Is the Cash Plus /Hilton buyout still on?
Is the Cash Plus /Hilton buyout still on?
Cash Plus's buyout of the Hilton Kingston Hotel may not be a done deal in light of this week's announcement of the US$26-billion buyout of the entire Hilton Hotel international chain by United States private equity firm, Blackstone.
Claudette Kenlock, sales and marketing director of the Hilton Kingston Hotel, told Caribbean Business Report, "In terms of the impact on the sale of the hotel, I can't comment until we have directives from Cash Plus and the Hilton Group." Senior Cash Plus executives, Carlos Hill and Marie Matthews, were said to be in a long management meeting and unable to speak to the press yesterday.
Since 2000, Hilton shares have climbed from US$9.5 to US$34 (257 per cent), and the company had been busy creating international partnerships. Blackstone paid a 32 premium on the Hilton's market value to acquire not just the hotel management business but the real estate held by the company; and this is one of the reasons local commentators say that the Cash Plus deal is in doubt.
According to the Financial Times report on July 4th, "Blackstone made clear it regarded the Hilton deal as a double play, the purchase offering both asset and operational benefits. Arthur de Haast of JLL Hotels said:
"One of the things this deal throws up is a private equity company buying into not just the real estate but the operational entity and a brand. They are a competitor as well as an owner." InvestorGuide.com wrote, "For one, it is unlikely that the company will be dismantled and sold for scrap. Hilton has done better than its competitors over the past five years, and had been forging ahead with several big deals to expand its international reach."
Less than a week after its $4.1-billion initial public offering on the New York Stock Exchange, the purchase of the Hilton Hotel gives Blackstone its choice of 600,000 hotel rooms worldwide.
Hilton operates in three business segments: Hotel Ownership, Managing and Franchising and Timeshare.
Its operations covers 2,357 properties. The hotel brands include Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Hampton, Homewood Suites by Hilton and Conrad. In addition, the company develops and operates timeshare resorts through Hilton Grand Vacations Company and its related entities.
Besides Jamaica, Hilton has hotel properties in Belgium, Egypt, England, Hong Kong, Ireland, Mexico, Puerto Rico, Singapore, Thailand and Turkey and franchised hotel properties in Canada, Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Peru, Puerto Rico and Venezuela.
The Hilton family, trustees to the William B Hilton Trust, own 20 per cent of the company and stand to gain US$900 million out of the deal.
Medical Tourism Takes Flight
Medical Tourism Takes Flight
By Kathleen Doheny
HealthDay Reporter Fri Jul 6, 7:02 PM ET
FRIDAY, July 6 (HealthDay News) -- Soaring U.S. medical costs are causing many Americans to take to the skies on "medical tourism" junkets, looking for high-quality yet low-priced health care at foreign clinics.
In many cases, patients get exactly what they are looking for, but experts also warn that the booming industry does have some risks.
"My own advice would be to look carefully at the accreditation of the hospital and consider the nature of the procedure. Are you sure it is the procedure you need? And is it done well at the place you are going?" said Dr. Ann Marie Kimball, a professor of epidemiology and health services at the University of Washington School of Public Health, in Seattle.
The surge in medical tourism over the past decade is being driven by rising U.S. health-care costs and growing numbers of uninsured or under-insured Americans, said Josef Woodman, the author of a guidebook on the topic called Patients Beyond Borders.
Almost 45 million Americans, or slightly more than 15 percent of the population, are currently uninsured, according to U.S. Census Bureau statistics from 2005, the latest available.
Woodman estimated that more than 150,000 Americans traveled abroad for health care in 2006. The number is projected to double in 2007, he said.
"That 150,000 number is conservative," he said. "Some experts say 400,000." Among the top destinations: Southeast Asia and Mexico, with many other countries, such as Costa Rica, expected to be the next popular destinations for medical care.
Medical tourism companies, in collaboration with special "health travel agents," have sprung up across the country, and some insurance plans are participating in these endeavors, as well.
In California, for instance, Salud con Health Net, a program of Health Net of California, provides access to health care for their insured Latino participants for services conducted across the border in Mexico. And BlueCross/BlueShield of South Carolina and BlueChoice HealthPlan of South Carolina now offer medical care at Bumrungrad International Hospital in Bangkok, Thailand, among treatment options. Bumrungrad treats more than 400,000 international patients every year.
The price savings on cross-border medical care can be dramatic. For example, one commercial medical tourism Web site (www.medicaltourism.com) estimates that a heart bypass in the United States costs $130,000, but just $10,000 in India and $11,000 in Thailand. A hip replacement in the United States would cost $43,000 but just $12,000 in Thailand or Singapore. Hysterectomy costs are about $20,000 here but $3,000 in India.
The medical tourism companies that have sprung up can help travelers find the hospital that provides the procedure or care they need. A growing number of overseas hospitals are accredited under the Joint Commission International, the international arm of the Joint Commission on Accreditation of Healthcare Organization (JCAHO), which accredits U.S. hospitals and other facilities.
As the practice has become more common, medical tourism has evolved, Woodman said. While the practice used to be associated with vacations -- get your facelift, sit on the beach -- and sometimes still is, for most procedures, he recommended separating the surgery from the vacation.
"Even after a minor surgery, there can be swelling," Woodman said. "Most doctors will advise you to stay out of the sun after surgery."
"It's not a 'fun in the sun' gimmick," he added. "People are going overseas and getting serious surgeries."
Medical tourism isn't without some concerns, of course. Experts in the United States worry that consumers might end up getting substandard care i f they don't choose their hospital and physician carefully.
The American Society of Plastic Surgeons has issued a briefing paper on the subject, cautioning potential patients that "it may be difficult to assess the training and credentials of surgeons outside of the United States." The ASPS also stressed that typical vacation activities -- which are sometimes marketed as part of a surgery trip -- should be avoided to allow for proper healing and reduce the risk of complications.
Even when patients select and book medical care abroad through a health travel agent, they must remain critical, informed health-care consumers, Woodman said.
The main thing a patient needs to do, he said, is check out the accreditation of the hospital and the credentials of the surgeon.
Spread of disease is another potential concern, said Kimball, who is also director of the APEC Asia Pacific Emerging Infectious Disease Network and author of Risky Trade: Infectious Disease in the Era of Global Trade.
"Medical tourism is obviously a route for pathogen spread," Kimball said, noting that different hospitals in different regions may have different types of flora. "The extent to which it's a problem versus a theoretical concern is as yet not known," she said. "I can't issue a blank 'go' or 'don't go,'" she added.
Kimball's advice: Look carefully at the accreditation of the hospital concerned and do your homework before you board the plane. "Check out the number of surgeries done, the success rates," Woodman added. It's also key to ask the surgeon you talk to if he or she will perform the operation, not an assistant.
Kimball said she urges potential medical tourists to talk it over with their own physician. As the concept and the practice of medical tourism has evolved, she said, a physician is not likely to automatically rule out the idea.
More information
There's more on medical tourism at the American Society of Plastic Surgeons.
Americans flock to the 'Rich Coast'
Americans flock to the 'Rich Coast'
Sunday, July 1, 2007
By SHANNON ROXBOROUGH
SPECIAL TO THE RECORD
Christopher Columbus, while drifting aimlessly through the Caribbean in 1502, set eyes on a breathtaking stretch of coastline and christened it Costa Rica.
More than 500 years later, the country of just over 4 million tucked between Nicaragua to the north and Panama to the south is experiencing a boom not seen since the 1980s, when American and European retirees arrived in droves to enjoy the good life on a budget. (According to the State Department, more than 20,000 U.S. expatriates live in Costa Rica, though the actual number is closer to 50,000.) Politically stable with a highly literate, cosmopolitan populace, stunning Pacific and Caribbean coastlines and huge swaths of protected rain forests, Costa Rica's tourism is booming, and so is the market for second homes.
Americans are once again flocking to the "Rich Coast," a literal translation of its name. One such newcomer is Amanda Courter, who was born in Manhattan and raised in Atlantic City. Citing burnout from a hectic 9-to-5 workweek, the breakneck pace of our rush-to-get-nowhere society, political discontent and an overall decline of the quality of life in the United States, she arrived in Costa Rica in 2005. She bought a 2-bedroom, 2½-bathroom villa for $390,000 in Punta Dominical, a gated luxury community on the country's southern Pacific Coast.
"I love the culture, the food and the water sports. There is something new and exciting every day with a slower pace and lighter level of responsibility than life back home," Courter said. "In so many ways, I feel like a child again, and I can finally breathe."
She is not alone in her praise of this traditional south-of-the-border retreat. "Costa Rica isn't for everyone, but it is very user-friendly for Americans since it has more U.S. citizens per capita than any place outside the United States. There are American movies, malls, food chains and all the familiar brands that make it easy for Americans to live here. They feel at home," said Christopher Howard, author of the book "The New Golden Door to Retirement and Living in Costa Rica," who sponsors relocation tours to Costa Rica.
Howard, a Los Angeles native who traveled throughout Central and South America, and lived and studied in Mexico before settling in Costa Rica in 1982, adds: "We live in a very exciting time. You have Latinos moving to the States to seek a better life and, on the other hand, Americans are moving to Latin America to improve their lives and explore a new, wide-open frontier."
In Costa Rica, a monthly income of $1,000 to $1,500 will afford you a good standard of living, covering the cost of a spacious 3-bedroom, 2-bath home (rental), groceries, utilities (including Internet access, cable TV and a cellphone), and a full-time housekeeper, and leave enough for cultural and recreational pursuits.
Living in Costa Rica also has many tax advantages: Property taxes are reasonable, business taxes are minimal, investors pay no capital gains taxes on real estate and high-interest bank accounts are tax free. Retirees can qualify for a $500-a-year version of Medicare. (Costa Rica has universal health care and one of the best health systems in Latin America, with many U.S.-educated doctors.)
"Since coming here, I have never looked back," Howard said. "I made the right choice by following my dreams, and the country has been very good to me."
Got a second-home story you'd like to share? E-mail Shannon Roxborough at ForeignPassport@aol.com
* * *
Perks
Reasonable real estate, friendly people and low violent crime. With more than a quarter of Costa Rica's total land area composed of national parks, wildlife refuges and biological reserves, the country is a nature lover's paradise with a thriving ecotourism industry. Costa Rica has a tropical climate, but year-round temperatures in the Central Valley (popular with Americans and just a few hours from the capital San Jose) average 72 degrees.
Drawbacks
Navigating red tape is a fact of life in Costa Rica, where almost nothing happens quickly. A simple trip to the bank usually means waiting in line for an hour. Today frequently means tomorrow and next week can mean next month. If you want to bring your car with you, expect hefty import duties on used automobiles (no matter the age, if you already own it, it's used) generally equivalent to 45 percent to 75 percent of the retail value.
Costs
Though Costa Rica is the most expensive country in Central America, the cost of living is still far below that of a comparable lifestyle in the U.S. Ocean-view lots and homes in Costa Rica start at about $200,000 and range up to seven figures. (More modest houses can still be found for $100,000 or less.)
Getting there
Continental has non-stop flights from Newark to San Jose starting at about $500.
Where to stay
The Hotels Costa Rica Web site provides links to dozens of accommodations. Visit hotels.co.cr.
Must see
Guanacaste Province on the northern Pacific Coast is known for its spectacular beaches and water-related activities, including surfing, snorkeling and sport fishing.
For more information
* Christopher Howard's Web site: costaricabooks.com
* Punta Dominical: puntadominical.com
* Punta Leona: vivapuntaleona.com
* Marisol Condos: dreammarisol.com
Spa Man
All’s Well Dept.
Spa Man
by Lillian Ross July 9, 2007
The most convoluted philosophical thinking outside of academe was taking place recently at the Global Spa Summit at the Waldorf-Astoria, with the purpose of fostering “thought leadership” in the forty-billion-dollar-a-year spa industry. One of the keynote speakers was Steve Case, the co-founder of America Online. He now owns a spa in Arizona called Miraval, whose motto is “Life in Balance.” At Miraval, one can indulge in a wild-lime scalp rejuvenator ($65), a marine contouring body wrap ($165), and seven kinds of Oriental bodywork.
In his address, Case said, “Four years ago, I was pushed out of my comfort zone by the revelation of how to transform industries in need of change.” He was wearing Dockers and a blue shirt open at the collar, and he seemed to be in an excellent zone as he continued, “It was a profound moment. I found balanced living. We are the modern healers. I don’t just want to feel better. I want to be better.” (Gerald Levin, who was Case’s counterpart at Time Inc., during its merger with A.O.L., has also made a second career of self-improvement, running a holistic mental-health institute in Los Angeles.)
Case went on, “Remember when the man who started Nike was selling his sneakers from the back of a truck?” He paused. “I want that unique collaboration between real estate and spas. Destination spas! Wellness must go beyond just the facial and the massage. We are building what I call ‘the Nike of Wellness.’ ” When he finished, the participants applauded, though some looked puzzled.
“He said nothing new,” a short, sturdy delegate named Tatyana Meshkova said. “He pontificated. I am thirteen years in Moscow beauty business. I distribute the most chic formulations, all over Russia, to Belarus, even Latvia.” Another Russian delegate agreed. “I do not care about sneakers,” she said. “And facials are important for our market!”
While delegates headed off to panels such as “What the Investment Sector Wants the Spa Industry to Know,” Case hung back. He wanted to make it clear that Miraval is more than a spa. “In fact, we don’t really use the term ‘spa,’ ” he said. “It conjures up pampering.” (He did admit, though, to loving the Thai massage.) He talked about making Miraval into a “life-style brand,” with such projects as Miraval Living in N.Y.C. (“It’s a condo!”), a resort in Costa Rica, and a hybrid resort and primary-living community in Florida. “I met this morning with Oprah,” Case said as he headed off to a meeting with a health-care executive. “I saw several C.E.O.s, too. I handle stress pretty well.”
Ted Ning, a director at Lifestyles of Health and Sustainability, or LOHAS, as it’s called, was talking to some delegates.
“Our new buzzword is ‘authenticity,’ ” another LOHAS employee said. “There is a fundamental disconnect between questions of social justice and the people who sell organic tea and yoga mats, and these should be fiercely connected.”
* from the issue
* cartoon bank
* e-mail this
Ning nodded. “I connect,” he said. “It’s always nice to indulge in some self-giveback. I do daily yoga with my wife. We live in an energy-efficient house with solar-panel appliances.We use organic linens and towels. We try to ride bikes to work. Spa to me means ‘pause and reconnect.’ ” He looked at his watch and said he had to run so he wouldn’t be late for his free convention massage.
Jamie Waring, of Six Senses Spas, held out a coffee-table book entitled “Balancing Senses.” “Look at this,” he said. “Our Evason Hideaway at Hua Hin, in Thailand, modelled on a rural Thai village and built entirely from mud. Our therapists serve detox salads!”
“What about sustainability?” a young man asked, frowning.
“We changed over from fluffy towels to linens during massage, to use less water in laundering,” Waring said.
Daniella Russell, from Cleopatra’s Spa, in Dubai, said that she was an industry pioneer: “We were sidelined for ten years, but we broke into a closed society. We even have an operation in Kabul. In Dubai, we go to ladies in special rooms in the palaces. They love massage, and now they are not afraid to take off their clothes.” ♦
Hudson Street Capital and Kingstown Capital Partners
NEW YORK, July 2 /PRNewswire/ -- Hudson Street Capital and Kingstown Capital Partners announced today that they sent a letter dated July 2, 2007 to the independent Board members of Whitney Information Network, Inc. (Pink Sheets: RUSS).
The full text of the letter follows: July 2, 2007 Independent Members of the Board of Directors Whitney Information Network, Inc. 1612 Cape Coral Parkway East Cape Coral, FL 33904 Attention: Frederick A. Cardin, Director Chester R. Schwartz, Director cc: Russell A. Whitney, Chairman & CEO Ronald A. Simon, Director & COO Stephen A. Cootey, Prides Capital VIA FACSIMILE AND OVERNIGHT DELIVERY Gentlemen:
Hudson Street Capital Management LLC and Kingstown Capital Partners LLC, respectively, manage funds that have an aggregate economic interest equivalent to approximately 4.5% of the outstanding shares of Whitney Information Network ("RUSS" or "the Company"). We are writing to the independent directors to express our concern that the RUSS Board of Directors, as currently configured, lacks independence from Russell Whitney, Chairman of the Board, CEO, and the Company's largest shareholder. We believe that other shareholders' interests have been surrendered to the self-interests and personal enrichment of Mr. Whitney, while shareholder value in general has precipitously eroded.
As such, we strongly urge the independent directors to:
First, remove Russell Whitney from the Board of Directors and CEO position for cause based on a pattern of blatant self-dealing that has enriched him at the expense of Company shareholders as well as his refusal to cooperate with the Special Committee's investigation (a detailed account of these self- dealings and the obstruction is provided in Exhibit I).
Second, immediately elect two outside directors who are representatives of significant shareholders of the Company to create true independence on the Board and adequately protect shareholder interests.
To the extent that the current independent directors do not act quickly and decisively on these suggestions, we intend to take action in two parts. First, we will take action to remove Russell Whitney from his above-stated positions at the Company's next annual meeting of shareholders. As an aside, we note that a definitive proxy has not been filed with the Securities and Exchange Commission (the "SEC") and as such we do not believe that the currently-scheduled meeting can go forward on this date. We would view any attempt by the Company to proceed with the annual meeting as scheduled as an attempt to disenfranchise its shareholders.
Second, we intend to request that Prides Capital (cc'd on this letter) immediately add either a Prides Capital representative or a Hudson Street/Kingstown representative to the Board of Directors as per Prides Capital's contractual right. As documented herein, the previous Prides Capital board seat was occupied by Stephen A. Cootey, who resigned along with another outside director, Anthony Petrelli, in March 2007, thereby making the Prides Capital designee director position available. It is our view, based on an informal polling of the Company's largest institutional investors and certain Directors, that any such action to increase independent representation on the Board of Directors would be ardently supported.
It is our belief that, once free of Russell Whitney's self-dealing and unchecked influence, the Special Committee could more expeditiously resolve the government investigations that hang over the Company and hamper its operating performance on many levels. In fact, the Company's Form 8-K dated May 29, 2007 discloses that "The Department of Justice and/or the SEC may view [Mr. Whitney's refusal to submit to an interview by the Special Committee's consultant WilmerHale] as lack of cooperation towards the Special Committee's efforts to determine the facts in its internal investigation and prolong the SEC's investigation and broaden the Department of Justice's investigation."
Mr. Whitney's removal from the Company along with moving to resolve these legal matters and investigations would pave the way for the Company to explore a host of value-maximizing strategic alternatives. We believe any of these alternatives would result in the creation of shareholder value in excess of $10 per share. As such, we would encourage the newly constituted Board to engage a qualified investment bank to review all strategic alternatives that would include, in our opinion, the following possibilities at a minimum:
-- An immediate sale of non-core assets that could result in net cash proceeds in excess of $6.00 per share as detailed in Exhibit II. This process could be undertaken before the government investigations are resolved and proceeds could be immediately distributed to shareholders in the form of a dividend. -- A restructuring of the Company under new leadership that facilitates market-comparable operating margins. We believe that the Company should at least be able to return to its previously achieved 2005 level of 12% cash flow margins (approximately half those of its competitors) once expenses are reduced. Applying the midpoint of the historic free cash flow multiple range of Investools during 2005-2006 when it was solely an investor education company (7.5x) implies a value of $16.50 per RUSS share, excluding the value of non-core asset sales. -- A sale or separation of the real estate and financial markets education business units that yields net cash proceeds in excess of $10 per share, excluding the value of non-core asset sales.
A more detailed description of these alternatives and related valuation calculations is provided in Exhibit III.
It has also come to our attention that Mr. Whitney had previous plans for a take-private transaction during the second half of 2006, though he did not immediately inform the Board of Directors of his intent. If Mr. Whitney wants to continue to run the Company as a personal enterprise, then we would suggest that he make an offer to take the Company private at a price which reflects the intrinsic value of the Company. Mr. Whitney could use the proceeds from the sale of the Company's non-core assets to fund such a transaction.
In light of the steep decline of the stock price to $3.65, the closing price of the shares on June 29, 2007, from over $10.00 as recently as November 2006, we believe that all of RUSS' shareholders-including Russell Whitney- would ultimately welcome progress towards any of the above possible outcomes as opposed to the continued deterioration of market value related to the current circumstances. We believe the Company has tremendous business prospects and our aim is to allow the Company's stockholders to benefit from these prospects while enabling all of the Company's talented employees and students to prosper. To this end, we look forward to a prompt reply from the Board of Directors.
Sincerely, Guy Shanon Michael Blitzer Hudson Street Capital Management LLC Kingstown Capital Management LLC Managing Partner Managing Partner
EXHIBIT I - Current Board Lacks Independence from Russell Whitney and is Unduly Coerced by Mr. Whitney
The current Board is comprised of the following four individuals: Russell A. Whitney, chairman and CEO; Ronald A. Simon, Co-President, COO, and director; Frederick A. Cardin, director; and Chester P. Schwartz, director. Per the 2007 Preliminary Proxy, Messrs. Cardin and Schwartz have no material relationships with the Company and are therefore deemed to be independent. It is our view that the current Board is unduly coerced by the interests and demands of Mr. Whitney. Specific examples include:
2006 Compensation. The compensation committee is currently comprised of the Board's two remaining outside directors: Fred Cardin and Chester Schwartz. The Company's 2007 Preliminary Proxy filed April 27, 2007 details a base salary of $600K for Mr. Whitney and an incentive award of $562K for total compensation of $1.16M, or approximately 2.7% of the Company's stock market capitalization, in a year in which the Company's stock declined nearly 50% from a height of $10 to approximately $5 (the stock has since fallen approximately another 40% to as low as $3.39 in 2007). The Preliminary Proxy also disclosed that in setting 2006 compensation, the Compensation Committee had reviewed data from and met with its outside consultant, Mercer Human Resources, and concurred with its recommendations. But the Proxy goes on to state that:
"In discussions with the Management at a Board meeting in March 2007, and taking into consideration the extra workload and stressful environment resulting from parallel investigations in 2007, coupled with individual performance and retention considerations, the Board and Management compromised on an annual incentive payout which was substantially higher than previously contemplated by the Compensation Committee."
Such a "compromise" seems unusual for a board of directors of a public company since the entire purpose of having compensation reviewed and set by outside board members is to prevent inside directors from enriching themselves with corporate assets at the expense of other shareholders. The Board's decision here seems even more unusual when one considers that the supposed reason for the compromise - the stressful environment related to parallel investigations - was brought on, in our belief, by the activities of Russell Whitney and the management team in the first place. It is not often in corporate America that a manager is awarded additional compensation for stresses incurred through government investigations relating to corporate activities that took place directly under that manager's watch. We also find it noteworthy that these decisions by the Board seem to coincide with the resignation of the Chairman of the Compensation Committee, Mr. Cootey, and of an additional independent board member, Mr. Anthony B. Petrelli, both in March 2007.
Corporate Aircraft. In its 2006 Form 10-K, the Company disclosed that it had purchased a corporate aircraft for $6.9M in early 2007. Our research indicates that this aircraft is a Cessna Citation jet; it has received approximately $300K of upgrades subsequent to purchase; and is used almost entirely by Russell Whitney, often for what we believe are non-business related trips. The value of this aircraft represents approximately 18% of RUSS's capitalization around the time that it was purchased and nearly 50% of the Company's 2006 free cash flow as measured by adjusted EBITDA. Given the significant size of this capital investment and that it has little to do with and is unnecessary for the Company's business, it is hard to understand how a Board that is acting in the best interests of its shareholders could approve it. In fact, our conversations with former Company executives indicate that the aircraft may have been purchased without the prior knowledge of the Board. If this is in fact the case, it highlights an even more alarming state of affairs concerning the corporate governance of the Company.
Government Investigations & Special Committee. As previously disclosed in public filings, the Company is being investigated by both the SEC and the Department of Justice's United States Attorney's Office for the Eastern District of Virginia. The Company has provided its shareholders with little information about these investigations, but has stated that it has been subpoenaed, a grand jury has been convened, documents have been supplied by the Company, investigations are ongoing and that such investigations generally concern the Company's marketing practices and its acquisition of other companies. These investigations clearly hamper the Company's operations through (1) substantial legal expense and management distraction, (2) uncertainty regarding the future of the Company that makes it difficult to recruit and retain key personnel, and (3) a legal taint that makes potential customers skeptical of the value of the Company's products-this last factor is well documented by numerous recent articles in local newspapers highlighting the Company's legal woes.
The Company appointed a Special Committee comprised of independent directors to conduct its own internal review of both the SEC and DOJ investigations. In a Form 8-K filed May 29, 2007 the Company disclosed that on May 14, 2007 it had received a copy of a letter from the legal counsel of Mr. Whitney, addressed to WilmerHale, counsel to the Special Committee, indicating that Mr. Whitney, upon advice of his counsel, would not be submitting to an interview at this time with WilmerHale. As of the date of this letter, the Board has not taken any action related to Mr. Whitney's obstruction of the Special Committee's investigation. The May 29th 8-K states that "The Department of Justice and/or the SEC may view [Mr. Whitney's refusal to submit to an interview with WilmerHale] as lack of cooperation towards the Special Committee's efforts to determine the facts in its internal investigation and prolong the SEC's investigation and broaden the Department of Justice's investigation." We believe Mr. Whitney should be removed from his management and Board positions for his obstruction of the investigations that will likely lead to increased legal expenses and increased exposure for the Company. What is abundantly clear is that Mr. Whitney's interests and the Company's interests are not only misaligned, but are directly antithetical. Our only conclusion is that the current Board as structured is unable to take actions contrary to the wishes of Mr. Whitney.
In addition to the ongoing SEC and Department of Justice investigations and other lawsuits against the Company and its subsidiaries, the Company was served with yet another complaint on March 22, 2007, alleging that a group of defendants, which includes the Company and Mr. Whitney, breached certain of their fiduciary duties to the plaintiffs and committed constructive and common law fraud and other violations. We do not think it a coincidence that Messrs. Cootey and Petrelli resigned on that day and the following day, respectively. We presume that their resignations are related to their ever-increasing exposure to liability as directors of the Company.
Self-dealing and Related Party Transactions. There are other indications that Mr. Whitney treats the Company more like a personal "piggybank" than an enterprise that protects and serves the interests of all of its stakeholders. The Company is rife with related party transactions and conflicts which illustrate a clear pattern of Mr. Whitney managing the Company for his own personal gain.
There are three corporate leases whereby the Company pays annual rents of $267,672 to an entity controlled by Mr. Whitney and his wife. We question whether there was ever a proper bidding process in place at the time these rents were secured and we have no way of knowing whether these values represent fair market rents. In any event, this strikes us as a glaring conflict of interest.
Russell Whitney's two children and wife are also employees of the Company, earning collectively over $500,000 in salary in fiscal 2006 alone. While it is entirely possible that Mr. Whitney's children and wife are high-value employees, we find such nepotism to be unusually extensive for a publicly-held company. We have also learned through discussions with former employees that they believe that significant expenses which appear to be unnecessary for the Company's business and therefore personal to Russell Whitney are consistently run through the P&L of the Company without reimbursement. In fact, one senior-level former employee has indicated that the operating margin of the business would be 2-3%+ higher without these expenses. Could this explain why operating margins of a very similar public competitor have been consistently higher at similar revenue levels on a historical basis?
There are also a number of instances where Mr. Whitney has commingled corporate and personal investments. Specifically, Mr. Whitney and Mr. Simon own financial interests, including the Company's Costa Rica real estate assets detailed in Exhibit II, in which the Company has invested in excess of $3M. We believe the Company has no business purpose for owning real estate in Costa Rica and also incurs significant expenses supporting Mr. Whitney's travel to Central America. Additionally, we question Mr. Whitney's marketing of real estate and time-share units in which he has personal financial interests to paid real estate education students. The Company has no such financial interests in these real estate assets and this once again shows Mr. Whitney's preoccupation with his own enrichment at the expense of the Company and its customers. In sum, we can only wonder if the energies of management and the Board are focused on maximizing value for all shareholders or whether the vast majority of the Company's activities and investments are focused on enriching Mr. Whitney and his family.
EXHIBIT II - Non-Core Asset Sales - Detail
Company assets have been wastefully diverted into a number of unrelated and non-core assets and investments, many with ties to personal interests of Mr. Whitney. We believe the sale of these assets combined with existing cash on the balance sheet would provide shareholders over $70M of net cash equaling more than $6 per share, nearly twice the current share price. A summary of the fair value of these assets, which we believe have been conservatively estimated after all selling/transaction costs, include:
Table I - Non-Core Assets Asset $M $ Per Share Excess cash 38.9 3.32 Note receivable 7.0 0.60 Florida land under contract 4.2 0.36 Assets held for sale 4.7 0.40 Corporate HQ 13.0 - 16.0 1.11 - 1.37 Costa Rica real estate 3.6 - 5.0 0.31 - 0.43 Aircraft 5.5 0.47 Debt (6.1) (0.52) Total 70.8 - 75.2 6.05 - 6.43 Sources: Form 8-K filed March 29, 2007, Form 10-K filed April 4, 2007 (1) Share count: 11.7M shares
Asset sales in total would provide between $6.05 - $6.43 per share as of March 31, 2007 per the Company's Form 8-K, which listed 11.7M shares outstanding. Since 70% of the total proceeds comprise cash or receivable equivalents (assets held for sale or under contract), the proceeds of these sales would be available to be disbursed to shareholders. Total capital gains on asset sales will likely have offsetting capital losses but note that the Company's $29M net operating loss carryforward would offset additional gains should certain assets sell for more than we have estimated.
Asset-By-Asset Detail. -- $38.9M of excess cash provided by $43.9M of cash and equivalents (including restricted cash related to credit card receivables) reported as of March 31, 2007 less $5M for working capital and/or funding of future losses. The Company's working capital has historically been a source of cash so it is possible that more than $38.9M could be used in the special dividend. -- $7.0M note receivable relating to the sale of an office building in Orlando, Florida in 2005 which was unrelated to core operations. -- $4.7M book value of assets held for sale including European headquarters and first corporate aircraft based on actual proceeds as follows: European headquarters was sold in April, 2007 for net proceeds of $3.5M after selling costs, first corporate aircraft was sold in May, 2007 for net proceeds of $1.2M after selling costs and repairs. -- $4.2M Florida land investment currently under contract with Gulf Gateway Enterprises, representing The Company's 50% ownership interest in Tranquility Bay of Southwest Florida, a joint venture established in 2004 which owns 74 acres of land zoned for residential development in Southwest Florida. -- $13-$16M for Company owned headquarters based on guidance from the Company's CFO and independent real estate appraisals, after selling commissions. The Company owns the land and building of its executive offices in Cape Coral, Florida which includes 40,000 square feet of office space and 4.5 acres of land with water access to the Gulf of Mexico via the west coast of Florida. We assume the Company would lease back space in the building, or find alternative space to lease at a cost of less than $800K per year (say $20 PSF), which would be absorbed by reduced legal fees and other cost-cutting measures going forward. -- $3.6M - $5M market value of various Costa Rica real estate investments based on estimated book value of $3.6M and capital appreciation since 2002. Investments include a 30% interest in a Panamanian entity with ownership of 394 acres of undeveloped land on the Pacific coast of Costa Rica and an interest in a beachfront land concession adjacent to a hotel property; an 8% interest in a second Panamanian entity with ownership of approximately 445 acres of Costa Rican undeveloped land and an interest in a beachfront land concession; a 51% interest in a third Panamanian entity that owns a beach front land concession and owns a hotel; and a fourth entity which holds a 100% interest in a 7,200 square foot conference center in Monterey, Costa Rica built in 2002 and the land on which it is situated. We believe this estimate could prove conservative as independent local appraisals and management comments in past conference calls indicate these assets have appreciated in value since purchase. We note though that the Company has never had any operations in Costa Rica or Central America and that the CEO is personally invested in at least two of these properties. -- $5.5M market value of newly-purchased Cessna Citation corporate aircraft estimated at 80% of book value at March 31, 2007. We note that his aircraft has had $300K of custom upgrade that is not included in our valuation. Also, we have not included any potentially reimbursable expenses related to use of the first corporate aircraft for personal travel prior to March 2007 when, per the 2007 Preliminary Proxy filed April 27, 2007, Russell Whitney began reimbursing the Company for such use. -- ($6.1M) of net debt including $3.0M related to the Orlando note receivable, $2.1M related to mortgage on the European headquarters which was paid off in April, 2007, $1M related to financing on the original corporate plane which was paid off in May, 2007. EXHIBIT III - Strategic Alternatives and Valuations - Detail Alternative #1: Restructuring of business under new leadership.
We believe the Company's core education business has significant value which could be restored in a restructuring led by new management. This value has been overshadowed by spending on legal representation and wasteful overhead. Adjusted EBITDA for the Company as a percentage of sales transaction revenue has averaged just 7.2% over the last 5 years and has declined to 1.6% or $835,000 from 15.0% in the first quarter of 2006. Despite deterioration in margins and a reduction in sales transaction volume, the Company continues to maintain a bloated cost structure.
Table II - RUSS Historic Margins ($M) 1Q07 1Q06 FY06 FY05 FY04 FY03 FY02 Sales 51.5 57.3 223.0 196.4 164.1 109.3 62.7 Adjusted EBITDA 0.8 8.6 15.6 23.4 (6.9) 9.6 7.9 Margin % 1.6 15.0 7.0 11.9 (4.2) 8.8 12.6 Sources: Form 8-K filed March 29, 2007, RUSS Form 10-K's.
(1) Adjusted EBITDA equals cash sales minus direct costs, selling, G&A, and other adjustments including changes in deferred revenues and other non-cash items.
We contrast this with the Company's closest public competitor, Investools, Inc which has a similar level of sales transactions revenue but has achieved adjusted EBITDA margins of 20.9% in 2006 and 15.8% in 2005 despite similar levels of sales. We compare 2006 spending levels at Whitney and Investools and note the difference in efficiency between the two businesses, which we believe to be largely due to a lack of focus on expense management at the Company.
Table III - RUSS vs Investools - 2005 & 2006 Margins Investools RUSS Difference (%) ($M) 2006 % 2005 % 2006 % 2005 % 2006 2005 Cash sales 252.9 176.1 223.1 163.1 Direct costs 121.3 48.0 92.2 52.4 111.9 50.2 94.8 58.1 Selling costs 52.9 20.9 37.3 21.2 64.1 28.7 49.8 30.5 G&A 32.7 12.9 24.2 13.8 34.8 15.6 27.7 17.0 Adjusted EBITDA 52.9 20.9 27.8 15.8 15.6 7.0 23.4 11.9 13.90 3.90 Sources: RUSS and SWIM 2005, 2006 Form 10-K's
We believe adjusted EBITDA to be a relevant proxy of free cash flow at the Company for a number of reasons, specifically:
-- Timing differences between GAAP expense and revenue recognition whereby expenses are recognized upfront while revenues are not recognized for several months or years after cash has been received. Since the Company's deferred revenue account requires very little, if any cash expenditures to be fully realized, adjusted EBITDA is a more appropriate proxy of the Company's cash flows. -- The Company has no interest expense other than on debt related to its non-core investments. -- The Company has very little capital investment requirements. The Company has spent only $700K per year in 2005 and 2006 on capital investment not including a $6.9M purchase of a corporate aircraft which we do not believe to be core to operations. -- The Company has paid virtually no cash taxes due to its significant NOL valued at $29M as of its Form 10-K filed on April 2, 2007.
In total, we estimate that over 95% of adjusted EBITDA is available for free cash flow and believe that the Company should at least be able to return to its previously achieved 2005 level of 12% cash flow margins (approximately half those of its competitors) once expenses are reduced. Using trailing twelve months cash sales of $217M, this would represent $26M of free cash flow or more than $2.20 per share. Applying the midpoint of the historic free cash flow multiple range of Investools during 2005-2006 when it was solely an investor education company (7.5x) implies a value of $16.50 per RUSS share, excluding the value of non-core assets.
Alternative #2: Sale or Separation of Business Units.
The Company operates in two primary business segments, financial markets education and real estate education. The profitability of these segments differs significantly. Real estate education has been operated by the Company since 1992, when it was founded by Mr. Whitney. This business reported 2006 revenues of $95M, down approximately 9% from 2005. While operating earnings are not disclosed for this business, our research indicates that this business has struggled to earn any cash flow and likely constitutes a use of cash predominately due to its bloated cost structure. This is supported by financial disclosures in the Company's Form 10-K which indicate the business achieved gross margins of just 12% in 2005, less than the operating margins of many of its peers. Still, we believe this business would be of value to a larger education business operator that would be able to manage the business with more appropriate financial discipline. Informal queries of potential strategic buyers have shown interest at approximately 50% of reported sales or $50M, or $4+ per share.
We believe the value of the Company's financial markets education business is significant and has largely been obscured by the underperforming real estate business. The financial markets education business, which was managed under separate leadership until the end of 2006, reported revenues of $112M in 2006, an increase of 138% over 2005. While the Company does not report cash flow by segment, an S-1 filed on May 22, 2006 related to a proposed IPO of this business (see below) indicated that it generated $13.5M of adjusted EBITDA in 2005 and $76.5M of transaction sales for a margin of 17.6%. Our belief is that margins and cash flow in 2006 were significantly higher and that the financial business achieved peak margins in 2006 and constituted a significant portion of the Company's total cash flow during that year.
We believe management's recognition of the value of the financial markets education business was the motivation behind its 2006 planned IPO of this segment under the EduTrades, Inc. brand. Prior to canceling the registration, the Company's financial advisors, Kaufman Bros., L.P. and Noble International Investments, Inc. valued EduTrades, Inc. at a post-IPO value of $116M, valuing the Company's stake at $84M or $7.15 per RUSS share. We have since learned that later in the year, Craig Hallum, another investment bank, and Kaufman Bros. raised the estimated valuation of the Company's stake to $114M or $9.74 per RUSS share as the business continued to grow its cash flows.
The profitability of the financial markets education business has recently declined coinciding with some key executive departures and its increased oversight by Mr. Whitney. However, we do not see any reason why it would not be able to return to past levels of profitability under more focused management. The mid-point of valuation projections related to the business' IPO was approximately $8.50 per RUSS share using 2006 figures. Combined with a potential sale of the real estate business ($4 per share) and the sale of non-core assets ($6 per share), we believe the entire Company's assets may be worth in excess of $18 per share in an auction process.
EXHIBIT IV - Prides Capital Director Designee
The Board seat that was vacated by Stephen Cootey was granted to Prides Capital in connection with the Company's 2006 equity offering and Prides Capital has the right to designate a successor to serve on the Board. The Company's Registration Statement on Form S-1 filed Jan 11, 2006 and the Stockholders Agreement dated December 12, 2005 by and among the Company, Prides Capital, EduTrades, Inc. and Mr. Whitney details this Board arrangement:
"If at any time any Purchaser Designee ceases to serve on the Company Board or the EduTrades Board, as the case may be (whether by reason of death, resignation, removal or otherwise), Purchaser shall be entitled to designate a successor director to fill the vacancy created thereby, the Company and EduTrades shall use its best efforts without any undue delay to cause such successor to become a director of the Company and EduTrades, respectively, and Whitney shall vote all of the Voting Stock owned or held of record by Whitney so as to elect any such director."
We will be furnishing Prides Capital with a copy of this letter. In the event that our request for a seat on the Board is denied by the Company, we intend to follow up with Prides Capital to offer to fill its vacancy on the Board. Hudson Street Capital; Kingstown Capital Partners
CONTACT: Guy Shanon of Hudson Street Capital, +1-212-763-3763; or
Michael Blitzer of Kingstown Capital Partners, +1-212-319-1309
Investor Profited on Sales to Himself
Investor profited on sales to himself
As Daniel Prewett sits in an Italian jail on drug charges, client lawsuits and bank foreclosures stack up in U.S.
By MICHAEL BRAGA
michael.braga@heraldtribune.com
Daniel Prewett, who is sitting in an Italian jail awaiting extradition to the United States on drug-trafficking charges related to a cocaine deal, thought he had the Midas touch when it came to investing in real estate.
During the past 10 years, he laid out $39 million of his own and investors' money to buy 97 Southwest Florida properties. He then sold 55 of them at a $14 million profit.
The profits alone prove that Prewett was a savvy investor, but former investment clients claim in lawsuits that Prewett engaged in numerous questionable transactions along the way.
The most questionable, they say, was the deal in which Prewett sold the 46-unit Bermuda Apartments to an investment team led by Prewett's former property manager and business associate, Warren Hickernell, for $10.23 million.
That sale came just nine months after Prewett paid $5 million for the property, and the inflated price tag allowed Hickernell to get a $9.4 million loan from Sarasota's Bank of Commerce -- a loan that is now in default.
But the Bermuda Apartments deal was not the only questionable transaction Prewett was involved in.
Lawsuits filed by his investment clients point to four more deals involving homes in the Phillippi Gardens neighborhood of Sarasota.
At one point, those homes belonged to Sarasota developer Melissa Demarco. But Demarco had trouble making interest payments on her more than $2.7 million loans in 2004, so Prewett agreed to help out.
In return for receiving title to her properties at no cost, Prewett agreed to pay Demarco's outstanding debt, cover ongoing construction costs and split profits from the ultimate sale of the properties.
Though no cash changed hands between Prewett and Demarco, deeds filed at the Sarasota County Court show the properties were transferred at a value of $2 million.
Court records also show that Prewett used new appraisals for all four properties to get a $3 million line of credit from Peoples Community Bank in Sarasota.
Then, on May 4, 2006, Prewett transferred one of the four properties into his own name.
Property records show that he paid $700,000 for the property and received a $630,000 mortgage from RBC Centura Bank.
Investors claim Prewett had no right under joint venture agreements to transfer property himself.
"Prewett directly received proceeds from a pattern of criminal activity by conveying properties originally purchased under the joint venture agreements with joint venture funds from JH Investment Services (Prewett's company) to his name and then either selling them or removing all equity from the property by mortgage and converting the same for personal use," said Steven Wieder in a lawsuit filed March 19.
Following the money
A search through court records reveals that Prewett made a habit of transferring property to himself over the years at no charge, completing a dozen such transactions since 1999.
In October 2005, for example, JH Investment bought two condo units at Blackburn Harbor for $1.5 million. The company transferred the units to Prewett in June 2006 at no charge, and Prewett got two loans totaling $1.65 million from the First Bank of Arizona.
On other occasions, Prewett sold properties to himself in order to generate profits.
In 1999, he garnered $251,500 by selling three of 11 lots in on Beneva Road to himself before reselling the lots to JH Investments.
At the same time, Prewett engaged in numerous deals with clients and business partners that yielded large profits in short periods of time.
On Oct. 4, 2002, Graphic Property Holdings, a company owned by Prewett's chief accountant at JH Accounting Services, Natalie Swaney, sold two building lots at University Park of Commerce to Prewett's company for $475,000.
Prewett's company sold the property two weeks later for $699,000, netting a $224,000 profit.
Since February, clients have won a series of judgments against Prewett, demanding repayment of of $19 million in invested funds.
At the same time, eight lenders -- Deutsche Bank, Peoples Community Bank, Century Bank, Aurora Loan Services, Citibank, LaSalle Bank, RBC Centura and the Guardian Limited Partnership -- have won $14 million more as the result of successful foreclosure proceedings.
Fortunately for creditors, Prewett and his company still own 42 parcels of land in Southwest Florida that were purchased for about $21 million.
Lawsuits filed by investors say that Prewett also bought golf course property in California and mountaintop home sites in Costa Rica and North Carolina that are not included in the $21 million figure.
But one investor, New York resident Dimitrios Pistikos, questions whether Prewett ever used money raised from investors to buy properties outside the state.
He either did not buy the properties or "those properties were transferred to Prewett or companies controlled by him for his own personal enrichment," Pistikos' April 3 lawsuit states.
