable 2,050 2,050
Due from related parties 518 520
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Total other assets 9,942 9,167
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Total assets $34,011 $33,605
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(in thousands) March 31, 2000 December 31, 1999
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Liabilities and Shareholders' Equity:
Current liabilities:
Current portion of long-term debt 629 730
Accounts payable and accrued expenses 5,902 7,530
Margin loans in investment accounts 308 179
Payroll and other accrued taxes 684 134
Accrued income taxes 278 108
Deferred revenue 2,619 2,441
Payables, related parties 2,269 1,867
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Total current liabilities 12,689 12,989
Deferred revenue 655 372
Long-term debt 3,355 3,455
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Total liabilities 16,699 16,816
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Minority interest 401 404
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Shareholders' Equity
Preferred stock - -
Common stock 64 64
Paid-in capital 4,845 4,845
Prepaid advertising (170) (170)
Unearned Compensation (56) (56)
Retained Earnings 12,765 12,239
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17,448 16,922
Less: common stock in treasury at cost: (537) (537)
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Total shareholders' equity 16,828 16,385
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Total liabilities, minority interest, and stockholders'
Equity $34,011 $33,605
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Wade Cook Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
For the Three Months Ended
-------------------------------------
(in thousands, except per share data) March 31, 2000 March 31, 1999
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Revenue, net of returns and discounts $19,363 $27,207
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Costs and expenses:
Cost of revenue 6,436 12,122
Selling, general and administrative 12,598
15,059
---------------- -----------------
Total operating costs 19,034 27,181
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Income from operations 329 26
---------------- -----------------
Other income (expense):
Interest and dividends - -
Gain (loss) on trading securities 217 416
Interest expense (62) (62)
Recovery of loss on investments 124 -
Other 184 886
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Total other income (expenses) 463 1,240
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Income before income taxes 792 1,266
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Provision for income taxes (tax 269 443
benefits)
Minority Interest 3 3
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Income from continuing operations $526 $826
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Net income $526 $826
================ =================
Earnings per share
Income from continuing operations $0.01 $0.01
Income from discontinuing operations -
Income during phase-out period -
---------------- -----------------
Net income $0.01 $0.01
================ =================
Weighted average number of shares 64,049 64,088
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Wade Cook Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flow
(Unaudited)
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Three Months Ended
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(in thousands) March 31, 2000 March 31, 1999
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Cash provided by (used in) operations $(296) $(349)
Cash provided by (used in) investing activities (642) 1,580
Cash used in financing activities:
Net (payments) borrowings (75) (859)
-------------- --------------
Net increase (decrease) in cash $(1,013) $372
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Wade Cook Financial Corporation and Subsidiaries
Notes to Interim Financial Statements
March 31, 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
three-month period ended March 31, 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 shareholders by the weighted average number of common shares
outstanding during the period.
3. Discontinued Operations
In June 1998, the Company, through SMIL 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 with EPI licensing agreement 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; however, although management does not presently anticipate
liability related to many of the legal proceedings and claims that 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.
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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 asset
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
March 31,
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(in thousands) 2000 1999 1998
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Net revenues and sales
Seminars $15,556 $18,280 $23,448
Product sales 2,744 7,014 6,640
Hotels - 821 118
Pager service 338 608 752
Travel service 685 552 702
Other 771 1,455 3,336
Less: inter-company sales (731) (1,523) (4,451)
---------------- -------------- --------------
$19,363 $27,207 $30,545
================ ============== ==============
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(in thousands) 2000 1999 1998
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Cost of sales
Seminars $5,170 $7,517 $9,454
Product sales 1,381 3,753 1,993
Hotels - 311 47
Pager service 109 64 240
Travel service - - -
Other 467 989 2,545
Less: inter-company sales (691) (512) (1,300)
---------------- -------------- --------------
$6,436 $12,122 $12,979
================ ============== ==============
Operating income
Seminars $410 $927 $(839)
Product sales (160) 395 177
Hotels - (289) (13)
Pager service 106 477 395
Travel service 66 73 248
Other (11) (184) 330
Less: inter-company sales (82) (1,373) -
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$329 $26 $298
================ ============== ==============
Net Identifiable assets
Seminars $ - $ - $ -
Product sales 2,137 2,369 2,752
Hotels - 13,122 4,648
Pager service 1,803 1,344 3
Travel service 68 22 -
Other 1,369 1452 864
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Segmented assets 5,377 18,309 8,267
Corporate assets 7,281 7,701 8,247
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Total identifiable assets $12,658 $26,010 $16,514
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8. Subsequent Events
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
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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 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 ("SMIL" 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.
SMIL hosts the Wealth Information Network ("WIN"), an Internet web site 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 August 1997, the Company was assigned all interests and rights in 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 ("Interjet
Net"), a wireless, high speed Internet access provider, for a total purchase
price of $1,500,000. In 1999, the Company sold approximately 635,831 shares of
common stock in Interjet Net and used the proceeds to fund recent stock
acquisitions and pay various
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operational expenses. The aggregate proceeds from the sale of the Interjet Net
stock was $3,177,992.57.
In January 1998, the Company acquired Quantum Marketing, Inc. ("Quantum"), a
corporation that provides local marketing of SMIL 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 which 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.
Also 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 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 August 1998, the Company acquired a fifty percent (50%) interest in Standard
American Oil Company ("Standard") for a total purchase price of $750,000.
Standard is engaged in the business of developing and marketing asphalt patching
products. In December 1999, the Company determined this venture to be
unprofitable and decided to write off its investment. In addition, during 1998,
the Company made minority investments in two oil wells. The Company discovered
that one of these wells was contaminated with a mineral called benidite and
would be unlikely to become operational, if at all, without significant capital
expenditures. Consequently in 1999, the Company decided to write off its
investment in the contaminated oil well.
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 SMIL, executed agreements to
invest in three private companies. The investments are as follows: 80,000 shares
of E-automate, Inc. common stock at $240,000 acquired through a private
placement; 450,000 shares of Surfbuzz.com, Inc. common stock at $450,000
acquired through a private placement; and 75,000 shares of Ceristar, Inc. common
stock at $150,000 acquired through a private placement. In December 1999, the
Company paid $40,000 to E-automate and $150,000 to Ceristar for common stock,
the remaining balance due for the above stock purchases was not funded until
January 2000 and is therefore reflected in the financial statements for the
quarter ended March 31, 2000. In January 2000, the Company purchased an
additional 100,000 shares of Surfbuzz.com common stock and 50,000 shares of
Ceristar, Inc. common stock for an additional $100,000 respectively. E-automate
is a software manufacturer that integrates small business operations.
Surfbuzz.com is a world wide web search engine access tool. Ceristar is a
company engaged in integrating telecommunications systems. This Investment is
accounted for using the Cost Method.
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
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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 March 31, 2000, the Company had current assets and current liabilities
in the amounts of $10.3 million and $12.7 million, respectively, resulting in a
working capital deficit of $2.4 million. The working capital deficit at December
31, 1999 was $2.8 million. The primary reason for the reduction in the capital
deficit in the first quarter was management's efforts to pay down the Company's
accounts payable. Current liabilities at March 31, 2000 include $655,000 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, but intends to apply its
income tax refund receivable of $1.2 million toward federal income taxes
accruing during the first quarter of 2000.
At March 31, 2000, the Company had payables to related parties in the
amount $2.3 million, which primarily represents royalties owed to Mr. Wade B.
Cook.
The market value of the Company's marketable securities increased by
$900,000 from $1.9 million at December 31, 1999 to $2.8 million at March 31,
2000, due primarily to up-trends in the securities market, active monitoring of
the Company's trading accounts, and the experience of the Company's Trading
Department. Inventory increased by $400,000 from $2.6 million at December 31,
1999 to $3 million at March 31, 2000 primarily as a result of returns on
merchandise purchased during the holiday season, the development of new product,
and stocking of existing product in anticipation of future sales. At March 31,
2000 the Company also had current receivables from related parties in the amount
of $238,000 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. Cash in the amount of
($296,000) was used in operations for the three months ended March 31, 2000, as
compared to ($349,000) as of March 31, 1999. The decrease in the Company's use
of cash in operations is primarily attributable to the management's recent
implementation of cost controls, restructuring of the Seminar segment, and the
more efficient use of existing Company resources.
Cash in the amount of $75,000 was used toward debt repayment for the three
months ended March 31, 2000, compared with $859,000 for the same period of 1999.
The debt repaid in 2000 was primarily attributable to the repayment of a loan on
property held through Bountiful Investment Group, a wholly owned subsidiary of
the Company. The decrease in Company's debt obligations during the first quarter
of 2000, as compared to 1999, is primarily attributable to the sale of the
Company's heavily encumbered hotel interests.
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 March 31, 2000, due to the purchase of common stock in
private companies, namely, Surfbuzz.com., Inc., E-automate, Inc., and Ceristar,
Inc.
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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 1,981
Private companies -- Various industries 1,914
-------------------
Total non-marketable investments $5,187
===================
Although the Company did not acquire any new businesses in the first
quarter of 2000, it did make investments in several private companies (see
discussion of Surfbuzz.com, Inc., E-automate, Inc., and Ceristar, Inc. contained
under the section captioned "General "). The Company has tried to focused on its
core and currently owned businesses, the repayment of debt and making additional
expenditures to fund existing operations, including advertising. Cash flow from
operations, which has historically been the Company's principal source of cash
for working capital, has increased in recent periods principally due to
management's recent implementation of cost controls, restructuring of the
Company's Seminar segment, and the more efficient use of existing Company
resources. However, cash flow remains insufficient to meet all of the Company's
operational needs.
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 in a timely manner. However, as of March 31, 2000, the Company
had approximately $5.9 million in accounts payable, a decrease of $1.6 million
from the $7.5 million in accounts payable due in the first quarter of 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 is 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 several pending proceedings and investigations or 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 and have been higher in
recent periods.* Adverse publicity resulting from these matters may be
negatively affecting the Company's business, and further adverse publicity could
have further negative effects.* If the Company were found to be liable in
certain of these proceedings, the liability could be material. In addition, if
government agencies establish violations of certain consumer protection or other
laws, the Company may be required to pay material penalties or to refund money
paid to the Company by seminar attendees within the jurisdictions
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involved 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.*
Results of Operations
Three Months Ended March 31, 2000 Compared with the Three Months Ended March 31,
1999
Revenue. Revenue from continuing operations was $19.4 million for the
quarter ended March 31, 2000, compared with $27.2 million as of March 31, 1999.
The decrease of $7.8 is primarily attributable to lower sales in the Company's
Seminar, Product Sales, Hotel and Other segments. During the first quarter of
2000, the sales of Seminar segment decreased by $2.7 million from $18.3 million
in the first quarter of 1999 to $15.6 million in 2000. This decrease was a
result of the restructuring of the Seminar segment which resulted in a reduction
in the over-all number of seminars presented, negative press coverage, and to
some extent the saturation of the Company's services in certain markets.
Revenues from product sales decreased by $5.3 million from $7 million in the
first quarter of 1999 to $2.7 million during the quarter ended March 31, 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, the high volume of holiday returns, the
presentation of fewer events in the Seminar segment where the Company's products
are marketed and sold, and negative press coverage.
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 quarter in 2000. Revenue in the pager segment decreased by $270,000 from
$608,000 in the quarter ended March 31, 1999 to $338,000 for the comparable
period of 2000. The decrease in pager revenue resulted primarily from the
presentation of fewer events in the Seminar segment were the Pager segment
principally markets it products, lower renewal rates by existing customers, and
reduced demand for one-way paging technology.
Revenue from the Company's travel segment increased by $133,000 from
$552,000 during the quarter ended March 31, 1999 to $685,000 for the comparable
period of 2000. The increase is attributable to increased sales of travel agent
training kits, and more active marketing of the Travel segment's services. The
Other segment, consisting primarily of the Company's real estate development
operations, retail sales locations, and advertising agency, decreased by
$683,000 from $1.5 million in the quarter ended March 31, 1999 to $772,000
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 sales locations.
Cost of Revenue. Cost of revenue decreased by $5.7 million from $12.1
million in the quarter ended March 31, 1999 to $6.4 million as of March 31,
2000. This decrease in cost of revenue is primarily due to the management's
recent 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
$2.3 million from $7.5 million for the quarter ended March 31, 1999 to $5.2
million for the comparable quarter in 2000 primarily due to the implementation
of cost controls by management, restructuring of the Company's Seminar segment,
the more efficient use of existing Company resources, and a lower volume of
sales in the Seminar segment. Cost of Product Sales decreased by $2.4 from $3.8
million in the quarter ended March 31, 1999 to $1.4 million for the comparable
period of 2000 primarily due to the implementation of cost controls by
management, reduced sales in the Products Sales segment, and more efficient use
of existing Company resources.
The Company discontinued the operation of its Hotel segment as of December
31, 1999 and as a result did not incur any cost in that Segment during the first
quarter of 2000. The cost of revenue for the Pager services segment increased by
$45,000 from $64,000 for the quarter ended March 31, 1999 to $109,000 for the
quarter ended March 31, 2000 due to repairs made on existing pagers and
equipment, and the development of new pager technology. The cost of revenue for
Travel Service segment remained
12
<PAGE>
constant between the quarter ended March 31, 1999 and the quarter ended March
31, 2000. The Other segment cost of revenue decreased by $552,000 from $989,00
at March 31, 1999 to $467,000 for the quarter ended March 31, 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 Advertising Expenses. Selling, general and
administrative costs for the quarter ended March 31, 2000 were $12.6 million
compared with $15.1 million in the comparable period in 1999. The decrease of
$2.5 million in such costs is primarily attributable to the implementation of
cost controls by management, salary reductions, job eliminations, reductions in
some legal expenses, and more efficient use of existing Company resources.
Operating Income. The Company had a gain of $303,000 in net operating
income from $26,000 for the quarter ended March 31, 1999 compared to $329,000
for the quarter ended March 31, 2000. The increase in operating income resulted
principally from operating income provided by the Seminar, Pager, and Travel
segments combined with the elimination of the Hotel segment at December 31,
1999, the restructuring in the Other segment, and a reduction in certain
advertising expenses accounted for as inter-company sales.
Operating income in the seminar segment decreased by $517,000 from income
of $927,000 for the quarter ended March 31, 1999 to $410,000 for the quarter
ended March 31, 2000. Much of this decrease was attributable to new product
development and lower attendance and sales at the Company's events. Operating
income attributable to the Product Sales segment decreased and the segment had a
loss of ($160,000) in operations compared with operating income of $395,000 for
the quarter ended March 31, 1999. The decrease is primarily the result of the
write-off of time sensitive inventory, the development of new products, and the
presentation of fewer events in the Company's Seminar segment which resulted in
fewer product sales.
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 that Segment
during the first quarter of 2000. Operating income in the Pager segment
decreased by $371,000 from $477,000 in the quarter ended March 31, 1999 to
$106,000 for the quarter ended March 31, 2000 primarily due to reduced demand
for the Pager segment's one-way paging, lower renewal rates by existing
customers, and increased expenses for the development of new pager technology.
In addition, operating income in the Travel Services segment decreased by $7,000
from $73,000 for the quarter ended March 31, 1999 to $66,000 for the quarter
ended March 31, 2000. Other segment exhibited an operating loss of ($11,000) for
the quarter ended 31, 2000 as compared to a loss ($184,000) for the quarter
ended March 31, 1999. The reduction in the amount of loss exhibited in the Other
segment is primarily due to restructuring which resulted in the elimination of
six retail sales locations.
Other Income (Expenses). Total other income was $363,000 for the quarter
ended March 31, 2000, compared with $1.2 million for a comparable period in
1999. During the quarter ended March 31, 2000, the Company experienced a
realized and unrealized gain on the trading of securities in the amount of
$217,000 compared with a gain of $416,000 in a comparable period of 1999. 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.
Income before income taxes for the quarter ended March 31, 2000 was
$792,000, compared with $1.3 million for the comparable period in 1999. It is
anticipated that this gain will result in income tax expense of $269,000 for the
quarter ended March 31, 2000. Income taxes are based on the applicable
prevailing statutory rates. However, the Company intends to off-set the
anticipated $269,000 tax expense with its accrued federal income tax refund
receivable of $1.2 remaining from the end of the fiscal year 1999.
13
<PAGE>
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 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 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:
Vendor suits. As of December 31, 1999, three vendors had taken legal action
against the Company with respect to allegedly delinquent payments for services.
Collectively, the dollar amount sought by these vendors was $412,000.00. During
the first and second quarters of the year 2000, the Company settled these vendor
actions without trial.
Stuart E. Mac Gregor, II vs. Wade B. Cook, Wade Cook Seminars, Inc., Information
Quest, Inc. and Wade Cook Financial Corporation. On September 21, 1999, Mr.
Stuart Mac Gregor filed suit in the Superior Court of Washington for King County
against Mr. Cook and the Company. Mr. Mac Gregor seeks approximately $54,000 in
actual and consequential damages, and also requests exemplary damages in the
matter. On February 28, 2000, the Company was granted a protective order
limiting the scope of Mr. Mac Gregor's discovery requests. The Company filed a
Complaint denying that it has engaged in any unlawful practices and intends to
defend itself in this matter.* The Company has negotiated a confidential
settlement in this matter.
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.
None.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q, period ending March 31, 2000 to be
signed on its behalf by the undersigned duly authorized.
WADE COOK FINANCIAL CORPORATION
May 4, 2000 /s/ Wade B. Cook
------------------------------------
Wade B. Cook, Chief Executive Officer
May 4, 2000 /s/ Cynthia Britten
------------------------------------
Cynthia C. Britten, Chief Financial
Officer, Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 841
<SECURITIES> 2,847
<RECEIVABLES> 1,276
<ALLOWANCES> 0
<INVENTORY> 2,984
<CURRENT-ASSETS> 10,338
<PP&E> 11,658
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,011
<CURRENT-LIABILITIES> 12,689
<BONDS> 3,355
0
0
<COMMON> 64
<OTHER-SE> 16,764
<TOTAL-LIABILITY-AND-EQUITY> 34,011
<SALES> 19,363
<TOTAL-REVENUES> 19,363
<CGS> 6,436
<TOTAL-COSTS> 6,436
<OTHER-EXPENSES> 12,598
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<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 793
<INCOME-TAX> 269
<INCOME-CONTINUING> 526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 526
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