UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 2000
Commission File Number 0-30601
WHY USA FINANCIAL GROUP, INC.
(Exact name of the small business as specified in its charter)
8301 Creekside #101
Bloomington, MN 55437
(Address of principal executive offices)
(Zip code)
(952) 841-7062
(Registrant's telephone number, including area code)
Nevada 87-0390603
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports)
YES [X] NO [ ], and (2) has been subject to such filing requirements for the
past 90 days. YES [X] NO [ ]
The number of shares outstanding of the Registrant's Common Stock, 0.001 par
value, as of September 30, 2000 was 32,827,640; the Company also had an
additional 72,820 shares subscribed for and reserved for issuance at September
30, 2000.
<PAGE>
WHY USA FINANCIAL GROUP, INC.
INDEX
PART I. Financial Information Page
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets at September 30,
2000 and December 31, 1999........................................4
Unaudited Consolidated Statements of Operation and
(Accumulated Deficit) Retained Earnings for the three
months and nine months ended September 30, 2000 and 1999..........5
Unaudited Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999.................6
Unaudited Notes to Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation................................10
PART II. Other Information
Item 1. Legal Proceedings.................................................17
Item 2. Changes in Securities.............................................17
Item 3. Defaults Upon Senior Securities...................................18
Item 4. Submission of Matters to a Vote of Securities Holders.............18
Item 5. Other Information.................................................18
Item 6. Exhibits and Reports on Form 8-K..................................18
Signatures.................................................................20
<PAGE> 2
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements
WHY USA FINANCIAL GROUP, INC.
For the Nine Months Ended September 30, 2000
(Unaudited)
<PAGE> 3
WHY USA FINANCIAL GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2000 1999
------------ -------------
Assets
Current Assets:
Cash $ 174,835 $ -
Accounts receivable 34,138 32,407
Notes receivable and accrued interest 151,429 3,210
Northwest Investment Trust-note and interest 476,904 -
------------ -------------
Total Current Assets 837,306 35,617
------------ -------------
Fixed Assets:
Furniture and equipment 70,508 14,572
Accumulated depreciation (11,005) (4,863)
------------ -------------
Net Fixed Assets 59,503 9,709
------------ -------------
Other Assets:
Franchise acquisition costs 2,104,589 1,994,589
Amortization of franchise costs (129,245) -
------------ -------------
Net Franchise Acquisition Cost 1,975,344 1,994,589
------------ -------------
Patent application 5,000 5,000
Investment in preferred stock 100,000 -
Advances to former officer - 70,619
------------ -------------
Total Assets $ 2,977,153 $ 2,115,534
============ =============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 39,058 $ 200
Note payable franchise acquisition 50,000 -
Deferred revenue on future conference - 5,729
Due to Northwest Financial Group, Inc. - 18,391
Loan from officer - 26,400
----------- -------------
Total Current Liabilities 89,058 50,720
------------ -------------
Deferred Income Taxes Payable - 3,000
Shareholders' Equity
Preferred stock: no par value, authorized
50,000,000, no shares issued and outstanding - -
Common stock: $.001 par value, authorized
250,000,000, 31,400,460 issued and outstanding
as of December 31,1999 and 32,827,640 as of
September 30, 2000 32,828 31,400
Additional paid in capital 3,832,361 2,022,698
(Accumulated deficit)/Retained earnings (977,094) 7,716
------------ -------------
Total Shareholders Equity 2,888,095 2,061,814
------------ -------------
Total Liabilities and Shareholders' Equity $ 2,977,153 $ 2,115,534
============ =============
See accompanying notes to consolidated financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
WHY USA FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
30-Sept 30-Sept 30-Sept 30-Sept
2000 1999 2000 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Mortgage loan originations $ 188,171 $ 79,529 $ 511,676 $ 460,863
Franchise fees - real estate 69,913 - 223,838 -
New franchise sales 49,500 - 100,500 -
Real estate franchise operations 30,000 - 30,000 -
Interest income 12,705 - 18,119 -
------------- -------------- ------------- -------------
Total Revenue 350,289 79,529 884,133 460,863
------------- -------------- ------------- -------------
Expenses:
General & administrative 326,159 29,220 1,101,658 74,680
Mortgage loan origination fees 152,539 88,947 423,682 285,783
Franchise costs - real estate 7,752 - 39,737 -
Marketing costs and travel 73,552 - 171,479 -
Depreciation 3,235 199 6,142 541
Amortization franchise
acquisition cost 45,929 - 129,245 -
------------- -------------- ------------- -------------
Total Expenses 609,166 118,366 1,871,943 361,004
------------- -------------- ------------- -------------
Income from continuing
operations (258,877) (38,837) (987,810) 99,859
Income from discontinued
operations - 9,775 - 17,036
(Income taxes) benefit
continuing operations - 12,000 3,000 (32,000)
- ------------- -------------- ------------- -------------
Net Income (loss) (258,877) (17,062) (984,810) 84,895
------------- -------------- ------------- -------------
(Accumulated deficit)Retained
Earnings beginning of period (718,217) 101,957 7,716 -
------------- -------------- ------------- -------------
Accumulated deficit, retained
earnings - end of period $ (977,094) $ 84,895 $ (977,094) $ 84,895
============= ============== ============= =============
Weighted average shares
outstanding 32,671,195 10,000,000 32,160,222 10,000,000
============= ============== ============= =============
Net income(loss) per common share:
Continuing operations $ (0.008) $ (0.003) $ (0.030) $ 0.006
Discontinued operations $ (0.000) $ 0.001 $ (0.000) $ 0.002
Net income (loss) $ (0.008) $ (0.002) $ (0.030) $ 0.008
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
WHY USA FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Sept 30, Sept 30,
2000 1999
------------ -------------
Cash Flows from (used in) Operating Activities:
Net income (loss) from continuing operations $ (984,810) $ 67,859
Adjustments to reconcile net income to net cash flow
Provision for depreciation and amortization 135,387 541
Deferred tax benefit (3,000) -
Common stock issued for compensation 390,000 -
------------ -------------
Increase (decrease) in Cash Flow from
continuing Operating Activities (462,423) 68,400
------------ -------------
Discontinued operations cash flow - 17,036
Changes in Operating Assets and Liabilities:
Decrease (increase) in accounts & notes receivable (626,854) -
Increase in accounts payable 38,858 (8,000)
Increase in income taxes payable - 32,000
Decrease in deferred conference revenues (5,729) -
------------ -------------
Total Change to Operating Assets an Liabilities (593,725) 24,000
------------ -------------
Net Cash from Operations (1,056,148) 109,436
------------ -------------
Cash Flows Provided By (Used) in Investing Activities:
Building acquisition and improvements - (427,256)
Capital expenditures - computers/equipment (55,936) (13,584)
Capital expenditures - franchise acquired (60,000) -
Investment in preferred stock (100,000) -
------------ -------------
Net Cash used in Investing Activities (215,936) (440,840)
------------ -------------
Cash Flows Used in Financial Activities:
Net proceeds of common stock sold 1,421,091 -
Advances from (repayments to)
Northwest Financial Group, Inc. 52,228 21,820
Mortgage and building loans - 336,772
Repay loan from officer (26,400) -
------------ -------------
Net Cash Used in Financing Activities 1,446,919 358,592
------------ -------------
Net Increase in Cash and Cash Equivalents 174,835 27,188
Cash and Cash Equivalents at Beginning of Period - 22,731
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 174,835 $ 49,919
============ =============
Supplemental Non-Cash Activities
Note payable given as consideration to acquire
Franchisee's real estate franchise. $ 50,000 $ -
============ =============
Supplemental Cash Flow Information:
Cash Paid During the Year for:
Interest Expense $ - $ -
Income Taxes $ - $ -
See accompanying notes to consolidated financial statements.
<PAGE> 6
WHY USA FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000. The
accompanying consolidated financial statements and notes should be read in
conjunction with the audited financial statements and notes thereto included
in the Company's December 31, 1999 financial statements in the Company's Form
10-SB12G as amended.
Certain amounts in the financial statements of prior periods have been
reclassified to conform to the presentation used for three and nine month
periods ended September 30, 2000.
NOTE 2 - NATURE OF BUSINESS
The company sells real estate franchises under the Why USA name and originates
loans under the Northwest Financial Ltd. name. The company does not service
or retain the loans, which it originates. Operations are conducted throughout
the United States, however the majority of the company's current income stream
is derived from the Midwestern states of Wisconsin, Minnesota, Iowa and
Nebraska. The company is actively marketing its franchise systems in Texas,
California and Arizona and eventually seeks to cover the entire continental
U.S.A. The company's business is impacted by the seasonality of real estate
sales from which it derives its franchise fees. The company's 2nd and 3rd
quarters have appreciably higher activity than the 1st and 4th quarters. The
company's mortgage origination business is strongly influenced by both the
refinancing of mortgages and new mortgage loan originations for residential
homes. The company's operations are negatively impacted when interest rates
rise and favorably impacted when interest rates drop. Currently, the company
is focusing on integrating its mortgage loan origination business with its
real estate franchisees.
NOTE 3 - PRIVATE PLACEMENT OF COMMON STOCK
The company recently completed the private placement of 1.5 million units at
$1.00 per unit which consists of one share of common stock and one 3 year
warrant excisable at $1.00. The private placement was offered under
Regulation D Rule 506 exemption because it is not publicly soliciting
investors and the company has limited solicitation to sophisticated investors
and business affiliates of officers and directors. The Company completed its
offering in October, 2000 with $1,500,000 in proceeds.
<PAGE> 7
NOTE 4 - NOTES RECEIVABLE / NORTHWEST INVESTMENT TRUST / RELATED PARTY
TRANSACTIONS
The Company advanced Northwest Investment Trust, an entity owned by Don
Riesterer, CEO and director of the Company. $468,000 at 8%, due upon demand.
The Company leases two office spaces at $3,4000 per month from Northwest
Investment Trust. The Company also leases at $1,400 its Janesville, Wisconsin
real estate office from the parents of Mr. Riesterer. The company has also
advanced $115,000 to two non-affiliated mortgage origination companies to
promote mortgage loan origination business. These notes bear interest at 8%
and they are due upon demand by the company. The Company finances new real
estate franchisees, which amounts totaled $34,910 at September 30, 2000.
NOTE 5 - PREFERRED STOCK INVESTMENT
The company has invested $100,000 in an 8% non-cumulative preferred stock of
America's Cashline to promote mortgage loan originations from associated
entities. America's Cashline specializes in doing B and C credit (non-
conforming) residential mortgages.
NOTE 6 - ADVANCES FROM NORTHWEST FINANCIAL GROUP, INC
The Company utilized the services (rent and personnel) of Northwest Financial
Group, Inc., an entity controlled by its largest stockholder and CEO, Don
Riesterer, which amounts have been settled in the third quarter of 2000.
NOTE 7 - COMPENSATION FOR COMMON STOCK
The Don Riesterer contributed 1,950,000 shares of common stock to the company
and then the company issued these shares to various individuals in exchange
for future services. The shares were valued at $0.20 each. The common stock
value of $.20 per share was based upon the purchase price utilized in the
acquisition of WHY USA North America, Inc. - 10,000,0000 shares for $2,000,000
in net assets, resulting in a payroll expense of $390,000 reflected in general
and administrative costs for the nine months ended September30, 2000 and have
been reflected as a capital contribution by Mr. Riesterer to the Company.
NOTE 8 - AMORTIZATION OF FRANCHISE ACQUISITION COSTS
The company amortizes its franchise acquisition costs of $2,104,589 over 12
years, based upon the original 3 year franchise agreement which is renewable
for three additional 3 year terms without additional cost to the franchisee.
The Company completed the acquisition of its Janesville, Wisconsin franchisee
office for $110,000 in the third quarter of 2000. These acquisition costs are
also being amortized over 12 years.
<PAGE> 8
ITEM 2 - MANAGEMENT DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Introduction
WHY USA Financial Group, Inc. (the "Company") is in the business of
providing comprehensive real estate services primarily for real estate brokers
and their sales agents and customers. The business is currently conducted
through two recently acquired, wholly-owned subsidiaries: Northwest Financial,
Ltd. ("NWF"), which offers residential mortgage loan services as a loan
originator, and WHY USA North America, Inc. ("WHY USA NA"), which franchises
and operates real estate offices. The Company's franchise sales are regulated
by the Federal Trade Commission as well as applicable state statutes.
Acquisition of Subsidiaries
The Company's business is that of its subsidiaries which were acquired on
December 31, 1999. In 1999, the Company was a public company with no trading
market and no operations or assets, which desired to acquire or merge with an
operating entity or entities. In an arms length transaction in December of
1999, it acquired NWF and its subsidiary, WHY USA NA, through the issuance of
10,000,000 of its unregistered common shares. The transaction was completed
through a series of steps, which included:
* the acquisition of all of the issued and outstanding shares of WHY
USA NA from its three shareholders by Mr. Don Riesterer for a
combination of cash and promissory notes equaling $2,026,400.
* Mr. Riesterer's contribution of the WHY USA NA shares to NWF for
which he was issued 90,000 NWF shares increasing his share
ownership in NWF to 100,000 shares; the 100,000 outstanding
shares of NWF constituted all of the outstanding shares of NWF;
* the issuance of 10,000,000 shares of the Company to NWF, and
the subsequent distribution of those shares to Mr. Riesterer
in exchange for his 100,000 shares of NWF (equaling 100 shares of
the Company for each NWF share.)
* the election of a new Board of Directors comprised of directors of
NWF and WHY USA NA.
As a result of this capitalization the Company acquired the business
operations, products and assets NWF and its subsidiary WHY USA NA. As the
stockholder of NWF became the largest shareholder of Company and he appointed
the new officers and directors of the Company, the historical financial
statements are those of NWF, with the equity section reflecting the
capitalization of NWF and the shares outstanding of the public shell.
Merger Treatment
The Company's acquisition/merger of NWF has been accounted for as a
recapitalization because management of NWF became management of the Company.
The financial statements for the Company's year ended 1999 reflected only the
operations of NWF for 1999. NWF was incorporated in 1998, but did not commence
operations until early 1999. The contribution of WHY USA NA has been
<PAGE> 9
accounted for as a purchase transaction and therefore the Company's Statements
of Operations and Cash Flows for December 31, 1999, did not include the
operations and cash flow of WHY USA NA. The financial statements of WHY USA
NA for December were accounted for separately at December 31, 1999 as those of
a purchased entity. The operations of WHY USA NA have combined with those
of the Company for the nine months ended September 30, 2000
Results of Operations
3RD QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999.
The Company's principal revenue sources are from: (1) franchise fees, (2)
new franchise sales, and (3) mortgage origination fees.
The Company's operations reflect a loss of $258,877 in the third quarter
of 2000 versus a loss of $17,062 in the third quarter of 1999. The 1999
results of operations reflect only the activities of NWF, the mortgage loan
organization portion of the Company. Mortgage loan organization's revenues
were $188,171 in 2000 versus $79,529 in 1999. Both periods reflect a poor
refinancing market for mortgage loans, as mortgage rates have been on the rise
since mid 1999. The increase between the periods reflect the benefits of
referrals from WHY USA system and referrals from the Janesville real estate
operations which was acquired in the third quarter of 2000. During the third
quarter of 2000, NWF originated 66 mortgages of which: 27 (41%)were new
mortgages, 22 (33%) were refinances and 17 (26%) were second mortgages. The
comparable 1999 activity reflects 25 loan originations, with 3(12%) new
mortgages, 16 (64%) refinances and 6 (24%) second mortgages. Costs
(principally commissions and salaries) related to mortgage loans increased to
$152,539 in 2000 versus $88,947 in 1999, reflecting the higher costs of
originating new mortgages versus refinancing existing mortgages (the number of
mortgages generated was insufficient to fund payroll related costs in 1999).
The Company lost $63,394 on its loan origination business in the year
2000 versus a pre-tax loss of $38,837 in 1999. Higher general and
administrative costs (personnel costs) related to the mortgage operations,
increased communications costs, and costs of integrating the mortgage and real
estate operations were all contributing factors to the increase in the loss
from mortgage operations, despite a 130% increase in revenues from
originations between periods.
New real estate franchise sales totaled $49,500 in 2000 and transaction
fees totaled $69,913; real estate revenues from the new Janesville operations
totaled $ 30,000 and interest income totaled $12,705, none of which had
comparable revenues sources in 1999 as the WHY USA NA operations are being
accounted for under the purchase accounting method, and the acquisition did
not take place until December 31, 1999. The comparative numbers for Why USA NA
on an unconsolidated basis were $1,000 in new franchise sales, and transaction
fees were $103,581 in 1999 reflecting an emphasis on new franchise sales in
2000 and an overall decline in the real estate market transactions services by
the Company between 2000 and 1999. Higher general and administrative costs
hurt the real estate franchising operations in 2000, the result of increased
legal fees to register the Company's franchise sales prospectus in more
states, higher personnel costs and professional fees. WHY USA NA suffered a
loss of $93,323 in 2000 versus a profit of $31,813 in 1999 in comparable third
quarters. The overall Company general and administrative expenses totaled
<PAGE> 10
$326,159 in the third quarter of 2000 versus $29,200 in 1999. Legal fees of
$26,474 were incurred in 2000 to register the common stock of the Company with
the Securities and Exchange Commission. Marketing expenses focused at new
franchise sales totaled $ 73,552 in 2000; new franchise sales were $49,500
and, therefore, the Company experienced a loss in the pursuit of new
franchises. No asset or other expense deferral is reflected in the financial
statements for the benefits of the future income streams of transaction
revenues from the new franchises being sold. Franchise amortization expense
was $45,929 in 2000 which reflects the amortization of the WHY USA franchise
cost of $2,104,589 over 12 years. No significant marketing or legal fees were
incurred in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999.
The Company incurred a loss of $984,810 in the nine months ended
September 30, 2000 versus a year earlier income of $84,895 for the nine months
ended September 30, 1999. Revenues were $884,133 versus $460,863 in 2000
versus 1999; however, the 1999 results do not reflect the operations of WHY
USA NA acquired on December 31, 1999. Mortgage loan revenues increased to
$511,676 in 2000 versus $460,863 in 1999 as the result of an increase in new
mortgage loan originations in 2000. Total mortgage loan origination volume
for the nine months ended September 30, 2000 was 165 loans versus 110 loans in
1999. The composition of the loan activity changed dramatically from 4% of
the activity being new loans in 1999 to 31% in 2000. Refinances shrunk from
83% of loan volume in 1999 to 39% in 2000. Second mortgage activity also
increased from 13% to 30% between 1999 and 2000. New mortgage loan activity
has generated lower margins than refinancing activity.
The loss experienced by the Company in 2000, is created by general and
administrative expenses ballooning to $1,101,658 from $74,680. Included in the
2000-year results is the expensing of $390,000 in stock given to the officers
and directors of the Company by the principal owner of the Company. The stock
value was reflected as a capital contribution by the principal stockholder of
the Company. The largest component of general and administrative expenses is
personnel costs.
Legal fees (included in G & A expenses) jumped in connection with the
registration of the Company's franchise prospectuses in several states and the
registration of the Company's common stock with the Securities and Exchange
Commission during the nine months ended September 30, 2000. Amortization of
franchise fees were $129,245 in 2000 and marketing costs were $171,479 with no
comparable expense in 1999.
The Company has focused its efforts on the expansion of its real estate
franchise system by providing stronger administrative support to existing
franchises and the hiring and training of sales representatives to sell new
franchises. The Company also commenced the operation of its own real estate
operations in Janesville, Wisconsin, which it acquired for $110,000 from Diane
Butts, a former franchisee. The Janesville operations generated $30,000 in
revenues during the nine months ending September 30, 2000.
Mortgage loan operations were conducted in adverse conditions throughout
2000 as the Federal Reserve Board steadily rose the federal discount rate
resulting in higher mortgage rates starting in June 1999. The first two
quarters at 1999 produced pre-tax income of $138,696, however, the downward
<PAGE> 11
trend in mortgage lending started in the 3rd quarter of 1999 with a pre-tax
loss of $38,837 occurring. Mortgage loan operations generated a $57,135 loss
in the 3rd quarter of 2000 and total losses of $157,725 for the nine months
ending September 30, 2000. Personnel costs, the largest component of the
Company's expense, have enough fixed salary costs, that the Company will have
to increase its revenue base by another 33% or more in order to achieve a
break even operations. The Company's cash flow operational losses were
approximately $460,000 after taking into account the amortization of franchise
costs and depreciation expense of $135,387 and the $390,000 in stock
compensation.
Liquidity and Capital Resources
Revenues
During the Company's third quarter ended September 30, 2000, the
Company's total revenues of $884,133 were comprised of the following: 58% of
its revenues came from mortgage loan origination fees, 25% from franchise
transaction fees, and 11% from new franchise sales, 3% from the operation of
its franchise operations and 2% from interest income chiefly derived from
advances to affiliates. Mortgage origination fees are achieved through NWF;
revenues from real estate transactions are generated by WHY USA NA, the
majority of which were derived from franchise fees. Franchise fees are
comprised of ongoing transaction fees paid to the Company by its franchisees,
76 as of September 30, 2000, based on $95 per transaction or 6% of commission
revenues, whichever is less, provided each franchisee must pay a monthly
minimum of $325. On a proforma basis in 1999, total revenues from operations
were $924,835 of which franchise fees from the Company's franchisees accounted
for $366,830 (or 40%) in 1999, new franchise sales totaled $11,805 (or 1%)and
mortgage loan originations totaled $546,200 (or 59%). The nine months of the
Company's fiscal year shows some shift in revenue percentages and evidences
its current focus on new franchise sales with an 10% increase in that revenue
category. Approximately 65% of such franchise fee revenues were generated from
the franchisees located in Minnesota and surrounding Midwestern states
(Nebraska, Iowa and Wisconsin). In 1998 and 1999, revenues from franchise
sales were based on an initial fee of $9,500 for local market areas with a
population greater than 50,000 and $6,500 for areas with a population of less
than 50,000. The Company's new franchise offering circular provides for one
initial fee of $9,900.
The Company's loan origination business has been adversely affected by
increased interest rates as the Federal Reserved Board has increased rates at
each of its last six meetings. Mortgage interest rates have generally trended
upward to the 8 1/2% interest rate level from the 6 1/2 to 7% level prevalent
in the early 1999 time frame. This interest rate increase has virtually
eliminated the housing refinance market, which represented approximately 85%
of the NWF's mortgage loan business in early 1999. Most refinancing currently
be conducted is due to credit rating improvement by the borrowers. In
response to the changing market, and in an effort to more successfully
integrate its mortgage loan business with its franchise business through WHY
USA NA referrals, NWF has begun shifting its loans from refinances to first
and second mortgages. The new mortgages and second mortgages have generated
lower margins due the higher costs of producing new mortgages versus the
refinancing of existing mortgages.
<PAGE> 12
The Company has lost money on both a cash and accrual basis throughout
2000. The Company has utilized the funds from its private placement of
$1,500,000 to fund these losses. The Company has remaining cash of $174,836
at September 30, 2000 to fund future losses and approximately $70,000 more in
private placement proceeds received after September 30,2000 to be utilized to
conduct operations. The operational consumption of cash was approximately
$200,000 in the 3rd quarter, which indicates the Company will require
additional cash to operate by the 1st quarter of 2001. The Company will
require that Northwest Investment Trust repay a portion of the $468,000
advanced at September 30,2000. The Company can and has in the past relied on
the advances of Northwest Financial Group (an entity controlled by Don
Riesterer, its CEO) for temporary advances to fund losses; however, unless
revenues accelerate from the new home mortgage originations, it is unlikely
the Company will produce cash flow from operations until the 2nd or 3rd
quarter of 2001. The first and fourth quarter of the Company's operations
have been slower than summer months as real estate sales slow and the related
mortgage loan activity also declines. The Company has the following options
to explore:
* consolidate staff with one of the entities it has advanced funding to
* reduce the level of expenses it is incurring to expand its franchise
system
* raise additional equity through the sale of stock.
The Company's lack of real estate holdings and operational cash losses, would
most likely preclude it from obtaining bank or other debt financing, other
than advances from affiliates. The Company's ability to expand will most
likely require both consolidation of staff with an affiliate, additional
equity funding, repayment of advances to Northwest Investment Trust, and
acceleration of revenues from mortgage loans.
Franchise Agreements
The Company has Franchise Agreements in effect with 76 franchisees. The
franchise agreement provides for:
* initial terms of three years renewable for three additional three
year terms with written notice to the Company prior to expiration
without additional cost to the franchisee, provided the franchisee
has complied with its obligations under the franchise agreement
* an initial franchise fee of $9,900; payment of $95 per transaction or
6% of revenues received from each transaction; a minimum of $325 in
fees in each month; pay not less than $50 per month or more than 10%
of transaction fees per month into an advertising fund if
established; and, pay a $2,500 transfer fee upon an approved
transfer of the real estate franchise.
* Provides for a "protected" territory and sets forth conditions and
provisions regarding non-competition, the use of the WHY USA logo and
proprietary information and selling techniques
* Sets forth the Company's various obligations to provide training and
<PAGE> 13
materials
Investing Activities
The Company has advanced $115,000 to two mortgage companies and $468,000
to Northwest Investment Trust as of September 30, 2000. Northwest Investment
Trust is an entity controlled by Don Riesterer, and is principally involved in
the operation of commercial real estate. The Company charges 8% on the loan
and the loan is due on demand. The Company invested $100,000 in the preferred
stock of a high risk or B market-lending originator. The Company also
purchased the Janesville, Wisconsin real estate operations for $110,000; the
Company paid $60,000 in cash and gave a note for $50,000 to the former owner
Diane Butts.
The Company purchased $55,936 in computer and communication equipment to
support its telemarketing operations during the first 9 months of 2000 versus
the acquisition of only $13,584 in equipment in the similar period in 1999,
which reflects the spool-up of the Company's operations and telemarketing
efforts in 2000. In the nine months ended September 30, 1999 the Company
completed the acquisition and improvement of a commercial office building for
$427,256 of which $336,772 was financed through debt. The office complex was
ultimately returned to an affiliated entity at December 30, 1999 and is
accounted for as a discontinued operation in 1999.
Liabilities/Contingent Liabilities/Lease Commitments
The Company's total payables at September 30, 2000 was $39,759 and a
contract payable of $50,000 to Diane Butts on the acquisition of the
Jamesville, Wisconsin real estate operations. The Company leases its mortgage
operations space from an entity controlled by Riesterer at $4,800 per month
for total rent expense of $14,300 in the 3rd quarter and $27,700 for the 9
months ended September 30, 2000. WHY USA NA leases it's space from its former
owners at $2,500 per month, for a 3rd quarter expense of $7,500, and $24,625
for the nine months ended September 30, 1999.
Financing Activities
The Company has raised $1,500,000 in its private placement of which
$1,427,640 had been deposited at September 30, 2000. The Company was repaid
$52,228 via the assumption of an advance to a former officer by Northwest
Financial Group. The Company also repaid Don Riesterer $ 26,400 in connection
with his original acquisition of WHY USA NA.
Cash Requirements and Expansion Plans
Although the Company realized net income in 1999, and had sufficient
revenues from operations to meet its cash requirements, during 2000 the
Company has operated at a loss. This trend will likely continue as the Company
contends with increased operating expenses and continues its expansion plans.
The Company does not have sufficient cash flows from operations to meet its
current operating expenses as well as expansion plans, which it believes are
necessary for the Company to succeed. The number of the Company's franchisees
decreased over the three years prior to the Company's acquisition of the
system, from 91 at year end 1997 to 65 at the Company's acquisition of WHY USA
NA on December 31, 1999. The Company is aggressively pursuing franchise sales
<PAGE> 14
and has increased its franchises to 76 at this date. The Company intends to
continue to aggressively pursue its plans to expand franchise support and
services and to expand its WHY USA Franchise System into more territories.
Although the Company is a national franchiser, it has achieved mostly regional
recognition in the Midwestern States where almost two-thirds of its
franchisees are located. Management believes the Company must develop a
stronger national presence in order to increase revenues from existing
franchisees and increase the number of franchise offices.
Expansion plan needs include: (1) increased working capital to support
the growth of current operations, (2) capital to finance marketing and
operational expansion into new territories, and (3) funding for the
acquisition of one or more established businesses engaged in real estate or
mortgage service operations. The Company is required therefore to seek sources
of financing to fund this expansion and has commenced the private placement
discussed below to fund part of it. The Company's general expansion plans
include some of the following in order of priority:
* expand existing telemarketing service; begin hiring full-time
telemarketing personnel (first five in the next 3-6 months)
* begin placing loan origination agents on site (15 in the next few
months);
* negotiate and buyout certain territories (currently the Diane Butts
territory)
* recruit additional employee/sales representatives
* pursue acquisition possibilities and strategic alliances
* expand web site capabilities including loan origination at website
* offer loan origination for higher risk loans;
* acquire and organize insurance entity
In connection with the Company's capital requirements over the next
year, the Company will require approximately $500,000 for working capital to
fund its operating losses; approximately $250,000 for expansion of
telemarketing, loan agents on site, employee recruitment and territory
buyouts; and $400,000 for strategic alliances and acquisition.
Private Placement of Common Stock
The Company commenced a private placement of up to 1,500,00 units at an
offering price of $1.00 per unit. The offering closed August 31, 2000 with
1,500,000 Units sold for proceeds to the Company of $1,500,000. Units
consisted of one share of common stock and one warrant to purchase a share of
common stock for $1.00, exercisable at any time for three year term commencing
upon the purchase of the Unit. The Company reserved the right to call and
redeem the warrants upon thirty days notice whenever the underlying stock has
been quoted in a public trading market for at least 20 consecutive days at
$2.00 or more. There is currently no public trading market for the Company's
securities. The offering was a "best efforts" offering with no minimum; funds
were available to the Company immediately upon receipt.
Seasonal Aspects
The Company realizes less revenues in general in the winter months when
the real estate market is slower especially just prior to Christmas.
<PAGE> 15
Inflation
Inflation usually softens the real estate market and increases interest
rates, which may also soften the market. In an effort to limit inflation, the
Federal Reserve has increased interest rates, which has also had a negative
impact on the Company's loan origination business.
Trends/Uncertainties/Risk Factors Affecting Continuing Operations
Limited Operating History
Both of the operating subsidiaries of the Company have relatively short
operating histories upon which to judge their progress and potential
profitability. The Company's future must be considered in light of the many
risks and uncertainties, expenses and difficulties encountered by businesses
in the early stages of expansion. The Company must be able to implement and
successfully execute its business and marketing strategy, develop and offer
quality services for its franchises at a competitive price, provide effective
support to its franchisees, develop and implement effective internal business
and financial systems controls, respond to competitive developments in the
real estate industry, respond to the effects of changes in the economy
including rising interest rates or inflation, and attract and retain qualified
personnel.
Need for Additional Financing.
The Company's current cash flow is insufficient to satisfy its cost of
operations, and therefore also insufficient to provide for its current
expansion plans. During the next year, revenues will be unlikely provide
sufficient cash flow to fund operations. As of this date, the Company is
dependent on obtaining funding necessary for both expanded working capital
requirements and expansion through its recently completed private placement
offering. The Company received $1,500,000 in proceeds in the offering. The
Company will be using $1,000,000 of the proceeds from its private placement
for expansion and $500,000 for expanded working capital requirements.
Approximately $1.3 Million has already been expended during the nine month
period ended September 30, 2000, including approximately $680,000 which was
invested. The $1,500,000 in proceeds from the offering, however, are
sufficient to satisfy only a portion of the Company's over-all business plan.
There is no assurance that additional financing will be available from any
source when and if needed by the Company either through debt or equity
sources. The inability to obtain additional funding could prevent the Company
from implementing its business expansion plans. Additional financing could
have a negative impact on the Company's shareholders in the form of dilution.
Reliance on Key Personnel
The Company's future success is highly dependent on the experience and
efforts of its management and key personnel. The loss of services of one of
more of these individuals could have an adverse affect on the Company's
business operations and future prospects. The Company is especially dependent
upon those individuals who have experience with the operations of WHY USA NA
and the WHY USA System although one of its priorities is to train and
familiarize all key personnel with all phases of the Company's various
operations. The Company does not have any key man insurance policies. The
<PAGE> 16
Company is also dependent on its ability to attract and retain key management,
marketing and operational personnel for its planned expansion.
Uncertainty of Market Acceptance
The Company's financial condition and future prospects will depend on it
ability to obtain a substantial and increasing share of the real estate and
mortgage business in the areas in which it operates and its ability to
significantly increase its franchisee network. Although the Company has gained
a toe hold in the Midwestern market, there is no assurance that the Company
will achieve national market acceptance.
Competition
Competition in the real estate franchising, mortgage origination, and
insurance industries is intense and each of these industries includes large
well-established firms and companies, banks and other financing institutions,
and specialized service companies. Most of these competitors are
substantially larger than the Company with greater expertise and name
recognition and substantially greater financial, personnel, marketing and
other resources than the Company has. In addition, these competitors have
obtained a large and loyal customers base and have achieved significant brand
name recognition for their services, franchises and marketing networks. The
Company will also compete with local businesses in each locale into which it
decides to expand franchise operations. Small, local competitors could provide
significant competition because they have achieved name recognition, customer
base, and reputation within their locale.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company received subscriptions for 1,500,000 Units in its recently
completed private placement offering, which closed on August 31, 2000. The
Company relied on the exemption from registration provided under Section 3(b)
Regulation D, Rule 506 in the offer and sale of the Units in the private
placement. The Company believes it is entitled to rely on the Regulation D
Rule 506 exemption because it is not publicly soliciting investors who are
largely individuals or entities with a business or personal association with
management. The Company believes that the investors: (1) have access to and
have been provided with information regarding the Company as set forth in a
private placement offering memorandum; (2) are aware that the securities are
not being registered under US securities laws; (3) are acquiring the
securities for his/her own account for investment purposes only; (4)
understand that the securities may need to be held indefinitely unless
registered or unless an exemption from registration applies to a proposed
disposition; (5) are "accredited" and/or "sophisticated" having sufficient
knowledge of Company and sufficient investment experience to make investment
decisions, and (6) are aware that no public market exists for the Company's
<PAGE> 17
securities. The Company is paying no commissions for sales of the Units. There
were 54 investors in the offering of which 52 were "accredited". Proceeds
were immediately available to the Company and it spent $252,709 of the
proceeds on working capital deficits during its first quarter and nearly $1.3
million to date, including approximately $680,000 which was invested in short
term loans and preferred stock. (See "Investing Activities.")
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Description Location
---------- ------------ ---------
2.1 Reorganization between the Black Butte (1)
Petroleum, Inc.
and Triam Ltd. dated March 23, 1983
2.2 Acquisition Agreement between Triam Ltd (1)
and Northwest
Financial Ltd., dated December 16, 1999
2.3 Acquisition Agreement Addendum, dated
December 20, 1999 (1)
2.4 Stock Purchase Agreement dated September
24, 1999 between Northwest Financial
Group, Inc.,WHY USA NA, and
its selling shareholders (1)
2.5 Addendum to Stock Purchase Agreement,
dated December 30, 1999 including Assignment (1)
to Donald Riesterer
3.1.1 Articles of Triam Ltd., dated January 6, 1983 (1)
3.1.2 Amendment to Articles of Incorporation,
March 4, 1983 (1)
3.1.3 Amendment to Articles of Incorporation,
filed March 29,1983 (1)
3.1.4 Articles of Merger, filed on November 9, 1999 (1)
3.1.5 Amendment to Articles of Incorporation,
Jan. 10, 2000 (1)
3.2 Bylaws (1)
10.1 Sample Franchise Agreement (1)
10.2 Sub-Lease on Menomonie Property (1)
10.3 Donald Riesterer - Note for $500,000 (1)
10.4 Donald Riesterer - Note for $850,000 (1)
10.5 Mainstreet Agreement (2)
10.6 Butts Agreement (2)
<PAGE> 18
10.7 Erks Agreement (2)
10.8 Jarvis Agreement (2)
10.9 Regional Sales Representation Agreements (2)
16 Letter re: Change of Accountants (2)
21 List of Subsidiaries (1)
27 Financial Data Schedule (3)
(1) Filed with the Company's initial Filing on Form 10SB on May 10, 2000.
(2) Filed with the Company's amended Form 10 on August 28, 2000
(3) Filed herewith
(B) Reports on Form 8-K
The Company filed no reports on form 8-K during the three months ended
September 30, 2000.
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHY USA FINANCIAL GROUP, INC.
11/14/00 /s/ Donald Riesterer
Dated:_________________ By: _______________________
Donald Riesterer
Chief Executive Officer
Chairman of the Board
11/14/00 /s/ Leslie M. Pearson
Dated:_________________ By: _______________________
Leslie M. Pearson
Secretary and Treasurer
(Chief Accounting Officer)
