John T. Reed page on Whitney information Network, Inc. 1 Whitney Information Network, Inc. is one of the plaintiffs in the lawsuit against me. Who exactly is this? Negative net worth Whitney Information Network, Inc. has a negative net worth. According to their 2003 annual report Form 10-K, their liabilities ($56,190,873) exceed their assets ($54,033,756). Should you never invest in a corporation with a negative net worth? No. Some corporations have a negative net worth in their first years and are still good investments because of promising research and development on some breakthrough product like an AIDS cure or the male "pill." Does this describe WIN, Inc.? Nah. They have been around long enough to start being held accountable for their numbers"”"Since 1992" according to the Form S-1 they filed with the S.E.C. Also, they just sell get-rich-quick seminars in hotel meeting rooms. Obviously, this is not an industry where patentable technological breakthroughs are likely to occur. WIN' biggest lender WIN' liabilities exceed their assets. Who is their biggest lender? Who would be dumb enough to lend money to a corporation with more liabilities than assets? You. Or at least it' you if you gave him any money for a seminar you have not yet taken. Look at the balance sheet in any of Whitney' SEC filings. In the most recent"” 2003 Form 10-K"”the biggest liability is $38,593,130 of "deferred revenue." What is "deferred revenue?" Seminar tuition paid in advance. You might think that money would be in the bank until the person in question actually takes the seminar. Nope. WIN spent most of it. They owe $38,593,130 in seminars to their customers, but they have only around $15 million in the bank. Suppose there was a "run on the bank" so to speak? That is, everyone or large numbers of people demanded a refund. Can Whitney pay those refunds? Apparently not. WIN' liabilities exceed its assets, remember? That means if he sold everything to raise the cash for the refunds, they could not pay them all. Would it cost them less than $38,593,130 to put on the seminars they owe? Apparently not. They have lost a "accumlated deficit" of $7,248,646 as of 12/31/03. In other words, they have never figured out how to operate WIN at a profit. That suggests that it would cost
them more than $38,593,130 to put on the $38,593,130 worth of seminars. WIN would no doubt point out that such a "run on the bank" could not happen because their contracts say they do not have to give such refunds. Suppose they got into some financial difficulty other than a "run on the bank?" It would appear that there is a danger that they would be unable to provide the promised and already-paid-for seminars because they already spent more than half the money collected from the students. To the extent that putting on the seminars have expenses"”which it certainly does"”where would they get the money to pay those expenses? Do I have any indications that he will suffer a run on the bank or some other adverse event? No. And it would appear that his contracts protect him against anyone seeking a refund after the first three days after it was signed. The only problem for Whitney I can conceive of regarding refunds would be a court finding that his no-refunds clause was invalid. Perhaps the biggest advantage to Whitney of financing his company with his students" money is that his biggest lender does not even know that they are his biggest lender, so they are unlikely to be very demanding. Indeed, they give him a heck of a deal on the interest rate: zero. Interest saved How much interest is he saving? He says his customers can take the seminar in question within a year of paying for it. So let' say on average they attend at the half-way point: six months. What interest rate would he be paying if WIN went to a bank? Well, WIN probably could not get a $38 million dollar loan from a bank or from Wall Street. WIN has few assets to pledge as security for any such loan and WIN has a negative net worth. So if WIN could find a lender at all, you would expect it would have to pay a high interest rate. But let' be very conservative and say WIN pays the prime interest rate. On 4/17/04 that was 4.00%. 4% x $38,593,130 = $1,543,725. As I said, WIN would have to pay a higher interest rate than that if it could borrow that much money with its current financial statements. Thanks, customers. Cumulative loss When you add up all the profits and losses since the corporation started being Whitney Information Network, Inc., you get a cumulative loss. Profit or (loss) 1997 $10,264 1998 $768,436 1999 ($1,962,266) 2000 ($8,703,127) 2001 $2,534,247 2002 $6,229,740 2003 ($1,557,659) Cumulative total net ($2,680,365) Stock price In spite of the fact that the corporation has a cumulative $2.7 million loss for its entire existence, and a negative net worth of millions more, we are told the stock price is currently around $4.50 a share. Why would anyone even buy a share in such a company"”let alone pay $4.50 for it? Not many do. In one report, Whitney Information Network, Inc. had a total 320 shareholders. Heck, they have 360 employees and more than 85 independent contractors. One suspects that the 320 shareholders are mostly Whitney employees, relatives, speakers, and some of his still-under-the-spell students. So is this really a public-traded company? Barely. This sounds like some sort of colossal joke. People are actually bidding to buy a piece of a corporation with a negative net worth that has also lost millions!? Why? Correction For a few days, I said here that Whitney Information Network was insolvent. By that I explained that they had a negative net worth on 9/30/02 and for some time before. However, Whitney' attorney has told me that there are other definitions of insolvent which do not apply to WIN, Inc. I checked and he is correct. Because of those other definitions, I retract the statement that WIN is insolvent. On 3/28/03, Whitney Information Network, Inc. sued me in U.S. District Court in Miami (Case # 03-60597) for saying that they were insolvent for three days. Case study My wife and I graduated from Harvard Business School. We did everything there by the case study method. Here is how I think a case discussion of Whitney Information Network, Inc. would go at Harvard. Professor: So what do we have here? Student A: A basket case. Professor: Be more precise. Student B: If this were an emergency room, the patient named WIN would be comatose, hemorrhaging profusely, and have multiple compound fractures. Professor: So this is an urgent situation? Student C: Absolutely. This company needs to be turned around immediately. Professor: How would you do that? Student D: Figure out what part of the company, if any, is profitable and get rid of the other parts immediately. We also need to shed liabilities to get back to positive net worth and to shed expenses to achieve cumulative profits. Professor: What are the big liabilities? Student A: According to Whitney' SEC filings, there is only one big liability: "deferred revenue." Professor: How do we get rid of it? Student C: Phase out borrowing from our students. Professor: Can we afford to do that? We have fifteen million cash in the bank. How can we pay off $38 million of loans? Can we sell assets? Student B: We only have $16 million of property and equipment. We could sell that plane we just bought and maybe some other stuff. But a $90-million-a-year company has to have a certain number of desks and office machines. Professor: What about cutting payroll? Student D: General and admin is only $22 million and we are known for being cheap already. Professor: How about paying the independent contractor speakers less? We spend almost $47 million on "Direct course expenses." Student E: No way! Those guys are like free agent pro athletes. They can switch to another guru or go on their own if they"re unhappy. Those guys are more important to the company than Russ. Professor: Can this patient be saved? Student A: I dunno. They know how to fill the seats at their seminars, but not how to make a profit at it. If it can be profitable, they probably need to scale back and skim the cream. There may be a profitable, positive net worth $5-million-a-year company inside this unprofitable, negative net worth $90-million-a-year company. Professor: Too much emphasis on trying to be big and not enough on net worth and profitability? Student C: Yeah. Scale back and make it profitable and have a positive net worth, then try to grow, but slow enough to maintain profitability and positive net worth during the growth. Russ Whitney life style versus corporate fortunes With Whitney' public company losing millions and having a negative net worth, you would expect that Russ would have sold his home, moved into his camper, and be eating Hamburger Helper until the corporation gets turned around. You"d be wrong. During the time his corporation has accumulated millions in losses and millions more negative net worth, he has built a 14,000-square-foot house for himself and his wife"”his in-wedlock children are grown. He drives a Cadillac Escalade; his wife, a Lexus 430. His S.E.C. documents say he spends substantially all his time on WIN, Inc. According to some of WIN' financial statements, Whitney received $5,805.34 a month rent from WIN, Inc. for rental of 4818 Coronado Parkway in Cape Coral, FL. WIN, Inc. apparently did not need the property. A resident of the area told me the parking lot is almost always empty. But that deal had the effect of transferring $5,805.34 x 12 = $69,664.08 a year from what would have been WIN, Inc. profits"”or lower losses"”into Russ Whitney' personal pocket. The 12/31/03 Form 10-K says, "We currently pay Mr. Whitney a salary and bonus of $675,000 per year"¦" That also increases WIN' losses and fills Russ' personal pocket at the corporation' expense. But of course you have to pay a pretty penny to get an ex-convict CEO who knows how to lose millions and drive the company net worth under water. Guys with qualifications like that don"t come cheap. "˜Whadya mean we?" What is this, "We pay Mr. Whitney"¦" stuff? Who is "We?" In fact, that Form 10-K document is signed by five people: Russ Whitney himself and four of his employees. Do employees have much say? Could they say, "You know, I don"t think you"re worth $675,000 considering the losses and negative net worth, so I am not going to vote in favor of your getting $675,000?" Ha! Whitney hires and fires them and everyone else in the company. Whitney owns 81.9% of the stock as of 12/31/03; the other guys, 3.9%, so they ain"t gonna outvote Whitney either. So the most accurate statement is probably, "Whitney pays himself $675,000 a year and the other directors have no meaningful say about it." Since the company pays no dividends, the more complete statement would be that Whitey pays himself $675,000 a year and his shareholders nothing a year. Is he worth $675,000 a year? Question: If Whitney were a hired CEO, not the majority owner, and you were the majority owner, would you pay him $675,000 to continue to perform as he has, or would you fire his butt immediately? Name changes Gimmel Enterprises, Inc. was incorporated in Colorado 2/23/96 as a shell corporation. It had no operations and was basically looking for something to do according to SEC filings by Whitney Information Network, Inc. On 8/19/98 it acquired Whitney Education Group, Inc., formerly WIN Systems, Inc, however this transaction was a reverse merger with WIN actually acquiring Gimmel. There is nothing wrong with reverse mergers per se. A few have become successes like Ted Turner'. They cost less than starting a public company from scratch"”which is a legitimate reason for using them. But they are generally associated with unsavory businesses because they have the advantage of less front-end scrutiny than starting a public company from scratch. Reputable businesses do not need less scrutiny and they are loathe to start their company in a way that may raise questions about their reputability. Whitney Education Group. Inc. changed its name to WIN Systems, Inc. 8/10/98. WIN Systems, Inc. changed its name to Whitney Information Network, Inc. on 2/11/99. The SEC file number for Whitney Information Network, inc. is 0-27403. The SEC CIK number is 0001095276. Those numbers help you to search the records at the SEC' EDGAR Web site. For state corporation record click here: Whitney Information Network, Inc.