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John T. Reed page on Whitney information Network, Inc. 2 Micro-Cap stocks in general WIN is a micro-cap stock (thinly traded at less than $5 a share). There is an excellent article about "Micro-Cap Fraud" at the California Department of Corporations Web site (https://www.corp.ca.gov/pub/microcap.htm). Has Whitney committed Micro-Cap fraud? I don"t know. But anyone who is going to invest in micro-cap stocks should probably read that article and other independent writings on the subject. Dispute with SEC In their SEC filing for the fourth quarter of 2000, they say Whitney Information Network, Inc. they say they were having a disagreement with the SEC about how Whitney treats seminar-related expenses. Whitney treats them as an asset called "deferred training course expenses." It is rarely appropriate for a business to treat expenses as an asset. It applies to some businesses like building jet airliners, which takes years and is generally done pursuant to a long-term contract. Whitney' business"”doing seminars in rented hotel meeting rooms"”warrants no such accounting approach. Here are Whitney' figures and how the SEC says Whitney should restate them: Net income of Whitney Information Network, Inc. Whitney said SEC says Year ended 12/31/98 $768,436 -$2,238,307 Year ended 12/31/99 $1,391,770 -$1,680,290 4th quarter 2000 $305,891 -$1,078,951 In other words, Whitney said it was making a profit, but the SEC said it was really losing millions. A former insider tells me the problem was WIN was asking seminar attendees to pay in advance and booking income when received. SEC said they had to wait until they actually gave the seminar that was being paid for before they could record it as income. The SEC position would be the normal one. Lost almost $11 million in 1999 and 2000 The 2001 SEC Form 10-K/A says Whitney Information Network, Inc. lost $8,703,127 in 2000 and $1,962,266 in 1999. This loss dwarfs all previous profits, which means Whitney Information Network, Inc. is a money loser for its entire existence. Firing or being fired by auditors and restatement of earnings On 7/28/00, Whitney information Network, Inc. terminated its long-time auditor, Larry Legel, C.P.A., 5100 North Federal Highway, #409, Fort Lauderdale, FL 33308 and replaced him with BDO Seidman"”a well-known, big accounting firm. Four months later, on 11/14/00, they fired BDO Seidman"”or more likely, BDO Seidman refused to work for Whitney. Now their auditor is Ehrhardt Keefe Steiner & Hottman. BDO Seidman would have given Whitney some credibility on Wall Street. As far as I know, the other two auditors are too obscure and tiny to do that. Whitney says there was "no dispute" with either of the departed auditors regarding "accounting policy or practice." Well, there was obviously unhappiness about something. You don"t lose two auditors in succession in four months without a reason. Whitney Information Network, Inc. also restated its earnings for the previous four quarters. That means they said, in effect, We did not make as much profit as we previously told you, or, in this case, we didn"t make any profit in spite of what we previously said. Rather, we lost a bundle. They say they decided to do this "after discussion with the [Securities and Exchange] Commission," but that the Commission had not taken any formal action. Reading between the lines, it sounds like the SEC told Whitney Information Network, Inc. to knock off hiding their losses immediately, restate their earnings for the previous four quarters, or the SEC was going to file some sort of formal disciplinary action against them. Losing two auditors in four months and restating your earnings after "discussions" with the SEC is a lot of "smoke." It' hard to

believe there is as little "fire" underneath as Whitney' "no dispute" and "no formal action" comments suggest. Not $100 million in 2001 Whitney once put out a press release saying its sales would be $100 million in 2001. He later rescinded that forecast and refused to make a revised forecast. Indemnification of officers According to SEC filings, Whitney Information Network, Inc. indemnifies Russ Whitney and two associates who own tiny percentages of the company against certain liability. However, those same SEC filings admit that the SEC said such indemnifications violate public policy and are therefore unenforceable. Owned no property According to some of its SEC filings, Whitney Information Network, Inc. owned no real or personal property. Not even a photocopier or a desk? Whitney' 2001 SEC Form 10-K/A says they own 1612 East Cape Coral, Cape Coral, FL plus equipment, fixtures, land, construction in progress, and leasehold improvements.. Leases office from Russ Whitney SEC filings say Whitney Information Network, Inc. leases its 8,700-square-foot office from Russ Whitney for $5,805.34 per month through 10/31/02 and that this"”$5,805.34 ÷ 8,700 = 67'¢/sq. ft. is a market rate. Is it? I am told that this office building is empty. So maybe the better question than whether the rent is market is why is Whitney Information Network, Inc. paying anything at all"”let alone $5,805.34 a month"”to rent an empty building that they apparently do not need? They also have leased 3,678 square feet for $46,563 a year in Draper, UT for their telemarketing and 3,000 square feet for $42,600 per year in Jackson, MS for a storefront Wealth Education Center. The landlord on the latter was Brown Lakeland Properties of Flowood, MS. Stock ownership Whitney owns 81.9% of the stock in Whitney Information Network, Inc. A former employee of Whitney' said that buying stock was "required" of the employees. It' not a mandatory written policy, rather an admonition that it' "your company" and you therefore should "support" it. Revenue recognition The SEC filings say that revenue is recognized when "the nonrefundable deposit is received for the seminars." What is a "nonrefundable deposit?" I thought they were illegal. I recall landlords in California getting into trouble for telling tenants that their security deposits were nonrefundable. One definition of a deposit in Black' Law Dictionary is, "Money lodged with a person as an earnest or security for the performance of some contract, to be forfeited if the depositor fails in his undertaking." I would say it is money you lose if you fail to keep your end of the bargain, but get back if the deposit holder fails to keep their end of the bargain. If it is nonrefundable, it is option consideration or a fee of some sort. The word "deposit" implies that it is refundable under some circumstances. Question for those who have been around when Whitney or his employees asked for a "deposit?" Do they tell you the deposit is nonrefundable? When I did seminars, I collected money from reservations made in the months before the seminar and at the seminar. I did not collect any deposits. We paid full refunds even after the person took the seminar (about one person a year did that and we felt we had been ripped off, but we were probably better off overall because that policy caused others to attend who might not have). Whitney' nonrefundable deposit policy appears to me to be a creation of his accountants to enable them to book revenue before it is earned in the normal sense by putting on the seminar in question. Where your tuition money goes Based on the components of seminar expenses in Whitney' Form 10-Q for the third quarter of 1999, here is where the, say, $3,000 you pay for a Whitney seminar goes: $1,581.30 advertising to get you to sign up $509.70 instructor $415.50 travel and meeting room rental $290.40 support services $203.10 administration The 2001 Whitney SEC Form 10-K/A says speaker fees amounted to 12% of revenues. That would mean that 12% x $3,000 = $360 of your tuition goes to create the information you receive. The rest goes to selling you on being there and administrative expenses. In an ad for speakers at his Web site, Whitney says they make $50,000 a month which is $600,000 a year. Who' paying them that? You are. Number of students According to its SEC Form 10-Q for 1st 1/4 2002, Whitney Information Network, Inc. was teaching 24,000 students per month. That' 24,000 x 12 months = 288,000 students per year. If they have been teaching students at that rate since, say 1997, by 2003, they would have taught about 6 x 288,000 = 1,728,000. There are only about 10,000,000 real estate investors in the country. I find it hard to believe that any guru would have so many seminar attendees. I suspect that they are counting the same students more than once as they attend more than one seminar and that they are counting the many who attend the "free training" seminars that are used to attract paying customers for the other seminars. If Whitney were getting say, $3,000 per student, 288,000 students per year would generate annual gross income of $864,000,000"”almost a billion dollars"”not counting sales of books and other non-seminar products. If you divide his sales claim of $45 million (SEC report) by 288,000 students, you get $156 per student. Since he charges much more than that, it would appear he' counting mostly people who pay nothing. That' a bit misleading, don"t you think? It' not considered nice to mislead investors on Wall Street. "˜Overview" Whitney' SEC Form 10-SB/A-1 for 1998 has an odd bit of corporate babble to describe itself. "Its learning solutions are designed to deploy and manage knowledge practically and more effectively for use as a competitive advantage." Sounds like something MBAs would concoct to make fun of corporate mission statements. I guess "learning solutions" are what we normal people would call seminars. "Deploy" is a military term that applies to relocation of troops and their equipment. "Manage knowledge?" How do you do that? I"ve heard of acquiring knowledge or using knowledge, but not "managing" knowledge. Either you have knowledge or you don"t. Managing of it is something your brain does without any conscious thought by you. Translated into plain English, Whitney seems to be trying to say, "Our seminars help you do better in the areas we cover." They go on. "The Company has accomplished its position in the market and growth through its innovative distribution channels, including classroom education, one-on-one mentoring, group instruction, training centers and Internet marketing." He means "achieved," not "accomplished." And there is nothing innovative about these distribution channels. Whitney may have some innovative twists to how he uses these channels, but he is far from the inventor of any of them. Presentations to the National Investment Banking Association According to a 10/9/02 news release, Whitney made presentations to a National Investment Banking Association conference in New Orleans. Would that be in preparation for moving from the OTC Bulletin Board to an exchange like the New York Stock Exchange or NASDAQ? The stock market is not my area of expertise, but I understand that those organizations have standards that preclude convicted felons from running or owning companies listed on their exchanges. Whitney served 19 months in state prison for second degree robbery. There is also the issue of fidelity insurance and bonding, which one would expect is required of the executives of public corporations entrusted with millions of dollars of stock holders" money. Typically, when you apply for fidelity insurance or a bond, they ask if you have ever been convicted of a felony. If you say yes, and the felony involves misbehavior with money"”like robbery"”you don"t get the insurance. Whitney' age Russ Whitney was born on 11/18/55. Oddly, however, he seems to have stopped aging in some of his SEC filings and his news releases. For example, a Yahoo company profile dated 11/18/02"” Whitney' 47th birthday"”said he was 44. An SEC Form 10-K dated 7/16/02 and signed by Whitney also says his age is 44. This may cause a first in the annals of corporate governance"”a CEO who is forced by the SEC to restate his age. Internet searches for Russ Whitney also turn up data on his wife whether you want it or not. After seeing Whitney turn ageless in his SEC filings, I was bemused to find that Mrs. Whitney' age is either the same as Russ or four years older, depending upon which Internet document you rely on. Where does he spend his time? On page 3 of a proxy statement for Russ Whitney' Whitney Information Network, Inc., it says, "Mr. Whitney is an executive officer of a number of privately held Florida-based companies which are engaged in real estate development, publishing, marketing, software development and mortgage services. Mr. Whitney nevertheless devotes substantially all of his time to the Company' [Whitney Information Network, Inc.] affairs." But a 10-K signed 7/16/02 says he "also actively invests in real estate." I"ll have to ask him for a breakdown of his day when I take his deposition. Whitney' home address I have heard that Whitney lives at 232 Bay Shore Drive in Cape Coral. In various government filings, corporate officers are required to state their address. His subordinates, the late Richard Brevoort and Ronald Simon seem to give actual home addresses: 4500 SE 5th Place #206, Cape Coral and 1402 Beechwood Trail, Fort Myers respectively. Whitney, however, gives 4818 Coronado, a largely empty office building address. Are CEO' exempt from the home address requirement? Income taxes Here are the income taxes paid by WIN over the years. Year Taxes Net operating loss 1997 ? 1998 ? 1999 $0 2000 $925,867 $13,690,000 2001 $0 $168,000 2002 $0 A lot of people look at the zero tax paid in 1999, 2001, and 2002 and figure Whitney is smart and figured out how to pay no taxes. Perhaps. But there are a couple of other possible explanations. Another reason corporations sometimes pay no tax is that they have no net income. In other words, they are unsuccessful. Tax accounting tends to be more accurate than annual report accouning because the tax reporting rules are stricter. The figures in the Annual Report are based on GAAP rules. That is, "Generally Accepted Accounting Principles." What are those? Good question. When we studied them at Harvard Business School the main point the professors seemed to be trying to get across was that GAAP was overly flexible. To state it in another, crude way, in the Internal Revenue Code, 2 + 2 = 4. In GAAP, 2 + 2 = 3 or maybe 4 or maybe 5"”What do you need? I complained in class at Harvard that GAAP was a language where the words had multiple definitions"”which renders them meaningless. The professor, John Shank, reacted like that was the great quote of the day in the class"”the point he was trying to get across all along. If you figure income tax accounting is more reliable, WIN is putting up a lot of zeroes"”or worse. Think about it. In 2002, the corporation grossed $62,000,000 in sales and paid zero taxes. I am well aware of clever tax accouning. I wrote the book Agggressive Tax Avoidance for Real Estate Investors which is now in its 18th edition. I will give Whitney credit for clever tax accounting with regard to WIN just as soon as I hear his explanation of how he avoided tax. Until then, I suspect it was because he had no net taxable income in a real sense"”at least for the multi-year period stretching back to 1999. When I say in a real sense, I mean maybe he just didn"t make any profit the way a layman thinks of profit. Does WIN, inc. get the expenses and Russ the income? WIN, Inc. promotes Whitney' "Millionaire University" which takes place in Cape Coral. While the students are there for that, they reportedly are pushed to invest in houses in the area. I see no mention of this revenue in the SEC filings. That suggests the income goes into Russ Whitney' personal pocket (more likely some entity that he solely owns and which is unrelated to WIN), but that the expenses of selling those houses is borne by WIN, Inc. as part of putting on the "Millionaire University." I am no lawyer, but I have the impression that commingling of personal and corporate funds is one of those mistakes that enables would-be litigants to "pierce the corporate veil." Financial Shenanigans A former securities lawyer who saw this Web site recommended that I get the book Financial Shenaningans by Howard Schilit to help me analyze Whitney Information Network, Inc. I did. It has a "Comprehensive Checklist of Warning Signs" on page 201. Here are some "warning signs" that WIN, Inc. appears to trigger. To be continued Copyright 2002, 2003, 2004 by John T. Reed Last update 4/17/04 John T. Reed, a.k.a. John Reed, Jack Reed, 342 Bryan Drive, Alamo, CA 94507, Voice: 925-820-7262, Fax: 925-820-1259, www.johntreed.com

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