-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V2Q3ceeNI4Nuyjgc9/94eUGphISiRbQvEOnEeGouRNmnNSDHvcvPRkyiN4rl5C+M ixxLMuxstA3QWAr6phkq2g== 0000912282-00-000115.txt : 20000331 0000912282-00-000115.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912282-00-000115 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WADE COOK FINANCIAL CORP CENTRAL INDEX KEY: 0000894417 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 911772094 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-29342 FILM NUMBER: 588115 BUSINESS ADDRESS: STREET 1: 14675 INTERURBAN AVE S CITY: SEATTLE STATE: WA ZIP: 98168 BUSINESS PHONE: 2069013000 MAIL ADDRESS: STREET 1: 14675 INTERURBAN AVENUE SOUTH CITY: SEATTLE STATE: WA ZIP: 98168-4664 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number: 000-29342 WADE COOK FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEVADA 91-1772094 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification number) 14675 Interurban Avenue South Seattle, Washington, 98168 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 901-3000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] N [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Aggregate market value of the Registrant's Common Stock held by non-affiliates as of February 29 was approximately $8,914,721.20. The number of shares of the Registrant's Common Shares outstanding as of December 31, 1999 was 63,761,448. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference to Part III of this Form 10-K: (1) Proxy Statement to be filed for registrant's 1999 Annual Meeting of Stockholders. TABLE OF CONTENTS Item 1. Business ............................................................1 Item 2. Properties .........................................................15 Item 3. Legal Proceedings ..................................................15 Item 4. Submission of Matters to a Vote of Security Holders ................17 Item 5. Market for Registrant's Common Equity And Related Stockholder Matters ...............................................18 Item 6. Selected Financial Data ............................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...............................19 Item 8. Financial Statements and Supplementary Data ........................28 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...............................28 Item 10. Directors and Executive Officers of the Registrant .................29 Item 11. Executive Compensation Summary of Cash and Certain Other Compensation .......................................33 Item 12. Security Ownership Of Certain Beneficial Owners And Management ...................................................36 Item 13. Certain Relationships and Related Transactions .....................36 Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K ..............................................37 Note Regarding Forward Looking Information This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, using words and phrases such as "expects," "believe," "believes," "plan" "plans," "anticipate," "anticipates," "is anticipated," or stating that certain actions, events or results "will," "may," "should," or "can" be taken, occur or be achieved) are not statements of historical fact and may be "forward-looking statements." Forward-looking statements are based on expectations, estimates and projections of the Company's management at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those anticipated by the Company. Such risks and uncertainties include, but are not limited to, the Company's working capital deficiency and liquidity constraints, the effect that volatility in the stock market may have on the interest of customers in the Company's seminars, products and services and on the Company's own investments, the Company's ability to manage its growth and to integrate recent acquisitions, fluctuations in the commercial real estate market, risks of the hotel business and failure of recently acquired hotel properties to perform as expected, the influence on the management of the Company by Wade B. Cook, the Company's CEO, the possibility of adverse outcomes in pending or threatened litigation and regulatory investigations and actions involving the Company, consequences associated with the Company's policy of committing available cash to additional investments, lack of liquidity in the Company's investments and other risks and uncertainties discussed herein and those detailed in the Company's other Securities and Exchange Commission filings. Investors are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis, estimates and opinions as of the date hereof. The Company undertakes no obligation to update forward-looking statements if circumstances, or management's analysis, estimates or opinions should change. For the convenience of the reader, the Company has attempted to identify forward-looking statements contained in this report with an asterisk (*). However, the omission of an asterisk should not be presumed to mean that a statement is not a forward-looking statement within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Item 1. Business Overview Wade Cook Financial Corporation (formerly known as Profit Financial Corp.) is a Nevada holding company. Unless the context otherwise requires, the terms "WCFC" and "the Company" refer to Wade Cook Financial Corporation and its consolidated subsidiaries. The Company's principal executive offices are located at 14675 Interurban Avenue South, Seattle, Washington 98168-4664, and its telephone number at that address is (206) 901-3000. Prior to December 1997, the Company was incorporated in the state of Utah. The Company's most significant subsidiary is Stock Market Institute of Learning, Inc. ("SMIL"), formerly known as Wade Cook Seminars, Inc., through which the Company conducts educational seminars, produces and sells video and audio tapes and distributes books and other written materials focusing on financial and personal wealth creation strategies. In addition, the Company has several publishing subsidiaries that publish books and other written materials relating to personal finance, inspirational themes and other topics. The Company also provides subscription based Internet access and paging services and maintains an information network on the Internet. The Company's investments include ownership of minority interests in hotels, marketable securities, real estate, oil and gas, and other venture capital partnerships and private companies. Acquisition of Stock Market Institute of Learning, Inc. In 1995, the Company acquired all the issued and outstanding capital stock of SMIL (then known as United Support Association, Inc.), a corporation controlled by Wade B. Cook and in exchange transferred to Mr. Cook a controlling interest in the Company. The transaction was accounted for as a reverse merger acquisition. As a result of the reverse merger, the Company became SMIL's parent and the historical financial results of SMIL became the historical financial results of the Company. Other Acquisitions. 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 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. 1 During 1998, the Company acquired majority interests in several hotel properties located in the western United States in exchange for cash, and in some cases, in exchange for relinquishing or reducing certain interests in other properties. See "Business - Hotels and Commercial Real Estate." Reference is made to Notes Q, R and S of the Notes to Financial Statements included in Item 14 of this report for further information concerning the above acquisitions. In 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. 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 has 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 is contaminated with a mineral called benidite and is unlikely 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. Sale of Entity Planners, Inc. 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. EPI was subsequently sold to the Anderson Law Group, P.C. ("ALG"). In June of 1999, the five year 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. 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 not reflected in the 1999 financial statements. 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. Strategy The Company provides financial education and stock market strategies to the growing number of individual investors in the U.S. According to the United States Federal Reserve, the value of household corporate equity holdings has increased from $903 billion in 1980 to $4.78 trillion in 1996. Furthermore, in 1999 the Federal Reserve Board estimated that 28% of household wealth in the United States was in the form of 2 stock investments, a figure up 12% from 1990. The Company believes this is due to population increases within the United States, the fact that the "baby-boom" generation is entering mid-life, the prolonged growth of the U.S. economy during the 1990s, and the recent growth in the market value of corporate securities. The Company has attempted to position itself to benefit from these trends. The majority of the Company's programs, products and services are based on the financial and trading strategies of its founder, Wade B. Cook. Mr. Cook has developed these programs and products based on his belief that people want to learn how to: (a) increase their wealth by increasing their cash flow; (b) minimize their federal and state income taxes; (c) use entities, such as Nevada corporations, family limited partnerships, living trusts, qualified pensions, and charitable remainder trusts, to protect their assets; (d) retire with sufficient income to maintain a comfortable standard of living; and (e) pass on their accumulated wealth to their loved ones without the complexities of probate. The Company will seek to expand market share for its existing products and services and to create new products and services that complement and extend existing lines.* The Company expects to improve its bottom line by reducing overhead, restructuring its subsidiaries for maximum efficiency, employing more focused marketing and advertising efforts, using existing distribution channels and enhancing customer service.* In order to accomplish these objectives, the Company has initiated a strategic plan consisting of the following elements: o Making strategic acquisitions, divestitures, and alliances in order to extend product lines that complement the Company's core business of financial education; o Developing new products and services; o Acquiring licenses for additional books, audio tapes, seminars, video tapes and other intellectual property from Mr. Cook and others in order to expand the scope of financial education available to customers of the Company; o Maximizing Company resources by hosting Company seminars at fewer locations which have larger populations; o Diversifying the authors and seminar leaders promoted by the Company in order to offer students a choice of investment strategies, styles and philosophies; and o Making more efficient use of administrative resources.* The Company intends primarily to concentrate on improving services offered through its core business of financial education.* The Company believes that the addition of Information Quest, Inc., a wholly owned subsidiary of the Company that provides pager services, has and will continue to enhance the Company's opportunities for growth and complement the Company's core business of financial education in the upcoming year.* In 1997 and 1998, with the view to diversifying its asset base, the Company acquired interests in several hotel properties in the western United States. During May and December of 1999, the Company sold four of these hotel properties in an effort to refocus the Company with respect to its core area of competency in the financial education market. Currently, the Company is assessing its options with respect to the minority interest it holds in Hampton/Fairfield Inns, Woods Cross Fairfield Inn, and Park City Hampton Inn & Suites. Business Segments and Principal Subsidiaries The Company's core business is financial education, which it conducts through its seminar and publishing segments. This core business is complemented by a pager service that provides up-to-date financial information and a subscription-based web site, the Wealth Information Network ("WIN"), that provides additional information about the strategies taught in the Company's seminars and publications. 3 The following table shows, for the years ended 1999, 1998 and 1997, the percentage of revenues derived from each business segment in which the Company operates: Business Segment 1999 1998 1997 ---------------- ---- ---- ---- Seminars 70% 65% 65% Product Sales (1) 14% 18% 31% Travel Services 3% 5% 4%- Hotels (2) 5% 3% - Pager Services (2) 6% 8% - Other (2) (3) 2% 1% - - --------------- (1) Includes WIN (2) Represents revenues of a business segment of the Company acquired in 1998. (3) Consists principally of sales from retail bookstores The Company's principal subsidiaries are engaged in the following activities: o Financial education seminars; o Publishing; o Retail; o Commercial real estate; o Various non-real estate investments; and o Support services; and o Multi-speaker Education Conventions At December 31, 1999, the Company's wholly-owned subsidiaries were: State of Corporate Name (1) Principal Business Incorporation - -------------- ------------------ ------------- Stock Market Institute of Learning, Inc. Financial Education Seminars Nevada Lighthouse Publishing Group, Inc. Publishing Nevada Left Coast Advertising, Inc. Support Services/Advertising Nevada Bountiful Investment Group, Inc. Commercial Real Estate Nevada Ideal Travel Concepts, Inc. Support Services (Travel Agency) Nevada Origin Book Sales, Inc. Publishing/Distribution Utah Worldwide Publishers, Inc. Publishing Utah Gold Leaf Press, Inc. Publishing Nevada Get Ahead Bookstores, Inc.(3) Retail (bookstores) Nevada Semper Financial, Inc. (2) Multi-speaker Education Conventions Nevada Information Quest, Inc. Retail (pagers) Nevada American Newsletter Co., Inc. (2) Publishing Nevada Unlimited Potential, Inc. (2) Commercial Real Estate Nevada Hotel Associates Management #1, Inc. (2) Commercial Real Estate Nevada American Publisher's Network, Inc. (2) Publishing Nevada Forward Thinking Group, Inc. (2) Retail Sales Nevada Money Works, Inc. (2) Support Services Nevada Entity Planners International, Inc. (2) Commercial Real Estate Nevada Wade Cook Financial Education Center, Inc. Retail (education centers) Nevada Winvest Centers, Inc. (2) Retail Sales Nevada Wade Cook Financial Education Network (2) Publishing Nevada Quantum Marketing, Inc. Support Services Nevada
- -------------------------- (1) Information in the table does not include entities in which the Company owns a partial interest. These entities are: (a) Airport Lodging Associates, L.L.C., a limited liability company in which WCSI is a 25% member; (b) Evergreen Lodging L.P., a limited partnership in which WCSI owns a 65% limited partnership interest and in which an affiliate Wade B. Cook is General Partner; (c) FSS L.P., a limited partnership in which Unlimited Potential, Inc. has a 2% interest and is the General Partner; 4 (d) Interurban Land Project L.P., a limited partnership in which Entity Planners International, Inc. has 100% interest and is General Partner; (e) Reno F.I.S., L.P., a limited partnership in which Unlimited Potential Inc. has a 2% limited partnership interest and is the General Partner, and in which Hotel Associate Management #1, Inc. is a 50% owner and a limited partner; (f) Rising Tide L.P., a limited partnership, in which Entity Planners International, Inc. has a 1% interest and is the General Partner and in which Bountiful Investment Group, Inc. has a 99% limited partnership interest; (g) Seattle-Tacoma Executive Properties, L.P., a limited partnership in which Entity Planners International, Inc. owns a 100% interest and is the General Partner; and (h) Sherlock Home Builders, L.P., a limited partnership in which Entity Planners International, Inc. own a 100% interest and is the General Partner and which owns the building that serves as the Company's principal office. (2) No financial activity in 1999, although activities were carried out in the names of certain of these corporations by SMIL or other WCFC entities. (3) Entities that were liquidated in the forth quarter of 1999, and whose operations were consolidated into the operations of SMIL. Financial Education Seminar Businesses Stock Market Institute of Learning, Inc. Stock Market Institute of Learning, Inc. ("SMIL") creates, designs, produces, owns, markets and sponsors a variety of seminars, clinics, and workshops focused on educating customers on various financial techniques and strategies. SMIL also produces and sells audio tapes and video tapes and distributes books and other materials designed to reinforce and complement the ideas taught in the educational seminars. By December of 1999, SMIL had conducted 2,700 seminars throughout the United States. In October of 1999 in order to streamline its seminar business, the Company made the decision to reduce the number of locations where it offers seminar services. Currently, the Company visits only the 25 most populous cities within the United States. The subject matter of the Company's seminars generally falls into three basic categories: o stock market trading strategies; o real estate trading strategies; and o general trading strategies. The stock market trading strategy seminars include the following: o The Financial Clinic is a two-and-one half hour seminar explaining the financial education products and services offered by SMIL and which provides an introduction to strategies for investing in the stock market, including strategies regarding rolling stock, covered calls, and options. The typical attendance fee for the seminar ranges from $12 to $33. o The Wall Street Workshop ("WSWS") is a two-day seminar which teaches students how to create income using specific stock market strategies such as the strategies set forth in Mr. Wade B. Cook's books, "Wall Street Money Machine" and "Stock Market Miracles." WSWS students are taught basic stock market terminology and stock market strategies. The workshop features instruction, demonstration of strategies and extensive practice through "paper trades." The cost of this seminar ranges up $5,695 depending on the seminar options chosen by the attendee. o Youth Wall Street is a version of the Wall Street Workshop for teenagers focusing on teaching teens how the financial markets work, and how they can experience the market themselves through making trades on paper. Admission to Youth Wall Street is offered free to high school business clubs and similar groups as a community service by the Company. Attendance is free for children 18 years old and under who are accompanied by a paying adult. Otherwise, the typical attendance fee for this seminar is $1,695. o Fortify Your Income ("FYI") is a five to six hour seminar. FYI allows students to review the strategies taught at the Wall Street Workshop from different angles. FYI is offered as a free 5 refresher course to graduates of WSWS and Wealth U. If not taken as a refresher course, the retail price for this seminar is $1,995. o The Next Step is a two day seminar for participants who have attended the WSWS. The Next Step presents advanced stock market strategies in a forum that allows students to actively participate, focusing on technicals, charting patterns, and presentation of advanced strategies. The attendance fee is $2,495 for WSWS graduates and $695 for Wealth U graduates (formerly "Cook University") respectively. The Company maintains several brokerage accounts that is uses during its seminars to demonstrate the various financial strategies offered. These trades are posted on the Company's subscription internet service, the Wealth Information Network, along with a brief description of the strategy used and the reason for making the trade. Although the Company uses its best efforts to make profitable trades in these brokerage accounts, the primary purpose of the trades is educational. The real estate investment strategy seminars include the following: o Building Perpetual Income is a three-hour workshop which summarizes cash-flow strategies related to the real estate market. The workshop introduces Real Estate Bootcamp which is typically offered free of charge to allow prospective customers to become familiar with the SMIL's real estate strategies. o Real Estate Bootcamp is a two and one-half day event which provides a detailed analysis of the strategies outlined in Mr. Cook's book "Real Estate Money Machine." The class often takes field trips to various local sites in an effort to familiarize students with the types of real estate available on the market. The typical attendance fee for this seminar ranges from $3,495 to $4,495. o The Real Estate One Day Workshop is an event which teaches students the general strategies outlined in Mr. Cook's book "Real Estate Money Machine." Students are taught strategies for identifying real estate investments and methods of turning real estate into cash-flow system. The Real Estate One Day Workshop costs between $995 and $1,495 depending on the availability of discounts at the time of payment. The Company offers general investment strategies in a series of individual one-day seminars termed "Support Events." Each individual event retails at $1,695, and if sold in a package of six events is offered for $10,170. o The One Minute Commute ("OMC") is a one day event teaching strategies for investing from home. o Supercharge Otherwise Average Returns ("SOAR") is a one day event that teaches strategies for writing covered calls. o The Day Trader ("DT") is a one day event offered to teach day trading strategies. o High Impact Trading ("HIT") is a one day event that teaches the psychology of the stock market. o Full Credit Spreads ("FCS") is a one day event that teaches strategies for using stock spreads to increase wealth. o Stock Splits Secrets ("SSS") is a one day event that teaches strategies for capitalizing on stock splits. 6 o Stock Market Safety Net ("SMSN") is a one day event that covers strategies for safely netting gains on trades in the market. o Spread `n Butter ("SB") is a one day event that provides students with in-depth coverage of the strategies available for using stock market spreads, and explains why covering your option trades can limit your losses. This course generally retails for $2,495. The Company intends to introduce the following Support Events in the year 2000*: o Write Up Your Income ("WUYI") will be a one day event teaching methods for writing covered calls, puts, and spreads. o Trading as a Business ("TAB") will be a one day seminar demonstrating how investing accounts may be set up, and how such accounts can be used as a business. As an adjunct to its more theory based events, the Company offers two events that provide students with a interactive style of learning. These events are called "Bootcamps" and allow students to implement strategies taught by the Company using practice trades. The Bootcamps retail for $5,995 and are as follows: o Forge is a two day Bootcamp designed to analyze trading habits in class, and help identify and redirect methodologies that may be ineffective. o Strategic Charting Bootcamp ("SCB") is a two day event that focuses on interpreting stock charts. The Company sometimes engages in promotions that permit students to attend seminars and other events without charge or at a reduced rate. The Company also packages all of the above seminars in multi-day seminar packages under the title "Wealth U" (formerly "Cook University"). The attendance fee for Wealth U ranges from $2,345 - $10,345 depending on nature and content of the seminar package purchased. Seminar Leaders. As of February 29, 2000, there were approximately 50 independent contractors providing professional speaking services for SMIL. SMIL has an extensive speaker training program that provides speakers with techniques to enhance the value of services provided to the Company's students. Typically speaker candidates are drawn from the ranks of SMIL students. The most promising candidates tour with more experienced speakers to learn by observation and then, if successful, gradually take on responsibilities as "second speakers." In addition, experienced speaker trainers conduct two-day, monthly workshops to allow speakers to continue to hone their skills. In order to protect SMIL's intellectual property, contracts between SMIL and speakers generally contain non-compete clauses. Products marketed by SMIL. SMIL's seminars and programs are supplemented by audio tapes, video cassettes, books and other printed materials that are licensed to SMIL. These materials provide students with reinforcement of the concepts, strategies and philosophies that are taught in the Company's seminars. The books promoted and marketed by SMIL include best-selling books written by Wade Cook such as "The Wall Street Money Machine," "Stock Market Miracles," "Bear Market Baloney," "Business Buy the Bible" and "Safety First Investing." SMIL also distributes a wide range of books and publications written by Mr. Cook on a variety of trading and business topics. The books are primarily distributed through sales at the seminars, product catalogues, and third party bookstores. The audio tapes promoted and sold by SMIL and authored by Wade B. Cook include the multi-media audio-tape seminars "Financial Fortress Home Study" and "Zero to Zillions." In addition, SMIL sells single tapes that generally address the ideas and concepts taught in its seminars. Mr. Cook is the primary speaker in each of these tapes. From time to time, SMIL distributes free "update tapes" as a tool to support 7 its students' continuing education, markets new SMIL products and maintains a strong connection with the SMIL customer base. The videotapes promoted and sold by SMIL include the multi-tape video versions of SMIL's Wall Street Workshop, The Next Step, Red Light/Green Light, and Spread `n Butter, as well as single-tape videos on a variety of investment topics. Sales and Marketing. SMIL creates interest and demand for its programs, products and services through a mix of radio and television advertising, direct mail, trade shows, Internet marketing, flyers, sports promotion, billboard advertising, and sponsorship of charitable organizations. SMIL's sales force includes approximately 100 representatives who respond to customer inquiries via phone, e-mail, Internet web-site, and facsimile. Furthermore, the sales force is trained to follow-up with existing clients and to promote new products and services, providing service from 6:00 a.m. to 9:00 p.m. Pacific Time. SMIL sales representatives generally receive between 1,000 and 4,000 calls a day. o Radio advertising is one of SMIL's primary means of promoting its seminars. In September of 1999, the Company began to target its radio advertising to the 25 most populous cities where it holds seminars. Radio spots are frequently supplemented by radio infomercials which typically promote a financial seminar being held in the local market and provide a toll-free telephone number. Radio advertising is often used in coordination with direct mail marketing efforts in order to maximize sales efforts and name recognition within the target population. o Television. The Company uses limited local television advertising to attract interest in its services, and to create name awareness. The Company anticipates increasing its use of local television advertising in the year 2000, but currently has no specific plans to do so.* The Company also anticipates advertising using national media by placing spots on popular financial information/news channels.* o Direct mail marketing is used by SMIL to market the full complement of its products, programs and services to its customer list of over 940,038 individuals. These marketing campaigns are developed by SMIL's centralized Marketing Department. SMIL continues to direct mail market to its existing customer base spread throughout the United States, but has narrowed direct mail marketing efforts with respect to new customers by targeting only the 25 most populous cities where the Company's seminars are held. o Trade shows have recently been used by SMIL to market services. Typically, SMIL participates in trade shows held at convention centers, fairgrounds, and sports arenas where it rents space from the trade show sponsors. During 1999, the Company participated in 6 trade shows within the United States. o Internet marketing was important aspect of SMIL's marketing program in 1999, with a focus on its Internet web site at http://wadecook.com. The site contains information about the SMIL's programs, products and services, some of which potential customers may purchase online. In addition, subscribers to the Company's Wealth Information Network may access WIN through the web site. In the future, the SMIL intends to expand the list of items available for purchase on its web site.* o Sport promotion. SMIL reduced its use of marketing through sports promotion in 1999. However, the Company did maintain limited sponsorship programs, including sponsorship of the Seattle Mariners, and the Joe Morgan Celebrity Golf Tournament in Sacramento California. Through the use of sports promotion, SMIL has tried to gain visibility, as well as the opportunity to promote services with giveaways of books, audiotapes and other promotional materials. 8 o Flyers and Billboard Advertising is used by SMIL to market its financial seminars. Typically, flyers are placed in community centers and other public places a few weeks prior to the date of the seminar. The Company's billboard advertising is primarily focused in the Seattle and Tacoma, Washington markets. The Company does not anticipate that it will use these types of advertising in the future.* o Sponsorship of Charitable Organizations. In 1999, the Company sponsored the Boys and Girls Club. Through the use of sponsorship activities, SMIL has strengthened name recognition in the local community, and has been able to promote its services with giveaways of books, audiotapes and other promotional materials. In addition to the foregoing, the Company believes that a significant amount of its seminar business is attributable to "word of mouth" advertising by its seminar students. Semper Financial Corporation Semper Financial, Inc. ("SFI"). In January 1999, the Company launched SFI, a wholly owned subsidiary, that creates, designs, produces, and sponsors a variety of seminars, clinics, and workshops focused on educating customers on various financial techniques and strategies. SFI offers multi-day, regional financial education conventions to SMIL students and others interested in trading. The multi-day conventions feature a condensed cross-section of SMIL's seminar speakers and topics allowing prospective students to experience a variety of SMIL's products and seminars in a short time. In 1999, SFI held 10 events throughout the United States. Money Works, Inc. Money Works, Inc., a wholly owned subsidiary, was incorporated to present seminars that cater to beginners in the financial market. Moneywork's events act as primers to the Wallstreet Workshop, helping students to build a foundation on which to learn about the Company's stock market strategies. Students will be encouraged to take these events before tackling the more advanced materials presented at SMIL's seminars. Moneyworks also will be marketing the "Simutrade" software developed by Dave Hebert.* Publishing Businesses The WCFC publishing subsidiaries focus their activities in the following areas: business, finance, self-improvement, religious and spiritual and general interest non-fiction. Lighthouse Publishing Group, Inc. Lighthouse is engaged in the business of producing and publishing books, and to a limited extent, audio and video tapes. Publications by Lighthouse generally concern topics such as business, finance, real estate and self improvement. Many of the current books published by Lighthouse are authored by Mr. Cook and have appeared on various best seller lists. Lighthouse carries additional authors including John J. Childers, Jr., Dave Hebert, John Huddleston, Bob Eldridge and Renee Knapp. Lighthouse intends to retain more authors and to expand into new categories of interest in 2000.* 9 Worldwide Publishers, Inc. Worldwide is engaged in the publishing business under the identifying publishing insignias Aspen Books and Buckeroo Books. Aspen Books publishes religious books or books with spiritual emphasis targeted primarily to members of regional religious communities. Buckeroo Books publishes primarily childrens' books. Origin Book Sales, Inc. Origin is a book distribution company that sells books on consignment and sells books, audio cassettes, art, and software in the retail market. Origin primarily distributes products for Worldwide and is the exclusive distributor of Worldwide's products. Origin is also the distributor of Lighthouse Publishing Group, Inc. Gold Leaf Press, Inc. Gold Leaf publishes non-fiction books in the inspirational, self-help and parenting categories, as well as some fiction. Information Services Wealth Information Network ("WIN") The Company operates WIN, a subscription based online service which can be accessed via the internet 24 hours a day. WIN provides detailed information illustrating trading techniques taught by the Company, its subsidiaries and by Mr. Cook personally as discussed in "Wall Street Money Machine" and "Stock Market Miracles." WIN also provides stock information and updates on the Company's programs and products, including a schedule of events and seminars provided by SMIL. Information Quest, Inc. IQ operates a subscription based paging service that uses standard pagers to distribute up-to-the minute stock quotes and other financial information to customers. The paging services are marketed solely to students of SMIL as an additional tool for their investing activities. In addition, IQ offers subscriptions to an authorized Internet service provider called "IQ Connect." In the year 2000, IQ anticipates improving its existing pager services by capitalizing on new interactive technology that will provide customers with greater personal options.* Retail Locations Wade Cook Financial Education Centers, Inc. ("WCFEC") In 1999, the Company, through WCFEC, operated educational centers that housed the WINvest Centers (online resource centers used by SMIL students), Get Ahead Bookstores (see below) and sales facilities for the sale of SMIL products. Get Ahead Bookstores, Inc. ("Get Ahead"). In 1999, Get Ahead Bookstores, Inc. operated three retail bookstores housed within the Wade Cook Financial Education Centers at Seattle, Tacoma and Santa Anna. In late 1999, Get Ahead's operations were consolidated into SMIL. 10 Hotels and Commercial Real Estate Hotels: The following table lists the hotel properties held in WCFC entities as of December 31, 1999: Property Rooms Location Manager % owned - -------- ----- -------- ------- ------- Hampton Inn/Fairfield Inn 126 Murray, UT Western States Lodging 12% Woods Cross Fairfield Inn 80 Woods Cross, UT Western States Lodging 7% Park City Hampton Inn & Suites 81 Park City, UT Western States Lodging 4%
In addition to the ownership of the hotel properties, WCFC entities also hold, for investment purposes, the following parcel of real estate: A 65% interest in a limited partnership that owns an undeveloped lot at 7200 South in Salt Lake City, Utah. Commercial Real Estate: Also WCFC, through several of its limited partnerships, holds the following parcels of real property for the development of residential housing: o Sherlock Homes LP owns 100% of two undeveloped residential lots located at Snoqualmie Ridge in Issaquah, Washington. o Seattle-Tacoma Executive Properties LP ("STEP") has entered into a contract to purchase two undeveloped residential lots located at Snoqualmie Ridge in Issaquah, Washington. STEP has deposited monies in escrow to secure the properties; however, escrow closing is subject to final approval by the seller. Support Services Ideal Travel Concepts, Inc. Ideal provides travel related services including domestic and international airline reservations, car rental reservations, tour packages, and cruises. Although the Company is Ideal's primary client, Ideal holds contracts with over 18,000 independent travel agents which have access to Ideal's travel related services. In addition to travel services, Ideal markets and sells travel agent training packages for individuals wishing to become independent travel agents. Ideal is currently working to benefit from the growth in the volume of business travel booked on-line. Ideal plans on adding state of the art internet technology to attract internet based business and leisure travel, and on attracting top management in the travel market.* Left Coast Advertising, Inc. Left Coast is engaged in the business of producing and placing advertising spots using various media; including, radio, television, newspapers and magazines. Left Coast was formed to allow WCFC to take advantage of the agency commission on media purchases. Left Coast is a fully licensed advertising agency whose only client is the Company and the Company's subsidiaries. Left Coast intends to attract clients other than the Company during 2000, but has not yet done so.* Competition The financial educational seminar industry is highly competitive. The market in which the Company operates is fragmented and decentralized with low barriers to entry. The Company's competitors include other companies and individuals who promote and conduct seminars and provide products on topics relating to investments, financial planning and personal wealth management. Some of the Company's competitors in the 11 financial educational seminar market include Robbins Research International, Online Investor Advantage, and various former speakers of the Company. There can be no assurance that the Company will be able to compete successfully against current or future competitors or alliances of such competitors, or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. Intellectual Property The Company regards its seminars, products, trademarks, servicemarks, trade symbols and other materials as proprietary and relies primarily on a combination of statutory and common law protections, such as copyrights, trademarks and trade secrets to protect its interests in such proprietary materials. While many of the product and trade names are common terms and do not afford the Company maximum copyright and trademark protection, the Company has taken several steps to maximize the copyright and trademark protection available to it. For example, the Company trains its marketing staff to consistently use all the applicable trademark symbols. Additionally, the Company adopts an aggressive litigation stance in protecting its intellectual property rights where warranted. The Company also relies on employee and third-party non-competition and non-disclosure agreements and other methods of protecting proprietary rights in order to safeguard the Company's intellectual property. The Company has an Open Ended Product Agreement with Wade B. Cook which expires June 30, 2002. Pursuant to the original terms of the agreement, the Company had a non-exclusive license with Mr. Cook to produce, market and sell licensed products and intellectual property in exchange for payment of a royalty to Mr. Cook equal to ten percent (10%) of gross sales of the licensed products. On May 7, 1999, and effective January 1, 1999, the Company and Wade B. Cook amended of the Open Ended Product Agreement. The Amendment modifies the royalties payable to Mr. Cook under the agreement from ten percent (10%) of the gross sales on all licensed products to a yearly royalty of $5,000,000 or 5% of gross sales, whichever is greater. Furthermore, under the terms of the Amendment, Mr. Cook may take draws in anticipation of future royalties up to a maximum of $1,250,000 per quarter. On March 15, 2000, Mr. Cook's Open-Ended Product agreement was further amended. The Amendment modifies the royalties payable to Mr. Cook under the Agreement to a yearly royalty of $5,000,000 or 5% of gross sales, whichever is lesser. Pursuant to this Amendment, the royalty calculation for 1999 is retroactively adjusted. The license, as amended, continues to grant the Company the right to use Mr. Cook's name, likeness, identity, trademarks and trade symbols. The agreement is open-ended in that it allows for future products developed by Mr. Cook to be licensed under the same terms and conditions upon the execution of a "License Order." Royalties are paid to Mr. Cook on a quarterly basis under the terms of the agreement. In the case of draws made by Mr. Cook against his royalties, the royalties owing are reconciled with the draws taken on a quarterly basis. The Company does not have a contract giving it either the first right to license or otherwise obtain the right to produce, market or sell any future products developed by Mr. Cook. Employees As of January 18, 2000, the Company had 316 employees, including 251 full-time employees, 65 part-time employees, and approximately 50 independent contractors. None of the Company's employees are represented by a labor union, and the Company believes its employee relations to be good. Risk Factors Corporate Control By Wade B. Cook Wade B. Cook is the founder, majority stockholder, Chairman of the Board, Chief Executive Officer and President of the Company. Laura Cook, Mr. Cook's wife, is the Secretary of the Company, a consultant to the Company's executive management, and is also a member of the Board of Directors. 12 Several of Mr. Cook's relatives work at the Company. Mr. Cook maintains control over many aspects of the Company including, but not limited to, setting corporate policy, determining strategic direction, determining the acquisition or sale of assets by the Company, setting the material terms of acquisitions and determining the material provisions of many of the Company contracts. Mr. Cook provides input on every product and seminar sponsored by the Company. Mr. Cook also directs most marketing efforts of the Company and has a substantial influence on the management of the Company. Mr. Cook will continue to have a significant influence over the policies and procedures of the Company and will be in a position to determine the outcome of corporate actions requiring stockholder approval, including the election of Directors, the adoption of amendments to the Company's corporate documents, the approval of mergers and the sale of the Company assets. Dependence on Wade B. Cook The Company's business is highly dependent on the continuing effective involvement of Mr. Cook. Mr. Cook personally directs most aspects of the Company's business. The Company has a non-exclusive license which expires June 30, 2002 to use Mr. Cook's products, intellectual property, name, image, identity, trademarks and trade symbols which are featured prominently in many of the Company's services and products. Mr. Cook is not prohibited from competing with the Company or granting licenses to competitors. See "Business - Intellectual Property." The business of the Company would be materially adversely affected if Mr. Cook's services were not available to the Company, or if Mr. Cook should compete with the Company or grant licenses or other assistance to competitors. Working Capital Deficiency, Liquidity Constraints At December 31, 1999, the Company had current assets of $10.2 million and current liabilities of $13 million, resulting in a working capital deficit of $2.8 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company's principal source of cash has been from its education seminars and its sale of books, tapes and other materials focused on business strategies, financial planning and personal wealth management. Income provided by operations decreased from $3.6 million in 1998 to ($7.3) million in 1999. This decrease is attributable to decreases in the Company's revenue, and higher than anticipated costs in the first three quarters of 1999. The Company's practice of using available cash to fund its subsidiaries, 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, and to some degree have had an effect on the Company's ability to pay certain obligations as they have come due. The Company has cash commitments in 2000, including $1.4 million primarily reflecting mortgage obligations on the Company's corporate headquarters, and lease obligations of several of the Company's wholly owned subsidiaries. Cash flow from operations was not sufficient to satisfy the Company's cash requirements in the fourth quarter of 1999. In response, the Company reduced overhead and restructured its seminars segment; however, there is no assurance that these measures will sufficiently ease cash-flow constraints and assist the Company in satisfying its cash requirements. If the Company is required to generate cash from its non-marketable investments to satisfy its current obligations, it may not be able to liquidate investments in a timely manner or in a manner that allows it to receive the full value of the investments. Failure to generate adequate cash resources could require the Company to cut back operations, delay expansion or development projects, or cause the Company to be unable to meet its obligations when due. Legal Proceedings and Governmental Investigations The Company is a party to various legal proceedings and governmental investigations. See Part I, Item 3 of this report. Although the Company does not presently expect material liability in any of these matters, the outcome of such matters is difficult to predict and subject to uncertainty, and the legal fees and other 13 costs involved are likely to be material. If the Company were found liable in certain of these legal proceedings, the amount of liability could be material.* In addition, if the Company were to be found to have violated certain consumer protection statutes or other laws, the Company could be required to pay material penalties or to refund money paid by seminar attendees within the jurisdictions involved. The Company could also be required to cease doing business in certain jurisdictions or to significantly change the manner in which its business is conducted in such jurisdictions. Any such result could have a material adverse effect on the Company's financial condition and results of operations. Jurisdictions in which litigation or investigations relating to the Company's business practices are in progress include California Washington, and Texas which accounted for 18%, 4%, and 8%, respectively of the Company's seminar sales in 1999. In case the Company were required to cease doing business in a particular state, the Company anticipates it would target markets in those states where it remains authorized to conduct business.* Risks of Hotel Business During 1997 and 1998, the Company began acquiring interests in hotel properties, and it currently owns minority interests in 3 hotels. See "Business - Hotels and Commercial Real Estate." The Company has no prior experience in owning or managing hotels. The Company's hotel segment has not performed as well as the Company anticipated, and it has suffered losses. There can be no assurance that the hotels will become profitable in the future. Effect of Securities Market Conditions on the Company's Business The Company believes that the level of public interest in investing, particularly in the securities markets as well as electronic trading has significantly influenced the market for its products and services. The securities markets have experienced substantial volatility in recent periods. A sharp drop or sustained or gradual decline in securities prices or other developments in the securities markets could cause individual investors to be less inclined to invest in the securities markets, which would be likely to result in reduced interest in the Company's seminars and related products and services. Declines in the securities markets could also adversely affect the value of the Company's investment portfolio. Management of Growth and Integration of Acquisitions In 1999, the Company's business declined in terms of revenue, number of employees and scope of activities in which it engages. During 1997, the Company acquired all interests and rights in Worldwide, Origin, Gold Leaf and Ideal, and during 1998, the Company acquired all rights and interests in Get Ahead (retail bookstores), Quantum (local sales and marketing offices) and IQ (distribution of paging devices that distributed stock market data). The Company currently has minority interests in four hotels. Additionally, the Company has invested in private companies in the oil and gas business and other businesses, some of which require continuing attention from the Company's management. Some of the acquired businesses and investments have not performed as well as expected by the Company. In the past, such growth has placed significant strains on the Company's management, accounting, financial and other resources and systems, and on its cash resources and working capital. Failure to manage successfully the growth in size and scope of the Company's business and to successfully integrate and manage the Company's recently acquired businesses could have a material adverse effect on the Company's results of operations and financial condition. Tax Deficiencies Current liabilities at December 31, 1999 include $225,000 in taxes payable, which stem from delinquent payments on 1998 federal taxes, including penalties and interest. However, the Company posted losses in 1999 of which it intends to offset against such current tax liabilities.* Additionally, the Company's audited financial reports indicate a total loss resulting a income tax refund receivable of 1.2 million and deferred tax asset of $456,000 for the year ended 1999. The Company intends to recover some if not all of the $1.2 million income tax refund receivable for taxes paid in 1997 and 1998 taxes.* The Company has not yet 14 made estimated tax payments for 1999; however, because the Company posted a loss for the year ended 1999, it does not anticipate that any federal tax liabilities will accrue.* Item 2. - Properties The Company owns and occupies a 63,000 square foot building in Seattle, Washington which houses its corporate headquarters. The building is subject to a $3,000,000 first mortgage, secured by the building and surrounding property. The first mortgage, taken out in December 1999, bears an 8.375% interest rate, and is amortized over a period of 15 years. The average monthly payments on the first mortgage equal $29,332.78. In addition, subsidiaries of the Company occupy the following commercial properties: o SMIL leases 32,776 square feet in Algona, Washington for its shipping and warehouse operations. The lease expires December 31, 2003. o SMIL also leases warehouse property in Tukwila, Washington which it currently subleases to a third party. The lease expires on April 30, 2000. o Origin leases 24,048 square feet of office and warehouse space located in Salt Lake City, Utah. The lease expires on September 30, 2004. o Wade Cook Financial Education Centers, Inc. leases approximately 10,000 square feet of office space in Gig Harbor, Washington. The lease expires on July 7, 2001. o Wade Cook Financial Education Center, Inc. leases 2,107 square feet of office space located in Federal Way, WA. The lease expires in February of 2002. o Wade Cook Financial Education Center, Inc. leases 3,400 square feet of office space located in Lynnwood, WA. The lease expires in July of 2002. o Wade Cook Financial Education Center, Inc. leases 2,400 square feet of office space located in Olympia, WA. The lease expires in February of 2004. o Wade Cook Financial Education Center, Inc. leases 4,000 square feet of office space located in Kent, WA. The lease expires in September of 2000. o Quantum Marketing, Inc. owns an office building in Santa Anna, California. The building and surrounding land are subject to a first mortgage in the amount of $560,000. The refinancing was complete in June 1999 and is due and payable five years following such date. Under the terms of the financing agreement, the Company is obligated to make monthly principal payments of $7,093.84 in addition to the payment of interest calculated at the current market rate. o Ideal leases a total of 8,000 square feet of office space located in Memphis, Tennessee. The lease is set to expire on February 22, 2002. In addition to the foregoing, the Company, through various subsidiaries and other entities, also holds minority interests in certain other hotel properties and raw and undeveloped land. See "Business - Hotels and Commercial Real Estate." Item 3. Legal Proceedings The following is a description of previously unreported material threatened or pending legal proceedings and updated information regarding previously reported material threatened or pending legal proceedings to 15 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: Investigation by the State of Washington, Securities Division. Since September 1996, the Washington State Department of Financial Institutions, Securities Division has been investigating Mr. Cook, SMIL, and the Company. The Company has been informed that the investigation is being performed pursuant to RCW 21.20.370 and 21.20.700. On July 2, 1999, the Superior Court for the State of Washington in King County granted the State of Washington its petition to enforce a subpoena ordering the Company to produce its list of certain Washington State customers. The subpoena was issued subject to a Protective Order granted in favor of the Company by the same court on July 10, 1999. The Protective Order limits the manner in which the Securities Division can contact customers of the Company. On September 7, 1999, the Company brought suit against Deborah Bortner and Rex Staples, solely in their official capacities as employees of the Department of Financial Institutions, Securities Division, of the State of Washington, for declaratory and injunctive relief. The Company's complaint asks that the Court find that the Company does not qualify as an "Investment Advisor" under RCW 21.200.5(6) and thus is not subject to the Securities Division's jurisdiction. In the alternative, if the Court finds that the Company is an "Investment Advisor" under RCW 21.200.005(6), said complaint asks the court to rule that the provisions of RCW 21.20 et seq. violate the Company's federal and state constitutional rights of free speech, and freedom of publication. On December 17, 1999, in response to the Company's complaint the Superior Court of the State of Washington in and for King County issued an oral ruling denying a motion for summary judgment filed by the State of Washington and advising the Department of Financial Institutions that it had until March 1, 2000 to file an action or cease its investigation. As of March 1, 2000, no action has been filed by the State and the parties are in negotiations to resolve the matter. Although no civil or criminal charges have been brought and the Company does not believe that it or its officers or directors have violated applicable laws, no assurance can be given that enforcement proceedings will not be brought against the Company, or its officers or directors, or as to the outcome of any investigations by the Washington State Attorney General.* 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. The complaint alleges that Mr. Cook and the Company committed negligent misrepresentation, fraud, and conspiracy to commit fraud in selling products and services to Mr. Mac Gregor. 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 not yet determined the impact on its financial statements and has not made provisions for losses, if any. Vendor suits. During the fourth quarter of 1999, two of the three vendors who had previously commenced suit against the Company settled without trial. At the end of the year, two additional vendors had taken legal action against the Company with respect to allegedly delinquent payments for services. Collectively, the dollar amount sought by these vendors is $412,000.00. The Company is currently assessing its options in these matters. Himmelman and Love vs. Wade Cook Seminars, Inc., et al. On February 26, 1999, two former employees of Wade Cook Seminars, Inc. filed a complaint with the Pierce County Superior Court of the state of Washington alleging sexual harassment, retaliatory discharge and defamation. Although no specific damages are alleged, the plaintiffs request lost income, pain and suffering, emotional distress, court costs, reasonable attorney fees, and punitive damages. On May 4, 1999, the Company submitted a response to the Plaintiff's complaint denying all claims thereunder and presenting affirmative defenses. Trial originally scheduled for March 2000, has been rescheduled for August 8, 2000. The Company has responded to Plaintiff's discovery requests, and will be filing a motion for summary judgement on several of the issues involved. The Company believes that it has not engaged in any unlawful practices and intends to defend itself in this matter.* The Company has not yet made an estimate of potential exposure or determined the impact on its financial statements and has not made provisions for losses, if any. 16 Stock Market Institute of Learning, Inc. v. Preston Christiansen, Panorama Capital, Inc., and Bull by the Horns. On January 20, 2000, the Company filed in United States District Court for the Western District of Washington against the defendants named above. The Company filed on the grounds that the defendants breached non-compete and confidentiality agreements with the Company, breached fiduciary duties owed to the Company, tortiously interfered with the business relations, violated the Uniform Trade Secrets Act ("UTSA"), and committed copyright infringement with respect to the Company's proprietary materials. The Company seeks a minimum of $150,000 in damages, an injunction against competition, attorney fees, and double damages for violations under the UTSA. The Company intends to vigorously defend its rights in this matter. Stock Market Institute of Learning, Inc. v. Commissioner of Internal Revenue Service. On January 13, 2000, SMIL filed a petition of appeal with the United States Tax Court with respect to a "Notice of Deficiency" issued on October 21, 1999. The Company's petition challenges the Commissioner's disallowance of various business deductions taken in the 1996 and 1997 fiscal years. The Commissioner assessed the Company deficiencies in the amount of $4,191.00 and $464,073.00 for 1996 and 1997 respectively. The Company has not paid the disputed deficiencies, and as a result penalties and interest may attach if the Company is unsuccessful in its efforts. The Company intends to defend itself vigorously in this matter. Wade Cook Financial Corporation and Stock Market Institute of Learning, Inc. v. Kim Brydson et al. In December 1999, the Company filed a complaint against the defendants in the United States District Court for the Western District of Washington. The Company alleges that the defendants committed copyright infringement with respect to its seminar contracts, materials and products; committed trade dress infringement with respect to the Company's methods of operations, violated 15 U.S.C section 1125 (the "Lanham Act") by using false designations of origin or misleading statements of fact, breached employee non-compete and confidentiality agreements, breached fiduciary duties, tortiously interfered with contractual relations between the Company and third parties, and violated the Uniform Trade Secrets Act. The Company seeks a minimum $250,000 in actual damages, and an injunction against unlawful competition and infringement upon the Company's intellectual property rights. In the alternative, the Company seeks actual damages equal to 50% of all profits earned by the defendants, plus prejudgment interest, attorney fees, and costs. The Company intends to vigorously defend its rights in this matter. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable 17 PART II Item 5. Market for Registrant's Common Equity And Related Stockholder Matters Price Range of Common Shares The Company's Common Stock has been traded on the over-the-counter Bulletin Board under the ticker symbol "WADE" since August 11, 1997. Prior to that time, the Company's Common Stock was quoted under the stock symbol "PFNL" in the over-the counter-market. The following table sets forth, for the periods indicated, the high and low bid quotations for the Company's Common Stock on the relevant markets. The quotations reflect inter-dealer prices which may include retail markups, markdowns or commissions and may not reflect actual transactions. OTC Bulletin Board --------------------------- --------------- -------------- High Low --------------- -------------- 1998 First Quarter.......................... 4.19 2.53 Second Quarter........................... 2.81 0.97 Third Quarter............................ 1.66 0.72 Fourth Quarter........................... 1.06 0.37 1999 First Quarter............................ 0.82 0.31 Second Quarter........................... 0.51 0.32 Third Quarter............................ 0.50 0.20 Fourth Quarter........................... 0.29 0.18 - ----------------- As of February 11, 2000, the Company had approximately 10,290 shareholders of record (including nominees and brokers holding street accounts. As of March 24, the last sale price for the Company's Common Stock on the OTC Bulletin Board was $0.41 per share. The Company has never paid cash dividends on its Common Stock and does not anticipate that it will pay dividends in the foreseeable future. The Company intends to continue to retain any earnings to expand and develop its business. Recent Sales of Unregistered Securities None Item 6. Selected Financial Data. The following selected consolidated financial data of the Company is qualified in its entirety by reference to and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this report. The consolidated statements of operations data for the years ended December 31, 1999 and 1998 and the consolidated balance sheet data at December 31, 1999 and 1998 are derived from and are qualified by reference to the Company's audited consolidated financial statements which were audited by Miller and Co. The consolidated financial data from prior years is unaudited. 18 1999 1998 1997 1996 1995 ------------- -------------- -------------- ------------- ------------- (in thousands, except per share data) Statement of Operations Data: Net sales $ 84,128 $ 118,207 $ 93,343 $ 37,008 $ 6,504 Cost of sales $ 40,517 $ 56,763 $ 39,492 $ 14,460 $ 2,877 ------------- -------------- -------------- ------------- ------------- Gross profit $ 43,611 $ 61,444 $ 53,851 $ 22,548 $ 3,627 Operating expenses $ 50,869 $ 57,890 $ 39,309 $ 18,178 $ 3,333 ------------- -------------- -------------- ------------- ------------- Income (loss) from operations $ (7,258) $ 3,554 $ 14,542 $ 4,370 $ 294 Other income (expenses) $ 602 $ 1,656 $ (706) $ (74) $ (55) ------------- -------------- -------------- ------------- ------------- Income (loss) from continuing operations $ (6,656) $ 5,210 $ 13,836 $ 4,296 $ 239 ------------- -------------- -------------- ------------- ------------- Income (loss) from Continuing Operations Data (1,2) Income (loss) before income taxes, minority interest, and acquired operations as reported $ (6,656) $ 5,210 $ 13,836 $ 4,296 $ 239 Provision (benefit) for income taxes $ (2,853) $ 2,346 $ 5,579 $ 1,452 $ 171 Minority interest in loss of $ 55 $ 127 $ 21 $ - $ - subsidiary ------------- -------------- -------------- ------------- ------------- Net income (loss) $ (3,748) $ 2,991 $ 8,278 $ 2,844 $ 68 ============= ============== ============== ============= ============= 1999 1998 1997 1996 1995 ------------- ------------- ------------- ------------- ------------- (in thousands, except per share data) Per Share Data: Income (loss) from continuing $ (0.06) $ 0.05 $ 0.13 $ 0.05 - operations per share Weighted average shares outstanding 63,870 63,888 63,363 59,610 57,585 Consolidated Balance Sheet Data: Total assets $ 33,605 $ 58,698 $ 41,404 $ 16,938 $ 2,283 Total debt, including current portion 17,220 39,011 24,649 12,618 1,458 ------------- ------------- ------------- -------------- ------------- Shareholders' equity $ 16,383 $ 19,687 $ 16,755 $ 4,320 $ 825 ============= ============= ============= ============== =============
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. General The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes and trends related to the financial condition of the Company and the results of its operations. This discussion and analysis should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto included elsewhere in this Form 10-K. 19 Overview WCFC is a holding company that, through its wholly owned subsidiaries SMIL and Semper Financial Inc., conducts educational business seminars, produces and sells video and audio tapes, and distributes books and other written materials focusing on trading strategies and personal wealth creation. The Company's core business is financial education, through its seminar and publishing concerns. These core businesses are complemented by bookstores that focus on financial education, a pager service that provides stock quotes and other financial information, a subscription-based web site that provides stock market information and that illustrates the strategies taught in the Company's seminars and publications and a travel-related service provider. During 1997, the Company acquired Ideal, which provides travel agent services to the Company and markets services to travel agents. Also during 1997, the Company expanded its publishing activities by acquiring three small publishing and book distribution businesses, Worldwide, Gold Leaf and Origin, that publish and market in areas outside of the Company's traditional focus of financial education. In January 1998, the Company acquired interests of employees of the Company in businesses created to market materials and services associated with the Company's financial education business - IQ, Get Ahead and Quantum. During the quarter ended September 30, 1998, the Company disposed of the business of Entity Planners, Inc. ("EPI"), its entity formation business. The buyer paid $250,000 to the Company for the stock of EPI, and agreed to pay up to $17.5 million to the Company in royalty payments based on future sales of the business under a Licensing Agreement. The Company accounts for EPI as a discontinued business operation. In June of 1999, the Licensing Agreement was mutually terminated by all 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 with EPI under the terms of the temporary arrangement. In addition to pursuing its core businesses, the Company has made a variety of investments in real estate, hotels, oil and gas projects and other venture capital limited partnerships and private companies and in marketable securities. In 1997, the Company formed Bountiful Investment Group ("BIG") to manage its real estate and hotel investments, and embarked on a strategy of acquiring larger stakes in hotel projects. See Part I, Item 1, "Business - Hotels and Commercial Real Estate." During 1998, the Company acquired Best Western McCarran House in Sparks, Nevada and the Four Points by Sheraton Inn in St. George, Utah and increased its 25% interest in the Airport Ramada Suites in Salt Lake City, Utah to a 75% interest. The financial results of each of these properties is consolidated in the Company's financial statements from the date the majority ownership was acquired. 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 $12,700,00, $9,890,000 of which represented debt assumption by the buyer of the hotels. In 1999, the Company experienced a decline revenues, substantial general and administrative expenses, and the continuing obligation to fund investments in hotel and other projects outside its traditional business. These factors have reduced profits in recent periods. During 1999, the Company experienced a sharp decrease in revenues due to lower than anticipated sales in its seminar and product segments, the repayment of Company debt, and the continued financing of the Company's investments and prior acquisitions. The Company cannot predict the effect that world economic conditions or stock market volatility will have on the interest of investors in the seminars and other products and services of SMIL or its other subsidiaries, or on their revenue or profits. There can be no assurance that the Company will be profitable in the future. 20 The following tables set forth the net sales, cost of sales and operating income of the continuing operations of each of the business segments for the years ended December 31, 1999, 1998, and 1997: (in thousands) 1999 1998 1997 -------- --------- -------- Net Revenue Seminars $59,242 $ 78,191 $60,759 Product Sales 12,955 24,355 29,386 Hotels 3,778 3,336 - Pager Service 5,395 8,427 - Travel Service 5,730 5,874 3,198 Other 5,360 8,576 4,302 Less: inter-company sales (8,332) (10,552) (4,302) -------- --------- -------- Totals $84,128 $118,207 $93,343 Costs of Revenue Seminars $28,544 $ 35,842 $19,319 Product Sales 6,708 16,011 17,210 Hotels 4,141 4,265 - Pager Service 578 525 - Travel Service 49 8 2,963 Other 497 112 - -------- --------- -------- Totals $40,517 $ 56,763 $39,492 Operating (loss) Income Seminars $(4,479) $ 483 $10,907 Product Sales (1,442) 813 3,538 Hotels (363) (432) - Pager Service 847 2,494 - Travel Service (716) 508 97 Other 43 419 - Less: inter-company profit (1,148) (731) - -------- --------- -------- Totals $(7,258) $ 3,554 $14,542
Results of Operations Year ended December 31, 1999 compared with year ended December 31, 1998 Revenue. Revenue decreased by $34.1 million from $118.2 million in 1998 to $84.1 million in 1999. Revenue from seminars decreased by $19 million from $78.2 million in 1998 to $59.2 million in 1999. The decrease in seminar revenue was due to a number of factors including fewer seminar attendees in the fall and summer months, a restructuring of the Company's Seminars Department which had the effect of reducing the over-all number of seminars held in 1999, negative press coverage, and to some extent saturation of the Company's services in certain markets. The Company's restructuring resulted in the Company holding only 2,700 seminars in 1999 as compared to 3,737 such seminars held in 1998 (see Item 1. Business, Financial Education Seminar Businesses). The Seminars that the Company now holds are targeted at only those urban centers with large populations. It is anticipated that by holding fewer seminars in cities with larger populations, the Company will be able to cut the overall costs of its seminars and the related advertising, and hence improve profitability.* However, no assurances can be made that the Company's efforts will be successful or increase profitability. 21 Revenues from books and other product sales decreased by $11.4 million from $24.4 million in 1998 to $13 million in 1999 due primarily to lower attendance in the Company's seminars segment where its products are frequently marketed and sold, the Company's current restructuring efforts, negative press coverage, and to some extent saturation of the Company's products in certain markets. Revenues in the hotel segment increased by $500,000 from $3.3 million in 1998 to $3.8 million in 1999. The increased revenues in the hotel segment were principally attributable to the fact that the Company's hotels became fully operational in 1999, that the hotels' reservation systems were in place, and that the occupancy rate of the hotels increased. Revenues from the Pager segment decreased by 3 million from $8.4 million in 1998 to $5.4 million in 1999. The decrease in revenue from pagers was the result of a decrease in subscription renewals, and decrease in attendance at the Company's seminars segment where the Pager segment's products are principally marketed. Travel related services decreased by $200,000 from $5.9 million in 1998 to $5.7 million in 1999. The decrease in revenue from the travel segment was the principal result of decreased bookings in travel from clients other than the Company, the Company's restructuring efforts which reduced its over-all travel needs, and a reduction in the amount of travel agent training kits sold to the public. Other revenues (consisting principally of sales from Company bookstores, and real estate ventures) decreased by $3.2 million from $8.6 million in 1998 to $5.4 in 1999. The decrease in Other revenues was due to low sales in the Company's retail bookstores in the first half of 1999, and the liquidation and closing of such retail bookstore in the second half of 1999. Costs of Revenue. Costs of revenue decreased by $16.3 million from $56.8 million in 1998 to $40.5 million in 1999. Cost of conducting seminars, which consist largely of royalties, speaker fees, cost of meeting rooms and travel decreased by $7.3 from $35.8 million in 1998 to $28.5 million in 1999, due to an decrease in the number of seminars held. Royalty expenses to Mr. Cook related to continuing operations were $3 million in 1999 as compared to $7.8 million in 1998. The decrease of $4.8 million is attributable to lower sales of the Company's products and seminars. Cost of product sales decreased by $9.3 from $16 million in 1998 to $6.7 million in 1999, primarily attributable to a decrease in the number of seminars held where products are sold, and to inventory reductions. Cost of sales in the pager segment increased by $53,000 from $525,000 in 1998 to $578,000 in 1999. Cost of sales in the hotel segment decreased by $100,000 from $4.2 million in 1998 to $4.1 million in 1999. Travel service costs increased by $41,000 from $8,000 in 1998, to $49,000 in 1999, attributable to products newly developed toward the end of the fourth quarter. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $7 million from $57.9 million in 1998 to $50.9 million in 1999, principally due to reduction in employee overhead, reductions in the temporary employee payroll, and salary/benefits adjustments. Operating Income. Operating income decreased by $10.9 million from $3.6 million in 1998 to ($7.3) in 1999. The decrease was due principally to investment write-offs taken in the fourth quarter of 1999, increased cost of sales during the first three quarters of 1999, and a reduction in segment revenues. Other Income and Expense. Other income and expense consists principally of royalty income, securities trading, interest income and expense and losses on private Company investments. In 1998, other income amounted to $1.7 million compared to $602,000 in 1999. The principal reasons for the decrease were losses recognized on the sale of hotels; and the writing-off of two unprofitable investments, namely Standard American Oil Company, and one oil well. These losses partially offset gains of $3.7 million recognized on the sale of marketable securities. Income Taxes. The Company's financial statements reflect a provision for income taxes of $(2.9) million and $2.3 million for the years ended 1999 and 1998, respectively, reflecting a loss for the Company during 1999. The Company's effective tax rates have historically differed from the federal statutory rate primarily because of certain deferred revenues, unrealized gains and losses on trading securities, accelerated 22 depreciation and state taxes. As a result of the foregoing, net income from operations was a gain of $3.8 million, or $.06 per share in 1998, compared with loss ($3.7) million, or ($0.06) per share in 1999. Year ended December 31, 1998 compared with year ended December 31, 1997. Please refer to note P in of the Financial Statements when reading the comparison between the years ended December 31, 1998, and the year ended December 31, 1997. Revenue. Revenue increased from $93.3 million in 1997 to $118.2 million in 1998. Revenue from seminars increased from $60.8 million in 1997 to $78.2 million in 1998. The increase is due in part to the fact that SMIL changed its fiscal year in 1997 and 1997 results include only eleven months of SMIL's operations. The Company held 3,737 seminars in 1998 compared to 2,416 in 1997. However, revenue generated per seminar decreased from $25,150 per seminar in 1997 to $21,000 per seminar in 1998, due to a reduction in participants per seminar. Books and other product sales decreased by $5.1 million, from $29.4 million in 1997 to $24.3 million in 1998 due to the reduced demand for titles that were published in 1997 combined with the production of fewer new titles in 1998. In addition, product sales for 1997 included $1.4 million in commissions from the sale of pagers, whereas the pager business is accounted for as a separate segment in 1998 with revenue of $8.4 million after the Company acquired it in January 1998. Product sales also include WIN subscription revenues which decreased from $4.0 million in 1997 to $2.8 million in 1998, as more subscribers paid the renewal rate of $1,995 per year rather than the new subscriber rate of $2,995, and free WIN subscriptions were offered as promotions in connection with seminar sales. The results of operations of hotels were reported on a consolidated basis in 1998 for the first time, as the Company acquired majority interests, and resulted in 1998 revenues of $3.3 million. Travel related services decreased by $900,000 from $3.2 million in 1997 to $2.3 million in 1998. Other revenues (consisting of principally sales from Company bookstores) were $1.7 million in 1998, as the businesses generating these revenues were established or acquired in 1998. Costs of Revenue. Costs of revenue increased by $17.3 million, from 1997 to 1998. Cost of conducting seminars, which consist largely of royalties, speaker fees, cost of meeting rooms and travel increased from $19.3 million in 1997 to $35.8 million in 1998, due to an increase in the number of seminars held and increased logistics costs of staging seminars. Royalties to Mr. Cook related to continuing operations were $8.0 million in 1998 and $10.0 million in 1997. Mr. Cook agreed to a $2.0 million reduction in royalties for the quarter ended September 30, 1998. Cost of product sales decreased from $17.2 million in 1997 to $16 million in 1998, reflecting lower product sales. Cost of sales in the pager segment, consisting principally of pager service fees were $525,000. Cost of sales in the hotel businesses, consisting principally of payroll and supplies, were $4.3 million. Travel service costs decreased by $2.9 million in 1998, reflecting a change in the method of categorization used by the Company for present and future reporting. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $39.3 million in 1997 to $57.9 million in 1998, principally due to increases of approximately $6.0 million in advertising expense and approximately $6.0 million in employee compensation and benefits. The great majority of the increase was attributable to the seminar and product segments. Operating Income. Increases in selling, general and administrative expenses were principally in the seminar and product sales segments, resulting in 1998 operating income in these segments of $483,000 and $813,000, respectively, compared with $11.0 million and $3.5 million in 1997. Operating income from the pager and travel service segments increased from $97,000 in 1997 to over $3.0 million in 1998. Other Income and Expense. Other income and expense consist principally of royalty income, securities trading, interest income and expense and losses on private company investments. In 1998, other income amounted to $1.7 million compared to a loss of $706,000 in 1998. The principal reasons for the improvement were $1.6 million in royalties received from the business of EPI after its sale and a gain of 23 $837,000 on trading of securities compared with a loss of $806,000 in 1997, which were offset in part by an increase of $1.1 million in interest expense due to increased borrowings, principally to fund hotel acquisitions. Income Taxes. The provision for income taxes of $2.3 million and $5.6 million for the years ended 1998 and 1997, respectively, reflect taxes payable in respect of profitable operations. The Company's effective tax rates have historically differed from the federal statutory rate primarily because of certain deferred revenues, unrealized gains and losses on trading securities, accelerated depreciation and state taxes. As a result of the foregoing, income from continuing operations was $3.0 million, or $.05 per share in 1998, compared with $8.2 million, or $.13 per share, in 1997. Income from discontinued operations, including EPI's income prior to its sale and gain on the sale, was $763,000, or $0.01 per share, in 1998 compared with $714,000, or $0.01 per share, in 1997. Year ended December 31, 1997 compared with year ended December 31, 1996 Revenue. Revenue from continuing operations for the year ended December 31, 1997 were $93.3 million as compared to revenues of $37.0 million for the year ended December 31, 1996. Results for 1997 include the results of WCSI for only eleven months due to a change in WCSI's fiscal year end from January 31 to December 31. Revenues grew significantly due to several factors, including a substantial increase in marketing, and the fact that several books authored by Mr. Cook appeared on the New York Times Business Best Seller list, resulting in greater recognition for Mr. Cook in the investment education market. Seminar sales grew from $23.8 million in 1996 to $60.8 million in 1997. Book and product sales rose from $13.2 million in 1996 to $29.4 million in 1997. Businesses acquired in 1997 contributed $6.0 million to the increase in revenue. Costs of Revenue. Costs of revenue increased from $14.5 million to $39.5 million due primarily to a corresponding overall growth in revenues. The costs to conduct the seminars increased from $8.0 million in 1996 to $19.3 million in 1997. Costs of product sales grew from $6.4 million in 1996 to $17.2 million in 1997. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by over $21 million to $39.3 million in 1997 from $18.2 million in 1996. The increase was attributable to increases in compensation and benefits ($7 million in 1996 compared to $16 million in 1997), and advertising ($6 million in 1996 compared to over $16 million in 1997), reflecting the increased size and scope of the Company's business. Other Income and Expense. For the year ended December 31, 1997, the Company's net other income/expense was an expense of $706,000 as compared to $74,000 in 1996. The increase in expense was due to the costs associated with the purchase of the Company's headquarters building coupled with a net investment loss of over $800,000 in trading securities. The net investment loss can be attributed to the losses incurred in the brokerage accounts used by seminar instructors to make demonstration trades as well as a downturn in the stock and securities markets at the end of 1997. Operating Income. Operating income increased from $4.3 million in 1996 to $14.5 million in 1997, an increase of $10.2 million. The increase was due to the Company's achieving revenue growth, while maintaining high profit margins on both seminar and product sales revenues as well as taking advantage of the economies of scale in the distribution, travel, and publishing areas. The provision for income taxes of $5.6 million and $1.5 million for years 1997 and 1996, respectively reflect taxes payable in respect of profitable operations. The Company's effective tax rates differed from the federal statutory rate primarily because of certain deferred revenues, unrealized loss on trading securities, accelerated depreciation and state taxes. 24 As a result of the foregoing, income from continuing operations increased from $2.8 million, or $.05 per share, in 1996 to $8.3 million, or $.13 per share, in 1997. Income from discontinued operations was $714,000, or $.01 per share in 1997, compared with $221,000 in 1996. Liquidity and Capital Resources At December 31, 1999, the Company had current assets of $10.2 million and current liabilities of $13 million, resulting in a working capital deficit of $2.8 million. Current liabilities decreased $15 million from $28 million in 1998 to $13 million in 1999. The working capital deficit at December 31, 1999 was $15 million. The decrease in liabilities is primarily attributable to repayment of delinquent taxes and other obligations, and sale of four hotels which were heavily encumbered with debt. The Company's current assets decreased by $1.8 million from $12 million in 1998 to $10.2 million in 1999. The Company's current assets decreased due to the liquidation of some of its marketable securities, and residual decrease is due the sale of its equity interests in the four hotels. Current liabilities at December 31, 1999, include $2.4 million in deferred revenue, which results principally from payments received from persons who have signed up and paid in advance for future pager services, subscriptions to the WIN website or to attend seminars not yet held. Current liabilities at December 31, 1999 also include $108,000 in taxes payable. At December 31, 1999, the Company had payables to related parties of $1.9 million, which represent principally royalties owed to Mr. Cook. The market value of the Company's marketable securities decreased from $2.9 million at December 31, 1998 to $1.9 at December 31, 1999, due to the liquidation of some of the Company's equity interests, the proceeds of which were used to assist in funding operations. Inventory decreased from $3.7 million at December 31, 1998 to $2.6 million at December 31, 1999 due principally to the closing five retail locations run by Wade Cook Financial Education Centers, Inc., a wholly owned subsidiary, and the reliance on previously existing inventory held in several of the Company's subsidiaries. At December 31, 1999 the Company also had receivables from related parties of $3.1 million consisting principally of term loans to employees and directors, the majority of which are secured by mortgages on real property. The Company's principal source of cash in the past has been from the operation of its investment seminars and sales of tapes, books and other materials focused on business strategies and financial and personal wealth management. The Company does not have an established bank line of credit. The results of operations was (4) million in 1999. This decrease reflects losses incurred in operations. Cash generated from financing activities, principally borrowing, was $9.9 million in 1999, compared with ($6.5) million in 1998. A portion of the cash generated by financing activities resulted from the refinancing of the Company's headquarters in the principal amount of $3,000,000. The proceeds of the mortgage were used to pay down accrued federal income taxes of $2,932,315 owed to the Internal Revenue Service (the $2,932,315 figure reflects adjustment for closing costs). The remainder of cash generated by financing activities is attributable to a refinancing of property owned by the Company in Santa Anna, California, and the financing of properties in the Hotel segment. In addition to cash received from its own operations, the Company is entitled to receive payment under its temporary license agreement with Entity Planners Inc.("EPI") (See Item 1. Business, "Sale of Entity Planners, Inc." With the Sale of EPI and EPI's subsequent transfer to the Anderson Law Group, the Company entered into a temporary arrangement which provides for the payment of marketing fees in the amount of 35% of EPI's gross proceeds to be paid to the Company. 25 The Company's other investments (formerly captioned non-marketable investments) include the following: Investment Description of the Investment (in thousands) ----------------------------------------------------------------------- Oil and gas properties $691 Hotel and motel investments $601 Investments in undeveloped land $1,981 Private Companies- various industries $940 ------------- Total non-marketable investments $4,213 ------------- The Company continues to use cash to fund its interests in hotel properties and other businesses. Use of cash for these purposes has significantly exceeded cash generated by operations. Net cash used to fund these continuing investments was $13 million in 1999, compared with $(20.6) million in 1998. The decrease was due to the sale of several hotel properties, and the Company's decision to reduce spending on investments outside the Company's area of expertise in the seminar segment. Property and equipment decreased from $29.2 million at December 31, 1998 to $12.1 million at December 31, 1999, reflecting principally the sale of four hotel interests. Other investments decreased from $9.7 million at December 31, 1998 to $4.2 million at December 31, 1999, due principally to the writing-off of investments in Standard American Oil Company and an oil well, with the residual decrease reflecting the Company's reduced investment in hotels. The Company's practice of using available cash to fund subsidiaries, hotels and new non-marketable investments, its working capital deficit, and the fact that the Company's seminar segment has not generated cash as in the past have resulted in constraints on liquidity. The Company has not paid all accounts payable in a timely manner and several creditors have commenced or threatened litigation to obtain payment. The Company has a number of cash commitments and requirements in future periods, including its unpaid taxes and other current payables, and $12.9 million in current maturities of long-term debt at December 31, 1999. The Company regularly evaluates other acquisition and investment opportunities, and additional cash resources may be devoted to pursuing such opportunities. In the fourth quarter the Company, through its wholly owned subsidiary SMIL, invested in the stock of three 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 not reflected in the 1999 financial statements. 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. If the Company is required to generate cash for working capital purposes from its properties and Other investments, it may not be able to liquidate these assets in a timely manner, or in a manner that allows the Company to realize the full value of the assets. Failure to generate adequate cash resources for working capital could require the Company to cut back operations, delay or cancel expansion and development projects, dispose of properties, businesses or investments on unfavorable terms or cause the Company to be unable to meet obligations.* Management is aware of the significant reduction in the Company's revenues, continued working capital deficit, and the lack of profit from operations for the year ended 1999. Management recognizes that to the 26 outside investor these factors raise questions about the Company's ability to continue as a going concern. In response to such questions, management has initiated a number of steps to reduce costs, improve profitability and improve the Company's overall financial condition. The steps being taken to reduce costs, improve liquidity and profitability are listed below. Many of these steps were put into place during the fourth quarter of 1999: (1) Refocus the Company's efforts in its core business of conducting educational stock market seminars; including: (A) Selling the Company's majority interests in the Hotel segment. In selling the majority of the Company's hotels, Management recognized that large capital expenditures would be required over the next several years to maintain the hotels as viable investments and that the hotels themselves were unlikely to be profitable within the foreseeable future. In 1999, the Company realized a loss of approximately $4 million from the hotel operations and the sale of that investment. (B) Discontinuance of unprofitable ventures. In the fourth quarter, the Company ceased involvement in the asphalt repair business and discontinued its participation in an oil well found to be contaminated. Management determined that these ventures were currently unprofitable and were unlikely to be profitable any time in the future. Approximately 1.2 million of the Company's 1999 loss is attributed to these eliminations. (C) Streamling operations by holding fewer seminars. The Company initiated a plan to reduce the number of seminars it holds and has chosen to hold such seminars only in the 25 most populous U.S. cities. The expected effect of this restructuring is a more efficient allocation of Company resources and a reduction in the costs related to travel, speakers, meeting room space, and an improvement in gross profit per attendee.* (2) Reduction of costs and improvement in profitability, including: (A) Tailored marketing and advertising efforts in order to maximize advertising expenditures as well as management involvement in the demographics review and the effectiveness of advertising efforts. (B) Reduction in number of Company employees, re-evaluation of employee benefits, and the implementation of a benefits and expenditures review system by Management. (C) Implementation of a purchase order system and Company-wide budgets. (D) Implementation of a program wherein the Company's educational brokerage accounts are strictly monitored in order to assure that the Company's trading strategies are followed. As of December 31, 1999, the Company's educational trading accounts showed unrealized and realized gains of $3.7 million up from the average account balance of $2.9 million in 1999. The Company attributed much the increase in the educational brokerage accounts to the implementation of this program. (3) Improvement of liquidity situation through a reduction of current liabilities. Due to the steps listed below the working capital deficit for the year ended December 31, 1999 improved by over $15 million over the year ended December 31, 1998. (A) Management refinanced the corporate headquarters in December of 1999 in order to pay federal taxes due in 1997 and 1998. Due to the loss in 1999, the Company intends to apply for a tax credit and receive a return of taxes recently paid and use such refund to assist in the further reduction of current liabilities. (B) The Company negotiated payment plans with vendors to satisfy accrued but unpaid obligations. (C) The Company sold four of the hotels heavily encumbered with debt, and thus greatly reduced current liabilities and improved its liquidity situation. Management believes that the steps outlined above will improve the profitability, the overall financial condition of the Company; however, no assurances can be made that such steps will prove successful. 27 The Company is a party to various government investigations and legal proceedings. See Part I, Item 3, of this report. The legal fees and other costs involved may be material.* If the Company were found to be liable in certain of these proceedings, the liability could be material.* In addition, if government agencies charge the Company with violation of certain consumer protection or other laws and establish such violations, they could seek to require the Company to pay material penalties or to refund money paid to the Company by seminar attendees within their jurisdiction, and to cease doing business in the jurisdiction or significantly change the manner in which the Company's business is conducted. Any such result could materially adversely affect the Company's financial condition or results of operations. Year 2000 The Company did not experience any significant disruption to its computing systems or to its over-all operations at the commencement of the Year 2000, and does not presently anticipate that any problems will arise in connection with Year 2000 readiness in the future. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See Note M to the Company's audited financial statements included under Item 14 of this report, which is incorporated herein by this reference. The Company is exposed to changes in interest rates affecting the return on its notes receivable and investments. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in interest rates. The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investments and notes receivables. The Company has not used derivative financial instruments in its investment portfolio. The Company places their investment with enterprises with which it has majority control and thus limits the amount of credit exposure to any one issuer. The Company protects and preserves its invested funds by limiting default, market and reinvestment risk. Item 8. Financial Statements and Supplementary Data. Reference is made to the financial statements listed under the heading "(a)(1) Financial Statements" of Item 14 herein, which financial statements are incorporated herein by reference in response to this Item 8. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. 28 Part III Item 10. Directors and Executive Officers of the Registrant. The individuals referenced below include persons who served as Company's directors, executive officers and key employees during the year ended December 31, 1999 and/or up until February 28, 2000: Name Age Position - ---- --- -------- Robin Anderson 36 Assistant to the President Over Sales and Marketing, and Director Joel Black 45 Director Cynthia Britten 34 Chief Financial Officer, and Treasurer Laura M. Cook 47 Consultant to Executive Management, Secretary and Director Wade B. Cook 50 Chairman, Chief Executive Officer, and President Nick Dettman 55 Director Robert T. Hondel 56 Director of the Sales Department at SMIL and Director Janice Leysath 44 Director Deborah Losse 46 Assistant to the President Over Seminars and Product Development Angela Pirtle 38 Director Carl Sanders 56 Executive Assistant to the President Gene Stevens 56 Director Dan Wagner 39 Director and Independent Consultant Bruce Couch (1) 51 Vice President of Operations John Lang (2) 49 Director Greg Maxwell (3) 46 Director Richard Smith (4) 43 Chief Financial Officer - ---------------------------- (1) Mr. Couch left the Company in July of 1999. (2) Mr. Lang resigned from the Company's Board of Directors effective November 2, 1999. (3) Mr. Maxwell resigned from the Company's Board of Directors effective October 28, 1999. (4) Mr. Smith resigned as Chief Financial Officer effective November 1, 1999, but continues as an employee of the Company. Current Directors and Executive Officers Robin Anderson, 36, has been a Director since 1997 and is currently the Assistant to the President Over Sales and Marketing. Ms. Anderson serves at the pleasure of the Board of Directors in her capacity as an executive officer. Ms. Anderson's term as a director expires in 2000 at the annual meeting of the stockholders. Ms. Anderson has been with the Company since 1994 and is the niece of Robert Hondel. Prior to becoming Assistant to the President, Ms. Anderson occupied many other positions with the Company including the Director of SMIL's Sales Department. In December of 1997, the Bankruptcy court dismissed an action filed by Ms. Anderson under Chapter 13 of the United States Bankruptcy Code with all outstanding claims satisfied in full. Joel Black, 45, accepted appointed to the Company's Board of Directors in March 1999. Mr. Black's term as a director expires in 2000 at the annual meeting of the stockholders. From 1995 to the present, Mr. Black has served as the Chief Executive Officer for Education Leadership Dynamics, Inc., a privately held 29 corporation that provides speaker and consulting services, operates a wilderness exploration program, and runs a private high school. Since 1986, Mr. Black has also been employed as a teacher in the Enumclaw, Washington School District, and provided his services as an educational consultant nationwide. Mr. Black received dual bachelor degrees from Brigham Young University in 1979 and 1980, a Masters of Outdoor Management and Recreation from Brigham Young in 1981 and a Doctorate in Educational Engineering from Pacific Western University in 1999. Cynthia Britten, 34, the Company's Chief Financial Officer, who serves at the pleasure of the Board, joined WCFC in July of 1997 as the Assistant Controller. In December of 1997, Ms. Britten was promoted to Controller of the Company's subsidiaries, and then later in January of 1999 became the Accounting and Finance Manager. Prior to working for WCFC, Ms. Britten served as the on-site Controller for Trucktown, Inc., and was a Certified Public Accountant for Martin/Grambush P.C. In 1980, Ms. Britten graduated from Washington State University with a Bachelor of Arts Degree in Business Administration. Ms. Britten was certified as a public accountant in April of 1993. Laura M. Cook, 47, is the Corporate Secretary of the Company, a consultant to executive management, and has been a member of the Board of Directors of the Company since 1995. Mrs. Cook serves as an officer of the Company at the pleasure of the Board of Directors, and her term as a director expires in 2001 at the annual meeting of the stockholders. Additionally, Mrs. Cook serves as the Corporate Secretary for the majority of the Company's wholly-owned subsidiaries and a consultant to the executive management, and is the operational manager for various affiliates of the Company. Mrs. Cook is the spouse of Wade B. Cook, the Company's CEO, President, and Chairman of the Company's Board of Directors. Mrs. Cook's expertise over the past 15 years has been concentrated in managing accounting systems. Wade B. Cook, 50, is the Chairman of the Board, CEO, and President of the Company and has occupied at least one of those positions since June 1995. Mr. Cook serves as an officer of the Company at the pleasure of the Board of Directors, and his term as a director expires in 2001 at the annual meeting of the stockholders. Since 1989, Mr. Cook also has served as Treasurer and President of the Stock Market Institute of Learning, Inc., a wholly-owned subsidiary of the Company. Since the end of 1998, Mr. Cook has also served as the President and Treasurer of the majority of the Company's wholly-owned subsidiaries. Mr. Cook has authored numerous books, tapes, and videos relating to finance, real estate, the stock market and asset protection. Furthermore, Mr. Cook actively participates in the activities of the Company, often providing his services as a speaker or trainer, or guiding the development of educational products on investing and personal wealth management. Mr. Cook is the spouse of Laura M. Cook, the Corporate Secretary and a Director of the Company. Nick Dettman, 54, has been a director of the Company since 1997. Mr. Dettman's term as a director will expire at the Company's 2002 annual meeting of stockholders. He has been a pilot for Delta Airlines over 30 years and is also the owner and operator of Kalowai Plantation, an orchid ranch in Kauai, Hawaii. Robert T. Hondel, 56, has been a director of the Company since 1997, and is currently the Director of the Sales Department at SMIL. Mr. Hondel also served as President of both Quantum Marketing, Inc. and Wade Cook Financial Education Centers, Inc., wholly-owned subsidiaries of the Company until the first quarter of 1999. Mr. Hondel's term as a director expires in 2000 at the annual meeting of the stockholders. Prior to working for the Company, Mr. Hondel spent 18 years as the Director and President of the Knapp College of Business in Tacoma, Washington. Mr. Hondel is the uncle of Robin Anderson. Janice Leysath, 43, accepted appointed to the Company's Board of Directors in March 1999. Mrs. Leysath's term as a director expires in 2001 at the annual meeting of the stockholders. Mrs. Leysath has previously served on numerous civic and charitable boards and committees in Las Vegas, Nevada, including the American Heart Association Board, the Elementary Education Committee and the Heritage Museum Committee. From 1993 to 1995, Mrs. Leysath served as the Public Relations/Marketing Director for the Heart Institute of Nevada and as the Business Manager for Desert Cardiology. Mrs. Leysath currently runs her own medical claims processing business. 30 Deborah Losse, 46, joined the Company in June of 1998 and has been the Assistant to the President Over Seminars and Product Development since August of 1999. Mrs. Losse serves at the pleasure of the Board of Directors. Mrs. Losse was the Director of the Fortify Your Income seminars and the Director of Distribution from June of 1998 to October of 1998, and then Director of Product Development from October of 1998 to June of 1999. Additionally, from November 1997 to June of 1998, Mrs. Losse worked for a company that provided speaking services for SMIL. Prior to working for the Company, Mrs. Losse took approximately one year off from working, preceded by five years of employment at the Boeing Company. Angela Pirtle, 38, was elected to the Company's Board of Directors in June of 1999. Mrs. Pirtle's term will expire in the year 2002 at the annual meeting of the stockholders. Since 1985, Mrs. Pirtle has worked as a licensed real estate broker in San Diego, California. In addition, Mrs. Pirtle volunteers substantial time to her community, including acting as a youth ministry teacher, Girl Scout leader, and Chairperson for several theatrical groups. Carl Sanders, 56, joined the Company in November 1997 and has been the Executive Assistant to the President since August of 1999. Before becoming Executive Assistant, Mr. Sanders was a Vice President of Business Development (February 1998 to August of 1999), and prior to that the Director of Corporate Security (November 1997 to February 1998). Mr. Sanders serves in his current position at the pleasure of the Board of Directors. For the past 26 years, Mr. Sanders has worked in the field of personal security, most notably as the Manager of Corporate Security at Alaska Airlines, Inc. in Seattle, Washington and as a U.S. Secret Service Agent in Los Angeles, California. Mr. Sanders attended California State University at Long Beach where he received a Bachelor of Arts degree in Sociology. Gene Stevens, 56, accepted appointment to the Board of Directors on March 20, 2000. Mr. Stevens replaces a vacancy in the Board of Directors left by the resignation of Greg Maxwell (Mr. Maxwell's term was set to expire in 2002). Mr. Stevens has been the proprietor of the Stevens Family Market since 1972. Prior to operating the Stevens Family Market, Mr. Stevens was an active member of the Washington State Air National Guard (from 1964-1970). Mr. Stevens graduated from Central Washington University in 1970 with a Bachelor of Arts in Business Administration. Daniel Wagner, 39, was appointed to the Company's Board of Directors in April 1999. Mr. Wagner's term as a director expires in 2000 at the annual meeting of the stockholders. From 1995 to 1999, Mr. Wagner served as a seminar speaker for T.P. Management, Inc, a private corporation which provides speaking services for the Company. During July of 1999, the Company hired Mr. Wagner as an independent consultant to coordinate activities between the Company and it various speaker corporations. Additionally, the Company has hired Mr. Wagner to provide independent consulting services with respect to Wade Cook Financial Education Centers, Inc. ("WCFEC"), a wholly owned subsidiary of the Company. Director and Executive Officers with terms expiring prior to December 31, 1999. Bruce Couch, 51, joined the Company in June 1998 and held the position of Vice President of Operations until July 2, 1999. Mr. Couch is no longer employed by the Company. From January 1998 to June 1998, Mr. Couch served as a marketing consultant to the Company. From 1992 to 1997, Mr. Couch worked at Florida Marketing International, Inc., a marketing firm, as the Vice President of Marketing. Mr. Couch attended Utah State University in Logan, Utah where he received a Bachelors degree in Marketing. John Lang, 49, served as a member of the Company's Board of Directors from June 2, 1999 to November 2, 1999 (currently Mr. Lang's directorship position remains unfilled). For the past 25 years, Mr. Lang has served as the Chief Executive Officer of Pinnacle Group L.L.C., a golf course development company located in Scottsdale, Arizona. Mr. Lang is also a trustee for the Pinnacle Foundation, a nonprofit foundation and handles the development, sales, marketing and property management for the Racquet Club at Scottsdale Ranch, Arizona. In addition, Mr. Lang serves on the Board of Directors for Phoenix Seminary. Mr. Lang received a Bachelors degree in Philosophy from Roanoke College, Salem, Virginia. Greg Maxwell, 46, was appointed to the Company's Board of Directors in April 1999 and served until October 28, 1999. Since 1989, Mr. Maxwell has been a pilot for United Airlines and, prior to that time, 31 was a registered representative for a registered broker/dealer in Dallas, Texas and a licensed real estate broker. Mr. Maxwell earned a Bachelors degree in Occupational Education (Aviation) from Southern Illinois University. Richard Smith, 43, served as the Company's Chief Financial Officer from March 1999 to November 8, 1999. Currently, Mr. Smith is responsible for overseeing a number of the Company's operating subsidiaries. For the three years prior working at WCFC, Mr. Smith worked as an independent consultant, assisting companies in the areas of internal audit, cost control and asset protection. Prior to that time, Mr. Smith served for eight years as the Director of Internal Audit for Egghead Software. Mr. Smith received a Bachelor of Arts degree in Political Science from Brigham Young University in 1985. Section 16(a) Beneficial Ownership Reporting Compliance The federal securities laws require the Company's directors and executive officers, and persons who own more than ten percent of the Company's common stock to file with the Securities and Exchange commission initial reports of ownership and reports of changes in ownership of any securities of the Company. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 1999, all of the Company's directors, executive officers and greater-than-ten percent beneficial owners made all required filings on a timely basis. Board Meetings and Committees During 1999, the Board of Directors held 9 meetings. Board Committees Until November 14, 1999, the Company recognized three distinct Board Committees under its Bylaws. The Committees were as follows: the Executive Committee established with the authority to approve acquisitions, financing, and disposition of certain assets; the Audit Committee established to maintain relations with the Company's independent auditors and to monitor fiscal policies and procedures; and the Compensation Committee established to review compensation strategies, employee salaries, and benefits programs. Laura Cook (Chair) Wade Cook, Angela Pirtle, Robert Hondel, and Robin Anderson (Vice-Chair, and Secretary) served on the Executive Committee during 1999. Nick Dettman (Chair) John Lang, Angela Pirtle, and Janice Leysath (Vice-Chair and Secretary) served on the Audit Committee during 1999. Greg Maxwell (Chair), Janice Leysath, Joel Black (Vice-Chair and Secretary) served on the Compensation Committee during 1999. The Audit and Compensation Committees each met once in 1999. On November 14, 1999, the Board of Directors met and amended the Company's Bylaws abolishing the Executive Committee and Compensation Committee as stand alone committees. The Board of Directors then resolved to establish one stand alone committee called the Audit/Executive Committee. The Audit/Executive Committee possesses the same authority and responsibilities as the Audit and Executive Committees had retained under the prior Bylaws. The members of the Audit/Executive Committee are as follows: Janice Leysath (Chairperson), Nick Dettman, Angela Pirtle, Gene Stevens, and Joel Black. The Audit/Executive Committee did not meet in 1999, but did meet March 15, 2000. 32 Item 11. Executive Compensation Summary of Cash and Certain Other Compensation Summary Compensation Table The table below shows, for the last three fiscal years, compensation paid to the Company's Chief Executive Officer and the three most highly paid executive officers serving at fiscal year end whose total compensation exceeded $100,000. We refer to all these officers as the "Named Executive Officers." Annual Compensation ---------------------------------------------------------------------- Fiscal Salary Bonus Other Annual Name and Principal Position Year ($) ($) Compensation ($) - ------------------------------------ ------- ------------------------ --------------------- -------------------- Wade B. Cook Chairman, President and Chief 1999 299,376 - 3,937,214(1) Executive Officer............... 1998 245,000 7,489,000 (1) 1997 238,000 7,500 9,997,000 (1) Robin Anderson Assistant to the President Over 1999 60,000 81,355(2) Sales and Marketing and Director 1998 59,000 500 81,000 1997 91,000 - Robert Hondel 1999 99,152 - 10,000(3) Director of Sales for the Stock 1998 110,000 - 11,000 Market Institute of Learning, 1997 112,000 - 81,000 Inc. and Director...............
- ------------------------------- (1) Represents royalties accrued by Mr. Cook for the licensing of certain intellectual property rights to the Company. See Item 13. "Certain Relationships and Related Transactions." (2) Represents amounts paid to Ms. Anderson for commissions, director fees, vacation pay, holiday pay and other employee benefits. (3) Represents amounts paid to Robert Hondel as director fees. 1997 Stock Incentive Plan The Company's 1997 Stock Incentive Plan (the "Plan") provides for the granting of stock bonuses, stock options, stock appreciation rights, phantom stock and other stock-based awards. The Plan is administered by the Board of Directors which has the right to grant awards to eligible participants and to determine the terms and conditions of such grants, including, but not limited to, the vesting schedule and exercise price of the awards. All directors, officers, consultants and other employees are eligible to receive awards under the Plan. The Company filed the Plan on the Form S-8 to register the shares with the Securities and Exchange Commission in August of 1999. Option Grants In The Last Fiscal Year During the fiscal year ended December 31, 2000, the Company granted the Named Executive Officers and Directors options to purchase the Company's common stock. The grants were issued under the Company' 1997 Stock Incentive Plan filed with the Securities and Exchange Commission on the Form S-8 and are as follows: 33 - ------------------------------------------------------------------------------------------------------------ Percent of Total Options Granted Number of to Employees, Securities Directors and Alternative to Underlying Independent (f) and (g) Option Contractors in Exercise of Grant date Name Granted (#) Fiscal Year Base Price Expiration value - ------------------------------------------------------------------------------------------------------------ Robin Anderson 2,500(1) 0.003% $0.50 December 15, 0% 2001 - ------------------------------------------------------------------------------------------------------------ Robin Anderson 40,000(2) 0.05% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------ Joel Black 2,500(3) 0.003% $0.50 December 15, 0% 2001 - ------------------------------------------------------------------------------------------------------------ Joel Black 20,000(4) 0.05% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------ Cynthia Britten 2,500(1) 0.003% $0.50 December 15, 0% 2001 - ------------------------------------------------------------------------------------------------------------ Cynthia Britten 40,000(5) 0.05% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------ Robert Hondel 2,500(1) 0.003% $0.50 December 15, 0% 2001 - ------------------------------------------------------------------------------------------------------------ Robert Hondel 40,000(6) 0.05% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------ Janice Leysath 20,000(7) 0.05% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------ Angela Pirtle 20,000(8) 0.05% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------ Daniel Wagner 2,500(9) 0.003% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------ Daniel Wagner 20,000(10) 0.05% $0.50 December 15, 0% 2002 - ------------------------------------------------------------------------------------------------------------
1. Represents options issued to the named party in his/her capacity as a Company employee. 2. Represents an option to purchase 20,000 shares in Ms. Anderson's capacity as Director of the Company, and an option to purchase 20,000 shares in Ms. Anderson's capacity as a member of the Company's Management. 3. Represent options issued to the named party in his/her capacity as an independent contractor. 4. Represents an option to purchase 20,000 shares in Mr. Black's capacity as Director of the Company. 5. Represents an option to purchase 20,000 shares in Mrs. Britten's capacity as Chief Financial Officer of the Company, and an option to purchase 20,000 shares in Ms. Britten's capacity as a member of the Company's Management. 6. Represents an option to purchase 20,000 shares in Mr. Hondels's capacity as Director of the Company, and an option to purchase 20,000 shares in Mr. Hondel's capacity as a member of the Company's Management. 7. Represents an option to purchase 20,000 shares in Mrs. Leysath's capacity as Director of the Company. 8. Represents an option to purchase 20,000 shares in Mrs. Pirtle's capacity as Director of the Company. 9. Represent options issued to the named party in his/her capacity as an independent contractor. 10. Represents an option to purchase 20,000 shares in Mrs. Leysath's capacity as Director of the Company. 34 Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option Values No option contracts were signed during the year ended December 31, 1999, and as a result none of the parties had a vested interest in the options until the year 2000. Compensation of Directors The directors of the Company were compensated during the last fiscal year as follows: Annual retainer as a director..............................................$ 10,000 Annual retainer for membership on a standing committee.....................$ 1,000 Annual retainer as Chair of a standing committee...........................$ 500 Reimbursement for all reasonable expenses incurred in attending Board or committee.......................................................$ 100 per meetings................................................................. diem, plus variable expenses.
In addition, each director is eligible to participate in the Company's 1997 Incentive Stock Plan. See "--1997 Stock Incentive Plan." Employment Agreements The Company has entered into an employment agreement with Mr. Cook, effective as of July 1, 1997, pursuant to which Mr. Cook serves as the Company's Chief Executive Officer and President. The agreement provides for a three-year term in which Mr. Cook will receive an annual base salary of $240,000 for the year ended June 30, 1998, $265,000 for the year ended June 30, 1999 and $300,000 in for the year ended June 30, 2000. Under the terms of the agreement, Mr. Cook may receive additional bonuses for work as approved by the Board of Directors. To date, no such bonuses have been requested or approved. In addition, Mr. Cook is entitled to reimbursement for reasonable travel and business entertainment expenses authorized by the Company, as well as certain fringe benefits. See Item 13. "Certain Relationships and Related Transactions." Compensation Committee Interlocks and Insider Participation During 1999, no member of the Compensation Committee was an employee or officer of the registrant or its subsidiaries, or was involved in a related party transaction required to be reported under Item 404 of Regulation S-K. Board Compensation Committee Report on Executive Compensation. The Board of Directors in conjunction with the Compensation Committee was responsible for establishing compensation policy and administering the compensation programs of the Company's executive officers. In November 1999, these responsibilities were assumed by a new Executive Audit Committee. During 1999, the Company maintained its existing policies on compensation with regard to employees, directors, and executive officers. Generally, the compensation of employees, directors, and executive officers and the terms of employment have been set solely by Mr. Cook. Mr. Cook, the Company's CEO, currently has an employment agreement with the Company which began in 1997 and set to expire in June of the year 2000. Consequently, neither the Company's Compensation Committee nor has the Board of Directors met to review Mr. Cook's annual compensation. 35 COMPARISON OF 30 MONTH CUMULATIVE TOTAL RETURN* AMONG WADE COOK FINANCIAL CORP., THE NASDAQ FINANCIAL INDEX AND THE RUSSELL 2000 INDEX [PERFORMANCE GRAPH] Cumulative Total Return ------------------------------------------------ 6/97 12/97 12/98 12/99 WADE COOK FINANCIAL CORP. 100.00 685.31 71.67 30.27 RUSSELL 2000 100.00 114.79 107.38 105.78 NASDAQ FINANCIAL 100.00 125.94 122.25 120.89 *$100 invested on 6/30/97 in stock or index - including reinvestment of dividends. fiscal year ending December 31 Item 12. Security Ownership Of Certain Beneficial Owners And Management The following table sets forth information, as of February 28, 2000, regarding the beneficial ownership of the Company's common stock by any person known to the Company to be the beneficial owner of more than five percent of the outstanding common stock, by directors, and by all directors and executive officers of the Company as a group. Amount and Nature of Beneficial Ownership of Percent of Name and Address (1) Common Stock(2) Class - ------------------------------------------------------- ---------------------------- ------------- * Robin Anderson...................................... 20,190 * Joel Black (5)...................................... 75 64.5% Laura M. Cook(3).................................... 41,351,185 64.5% Wade B. Cook(3)..................................... 41,351,185 * Nick Dettman(4)..................................... 180,000 * Robert Hondel....................................... 201,310 Janice Leysath...................................... 10,000 * Angela Pirtle....................................... -- * Gene Stevens........................................ 5,000 Daniel Wagner(6).................................... 3,885 * All current directors and executive officers as a group (13 persons) .............................. 41,771,645 65.2%
* Represents less than 1%. (1) Unless otherwise indicated, the address for each beneficial owner is c/o Wade Cook Financial Corporation, 14675 Interurban Avenue South, Seattle, Washington 98168-4664. (2) Based on an aggregate of 64,058,948 shares outstanding as of February 29, 2000. (3) Includes (a) 8,517,745 shares of Common Stock owned of record by Mr. Cook directly; (b) 266,100 shares of Common Stock held in the name of Mr. Cook's individual retirement account; (c) 800,000 shares held by the Wade Cook Family Trust; (d) 1,775,200 shares held by corporations controlled by Mr. Cook; (e) 295,000 shares held by a trust for Wade and Laura Cook's minor children and (f) 29,697,140 shares owned by Wade B. Cook and Laura M. Cook Family Trust. (4) Represents 180,000 shares held by a company controlled by Mr. Dettman. (5) Represents 75 shares held by a company controlled by Mr. Black. (6) Represents 3,885 shares held by company controlled by Mr. Wagner. Item 13. Certain Relationships and Related Transactions. On March 2, 1999, Mr. Cook and the Company entered into a Publishing Agreement, effective February 1, 1996, which gives the Company certain rights to promote and sell materials authored by Mr. Cook. Under the terms of the Publishing Agreement, Mr. Cook is entitled to receive a ten percent (10%) royalty on the net revenues attributable to the sale of published materials. In 1999, $93,027.32 was paid under the contract. The Company has an Open-end Product Agreement with Mr. Cook, most recently amended on March 15, 2000, that gives the Company a non-exclusive license to use Mr. Cook's products, intellectual property, name, image, identity, trademarks and trade symbols. Under the terms of the Open-ended Product Agreement, Mr. Cook is entitled to receive the lesser of $5,000,000 or 5% of gross sales. In 1999, Mr. Cook had accrued approximately $3 million in royalties under the Agreement. On December 15th, 1999, the Company entered into an Assignment Agreement with Never Ending Wealth, L.P., a corporation controlled by Mr. Cook, in which Mr. Cook was assigned all right, title, and interest in Certain Promissory Notes held by several of the Company's wholly owned subsidiaries. The Promissory 36 Notes have an aggregate value determined to be $786,337.67. The Promissory Notes were assigned in satisfaction of $786,337.67 in royalties owed to Mr. Cook by the Company. The obligator on the Promissory Notes is Newstart Auto Centres, Inc., an automotive leasing Company in which Mr. Cook presently owns a 50% interest. During 1999, the Company paid an aggregate of $62,415.40 to companies controlled by Scott Scheuerman, Mr. Cook's brother-in-law, primarily as vendors of business, office support and registered agent services provided to the Company's customers. Of the monies paid to companies controlled by Mr. Scheuerman, $33,000 represents the transfer of a Company owned automobile. During 1999, the Company paid salaries and other compensation to its executive officers as set forth under Item 11. "Executive Compensation." Part IV Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements (i) Consolidated Balance Sheets at December 31, 1998 and 1999 (ii) Consolidated Statements of Operations and Retained Earnings for the years ending December 31, 1997, 1998 and 1999 (iii) Consolidated Statements of Changes in Shareholders' Equity (iv) Consolidated Cash Flow Statements (v) Notes to Consolidated Financial Statements 2. Financial Statement Schedules Not required. 3. Exhibits Exhibit No. Description - ----------- ----------- 2.1(Infinity) Stock Purchase Agreement dated June 30, 1998, by and among the Company, Entity Planners, Inc., and Berry, Childers & Associates, L.L.C. 2.2(Infinity) Amendment to Stock Purchase Agreement dated September 30, 1998 by and among the Company, Entity Planners Inc. and Berry, Childers & Associates, L.L.C. 2.3* Purchase and Sale Agreement, dated July 4, 1996, between United Support Association and Seller 2.4* All Inclusive Trust Deed dated March 8, 1997, for the purchase and assumption of certain real-estate by Rising Tide, LTD from East Bay Lodging Association, LTD 2.5** Share Exchange Agreement, dated January 1, 1998, between Wade Cook Financial Corporation and Information Quest, Inc. 2.6** Stock Purchase Agreement, dated August 8, 1997, between Profit Financial Corporation and Curtis A. Taylor and Stanley J. Zenk regarding Worldwide Acquisition. 37 Exhibit No. Description - ----------- ----------- 2.7** Stock Purchase Agreement, dated August 1, 1997, between Wade Cook Financial Corporation and John V. Childers, Sr., Brenda Childers, Tracy Allan Childers and John V. Childers, Jr. regarding Ideal Acquisition. 2.8** Share Exchange Agreement, dated August 15, 1997, between Profit Financial Corporation and Gold Leaf Press, Inc. 2.9** Share Exchange Agreement, dated August 15, 1997, between Profit Financial Corporation and Origin Book Sales, Inc. 2.10*** Assignment and Assumption of Interest, Consent Agreement, Memorandum of Terms re: Airport Hotel Partners, L.L.C. 2.11*** Limited Liability Company Interest Purchase Agreement re: Woods Cross Hotel Partners, L.C. dated November 29, 1997 2.12*** Limited Liability Company Interest Purchase Agreement with exhibits re: Park City Hotel Partners, L.C. dated February 4, 1997 2.13*** Memorandum of Terms, Assignment and Assumption of Interest, Warranty Deed re: Airport Lodging Associates, L.L.C. 2.14**** Share Exchange Agreement, dated January 1, 1998, between WCFC & Quantum Marketing, Inc. 2.15**** Stock Assignment Agreement dated January 1, 1998, between WCFC & Glendon H. Sypher 3.1** Articles of Incorporation of Wade Cook Financial Corporation 3.2 Bylaws of Wade Cook Financial Corporation 4.1** Form of Wade Cook Financial Corporation's Common Stock Certificate 10.1**(Function) 1997 Stock Incentive Plan of Wade Cook Financial Corporation 10.2** Form of Indemnification Agreement of Wade Cook Financial Corporation 10.3* Product Agreement, dated June 25, 1997, and effective as of July 1, 1997, among Wade Cook Seminars, Inc., Money Chef, Inc., and Wade B. Cook 10.4* Agreement dated February 1, 1996, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.5* Amended Agreement, dated June 26, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.6* Agreement Dated January 1, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.7* Amended Agreement dated June 26, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 38 Exhibit No. Description - ----------- ----------- 10.8* Agreement dated March 1, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.9* Agreement dated May 1, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.10*(Function) Employment Agreement dated June 26, 1997, by and between Wade Cook Seminars, Inc., and Wade B. Cook 10.11* Commercial Lease dated June 25, 1997, by and between Wade Cook Seminars, Inc. and U.S.A. Corporate Services, Inc. 10.12* Agreement dated November 1, 1996, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.13* Secured Loan Agreement and Promissory Note (Secured) between U.S.A., Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.14** Open-Ended Product Agreement, dated March 20, 1998, between Wade Cook Financial Corporation and Wade B. Cook 10.15*** Product Agreement, dated March 23, 1998, between Planet Cash, Inc., Steven Allyn Wirrick and Wade Cook Financial Corporation 10.16*** Stock Assignment Agreement, dated January 1, 1998, between Get Ahead Bookstores, Inc., Glendon H. Sypher and Wade Cook Financial Corporation 10.17** Product Agreement, dated March 23, 1998, between Wade Cook Financial Corporation, Information Quest, Inc. and Thomas Cloward 10.18** Share Exchange Agreement, dated September 12, 1997, between Profit Financial Corporation and Applied Voice Recognition, Inc. 10.19** Publishing Agreement, effective October 1, 1997 and signed January 12, 1998, between Lighthouse Publishing Group, Inc. and Wade B. Cook 10.20** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated May 23, 1997, between USA/Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.21** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated June 20, 1997, between Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.22** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated July 25, 1997, between Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.23** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated August 22, 1997, between Information Quest, Inc. and Newstart Centre, Inc. 39 Exhibit No. Description - ----------- ----------- 10.24** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents, dated October 9, 1997, between Information Quest, Inc. and Newstart Centre, Inc. 10.25** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents, dated October 9, 1997, between Left Coast Advertising, Inc. and Newstart Centre, Inc. 10.26** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents dated August 19, 1997, between Left Coast Advertising, Inc. and Newstart Centre, Inc. 10.27*** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents, dated January 20, 1998, between Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.28** Secured Promissory Note, dated July 31, 1997, between Wade Cook Seminars, Inc. and Robert and Meda Hondel 10.29*** Secured Promissory Note, dated June 18, 1997, between Paul and Laurie Cook and Wade Cook Seminars, Inc. 10.30*** Secured Promissory Note, dated January 1, 1998, between Paul and Laurie Cook and Wade Cook Seminars, Inc. 10.31*** Warranty Deed, Articles of Organization re: Red Rock Lodging Associates 10.32**** Contract for Sale of Real Estate dated January 20, 1998 by and between Ideal Travel Concepts, Inc. and/or assigns and Kenneth B. Lenoir 10.33(Infinity) Exclusive Product License Agreement dated June 30, 1998 by and between Wade B. Cook, and Entity Planners, Inc. 10.34(Infinity) Exclusive Product License Agreement dated June 30, 1998 by and between Wade Cook Financial Corporation, and Entity Planners, Inc. 10.35(Infinity) Open Ended Product Agreement between the Company and Wade Cook dated March 20, 1998 10.36(Infinity) Amendment to the Open Ended Product Agreement dated November 13, 1998 by and between the Company and Wade Cook 10.37# Assignment and Assumption of Interest dated August 22, 1996 by and between Zion's Management and Development Co., Airport Lodging Associates L.C. and Wade Cook Seminars, Inc. 10.38# Real Estate Purchase Contract dated August 22, 1997 (St. George Hilton) 10.39# Addendum No. 1/Counteroffer to Real Estate Purchase Contract dated August 1997 (St. George Hilton 10.40# Real Estate Lease dated July 16, 1998 between Origin Book Sales, Inc. and California Avenue Associates, LLC. 40 Exhibit No. Description - ----------- ----------- 10.41# Form of Speaker Agreement 10.42# Agreement dated December 11, 1998 between THH Ventures L.C. and the Company 10.43 Assignment Agreement dated December 15, 1999 by and between Wade Cook Financial Corporation and Never Ending Wealth, L.P. 10.44 Purchase and Sale Agreement for Hotel Properties dated December 1999 by and between Bountiful Investment Group, Inc. and Eagle Rock Finance, L.C. 10.45 Promissory Note dated December 20, 2000 made by Stock Market Institute of Learning, Inc. in favor of Sun Life Assurance Company of Canada. 10.46 Promissory Note dated June 1999 made by Quantum Marketing, Inc. in favor of Habib American Bank. 11.1# Statement of Computation of Per Share Earnings 16.1** Letter re: Change in Certifying Accountant 21.1# List of Wade Cook Financial Corporation Subsidiaries 27.1# Financial Data Schedule - December 31, 1999 - --------------------------------- * Previously filed as an exhibit to the Company's registration statement on Form 10 filed with the SEC on April 30, 1997, as amended on June 29, 1997 and September 24, 1997 ** Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 31, 1998 *** Previously filed as an exhibit to the Company's Form 10-K/A filed with the SEC on July 20, 1998 **** Previously filed as an exhibit to the Company's Form 10-Q filed with the SEC on August 8, 1998 (Infinity) Previously filed as an exhibit to the Company's Form 10-Q filed with the SEC on November 16, 1998 (Function) This document has been identified as a management contract or compensatory plan or arrangement. # Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 31, 1999 (b) Reports on Form 8-K There were no reports filed on Form 8-K filed by the Company during the fourth quarter of 1999. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Wade Cook Financial Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 29, 2000. WADE COOK FINANCIAL CORPORATION /s/ Wade B. Cook ------------------------------------- Wade B. Cook, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report to be signed by the following persons on behalf of Wade Cook Financial Corporation in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Wade B. Cook Chief Executive Officer, March 29, 2000 - --------------------------- Director Wade B. Cook (principal executive officer) /s/ Cynthia Britten Chief Financial Officer March 29, 2000 - --------------------------- Cynthia Britten /s/ Laura Cook Director/Secretary March __, 2000 - --------------------------- Laura Cook /s/ Robert Hondel Director March 30, 2000 - --------------------------- Robert Hondel /s/ Robin Anderson Director March 30, 2000 - --------------------------- Robin Anderson /s/ Nicolas Dettman Director March __, 2000 - --------------------------- Nicolas Dettman /s/ Joel Black Director March 30, 2000 - --------------------------- Joel Black /s/ Janice Leysath Director March 30, 2000 - --------------------------- Janice Leysath /s/ Dan Wagner Director March 29, 2000 - --------------------------- Dan Wagner /s/ Gene Stevens Director March 30, 2000 - --------------------------- Gene Stevens MILLER AND CO. LLP ACCOUNTANTS AND CONSULTANTS Tel: (310 576-6880 501 Santa Monica Boulevard MEMBER OF Fax: (310) 576-6881 Second Floor SEC PRACTICE SECTION e-mail: millco@miller Santa Monica, California 90401 OF THE andcollp.com AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS Established 1949 REPORT OF INDEPENDENT AUDITORS Board of Directors Wade Cook Financial Corporation and Subsidiaries Seattle, Washington We have audited the accompanying consolidated balance sheets of Wade Cook Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years ended December 31, 1999, 1998, and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wade Cook Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their consolidated operations and their consolidated cash flows for the years ended December 31, 1999, 1998, and 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note Y to the financial statements, the Company has suffered a significant operating loss from operations and continues to have a working capital deficiency that raises substantial doubt in its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note Y. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Miller and Co. LLP Santa Monica, California March 8, 2000 -1- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (in thousands, except for per share data) December 31, -------------------------------------- CURRENT ASSETS NOTES 1999 1998 - -------------- ------------ ----------------- ----------------- Cash and cash equivalents A $ 1,854 $ 1,742 Marketable securities A,C 1,914 2,870 Trade and credit card receivables B 1,212 3,112 Inventory A 2,597 3,743 Notes receivable B,Q 362 - Due from related parties B,F 124 65 Notes receivable - employees, current portion B,F 119 112 Prepaid expenses 363 354 Deferred tax assets O 456 - Income tax refund receivable A, O 1,199 - ----------------- ----------------- TOTAL CURRENT ASSETS 10,200 11,998 ----------------- ----------------- PROPERTY AND EQUIPMENT A,D,Q 12,098 29,203 ----------------- ----------------- GOODWILL & OTHER INTANGIBLE ASSETS A 2,140 3,061 ----------------- ----------------- OTHER ASSETS Other investments A,L 4,213 9,748 Deposits E 23 152 Notes receivable - employees B,F 2,361 2,920 Note receivable B,Q 2,050 - Due from related parties B,F 520 1,616 ----------------- ----------------- TOTAL OTHER ASSETS 9,167 14,436 ----------------- ----------------- TOTAL ASSETS $ 33,605 $ 58,698 ================= =================
The accompanying notes are an integral part of these consolidated financial statements. See accompanying independent auditors' report. -2- LIABILITIES AND SHAREHOLDERS' EQUITY December 31, ------------------------------------- CURRENT LIABILITIES NOTES 1999 1998 - ------------------- ------------ ---------------- ---------------- Current portion of long-term debt G $ 730 $ 4,667 Accounts payable and accrued expenses 7,530 9,198 Margin loans in investment accounts L 179 146 Payroll and other taxes withheld and accrued 134 163 Income taxes payable A,O 108 4,969 Deferred tax liability O - 642 Deferred revenue A 2,441 5,031 Due to related parties F 1,867 3,155 ------------- -------------- TOTAL CURRENT LIABILITIES 12,989 27,971 ------------- -------------- LONG -TERM LIABILITIES Long-term debts G 3,455 9,473 Deferred revenue A 372 631 ------------- -------------- TOTAL LONG-TERM LIABILITIES 3,827 10,104 ------------- -------------- TOTAL LIABILITIES 16,816 38,075 ------------- -------------- COMMITMENTS & CONTINGENCIES N,T MINORITY INTEREST 404 936 ------------- -------------- SHAREHOLDERS' EQUITY Preferred stock, 5,000 shares authorized at $10 par value, none issued and outstanding - - Common stock, 140,000 shares authorized at $0.001 par value, 64,003 shares and 64,246 shares outstanding as of, December 31, 1999 and 1998, respectively H 64 644 Paid-in capital 4,845 4,093 Prepaid advertising I (170) (500) Unearned compensation K (56) - Retained earnings 12,239 15,987 ------------- -------------- 16,922 20,224 Less: treasury stock at cost (251 shares) H (537) (537) ------------- -------------- TOTAL SHAREHOLDERS' EQUITY 16,385 19,687 ------------- -------------- TOTAL LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY $ 33,605 $ 58,698 ============= ==============
-3- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Years Ended ---------------------------------------------------------- December 31, --------------------------------------------------------- (in thousands, except per share data) NOTES 1999 1998 1997 --------- ----------------- ---------------- ----------------- REVENUES, NET OF RETURNS AND DISCOUNTS P $ 84,128 $ 118,207 $ 93,343 COSTS OF REVENUES P Royalties to related party 2,979 7,811 9,997 Speaker fees to related party 60 378 167 Other costs of revenues 37,478 48,574 29,328 --------------- --------------- -------------- TOTAL COSTS OF REVENUES 40,517 56,763 39,492 --------------- --------------- -------------- GROSS PROFIT 43,611 61,444 53,851 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 50,869 57,890 39,309 --------------- --------------- -------------- INCOME (LOSS) FROM OPERATIONS (7,258) 3,554 14,542 --------------- --------------- -------------- OTHER INCOME (EXPENSE) Dividends and interest 335 624 385 Gain (loss) on trading securities A,C 3,728 837 (804) Other income 427 386 128 Loss on other investments (1,705) (435) (106) Loss on disposition of fixed assets (2,946) - - Licensing fees V 2,516 1,697 - Interest expense (1,753) (1,453) (309) --------------- --------------- -------------- TOTAL OTHER INCOME (EXPENSE) 602 1,656 (706) --------------- --------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES (6,656) 5,210 13,836 PROVISION FOR (BENEFITS FROM) INCOME TAXES O (2,853) 2,346 5,579 --------------- --------------- -------------- INCOME (LOSS) BEFORE MINORITY INTEREST (3,803) 2,864 8,257 MINORITY INTEREST 55 127 21 --------------- --------------- -------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (3,748) 2,991 8,278 --------------- --------------- --------------
The accompanying notes are an integral part of these consolidated financial statements. See accompanying independent auditors' report. -4- Years Ended --------------------------------------------------------- December 31, --------------------------------------------------------- (in thousands, except per share data) 1999 1998 1997 ---------------- ----------------- ---------------- DISCONTINUED OPERATIONS V Income from operations of Entity Planners, Inc., to be disposed of (net of income taxes of $315 in 1998, and $484 in 1997) - 585 714 Operating income of Entity Planners, Inc., during phase-out period (net of income tax of $8 in 1998) - 15 - Gain on disposal of Entity Planners, Inc. (net of income tax of $88 in 1998) - 163 - ---------------- ----------------- ---------------- INCOME FROM DISCONTINUED OPERATIONS - 763 714 ---------------- ----------------- ---------------- NET INCOME (LOSS) ($ 3,748) $ 3,754 $ 8,992 ================ ================= ================ EARNINGS PER SHARE A Income (loss) from continuing operations ($ .06) $ .05 $ .13 Income from discontinued operations - .01 .01 Income during phase-out period - - - Gain on disposal - - - ---------------- ----------------- ---------------- NET INCOME (LOSS) ($ .06) $ .06 $ .14 ================ ================= ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 63,870 63,888 63,363 ================ ================= ================
The accompanying notes are an integral part of these consolidated financial statements. See accompanying independent auditors' report. -5- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Class A Prepaid Common Stock Additional Retained Advertising/ Total (in thousands) --------------------- Paid-in Earnings Unearned Treasury Shareholders Shares Amount Capital (Deficit) Compensation Stock Equity ---------- --------- ---------- ----------- -------------- ---------- ------------- Balances - December 31, 1996 as restated 60,129 $ 60 $ 901 $ 3,241 ($ 500) - $ 3,702 Issuance of restricted common stock for acquisition and Investments 4,103 4 3,363 3,367 Authorized but unissued restricted stock for employee bonus 14 - - - Collection of subscription 6 6 Receivable Net Income for year ended December 31, 1997 8,992 8,992 ---------- --------- ---------- ----------- -------------- ---------- ------------- Balances - December 31, 1997 64,246 64 4,270 12,233 (500) - 16,067 Issuance of restricted common stock for acquisition and Investments 100 - 403 403 Common stock purchased and held in treasury at December (537) (537) 31, 1998 Net Income for year ended December 31, 1998 3,754 3,754 ---------- --------- ---------- ----------- -------------- ---------- ------------- Balances - December 31, 1998 64,346 64 4,673 15,987 (500) (537) 19,687 Issuance of restricted common stock for employee option plan 57 - 372 372 Returned shares on prepaid advertising, Note I (400) - (200) 200 - Utilization of prepaid advertising to settle payable 130 130 to vendor, Note I Unearned compensation, Note K (56) (56) Net deficit for the year ended December 31, 1999 (3,748) (3,748) ---------- --------- ---------- ----------- -------------- ---------- ------------- Balances - December 31, 1999 64,003 $ 64 $ 4,845 $ 12,239 ($ 226) ($ 537) $ 16,385 ========== ========= ========== =========== ============== ========== =============
The accompanying notes are an integral part of these consolidated financial statements. See accompanying independent auditors' report. -6- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS Years Ended ---------------------------------------------------------- December 31, ---------------------------------------------------------- (in thousands) 1999 1998 1997 ----------------- ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($ 3,748) $ 3,754 $ 8,992 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 3,762 1,958 1,287 (Gains) losses on trading securities (3,728) (684) 804 Losses on disposition of fixed assets 2,946 - - Impairment of long-lived assets 315 - - Loss from other investments 1,705 443 106 Bad debts 244 - - Net proceeds from (purchases of) trading securities 4,684 1,979 (1,487) Changes in assets and liabilities: net of effects of acquisitions: Receivables 1,900 171 (2,423) Inventory 1,146 (2,431) (582) Prepaid expenses (9) (118) (143) Deferred taxes (1,098) 893 532 Income tax refund receivable (1,199) - - Deposits 129 3,941 (4,058) Due from related parties 1,037 (332) - Accounts payable and accrued expenses (1,724) 2,747 8,536 Payroll and other taxes withheld and accrued (29) - (688) Income taxes payable (4,861) (285) 3,178 Deferred revenue (2,849) 898 (396) Due to related party - royalties payable (1,288) 2,327 290 ------------- ------------- ------------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (2,665) 15,261 13,948 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Notes receivable from employees and officers 552 504 (1,571) Notes receivable from others (2,411) - - (Capital expenditures) sales of properties 11,264 (18,926) (4,157) (Purchase) sales of other investments 3,348 (2,162) (6,286) Subsidiary's investment - 139 (769) Return of subsidiary's investment (54) 248 - Payment for purchase of companies, net of cash acquired - (423) (1,748) ------------- ------------- ------------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 12,699 (20,620) (14,531) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of subsidiary's minority interest - - 70 Payment of book overdrafts - (2,156) - Long-term borrowings (6,018) 11,875 - Repayment on short-term borrowings (3,904) (2,621) (292) Issuance of common stock - - 72 Collection on subscription receivables and return of stock profits by officer - - 638 Purchase of treasury stock - (537) - ------------- ------------- ------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (9,922) 6,561 488 ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH 112 1,202 (95) CASH, beginning of year 1,742 540 635 ------------- ------------- ------------- CASH, end of year $ 1,854 $ 1,742 $ 540 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements See accompanying independent auditors' report. -7- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Summary of Significant Accounting Policies Business Wade Cook Financial Corporation (WCFC), or Company, is the legal successor to Profit Financial Corporation (PFC), a holding company, whose principal operating subsidiaries include: Stock Market Institute of Learning, Inc. (SMIL), (formerly known as Wade Cook Seminars, Inc, and United Support Association, Inc.) - SMIL conducts educational investment and business seminars and produces video tapes, audio tapes, and written materials designed to teach various investment and cash flow strategies for investing in the stock market, asset protection and asset accumulation techniques or strategies. SMIL also hosts a subscriber internet service, Wealth Information Network (WIN), which allows subscribers to log on for information related to the stock market. Lighthouse Publishing Group, Inc. (Lighthouse) - publishes books on investment, financial and motivational topics. Left Coast Advertising, Inc. (Left Coast) - is an advertising agency, with only inter-company sales. Origin Book Sales, Inc. (Origin) - is a book distributor. Worldwide Publishers, Inc. (Worldwide) - is a book publisher. Gold Leaf Press, Inc. (Gold Leaf) - is a book publisher. Ideal Travel Concepts, Inc. (Ideal) - is a travel agency, also in the business of selling travel agent training kits. Bountiful Investment Group, Inc. - owns interest in real estate ventures, primarily hotels. In 1998, the Company acquired the following business enterprises (Note R): Information Quest, Inc. (IQ) - the producer of the IQ Pager, which provides subscribers with paging services for stock related information. Quantum Marketing Inc. (Quantum) - which provides local marketing through its website on the internet and retail centers located in Tacoma and Seattle, Washington and Santa Ana, California. The retail centers also provide consumers with online terminals with access to stock market information through the Wealth Information Network (WIN). Get Ahead Bookstores, Inc. - a retail distributor of financial education, personal development, and inspirational products, including books, audio tapes, and video tapes located in the Quantum education centers. Copyrights The copyrights to most seminars, video and audio tapes, and written materials are owned by Wade B. Cook, a related party. As used hereafter, "Company" refers to Wade Cook Financial Corporation and its consolidated subsidiaries. -8- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Summary of Significant Accounting Policies (continued) Accounting principles and consolidation policy The accompanying consolidated financial statements include the accounts of Wade Cook Financial Corporation and its majority-owned subsidiaries. SMIL had a fiscal year end of January 31, and the balances as of January 31, 1997 have been used to prepare the consolidated financial statements as of December 31, 1996. In 1997, SMIL changed its fiscal year end to December 31, and the balances as of December 31, 1997 do not include activity for the month of January 31, 1997. All significant inter-company transactions and balances have been eliminated in the consolidation. During 1997, WCFC acquired Ideal, Origin, Worldwide, and Gold Leaf and during 1998, WCFC acquired IQ, Quantum, and Get Ahead Bookstores, the purchase method of accounting was used for all acquisitions (see Note R). The consolidated financial statements include the activity of each identified acquisition from the date of acquisition through December 31, 1998 and 1997. All significant inter-company transactions and balances have been eliminated in the consolidation. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to financial statements. Changes in such estimates may affect amounts reported in future periods. Cash and cash equivalents The Company considers highly liquid investments with the original maturity of three months or less to be cash and cash equivalents. Included in these amounts are money market funds of $1,337,000, and $124,000 as of December 31, 1999 and 1998, respectively. Marketable securities Marketable securities consist mainly of stocks and options. They have been categorized as trading securities and, as a result, are stated at market value. All changes in trading securities' fair values are reported in earnings as they occur. Realized gains and losses on the sale of securities are determined using the specific-identification method. Inventory Inventory, which consists primarily of finished goods, is valued at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and equipment Property and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets for both financial reporting and tax reporting purposes. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated life of the asset or the remaining term of the lease. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. -9- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Summary of Significant Accounting Policies (continued) Property and equipment (continued) The Company evaluates impairment of long-lived assets in accordance with the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of. SFAS 121 requires the Company to assess whether an asset (or group of assets) that will continue to be used is impaired and needs to be adjusted. Other long-lived assets to be disposed of (either by sale or abandonment unrelated to the disposal of a business segment) should be written down to fair value less the cost to sell such assets. Intangible In 1998 and 1997 acquisitions (Note R) resulted in the Company recording goodwill, which represents the excess of the cost of the assets purchased over their fair value. Amortization is computed using the straight-line method over the estimated useful life of the intangible asset or 40 years, whichever is shorter. Other investments If the Company owns less than 20% of the investee, the Company accounts for other investments using the cost method. The Company uses the equity method when the investment represents ownership between 20% and 50%. Revenue recognition Revenues for seminars are recognized when services are rendered. Subscription revenues for WIN membership generally are received for up to one year in advance and are recorded and presented in the financial statements as deferred revenue until earned. Although a typical subscription binds the subscriber to prepay, the subscription term begins when the customer receives his logon code. The deferred revenues are recognized on a monthly basis over the term of the contract. If a subscriber cancels within the first twelve months of the service period, any remaining unearned subscription revenue will be recognized into income at the time of the cancellation because the subscription is a binding nonrefundable contract. IQ sells pager services in twelve or twenty-four month contract subscriptions, but receives the revenue in advance, which is presented in the financial statements as deferred revenue until earned. The deferred revenues are recognized on a monthly basis over the term of the contract. Other revenues are recognized when finished products are shipped to customers or services have been rendered. Advertising costs Advertising costs are expensed when incurred. Advertising costs amounted to $10.412 million, $19.230 million, and $13.685 million for the years ended December 31, 1999, 1998 and 1997, respectively. -10- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Summary of Significant Accounting Policies (continued) Income taxes Income taxes are provided for tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. As of December 31, 1999, the Company owed the United States Treasury $225,000 in income taxes and accrued penalties and interest on unpaid income taxes for the year ended December 31, 1998. In addition, the Company owed various state governments $147,000 in unpaid taxes and accrued penalties and interest, also on unpaid taxes for the year ended December 31, 1998. An income tax refund receivable in the amount of $1.424 million is anticipated from the current use of current net operating losses. Barter transactions The Company is accounting for barter credits in accordance with APB Opinion No. 29, Accounting for Non-monetary Transactions, and EITF issue No. 93-11, Accounting for Barter Transactions, involving barter credits which presumes that the fair value of the non-monetary asset exchanged is more clearly evident than the fair value of the barter credit received, and that the barter credit should be reported at the fair value of the non-monetary asset exchanged. The Company purchased radio airtime advertising in exchange for common stock. The transaction is discussed in Note I. Earnings per share The Company accounts for earnings per share in accordance with FASB No. 128. Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year. Reclassification of Financial Statement Presentation Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the 1999 financial statement presentation. Such reclassifications had no effect on net income as previously reported. New Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued in June 1999, FASB Interpretation No. (FIN) 43, Real Estate Sales, An Interpretation of Statement of SFAS No. 66. FIN 43 clarifies that the phrase all real estate sales includes sales of real estate with property improvements or integral equipment that cannot be moved and used separately from the real estate without incurring significant costs. FIN 43 is effective for all sales of real estate with property improvements or integral equipment entered into after June 30, 1999. SFAS 66, as amended by SFAS 135, includes as examples of real estate sales transactions: sales of corporate stock of enterprises with substantial real estate, sales of partnership interests, and sales of time sharing interest if the sales are in substance sales of real estate; and sales of options to purchase real estate. These pronouncements did not affect the Company in 1999. The Company recognized losses in all its real estate sales transactions, except for gain from raw land which was sold for cash. -11- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Summary of Significant Accounting Policies (continued) New Accounting Pronouncements (continued) The Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued in December 1998, Statement of Position (SOP) 98-9, Modification of SOP97-2, Software Revenue Recognition, With Respect to Certain Transactions. This SOP requires recognition of revenue using the residual method, which did not affect the Company in 1999. The Company is planning to provide subscribing customers with greater options through new interactive technology which may bundle multiple elements such as hardware, software, access to data, or other elements to be delivered. The Company believes that its current accounting policy of deferring subscription revenue will substantially comply with the residual method required by this SOP. The AcSEC of the AICPA issued in March 1998, Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which provides guidance on accounting for the costs of computer software developed or obtained for internal use. In 1998, the Company began installation of a company-wide software program, SAP. The Company has contracted with an outside engineering firm for the installation, implementation, and training. As of December 31, 1998, the Company has spent $795,000 and estimates an additional $1.205 million will be required to have the computer system operating. At December 31, 1998, the progress payments on the installation phase are classified as a fixed asset, with no depreciation being taken. Once the software performs its intended use, the Company will begin depreciating. At the beginning of 1999 the Company spent additional $264,500. However, the Company disputed the total cost required for the installation with the vendor and ceased the installation process. A loss on impairment was recognized and the remaining carrying value was depreciated over the estimated life. See Note D. The Financial Accounting Standards Board (FASB) issued in February of 1998 an exposure draft (ED) of a proposed Statement of Financial Accounting Standards (SFAS), Consolidated Financial Statements: Purpose and Policy. FASB issued in December 1999 an ED of a proposed SFAS, Business Combinations and Intangible Assets. The Company believes that the proposed accounting standards will not have a material effect on the consolidated financial statements. Note B - Receivables Following is a summary of receivables: December 31, December 31, (in thousands) 1999 1998 --------------- ----------------- Trade and credit card receivables $ 1,212 $ 3,112 Notes receivable - employees 2,480 3,032 Due from related parties 644 1,681 Other 2,412 - --------------- ----------------- Total $ 6,748 $ 7,825 ================ =================
-12- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note B - Receivables (continued) An allowance for uncollectible accounts is maintained, and at December 31, 1999 and 1998, the allowance amounted to $493,000 and $629,000, respectively. Amounts reported on the balance sheet are shown net of the allowance. Note C - Marketable Securities The net unrealized gain (loss) in trading securities that has been included in earnings during the period amounted to $466,000, $684,000, and ($755,000) for the years ended December 31, 1999, 1998, and 1997, respectively. Note D - Property and Equipment In the fourth quarter of 1999 the Company recognized $315,000 impairment loss on certain equipment in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The following is a summary of property and equipment: December 31, December 31, (in thousands) 1999 1998 ----------------- ----------------- Land $ 532 $ 532 Land - hotels - 2,906 Building 7,324 8,723 Building - hotels - 9,190 Equipment 5,698 5,307 Automobiles 1,346 1,634 Furniture and fixtures 2,081 3,704 ----------------- ----------------- 16,981 31,996 Less: Accumulated depreciation (4,883) (3,295) Less: Accumulated depreciation - hotels - (293) ----------------- ----------------- 12,098 28,408 Software installation in progress - 795 ----------------- ----------------- Total $ 12,098 $ 29,203 ================= =================
Depreciation expense charged to operations was $2.243 million, $1.958 million, and $1.269 million in December 31, 1999, 1998, and 1997, respectively. 13 WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note E - Deposits Deposits as of December 31, 1999 and 1998 amounted to $23,000, and $152,000, respectively. Deposits represent the following: December 31, --------------------------- (in thousands) 1999 1998 ------------- ---------- Held by credit card processors $ - $ 50 Held for security on buildings 23 24 Held in escrow accounts - 78 ------------- ---------- Totals $ 23 $ 152 ============= ========== Note F - Related Party Transactions The Company entered into a product agreement with Wade B. Cook, to obtain the rights to promote and sponsor seminars, entity formation services (discontinued in June 1998) and products owned and controlled by Wade B. Cook for a royalty. Royalty expenses to Mr. Cook totaled $2.979 million, $7.976 million, and $9.997 million for the years ended December 31, 1999, 1998, and 1997, respectively. As of December 31, 1999 and 1998, accrued royalties were $1.770 million and $2.989 million, respectively. In 1999, the Company renegotiated its' product agreement with Wade B. Cook. Under the new term the Company shall pay Mr. Cook a maximum yearly royalty that is the lesser of $5 million or five percent (5%) of gross sales revenue received from sales of products. In December 1999, the Company entered into an exchange agreement with Never Ending Wealth, L.P., a company controlled by Mr. Cook, to assign all rights, title, and interest the Company had in certain promissory notes due from Newstart Centre, Inc. (a related party) to Mr. Cook. The promissory notes had an aggregate value of $786,000. And the exchange was made to satisfy royalty due to Mr. Cook. The Company obtained services from related seminar speakers. Total speaker fees paid to such companies totaled $60,000, $378,000, and $167,000 for the years ended December 31, 1999, 1998, and 1997. There were no additional amounts due to such companies as of December 31, 1999 and 1998. In 1999, the Company sold property to a previous employee for $355,000, which resulted in a loss of $90,000. The Company is holding a note receivable secured by the property, which is included in notes receivables from employees. In 1999, the Company paid an aggregate of $62,000 for services to related entities controlled by a relative of Mr. Cook. 14 WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note F - Related Party Transactions (continued) Due from related parties represent advances to the following: (in thousands) December 31, 1999 December 31, 1998 -------------------------- ------------------------ Related Parties Relationship Current Non-Current Current Non-Current ------------------- -------------------------- ------------ ---------- ---------- ---------- Newstart 50% owned and controlled Centre, Inc. by President/CEO of WCFC or his affiliates $ - $ - $ 60 $ 808 Crossroads General partner is President/CEO of WCFC - 250 Five Star General partner is Consulting, Inc. President/CEO of WCFC - 38 Related Associated with WCFC Individuals 5 520 5 520 ------------ ---------- ---------- ---------- Total $ 5 $ 520 $ 65 $ 1,616 ============ ========== ========== ==========
Due to related parties consists of the following: December 31, December 31, (in thousands) Relationship 1999 1998 -------------------------- ----------------------------- ----------------- ---------------- Wade B. Cook President/CEO of WCFC $ 1,770 $3,110 Officers of WCFC 45 45 Liberty Music, Inc. Majority stockholder is a 52 - stockholder of WCFC ----------------- -- ---------------- Total $1,867 $3,155 ================= ================
The Company has various notes receivable from employees and officers. Original maturity dates are from 4 months to 360 months. Annual interest rates range from 5.5% to 12%. The manner of settlement is by salary deduction or payment. The majority of notes receivable are secured by real property or personal property. The Company evaluates notes receivables in accordance with Statement of Financial Accounting Standards No 114, Accounting by Creditors for Impairment of a Loan. Statement No. 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Statement No. 118, Income Recognition and Disclosures, amends Statement No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. At December 31, 1999 and 1998, reductions in the notes receivable of $351,000 and $243,000, respectively, were recorded to reflect impaired notes. Substantially all of the reductions were from unsecured receivables from employees who are no longer with the Company. Future cash flow was not expected, due to the uncertainty of repayment. 15 WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note F - Related Party Transactions (continued) At December 31, 1999 and 1998, due from employees amounted to $2.457 million and $3.032 million, respectively, of which, $119,000, and $112,000, respectively, has been classified as current. Amounts due from employees represent loans both secured and unsecured: December 31, December 31, Loan (in thousands) 1999 1998 ------------------------ ---------------- --------------- Secured $ 2,420 $ 2,909 Unsecured 60 123 ---------------- --------------- Total $ 2,480 $ 3,032 ================ =============== For the years ended December 31, 1999 and 1998, interest income resulting from the employee note receivables were $196,000 and $270,000, respectively. Interest income is calculated by multiplying the outstanding balance of unimpaired loans with their respective interest rate. Interest income is not calculated on impaired loans. Note G - Long-Term Debt December 31, (in thousands, except in descriptions) 1999 1998 ----------------- ---------------- Note payable, secured by land and building (Seattle, WA), due January 2015, payable in monthly installments of $29,333, including interest at 8.375% $ 3,000 - Note payable, secured by land (Provo, Utah), due in quarterly installments of $4,125 from February 10, 2000 to November 10, 2000, including interest at 15% 110 - Note payable, secured by land (Santa Ana, CA), due July 2009, payable in monthly installments of $7,094, including interest of 9.38% 541 - Mortgage payable (Seattle, WA), secured by land and building, due in monthly installments of principal and interest of $100,000 from September 1, 1998 to February 1, 1999, and $555,682 on March 1, 1999, including interest at 9% per annum - 746 Real estate contract payable (Seattle, WA), secured by land and building, payable in monthly installments of $2,157, including interest at 7% per annum, with an original maturity date of September 1, 1999 - 340
16 WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note G - Long-Term Debt (continued) December 31, (in thousands, except in descriptions) 1999 1998 ----------------- ---------------- Mortgage payable, secured by land and building (Memphis, TN), due in monthly installments of principal and interest of $13,380 from April 1, 1999 through January 1, 2016, including interest of 11% per annum - 1,053 Note payable, secured by land (Best Western McCarran House, Sparks, NV), with interest only monthly payments of $6,250, at 15% per annum, with principal due June 1, 1999 - 500 Note payable, secured by land (72 South, Salt Lake City, UT), due June 1, 2000 in one payment of principal with quarterly payments of accrued interest at 10.5% per annum 440 450 Note payable, secured by land and building (Best Western McCarran House, Sparks, NV), due June 30, 2011, in monthly installments of principal and interest of $30,514, with interest at 10% per annum, and with a balloon payment of $2 million on June 30, 2001 - 3,437 Note payable, secured by land and building (Best Western McCarran House, Sparks, NV), due March 10, 1999, with monthly interest payments at 10% per annum - 895 Mortgage payable, secured by land and building (Airport Ramada Suites, Salt Lake City, UT), due in December 2003, in monthly installments of principal and interest of $18,470, with an initial interest rate of 10.35% per annum - 1,817 Mortgage payable, secured by land and building (Four Points by Sheraton, St. George, Utah), due February 1, 2023, in monthly installments of principal and interest of $24,084, at 11.0% per annum - 2,967 Mortgage payable, secured by land and building (Santa Ana, CA), due March 2000, in monthly installments of principal and interest of $28,719, at 8.0% per annum - 409
-17- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note G - Long-Term Debt (continued) December 31, (in thousands, except in descriptions) 1999 1998 ----------------- ---------------- Various secured notes payable, at market rates of interest ranging from 6.9% to 19.05% per annum, with due dates ranging from June 1999 to December 31, 2003 94 1,526 ----------------- ---------------- Total Long Term Debt 4,185 14,140 Less: Current maturities (730) (4,667) ----------------- ---------------- Net Long Term Debt $3,455 $9,473 ================= ================
The following are maturities of long-term debt for each of the next five years: 2000 $ 730 2001 169 2002 174 2003 183 2004 199 Thereafter 2,730 ---------- Total $4,185 ========== Note H - Shareholders' Equity The Company did not declare or pay any dividends for the years shown in these financial statements. In June 1999, the board of directors of the Company resolved to authorize a change in par value of the common stock from $0.01 to $0.001. As a result the Company adjusted the common stock and paid in capital to reflect this change. In 1998, in compliance with the Company's plans to re-acquire up to one million shares of its own common stock, the Company purchased 251,000 shares at a cost of $537,000. The re-acquired shares are classified as treasury stock and are stated using the cost method. The shares have not been retired and therefore are still considered outstanding. Return of stock issued for prepaid advertising In connection with the settlement on prepaid advertising with ITEX, 400,000 shares were returned to the Company and subsequently cancelled. See Note I. -18- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note I - Prepaid Advertising In 1995, the Company entered into an agreement with Associated Reciprocal Traders, Ltd. (ART) to purchase from ART 20,000 Investor Relations-Advertising-Infomercial radio air time spots, priced at $25 per ad spot, per station, for a sum total of $500,000. In payment of the foregoing, the Company issued 100,000 shares (equivalent to 1,800,000 shares at December 31, 1998 with stock split effects) of common stock to ART on September 10, 1996. The prepaid advertising is shown as a reduction of shareholders' equity rather than as an asset (Note H). In 1999, the Company reached a settlement agreement with ART and it's successor ITEX Corporation (ITEX) acknowledging that ART/ITEX have fully paid the consideration for their 1,400,000 shares of WCFC stock by issuing 300,000 ITEX trade dollars to the Company. The remaining 400,000 shares were returned to the Company and were treated as deduction to prepaid advertising. In connection with the Company's negotiation with its vendors, the Company used approximately 130,000 of the ITEX dollars to settle some of it's accounts payable (Note S). At December 31, 1999 the remaining balance of the ITEX dollars was $170,000. Note J - Concentration of Risks Cash in banks, based on bank balances, exceeded federally insured limits by $1,337,000 and $799,000 at December 31, 1999 and 1998, respectively. Receivables from credit card companies aggregated approximately $327,000 and $880,000 at December 31, 1999 and 1998, respectively. The Company invests excess cash in marketable securities. Marketable securities are carried at fair market value, which amounted to $1,914,000 and $2,870,000 as of December 31, 1999, and 1998, and accounted for 6% and 5% of the Company's consolidated assets as of December 31, 1999 and 1998, respectively. The following table shows the percentage of revenues: 1999 1998 1997 ---------- ---------- ---------- Seminars 70% 65% 65% Product sales 14% 18% 31% Travel services 3% 5% 4% Hotel revenue 5% 3% - Pager services 6% 8% - Other 2% 1% -
The following table shows the states from which the Company derived over 10% of its seminar revenues: 1999 1998 1997 ---------- ---------- ---------- California 18% 16% 15% Florida 11% 10% 10%
-19- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note J - Concentration of Risks (continued) Historically, the Company's success has been reliant upon the success of Wade B. Cook and the products and seminars under his control. Mr. Cook's products and seminars account for the vast majority of the revenue of the Company, as well as, the majority of the new products and seminars that have been created. Currently, the Company is attempting to diversify through acquisitions and the signing of new authors, however, in the foreseeable future, the ability of the Company to continue to generate similar revenue and profitable operations is reliant on maintaining a licensing agreement with Mr. Cook. Note K - Stock Incentive Plan The Company's 1998 Incentive Stock Plan (Plan) provides for the granting of stock, restricted stock, phantom stock, stock appreciation rights both stand-alone and tandem (SAR's), stock options, and other stock-based awards, including Incentive Stock Options (ISO's). The Plan is to be administered by the Board of Directors (Board). Under the terms of the Plan, plan administers have the right to grant awards to eligible recipients and to determine the terms and conditions of award agreements. Eligible participants will be directors, officers, consultants and other employees of the Company. The maximum number of shares of Company stock reserved for issuance under the plan has increased from 1,000,000 shares in 1998 to 5,000,000 shares in 1999. Such shares may be authorized but unissued Company stock or authorized and issued Company stock held in the Company's treasury. The Board has the authority to determine the expiration date of each option, provided that no ISO will be exercisable more than 10 years after the date of grant. There were no outstanding nor exercisable common stock purchase options at the beginning of 1999. The following table summarizes information concerning outstanding and exercisable options at December 31, 1999: Options Outstanding & Remaining Exercise Exercisable Life Price ------------------------ ---------------- --------------- 251,000 2.00 years $ 0.40 135,000 2.00 years 0.50 940,000 3.00 years 0.50 ------------------------ ---------------- --------------- 1,326,000 2.71 years $ 0.48 ======================== ================ ===============
The common stock purchase options were issued for past services. Options to purchase approximately 1,326,000 shares of common stock were granted at December 15, 1999 when the underlying stock was at $0.2188 per share. No options were exercised in 1999. -20- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note K - Stock Incentive Plan (continued) The Company uses the intrinsic value based method of Accounting Principles Board Opinion No. 25 (APB25), as permitted by SFAS 123, "Accounting for Stock-Based Compensation". SFAS 123 requires additional disclosures, including proforma calculations of net earnings and net earnings per share, as if the fair value method of accounting prescribed by SFAS 123 had been applied. Had compensation cost been determined based on the fair value of the common stock purchase options using the provisions of SFAS 123, the Company's net loss in 1999 would have increased by $97,010 and the net loss per share in 1999 would have increased by an immaterial amount. For proforma calculation, the fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model and the following assumptions for awards in 1999: zero dividend yield, expected volatility of 98%, risk-free interest rate of 6.1%, and expected life of 3 years. Using these assumptions, the grant-date fair value per share of the options granted in 1999 was $0.07. The Board may grant common stock as a bonus. The Board may suspend, terminate or amend the Plan at any time provided that stockholder approval will be required if and to the extent the Board determines that such approval is appropriate for purposes of satisfying Section 422 of the Internal Revenue Code of 1986. In 1999 there were 11,000 shares issued as bonuses and additional 45,000 shares were issued to founding employees. At December 31, 1999 the Board granted, but not issued, 297,500 shares of restricted stocks to certain eligible employees as millenium bonus for service to be provided by the employees in year 2000. These restricted shares were granted under the Company's 1997 Incentive Stock Plan. Stock issued before the performance of services are shown as a separate reduction of stockholders' equity in accordance with APB No. 25, "Accounting for Stock Issued to Employees". The aggregate value of the 297,500 shares was approximately $56,000. Note L - Other investments Other investments consist of investments in venture capital partnerships and private companies, primarily comprised of hotel/motel properties and other real estate investments. The estimated other investments approximated the carrying amount at December 31, 1999 and 1998. The fair values of investments in venture capital partnerships and private companies were estimated based on financial condition and operating results, or other pertinent information. No dividends were received from other investments during the years shown. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of in 1995. In December 1999 the Company recognized the impairment losses on investments made on certain asphalt patching products developing and marketing company ($615,000), and on certain unproductive oil well ($637,000). In 1998 the Company recorded a non-cash pre-tax charge of $226,000 to write down the carrying value of an investment in a private company. The Company considers the investments to be unprofitable and therefore have no market value. -21- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note L - Other investments (continued) Other investments consist of the following: December 31, December 31, (in thousands) 1999 1998 ------------------ ---------------- Cost method Oil and gas $ 691 $1,325 Hotels/motels 601 784 Real estate 1,981 4,961 Private companies 940 750 Other - 255 ------------------ ---------------- 4,213 8,075 ------------------ ---------------- Equity method Hotels/motels - 933 Private companies - 740 ------------------ ---------------- - 1,673 ------------------ ---------------- Total $4,213 $9,748 ================== ================
Investments in private companies in 1999 include a privately held computer software company ($750,000), a software manufacturer ($40,000), and a telecommunication company ($150,000). Investments in private companies in 1998 include a privately held computer software company ($750,000), an inactive public company ($150,000), and a concrete repair business ($590,000). Equity investments are shown net of their share of income and losses for the year ended December 31, 1999 and 1998. Accumulated deficit during the development stage was not material in 1999 and 1998. In connection with its' investment in the software manufacturer company, the Company was committed to make additional $200,000 investment in 2000. The Company was also committed to invest $450,000 in another private company in January 2000. Note M - Disclosures About Fair Value of Financial Instruments Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures About Fair Value of Financial Instruments, as part of a continuing process by the FASB to improve information regarding financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents - The carrying amount of cash and cash equivalents approximates its fair value. Notes receivable from The fair value of notes receivable was employees and officers - determined by discounting the expected future cash flows from the notes receivable at market rate at the end of the year. -22- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note M - Disclosures About Fair Value of Financial Instruments (continued) Marketable securities - The fair value of marketable securities were estimated based on quotes obtained from brokers for those instruments. Other investments - The fair value of other investments is determined by financial positions of the investee companies and market conditions. Margin loans in investment accounts - The carrying amount of margin loans approximates its fair value. Long-term debt - The fair values of the Company's long- term debt either approximates fair value or estimates using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows: 1999 1998 ------------------------- --------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value ----------- ---------- ------------ ----------- Cash and cash equivalents $ 1,854 $ 1,854 $ 1,742 $ 1,742 Marketable securities 1,914 1,914 2,870 2,870 Receivables including employees and officers 4,891 4,832 3,032 3,222 Other investments 4,213 4,213 9,748 9,748 Margin loans in investment accounts 179 179 146 146 Long-term debt 3,455 3,455 9,473 9,473
The carrying amounts in the table are included in the balance sheets under the indicated captions, except for notes receivable which has several components on the balance sheet. Note N - Lease and Other Commitments Operating lease commitments are primarily for the Company's shipping warehouse and equipment rentals. Rental expense amounted to $710,000, $498,000, and $135,000 for the years-ended December 31, 1999, 1998, and 1997, respectively. -23- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note N - Lease and Other Commitments (continued) Future minimum rental commitments are as follows: (in thousands) 2000 $ 673 2001 609 2002 500 2003 415 2004 161 Thereafter - ---------------- Total $ 2,358 ================ The Company entered into an employment agreement in June 1997 with Wade Cook, the president and CEO of the Company. The agreement provided for a minimum salary of $240,000 for the first year, $265,000 for the second year, and $290,000 for the final year of the agreement. Cook will be paid in accordance with the Company's standard method of payment for executives. Cook may receive additional bonuses for work as approved by the Board of Directors. Note O - Income Taxes Provisions for (benefit from) income taxes in the consolidated statements of operations consist of the following components: Years ended December 31, ------------------------------------------------------- (in thousands) 1999 1998 1997 --------------- --------------- ---------------- Current Federal $ - $3,219 $ 4,660 States 5 180 458 --------------- --------------- ---------------- 5 3,399 5,118 --------------- --------------- ---------------- Deferred Federal (2,619) (550) 945 State (239) (92) - --------------- --------------- ---------------- (2,858) (642) 945 --------------- --------------- ---------------- Total income taxes ($ 2,853) $2,757 $ 6,063 =============== =============== ================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. -24 WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note O - Income Taxes (continued) Significant components of the Company's deferred tax assets and liabilities are as follows: (in thousands) December 31, ------------------------------------- Deferred tax assets: 1999 1998 ---------------- ----------------- Unrealized (gain) loss on trading securities $ 21 ($ 309) State income tax - - ---------------- ----------------- Total deferred tax assets 21 (309) ---------------- ----------------- Deferred tax liabilities: Accelerated depreciation 651 (187) Deferred revenues (1,086) 1,109 State income tax - 29 ---------------- ----------------- Total deferred liabilities (435) 951 ---------------- ----------------- Net Deferred tax asset (liability) $ 456 ($ 642) ================ =================
The reconciliation of the effective income tax rate to the Federal statutory rate is as follows: 1999 1998 1997 ---------- ---------- ---------- Federal income tax rate (39.0%) 35.0% 35.0% Unrealized loss on trading securities 2.0 (9.1) 6.2 Deferred revenues (12.0) 23.1 - Accelerated depreciation 7.0 (5.4) (1.3) State income tax - 1.4 .4 ---------- ---------- ---------- Effective income tax rate (42.0%) 45.0% 40.3% ========== ========== ==========
The net operating loss in 1999 will be carried back to earlier years under provision of the tax law. An asset was recognized for the amount of refundable taxes under SFAS 109. Note P - Revenues and Other Cost of Revenues (in thousands) Pager Travel Seminar Product Service Hotel Related Total Revenue Sales Fees Income Service Other --------- --------- ------- ------- -------- ---------- ---------- Year ended December 31, 1999: Revenues, net of returns and discounts $59,242 $11,599 $5,395 $3,778 $ 2,157 $ 1,957 $ 84,128 --------- --------- ------- ------- -------- ---------- ---------- Royalties to related 2,407 379 - - - 193 2,979 party Speaker fees to related 47 - - - - 13 60 party Other costs of revenues 26,090 6,329 578 4,141 49 291 37,478 --------- --------- ------- ------- -------- ---------- ---------- Total cost of revenues 28,544 6,708 578 4,141 49 497 40,517 --------- --------- ------- ------- -------- ---------- ---------- Gross Profit $30,698 $ 4,891 $4,817 ($ 363) $ 2,108 $ 1,460 $ 43,611 ========= ========= ======= ======= ======== ========== ==========
-25- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note P - Revenues and Other Cost of Revenues (continued) (in thousands) Pager Travel Seminar Product Service Hotel Related Total Revenue Sales Fees Income Service Other --------- --------- ------- ------- --------- --------- ---------- Year ended December 31, 1998: Revenues, net of returns And discounts $ 78,191 $ 24,250 $ 8,427 $ 3,336 $ 2,320 $ 1,683 $ 118,207 --------- --------- -------- -------- --------- -------- ----------- Royalties to related party 6,521 1,290 - - - - 7,811 Speaker fees to related 378 - - - - - 378 party Other costs of revenues 28,943 14,721 525 4,265 8 112 48,574 --------- --------- -------- -------- --------- -------- ----------- Total cost of revenues 35,842 16,011 525 4,265 8 112 56,763 --------- --------- -------- -------- --------- -------- ----------- Gross Profit $ 42,349 $ 8,239 $ 7,902 ($ 929) $ 2,312 $ 1,571 $ 61,444 ========= ========= ======== ======== ========= ======== =========== Year ended December 31, 1997: Revenues, net of returns And discounts $60,759 $29,386 $ - $ - $3,198 $ - $93,343 --------- --------- -------- -------- --------- -------- ----------- Royalties to related party 6,559 3,438 - - - - 9,997 Speaker fees to related 155 12 - - - - 167 party Other costs of revenues 12,605 13,760 - - 2,963 - 29,328 --------- --------- -------- -------- --------- -------- ----------- Total costs revenues 19,319 17,210 - - 2,963 - 39,492 --------- --------- -------- -------- --------- -------- ----------- Gross Profit $ 41,440 $ 12,176 $ - $ - $ 235 $ - $53,851 ========= ========= ======== ======== ========= ======== ==========
Note Q - Supplementary Disclosure of Cash Flow Information The Company paid $1.753 million, $1.453 million, and $309,000 in interest, and $4.306 million, $2.750 million, and $2.485 million for income taxes for the years ended December 31, 1999, 1998, and 1997, respectively. The Company purchased a three-story commercial building in July 1996, and relocated in January 1997. The $3.300 million purchase was financed with a $2.550 million mortgage with an interest rate of 9% per annum, and a down payment of $750,000. See Note G for more information regarding the debt. In December 1999, the Company sold 100% interest in three of its hotel properties collectively for $12,700,000. The three hotels are Best Western McCarran house in Sparks, Nevada, Airport Ramada Suites in Salt Lake City, Utah, and Sheraton hotel in Sparks, Nevada. After the buyer assumed all outstanding mortgage loans and other liabilities, the Company received net proceeds of $2,822,000, of which $410,000 is in cash, $362,000 in note receivable, due in 2000, and $2,050,000 in note receivable, due on January 1, 2003, at interest of 7% per annum. The majority of the acquisition of the interest in these three hotels was made in 1998 by long term debt financing as indicated in the following paragraphs. On March 11, 1998, the Company purchased the Best Western McCarran House in Sparks, Nevada. The purchase price was $5.25 million, which included a $990,000 down payment and an assumption of promissory notes totaling $4.260 million. See Note G for more information regarding the debt. -26- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Q - Supplementary Disclosure of Cash Flow Information (continued) In 1998, the Company purchased an operating hotel in St. George, Utah. The purchase price was $4.659 million. The down payment of $1.569 million was paid for in two installments: $769,000 and $800,000 in 1998 and 1997, respectively. In the acquisition, the Company assumed promissory notes totaling $3.090 million (Note G) and recorded land, building, and equipment totaling $4.182 million. In September 1997, the Company acquired its first 25% interest of the Airport Ramada Suites, in Salt Lake City, Utah, with a cash deposit of $250,000. In June and September 1998, the Company acquired an additional 25% each transaction in trades of other hotel property interests; bringing the Company's ownership to 75%. Once majority ownership was obtained, the Company recorded land, building, and equipment of $2.763 million and notes payable of $2.294 million (Note G). In February 1999, the Company sold an office building located in Memphis Tennessee for $1,434,000. The building was originally bought for $1,425,00 through its wholly owned subsidiary, Bountiful Investment Group in April 1998. The $1.425 million purchase was financed with a $1.068 million mortgage and a down payment of $357,000. See Note G for more information regarding the debt. During 1999, the Company also sold its' 49% interest in a partnership, which holds a hotel operation for $800,000, and other investments for $1,685,000. Note R - Acquisitions During 1998, the Company completed the acquisition of Information Quest (IQ), Quantum Marketing, Inc. (Quantum), and Get Ahead Bookstores, Inc. In January 1998, the Company acquired IQ, a Nevada corporation, and the producer of the IQ Pager, which provides subscribers with paging service for stock related information. WCFC exchanged 45,000 shares of restricted common stock for 50,000 shares of IQ, representing all of the issued and outstanding shares of IQ. On the date of acquisition, the market value of the stock issued was $188,000. The acquisition was accounted for as a purchase, resulting in assets of $1.961 million, liabilities assumed of $1.835 million, and goodwill of $126,000. In January 1998, the Company acquired Quantum, a Nevada Corporation. WCFC exchanged 45,000 shares of restricted common stock for 24 million shares of Quantum, representing all of the issued and outstanding capital stock of Quantum. On the date of acquisition, the fair value of the stock issued was $189,000. The acquisition was accounted for as a purchase, resulting in goodwill of $189,000. In January 1998, WCFC acquired Get Ahead Bookstores, a Nevada corporation, a retail distributor of financial education, personal development, and inspirational products, including books, audio tapes, and video tapes, located in Quantum's financial education centers. WCFC paid $1.00 for an assignment of all interest, rights, and claims in Get Ahead Bookstores. -27 WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note R - Acquisitions (continued) In December 1999, the Company recognized the impairment of goodwill based on the continuous loss from some of its subsidiaries in accordance with the Financial Accounting Standards board's SFAS No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed of". The impairment loss of goodwill was charged to selling, general and administrative expenses. At December 31, 1999 and 1998, goodwill was $2.187 million and $3.166 million, and accumulated amortization was $127,000 and $105,000, recording net goodwill of $2.060 million and $3.061 million, respectively. The 1999 amounts were reduced by an impairment loss of $1.095 million. Note S - Accounts Payable Negotiation SFAS No. 15 establishes accounting standards for debtors and creditors during troubled debt restructurings. A debtor that transfers its receivable from a third party to a creditor to settle fully a payable shall recognize a gain on restructuring of payable. Gain on restructuring of payables shall be aggregated, included in measuring net income for the period of restructuring, and if material, classified as an extraordinary item, net of related income tax effect, in accordance with SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." In 1999, as part of the Company's negotiation with its vendors, the Company used $130,000 of prepaid advertising credit, ITEX trade dollars (see Note I), to settle $160,000 accounts payable. Since no material gain or loss arose from such transaction, no extraordinary gain or loss was recognized. Note T - Pending Litigation and Legal Proceeding During 1998 and 1999, the Company received Civil Investigative Demands ("CID") from Attorneys General (`AG") of ten states (the "multi-state-group"). Each CID was essentially the same and requested general information concerning the Company and its officers. The CID also requested substantiation for certain specific statements from the Company's advertisements and marketing materials, and certain of its publications. The Company subsequently provided extensive responses and materials for the advertising and marketing statements. Although there were sporadic contacts with the office of the Attorney General of Washington as lead counsel for the multi state group, little of substance has occurred during the pendency of discussion with the Federal Trade Commission ("FTC") discussed above. However, as discussions with the FTC began to ripen into consensus, the potential FTC agreement has become a focal point for resolving matters with the multi-state-group. The multi-state-group indicated it was amenable to a settlement predicated on the FTC draft agreement, but subject to certain additional issues. Discussions between the Company and an expanded AG multi-state group members, which now includes the Attorneys General of California and Texas, continue as of this date. It is not possible at this juncture to predict what the outcome of those discussions will be or whether these matters will ultimately be settled or litigated. Furthermore, no assurance can be made that any of the state AG will conform to the settlement approved by FTC. -28- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note T - Pending Litigation and Legal Proceeding (continued) In March 1998, the District 4 Subcommittee of the Unauthorized Practice of Law Committee in the state of Texas sent a request to SMIL and two former employees of the Company asking that the parties sign an agreement to voluntarily cease and desist in the activities which may constitute the unauthorized practice of law in Texas. The committee alleged that SMIL offered to set up Nevada corporations, Living Trusts, Keogh Plans, and Corporate Pension Plans, Family Limited Partnerships, Massachusetts Business Trust, and Charitable Remainder Trusts. The committee further alleged that the Company advised clients about legal structuring, legal advantages and legal strategies associated with such entities, and provided specific proposals of structuring an individual's assets and businesses. The Company declined to enter into a voluntary cease and desist on behalf of the former employees named in the request because they no longer work for the Company. In 1998, the Company divested that portion of its business associated with the activities specified in the request. The Company has not yet determined any impact on its financial statements and no provision for losses has been made. On May 1, 1998, the Attorney General of Texas filed a lawsuit in the District Court of Bexar County, Texas contending that the Company has engaged in false, deceptive and misleading acts and practices in the course of trade and commerce as defined in the Texas Deceptive Trade Practices-Consumer Protection Act. Specifically, the state of Texas contends that the Company's sales contracts fail to have the statutorily required notice of the three day right to cancel. The Company has not yet determined any impact on its financial statements and no provision for losses was made. On or about January 11, 1999, The People of the State of California filed a complaint for rescission of contract, restitution, injunctive relief, civil penalties, and other equitable relief against the Company and others. The case is based on the allegation that the Company marketed investment strategy seminars and products without properly advising California participants and customers that they had three days within which to revoke their purchase of any such seminar or product. On the basis of this allegation, the District Attorney for the County of Fresno is seeking full restitution of all monies paid for the Company's seminars and products by California participants and customers during the four years preceding the filing of the complaint, civil penalties in an amount not less than $2,000,000, imposition of a constructive trust on the Company's profits acquired as a result of its alleged wrongful conduct, costs of suit, and other relief. On or about April 7, 1999, the Company filed an answer in which it denied all material allegations of the complaint and asserted certain affirmative defenses. The Company has not yet determined any impact on its financial statement and no provision for losses has been made. In 1996, the Washington State Department of Financial Institutions ("DFI") first notified the Company that it was investigating unspecified violations. To date, no complaint or other action has been filed by the DFI. On September 7, 1999, the Company filed a complaint in the Superior Court of Washington against DFI, seeking a Declaratory Judgment that the DFI did not have the statutory authority to conduct its investigation because the Company is not an "investment advisor" under the Washington Securities Act, that the DFI had violated the Company's right to due process and exceeded its statutory authority by conducting an open ended and unresolved investigation over for a period of four years without closure or other action. The Court has taken the complaint under advisement and indicated it would entertain a motion to proceed if the DFI failed to take action by March 1, 2000. As of this date, no such action has been taken by DFI. The Company has informed the Court of the negotiations with the Washington Attorney General -29- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note T - Pending Litigation and Legal Proceeding (continued) and indicated that it would refrain from any further action to pursue its complaint against DFI during the pendancy of those discussions. On or about October 15, 1999, the Company was informed by the Federal Trade Commission that the agency was conducting an investigation of possible violations of the Federal Trade Commission Act. Several meetings were held between counsel and the FTC staff in which the Company vigorously contested any allegations of such trade practices. As matters progressed, it became evident that there might be a basis for a negotiated resolution of this dispute. The FTC staff made it clear that their focus was on specific past advertising issued and that the efficacy of the Company's publications and educational seminars were not at issue in their investigation. Management determined that the Company did not wish to expend the extraordinary sums that would be required for a full defense of an FTC complaint if a consent agreement could be negotiated that would set consensual standards for future advertising and marketing and that would assure that a mechanism was created for the equitable resolution of any meritorious past customer complaints. Counsel and the FTC staff have been engaged in intensive and detailed discussions. As of this date, FTC staff and the Company have arrived at a tentative agreement in principle. If that agreement can be refined into a mutually acceptable written consent order agreement, it will then be forwarded to the Federal Trade Commissioners for their independent review. At this juncture, there is no way to predict what action the Commissioners would take in this regard or whether this matter will ultimately be settled or litigated. Other Litigation The Company has been named a defendant in several other lawsuits in the normal course of its business. In the opinion of the management, after consulting with legal counsel, the liabilities, if any, resulting from these matters will not have a material effect on the consolidated financial statements of the Company. Note U - Significant Fourth Quarter Adjustments In the fourth quarter of 1999, the Company recorded the following: Impairment losses on other investments $ 1,265,000 Write-off equipment 610,000 Write-down of goodwill 1,148,000 Deferred tax benefit (2,858,000) Note V - Discontinued Operations On June 15, 1998, the Company adopted a formal plan to sell Entity Planners, Inc. (EPI), a wholly owned subsidiary of WCFC. On June 30, 1998, the Company sold the stock of EPI, the holder of a five year licensing agreement with the Company enabling it to provide entity structuring services relating to the topic of asset protection, estate planning, and tax reduction. -30- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note V - Discontinued Operations (continued) EPI was sold to a newly formed company by principals who have been involved in the production, selling, and marketing of products and seminars for the Company. The stock of EPI was sold for $250,000. Operating results of EPI for the year ended December 31, 1998 are shown separately in the accompanying income statement. The income statement for the year ended December 31, 1997 has been restated and operating results of EPI are also shown separately. As a result of the sale of EPI, the licensing agreement between the Company and EPI was transferred to the new owners of EPI. The agreement provides for aggregate licensing fees of $17.720 million payable with future cash flows of the business transferred. The payment schedule requires, on a weekly basis, the remittance of an amount ranging from 70% to 75% of net sales or 30% of gross sales, whichever greater, for a period of five years. In June of 1999, the five-year 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 sales proceeds. Total licensing revenue for the year ended December 31, 1999 and 1998 were $2.7 million and $1.7 million, respectively. Note W - Segment Reporting The Company operates through six business segments: seminars, product sales, hotels, pager services, travel services, and other. The seminar segment conducts educational investment and business seminars. The product sales includes the publishing and distribution of video tapes, audio tapes, and written materials designed to teach various investment and cash flow strategies for investing in the stock market, asset protection and asset accumulation techniques or strategies. The hotel segment includes the ownership of operating hotels. The pager services segment produces the IQ Pager, which provides subscribers with paging services for stock related information. The travel service is a travel agency that is also in the business of selling travel agent training kit. The other segment includes retail book sales, interest in real estate ventures, and an inter-company advertising agency. Information on the Company's business segments for the years ended December 31, (in thousands) 1999 1998 1997 ------------- ------------- ------------- Net revenues and sales Seminars $ 59,242 $78,191 $60,759 Product sales 12,955 24,355 29,386 Hotels 3,778 3,336 - Pager service 5,395 8,427 - Travel service 5,730 5,874 3,198 Other 5,360 8,576 4,302 Less: inter-company sales (8,332) (10,552) (4,302) ------------ ------------- ------------- $84,128 $ 118,207 $93,343 ============= ============= =============
-31- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note W - Segment Reporting (continued) (in thousands) 1999 1998 1997 ------------- ------------- ------------- Operating income (loss) Seminars ($ 4,479) $ 483 $10,907 Product sales (1,442) 813 3,538 Hotels (363) (432) - Pager services 847 2,494 - Travel services (716) 508 97 Other 43 419 - Less: inter-company profit (1,148) (731) - ------------- ------------- ------------- (7,258) 3,554 14,542 Other income (expense) 602 1,656 (706) ------------- ------------- ------------- Income (loss) from continuing operations before income taxes ($ 6,656) $ 5,210 $ 13,836 ============= ============= ============= Identifiable assets Seminars $ - $ - $ - Product sales 517 487 - Hotels - 13,482 - Pager services 1,198 1,521 - Travel services 73 18 18 Other 1,576 3,084 ------------- ------------- ------------- Segmented assets 3,364 18,592 18 Corporate assets 13,617 14,199 12,037 ------------- ------------- ------------- Total identifiable assets 16,981 32,791 12,055 ------------- ------------- ------------- Accumulated depreciation and Amortization Seminars - - - Product sales 333 264 - Hotels - 293 - Pager services 358 257 - Travel services 9 1 - Other 183 111 ------------- ------------- ------------- Segmented asset depreciation and Amortization 883 926 - Corporate asset depreciation and Amortization 4,000 2,662 1,630 ------------- ------------- ------------- Total accumulated depreciation and Amortization 4,883 3,588 1,630 ------------- ------------- ------------- Net identifiable assets $12,098 $ 29,203 $ 10,425 ============= ============= =============
-32- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note W - Segment Reporting (continued) (in thousands) 1999 1998 1997 ------------- ------------- ------------- Capital expenditures Seminars $ - $ - $ - Product sales 30 487 - Hotels (13,482) 13,482 - Pager services (323) 1,521 - Travel services 55 - Other (1,508) 3,084 - ------------- ------------- ------------- Total segment expenditures (15,228) 18,574 - Corporate expenditures (582) 2,162 4,157 ------------- ------------- ------------- Total capital expenditures ($ 15,810) $ 20,736 $ 4,157 ============= ============= =============
In all material respects, the Company accounts for inter-company sales and transfers as if the sales or transfers were to third parties for purposes of reporting on the business segment information. Identifiable assets are those assets used in a segment's operation. Corporate assets consist of certain non-current assets used by multiple segments. Discontinued operations have not been included in the calculation of segmented information. In arriving at operating income, certain expenses were allocated based on the Company's policy for allocating expenses. Substantially all of the Company's sales are domestic, See Note J for a summary of material domestic sales. All of the Company's assets are located within the continental United States. No customer accounted for greater than 10% of the Company's revenues. No vendor accounted for more than 10% of the Company's expenses. Note X - Subsequent Events On January 3, 2000 the Company issued 297,500 shares of restricted common stocks granted on December 31, 1999 to employees as bonus. See Note K. In January 2000, the Company funded its investment commitment of $650,000 as disclosed in Note L. On March 6, 2000, the Company announced it would buy back up to two million shares of the Company's outstanding common stocks over the next year through the Company's brokerage accounts. The repurchase program will be conducted in compliance with Rule 10-18 of the Securities Exchange Act of 1934 and will expire no later than February 16, 2001. -33- WADE COOK FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note Y - Going Concern The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. However, the Company has sustained a significant operating loss for the year ended December 31, 1999. In addition, the Company has used substantial amounts of working capital in its operations. Further, at December 31, 1999 and 1998, current liabilities exceed current assets by $2.789 million and $15.973 million, respectively. In view of these matters, realization of a major portion of the assets in the accompanying balance sheets is dependent upon continued operations of the company, which in turn is dependent upon the Company's ability to meet its working capital requirements, and the success of its future operations. Management has taken steps to reduce costs, improve profitability, and liquidity. By selling the Company's major holdings in the four hotels, the company has redirected its focus on its core business of conducting education investment seminars. The Company started and continues to streamline its operations by holding seminars in fewer but concentrated markets reducing travel, speaker, and meeting room costs, resulting in greater efficiency and better gross profit per seminar attendee. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 2.1(Infinity) Stock Purchase Agreement dated June 30, 1998, by and among the Company, Entity Planners, Inc., and Berry, Childers & Associates, L.L.C. 2.2(Infinity) Amendment to Stock Purchase Agreement dated September 30, 1998 by and among the Company, Entity Planners Inc. and Berry, Childers & Associates, L.L.C. 2.3* Purchase and Sale Agreement, dated July 4, 1996, between United Support Association and Seller 2.4* All Inclusive Trust Deed dated March 8, 1997, for the purchase and assumption of certain real-estate by Rising Tide, LTD from East Bay Lodging Association, LTD 2.5** Share Exchange Agreement, dated January 1, 1998, between Wade Cook Financial Corporation and Information Quest, Inc. 2.6** Stock Purchase Agreement, dated August 8, 1997, between Profit Financial Corporation and Curtis A. Taylor and Stanley J. Zenk regarding Worldwide Acquisition. 2.7** Stock Purchase Agreement, dated August 1, 1997, between Wade Cook Financial Corporation and John V. Childers, Sr., Brenda Childers, Tracy Allan Childers and John V. Childers, Jr. regarding Ideal Acquisition. 2.8** Share Exchange Agreement, dated August 15, 1997, between Profit Financial Corporation and Gold Leaf Press, Inc. 2.9** Share Exchange Agreement, dated August 15, 1997, between Profit Financial Corporation and Origin Book Sales, Inc. 2.10*** Assignment and Assumption of Interest, Consent Agreement, Memorandum of Terms re: Airport Hotel Partners, L.L.C. 2.11*** Limited Liability Company Interest Purchase Agreement re: Woods Cross Hotel Partners, L.C. dated November 29, 1997 2.12*** Limited Liability Company Interest Purchase Agreement with exhibits re: Park City Hotel Partners, L.C. dated February 4, 1997 2.13*** Memorandum of Terms, Assignment and Assumption of Interest, Warranty Deed re: Airport Lodging Associates, L.L.C. 2.14**** Share Exchange Agreement, dated January 1, 1998, between WCFC & Quantum Marketing, Inc. Exhibit No. Description - ----------- ----------- 2.15**** Stock Assignment Agreement dated January 1, 1998, between WCFC & Glendon H. Sypher 3.1** Articles of Incorporation of Wade Cook Financial Corporation 3.2 Bylaws of Wade Cook Financial Corporation 4.1** Form of Wade Cook Financial Corporation's Common Stock Certificate 10.1**(Function) 1997 Stock Incentive Plan of Wade Cook Financial Corporation 10.2** Form of Indemnification Agreement of Wade Cook Financial Corporation 10.3* Product Agreement, dated June 25, 1997, and effective as of July 1, 1997, among Wade Cook Seminars, Inc., Money Chef, Inc., and Wade B. Cook 10.4* Agreement dated February 1, 1996, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.5* Amended Agreement, dated June 26, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.6* Agreement Dated January 1, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.7* Amended Agreement dated June 26, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.8* Agreement dated March 1, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.9* Agreement dated May 1, 1997, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.10*(Function) Employment Agreement dated June 26, 1997, by and between Wade Cook Seminars, Inc., and Wade B. Cook 10.11* Commercial Lease dated June 25, 1997, by and between Wade Cook Seminars, Inc. and U.S.A. Corporate Services, Inc. 10.12* Agreement dated November 1, 1996, between Wade B. Cook and Lighthouse Publishing Group, Inc. 10.13* Secured Loan Agreement and Promissory Note (Secured) between U.S.A., Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.14** Open-Ended Product Agreement, dated March 20, 1998, between Wade Cook Financial Corporation and Wade B. Cook 10.15*** Product Agreement, dated March 23, 1998, between Planet Cash, Inc., Steven Allyn Wirrick and Wade Cook Financial Corporation Exhibit No. Description - ----------- ----------- 10.16*** Stock Assignment Agreement, dated January 1, 1998, between Get Ahead Bookstores, Inc., Glendon H. Sypher and Wade Cook Financial Corporation 10.17** Product Agreement, dated March 23, 1998, between Wade Cook Financial Corporation, Information Quest, Inc. and Thomas Cloward 10.18** Share Exchange Agreement, dated September 12, 1997, between Profit Financial Corporation and Applied Voice Recognition, Inc. 10.19** Publishing Agreement, effective October 1, 1997 and signed January 12, 1998, between Lighthouse Publishing Group, Inc. and Wade B. Cook 10.20** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated May 23, 1997, between USA/Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.21** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated June 20, 1997, between Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.22** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated July 25, 1997, between Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.23** Secured Loan Agreement, Promissory Note, and Certificate of Delivery and Receipt of Documents, dated August 22, 1997, between Information Quest, Inc. and Newstart Centre, Inc. 10.24** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents, dated October 9, 1997, between Information Quest, Inc. and Newstart Centre, Inc. 10.25** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents, dated October 9, 1997, between Left Coast Advertising, Inc. and Newstart Centre, Inc. 10.26** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents dated August 19, 1997, between Left Coast Advertising, Inc. and Newstart Centre, Inc. 10.27*** Secured Loan Agreement, Promissory Note and Certificate of Delivery and Receipt of Documents, dated January 20, 1998, between Wade Cook Seminars, Inc. and Newstart Centre, Inc. 10.28** Secured Promissory Note, dated July 31, 1997, between Wade Cook Seminars, Inc. and Robert and Meda Hondel 10.29*** Secured Promissory Note, dated June 18, 1997, between Paul and Laurie Cook and Wade Cook Seminars, Inc. 10.30*** Secured Promissory Note, dated January 1, 1998, between Paul and Laurie Cook and Wade Cook Seminars, Inc. 10.31*** Warranty Deed, Articles of Organization re: Red Rock Lodging Associates 10.32**** Contract for Sale of Real Estate dated January 20, 1998 by and between Ideal Travel Concepts, Inc. and/or assigns and Kenneth B. Lenoir 10.33(Infinity) Exclusive Product License Agreement dated June 30, 1998 by and between Wade B. Cook, and Entity Planners, Inc. 10.34(Infinity) Exclusive Product License Agreement dated June 30, 1998 by and between Wade Cook Financial Corporation, and Entity Planners, Inc. Exhibit No. Description - ----------- ----------- 10.35(Infinity) Open Ended Product Agreement between the Company and Wade Cook dated March 20, 1998 10.36(Infinity) Amendment to the Open Ended Product Agreement dated November 13, 1998 by and between the Company and Wade Cook 10.37# Assignment and Assumption of Interest dated August 22, 1996 by and between Zion's Management and Development Co., Airport Lodging Associates L.C. and Wade Cook Seminars, Inc. 10.38# Real Estate Purchase Contract dated August 22, 1997 (St. George Hilton) 10.39# Addendum No. 1/Counteroffer to Real Estate Purchase Contract dated August 1997 (St. George Hilton 10.40# Real Estate Lease dated July 16, 1998 between Origin Book Sales, Inc. and California Avenue Associates, LLC. 10.41# Form of Speaker Agreement 10.42# Agreement dated December 11, 1998 between THH Ventures L.C. and the Company 10.43 Assignment Agreement dated December 15, 1999 by and between Wade Cook Financial Corporation and Never Ending Wealth, L.P. 10.44 Purchase and Sale Agreement for Hotel Properties dated December 1999 by and between Bountiful Investment Group, Inc. and Eagle Rock Finance, L.C. 10.45 Promissory Note dated December 20, 2000 made by Stock Market Institute of Learning, Inc. in favor of Sun Life Assurance Company of Canada. 10.46 Promissory Note dated June 1999 made by Quantum Marketing, Inc. in favor of Habib American Bank. 11.1# Statement of Computation of Per Share Earnings 16.1** Letter re: Change in Certifying Accountant 21.1# List of Wade Cook Financial Corporation Subsidiaries 27.1# Financial Data Schedule - December 31, 1999 - --------------------------------- * Previously filed as an exhibit to the Company's registration statement on Form 10 filed with the SEC on April 30, 1997, as amended on June 29, 1997 and September 24, 1997 ** Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 31, 1998 *** Previously filed as an exhibit to the Company's Form 10-K/A filed with the SEC on July 20, 1998 **** Previously filed as an exhibit to the Company's Form 10-Q filed with the SEC on August 8, 1998 (Infinity) Previously filed as an exhibit to the Company's Form 10-Q filed with the SEC on November 16, 1998 (Function) This document has been identified as a management contract or compensatory plan or arrangement. # Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 31, 1999 EX-3.2 2 ANNUAL BYLAWS Exhibit 3.2 BYLAWS WADE COOK FINANCIAL CORPORATION ARTICLE I Offices The principal office of the corporation shall be located at its principal place of business or such other place as the Board of Directors (the "Board") may designate. The corporation may have such other offices, either within or without the State of Nevada, as the Board may designate or as the business of the corporation may require from time to time. ARTICLE II Shareholders 2.1 Annual Meeting. The annual meeting of the shareholders shall be held on such date and at such place and time as the Board may specify for the purpose of electing directors and officers and transacting such business as may properly come before the meeting. If the day fixed for the annual meeting is a legal holiday at the place of the meeting, the meeting shall be held on the next succeeding business day. If the annual meeting is not held on the date designated therefor, the Board shall cause the meeting to be held as soon thereafter as may be convenient. 2.2 Special Meetings. The President, the Board, or the holders of not less than fifty percent (50%) of the outstanding shares of the corporation entitled to vote at the meeting may call special meetings of the shareholders for any purpose, 2.3 Meetings by Telephone. Shareholders may participate in a meeting of the shareholders by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. 2.4 Place of Meeting. All meetings shall be held at the principal office of the corporation or at such other place within or without the State of Nevada designated by the Board. 2.5 Notice of Meeting. The President, the Secretary, the Board, or shareholders calling an annual or special meeting of shareholders as provided For herein, shall cause to be delivered to each shareholder entitled to notice 1 of or to vote at the meeting either personally or by mail, postage prepaid, or facsimile transmission to the extent permitted by applicable state law, not less than ten (10) nor more than sixty (60) days before the meeting, written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. At any time, upon written request of the holders of not less than fifty percent (50%) of the outstanding shares of the corporation entitled to vote at the meeting, it shall be the duty of the Secretary to give notice of a special meeting of shareholders to be held on such date and at such place and time as the Secretary may fix, not less than ten (10) nor more than sixty (60) days after receipt of said request, and if the Secretary shall neglect or refuse to issue such notice, the person making the request may do so and may fix the date for such meeting. If such notice is mailed, it shall be deemed delivered when deposited in the official government mail properly addressed to the shareholder at his or her address as it appears on the stock transfer books of the corporation with postage prepaid. If the notice is telegraphed, to the extent permitted by state law, it shall be deemed delivered when the telegram is delivered to the telegraph company. If the notice is transmitted by facsimile, to the extent permitted by state law, it shall be deemed delivered when received. 2.6 Waiver of Notice. Whenever any notice is required to be given to any shareholder under the provisions of these Bylaws, the Articles of Incorporation or the General Corporation Law of the State of Nevada, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 2.7 Fixing of Record Date for Determining Shareholders. For the purpose of determining shareholders entitled to notice of, or to vote at, any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose, the Board may fix in advance a date as the record date for any such determination. Such record date shall be not more than sixty (60) days, and in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination is to be taken. If no record date is fixed for the determination of shareholders entitled to vote at a meeting or to receive payment of a dividend, the date and hour on which the notice of meeting is mailed or on which the resolution of the Board declaring such dividend is adopted, as the case may be, shall be the record date and time for such determination. Such a determination shall apply to any adjournment of the meeting. 2.8 Voting Record. At least ten (10) days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, shall be made, arranged in alphabetical order, with the address of and number of shares held by each shareholder. This 2 record shall be kept on file at the registered office of the corporation for ten (10) days prior to such meeting and shall be kept open at such meeting for the inspection of any shareholder. 2.9 Quorum. A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of the shareholders. If less than one hundred percent of the outstanding shares entitled to vote are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. If a quorum is present or represented at a reconvened meeting following such an adjournment, any business may be transacted that might have been transacted at the meeting as originally called. 2.10 Manner of Acting. If a quorum is present, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number is required by these Bylaws, the Articles of Incorporation or the General Corporation Law of the State of Nevada. 2.11 Proxies. A shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized agent. Such proxy shall be filed with the Secretary of the corporation before or at the time of the meeting. A proxy shall become invalid six (6) months after the date of its execution, unless otherwise provided in the proxy. A proxy with respect to a specified meeting shall entitle the holder thereof to vote at any reconvened meeting following adjournment of such meeting but shall not be valid after the final adjournment thereof. 2.12 Voting of Shares. Each outstanding share entitled to vote with respect to the subject matter of an issue submitted to a meeting of shareholders shall be entitled to one vote upon each such issue. 2.13 Voting for Directors. Each entitled to vote at an election of directors, in person or by proxy, has a right to vote one (1) vote for each share of stock standing in his name on the books of the corporation. 2.14 Action by Shareholders Without a Meeting. Any action which could be taken at a meeting of the shareholders may be taken without a meeting if a written consent setting forth the action so taken is signed by shareholders holding a majority of the voting power of all shares entitled to vote with respect to the subject matter thereof; provided, that if a different proportion of voting power is required by the Articles of Incorporation, these Bylaws or the General Corporate Law of the State of Nevada, then that proportion of written consents is required. Any such consents shall be inserted in the minute book as if it were the minutes of a meeting of the shareholders. 3 ARTICLE III Board of Directors 3.1 General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board, except as may be otherwise provided in these Bylaws, the Articles of Incorporation or the General Corporation Law of the State of Nevada. 3.2 Number and Tenure. The Board may be increased or decreased from time to time; provided, however, that the number shall not be less than three (3) or more than twelve (12). In the case of an increase in the number of Directors, the additional director or directors shall be elected by the shareholders at an annual meeting or at such special meeting called for that purpose. In case of a vacancy in the Board of Directors, the remaining Directors, by majority vote, may elect a successor to hold office for the unexpired term of the Director whose position is vacant, and until the election and qualification of a successor. The directors of this Corporation will be divided into three classes: Class I, Class II, and Class Ill. Such classes must be as nearly equal in number as possible. The term of the Class I directors will expire at the first annual meeting of the shareholders following the designation; the term of the Class II directors will expire at the second annual meeting of the shareholders following designation; and the term of the Class III directors will expire at the third annual meeting of the shareholders following designation. Any changes to the number of directors will be apportioned among the classes so that after the change, the classes will remain as nearly equal in number as possible. The provisions of this Article 3.2 may not be amended or repealed, and no provisions inconsistent herewith may be adopted by the Corporation, without the affirmative vote of the holders of at least sixty-seven percent ( 67%) of the shares of the Corporation. 3.3 Annual and Regular Meetings. An annual Board meeting shall be held without notice immediately after and at the same place as the annual meeting of shareholders. A resolution of the Board, or any committee thereof, may specify the time and place either within or without the State of Nevada for holding regular meetings thereof without other notice than such resolution. 3.4 Special Meetings. Special meetings of the Board or any committee appointed by the Board may be called by or at the request of the Chairman of the Board, the President, the Secretary or any one director. The person or persons authorized to call special meetings may fix any place either within or without the State of Nevada as the place for holding any special Board meeting called by them. 4 3.5 Meetings by Telephone. Members of the Board or any committee designated by the Board may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. 3.6 Notice of Special Meetings. Written notice of a special Board or committee meeting stating the place, day and hour of the meeting shall be given to a director at his or her address shown on the records of the corporation. Neither the business to be transacted at, nor the purpose of, any special meeting need be specified in the notice of such meeting. 3.6.1 Personal Delivery. If delivery is by personal service, the notice shall be effective if delivered at such address at least two (2) days before the meeting. 3.6.2 Delivery by Mail. If notice is delivered by mail, the notice shall be deemed effective if deposited in the official government mail properly addressed with postage pre-paid at least five (5) days before the meeting. 3.6.3 Delivery by Telex or Facsimile. If notice is delivered by telex or facsimile, the notice shall be deemed effective if sent and evidenced by transmission receipt or report at least three (3) days before the meeting. 3.7 Waiver of Notice. 3.7.1 In Writing. Whenever any notice is required to be given to any director under the provisions of these Bylaws, the Articles of Incorporation or the General Corporation Law of the State of Nevada, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board need be specified in the waiver of notice of such meeting. 3.7.2 By Attendance. The attendance of a director at a Board or committee meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. 3.8 Quorum. A majority of the directors shall constitute a quorum for the transaction of business at any Board meeting. A majority of the directors 5 present may adjourn the meeting from time to time without further notice. 3.9 Manner of Acting. The act of the majority of the directors present at a Board or committee meeting at which there is a quorum shall be the act of the Board or of such committee, unless the vote of a greater number is required by these Bylaws, the Articles of Incorporation, or the General Corporation Law of the State of Nevada. 3.10 Presumption of Assent. A director of the corporation present at a Board or committee meeting at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting, or unless such director files a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof, or forwards such dissent by registered mail to the Secretary of the corporation immediately after the adjournment of the meeting. A director who voted in favor of such action may not dissent. 3.11 Action by Board or Committees Without a Meeting. Any action which could be taken at a meeting of the Board or of any committee appointed by the Board may be taken without a meeting if a written consent setting forth the action so taken is signed by each of the directors or by each committee member. Any such written consent shall be inserted in the minute book as if it were the minutes of a Board or a committee meeting. 3.12 Resignation. Any director may resign at any time by delivering written notice to the Chairman of the Board, the President, the Secretary or the Board, or to the registered office of the corporation, or by giving oral notice at any meeting of the directors or shareholders. Any such resignation shall take effect at the time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 3.13 Removal. At a meeting of shareholders called expressly for that purpose, one or more members of the Board (including the entire Board) may be removed, with or without cause, by a vote of the holders of two-thirds (66 2/3%) of the shares then entitled to vote on the election of directors. If the Articles of Incorporation permit cumulative voting in the election of directors, and if less than the entire Board is to be removed, no one of the directors may be removed if the votes cast against his or her removal would be sufficient to elect such director if then cumulatively voted at an election of the entire Board. 3.14 Vacancies. Any vacancy occurring on the Board may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office. Any directorship to be 6 Filled by reason of an increase in the number of directors may be filled by the Board for a term of office continuing only until the next election of directors by the shareholders. 3.15 Compensation. By Board Resolution, directors may be paid their expenses, if any, of attendance at each Board meeting, or a fixed sum for attendance at each Board meeting, or a stated salary as a director, or a combination of the forgoing. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.16 Establishment of Committees. The Board shall have the Power, by resolution or resolutions passed by a majority of the Board, to designate one or more committees from among its members, each committee to consist of not less than two directors of the Corporation, which to the extent provided in the resolutions or in these Bylaws, shall report to the Board and may exercise the authority of the Board to the extent provided in its enabling resolution and any pertinent subsequent resolutions adopted in like manner, provided that the authority of each such committee shall be subject to applicable law. Each committee or committees shall have such name or names as may be stated in these Bylaws or as may be determined from time to time by resolution of the Board. The sole committee of the Corporation existing as of November 15, 1999 shall be the Audit/Executive Committee, whose membership shall consist solely of outside director members. The Board shall be responsible for the scope and power of the Individual committees and their assignments. ARTICLE IV Officers 4.1 Number. The officers of the corporation shall be President, Secretary, and Treasurer, each of whom shall be elected by the Board. The Board may also elect Vice Presidents, as well as other officers and assistant officers, including a Chairman of the Board, who may or may not be an executive officer of the Corporation as may be designated by the Board, such officers and assistant officers to hold for such period, have such authority and perform such duties as are provided in these Bylaws or any may be provided by resolution of the Board. Any officer may be assigned by the Board any additional title that the Board deems appropriate including the title of Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Accounting Officer and 7 Controller. The Board may delegate to any officer or agent the power to appoint any subordinate officers or agents and to prescribe their respective terms of office, authority and duties. Any two or more offices may be held by the same person. 4.2 Election and Term of Office. The officers of the corporation shall be elected annually by the Board at the Board meeting held after the annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as a Board meeting conveniently may be held. Unless an officer dies, resigns, or is removed from office, he or she shall hold office until the next annual meeting of the Board or until his or her successor is elected. 4.3 Resignation. Amy officer may resign at any time by delivering written notice to the Chairman of the Board, the President, the Secretary or the Board, or by giving oral notice at any meeting of the Board. Any such resignation shall take effect at the time specified therein, or if the time is not specified, upon delivery thereof and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 4.4 Removal. Any officer or agent elected or appointed by the Board may be removed by the Board with or without cause whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. 4.5 Vacancies. A vacancy in any office created by the death, resignation, removal, disqualification, creation of a new office or any other cause may be filled by the Board for the unexpired portion of the term or for a new term established by the Board. 4.6 President. The President shall preside over meetings of the Board and shareholders and, subject to the Board's control, shall supervise and control all of the assets, business and affairs of the corporation. The President may sign certificates for shares of the corporation, deeds, mortgages, bonds, contracts, or other instruments, except when the signing and execution thereof have been expressly delegated by the Board or by these Bylaws to some other officer or agent of the corporation or are required by law to be otherwise signed or executed by some other officer or in some other manner. In general, the President shall perform all duties incident to the office of President, and such other duties as are prescribed by the Board from time to time. 4.7 Vice President. Except as otherwise provided herein, in the absence of the President or his inability to act, the senior Vice President shall act in his place and stead and shall have all the powers and authority of the President, except as limited by resolution of the Board. 8 4.8 Secretary. The Secretary shall: (a) keep the minutes of meetings of the shareholders and the Board in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records of the corporation; (d) keep registers of the post office address of each shareholder and Director; (e) sign certificates for shares of the corporation; (f) have general charge of the stock transfer books of the corporation; (g) sign, with the President, or other officer authorized by the President or the Board, deeds, mortgages, bonds, contracts, or other instruments; and (h) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the President or by the Board. In the absence of the Secretary, an Assistant Secretary may perform the duties of the Secretary. 4.9 Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the corporation. He shall deposit all monies and other valuables in the name and to the credit of the corporation in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board, the Chairman of the Board (if there is one), or the President, taking proper vouchers for such disbursements. He shall render to the Chairman of the Board (if there is one), the President and the Board at the regular meetings of the Board, or whenever they may request it, and to the shareholders at the annual meeting of the shareholders, an account of all his transactions as treasurer and of the financial condition of the corporation. If required by the Board he shall give the corporation a bond for the faithful discharge of his duties in such amount and with such surety as the Board shall prescribe. The Treasurer shall also perform such other duties as may be assigned to him by the Chairman of the Board (if there is one), the President or the Board. ARTICLE V Contracts, Loans, Checks and Deposits 5.1 Contracts. The Board may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances. 5.2 Loans. No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board. Such authority may be general or confined to specific instances. 5.3 Checks, Drafts, etc. All checks, drafts or other orders for the 9 payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, or agent or agents, of the corporation and in such manner as is from time to time determined by resolution of the Board. 5.4 Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board may select. ARTICLE VI Certificates for Shares and Their Transfer 6.1 Issuance of Shares. No shares of the corporation shall be issued unless authorized by the Board, which authorization shall include the maximum number of shares to be issued and the consideration to be received for each share. 6.2 Certificates for Shares. Certificates representing shares of the corporation shall be signed by the President and shall include on their face written notice of any restrictions which may be imposed on the transferability of such shares. All certificates shall be consecutively numbered or otherwise identified. 6.3 Stock Records. The stock transfer books shall be kept at the registered office or principal place of business of the corporation or at the office of the corporation's transfer agent or registrar. The name and address of the person to whom the shares represented thereby are issued, together with the class, number of shares and date of issue, shall be entered on the stock transfer books of the corporation. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. 6.4 Restrictions on Transfer. All certificates representing the issuance of shares of the corporation not otherwise registered pursuant to a registration statement filed with the Securities and Exchange Commission shall bear the following legend on the face of the certificate or on the reverse of the certificate if the reference to the legend is contained on the face. The securities evidenced by this Certificate have not been registered under the Securities Act of 1933 or any applicable state law, and no interest therein may be sold, distributed, assigned, offered, pledged or otherwise transferred unless (a) there is an effective registration statement under such Act and applicable state securities laws covering and such transaction involving said securities or (b) this corporation receives an opinion of legal counsel for the holder of these securities (concurred in by legal counsel for 10 this corporation) stating that such transaction is exempt from registration or (c) this corporation otherwise satisfies itself that such transaction is exempt from registration. 6.5 Transfer of Shares. The transfer of shares of the corporation shall be made only on the stock transfer books of the corporation pursuant to authorization or document of transfer made by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney-in-fact authorized by power of attorney duly executed and filed with the Secretary of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificates for a like number of shares shall have been surrendered and canceled. 6.6 Lost or Destroyed Certificates. In the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the Board may prescribe. ARTICLE VII Books and Records The corporation shall keep correct and complete books and records of account, stock transfer books, minutes of the proceedings of its shareholders and Board and such other records as may be necessary or advisable. ARTICLE VIII Accounting Year The accounting year of the corporation shall be the calendar year, provided that if a different accounting year is at any time selected for purposes of federal income taxes, the accounting year shall be the year so selected. ARTICLE IX Seal The seal of the corporation shall consist of the name of the corporation, the state of its incorporation and the year of its incorporation. ARTICLE X Indemnification To the full extent permitted by the General Corporation Law of the State of 11 [last page missing] 12 EX-10.43 3 WC ASSIGNMENT AGREEMENT Exhibit 10.43 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT (the "Assignment") is entered into as of the 15th day of December, 1999 by and between Wade Cook Financial Corporation, a Nevada corporation ("WCFC"), and Never Ending Wealth, L.P., a Nevada limited partnership ("NEW") (collectively, the "Parties"). Recitals A. WCFC entered into an Open-Ended Product Agreement dated March 20, 1998 (the "Product Agreement") with Wade B. Cook, a married individual ("Cook"), pursuant to which Cook granted WCFC an exclusive license to certain intellectual property in exchange for royalties. Cook assigned his rights to such royalties to NEW. B. WCFC currently owes NEW royalties under the Product Agreement. C. Certain of WCFC's subsidiaries have assigned to WCFC all of their right, title and interest as holders of eight separate Promissory Notes, which are described in Exhibit A attached hereto and incorporated herein by reference (the "Notes"). D. WCFC desires to assign all of its right, title and interest in the Notes, and NEW desires to accept same, as payment toward royalties due under the Product Agreement, on the terms set forth below. Agreements In consideration of the foregoing recitals, the mutual covenants set forth below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Assignment and Acceptance. WCFC hereby assigns, sets over, transfers, conveys, and sells to NEW all of WCFC's right, title, and interest in and to the Notes as payment toward royalties due under the Product Agreement. NEW hereby accepts such assignment. For purposes of calculating the amount paid toward royalties due under the Product Agreement, the Parties agree that the aggregate value of the Notes is $786,337.67 payment toward royalties of $786,337.67 pursuant to this Assignment. 1.1 Delivery of Notes. WCFC agrees to deliver to NEW each of the original Notes properly endorsed as necessary to effectively transfer ownership of the Notes to NEW as contemplated hereby as soon as reasonably practicable to do so. 2. Representations and Warranties. WCFC represents and warrants that WCFC has good and marketable title to the interests conveyed hereby; that WCFC has full and lawful authority to assign such interests; and that WCFC will defend the assignment under this Assignment against all persons claiming the same or any part thereof, and indemnify and hold Assignment Agreement Page 1 of 2 harmless NEW from and against any and all loss, expense or liability (including attorneys' fees and costs of court) arising from any such claim. In the event of such a claim, upon WCFC's written request, NEW shall make available to WCFC such original documents, or copies thereof, as are necessary to defend such a claim, and shall cooperate with WCFC as reasonably necessary, at no expense to NEW, to defend such a claim. 3. Indemnification. WCFC hereby agrees to indemnify NEW from any and all claims, actions, causes of action, damages, costs, expenses, liabilities and other obligations (including without limitation all attorneys' fees and costs of court) incurred or sustained by NEW as a result of any default by WCFC under the terms of this Assignment. 4. Binding Effect. This Assignment shall inure to and be binding upon the Parties and their respective successors and assigns. 5. Governing Law. This Assignment shall be governed by and construed in accordance with the laws of the State of Washington. 6. Facsimile Transmission. Facsimile transmission of any signed original document, and retransmission of any signed facsimile transmission, shall be the same as transmission of an original. At the request of any party hereto, the Parties will confirm signatures transmitted by facsimile by signing an original document. 7. Counterparts. This Assignment may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. EXECUTED as of the date first written above. WADE COOK FINANCIAL CORPORATION a Nevada corporation By: /s/ [illegible] --------------------------------------- Its: CFO -------------------------------------- NEVER ENDING WEALTH, L.P., a Nevada limited partnership By: /s/ Wade B. Cook --------------------------------------- Its: General Partner ------------------------------------- Assignment Agreement Page 2 of 2 EX-10.44 4 PSA - HOTEL Exhibit 10.44 PURCHASE AND SALE AGREEMENT FOR HOTEL PROPERTIES THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is entered into this ____ day of December into by and between Bountiful Investment Group, Inc., a Nevada corporation ("BIG"), and Eagle Rock Finance, L.C., a Utah limited liability company, a/k/a Eagle Rock, L.C. ("Purchaser") (collectively, the "Parties"). Recitals A. BIG owns and operates the Best Western McCarran House located at 55 East Nugget Avenue in Sparks, Nevada (the "Best Western"), which is more particularly described in Exhibit A, attached hereto. BIG owns 100% of the ownership interests in Sparks Lodging Associates Corporation, a Nevada corporation ("SLAC") created to provide management services at the Best Western. B. BIG owns and/or controls 100% of the ownership interests in Airport Lodging Associates, L.C., a Utah limited liability company ("ALA") that owns and operates the Ramada Ltd. & Suites located at 315 N. Admiral Byrd Road in Salt Lake City, Utah (the "Ramada"), which property is more particularly described in Exhibit A attached hereto. C. BIG owns and/or controls 100% of the ownership interests in Red Rock Lodging, L.C., the Utah limited liability company ("RRL") that owns and operates the Four Points Hotel by Sheraton located at 1450 South Hilton Drive in St, George, Utah (the "Sheraton"), which property is more particularly described in Exhibit A attached hereto (The Best Western, the Ramada and the Sheraton are referred to occasionally herein collectively as the "Hotels") (SLAC, ALA and RRL are referred to occasionally herein collectively as the "Hotel Entities") (the real properties, together with all goodwill, cash, accounts receivable, appliances, furniture, equipment, fixtures, and all other items of personal property located on or held or used in connection with the operations or the Hotels, are collectively referred to herein as the "Hotel Properties"). D. Purchaser is engaged in a variety of business endeavors, including the ownership and operation of hotel properties. E. BIG desires to sell, and Purchaser desires to purchase, all of BIG's right, title and interest in the Hotel Entities and in the Best Western (the "Purchased Interests") on the terms and conditions set forth in this Agreement. Agreements In consideration of the foregoing recitals and the mutual covenants set forth below, the Parties agree as follows: 1. Purchase and Sale. 1.1 Purchase Price. BIG shall sell, and Purchaser shall purchase, the Purchased Interests for the agreed sum of Twelve Million Seven Hundred Thousand and No/100ths Dollars ($12,700,000.00) (the "Purchase Price"), which shall be payable as follows: Purchase and Sale Agreement for Hotel Properties Page 1 of 16 1.1.1 Nonrefundable Cash Down Payment. The Parties acknowledge that Purchaser already has delivered a check to Title West in the amount of Fifty Thousand and No/l00ths Dollars ($50,000.00) pursuant to a letter of intent signed by the Parties dated December 13, 1999, which check constitutes a nonrefundable cash down payment on the Purchased Interests. If the amount has not already been delivered to BIG, that amount shall be delivered immediately, but in no event later than Closing, as defined in Section 4.1 below. 1.1.2 Cash Payment at Closing. Purchaser shall pay the sum of Three Hundred Sixty Thousand and No/100ths Dollars ($360,000.00) in cash, at Closing, by certified or cashier's check, wire transfer or other form of immediately available federal Funds. 1.1.3 Assumption of Existing Debt. Purchaser agrees to assume the existing general liabilities plus the mortgage or trust (feed debt on each of the Hotel Properties as of the Closing Date, but not to exceed more than a collective total of Nine Million Eight Hundred Ninety Thousand and No/100ths Dollars ($9,890,000.00). Purchaser acknowledges that Zion's Management & Development Group, Inc., a Utah corporation ("Zions"), the entity that currently manages the Hotel Properties for BIG, previously had an ownership interest in each of the Hotel Properties and is listed as a borrower. Certain of Zion's owners have personally guaranteed the loans on each of the Hotel Properties, Purchaser has entered into an agreement with Zion's regarding the ongoing management of the Hotel Properties and all issues arising from or related to the debt to be assumed hereunder, Purchaser shall assume all responsibility for such debt and for notifying the respective lenders and obtaining their approval to Purchaser's assumption of such debt promptly following the Closing Date, as defined in Section 4.1 below, BIG shall have no further obligation to Zions with respect to such debt following Closing. Purchaser specifically does not agree to assume any other debts or obligations of BIG or either Hotel Entity, except as expressly provided herein. 1.1.4 Promissory Note. Purchaser shall execute and deliver to BIG a promissory note in the amount of Two Million Three Hundred Ninety Thousand and No/100ths Dollars ($2,390,000.00) (the "Note"), provided, however, that the principal amount of the Note shall be reduced by any amount by which the aggregate actual debt amount exceeds the fixed amount set forth in Section 1.1.3 above. The Note shall be interest free for the first 180 (lays following Closing. Thereafter, the Note will bear interest at the Tate of seven percent (7%) per annum. Purchaser shall pay BIG a principal reduction payment of Two Hundred Thousand and No/100ths Dollars ($200,000.00) on or before the date that is 180 days following Closing. Thereafter, Purchaser shall make monthly interest only payments to BIG on or before the first day of each month commencing on August 1, 2000, for a period of 30 months. The entire outstanding principal balance of the Note shall be due and payable on or before January 1, 2003; provided, however that Purchaser shall have the option, upon payment to BIG of the Sum of Five Thousand and No/100ths Dollars ($5,000.00), to convert the Note into a note that will bc amortized over 240 months at the rate of ton percent (10%) per annum, which note also shall have a call that may be exercised by BIG at any time after the first 36 months upon 60 days' written notice from BIG of its intent to do so. Purchase and Sale Agreement for Hotel Properties Page 2 of 16 1.1.5 Fairfield Inn Payment. In addition to the foregoing, Purchaser also agrees to pay to BIG, at Closing, the sum of Three Hundred Ninety Thousand and No/100ths Dollars ($390,000.00), in cash, via certified or cashier's check, wire transfer, or other immediately available federal funds. This cash payment will constitute payment in full of a promissory note executed and delivered by Zions to BIG as part of the payment for Zion's purchase of BIG's 49% ownership interest in the entity that owns and operates the Fairfield Inn located in Provo, Utah. Purchaser represents that Purchaser and Zion's already have entered into an agreement pursuant to which Zion's agreed to assign the 49% ownership interest acquired from BIG to Purchaser in exchange for Purchaser's promise to pay the outstanding amount of Zion's promissory note to BIG as set forth in this Section 1.1.5. BIG shall have no further rights and interests in that entity or the Fairfield Inn or any further obligations related thereto. 1.1.6 Allocation of Purchase Price. The Parties agree to allocate the Purchase Price as specifically set forth below in this Section 1.1.6. The Parties further agree that they will prepare and file their federal and any state or local income or other tax returns based on such allocations, and that the they will prepare and file any other notices or filings its may be required by any federal, state or local agency based on such allocations. Hotel Property Real Property All Other Property Total Best Western $4,950,000.00 $950,000.00 $5,900,000.00 The Sheraton $3,550,000.00 $650,000.00 $4,200,000.00 The Ramada $2,200,000.00 $400,000.00 $2,600,000.00 2. Security Interest. 2.1 Grant of Security Interest; Perfection. As security for Purchaser's obligations set forth in the Note, and all renewals, modifications and extensions thereof, if any, BIG shall have, and Purchaser hereby grants, a first-priority security interest in interests in the Hotel Entities acquired by Purchaser hereunder, and a second priority security interest in the Best Western, which shall be subordinate only to the existing debt on the Best Western (collectively, the "Collateral"). Purchaser agrees to execute and deliver such documents as BIG may request to formally document, perfect, and maintain the security interests granted hereby, including, but not limited to UCC-l Financing Statements, Pledge Agreements, Security Agreements, and a Deed or Trust (collectively, the "Security Documents"). BIG may file or record in the appropriate public offices any and all Such documents required or permitted by law to be filed or recorded with respect to BIG's interest in the Collateral, only if (a) BIG gives Purchaser not less than 20 days' prior notice of its intent to take any such action, and (b) doing so does not in any way cause or possibly cause a violation of or an acceleration of any financing or loan with respect to any of the Hotel Properties, Purchaser agrees to pay before delinquency any tax or other governmental charge which is or can become, through assessment or distraint or otherwise, a lien on the Collateral, and to pay any tax which may be levied on any obligation secured hereby. 2.2 Control of Collateral. Purchaser shall not voluntarily sell, transfer, assign, pledge, or otherwise transfer any part of the Collateral or collect any distributions from the Hotel Entities and/of the Best Western, except with the prior written consent of BIG or as follows: Purchase and Sale Agreement for Hotel Properties Page 3 of 16 2.2.1 Purchaser may sell the Collateral provided that the sales price is sufficient to pay the principal amount of the Note described in Section 1.1.4 above or the proportionate share thereof if only part of the Collateral is sold, and the sales proceeds are used by Purchaser to pay the proportionate share of the Note in accordance with the allocations set forth in Section 1.1.6 above; provided, that any such payments shall first be applied to the amount due and payable on the date that is 180 days following tile Closing Date. 2.2.2 Purchaser is authorized to collect distributions from, the Hotel Entities and/or the Best Western at all times during which Purchaser is current in meeting its obligations under tile Note or until such time as Purchaser's authority to do so is terminated pursuant to this Agreement. 2.2.3 In the event of default by Purchaser in payment of tile Note, BIG shall have the right to notify Purchaser to cease collecting distributions from the Hotel Entities and/or the Best Western, whereupon BIG may proceed to co-license such distributions and may deduct therefrom the reasonable expenses of collection. 2.2.4 Any sum received by BIG from the Hotel Entities and/or the Best Western shall be applied as BIG shall elect to the obligations secured by this Agreement or as may be due under the Note and/or the Security Documents. 2.3 Accounting and Inspection of Books. Purchaser agrees to maintain full and accurate records, including books of account, covering the Collateral and to permit BIG or its duly authorized representative to examine such of the books and records as related to the Collateral at all reasonable times during business hours with ten days advance notice from BIG. 2.4 Notice to the Hotel Entities and/or the Best Western. Upon termination of Purchaser's authority to collect distributions from the Hotel Entities and/or the Best Western, pursuant to this Agreement, BIG is authorized to notify the Hotel Entities and/or the Best Western to effect direct collection of any distributions from the Hotel Entities and/or the Best Western that are attributable to the Collateral. At the request of BIG, Purchaser agrees to execute an appropriate notice to the Hotel Entities and the Best Western of BIG's right to collect such distributions therefrom as provided herein. 2.5 Default. Occurrence of any of the following events shall constitute a default by Purchaser under this Agreement. 2.5.1 Any failure to pay when due the full principal amount of the Note, or other charge which is or may be secured hereby or by the Security Documents. 2.5.2 The falsity of any representation of warranty made by Purchaser herein or in the Security Documents. 2.5.3 If the Collateral should be seized of levied upon or under any legal or governmental process against Purchaser or against the Collateral. 2.5.4 If Purchaser becomes insolvent or is the subject of a petition in bankruptcy, either voluntary or involuntary, or in any other proceedings under the federal Purchase and Sale Agreement for Hotel Properties Page 4 of 16 bankruptcy laws; or makes an assignment for the benefit of creditors; or if Purchaser is named in or the Collateral is subjected to a suit for the appointment of a receiver. 2.5.5 Dissolution or Liquidation of Purchaser. Upon any such event of default, BIG may give written notice to Purchaser thereof. If such default is not cured within thirty (30) days from receipt of such notice by Purchaser, all obligations and indebtedness secured hereby shall, at the option of BIG, become immediately due and payable, and BIG shall have the right to pursue any remedies to which it may be entitled pursuant to the Security Documents. 3. Condition of Title. Title to the Purchased Interests is to be free of all encumbrances or defects other than the existing security interests granted to the lenders, and such other circumstances as do not materially affect Purchaser's ability to own and operate the Hotel Properties. 3.1 Title Insurance. BIG shall, at BIG's cost and expense, order and deliver to Purchaser preliminary commitments for an Owners Standard Policies of Title Insurance, in the amounts set forth in the allocations for real estate for each of the respective Hotel Properties as set forth in Section 1.1.6 above to be issued by First American Title in Reno, Nevada for the Best Western, Sutherland Title in Salt Lake City, Utah for the Ramada property, and First Title in St. George, Utah for the Sheraton property, respectively (collectively, the "Title Companies") describing the state of title of the Hotel Properties (the "Title Reports"). The Parties authorize the Escrow Agent to correct and/or insert the legal descriptions to the Hotel Properties on Exhibit A attached hereto at Closing, if necessary, based on the legal descriptions issued in the Title Reports. The Title Reports shall contain no exceptions other than those encumbrances of record which were of record when BIG and/or tile Hotel Entities acquired the Hotel Properties and that do not materially affect the value of the Hotel Properties or unduly interfere with Purchaser's ability to operate the Hotel Properties as hotels. Encumbrances to be paid by BIG may be paid out of the Purchase Price received at Closing. If title cannot be made so insurable prior to the Closing Date, Purchaser may, at Purchaser's sole option, waive any and all such remaining encumbrances and defects and elect to purchase the Purchased Interests subject to such encumbrances and defects and pursuant to the terms and conditions of this Agreement or may terminate this Agreement without ,any further liability or obligation to BIG hereunder, in which event Purchaser shall receive full refund of the nonrefundable deposit, notwithstanding the nonrefundable nature thereof. 4. Closing. 4.1 Closing Date. This sale shall be closed in the offices of Hill, Johnson & Schmutz located at 3319 North University Avenue, Suite # 200, Provo, Utah 84604 ("Escrow Agent") on or before 12:00 noon Mountain Standard Time on December 31, 1999 (the "Closing Date"). Closing shall mean the consummation of the transaction contemplated by this Agreement by the recording of all instruments requiring recording, the rendering of all performances necessary to the consummation of the purchase and sale contemplated hereby, and the delivery of other documents and proceeds to the parties entitled thereto (the "Closing"). 4.2 Closing Costs. At Closing, BIG shall pay (a) one-half (1/2) of the escrow fee; (b) any real estate excise or transfer taxes; (c) any revenue or documentary stamps; (d) the premium for the policy of title insurance described in Section 3 above; (e) recording and Purchase and Sale Agreement for Hotel Properties Page 5 of 16 miscellaneous charges customarily attributable to sellers in similar transactions; and (f) all attorneys' fees then owed by BIG to its counsel, whether incurred in negotiating this Agreement and in consummating the transaction contemplated herein. At Closing, Purchaser shall pay (a) one-half (1/2) of the escrow fee; (b) recording and miscellaneous charges customarily attributable to purchasers in similar transactions; and (c) all attorneys' fees incurred by Purchaser to its counsel in negotiating this Agreement and in consummating the transaction contemplated herein. 4.3 Prorations for Rest Western. Taxes for the current year constituting liens for Or against the Best Western, shall be prorated between Purchaser and BIG as of the Closing Date. 4.4 Transfer and Closing Documents. At Closing, BIG shall transfer and convey all of BIG's right, title and interest in the Hotel Entities to Purchaser, and Purchaser shall assume all of tile mortgage or trust deed obligations which encumber the Hotel Properties and become the owner of the Hotel Entities, pursuant to an Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit B. At Closing, BIG also shall transfer and convey all of its right, title and interest in all contracts, leases and agreements used in the ownership and/or operation of the Best Western, and Purchaser shall assume same, pursuant to an Assignment and Assumption Agreement for the Best Western's Contracts, Leases and Agreements substantially in the form attached hereto as Exhibit D. BIG shall execute and deliver (a) a statutory Warranty Deed to McCarran Lodging, LLC, a Utah limited liability company formed by Purchaser to hold and accept the Best Western, pursuant to which BIG transfers and conveys all of its right, title and interest in and to the Best Western to McCarran Lodging LLC, (b) statutory Quit Claim Deed,; for the real properties of the Hotel Entities; (c) assignments of limited liability company interests for the Hotel Entities (in the form attached hereto as Exhibit B) and of contracts, leases and agreements for the Best Western (in the form attached hereto as Exhibit D); and (d) a Bill of Sale for the personal Properties of the Best Western (in the form attached hereto as Exhibit E). The Parties further shall execute and deliver to the Escrow Agent or to the other, as the case may be, such other documents as may be necessary to consummate the transaction contemplated hereby. 5. Possession. BIG shall deliver possession of the Purchased Interests to Purchaser on the Closing Date, provided, however, that Purchaser shall have the right to enter upon the Hotel Properties for completion of any studies or tasks that Purchaser may wish to perform prior to the Closing Date, 6. Purchaser's Representations and Warranties. Purchaser represents, warrants, and agrees as of the date of this Agreement and as of Closing as follows: 6.1 Authority. Purchaser is a limited liability company duly organized and existing under the laws of the State of Utah and has the power and authority to enter into this Agreement and all documents contemplated by this Agreement, to consummate the transactions contemplated by this Agreement, and to perform its obligations to be performed by it under this Agreement and under all documents contemplated by this Agreement. 6.2 Approval; Enforceability. The execution, delivery, and performance of this Agreement and all documents contemplated by this Agreement have been duly authorized by all necessary company action. This Agreement and all documents contemplated by this Agreement, when executed and delivered by Purchaser, will be valid and enforceable obligations of Purchaser in accordance with their respective terms. Purchase and Sale Agreement for Hotel Properties Page 6 of 16 6.3 No Violation. Purchaser's execution and performance of this Agreement and compliance with [lie provisions of this Agreement will not constitute a violation by Purchaser of any provision of law, of its Articles of Organization, any amendments thereto, or any indenture, mortgage, agreement, or other instrument to which Purchaser is a party or by Purchaser is bound or affected. 6.4 No Reliance. Purchaser has made its own inspection of the Best Western and [lie Hotel Entities, and his own investigation and evaluation of the Purchased Interests, In entering this Agreement, Purchaser is not relying on any representations or statements made by BIG regarding the Purchased Interests other than those expressly set forth herein. Purchaser has had an opportunity to review financial records, and all other relevant documents and information related to the Purchased Interests that would be material in determining whether to purchase the Purchased Interests pursuant to this Agreement. 7. BIG's Representations and Warranties. BIG represents, warrants, and agrees as of the date of this Agreement and as of Closing: 7.1 Authority. BIG is a corporation duly organized and existing under the laws of the State of Nevada and has the power and authority to enter into this Agreement and all documents contemplated by this Agreement, to consummate the transactions contemplated by this Agreement, and to perform the obligations to be performed by it under this Agreement and under all documents contemplated by this Agreement. 7.2 Approval; Enforceability. The execution, delivery, and performance of this Agreement and all documents contemplated by this Agreement have been duly authorized by all necessary corporate action. This Agreement and all documents contemplated by this Agreement, when executed and delivered by BIG, will be valid and enforceable obligations of BIG in accordance with their respective terms. 7.3 No Violation. BIG's execution and performance of this Agreement and compliance with the provisions of this Agreement will not constitute a, violation by BIG of any provision of law, BIG's Articles of Incorporation, BIG's Bylaws, or any indenture, mortgage, agreement, or other instrument to which BIG is a party or by which BIG is bound or affected. 7.4 The Hotel Properties. BIG represents and warrants to Purchaser as follows: (a) BIG has good and marketable title to the Best Western and its Hotel Properties, and the Hotel Entities, and each Hotel Entity owns its respective Hotel Properties, free and clear of all liens and encumbrances other than those allowed under Section 3 above and free and clear of all third party claims of ownership (its to the Hotel Properties or the Hotel Entities), including without limitation Zions Management & Development Company, Inc.; Glen A. Overton, Investment Lodging Corporation; THH Ventures, L.C.; and East Bay Lodging Associated, Ltd.; (b) there are no outstanding unrecorded leases, licenses, permits, contracts or agreements to which BIG or either Hotel Entity is a party affecting the Hotel Properties other than those disclosed herein or in Exhibit C attached hereto, or those assigned hereunder; (c) BIG has disclosed all known defects, faults or other material facts regarding the Hotel Properties; (d) the Hotel Properties have been maintained in substantial compliance with all federal, state and local environmental protection, similar laws, ordinances, restrictions, and licenses; (e) except as has been previously disclosed to Purchaser regarding the filling station located on the separate parcel next to the Sheraton, which is to be Purchase and Sale Agreement for Hotel Properties Page 7 of 16 acquired as part of the Hotel Properties, to the best of BIG's knowledge, no hazardous substance (as that term is used in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ""9601 et seq.) is or has been stored or disposed of on any of the Hotel Properties; (f) BIG has no notice of any pending or threatened action, claim or proceeding under any condemnation laws, under any bankruptcy laws, or under any environmental laws arising out of the condition of the Hotel Properties or conditions thereon; and (g) from the date of this Agreement until the Closing Date, BIG agrees not to make any material adverse change to the Hotel Properties, or to enter any contracts or undertake any obligations that would affect the Hotel Properties that would remain unpaid or continue after the Closing Date. 7.5 Limitation of Warranties. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, NEITHER BIG NOR ANY AGENT, REPRESENTATIVE, OR EMPLOYEE OF BIG HAS HERETOFORE OR IS NOW MAKING ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER RELATED TO THE PHYSICAL CONDITION OF THE HOTEL PROPERTIES. PURCHASER IS ACQUIRING THE HOTEL PROPERTIES "AS IS" AND "WITH ALL FAULTS," INCLUDING WITHOUT LIMITATION THE STABILITY OF THE SOILS, SUITABILITY FOR ANY CONSTRUCTION OR DEVELOPMENT, ENCROACHMENT OR BOUNDARY QUESTIONS, DRAINAGE, ZONING, AVAILABILITY OF UTILITIES, ACCESS, AND SIMILAR MATTERS. PURCHASER IS CONDUCTING ITS OWN INSPECTIONS AND "DUE DILIGENCE" WITH RESPECT TO ALL PHYSICAL AND OTHER ASPECTS OF THE HOTEL PROPERTIES. BIG SHALL ALLOW PURCHASER REASONABLE ACCESS TO BIG'S BOOKS, RECORDS, AND THE HOTEL PROPERTIES TO ENABLE PURCHASER TO COMPLETE SUCH INSPECTIONS. PURCHASER SHALL BE RESPONSIBLE FOR ALL COSTS OF SUCH INSPECTIONS AND STUDIES. 8. Conditions. Purchaser's obligation to purchase the Purchased Interests is subject to the following conditions: 8.1 Good Standing with Franchisors. Each of the Hotel Properties shall be in good standing with its respective franchisor (for purposes of this Section 8.1, "good standing" means that BIG has paid all fees required to be paid by the Franchisor and has met all other obligations and has responded satisfactorily to all notices and demands arising under any franchise agreement affecting any of the Hotel Properties; provided, however, that Purchaser acknowledges and agrees that the Best Western's franchisor has required renovations in the amount of approximately ($800,000,00) to bring that property into good standing, which amount Purchaser has agreed, and is prepared to pay. Purchaser acknowledges that the franchiser has set a deadline of December 31, 1999 for completing the renovations or making appropriate arrangements for doing so in a timeline acceptable to (lie franchiser. If appropriate arrangements are not made by that time, franchisor has threatened to remove the Best Western from franchisor's reservation system. Purchaser assumes the responsibility of working with franchisor to insure that such arrangements arc made and the renovations completed, at Purchaser's sole cost and expense, so that the Best Western is not removed from franchiser's reservation system. Any amounts owed to satisfy any obligations necessary to bring the Hotel Properties in good standing, except for the amounts necessary to complete the renovations required at the Best Western as described above, shall be paid by Purchaser at or -is soon as reasonably practicable after Closing, but shall reduce the principal amount of the Note, and shall be taken first from the principal payment to be made by Purchaser to BIG on or before the date that is 180 days following Closing. Purchase and Sale Agreement for Hotel Properties Page 8 of 16 8.2 Engagement of Zions Management. Purchaser shall have entered into an agreement with Zions, on terms and conditions acceptable to Purchaser, pursuant to which Zions agrees to continue to manage the Hotel Properties, 8.3 Closing Before Year End. The transaction contemplated hereby shall have closed before 11:59 p.m. on December 31, 1999. 8.4 Payment of Debt Service and Mortgage Payments. All mortgage payments and other debt service installment payments for the Hotel Properties (owing or accrued as of December 31, 1999) shall have been paid current through December 31, 1999. Any such amounts owing may be withheld from the cash payments to be made to BIG at Closing. If any such amounts are not withheld at Closing or not paid by BIG immediately thereafter, the same shall be paid by Purchaser, and shall reduce the principal amount of the Note, and shall be taken first from the principal payment to be made by Purchaser to BIG on or before the date that is 180 days following Closing. 8.5 Taxes and Franchise Fees. All taxes, including without limitation, payroll, property, use and sales taxes (owing or accrued as of December 31, 1999), shall be paid current through December 31, 1999. In addition, all fees, payments, obligations, and performances (owing or accrued as of December 31, 1999) under any franchise agreement affecting any of the Hotel Properties shall be current or fulfilled in full through December 31, 1999. Any amounts required to bring such taxes, fees, payments, obligations and performances current shall be paid by Purchaser at or as soon as reasonably practicable after Closing, but shall reduce the principal amount, of the Note, and shall be taken first from the principal payment to be made by Purchaser to BIG on or before the date that is 180 days following Closing. 9. Damage, Destruction, and Condemnation. In the event of the partial or total damage, destruction, or condemnation of the Hotel Properties prior to the Closing Date, at Purchaser's option, Purchaser may consummate the purchase of the Purchased Interests or terminate this Agreement by written notice to BIG. Purchaser's election under this section shall be exercised by giving written notice to BIG of its intent to do so. In the event Purchaser elects to terminate this Agreement, Purchaser shall pay any title and escrow charges, and neither party shall have any further rights or obligations under this Agreement. Purchaser shall receive full refund of the non-refundable deposit. If Purchaser elects to proceed with the purchase of the Property hereunder, all insurance or condemnation proceeds shall be paid over to Purchaser (or assigned, if not yet collected). If the insurance or condemnation proceeds are not yet determined, Purchaser shall receive a credit at Closing against the Purchase Price in the amount of the loss of value of the damaged, destroyed, or condemned portion, as agreed upon by Purchaser and BIG, and BIG shall retain all insurance or condemnation proceeds. Except as otherwise elected by Purchaser hereunder, the risk of loss prior to Closing rusts with BIG. 10. Remedies. 10.1 Failure to Close. If, without breach by BIG or Purchaser, the conditions to Closing are not and cannot be eliminated, satisfied, or waived within the time limits set forth herein, either party may either withdraw from and terminate this Agreement or waive the condition or portion thereof which cannot be satisfied mid proceed with Closing. If terminated, this Agreement shall be deemed null and void, the non-refundable deposit shall be returned to Purchaser, and the escrow to be established hereunder shall be cancelled. Purchase and Sale Agreement for Hotel Properties Page 9 of 16 10.2 Seller's Breach. If BIG breaches this Agreement and fails to close the sale contemplated hereby through no fault of Purchaser, Purchaser shall be entitled, at Purchaser's election (a) to terminate its obligations to perform further under this Agreement and recover any and all damages; (b) to seek specific performance of this Agreement; and (c) to pursue any and all remedies in addition to or by way of alternative to the foregoing available at law or in equity. The non-refundable deposit shall be refunded to Purchaser immediately upon demand, 10.3 Purchaser's Breach. If Purchaser breaches this Agreement and fails to close the purchase contemplated hereby through no fault of BIG, BIG shall be entitled to receive the nonrefundable deposit and retain it as liquidated damages and not as a penalty as its sole and exclusive remedy for such breach. 11. Indemnification. 11.1 Indemnification by Purchaser. Purchaser shall indemnify, defend, and hold BIG harmless from any and all loss, liability, damage, and expense whatsoever (including attorneys' fees, expenses of litigation, and costs of appeal) arising (i) out of Purchaser's and/or each of the Hotel Entities ownership or use of the Hotel Properties after the Closing Date; and/or (ii) as a result of any material inaccuracy of any representation or material breach of any warranty or covenant of Purchaser contained in this Agreement, any certificate or other instrument furnished or to be furnished, and/or any other agreement to be executed Pursuant to or in connection with this Agreement. 11.2 Indemnification by Seller. BIG shall indemnify, defend, and hold Purchaser harmless from any and all loss, liability, damage, and expense whatsoever (including attorneys' fees, expenses of litigation, anti costs of appeal) arising (i) out of BIG's and/or each of the Hotel Entities ownership interest in or use of the Hotel Properties prior to the Closing Date; (ii) out of any breach of the specific warranties set forth in Section 7.4 above (including without limitation the failure of BIG and/or the Hotel Entities to have good and marketable title to all of the Hotel Proper-ties); (iii) out or any failure of the conditions set forth in Sections 8.1, 8.4 and 8.5 above (assuming Purchaser proceeds to Closing notwithstanding such failure), and/or (iv) as a result of any material inaccuracy of any representation or material breach of any other warranty or covenant of BIG contained in this Agreement, any certificate or other instrument furnished or to be furnished, and/or any other agreement to be executed pursuant to or in connection with this Agreement. 11.3 Procedures for Indemnification. The following procedures and requirements shall apply with respect to any actual or potential claim, any written demand, the commencement of any action, or the occurrence of any other event which involves any matter or related series of matters (a "Claim") against which either party is entitled to indemnification (the "Indemnified Party") from the other party (the "Indemnifying Party") under Section 11.1 or 11.2 above. 11.3.1 Promptly after the Indemnified Party first receives written documents pertaining to the Claim, or if such Claim does not involve a third party Claim, promptly after the Indemnified Party first has actual knowledge of such Claim, the Indemnified Party shall give notice to the Indemnifying Party of such Claim in reasonable detail and stating the amount involved, if known, together with copies of any such written documents. The Indemnifying Party shall have 10 days from the personal delivery or mailing of the Claim Purchase and Sale Agreement for Hotel Properties Page 10 of 16 notice (the "Notice Period") to notify the Indemnified Party (i) whether or not it disputes its liability to the Indemnified Party hereunder with respect to such Claim, and (ii) notwithstanding any such dispute, whether or not it desires, at its sole cost and expense, to defend the Indemnified Party against such Claim. 11.3.2 If the Indemnifying Party disputes its liability with respect to such, Claim or the amount thereof (whether or not the Indemnifying Party desires to defend the Indemnified Party against such Claim as provided below), such dispute shall be resolved in accordance with Section 11.3.7 below. Pending the resolution of any dispute by the Indemnifying Party of its liability with respect to any Claim, any such third-party Claim shall not be settled without the prior written consent of the Indemnified Party. 11.3.3 If the Indemnified Party desires to defend the Indemnified Patty against the Claim, then the Indemnifying Party - upon first paying into court or independent escrow a cash sum equal to fifty percent (50.0%) of the amount in dispute during the Notice Period - shall have the right, at its sole cost, expense and ultimate liability regardless of the outcome, and through counsel of its choice, to litigate, defend, settle or otherwise attempt to resolve such Claim. Notwithstanding the foregoing, the Indemnified Party may nevertheless elect, at any time and at the Indemnified Party's sole cost, expense and ultimate liability, regardless or the outcome, and through counsel of its choice, to litigate, defend, settle or otherwise attempt to resolve such Claim. If the Indemnified Party so elects (for reasons other than the Indemnifying Party's failure or refusal to provide a defense to such Claim), then the Indemnifying Party shall have no obligation to indemnify the Indemnified Party with respect to such Claim; provided, however, any such disposition will be without prejudice to any other right the Indemnified Party may have to indemnification under Section 11.1 or 11.2 above, regardless of the outcome of such Claim. In any event, Purchaser and BIG shall fully cooperate with each other and their respective counsel in connection with any such litigation, defense, settlement or other attempted resolution. 11.3.4 If the Indemnifying Party elects not to defend the Indemnified Party against such Claim, whether by not giving the Indemnified Party timely notice as provided above or otherwise, then the amount of any such Claim or, if the same be defended by the Indemnifying Party, then that portion thereof as to which such defense is unsuccessful, in each case, shall be conclusively deemed to be a liability of the Indemnifying Party hereunder, unless the Indemnifying Party shall have disputed its liability to the Indemnified Party hereunder as provided above, in which event such dispute shall be resolved as provided in Section 11.3.7 below. 11.3.5 If an Indemnified Patty has a Claim against the Indemnifying Party hereunder that does not involve a Claim being asserted against or sought to be collected from it by a third party, the Indemnified Party shall promptly send a notice with respect to Such Claim to the Indemnifying Party. If the Indemnifying Party disputes its liability with respect to such Claim, such dispute shall be resolved in accordance with Section 11.3.7 below; provided, however, that if the Indemnifying Party does not notify the Indemnified Party within the Notice Period that it disputes such Claim, the amount of such Claim shall be conclusively deemed a liability of the Indemnifying Party hereunder. 11.3.6 Upon tile determination of the liability for indemnification as provided herein, the Indemnifying Party shall pay to the Indemnified Party within 15 days Purchase and Sale Agreement for Hotel Properties Page 11 of 16 after such determination the amount of any claim for indemnification made hereunder. If the Indemnified Party is not paid in full and on time for any such claim, it shall have the right, notwithstanding any other rights that it may have against any other person or corporation, to setoff the unpaid amount of any such Claim against any amounts owed by it under this Agreement, any promissory note, or any other agreements entered into pursuant to this Agreement. Where Purchaser is the Indemnified Party, the amount of any such offset shall reduce the principal amount of the Note, and shall be taken first from the principal payment to be made by Purchaser to BIG on or before the date that is 180 days following Closing. Upon the payment in full of any claim, either by setoff or otherwise, the entity making payment shall be subrogated to the rights of the Indemnified Party against any person, firm or corporation with respect to the subject matter of such Claim. 11.3.7 All disputes under this Section l1.3 regarding liability for indemnification shall be settled by arbitration in Provo, Utah, before a single arbitrator pursuant to the rules of the American Arbitration Association. Arbitration may be commenced at any time by any Party hereto giving written notice to each other Party to a dispute that such dispute has been referred to arbitration under this Section 11.3.7. The arbitrator shall be selected by the joint agreement of BIG and Purchaser but, if they do not agree within 20 days after the date of the notice referred to above, the selection shall be made pursuant to the rules from the panels of arbitrators maintained by such Association. Any award rendered by the arbitrator shall be conclusive and binding upon the parties hereto; provided, however that any such award shall be accompanied by a written opinion of the arbitrator giving the reasons for the award. This provision for arbitration shall be specifically enforceable by the Parties, and the decision of the arbitrator in accordance herewith shall be final and binding and there shall be no right to appeal therefrom. Each Parry shall pay its own expenses of arbitration and the expenses of the arbitrator shall be equally shared; provided, however, that if in the opinion of the arbitrator any claim for indemnification or any defense or objection thereto was unreasonable, the arbitrator may assess, as part of his award, all or any part of the arbitration expenses of the other party (including reasonable attorneys' fees and fees of the arbitrator) against the party raising such unreasonable claim, defense or objection. Nothing contained in this Section 11.3.7 shall prevent the Parties from settling any dispute by mutual agreement at any time, 11.3.8 The indemnification rights of the Parties under this Section 11.3 are independent of and in addition to such rights and remedies as the parties may have at law or in equity or otherwise for any misrepresentation, breach of warranty or failure to fulfill any agreement or covenant hereunder on the part of any party hereto including, without limitation, the right to seek specific performance, rescission or restitution, none of which rights or remedies shall be affected or diminished hereby. 12. General Provision. 12.1 Survival of Representations. The representations, warranties, indemnities, and agreements contained in this Agreement shall survive the execution of this Agreement and the transfers Contemplated by this Agreement. 12.2 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties, and their respective Successors and assigns, provided that no party Purchase and Sale Agreement for Hotel Properties Page 12 of 16 to this Agreement shall assign any of such party's rights or obligations under this Agreement without the prior written consent of the other party hereto. 12.3 Entire Agreement. This instrument, together with its exhibits, contains the entire agreement of the Parties and the other signatories hereto with respect to the transactions contemplated by this Agreement, supersedes any and all prior agreements or understandings, written or oral, between the Parties, including the letter of intent, with respect to the subject matter hereof, and may not be modified or amended in any way except in a written instrument signed by the Parties. 12.4 Notices. All notices to be given under this Agreement shall be in writing and shall be personally delivered or mailed by certified mail, return receipt requested, postage prepaid, as follows: If to BIG: Bountiful Investment Group, Inc, 14675 Interurban Avenue South Seattle, WA 98169 Attention: Pam Andersen With a copy to: Kirt W. Montague Vance, Romcro & Montague, P.S. 155 - 108th Avenue N.E., Suite 202 Bellevue, Washington 98004 If to Purchaser: Eagle Rock Finance, L.C. 2500 North University Avenue, #200 Provo, Utah 84604 Attention: Eric K. Thompson With a copy to: F. McKay Johnson Hill Johnson & Schmutz 3319 North University Avenue, #200 Provo, UT 84803 or to such other address as either party shall specify by written notice so given to the other party, Each notice personally delivered shall be deemed to have been given as of the date so delivered. Each notice mailed shall be deemed to have been given on the third day after the date deposited in the United States mail. A copy of each notice given to either party pursuant to this Section 11.5 shall be mailed simultaneously. 12.5 Waiver. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute a waiver of any other breach of the same or any other term or condition of this Agreement. 12.6 Exhibits. Exhibits A, B, C, D and E attached to this Agreement are by this reference fully incorporated in this Agreement and made a part hereof. Purchase and Sale Agreement for Hotel Properties Page 13 of 16 12.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Utah. 12.8 Attorney's Fees. In any proceeding brought to enforce this Agreement or to determine the rights of the parties under this Agreement, the prevailing party shall be entitled to collect, in addition to any judgment awarded by a court, a reasonable sum as attorneys' fees, and all costs and expenses incurred in connection with such a lawsuit, including attorneys' fees, expenses of litigation, and costs of appeal. For purposes of this Agreement, the prevailing party shall be that party in whose favor final judgment is rendered or who substantially prevails, if both parties are awarded judgment. The term "proceeding" shall mean and include arbitration, administrative, bankruptcy, and judicial proceedings, including appeals. 12.9 Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 12.10 Time of Essence. Time is of the essence of this Agreement. 12.11 Severability. The unenforceability, invalidity, illegality, or termination of any provision of this Agreement shall not render any other provision of this Agreement unenforceable, invalid, or illegal and shall not terminate this Agreement or impair the rights or obligations of the parties hereto provided the essential purposes of this Agreement are not thereby thwarted. 12.12 Captions. Section or paragraph titles or other headings contained in this Agreement are for convenience only and shall not be a part of this Agreement, nor considered in its interpretation. 12.13 Brokerage Commission and Finder's Fee. The Parties each warrant to the other that no person or entity can properly claim a right to a commission, finder's fee, acquisition fee or other brokerage type compensation based upon the acts or omissions of that party with respect to the transaction contemplated by this Agreement. 12.14 Facsimile Transmission. Facsimile transmission of any signed original document, and retransmission of any signed facsimile transmission, shall be the same as transmission of an original. At the request of any party hereto, or the Escrow Agent, the parties hereto will confirm signatures transmitted by facsimile by signing an original document. 12.15 Further Access. The Parties hereto shall perform such further acts as may be reasonably necessary to carry out the intent and provisions of this Agreement. 12.16 Authority. Persons signing this Agreement on behalf of the respective parties personally warrant and represent that they are authorized to execute this instrument and bind the respective parties hereto. Purchase and Sale Agreement for Hotel Properties Page 14 of 16 12.17 Good Faith. In addition to complying with any specific standards of conduct set forth herein, each party hereto represents and warrants to the other that such party has acted toward the other in good faith, and agrees to continue to so act, in the negotiation, execution, delivery, performance, and any termination of this Agreement. EXECUTED as of the date and year first above written. BOUNTIFUL INVESTMENT GROUP, INC., a Nevada corporation By: /s/ [illegible] ----------------------------- Its: Authorized Agent --------------------------- EAGLE ROCK FINANCE, L.C., a Utah limited liability company By: /s/ [illegible] ----------------------------- Its: Manager --------------------------- State of ___________ ) ) ss. County of ____________ ) I certify that I know or have satisfactory evidence that __________________________, a representative of BOUNTIFUL INVESTMENT GROUP, INC., personally appeared before me, and said person acknowledged that he or she signed this Purchase and Sale Agreement, on oath stated that he or she was authorized to execute this Purchase and Sale agreement and acknowledged it to be the free and voluntary act of said corporation for the uses and purposes mentioned herein. SUBSCRIBED AND SWORN to before me this 30th day of December, 1999. /s/ [illegible] ---------------------------------------- Printed/Typed Name: [illegible] ----------- NOTARY PUBLIC in and for the State of residing at ----------, --------------- My commission expires ------------------ [Notary Stamp] Purchase and Sale Agreement for Hotel Properties Page 15 of 16 State of ___________ ) ) ss. County of ____________ ) I certify that I know or have satisfactory evidence that __________________________ a representative of EAGLE ROCK FINANCE, L.C., personally appeared before me, and said person acknowledged that he or she signed this Purchase and Sale Agreement, on oath stated that he or she was authorized to execute this Purchase and Sale agreement and acknowledged it to be the free and voluntary act of said corporation for the uses and purposes mentioned herein. SUBSCRIBED AND SWORN to before me this 31st day of December, 1999. /s/ [illegible] ---------------------------------------- Printed/Typed Name: [illegible] ----------- NOTARY PUBLIC in and for the State of residing at ----------, --------------- My commission expires ------------------ [Notary Stamp] Purchase and Sale Agreement for Hotel Properties Page 16 of 16 EX-10.45 5 PROMISSORY NOTE Exhibit 10.45 PROMISSORY NOTE 1. DEFINED TERMS. As used in this Promissory Note, the following terms shall have the following meanings: 1.1 Borrower: Stock Market Institute of Learning, Inc., a Nevada corporation, its successors and assigns. 1.2 Lender: Sun Life Assurance Company of Canada, a Canadian corporation, together with other holders from time to time of this Note. 1.3. Guarantor(s): Wade Cook Financial Corporation, a Nevada corporation. 1.4 Principal Sum: $3,000,000. 1.5 Monthly Payment: $29,322.78. 1.6 Date of Disbursement: December 22, 1999 1.7 Interest Rate: 8.375% per annum. 1.8 Default Rate: five percent (5%) more than the Interest Rate. 1.9 Maturity Date: January 1, 2015. 1.10 Amortization Period: Fifteen (15) years from the First Payment Date. 1.11 Interest Only Payment Date: January 1, 2000, being the first day of the first month after the Date of Disbursement. 1.12 First Payment Date: February 1, 2000, being the first day of the second month after the Date of Disbursement. 1.13 Lender's Payment Address: c/o Draper Hergert Shaw, Inc., 9706 Fourth Avenue N.E., Suite 201, Seattle, Washington 98115 1.14 Permitted Prepayment Period: the period commencing on January 1, 2005, and ending on the Maturity Date, subject to and in accordance with the provisions of Paragraphs 12 and 13 of this Note, 1.15 Mortgage: a Deed of Trust, Security Agreement and Fixture Filing of even date with this Note from Borrower to, or for the benefit of, Lender, which secures Borrower's obligations hereunder, and which covers property in King County, Washington, and all modifications or amendments thereto or extensions thereof. 1.16 Loan Documents, Insurance Proceeds, Laws, Taking Proceeds, Secured Debt, Property, and Event of Default: shall have the same meanings as in the Mortgage. The Loan Documents are incorporated herein by this reference. 2. DEBT. For value received, Borrower promises to pay to the order of Lender, the Principal Sum with interest on unpaid principal from the Date of Disbursement at the Interest Rate. Interest shall be calculated on a 360-day year of twelve 30-day months. 3. PAYMENTS. Borrower shall pay the Monthly Payment to Lender commencing on the First Payment Date and continuing on each monthly anniversary thereof until the Maturity Date. If a payment date is a non-business day, the Monthly Payment shall be due on the next business day. On the Interest Only Payment Date, Borrower shall pay the interest then due and accrued from the Date of Disbursement. On the Maturity Date, Borrower shall pay to Lender the entire then unpaid balance of principal and interest. Lender shall have no obligation, express or implied, to refinance the "balloon payment" then due. All payments shall be made in lawful money of the United States of America, in immediately available funds, at Lender's Payment Address, or at such other place as Lender may from time to time designate in writing. 4. LATE CHARGE AND ADDITIONAL INTEREST. Borrower recognizes that if it does not make the Monthly Payments when due, Lender will incur additional administrative expenses in servicing the loan, will lose the use of the money due and will be frustrated in meeting its other financial and loan commitments. Lender and Borrower acknowledge that different methods could be used to calculate Lender's actual damages if the Monthly Payment is not made when due. To avoid disputes over which method shall apply, Borrower agrees that a late charge equal to four percent (4%) of each Monthly Payment which is not made when due is a reasonable method for calculating said damages. Borrower shall pay such late charge to Lender immediately after the due date for each Monthly Payment which is not made when due. The payment of such late charge shall not affect Lender's other rights and remedies under this Note and the other Loan Documents. All expenditures by Lender pursuant to the Loan Documents, other than advances of the Principal Sum, which are not reimbursed by Borrower immediately upon demand; all amounts remaining due and unpaid after the Maturity Date; and any amounts due and unpaid after an Event of Default (including late charges) shall bear interest at the Default Rate until such amounts are paid to Lender. Such payments sh3ll be in addition to the late charge described above. 5. APPLICATION OF PAYMENTS. Unless Lender elects other/vise, all sums received by Lender in payment hereunder shall be applied first to late charges, costs of collection or enforcement, all expenditures made by Lender pursuant to the Loan Documents, and any other similar amounts due, if any, under this Note and the other Loan Documents, then to amounts due pursuant to Paragraph 13 of this Note, then to interest which is due and payable under this Note and the remainder to principal due and payable under this Note. If an Event of Default has occurred arid is continuing, such payments may be applied to sums due hereunder or under the other Loan Documents in any order and combination that Lender may, in its sole discretion, determine. 6. WAIVERS. Borrower waives presentment for payment, demand, notice of nonpayment, notice of intention to accelerate the maturity of this Note, diligence in collection, 2 commencement of suit against any obligor, notice of protest, and protest of this Note and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, before or after maturity of this Note, with or without notice to Borrower, and agrees that Borrower's liability shall not be in any manner affected by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Lender. Borrower consents to any and all extensions of time, renewals, waivers or modifications that may be granted by Lender with respect to the payment or other provisions of this Note, and to any substitution, exchange or release of the collateral for this Note, or any part thereof, with or without substitution of said collateral, and agrees to the addition or release of any guarantor, all whether primarily or secondarily liable, before or after maturity of this Note, with or without notice to Borrower, and without affecting Borrower's liability under this Note. 7. NO USURY. Lender and Borrower intend to comply at all times with applicable usury laws. If, at any time, such laws would render usurious any amounts called for under this Note or the other Loan Documents, it is Borrower's and Lender's express intention that Borrower shall never be required to pay interest on this Note at a rate in excess of the maximum lawful rate then allowed. The provisions of this Paragraph 7 shall control over all other provisions of this Note and the other Loan Documents which may be in apparent conflict hereunder. Any excess amount shall be immediately credited on the principal balance of this Note (or, if this Note has been fully paid, refunded by Lender to Borrower), and the provisions hereof shall be immediately reformed, and the amounts thereafter collectible under this Note shall be reduced, without the necessity of the execution of any further documents, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for under this Note. Any such crediting or refund shall not cure or waive any default by Borrower under this Note or the other Loan Documents. Borrower agrees that in determining whether or not any interest payable under this Note or the other Loan Documents exceeds the highest rate not prohibited by law, any non-principal payment (except payments specifically stated in this Note or in the other Loan Documents to be "interest"), including, without limitation, prepayment indemnification and late charges, shall, to the maximum extent not prohibited by law, be an expense, fee, or indemnification amount rather than interest. The term "applicable law" as used in this Note shall mean the laws of the state in which the Property is located or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. 8. ACCELERATION AND OTHER REMEDIES. The rights and remedies of Lender are set forth in the other Loan Documents and include, without limitation, the right to declare the Secured Debt, including the principal balance of this Note and accrued interest, immediately due and payable in case of an Event of Default. 9. JOINTAND, SEVERAL LIABILITY. If there is more than one Borrower, the obligations and covenants of each Borrower shall be joint and several. 10. AMENDMENTS. This Note may not be changed or amended orally, but only by an agreement in writing, signed by the party against whom enforcement is sought. 11. GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the state in which the Property is located. 3 12. PREPAYMENT. Except as set forth herein below, Borrower shell have no right to prepay, and Lender shall have no obligation to accept tendered payments of, any portion of the unpaid Principal Sum outstanding under this Note prior to the beginning of the Permitted Prepayment Period. Borrower may prepay the entire unpaid Principal Sum (but not any lesser amount except as set forth herein below) (the "Amount Prepaid"), with accrued interest thereon to the date of prepayment, on any date on which a Monthly Payment is due after the beginning of the Permitted Prepayment Period, Upon thirty (30) days'. prior written notice to Lender of its intention to prepay, provided that Borrower pays, at the time of prepayment and in addition thereto, the amounts required to be paid pursuant to Paragraph 13 of this Note and all other sums due under this Note and the other Loan Documents. The date fixed for prepayment in such notice shall become the Maturity Date, except that for the purpose of calculating the amounts payable pursuant to Paragraph 13 of this Note, the Maturity Date shall mean the date set forth in Paragraph 1.9 of this Note. Notwithstanding anything contained in this Paragraph 12 and in Paragraph 13 below to the contrary, at any time after the Date of Disbursement, including prior to the Permitted Prepayment Period, Borrower may prepay in any one calendar year ten percent (10%) of the principal balance of this Note which remains unpaid on January 1 of said calendar year, on a non-cumulative basis, without payment of the amounts required to be paid pursuant to Paragraph 13 of this Note. The total amount which may be prepaid pursuant to the preceding sentence is $1,000,000. 13. PREPAYMENT INDEMNIFICATION. Borrower shall indemnify Lender against any loss, damage and expense Lender incurs if the unpaid Principal Sum is paid prior to the Maturity Date for any reason except (i) a payment of the entire unpaid Principal Sum, with accrued and unpaid interest, made within ninety (90) days of the Maturity Date or (ii) any application by Lender of Insurance Proceeds or Taking Proceeds to reduction of the Secured Debt pursuant to the other Loan Documents. Lender and Borrower acknowledge that different methods could be used to calculate Lender's actual damages if the unpaid Principal Sum is paid prior to the Maturity Date. To avoid disputes over which method shall apply, Borrower agrees that the following is a reasonable method to calculate damages in such case, and Borrower shall pay to Lender a prepayment premium in an amount equal to the greater of: (a) two percent (2%) of the then unpaid Principal Sum; or (b) the Discounted Yield Maintenance Prepayment Fee, as hereinafter defined. For purposes of this Paragraph 13, the term "Treasury Security" shall mean the U.S. Treasury bill, note or bond having a maturity date most closely equivalent to the Maturity Date. If more than one such bill, note or bond matures in the same month as the Maturity Date, the bill, note or bond with a coupon interest rate closest to the Interest Rate shall be the Treasury Security. For purposes of this Paragraph 13, the term "Treasury Yield" shall mean the per annum yield to maturity of the Treasury Security, as published in the Wall Street Journal on the fifth (5th) business day prior to the date of prepayment. If the Interest Rate is greater than the Treasury Yield, the difference between the Interest Rate and the Treasury Yield shall be divided by twelve (12) and multiplied by the then unpaid Principal Sum to determine the monthly payment 4 differential. The present value of the series of monthly payment differentials for the number of whole and partial months from the date of prepayment to the Maturity Date shall be calculated using the Treasury Yield as the discount rate, compounded monthly. The resulting sum of all the discounted monthly payment differentials shall be the Discounted Yield Maintenance Prepayment Fee. If the Interest Rate is equal to or less than the Treasury Yield, the prepaym6nt premium shall be two percent (2%) of the then unpaid Principal Sum. In addition to the foregoing prepayment premium, Borrower shall pay to Lender on account of such prepayment the amount (the "Lender's Reinvestment Expense"), as reasonably estimated by Lender, of Lender's reasonable out-of-pocket costs and expenses in re-investing the Amount Prepaid, including, without limitation, transaction and processing fees and costs, legal fees and brokerage expenses, and Lender's expenses in terminating any servicing agreement related to the loan. 14. ACCELERATION INDEMNIFICATION. If the Maturity Date is accelerated by Lender because of the occurrence of an Event of Default, Lender will sustain damages due to the loss of its investment. Borrower therefore agrees to pay, at the time of acceleration, in addition to all other sums due under this Note and the other Loan Documents, as liquidated damages, an acceleration premium in an amount equal to the greater of: (a) three percent (3%) of the then unpaid Principal Sum; or (b) the Discounted Yield Maintenance Prepayment Fee, as defined in Paragraph 13 of this Note. In addition to the foregoing acceleration premium, Borrower shall pay to Lender on account of such acceleration Lender's Reinvestment Expense, as defined in Paragraph 13 of this Note. 15. NONRECOURSE DEBT. Borrower shall be liable upon the indebtedness evidenced by this Note, for all sums to accrue or to become payable thereon and for performance of all covenants contained in this Note or in any of the other Loan Documents, to the extent, but only to the extent, of Lender's security for the same, including, without limitation, all properties, rights, estates and interests covered by the Mortgage and the other Loan Documents. No attachment, execution or other writ or process shall be sought, issued or levied upon any assets, properties or funds of Borrower other than the properties, rights, estates and interests described in the Mortgage and the other Loan Documents. In the event of foreclosure of such liens, mortgages or security interests, by private power of sale or otherwise, no judgment for any deficiency upon such indebtedness, sums and amounts shall be sought or obtained by Lender against Borrower. Subject to the foregoing, nothing herein contained shall be construed to prevent Lender from exercising and enforcing any other remedy relating to the Property allowed at law or in equity or by any statute or by the terms of any of the Loan Documents. Notwithstanding the foregoing, Borrower shall be personally liable to Lender for: 5 (a) any damages, losses, liabilities, costs or expenses (including, without limitation, attorneys' fees) incurred by Lender due to any of the following: (i) any security deposits of tenants of the Property (not previously applied to remedy tenant defaults) which have not been paid over to Lender; (ii) any rents prepaid by any tenant of the Property more than one (1) month in advance; (iii) any insurance proceeds or condemnation awards received by Borrower and not applied according to the terms of the Mortgage; (iv) repairs to the Property resulting fr6m casualty not reimbursed by insurance, to the extent insurance coverage for such repairs was required by the Loan Documents; (v) fraud, material misrepresentation or bad faith on the part of Borrower; (vi) any event or circumstance for which Borrower is obligated to indemnify Lender under the provisions of the Mortgage respecting Hazardous Substances, Contamination or Clean-Up; (vii) waste of the Property by Borrower; (vii) Borrower's failure to pay real estate taxes or other assessments against the Property; or (ix) Borrower's failure to comply with the Americans with Disabilities Act of 1990, as amended, or any other Laws; and (b) all rents, issues and profits from the Property collected by Borrower after an Event of Default has occurred and is continuing or after an event or circumstance has occurred and is continuing which with the passage of time or the giving of notice, or both, would constitute an Event of Default, unless such rents, issues and profits are applied to the normal operating expenses of the Property or to the Secured Debt. Lender shall not be limited in any way in enforcing the personal liability and obligations of Borrower under the Loan Documents against Borrower, nor sh,311 Lender be limited in any way in enforcing the personal liability and obligations of any guarantor or indemnitor in accordance with the terms of the instruments creating such liabilities and obligations. 16. SECURITY. This Note is secured by the other Loan Documents and all amendments, modifications, supplements, substitutions, additions, renewals, replacements and extensions thereof. 17. COLLECTION. Any check, draft, money order or other instrument given in payment of all or any portion of the Secured Debt may be accepted by Lender and handled by collection in the customary manner, but the same shall not constitute payment hereunder or diminish any rights of Lender except to the extent that actual cash proceeds of such instrument are unconditionally received by Lender and applied to the Secured Debt in the manner elsewhere herein provided. Acceptance by Lender of actual cash proceeds of less than the total amount of the Secured Debt shall not constitute acceptance of such partial payment in satisfaction of the total amount of the Secured Debt, including, without limitation, the amounts payable to Lender pursuant to Paragraph 13 of this Note. 18. ATTORNEYS'FEES. Upon any Event of Default, Borrower shall pay all costs incurred by Lender in the course of collection of sums due under this Note or in enforcing any of Borrower's other obligations under the Loan Documents, including, without limitation, reasonable attorneys' fees and expenses, whether or not suit is filed by Lender. 6 19. REGISTRATION. This Note shall be deemed to be in registered form at Lender's sole election. Such election may be made at any time without endorsement of this Note or any other action by Borrower. Borrower shall recognize any such election and, upon request by Lender, shall cooperate with Lender to facilitate the consummation of such election. 20. YEAR 2000 PROBLEM. Borrower has reviewed and assessed its business operations and computer systems and applications to address the "Year 2000 Problem" (that is, that computer applications and equipment used by Borrower, directly or indirectly through third parties, may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). Borrower reasonably believes that the Year 2000 Problem will not result in a material adverse change in Borrower's business condition (financial or otherwise), operations, properties or prospects or ability to repay Lender. Borrower will promptly deliver to Lender such information relating to this representation at Lender's requests from time to time. IN WITNESS WHEREOF, this Note has been executed and delivered this 20th day of December, 1999. BORROWER: STOCK MARKET INSTITUTE OF LEARNING, INC., a Nevada corporation By: /s/ Wade B. Cook ------------------------------------- Name: /s/ Wade B. Cook ------------------------------------ Title: President ---------------------------------- 7 EX-10.46 6 PROMISSORY NOTE - DOT Exhibit 10.46 PROMISSORY NOTE SECURED BY DEED OF TRUST Los Angeles, California June, 1999 In consideration of a loan from HABIB AMERICAN BANK (hereinafter "Lender") the undersigned (hereinafter "Borrower"), Borrower hereby promises to pay to the order of Lender at its office in Los Angeles, California, or at any other place that may be designated in writing by Lender, in lawful money of the United States of America, the sum of five hundred sixty thousand dollars ($560,000.00), plus any and all interest thereon as stated herein. The unpaid balance of the loan will bear interest at the rate of the National Prime Rate, which at the time of execution of this Promissory Note is 7.75% per annum, and which is based on the Prime Rate published in the Wall Street Journal, plus 1.25%, not to exceed 10% during the first five years of the loan, calculated on the basis of a 360 day year and the number of days elapsed. Principal and interest shall be paid monthly and due monthly commencing thirty days from the date of this Note. The amount of the payments shall be determined by a ten-year amortization of the original amount of the loan. The first such payment shall be in the amount of $7,093.84. All remaining principal and any accrued unpaid interest shall be due on June 10, 2004 ("Maturity Date"). This Note is secured by the Deed of Trust, Security Agreement, and Fixture Filing, with Assignment of Rents and Agreements of the same date as this Note, executed by Borrower, as trustor, in favor of Lender, as beneficiary ("Deed of Trust"), and encumbering the real property described in the Deed of Trust ("Property"). The holder of this Note will be entitled to the benefits of the security provided by the Deed of Trust and will have the right to enforce the covenants and agreements of Borrower contained in the Deed of Trust. From and after the Maturity Date, or an earlier date on which all sums owing under this Note become due by acceleration or otherwise, all sums owing under this Note will bear interest until paid in full at a rate equal to three percent (3%) per annum in excess of the National Prime Rate specified above ("Default Rate"). All payments on this Note will be applied first to the payment of any costs, fees, late charges, or other charges incurred in connection with the indebtedness evidenced by this Note; next, to the payment of accrued interest; then to the reduction of the principal balance; or in any other order that Lender requires. If: (a) Borrower fails to pay when due any sums payable under this Note; (b) an uncured Event of Default (defined in the Deed of Trust) occurs; or 1 (c) any other event or condition occurs that, under the terms of the Deed of Trust, gives rise to a right of acceleration of sums owing under this Note, then Lender, at its sole option, will have the right to declare all sums owing under the Note immediately due. However, if any document related to this Note provides for the automatic acceleration of payment of sums owing under this Note, all sums owing will be automatically due in accordance with the terms of that document. Borrower will have the right to pay, without penalty or premium, on any monthly payment date, all or any portion of the outstanding principal amount of this Note prior to the Maturity Date. Lender will apply all prepayments first to the payment of any costs, fees, late charges, or other charges incurred in connection with the indebtedness evidenced by this Note; next, to the payment of accrued interest; then to the outstanding principal amount of this Note in inverse order of maturity, or, at the option of Lender, in the regular order of maturity; or in any other order that Lender requires. Borrower will pay to Lender all sums owing under this Note without deduction, offset, or counterclaim of any kind, provided however that Borrower does not waive the right to assert any counterclaim byway of a judicial action. The relationship of Borrower and Lender under this Note is solely that of borrower and lender, and the loan evidenced by this Note and secured by the Deed of Trust will in no manner make Lender the partner or joint venturer of Borrower. If any attorney is engaged by Lender to enforce or construe any provision of this Note, the Deed of Trust, or the other Loan Documents (defined in the Deed of Trust) or as a consequence of any uncured Event of Default, with or without the filing of any legal action or proceeding, then Borrower will immediately pay to Lender on demand all reasonable attorney fees and other costs incurred by Lender, together with interest from the date of the demand until paid at the Default Rate. No previous waiver or failure or delay by Lender in acting with respect to the terms of this Note, the Deed of Trust, or the other Loan Documents will constitute a waiver of any breach, default, or failure of condition under this Note, the Deed of Trust, or the other Loan Documents. A waiver of any term of this Note, the Deed of Trust, or the other Loan Documents must be made in writing and will be limited to the express written terms of the waiver. If there are any inconsistencies between the terms of this Note and the terms of any of the other Loan Documents, the terms of this Note will prevail. All notice required or permitted in connection with this Note will be in writing and will be given at the place and in the manner provided in the Deed of Trust for the giving of notices. The persons executing this instrument represent and confirm that this loan and the related Deed of Trust are duly authorized by Borrower. Borrower waives presentment; demand; notice of dishonor; notice of default or delinquency; notice of acceleration; notice of protest and nonpayment; notice of costs, expenses, or losses and interest; notice of interest on interest and late charges; and diligence in taking any action to collect any sums owing under this Note or in 2 proceeding against any of the rights or interests to properties securing payment of this Note. Time is of the essence with respect to every provision of this Note. This Note will be construed and enforced in accordance with California law, except to the extent that Federal laws pre-empt state law, and all persons and entities in any manner obligated under this Note consent to the jurisdiction of any Federal or State Court within California having proper venue and also consent to service of process by any means authorized by California or Federal law. Quantum Marketing, Inc., a Nevada corporation By /s/ [illegible] ------------------------------------------- 3 EX-27 7 FDS --
5 12-MOS DEC-31-1999 DEC-31-1999 1,854 1,914 1,212 0 2,597 10,200 12,098 0 33,605 12,989 0 0 0 64 33,605 0 0 84,128 40,517 40,517 50,869 0 1,753 (6,656) (2,853) (3,748) 0 0 0 (3,748) (.06) (.06)
-----END PRIVACY-ENHANCED MESSAGE-----