**EXHIBIT99.2**

 

PRIVATE SECURITIESLITIGATION REFORM ACT OF

 

1995 - SAFE HARBOR FORFORWARD-LOOKING STATEMENTS

 

 

The Private Securities Litigation Reform Act of 1995 provides a safeharbor for forward looking statements made by public companies. This safe harborprotects a company from securities law liability in connection withforward-looking statements if the company complies with the requirements of thesafe harbor. As a public company, Wade Cook Financial Corporation has reliedand will continue to rely on the protection of the safe harbor in connectionwith its written and oral forward-looking statements.

 

When evaluating Wade Cook Financial Corporation’s business, you shouldconsider:

 

•                  all of the information in this quarterly report on Form 10-Q;

 

•                  or the risk factors described in the Company’s Annual report for theyear ended December 31, 2001 filed with the Securities and Exchange Commission;and

 

•                   the risk factors described below.

 

 

RISK FACTORS

 

Corporate Control By Wade B. Cook

 

Wade B. Cook is the founder, majority stockholder, Chairman of theBoard, Chief Executive Officer and President of the Company. Laura Cook, Mr.Cook’s wife, is the Secretary of the Company, and frequently serves as aconsultant to the Company’s executive management. Several of Mr. Cook’srelatives work at the Company. Mr. Cook maintains control over most aspects ofthe Company including, but not limited to, setting corporate policy,determining strategic direction, determining the acquisition or sale of assetsby the Company, setting the material terms of acquisitions and determining thematerial provisions of many of the Company contracts. Mr. Cook provides inputon practically every product and seminar sponsored by the Company. Mr. Cookalso directs most marketing efforts of the Company and has a substantialinfluence on the management of the Company. Mr. Cook will continue to have asignificant influence over the policies and procedures of the Company and willbe in a position to determine the outcome of corporate actions requiringstockholder approval, including the election of Directors, the 1 adoption ofamendments to the Company’s corporate documents, the approval of mergers andthe sale of the Company assets.

 

 

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Dependence on Wade B. Cook

 

The Company’s business is highly dependent on the continuing effectiveinvolvement of Mr. Cook. Mr. Cook personally directs most aspects of theCompany’s business. The Company has a non-exclusive license which expires June30, 2002 to use Mr. Cook’s products, intellectual property, name, image,identity, trademarks and trade symbols which are featured prominently in manyof the Company’s services and products. Mr. Cook is not prohibited fromcompeting with the Company or granting licenses to competitors. See “Business -Intellectual Property.” The business of the Company would be materiallyadversely affected if Mr. Cook’s services were not available to the Company, orif Mr. Cook should compete with the Company or grant licenses or otherassistance to competitors.

 

Working Capital Deficiency, Liquidity Constraints

 

At December 31, 2001, the Company had current assets of $9.1 millionand current liabilities of $10.3 million, resulting in a working capitaldeficit of $1.2 million (See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Liquidity and Capital Resources”). TheCompany’s principal source of cash has been from its education seminars and itssale of books, tapes and other materials focused on business strategies,financial planning and personal wealth management. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations - Results ofOperations and Liquidity and Capital Resources.”

 

The Company’s practice of using available cash to fund subsidiaries andnew non-marketable investments, its working capital deficit, the Company’ssignificant long and short term obligations, recent earthquake damage, costsassociated with the Company’s consumer redress program, the September 11terrorist attack, the fact that the Company’s segments are not generating cashas in the past, and the significant losses experienced in the Company’s OtherIncome have resulted in substantial constraints on liquidity.

 

If the Company is required to generate cash from its non-marketableinvestments to satisfy its current obligations, it may not be able to liquidatethese investments in a timely manner or in a manner that allows it to receivethe full value of the investments. Failure to generate adequate cash resourcescould require the Company to cut back operations, delay expansion ordevelopment projects, or cause the Company to be unable to meet its obligationswhen due.

 

Legal Proceedings and Governmental Investigations

 

The Company is a party to a small number of legal proceedings. See Item3. Legal Proceedings. The Company, based upon the information available to date(including information supplied by counsel) and particularly in light of theCompany’s past history of settling previous legal disputes out of court, doesnot presently expect material liability in these matters or any others.However, the outcome of such matters is difficult to predict and subject touncertainty, and the legal fees and other costs involved could be material. Anynegative finding as a result of this investigation could have a materiallyadverse effect on the Company’s financial condition and results of operations.Effect of Securities Market Conditions on the Company’s Business The Companybelieves that the level of public interest in investing, particularly in thesecurities and option markets as well as electronic trading has significantlyinfluenced the market for its products and 

 

 

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services. The securities markets have experienced substantialvolatility in recent periods. A sharp drop or sustained or gradual decline insecurities prices or other developments in the securities markets typicallycould cause individual investors to be less inclined to invest in thesecurities markets, which would be likely to result in reduced interest in theCompany’s seminars and related products and services. Declines in thesecurities markets also adversely affects the value of the Company’s investmentportfolio.

 

Management of Growth and Integration of Acquisitions

 

In 1999, the Company’s business declined in terms of revenue, number ofemployees and scope of activities in which it engages. During the year 2000,the Company showed similar declines in revenue, number of employees, and scopeof business activities. During 1997, the Company acquired all interests andrights in Worldwide, Origin, Gold Leaf and Ideal, and during 1998, the Companyacquired all rights and interests in IQ (distribution of paging devices thatdistributed stock market data). The Company discontinued Origin’s operations asof December 31, 2001. The Company currently has a minority interest in onehotel. During 2001, Brookhaven Homes Limited Partnership, a Company controlledentity, become involved in the construction and development of luxury homes inthe Western Washington area. Additionally, in the beginning of 2002, theCompany through Health and Wealth, Inc., a wholly owned subsidiary, becameinvolved in the sale and distribution of the Fresh Cleanse(R) skin care productline. Some of these acquired businesses, investments, and recentdiversification have not performed as well as expected by the Company. In thepast, such growth has placed significant strains on the Company’s management,accounting, financial and other resources and systems, and on its cashresources and working capital. Failure to manage successfully the growth insize and scope of the Company’s business and to successfully integrate andmanage the Company’s recently acquired businesses could have a material adverseeffect on the Company’s results of operations and financial condition.

 

State and Federal Government Relations

 

As discussed throughout this report, the Company is a party to a numberof voluntary Consent Decrees (the “Agreements”) with the Federal TradeCommission and the consumer affairs divisions of 14 states. The Agreementsrelate to the Company’s future advertising practices and the implementation ofa consumer redress program. While the Company fully intends to comply withthese Agreements, failure to comply with the terms of these Agreements couldresult in legal action by the respective state and federal authorities. Legalremedies could include injunctions against violating respective consumer laws,recession of prior customer contracts, customer refunds, contempt, and/ordisgorgement. On February 20, 2002, the FTC filed an application for a motionfor contempt (the “Application”) in the Federal District Court for WesternWashington, claiming that the Company had allegedly violated provisions of theAgreements. According to an FTC press release dated February 21, 2002, thealleged violations involve disclosure of the Company’s rate of return,substantiation of promotional claims, and compliance with consumer redress programdeadlines and payment obligations. The Company is reviewing the Application.While the Company believes that the FTC’s actions are unmerited and has beenworking closely with the FTC in resolving the matter, failure to successfullyresolve this matter could have a material adverse affect on the Company’sresults of operations, 

 

 

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operations, and financial condition (For a more complete description ofrecent events see Item 3. Legal Proceedings).

 

February 28, 2001 Earthquake

 

On February 28, 2001, an earthquake (the “Earthquake”) measuring 6.8 onthe Richter scale struck Western Washington. In concert with the earthquake,Wade Cook Financial Corporation’s (“WCFC”) corporate headquarters (the “Headquarters”),located in Seattle, Washington, experienced severe localized resulting waterdamage (the “Flooding”). The Headquarters is home to WCFC, as well as the StockMarket Institute of Learning, Inc. (“SMILe”), Lighthouse Publishing Group, Inc.(“Lighthouse”), Ideal Travel Concepts, Inc. (“Ideal”), and Information Quest,Inc. (“IQ”), all wholly owned subsidiaries of WCFC. Collectively SMILe,Lighthouse, Ideal, and IQ account for the majority of WCFC’s annual revenues.The combination of the Earthquake and the Flooding has caused the Company tosignificantly reduce operations, and rendered one half of the Headquartersunusable for an extended period of time. Occupation was restored to thecorporate headquarters in July of 2001. All repairs have not yet beencompleted, and it is not presently known when the Company headquarters will befully restored. The inability to complete restoration or to fully resumeoperations for a number of months caused and continues to cause the Company tolose a significant amount of revenue, as well as the attendant loss of profits,and to incur substantial continuing and extra expenses. As of December 31,2001, the Company was still in the process of estimating the extent of fullproperty damage, lost profits, loss of goodwill, and associated expensesincurred on account of the Earthquake and the Flooding. However, initialestimates of physical damage to the Headquarters and related furniture,fixtures and inventory indicate that the repair, reconstruction, and/orreplacement costs for these items may equal $5,000,000. The Company hasreceived approximately $800,000 in insurance proceeds from its 3 commercialproperty insurance carrier Caliber One Indemnity Company thus far. The Companyis seeking additional insurance proceeds from Caliber One Indemnity Company tofund continued restoration of the Company’s headquarters and to compensate itfor various losses caused by the earthquake and subsequent flooding, includingdamaged and destroyed equipment, lost business income, and extra expenses.Failure to properly resolve coverage issues arising out of recent Flooding andEarthquake or inadequate insurance coverage could have a material adverseeffect on operations and the Company’s financial condition.

 

Audited Financials for the Year Ended December 31, 1999

 

Filed in April 2001 In May of 2001, the Company was contacted by theSEC concerning technical filing error with respect to its Annual Report on theForm 10-K (“Annual Report”) for the year ended December 31, 2000. The assertedtechnical filing error involved the Company’s filing of the Annual Reportwithout including a written consent (“Consent”) by Miller and Co. LLP(“Miller”) relating to the Company’s financial report for the year endedDecember 31, 1999. Miller, the Company’s former auditor, was dismissed inNovember of 2000. On December 4, 2000, the Company filed a Special Report onthe Form 8-K (“8-K”) disclosing Miller’s dismissal. Miller attached a letter tothe 8-K, agreeing substantially that Miller’s reports for 1998 and 1999 do notcontain an adverse opinion or disclaimer, and that there had been nodisagreements with Miller on matters relating to accounting principles orpractices, financial statement disclosure, or 

 

 

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auditing scope and procedure which were not resolved to Miller’ssatisfaction. Furthermore, there were no reportable events as described in Item304 (a) (1) (iv) of Regulation S-K, or any reportable event, as the term isdefined in Item 304(a)(1)(v) of Regulation S-K. (For additional informationconcerning this event please see the Company’s Special Report on Form 8-K filedDecember 4, 2000). Shortly before filing the Annual Report, the Companyrequested Miller’s written Consent to refile the prior audited financials inthe current Annual Report. In a letter dated April 9, 2001, Miller stated “itis our understanding that we are not required to authorize the release of thefirm’s report.” In reliance on Miller’s statements, the Company believed thatMiller’s Consent was either implicitly given and/or would not be needed to filethe Annual Report, and acted accordingly. Subsequent to filing the AnnualReport, the SEC contacted the Company, informing Company representatives thatabsent Miller’s written Consent, the financials from prior audit years (1998 -1999) would be deemed as unaudited by the SEC. The SEC also disclosed that as aresult of this situation, the Company would be unable to raise capital throughpublic offerings until the matter was resolved. The Company is not aware of anyassertions by Miller, claiming that its prior audit information is inaccurate,misleading, or has otherwise been impacted by subsequent events. The Companycontacted Miller to solicit express written consent. The Company also contactedMiller in effort to gain access to the Company’s client records and relevantwork papers held by Miller that would be needed to perform a re-audit of theCompany’s prior financials should Miller choose not to issue a written consent.However, the Company was unable, after lengthy discussions, to come to termswith Miller regarding either their written consent or access to the Company’sclient records and relevant work papers. Consequently in August 2001, theCompany filed a lawsuit against Miller to resolve this situation (for a morecomplete description of the lawsuit against Miller, please see Item 3 - LegalProceedings of this Report). While the Company is attempting to resolve thissituation, the Company can make no assurances as to whether it will besuccessful. Failure to resolve this situation could adversely affect theCompany’s reporting relationship with the SEC or ability to raise capitalthrough public offering.

 

September 11, 2001 Terrorist Attacks

 

The September 11, 2001 terrorist attack (the “Attack”) on the WorldTrade Center in New York and the Pentagon in Virginia had an adverse impact onthe Company’s operations and ability to supply seminar services to itsclientele. Initially after the Attack, the Company was forced to cancel some ofits previously scheduled seminars during the months of September throughNovember, and to reschedule others. Cancellation and rescheduling resulted inthe loss and/or deferment of significant revenue. Also as a result of theAttack, some U.S. residents seem to be choosing to travel less frequently, andif they must travel, to take alternative means to air transport. A significantportion of customers who attend the Company’s events travel by airplane. Whilethe Company is taking steps to lessen the potential future effects of September11, 2001, the Company’s revenues in future periods could be adversely effected,if a large percentage of the Company’s future customers choose not to travel toCompany events or to use the Company’s travel agency to book travel plans.

 

 

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General Economic Conditions

 

Any negative changes in economic conditions, significant priceincreases, inflation, or adverse events related to the seminar, travel and/ortourism, commercial real estate, or information services industries such as thecost and availability of fuel, the price of real estate, or the willingness ofindividual investors to trade could harm discretionary consumer spending andhave a material adverse effect on the Company’s business, results of operationsand financial condition. These types of economic conditions, includingrecession, could also adversely affect the availability to secure futurefinancing transaction on terms favorable to the Company. Furthermore, adversechanges in economic conditions could negatively affect the collectability ofCompany’s notes receivable.

 

Delay of pay roll obligations.

 

During the second fiscal quarter of2002, the Company experienced certain liquidity constraints that caused theCompany to delay satisfying some of its second quarter accrued payrolltaxes.  The Company’s intention was todelay payment of these payroll taxes until the end of the second quarter (aspermitted by federal law).   In thebeginning of the third fiscal quarter of 2002, the Company paid the secondquarter’s deferred payroll taxes.   Infuture fiscal periods the Company’s liquidity situation may cause the Companyto make similar tax delays.  If theCompany makes such delays but is unable to satisfy those obligations when due,the Company’s operations and financial condition could be negatively affected,and the Company and/or its officers could face significant fines and penalties.

 

Recent Director Resignations

 

During the second fiscal quarter of2002, Ken Roberts, Angela Pirtle, and Janice Leysath individually resigned asmembers of the Company’s Board of Directors, and as members of the Company’sExecutive/Audit committee.  The Companyannounced these resignations on June 10, 2002 on the Form 8-K filed with theSecurities and Exchange Commission.  Ms.Leysath’s letter of resignation was attached, per her request, as an exhibit tothe Form 8-K.  Ms. Leysath’s letter ofresignation contained certain inflammatory allegations regarding the Companyand resulted in some negative press coverage. Negative press coverage relating to this resignation or the resignationsof the other directors, could have an adverse impact on the Company’s effortsto attract new and existing customers, obtain favorable financing, and gainaccess to new business opportunities. Any adverse impact on these items could negatively affect Companyoperations and/or financial condition.

 

 

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