Profit Financial Corp.
Profit Financial Corporation
[Note -- As of this writing (9-28-97), the common stock of Profit Financial Corp. is not traded on a domestic stock exchange. It is listed as an Over-the-Counter, Bulletin Board stock. This means that until now, the company has not filed for and/or has not met the minimum financial requirements for listing on the Nasdaq. The company has filed documents with the NASD requesting that its stock be listed on the Nasdaq Small Cap market. This is still pending. Currently, the stock is not considered by most brokerage houses as a marginable security.]
Profit Financial Corp opened up the month of August trading at $6 per share. In the 32 trading days since then, the stock has risen 650%. What has prompted such a fiery and meteoric rise in these shares? What incredible news, what marvelous discovery, what groundbreaking revelation is responsible for such a majestic performance? Not much. Profit Financial has issued three press releases in the past few weeks:
1. Profit Financial expects third and fourth quarter revenue to be better than last year.
2. Profit Financial will split 3-for-1. (This was announced in early August and has already happened.)
3. Profit Financial has filed for listing on the Nasdaq Small Cap market. (It has not yet been approved.)
Background -- A 650% rise in stock price, in and of itself, is not a reason to be negative on a stock. It's only after looking at the underlying business that one might get concerned. Profit Financial is a holding company for Wade Cook Seminars Inc. and Lighthouse Publishing Inc. Wade Cook, a self-described "cab driver," has written 15 books on subjects ranging from real estate, the stock market, and the Bible (Business Buy the Bible). Not bad for a cab driver. His company also conducts seminars around the country that preach his teachings. The books, audio and video tapes, and seminars are the primary souce of revenue for Profit Financial.
This company has more subsidiaries and subcorporations than Freddy Kreuger has movies. All totaled, there are 15 subsidiaries is this holding company. Remember, this is a very small OTC:BB stock. We're not talking about some major multi-billion dollar conglomerate here.
The Business -- As mentioned above, Profit Financial is a holding company. Several of the companies in this holding company are structured so that Wade Cook benefits more than the shareholders. Let's look at the two major subsidiaries and examine the relationships to Wade Cook.
Wade Cook Seminars Inc. (WCSI) conducts all of the seminars where Wade and his instructors teach his methods. These seminars charge big bucks ($4000+) to attend. The material taught in these seminars is not owned by WCSI. Wade Cook Seminars Inc. licenses all of the material that they teach from a privately held company named "Money Chef."
Guess who owns 100% of Money Chef? Wade Cook.
The deal that Money Chef has with Profit Financial states that Money Chef (remember -- 100% owned by Wade Cook) will receive anywhere from 10-50% of the revenue derived from the seminars. Money Chef (Mr. Cook) can grab up to half of the total revenue from all the seminars and legally never have to share that with Profit Financial shareholders. Currently, Money Chef is only taking 10% ($4 million last year) of the revenue, but that can change. Oddly enough, Profit Financial Investor Relations couldn't elaborate on the nature or length of the contract.
Although it's highly unlikely that Money Chef would ever pull the rug out from under WCSI by refusing to license the material (Mr. Cook also owns 60.4% of Profit Financial), it still represents a significant risk. After all, he could have structured this anyway he wanted and he chose to structure it as two separate entities. Why not just sell the material, in whole, to WCSI?
Lighthouse Publishing Inc. is 100% owned by Profit Financial and publishes all of the written, audio, and video material. The publishing deal is basically structured as a 50-50 split between Mr. Cook and Lighthouse. Again, he's grabbing 50% of the money for himself and not sharing that with the Profit Financial shareholders. Additionally, all of the expenses associated with the publishing of the materials are incurred by Lighthouse, thus further reducing an already diminished revenue stream. Not very shareholder friendly.
Questionable Practices? As if the business structure of Profit Financial weren't shareholder unfriendly enough, there are some unsettling revelations about Mr. Cook that also raise the spectre of doubt in one's mind about how interested he is in creating shareholder value. From company documents filed with the SEC:
The State of Arizona commenced an administrative proceeding against Wade B. Cook and his former businesses American Business Alliance and Monarch Funding Corporation in February, 1989. The State of Arizona issued an administrative order, on or about May 1989, concluding that Mr. Cook and his businesses had violated various securities laws, including anti-fraud provisions, and as a result, ordered them to (1) pay over $390,000 in restitution, (2) jointly and severally pay a $150,000 administrative penalty, and (3) to cease and desist the allegedly fraudulent conduct. Mr. and Mrs. Cook filed for bankruptcy under Chapter 7 in the U.S. Bankruptcy Court in Phoenix, Arizona. The bankruptcy was discharged in September 1987 and the State of Arizona indicted Mr. Cook on 18 counts of felony. (SEC Filing 10-12/G (4/30/97)
All of the 18 counts of fraud were dismissed due to the double-jeopardy clause and no jury judgement was ever rendered. Unfortunately, this doesn't offer much solace.
In the end, the company is structured in what seems to be a very unfriendly way for all shareholders except Wade Cook and his family. There are allegations of wrongdoing that, despite being dismissed, still make one feel uneasy and worried about the motivations of Wade Cook and Profit Financial as an investment.
Fool Writings on Wade Cook