FORM 10-SB/A
Amendment No. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) and (g) of the Securities Exchange Act of 1934
Commission File No. 0-30601
WHY USA FINANCIAL GROUP, INC.
____________________________________________
(Name of Small Business Issuer in its charter)
Nevada 87-0390603
________________________________ ___________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
8301 Creekside, Unit 101, Bloomington, Minnesota 55437
_______________________________________________ __________
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (952)841-7062
________________
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be registered Each class is to be registered
None None
______________________ ______________________________
Securities to be registered under Section 12(g) of the Act:
Common
________________
(Title of class)
<PAGE> TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 3. DESCRIPTION OF PROPERTY
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 5. DIRECTORS, EXECUTIVE, OFFICERS, PROMOTERS AND CONTROL PERSONS
ITEM 6. EXECUTIVE COMPENSATION
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 8. DESCRIPTION OF SECURITIES
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS
ITEM 2. LEGAL PROCEEDINGS
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS RECENT SALES OF
UNREGISTERED SECURITIES
ITEM 4. RECENT SALE OF UNREGISTERED SECURITIES
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
PART F/S
PART III
ITEM 1. INDEX TO EXHIBITS
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Introduction
------------
WHY USA Financial Group, Inc. 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., which
offers residential mortgage loan services principally as a loan originator,
and WHY USA North America, Inc., which offers a real estate franchise program.
The Company's franchise sales are regulated by the Federal Trade Commission.
as well as applicable state statutes.
Inception and History
---------------------
WHY USA Financial Group, Inc. (the "Company") was incorporated in Nevada
on January 6, 1983 as Triam, LTD. ("Triam") for the purpose of marketing a
newly discovered gemstone called Damsonite. Triam's sole shareholder at
inception was a Utah corporation named Black Butte Petroleum, Inc. ("Black
Butte") which was founded on September 30, 1980, for the purpose of acquiring
mineral properties and interests. Prior to its formation of Triam, Black
Butte conducted business for three years beginning with a public offering of
15,000,000 shares of its common stock at an arbitrarily determined price of
$.01 per share. The offering closed with $150,000 in gross proceeds on
November 20, 1980, and was made only to residents of Utah in reliance upon the
exemption from registration provided for under Section 3a(11) of the
Securities Act of 1933. The offering was also registered with the Utah
Securities Division. Black Butte purchased various mining leases and interests
in the State of Utah with the offering proceeds.
On March 4, 1983, in preparation for a contemplated merger with Black
Butte, the Company amended its Articles increasing its capitalization from
25,000,000 shares authorized, par value $0.001, to 100,000,000 common shares
authorized par value $0.001. The Company completed its merger with Black
Butte on March 7, 1983 which included the conversion of each of the 19,500,000
outstanding shares of Black Butte into 19,500,000 shares of the Company, the
dissolution of Black Butte, and the return to the Company's treasury of the
750,000 shares issued to Black Butte at the Company's inception. The terms of
the merger were arbitrarily determined with its main purpose being a change of
domicile. On March 29, 1983, the Company amended its articles expanding its
business purpose. The Company failed to file its Articles of Merger with the
State of Nevada until November 9, 1999.
From the completion of its merger in 1983 until approximately 1990, the
Company continued with its expanded business purposes which included the
holding of mining leases in the Cottonwood Canyons in Utah, interests in
drilling programs in Wyoming and Oklahoma, and the marketing of Damsonite
gemstones and a counterfeit bill detector. The Company also acquired
additional mining claims, distribution rights for Hawaiian commemorative
coins, investment stock in various Utah-based enterprises, an inventory of
historical books, and a lease/purchase of recreational/resort property in
Midway, Utah. In the late 1980s, the Company's operations proved unprofitable;
its then president took other full-time employment, and the Company ultimately
became inactive in 1990. At such time the Company also reverse split its
<PAGE> 3
outstanding common stock on a one for twenty-five basis, and the it began
looking for capital to recommence operations and/or other business
opportunities. The Company's mining assets reverted to their former lease
holders due to a failure to complete assessment work, new environmental laws
in the Cottonwood Canyons, and designation of the Cottonwood Canyons to
recreational. The only business conducted by the Company during this ten year
time period was minimal operations to remain in good standing as a corporation
and the search for new business opportunities, additional capital and/or a
merger candidate.
Acquisition of Northwest Financial Ltd.
--------------------------------------
On December 31, 1999, in an arm's length transaction, the Company
completed the acquisition of Northwest Financial, Ltd., a residential mortgage
origination company which incorporated under the laws of Minnesota on October
20, 1998 as Northwest Property Development Group, Inc. At the time of the
acquisition transaction, Northwest Financial, Ltd. was completing its own
acquisition of a corporation known as WHY USA North America, Inc. Included in
the completion of the Company's acquisition of Northwest Financial Ltd. were:
(1) a name change of the Company to WHY USA Financial Group, Inc.; (2) an
increase in the Company's capitalization from 100,000,000 common shares to
300,000,000 common shares, par value $0.001, and the addition of 50,000,000
non-voting preferred shares with no par value; (3) the acquisition of all of
Northwest Financial, Ltd.'s assets, liabilities and outstanding stock through
the issuance of 10,000,000 of the Company's common shares; and (4) the
election of a new Board of Directors comprised of individuals associated with
Northwest Financial, Ltd. and WHY USA North America, Inc. The terms of the
acquisition transaction were arbitrarily determined and approved by the
shareholders of the parties. The acquisition was conditioned upon completion
of Northwest Financial, Ltd.'s acquisition of WHY USA North America, as
discussed below. The transaction was effected through an acquisition agreement
dated December 16, 1999, and an addendum, dated December 20, 1999. The
Company's Articles were amended on January 10, 2000 to effect its name change
and increase capitalization.
At the time of the acquisition transaction, Donald Riesterer the
Company's current Chief Executive Officer and President, was President, sole
director and sole shareholder of Northwest Financial, Ltd; he had no
relationship with the Company, nor was he an officer or director of WHY USA
North America.
Northwest Financial, Ltd.'s Acquisition of WHY USA North America, Inc.
----------------------------------------------------------------------
On December 31, 1999, Northwest Financial Ltd. completed its acquisition
of WHY USA North America, Inc., a Wisconsin corporation formed on July 1, 1998
for the purpose of providing franchised real estate services. The
acquisition was accomplished through the purchase of all of the outstanding
shares of WHY USA North America from its three shareholders for a combination
of cash and promissory notes equaling $2,026,400, by Donald Riesterer. Mr.
Riesterer contributed the purchased shares of WHY USA North America to
Northwest Financial, Ltd. for 90,000 of its common shares. Mr. Riesterer was
sole shareholder of Northwest Financial Ltd. both before and after the
contribution and the payment to Don Riesterer of 90,000 shares was
arbitrarily determined. Mr. Riesterer was then issued 10,000,000 shares of the
Company in exchange for all of his shares in Northwest Financial Ltd.(equaling
100,000 shares) in its acquisition of Northwest Financial Ltd. which included
the acquisition of all of its outstanding shares. WHY USA North America is a
wholly owned subsidiary of Northwest Financial, Ltd.; as a result, both
<PAGE> 4
companies are wholly owned subsidiaries of the Company. Mr. Riesterer is now
the Company's Chief Executive Officer and Chairman of the Board of Directors.
The transaction was effected through a stock purchase agreement entered into
on September 24, 1999 and amended on December 30, 1999.
Voluntary Filing of this Registration Statement
-----------------------------------------------
The Company has elected to file this Form 10-SB registration statement on
a voluntary basis in order to become subject to the reporting requirements of
Section 13 of the Securities and Exchange Act of 1934, as amended. The primary
purpose for this is the Company's intention to apply for a listing on the
National Association of Securities Dealers Over-the Counter Bulletin Board.
Forward Looking Information
---------------------------
This registration statement contains certain forward-looking statements
relating to the Company that are based upon beliefs of the Company's
management as well as assumptions made by and information currently available
to the management. When used in this registration statement, the words
anticipate, believe, estimate, expect, and similar expressions, as they relate
to the Company and the Company's management, are intended to identify forward-
looking statements. Such statements reflect the current view of the Company
with respect to the future events and are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward looking statements.
BUSINESS OF REGISTRANT
Principal Products or Services and Their Market
-----------------------------------------------
Introduction
The Company provides comprehensive real estate services through two wholly
owned subsidiaries: Northwest Financial, Ltd.("NWF"),which offers residential
mortgage loan services principally as a mortgage loan originator, and WHY USA
North America, Inc. ("WHY USA NA"), which offers a real estate franchise
program. The franchise program utilizes a proprietary plan of operation which
consists of listing, selling, marketing and management techniques supported by
a comprehensive plan of assistance that includes training programs and a
variety of copyrighted marketing and educational materials (the "WHY USA
System"). The Company also intends to incorporate or acquire a third
subsidiary which will offer real estate title and insurance policies, and may
also establish or acquire additional entities to provide other real estate
related services.
Business Strategy - "Bundled" Real Estate Services
The Company's business strategy consists of developing and providing
"turnkey" residential real estate services and support to its network of
franchised real estate brokers and to all home buyers and sellers involved
with the Company's franchisees or directly with the Company. Because offering
"bundled" services has become an effective method of achieving market
penetration in many industries including the real estate industry, the Company
intends to offer its franchisees and their real estate customers a complete
real estate package of one-stop "bundled" services through its subsidiaries.
<PAGE> 5
Currently, the Company's franchisees: (1) utilize the Company's innovative and
proprietary WHY USA System; (2) are provided franchise support through the
Company and/or regional representatives, and (3) have loan origination
services available to them through NWF at its Minnesota office. The Company
is now positioning itself to expand its operations by offering its franchisee
and real estate customers a more complete package of "bundled" services. The
services will include not only its unique franchised real estate listing and
sales program with enhanced support services, but also full mortgage
origination services, owner and mortgagor title insurance, and mortgage and
homeowner insurance policies. The Company will accomplish this by placing
loan origination personnel on-site with franchisees, by acquiring or founding
a third subsidiary which will provide insurance services, by expanding
support services through various means including a telemarketing program, and
by acquiring other real estate services if warranted. The Company's goal is
to expand its franchise program and establish a significant national presence
in the industry; management believes offering "bundled" services will help
accomplish this goal.
The WHY USA Franchise Program and System
-The Company's Ownership of the WHY USA System-
The primary focus of the Company's business is its WHY USA franchise
program under which franchisees are entitled to utilize the Company's unique
WHY USA System. The WHY USA System was developed in several steps beginning
with its introduction in 1988 by WHY USA, Inc., an Arizona corporation,
through its own non-franchised real estate office. WHY USA, Inc. granted
rights to license the WHY USA System to one of its affiliates, WHY USA
Franchise Corporation, an Arizona corporation which was formed in 1988 for the
purpose of franchising in Arizona. WHY USA Development Corporation was formed
in October of 1989 for the purpose of franchising the WHY USA System
nationally. Mr. Greg Hague was the developer of the WHY USA System, and the
founder and a principal in each of the foregoing Arizona entities. None of the
Arizona entities are affiliates of the Company or its subsidiaries.
Through a series of transactions beginning in December 1996 through
February 1998, WHY USA NA (then a partnership owned by Douglas Larson, Emil
Gluck and David O. Thomas) and Mid America Realty (a corporation owned by
David O. Thomas) acquired ownership of the WHY USA System which included the
WHY USA trademark, copyrighted materials, supplier agreements and the
assignment of existing franchise agreements. WHY USA North America, the
partnership, was assigned Mid America Realty's interest in the WHY USA System
in late April 1998; and, upon formation of WHY USA NA, the corporation, on
July 1, 1998, all of the partnership's ownership in the WHY USA System was
transferred to the corporate entity by the partners who became its sole
shareholders. The trademark was assigned to WHY USA NA in September 1998. WHY
USA NA now has all right title and interest to the WHY USA franchise system
subject to (1) an exclusive license granted in the State of Arizona, and (2)
various regional rights granted to certain individuals/entities entitling them
to a percentage of initial franchise fees and/or a percentage of transactions
fees generated by certain franchisees in their respective territories.
-The Why USA System-
The WHY USA System utilizes a confidential plan of operation to assist
independent real estate brokers and/or agents. It consists of a number of
successful listing, selling, marketing and management techniques developed
over the years and supported by a comprehensive plan of assistance that
<PAGE> 6
includes an ongoing sequence of training programs and a variety of copyrighted
marketing methods and educational materials. These techniques are frequently
supplemented by new techniques or refinements which then become a part of the
WHY USA System. The System involves the use of the "WHY USA" name and service
marks. Franchisees may also participate in joint marketing and educational
programs and receive access to newly developed promotional and training
materials. Franchisees will also receive the benefit of newly developed
franchisee support as it is introduced into the WHY USA System. The Company
believes its WHY USA System to be unique and proprietary in nature and made
application for provisional patent protection on the WHY USA System in January
20, 2000. The WHY USA method for listing real property offers selling
owners three basic options:
* "$990-For Sale by Owner Plan". Under this plan, the seller pays a
flat fee of $990 for which the WHY USA franchise office provides
signs, and other printed information and professional real estate
forms, general advice about sale of the property, and allows the
agent to assist the seller in advertising and showing their homes.
The program allows the seller to host its own open houses and
buyers are referred to the agent.
* Full Service Listing. The full listing plan allows the agent to
list the property on the Multiple Listing System, conduct showings
and open houses and take all steps associated with an agent listing
sale and is offered at a discounted commission of 5.9%. The full
service plan also has additional options for reduction(s) in the
5.9% commission: if seller allows the Company to finance the
mortgage on a home he may be purchasing, seller would receive a
reduction in commission; seller may elect to pay a set
non-refundable fee that will reduce the commission; seller may
reduce commission further if he allows the Company to assist in
buying a new home. The seller may use any or all of the foregoing
and receive a reduction on the commission for each option seller
elects to use.
* Hybrid Plan. This plan allows the seller to continue to try to
sell his home to a friend or relative or acquaintance while the
agent commences the full listing process. If the seller finds a
friend, relative or acquaintance to purchase the property, he pays
only the flat fee of $990. If the agent finds a buyer first, the
seller pays the agreed upon commission price.
The WHY USA SYSTEM also includes a 29 DAY FAST SALE PROGRAM in which the
seller agrees to offer a bonus commission to the selling agent to conduct four
(4) consecutive open houses and to price their home based on three (3) recent
comparable sales in the market area.
-Availability and Cost of WHY USA Franchise-
WHY USA franchises are available to all licensed real estate brokers and
their agents who must review a Franchise Offering Circular and enter into WHY
USA Franchise Agreement in order to conduct business under the WHY USA name
utilizing the WHY USA System. The initial fee for a WHY USA real estate
franchise office is $9,900. (In 1998, initial franchise fees ranged from
$6,500 to $9,500.) Franchisees also pay ongoing transaction fees to the
Company based on flat fee per transaction or a percentage of commission
revenues, whichever is less, provided they must pay a minimum monthly fee.
Transactions are defined as any closing or rental as a listing or selling
<PAGE> 7
agent, any referral or advance fee received from a client and any consulting,
assistance or materials purchase fee related to leasing or selling a property.
The Company provides substantial initial and ongoing support including
assistance with office location, provisions of the confidential WHY USA
Operations Manual, a training seminar for new franchisees, training and
promotional videos and brochures, sample marketing materials, continuing
advisory assistance regarding operations, supplemental marketing and
advertising materials, and advice about the purchase of a suitable computer
system with good Internet access capability. The Company may also provide
financial assistance to a qualified purchaser or become a 50% partner with a
franchisee.
-Current WHY USA Franchise Offices-
The Company currently has 76 franchisee offices of which almost two-thirds
are located in Minnesota and nearby Midwestern states, with remaining
franchisees spread throughout the country. The Company has no material
presence in the Eastern and Southern states. Current franchisees include
approximately 600 full and part-time agents, and generate a total of
approximately 300 to 400 monthly real estate transactions. For additional
information on the Company's WHY USA franchisees, see this PART I, ITEM 1.
DESCRIPTION OF BUSINESS, "Patents, Trademarks, Licenses, Franchises,
Concessions, Royalty Agreements, Labor Contracts."
The Company's Mortgage Service
The Company's mortgage origination activities are conducted by NWF based
in Minneapolis, Minnesota. NWF's primary mortgage financing operations to
date consist of residential mortgage originations in Minnesota and Wisconsin.
NWF typically processes mortgage loan applications through one of a number of
mortgage lenders with which it conducts business, acts a underwriter for the
mortgagee client, and promptly sells the loan to the third party mortgage
lender who usually funds the loan directly to the borrower. NWF normally pays
for the credit report, property appraisal, and expenses of processing and
underwriting the loan. NWF does not service any of the loans it originates,
and, in some cases, is not responsible for the underwriting.
Management believes that its mortgage origination business will assist the
Company substantially in expanding its WHY USA real estate franchise business
because it gives franchisees another source of revenues and enables them to
provide an additional service to their customers; it will also provide a
continual source of mortgage loan origination fees to the Company. The Company
intends to have a qualified mortgage loan originator in each of its franchisee
offices. Loan originators will earn established fees based on the volume of
loan originations which are successfully closed due to their efforts.
Mortgages placed by the Company for customers of WHY USA franchisees also
benefit their customers because the Company can provide them with an
additional discount of 1/2% of the real estate commission in consideration for
using the Company's mortgage origination services. Franchisee customers,
however, are not required to use WHY USA mortgage origination services. In
addition to anticipated business from WHY USA franchisees, the Company will
continue to obtain origination fees from its own direct sales of mortgage
services to other borrowers, especially in regard to secondary and refinanced
mortgages.
<PAGE> 8
Title and Other Insurance Services
The final element of the Company's "bundled" services is to offer title,
mortgage and homeowner insurance to clients of the WHY USA franchise offices.
The Company is currently developing relationships and alliances with selected
national insurance companies to carry and resell their insurance policies to
WHY USA clients as well as other direct clients the Company may develop
independently. The Company has established a working relationship with a
large national title insurance company, Commonwealth Land Title Insurance
Corporation to underwrite those policies sold to the Company's customer base.
The Company also has developed a relationship with Prime One Home Warranty to
provide home warranty services to its customers. Franchisees generate
additional revenues each time they use either of the foregoing entities. An
immediate goal of the Company is the organization or acquisition of a title
and insurance subsidiary.
Distribution Methods of the Products or Service
-----------------------------------------------
The market for the Company's WHY USA real estate brokerage services is
anyone buying or selling real estate. The Company has conducted no
independent third party marketing studies regarding the marketing of its
services and is relying on management's familiarity with the industry, the
results of operations of the two subsidiaries prior to their acquisition by
the Company, and its own analysis of the current real estate market to
establish its marketing plans.
The Company distributes its product in three ways: (1) by providing
support and promotion of the WHY USA System to current franchisees; (2) sales
of franchises, and (3) by generating mortgage financing business both to
franchisees and their customers as well as to persons not being served by a
WHY USA franchise.
Franchisee Support
The Company's primary marketing focus is franchisee support. The Company
now utilizes or will utilize the following to provide support to its
franchisees:
* Telephone and On-site Technical Support - Franchisees receive
telephone and on-site technical support as well as professional
training videos emphasizing services and advantages of the WHY USA
real estate franchises.
* Telemarketing - The Company is developing a permanent
telemarketing operation to conduct regular telemarketing into the
territories of the WHY USA Franchisees to generate both real
estate listing and mortgage origination leads for them. The
Company currently has six part-time telemarketers who work out of
a small office in Sebeka, Minnesota; the Company intends to hire
up to 25 additional employee/telemarketers who will work out of
the WHY USA NA office in Menomonie. It expects to hire the first
five (5) of these full-time telemarketers during the summer of
2000. The Company utilizes lists generated by WHY USA open houses
which it shares with other sellers through telemarketing; it also
purchases "for sale by owner" lists which are compiled by a
company in Utah through a database of newspaper classified ad
listings by owners selling their own homes.
<PAGE> 9
* WEB Site - The Company has established two (2) web sites:
www.WHYUSA.com and www.WHYUSA.org. The web sites currently
advertise the advantages of the WHY USA system of listing and sales
emphasizing its $990 For Sale By Owner Program. The sites also
provide links to an office locator, real estate information, and
information about owning a WHY USA franchise. In the future, all of
the WHY USA bundled services will be accessed by all of the
Company's franchisees and their clients through these web sites
including on-line loan application.
* Promotion/Advertising - Although neither the franchisee nor the
Company is required to provide advertising under the terms of the
Franchise Agreements, the Company dedicates a small portion of its
budget each year to advertising/promotion in an effort to increase
name recognition on national, regional and local levels and to help
generate business for franchisees. Most of this effort is
consolidated in its promotional materials. The Company spent
approximately $10,000 on advertising and promotion efforts in 1999.
The Company has established in its updated franchise offering
circular the requirement of franchisees to contribute an
amount not less than $50 nor more than 10% of its monthly
transaction fees to an national advertising fund. No fund has been
established as of this date.
* Forums and Seminars - The Company hosts both national and regional
forums/seminars for franchisees and agents. The Company's most
recent national forum was held in Las Vegas in early 2000 and was
attended by 110 individuals representing 45 WHY USA real estate
franchise offices. The Company's current plan is to host regional
seminars four times per year in various parts of the country for
training of new and existing agents of WHY USA franchisees. A
regional training seminar is being held in Minnesota in June, in the
Eastern US during September, and in the West during December. It is
likely one or more of the regional trainers will host or assist with
the Western forum.
* Special Franchisee Assistance - Occasionally the Company will assist
certain franchisees with marketing in their locale. During 1998,
the Company invested $30,000 in marketing and promotional assistance
for a California franchisee with positive results: the franchisee's
business increased significantly and it hired two new agents.
Franchise Sales
-How Franchises are Sold-
The Company intends to expand franchises into existing markets as well as
new areas of the United States. The Company has sales representation
agreements and/or sales directors agreements in effect with seven (7)
individuals/ entities including two new agreements with sales
representative/employees. Leads are generated by the sales representatives
who, under the terms of their respective representation agreements, complete
the sale of franchise in a manner which complies with the Company's policies,
or gives the leads to the Company to complete the transaction. Compensation,
in general, is commiserate with the nature of the service required of and
performed by the sales representative, usually a percentage of the initial
franchise fee or a commission. Some of these sales representatives/directors
also have certain obligations to provide support to franchisees in their
<PAGE> 10
territories, or to sell a quota of franchises each year. Individuals who have
obligations to provide support services in their territory, in general,
receive both a percentage of the initial franchise fee and also a percentage
of the transaction fees paid to the Company by franchisees in their territory.
The Company has sold six (6) franchises in this fiscal year 2000 as a result
of the efforts of a sales representative/employees. (See "Regional Sales
Representative/Director Agreements", below.)
Franchise sales are also made by various individuals at the WHY USA NA
offices. These sales are made in areas which are not subject to sales
representation agreements or in which the agreements do not grant exclusive
rights to sell franchises (currently none of these territories are exclusive),
and are based mostly on referrals and inquiries. The majority of any referral
sales are/will be handled by David O. Thomas and Don Riesterer who are both
officers and/or directors of the Company, and Mr. Jay Luck, an independent
contractor who provides services to the Company. David O. Thomas is also
responsible for training new WHY USA franchisee owners and agents and
supervising the opening of new franchises which are sold by sales
representatives or assigning that responsibility to a trainer/ consultant.
The Company does not solicit franchise sales except in those states where
it has registered its Franchise Offering Circular. Thirteen states require
specific registrations. The Company's WHY USA franchise is currently approved
for sale in California, Illinois, Michigan, Minnesota and Wisconsin (all
states requiring franchise registration) and it is registered in Texas,
Nebraska, and Louisiana (business opportunity states). The Company also has
registrations pending in Virginia and Maryland. For additional information on
state franchise sales compliance, see "Need for Government Approval/Effect of
Existing or Probable Government Regulations/Costs and Effects of Compliance."
-Franchise Offering Circular-
The Company offers its franchises through its Franchise Offering Circular
which must be reviewed by the Federal Trade Commission and updated a minimum
of once every 12 months; the WHY USA NA Franchise Offering Circular was
updated on March 31, 2000 and filed with the Federal Trade Commission. The
updated Franchise Offering Circular must also be provided to those states in
which the Company is registered to sell franchises or where it is required to
maintain a current circular on file. Potential franchisees go through a four
step process when applying for a franchise which includes (1) a preliminary
questionnaire to establish eligibility; (2) an examination of the WHY USA
marketing program;(3) the receipt and review of the Franchise Offering
Circular; and (4) application for the franchise. The Company, in approving a
franchisee's application, assigns a geographical area which is inserted into
the franchise agreement and includes a one mile radius "protected area."
-Franchise Agreement -
Franchise Agreements are executed as between the Company's subsidiary, WHY
USA NA and each new franchisee. Existing franchisees are required to renew
their agreements with the Company every three years, although renewals may
contain certain special provisions, as applicable, which may have been a part
of the renewing franchisee's initial franchise agreement.
1. Term - three years; renewable for three (3) additional 3-year terms
with written notice to the Company prior to expiration, and is without
additional cost provided franchisee has complied with its obligations under
the franchise agreement.
<PAGE> 11
2. Franchisee operates only under a trade name approved by the Company and
is prohibited from using "WHY" or "USA" in any corporate name.
3. Franchisee receives a "protected area"; the Company cannot grant
another franchisee a location in the "protected area."
4. Franchisee opens its office within 120 days of the agreement.
5. The Company agrees to: provide franchisee with a manual and training
materials and sample marketing materials; provide franchisee with initial
training library video or audio tapes and supervise franchisee with respect to
the information contained in the same; provide an initial training seminar at
a location chosen by the Company and paid for by the Company, except
franchisee pays travel expenses and lodging of their agents; provide
supplemental marketing and training material from time to time; provide
advisory assistance to franchisee at its discretion. The Company has the
right to establish an advertising fund.
6. Franchisee agrees to: pay an initial franchise fee of $9,900; submit
reporting forms and pay the lesser of $95 per transaction or 6% of revenues
received from each transaction; submit report and make payment to the Company
by the tenth day of each month based upon calculations on revenues received in
the preceding month; pay 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. Transaction is defined as a
commission received upon closing or rental as listing agency; a commission
received upon closing or rental as selling agency; a referral fee received; a
retainer or advance from prospective seller or buyer, lessor or lessee (which
may be deducted from "final" transaction fee paid on closing of the related
transaction);franchisee pays 1.5% transaction fee on a commission received
from the sale of a nonresidential property.
7. Franchisee's obligations: completion of initial training seminar prior
to commencing business; operation of franchise in accordance with standards
set by the Company; assisting the Company in protection of its trademark;
implementation of substitute marks or changes to marks at its own expenses
within one year; include WHY USA logo, 990 SELLS HOMES and the slogan
"Independently Owned and Operated" on promotional materials; the purchase at
its own expense of hardware, software, dedicated phone lines, modems, printer,
etc. as specified by the Company; duty not to operate a web site or internet
presence without prior written consent of Company as to use and content; act
as or designate and maintain a licensed real estate broker for the franchise
office; make an independent determination of that marketing and advertising
provided by the Company complies with applicable laws, rules and regulations
before using; maintain and report listings sold, sales and financial
information as prescribed by Company; permit inspection of premises and
records by Company on reasonable notice; permit audit of books and records by
the Company and pay costs of the same if audit establishes a 10% or more
underpayment of fees due the Company; maintain comprehensive public liability
insurance insuring indemnity given by the Company with minimum coverage of
$500,000 bodily injury liability and $100,000 property damage liability with
WHY USA designated as additional named insured; make purchases of supplies
from approved suppliers if designated by the Company or meet minimum
requirements as established by the Company.
8. Franchisee acknowledges proprietary nature of the WHY USA System and
agrees to keep confidential except information specifically designed
<PAGE> 12
to be promoted to the public; franchisee also acknowledges that the WHY USA
System is exclusive property of the Company and that franchisee has no
interest therein; franchisee will not register or license to others the use of
the WHY USA System or trademark nor do anything to diminish the Company's
right to use or value of the trademark.
9. Franchisee makes representations regarding: availability of Franchise
Offering Circular and attachments including franchise agreement and
acknowledgment that neither the Company nor its employees or agents has made
any representations regarding projected revenues or earnings.
10. The franchise agreement may be terminated upon expiration of the term
or one of the following: mutual consent; upon 15 days notice by the Company
specifying a default by franchisee; immediately if franchisee becomes bankrupt
or insolvent, is convicted of or pleads guilty to any felony or criminal
misconduct relevant to the real estate business, makes a material
misrepresentation or omission in the franchise agreement, breaches any
provision of the non-compete covenants or confidentiality provisions of the
franchise agreement, fails to timely submit reports three or more times in a
12 month period, or abandons or closes business.
11. Upon termination franchise automatically terminates and reverts to
the Company and all monies owed by franchisee are immediately payable.
Franchisee at its own expense shall: discontinue use of the WHY USA System and
trademark; return training and marketing materials; delete/disconnect web
sites if the same had been permitted; pay all monies due the Company; maintain
required records for one year and allow inspection thereof; abide by
non-compete covenants and confidentiality provisions for the specified period
in the franchise agreement; cancel all assumed names or equivalent
registrations used in connection with any name or trademark of WHY USA; comply
with obligations to clients under existing agreements.
12. Franchisee agrees not to participate in any capacity in any other
residential real estate brokerage business during the term of the franchise
agreement without prior written consent of the Company; for two years after
the expiration or termination of the franchise agreement franchisee will not
participate in any business which copies or imitates the names, methods or
discount plan of WHY USA, or the fee structure of WHY USA System.
13. Franchisee may sell franchise to a qualified franchisee approved by
the Company upon payment of a $2,500 fee if: transferee executes a franchise
agreement and assumes its obligations of franchisee; franchisee is not in
default on payments to the Company; and transferee meets WHY USA criteria.
14. The Company has right to sell all or some of its obligations under
the franchise agreement including to a regional manager.
15. The franchise agreements also provides for: modification by mutual
agreement of the parties; disputes to be settled by arbitration; all terms of
the franchise agreement including exhibits and expressly referenced documents
are binding.
-Trainer Consultation Agreements-
To assist the Company in opening new franchises, the Company has
consultation agreements with three individuals. These individuals are each
owners of a WHY USA franchise themselves and have agreed to provide, upon
request by the Company, certain training and consulting services to new
<PAGE> 13
start-up franchises and to coordinate regional forums.
-Regional Sales Representative/Director Agreements-
To assist in franchise sales and support, the Company has the following
agreements in effect granting non-exclusive rights to sell and/or service
franchises in certain territories, and to receive one or more of the
following: a percentage of initial franchise fees, a commission on initial
franchise fees, and/or a percentage of transaction fees generated by certain
of the WHY USA franchises within a territory:
1. THE JARVIS AGREEMENT WHY USA NA is the successor party to an
agreement between Jerry Jarvis and Mid America Development Corporation, dated
April 30, 1998. WHY USA NA purchased all rights owned by Mid America
Development and Dale & Carol Erks in November of 1998 which resulted in WHY
USA NA becoming the successor party to the existing agreement with Mr. Jerry
Jarvis. The agreement
* requires that Jarvis meet a quota of sales and maintenance of seven
(7) franchises during the first 3.5 years following the execution
date;
* grants Jarvis the right to offer and sell franchises in Minnesota
and 30% of the initial franchise fees for franchises sold by him;
and grants Jarvis 30% of the revenues received by the Company from
franchises sold by him in his territory, provided the sales and
maintenance quota is maintained.
* obligates Jarvis to perform certain training and support services
for those franchises he has sold.
* reduces by on-half the 30% of revenues from transaction fees to
which Jarvis is entitled to until such time as the quota is met and
waives obligations to provide support services during that time
period.
Jarvis has sold only one franchise and is paid one-half of 30% of the revenues
paid by such franchisee to the Company. The Jarvis agreement is not exclusive
and contains a non-compete clause which survives any termination of the
agreement for two years.
2. The BUTTS AGREEMENT - WHY USA NA is also the successor party to a
second agreement between Mid America Development Corporation and a regional
representative, Diane Butts, dated April 28, 1998. The terms of the agreement
are the same as those of the Jarvis Agreement above. Ms. Butts has sold only
one franchise and is entitled to one-half of 30% of the transaction fee
revenues generated from such franchisee. The Company is currently negotiating
with Ms. Butts for repurchase of the territory.
3. THE ERKS AGREEMENT -As part of the purchase of rights granted to Mid
America Development Corporation/Dale and Carol Erks on November 9, 1998, the
Company agreed to enter into a regional manager agreement with Mr. Erks which
it consummated on November 17, 1998. The agreement with Mr. Erks
* granted him franchise sales rights and compensation for those sales
in Minnesota and Wisconsin;
* granted him the right to 30% of transaction fees collected by the
<PAGE> 14
Company from franchises which he has sold in Minnesota and
Wisconsin.
* made the rights in Minnesota exclusive for the first year (although
exclusive nature expired on November 17, 1999 for failure to meet
certain sales quotas)
* expires two years from execution with Erks continuing to receive his
30% of transaction fees from those franchises which he sold after
the termination unless the Company buys all of his rights under the
agreement.
* grants the Company the right to purchase Erks' rights at the
expiration of two years at a price equal to four times Erks' net
income under the agreement during the previous year.
As of this date, Mr. Erks has sold only one franchise in this territory.
The Erks agreement contains a non-compete clause which survives any
termination of the agreement for two years.
4. THE MAINSTREET REALTY AGREEMENT - The Company is the successor party
in a regional director agreement between WHY USA Development Corporation and
Larry Day/Dean Molinsky (dba Mainstreet Realty) which was executed in August
of 1992. The agreement grants Molinsky/Day the right to receive 35% of all
revenues paid to the Company by WHY USA offices in their region in exchange
for advice and assistance regarding the development of the WHY USA business as
and participation in strategic planning and training for WHY USA franchise
owners in their territory. There are currently five WHY USA franchise offices
in their territory which is comprised of Nebraska and parts of Iowa. The
agreement is in effect so long as Day/Molinksky continue to meet their
obligations under the agreement and continue to own and operate a WHY USA
franchise. The agreement is non-exclusive and does not contain any
non-competition clauses although it does have a confidentiality clause.
5. REGIONAL SALES EMPLOYMENT AGREEMENTS - The Company is a party to two
regional sales/employment agreements which grant the right to sell franchises
and collect a $2,750 - $4,500 commission on sales. The agreements are with
Donna Dwyer VanZandt for the State of Texas and Marvin Hansen for Wisconsin
and Michigan. The agreements are non-exclusive and grant each individual
specified compensation, a commission on franchise sales, and a specified
monthly expense allowance; two of the agreements allow for bonuses for
certain sales quotas. There are no rights to a percentage of transaction fees
granted under these agreements.
6. "UNDERSTANDINGS" RE: FRANCHISE SALES WITH KEY PERSONNEL AND
INDEPENDENT CONTRACTORS- The Company has an understandings with certain
members of management that they will receive a percentage of or commission on
initial franchise fees for those franchises sold by them.(See "Certain
Relationships and Related Transactions.") The Company also has an
understanding with two individuals who act as independent sales agents and who
receive $2,500 for each franchise sold by them.
Interest Generated by Web Site/Name Recognition
Some franchise interest has also been generated from the WHY USA web
site. The Company has responded to approximately 61 inquiries on the web site
since January 1, 2000. The Company expects to continue to generate interest
from the website. The Company also generates leads for franchise sales based
<PAGE> 15
on WHY USA name recognition which has stimulated calls to the Company's office
regarding franchisee applications.
Participation in Industry Trade Shows
The Company participates in selected regional and national industry trade
shows such as the national franchise convention and the national real estate
convention where it displays and markets via trade booths.
Loan Origination
Most of the Company's residential loan origination business is achieved in
the Minnesota and Wisconsin area and is based on existing reputation and
referrals in the industry. NWF initially limited its business to those states
because (1)it was a start-up enterprise with limited operating capital (which
began conducting business in early 1999); (2) Don Riesterer, its sole director
and CEO, resided in Minnesota and elected to limit business to those states
where he had business contacts which included some referral business from the
WHY USA offices in those states. The Company will continue to pursue
business in the states of Minnesota and Wisconsin; it also intends to
distribute its NWF services through the placement of qualified loan
origination agents at each WHY USA franchise office. The Company currently
has one loan origination agent at the office of one of its Minnesota
franchisees. The Company hopes to have several more qualified agents at
various WHY USA franchise offices within the next six months. Timing on such
placement will be based on the Company's ability to meet mortgage broker
licensing requirements in each of the individual states where the Company
intends to operate its loan origination business. Some states will also
require licensing of the individual agents.
Until the Company achieves its goal of a mortgage loan originator for each
franchisee, franchisees can utilize the Company's office in Minnesota for loan
origination if they wish. Franchisees earn a commission on mortgage
applications completed by them and placed through NWF. The Company also
intends to make mortgage loan applications available through its web sites.
The Company has not yet determined when loan applications will be processed
through its web site.
Competitive Business Conditions/Competitive Position
----------------------------------------------------
in the Industry/Methods of Competition
--------------------------------------
The Company faces extreme competition on national, regional and local
levels. Competition will come from companies which offer similar multiple
real estate services. The Company will compete on three levels: (1) market
share for franchise sales, (2) market share for real estate transactions, and
(3) market share for loan origination.
Real Estate Market Competition
There are many real estate franchise companies which have a large presence
at the national level and have far more financial resources, personnel, and
experience than the Company. These companies also have the ability to respond
quickly to industry trends, and have, in response to such trends, begun
offering a wider variety of "non-traditional" or "associated" real estate
services to their clients. Many of these companies also offer mortgage loan
services themselves or through affiliates. They also have larger advertising
budgets, a stronger national presence, and more internet services available to
their clients including loan origination at their web sites. These larger
<PAGE> 16
companies are in the financial position to organize, acquire, and/or provide
additional nationwide services faster and sooner to their clients than the
Company will be able to. Some of the Company's national competitors include
Coldwell Banker, Prudential, Better Homes & Gardens Real Estate, Century 21,
and ReMax. Each of these companies is larger, offers similar and more
"bundled" real estate related services, and has a stronger reputation in the
industry. Each local franchise office will suffer competition from other
local real estate offices as well as the nationally franchised independent
offices. In Minnesota, two local real estate companies which compete with the
Company are Edina Realty and Burnett.
Competition for Loan Origination
The Company also suffers competition from a multitude of different
business organizations for loan origination market share. The Company must
compete not only with companies which provide such services in connection with
bundled real estate services but with companies which provide such services in
general such as banks and loan institutions as well as a diverse group of
internet companies that provide loan origination services through their web
sites. The majority of the Company's loan origination competition as of this
date are local competitors in the greater Minneapolis/St. Paul area as well as
"bundled" loan origination products offered through several national companies
including many of the national real estate franchise companies.
Prior to the Company's acquisition of NWF and during the first quarter of
2000, NWF also competed with Northwest Financial Group Inc., an affiliated
entity. Both entities were owned by Don Riesterer prior to the acquisition
transaction; subsequent to the acquisition transaction, Riesterer became a
principal of the Company and remained Northwest Financial Group's sole
shareholder. On April 1, 2000, Northwest Financial Group ceased conducting
mortgage loan business and is no longer a competitor of the Company.
Methods of Competition - Some Advantages of the WHY USA System
The Company believes its main method of competition is its one-stop
"bundled" services available to its customers/franchisees under the WHY USA
trademark combined with its unique listing and selling method, especially its
$990 For Sale by Owner Plan. The Company hopes that by offering its "bundled
services" and unique method of listing and selling, it will develop a presence
and WHY USA name recognition in the industry despite the extreme competition
it will suffer from several dominant companies offering networked real estate
services. It hopes to target those sellers interested in competitive listing
fees, flexible listing programs and the ability to save money through its
"$990 For Sale by Owner Plan." The following are some of the advantages of its
WHY USA System which the Company believes will help it to compete for market
share:
* Innovative Approach- The For Sale by Owner plan motivates sellers
to hold "open houses" whenever they choose since the WHY USA agent
will handle everything else for $990 if the seller finds a buyer
not working with an agent; buyers not working with agents are
automatically directed to the WHY USA agent.
* Flexibility - Sellers unite with a broker to receive a full listing
service or a "for sale by owner" plan; each option is
competitively priced.
* Value - Sellers receive a mortgage service that is guaranteed to
<PAGE> 17
offer them the lowest available commercial interest rate for which
they qualify. Sellers have certain options available to them which
may further reduce fees.
* Convenience - Sellers receive other real estate related services
such as a full title insurance company which can arrange for title
insurance, document preparation and closing services as requested.
Sellers may also have other related services available as the
Company expands and includes other services in its "bundled" system
as well as national marketing support.
* Extra Income -Franchise offices can generate extra income for their
office through loan origination fees, commissions on home
warranties, as well as other commissions when a buyer uses one of
the Company's other services. They have the advantage of additional
buyers approaching them through "for sale by owner" open houses.
* Franchise Financing - In an effort to promote franchise sales, the
Company also offers its own financing on franchise purchases or the
alternative of having the Company as a 50% partner in a franchise.
The Company currently has two (2) promissory notes outstanding on
purchased franchises. The Company is not currently a partner in any
WHY USA franchise office but intends to actively seek such
opportunities.
* Name Recognition - The Company has already achieved some name
recognition in the market through its trade mark WHY USA and
through its $990 Program. It was featured in two books: "How to
Sell Your Home in the '90s" by Carolyn Janik and in "Kiplinger's
Buying & Selling a Home" by the staff of Changing Times Magazine.
The Company has also was featured in the following periodicals:
"Smart Money Moves to Make Now" in the Wall Street Journal, Money
Magazine, the Miami Herald, the Real Estate Professional in an
article entitled "The Story Behind WHY USA," in a US News & World
Report cover story "Saving Brokers Fees," and in the Pittsburgh
Business Times.
* Loan Origination - the Company will continue to conduct its loan
origination business as a separate business. The Company has
succeeded in achieving some market penetration in Minnesota and
Wisconsin with its loan origination especially in the area of
refinancing and secondary mortgages. The Company attributes this to
management's market experience.
Sources and Availability of Raw Materials/Names of Principal Suppliers
----------------------------------------------------------------------
The Company does not have any supplier agreements currently in effect
although it consistently uses three main vendors who are familiar with the WHY
USA specifications for required materials and use of trademarks and the WHY
USA System. Because franchisees are required to conform to the Company's
specifications, they often use the Company's vendors. These vendors are ADA
Printing and Design, MacDaniel Sign Co., and Fiesta Business Forms. No
franchisee, however, is required to use these suppliers. The Company has
retained the right to designate certain suppliers at its discretion. The
Company and its franchisees often use Commonwealth Land Title, a national
title insurance company, to provide title insurance, and Prime One Home
Warranty, a national company which provides home warranties.
<PAGE>
Dependence on a Few Major Customers
-----------------------------------
The Company is not dependent on a few major customers. It has 66
franchisees which generate revenues for the Company; it also has a multitude
of customers for its mortgage origination business in the Minnesota area many
of which are unrelated to the Company's franchise business.
Patents, Trademarks, Licenses, Franchises, Concessions,
------------------------------------------------------
Royalties Agreements, Labor Contracts
-------------------------------------
Provisional Patent Application Made
The Company made provisional application on its WHY USA System which was
applied for in January 20, 2000 with the US Patent and Trademark Office.
Provisional patent application protects the Company's right to complete the
application process so long as it is done within one year from the provisional
application.
Trademark
The Company's trademark was registered by the U.S. Patent and Trademark
Office on the Principal Register as US Trademark Registration Number 1,524,821
on February 14, 1989. The ownership of the trademark was assigned to the
Company's wholly owned subsidiary, WHY USA NA, by the previous owner, WHY USA
Development Corporation, in September of 1998. The assignment was filed by WHY
USA NA with the US Patent and Trademark Office.
Exclusive License Granted in Arizona
WHY USA NA's ownership of the WHY USA franchise rights and system is
subject to an exclusive license owned by Mr. Tim Doughtery for franchise
sales, revenues from franchise sales, and revenues from transaction fees for
the State of Arizona. Such rights are not contained in a written agreement but
are a result of rights retained by Why USA Development (a non-affiliate), the
original franchise owner, which have been subsequently transferred. At the
present date, Mr. Tim Dougherty, the transferee, is entitled to full use of
the WHY USA name and WHY USA System in Arizona including the right sell and
service franchises. The significance of this license to the Company is that it
(1) cannot sell franchises in Arizona unless it reaches an understanding with
Doughtery; and (2) it is entitled to receive a total of 32.5% of all revenues
generated from WHY USA franchise sales and transactions fees in Arizona. As of
this date, Mr. Doughtery has three WHY USA real estate offices in the State of
Arizona.
Rights to Initial Franchise or Transaction Fees Granted Pursuant to Regional
Agreements and/or "Understandings"
The Company currently has six (6) written sales representative/
regional director agreements in effect with varying provisions, terms of
compensation, and obligations. All of those agreements provide for one or
more of the following with respect to the territory defined in each agreement:
a percentage of franchise sales, a percentage of all or certain specific
transaction fees within the territory, and/or a commission on franchise sales.
The Company also has an understanding with two members of management which
provide for commissions on franchise sales as well as two independent
contractors. The agreements and understandings ultimately provide for varying
commission/percentages on initial franchise fees that range from $2,500 to
$7,500 per sale or between 25% and 76% of the initial franchise fee. Four of
<PAGE> 19
the agreements provide for percentages of transaction fees to be paid which
range from 30% to 35% (which under the terms of two agreements have been
reduced by half because certain sales quotas were not met). As of this date,
the Company pays a percentage of transactions fees to regional sales
representatives/directors on a total of 18 out of its 76 franchises.
Percentages of transaction fees paid equals approximately 4% of its total
transaction fee revenues per month. The Company is negotiating to repurchase
one of these agreements. The Regional Sales Representation/Director Agreements
are discussed in detail under PART I, Item 1. DESCRIPTION OF BUSINESS,
Distribution Methods of the Products or Service, Franchise Sales.
The WHY USA Franchise
The Company is the owner of one real estate brokerage franchising system,
which is sold and operated under the trademark WHY USA. A summary of the
franchisee status as of January 1, 2000/1999/1998** is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Cancelled Reacquired Left the Total from Net
or Not by System System Left Operating
State Transfers Terminated Renewed Franchisor Other Columns At Year End
-------- --------- ---------- ------- ---------- -------- ---------- -----------
Alabama 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 1/1/1
Alaska 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 1/1/1
Arizona 0/0/3 4/0/0 0/1/1 0/0/1 0/0/0 4/1/5 0/5/5
Calif. 0/1/2 1/1/0 0/0/4 0/0/0 0/1/0 1/3/6 5/14/12
Colorado 0/0/0 2/0/1 0/0/0 0/0/0 0/0/0 2/0/1 0/2/2
Florida 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0
Illinois 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 1/1/1
Indiana 0/0/0 1/0/0 0/0/0 0/0/0 0/0/0 1/0/0 1/2/2
Iowa 0/0/0 0/2/0 0/1/0 0/0/0 0/0/0 0/3/0 6/6/9
Kansas 0/0/0 0/0/0 0/1/0 0/0/0 0/0/0 0/1/0 0/0/1
Louisiana 0/0/0 0/0/0 0/0/0 O/0/0 0/0/0 0/0/0 1/1/1
Maryland 0/0/0 0/0/0 0/0/0 0/0/0 0/0/1 0/0/1 2/4/4
Michigan 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 1/1/1
Minnesota 0/0/3 1/5/0 0/1/1 1/0/0 0/2/0 2/8/4 21/21/19
Missouri 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 1/1/0
Montana 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 1/1/1
Nebraska 0/0/0 0/2/0 0/0/0 0/0/0 0/0/0 0/2/0 8/10/11
Nevada 0/0/0 1/0/0 0/0/0 0/0/0 0/0/0 1/0/0 0/1/1
Ohio 0/1/0 1/0/0 0/0/1 0/0/0 0/0/0 1/1/1 3/4/3
Oklahoma 0/0/0 0/1/0 0/0/0 0/0/0 0/0/1 0/1/1 0/0/1
Oregon 0/0/0 0/1/0 0/0/0 0/0/0 0/0/0 0/1/0 1/1/2
Penna. 0/0/0 3/0/0 0/0/0 0/0/0 0/0/0 3/0/0 0/3/3
S.Carolina 0/0/0 0/1/0 0/0/0 0/0/0 0/0/0 0/1/0 0/0/1
S. Dakota 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 0/0/0 1/1/1
Tennessee 0/0/0 0/0/0 0/0/0 0/0/0 0/0/1 0/0/1 0/0/0
Texas 0/0/1 0/0/0 0/0/1 0/0/0 0/0/0 0/0/2 3/2/1
Virginia 0/0/1 0/0/0 0/0/0 0/0/0 0/0/0 0/0/1 1/1/1
Wisconsin 0/0/0 0/1/0 0/0/0 0/0/0 0/1/0 0/2/0 6/3/5
Wyoming 0/0/0 0/0/0 0/1/1 0/0/0 0/0/0 0/1/1 0/0/1
-------- --------- ---------- ------- ---------- -------- ---------- -----------
Totals 0/2/0 14/14/1 0/5/9 1/0/1 0/4/2 15/25/23 65/86/91
** The Company has sold eleven (11) additional franchises since January 1, 2000.
</TABLE>
Need for Government Approval/Effect of Existing or Probable
-----------------------------------------------------------
Government Regulations/Costs and Effects of Compliance
------------------------------------------------------
The sale of franchises is regulated by the Federal Trade Commission. The
Company must maintain a franchise offering circular in effect which has been
filed with the FTC and is updated a minimum of once every 12 months. In
addition, the following states where the Company may sell franchises are known
to the Company to have statutes which may supersede franchise agreements in
the franchisee's relationship to the Company, especially in regard to
termination or renewal: Arkansas, California, Connecticut, Delaware, DC,
<PAGE> 20
Hawaii, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Mississippi,
Missouri, Nebraska, New Jersey, Rhode Island, South Dakota, Virginia,
Washington and Wisconsin. The Company's WHY USA franchise is currently
approved for sale in California, Illinois, Michigan, Minnesota and Wisconsin
(all states requiring franchise registration) and it is registered in Texas,
Nebraska, and Louisiana. The Company also has registrations pending in
Virginia and Maryland. The Company does not sell franchises at this time in
the following states: Hawaii, Indiana, New York, North and South Dakota, Rhode
Island, and Washington (all states requiring registration). Individual agents
of WHY USA franchises must comply with rules regarding licensing of personnel.
The Company spends approximately $10,000 per year on regulatory compliance for
sales of its franchises.
The Company's loan origination business is currently licensed as a
mortgage broker in the state of Minnesota where it operates; it is not
required to have any special licenses for its agents in the State of
Minnesota. The Company will be required to license as a mortgage broker in
those states where it intends to conduct loan origination by placing qualified
loan origination agents at WHY USA franchise offices. Some of these states may
also require the licensing of the individuals agents. Cost of such state
registration/compliance will be between $500 and $1,000 for each state not
including associated legal expenses. In providing its loan origination
services the Company must comply with the provisions of the Truth and Lending
Act. There are no special costs to such compliance.
Other regulations which affect the Company are the Securities Act of 1933
which regulates the manner in which it offers securities privately and or to
the public; and the Securities and Exchange Act of 1934, which imposes certain
reporting obligations on the Company once it is a "full reporting" company.
The Company will become subject to reporting obligations within 60 days of the
filing of this registration statement. The Company estimates it will cost it
between $25,000 and $50,000 per year to comply with legal and accounting
obligations under the 1934 Act.
Status of Any Recently Announced Products or Services
-----------------------------------------------------
The Company has no recently announced products or services other than the
business of its recently acquired subsidiaries which is the only business of
the Company. It is discussed under the various subheadings above.
Research and Development Activities in the Past Two Years
---------------------------------------------------------
None.
Total Number of Employees
--------------------------
The Company currently has 24 full time employees who are not executive
officers of the Company: one (1) is employed by the Company at its principal
office in Bloomington, four (4)are employed by WHY USA NA in administrative
capacities and work out of the Menomonie office, two (2) are regional sales
representative employees who receive both a salary and commissions on
franchise sales, and 16 are employed by NWF as loan processors and other
personnel. The foregoing does not include the Company's executive officers who
serve on an "as needed" basis devoting approximately 30% - 90% of their time
to the Company. The Company has six (6) part time employees who perform
telemarketing and work out of the Company's office in Sebeka, Minnesota. It
also has four (4) contracts in effect with various individuals/ entities who
serve as independent contractor sales representatives/directors for
<PAGE> 21
territorial sales and/or support of WHY USA franchises, and are not considered
employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 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 an additional 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 the merger the Company acquired the business operations,
products and assets NWF and its subsidiary WHY USA NA. The public shell had no
revenues or operations.
Merger Treatment
----------------
The Company's merger with 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 reflect only the
operations of NWF for 1999. NWF was incorporated in June 1998, but did not
commence operations until early 1999. NWF originates residential mortgage
loans and resells them for a commission. The contribution of WHY USA NA has
been accounted for as a purchase transaction, therefore the operating
statements do not include the operations and cash flow of WHY USA NA, which
franchises real estate brokers. The financial statements of WHY USA NA are
presented separately as those of a purchased entity. The operations of WHY
USA NA have been combined with the Company's on a pro forma basis in the
footnotes to the Company's financial statements. The balance sheet at
December 31, 1999 reflects the assets of NWF and the acquisition of WHY USA
NA.
Results of Operations
---------------------
Year 1999/Year 1998
The Company's mortgage loan business generated revenues of $546,200 in 1999
<PAGE> 22
and a loss from continuing operations of $1,056. The mortgage loan business
was excellent in the first half of 1999 and turned abruptly downward in the
second half of 1999 as the federal reserve board increased rates resulting in
increased residential mortgage loan rates. This increase in loan rates
virtually dried up the company's mortgage loan refinance business which
accounted for a significant portion of the Company's revenues in the first
half of 1999. The Company reflected income of $9,372 from discontinuing
operations which represents the net rental income of an office building which
the Company returned to an affiliated entity on Dec 30, 1999. There were no
comparable operations in 1998 as the Company did not commence operations until
January 1999.
The operations of WHY USA NA reflect an increase in franchise fees from
transactions from $288,898 in 1998 to $365,014 for 1999 which was a result of
the acquisition of additional franchise interests in 1999. The new franchise
sales fell to $11,805 in 1999 from $24,075 in 1998. Total expenses increased
to $374,481 from $308,508 between 1999 and 1998; the most significant increase
was an increase in personnel cost to $101,605 from 30,893, and an increase in
office and administrative expenses to $30,385 from $19,256. The franchise
operations of WHY USA NA reflected income of $4,154 in 1999 vs. income of
$5,202 in 1998. Relative revenues per franchisee have remained relatively
consistent in 1999 and 1998. Amortization expense increased to $87,035 in 1999
from $55,318 in 1998 which reflects the amortization of additional franchise
costs on December 31, 1998. The Company began to gear up its franchise
marketing and sales operations during the fiscal year 2000. The Company's
real estate franchise fees are earned with a relatively small amount of direct
expense. The resulting gross margin has been used to fund legal expenses to
register the franchise in additional states, fund the expansion of marketing
efforts, pay interest expense on debt utilized to purchase franchises, and
compensate the owners.
The mortgage loan origination fee income is a more volatile source of
income stream. Reduced or declining interest rates directly impact refinancing
activities by increasing the likelihood of refinancing. Increased rates reduce
refinancing activities and NWF loses money during periods of increased
interest rates. Refinancing has accounted for up to 95% of the Company's fee
income from loan originations in 1999. NWF's second mortgage loan origination
business is increasing and is mitigating the Company's loss of its refinance
business. Second mortgages are utilized as equity builds in personal
residences to pay credit card or other high interest debt. New mortgage
loans, due to the WHY USA referral system, have increased steadily and now
account for over 40% of the NWF's fee volume. NWF is in the process of
shifting its mortgage loan origination business from refinance to new mortgage
loans mostly generated by referrals from the WHY USA franchise offices.
Liquidity and Capital Resources
-------------------------------
Revenues from Operating Activities
The Company derives revenues from: (1) franchise fees, (2) new franchise
sales, and (3) mortgage origination fees. On a pro forma basis in 1999, total
revenues from operations were $924,835 of which franchise fees from the
Company's franchisees accounted for $365,014 (or 39%), new franchise sales
totaled $11,805 (or 1%), and mortgage loan originations totaled $546,200 (or
59%). 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 transaction fees. Franchise fees are comprised of
ongoing transaction fees paid to the Company by its franchisees (65 in 1999)
<PAGE> 23
based on $95 per transaction or 6% of commission revenues, whichever is less,
provided each franchisee must pay a monthly minimum of $325. During 1999, the
Company had also reduced the minimum percentage to 4% of commission revenues,
and the monthly minimum payment to $225 under certain circumstances.
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.
Franchise Agreements
The Company requires each franchisee to enter into a Franchise Agreement.
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; the lesser of $95 per transaction
or 6% of revenues received from each transaction with a minimum fee
of $325 in per 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.
* 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
materials
The provisions of the Franchise Agreement are fully described on page 11
under "Franchise Agreement." The Company had 65 franchise agreements in effect
as of December 31, 1999 and has 76 in effect as of October 30, 2000.
Investing Activities
The Company increased its assets during 1999 to $2,115,534 through its
acquisition of NWF and its subsidiary WHY USA NA. The Company's assets at
December 31, 1999 are comprised of: $32,407 in accounts receivable, notes
receivable of $3,210, office and computer equipment (net of accumulated
depreciation) valued at $9,709; the WHY USA franchise system acquired on
December 31, 1999 valued at $1,994,589, organizational and patent costs of
approximately $5,000, and an advance from an affiliated party of $70,619. The
purchase of the WHY USA franchise and System was accomplished through the
payment by NWF's then sole shareholder of a combination of cash and promissory
notes totaling $2,026,400.
Liabilities/Contingent Liabilities
The Company has total liabilities as of December 31, 1999 of $50,720 which
includes accounts payable of $200, an advance from Northwest Financial Group,
Inc. of $18,391, $26,400 due Donald Riesterer, and deferred revenues on future
<PAGE> 24
conference held for franchisees in January of 2000 of $5,729. As of December
31, 1999, the Company was not committed under any operating lease agreements.
However, on February 1, 2000, the Company entered into a sub-lease with
payments of $2,500 per month through October 31, 2000, with total future
minimum sub-lease payments of $ 22,500. The Company's three other office
facilities are rented on a month to month basis from affiliates.
Financing Activities
Funding of Losses Prior to Acquisition of Subsidiaries
Triam, Inc. was inactive from approximately 1990 until its acquisition of
its subsidiaries in December 1999. Triam, Inc. has no cash or assets. Triam,
Inc. funded its expenses by issuing 5,116,000 shares of common stock to
Castlewood Corporation who performed various administrative tasks. These
services included maintaining an office in Salt Lake City for the Company's
use, providing telephone and answer service, tax return and annual report
filing requirements, and shareholder communication and correspondence, as
needed. Triam, Inc. issued shares at par value for its share of the above
expenses. The par value was selected because Triam, Inc. had no assets, no
operations and no market for its common stock. The issuance of shares at par
value was purely arbitrary and bears no relationship to Triam's net value of
its assets, fair value or any other normal criteria in determining a fair
price or consideration.
Funding of the Acquisition of NWF and WHY USA NA
The Company's purchase of NWF (which included NWF's ownership of WHY USA
NA) was accomplished through an acquisition of assets whereby the Company
acquired all of the assets and shares of NWF, in exchange for the issuance of
10,000,000 of its unregistered common shares. The transaction was completed
on December 31, 1999, concomitant with NWF's purchase of all of the
outstanding shares of WHY USA. The WHY USA NA purchase was completed by NWF's
sole shareholder, Donald Riesterer. In general, prior to their acquisition by
the Company, the operations of NWF and WHY USA NA were supported by internally
generated funds, as well as, from time to time, advances from shareholders of
the respective entities. In the case of NWF this included Donald Riesterer
and/or Northwest Financial Group, Inc., an entity controlled by him. In the
case of WHY USA NA advances were made by its three shareholders and/or Quality
Investments, an entity controlled by the three WHY USA NA shareholders.
Cash Requirements and Expansion Plans
The Company incurs the following expenses in its operations:
* commissions based on a percentage of initial franchise fees ranging
from 26% to 76% on sale of new franchises; commission obligations
are based on existing oral and written agreements with independent
contractors, employees and certain officers and directors and are
discussed in detail on pages 14 and 15;
* commissions on percentages of transaction fees ranging from 30% (or
one-half of 30% if certain quotas are not met)to 35% paid to
certain sales representatives for revenues derived from franchisees
in their territories; these commissions on percentages of
transaction fees are based on agreements with Diane Butts, Jerry
Jarvis, Molinsky/Day dba Mainstreet Realty; and Dale Erks and are
described on pages 14 - 15.
<PAGE> 25
* commissions on loan originations which are paid to loan origination
employees NWF as part of their compensation;
* appraisal and credit report fees
* office and administrative expenses
* personnel costs
* state registration fees;
* equipment and trade show expenses;
* marketing expenses including advertising and promotional material,
travel, sales personnel expenses and recruiting fees.
* interest, depreciation and franchise amortization expenses
Although the Company realized minimal net income in 1999, and had
sufficient revenues from operations to meet its cash requirements, during the
first half of 2000 the Company operated at a loss due to expanded working
capital requirements. This trend will likely continue as the Company
initiates its expansion plans. The Company does not have sufficient cash flows
to meet its increased operating expenses and the expansion plans which it
believes are necessary for the Company to succeed. The Company's working
capital requirements during the next 12 months are approximately $1.5 Million
with approximately $1,000,000 in anticipated revenues over the same time
period. The Company anticipates utilizing $500,000 of its private placement
proceeds to cover this shortfall. The Company estimates its General and
Administrative expenses will be between $200,000 and $250,000 per quarter
including personnel, rents, and legal and accounting expenses. This is a
significant increase over the pro forma general and administrative expenses of
1999, and is attributed to the Company's gearing up to expand franchise sales
and increased legal and accounting expenses. Mortgage loan origination fees
and franchise costs will be directly related to revenues in those categories,
and, based on pro forma December 31, 1999 expenses, will cost the Company
approximately $110,000 per quarter. The Company also will experience
approximately $30,000 to $40,000 in travel and marketing expenses per quarter
in the next twelve months. The Company expects revenues of approximately
$250,000 per quarter based on the number of existing franchises and quarterly
results for its first two quarters.
The number of the Company's franchisees decreased over the last three years
prior to the Company acquisition of the franchise system from 91 at year end
1997 to 65 at the Company's acquisition of WHY USA NA and the Company is
aggressively pursuing franchise sales. During 2000, it has increased its
franchisee offices 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
<PAGE> 26
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 negotiating
with Diane Butts for purchase of her 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 $400,000 for expansion of telemarketing,
loan agents on site, employee recruitment and territory buyouts; and $600,000
for strategic alliances and acquisitions.
Private Placement Offering
In order to fund a portion of its expansion plans, on January 24, 2000,
the Company commenced a private placement of up to 1,500,00 units at an
offering price of $1.00 per unit. Units are comprised 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. The Company intends to use $500,000 of the
proceeds towards working capital expenses to support the growth of current
operations and the balance for marketing and operation expansion and/or
acquisitions. $100,000 of this was expended in the Company's first fiscal
quarter. The Company sold the maximum 1,500,000 Units in the private
placement and issued all subscribed for securities at the close of the
offering. The offering was closed on August 31, 2000 and the shares and
warrants have been issued.
Seasonal Aspects
The Company realizes less revenues in general in the winter months
especially just prior to Christmas.
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.
<PAGE> 27
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. As of this date, the Company is dependent on obtaining
funding necessary for both expanded working capital requirements and expansion
through its current private placement offering. The Company closed its
private placement offering on August 31, 2000 with $1,500,000 in proceeds.
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. Even with its private placement offering successfully
completed with gross proceeds of $1,500,000, the proceeds will be 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
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.
<PAGE> 28
Control by Management
Even assuming the successful completion of the current private placement
offering, the Company's officers and directors and affiliated persons,
especially Don Riesterer, will continue to hold a large percentage of the
Company's outstanding shares. Accordingly, they will be able to control the
Company's business, operations and corporate policies, including the ability
to manage all operations, appoint all future executive officers, determine
management salaries and other compensation, and elect the members of the
Board. Current Management controls approximately 42% of the Company's
outstanding shares taking into account the 1,500,000 shares subscribed for in
the recently completed private placement.
Conflicts of Interest
Each of the Company's officers and directors have other interests to which
they devote a significant portion of their time. Leslie Pearson has a legal
practice, as does Greg Miller; each devotes approximately 30% of their time to
the Company's business. David O. Thomas owns his own independent Why USA
franchises although he does devote a majority of his time to the Company.
Although Donald Riesterer intends to devote a majority of his time to the
Company, he has numerous business interests which he manages including an
affiliate, Northwest Financial Group, Inc. Northwest Financial Group has
historically directly competed with the Company for business although in April
2000, the entity ceased business operations which would be considered
competitive with the Company. Mr. Riesterer also owns several office complexes
some of which the Company rents. There can be no assurance that if a conflict
of interest arose that it would be resolved in favor of the Company.
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.
Uncertainty of Protection of Intellectual Property
The Company regards its intellectual property including its WHY USA
System franchise program, trademarks and trade names, and its confidential
Operations Manual and trade secrets as being particularly valuable to the
Company's business operations. The Company is relying on the uniqueness of its
full service WHY USA System, as well as its unique listing and selling methods
to help it penetrate and compete in the real estate business. The Company
will rely on general trademark laws, confidentiality agreements, and certain
other protective matters to protect its intellectual property. The Company
has filed for provisional patent protection on its WHY USA System but must
make a patent application before 2001. There can be no assurance, however,
that the various steps taken will protect the proprietary intellectual
<PAGE> 29
property rights, will be adequate or effective, or that third parties will not
assert infringement claims against the Company regarding its proprietary
rights. When and if the Company achieves patent protection, there is no
guarantee that a third party will not violate the Company's patent rights
forcing the Company to assert an action or that the Company will be successful
in such assertion.
ITEM 3. DESCRIPTION OF PROPERTY
The Company currently rents space for its management and administrative
offices in Bloomington, Minnesota in office space owned by the Northwest
Financial Group, Inc., an affiliated entity controlled by Donald Riesterer.
NWF shares the space with its parent for the administration of its business
operations. The Company rents approximately 2,300 square feet on a month to
month basis for $2,000 per month. The $2,000 per month rate is based on
amounts charged to other tenants in the same building.
Beginning in the year 2000, NWF runs its processing center out of 1,500
square feet of office space in Minneapolis, Minnesota which is rented on a
month-to-month basis. The processing center shares space with an independent
franchise, WHY USA Real Estate Service; each party pays $625 per month.
As of February 1, 2000, WHY USA NA began operating out of Menomonie,
Wisconsin. It subleases 6,000 square feet of office space from Douglas
Larson, one of its former principals, for $2,500 a month. Larson's lease, and
therefore the Company's sublease, expires in October of 2000. The space is
sufficiently large for the conduct of WHY USA NA's business operations as
well as to accommodate up to 25 full-time telemarketing personnel. The Company
intends to negotiate for a lease directly with the owner once the existing
lease expires if the space proves to meet the Company's needs over the next
several months. The terms of the lease are comparable to other similar leases
in that geographical location.
Also beginning in 2000, the Company's six (6) part time telemarketers work
out of a small office in Sebeka, Minnesota. The office space is in a building
owned by Donald Riesterer. The office is comprised of approximately 1,500
feet of space, and is rented on a month to month basis for $ 500 per month.
The month to month rate is comparable to other rents in that locale.
Prior to the Company's acquisition of NWF, NWF owned commercial property
in Minnesota which it leased. The property was quit claimed to an entity
controlled by Mr. Riesterer, NWF's sole shareholder, prior to the acquisition
transaction; that property was not a part of the assets of NWF being acquired
by the Company.
ITEM 4. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following tables set forth: Table 1 - the amount and nature of
beneficial ownership of each person known to a beneficial owner of more than
five percent of the issued and outstanding shares of the Company and Table 2 -
the amount and nature of beneficial ownership of each of the executive
officers and directors of the Company. The following information is based on
31,400,460 shares issued and outstanding as of December 31, 1999; it does not
reflect the results of the 1,500,000 shares issued in the Company's private
placement offering which closed on August 31, 2000. (Footnote 4 below sets
forth the ownership percentages as of the date hereof taking into account the
effects of the issuance of 1,500,000 shares in the private placement.)
<PAGE> 30
Table 1: SECURITY OWNERSHIP OF 5% BENEFICIAL OWNERS
_____________________________________________________________________________
Name and Amount and
Address of Nature of
Title of Beneficial Beneficial Percent of
Class Owner Owner(1) Class
--------- ------------- -------------- ----------
Common Donald Riesterer 11,116,000(2) 35.40%
8301 Creekside
Unit 101
Bloomington MN 55437
Table 2: SECURITY OWNERSHIP OF MANAGEMENT
_____________________________________________________________________________
Name and Amount and
Address of Nature of
Title of Beneficial Beneficial Percent of
Class Owner Owner(1) Class(4)
-------- ------------------- ------------- ----------
Common Donald Riesterer 11,116,000(2) 35.40%
8301 Creekside
Unit 101
Bloomington MN 55437
Common Gregory Miller 300,000 0.95%
869 McDiarmad Dr
Hudson WI 54016
Common Leslie Pearson 500,000 1.59%
7710 Computer Ave #131
Edina MN 55435
Common Lisa A. Gunberg 1,100,000 3.50%
8025 Xerxes Ave So.
Bloomington MN 55431
Common David O. Thomas(4) 850,000(3) 2.71%
2110 US Highway 12
Menomonie WI 54751
-------------
Officers and
Directors as a group (6 Persons) 13,866,000 44.15%
(1) The Company's officers and directors had the right to subscribe for Units
in the Company's current offering; none of the those individuals subscribed
for Units.
(2) Includes 5,116,000 shares transferred to Don Riesterer from Castlewood
Corporation, a former affiliate, and held in the record name of Northwest
Financial Group, Inc., a corporation which is controlled by Don Riesterer, its
sole shareholder. Riesterer currently has 1,000,000 of his shares escrowed as
security on a promissory note; he still retains voting power over such shares.
(3) David O. Thomas' shares are his proportionate beneficial interest in a
certificate for 850,000 shares owned of record by David Thomas, Douglas
Larson, and Emil Gluck. Although Mr. Thomas' beneficial ownership is for
one-third of the certificate (283,333 shares) the three individuals have
combined voting power over 850,000 shares.
<PAGE> 31
(4) Beneficial ownership percentage ownership positions as of this date,
taking into account the issuance of 1,500,000 shares in the Company's private
placement which closed on August 31, 2000 (32,900,460 shares then outstanding)
are as follows: Donald Riesterer - 33.79%, Gregory Miller - .91%, Leslie
Pearson - 1.51%, David O. Thomas - 2.58%, Lisa A Gunberg - 3.34%. Officers and
directors as a group own 42.13%
Change in Control Arrangements
None.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Officers and Directors
The names and ages of all directors and executive officers of the
Company, along with their respective positions, term of office and period such
position(s) was held, is as follows:
Name Age Positions Held (1) Director Since
____________________ ____ _____________________________ ______________
Donald Riesterer(2) 32 Chief Executive Officer, Dec. 31, 1999
Chairman of the Board of
Directors
Greg Miller (3) 31 President, Director Dec. 31, 1999
Leslie Pearson(4) 37 Secretary/Treasurer, Director Dec. 31, 1999
Lisa Gunberg 32 Vice President, Director Dec. 31, 1999
David Thomas (5) 59 Director Dec. 31, 1999
James Gessert 47 Director Dec. 31, 1999
(1) Each of the above individuals will serve in their respective capacities
until the next annual meeting of the shareholders or until a successor
is duly qualified and elected.
(2) Also a director of WHY USA NA and sole director, President and CEO of
NWF.
(3) Also Vice President and a director of WHY USA NA.
(4) Also Secretary/Treasurer and a Director of WHY USA NA and
Secretary/Treasurer of NWF.
(5) Also President, CEO and a Director of Why USA NA.
------------------------
Biographical Information for Officers and Directors
---------------------------------------------------
DONALD L. RIESTERER, is President and principal owner of Northwest
Financial Group, Inc., an affiliated entity based in Minneapolis, Minnesota.
Northwest Financial Group was originally formed to provide loan origination
services but now exists as a holding company for real estate. He was founder,
sole shareholder, and sole director of NWF from its inception in 1998 until
its acquisition by the Company in December of 1999. Mr. Riesterer has served
<PAGE> 32
as Vice-President/Sales and Marketing for Display Carousels Inc. from 1993
through 1996, marketing firm. and as district manager of a financial service
firm, Primerica Financial Service where he was employed from 1991 to 1993. He
is a licensed real estate agent, a life/health insurance agent, and a loan
originator in several states. He devotes a majority of his time to the
Company. Mr. Riesterer attended College of St Thomas from 1986 through 1990
where he studied theology and communications.
GREG M. MILLER is a partner and shareholder in the law firm of Gregory
Miller and Associates, Ltd. of Minneapolis Minnesota which he founded on
January 1, 2000. Prior to that, from February of 1997 through December of
1999, he was a partner and shareholder of Davis, Dodd, Levine & Miller, Ltd.
of Minneapolis, Minnesota. Before 1997 he was a shareholder/partner in Levine
& Miller. Mr. Miller has practiced law in the Minneapolis/St Paul area since
1994. His principal areas of practice include commercial and residential real
estate transactions, and various corporate and business transactions. He
devotes approximately 30% of his time to the Company. Greg Miller received a
juris doctor degree from William Mitchell College of Law in 1994.
LESLIE M. PEARSON is a practicing attorney and is the owner of Leslie M.
Pearson Associates PA of Edina, Minnesota, which she founded in April of 1994.
Her principal areas of law practice include complex business and tax matters
for closely held businesses, personal estate planning, and various general
corporate matters. She devotes approximately 30% of her time to the Company.
Leslie Pearson received her Bachelor of Arts in Mathematics and History from
St. Olaf College in Northfield, Minnesota in 1985; in 1988 she received her
juris doctor degree from William Mitchell College of Law in St. Paul,
Minnesota.
LISA A. GUNBERG is a principal loan officer of Northwest Financial Ltd.
where she has served in such capacity since 1998. From 1997-1998, she was
employed as a proposal writer by Health Risk Management, Inc. of Bloomington,
Minnesota; during 1995-1996 she worked as a market development analyst for
Universal Hospital Services also located in Bloomington. For the four years
prior to that Ms. Gunberg was an insurance specialist at Park Nicollet Medical
Center in St. Louis, Minnesota. She is a licensed real estate agent in the
State of Minnesota as well as a loan originator in several states. Her
business experience includes all aspects of marketing, ranging from market
research to promotion of new business opportunities. Lisa Gunberg received a
Bachelor of Arts degree in Business Management from Gustavus Adolphus College
of St. Peter, Minnesota in 1990; she earned her masters degree in Business
Communications in 1998 from the University of St. Thomas of Minneapolis,
Minnesota.
DAVID O. THOMAS is President of the Company's subsidiary WHY USA NA, a
position held since its inception in July of 1998. Prior to its inception he
was president of its predecessors since 1996. Mr. Thomas owns and operates
three WHY USA franchise offices in northwest Wisconsin. He has 20 years of
experience in building and developing condos, homes and commercial real estate
and currently serves as President of Northern Waters Board of Realtors. Mr.
Thomas attended the University of Minnesota, and has been licensed to sell
real estate in Wisconsin since 1973. He has also taught Real Estate License
Law courses at the technical school in northwest Wisconsin. He devotes the
majority of his time to the Company's business.
JAMES H. GESSERT is Vice President of Commercial Loans of Liberty State
Bank of St. Paul, Minnesota where he manages a portfolio of $25,000,000 in
commercial loans. He has worked for Liberty State Bank since April of 1991.
<PAGE> 33
Prior to that he held various management positions in the banking industry
including Vice-President/Branch Manager of First National Bank of Brooklyn
Park, Assistant Vice President/Commercial Loans of First National Bank in
Anoka, and a National Bank Examiner for the federal Controller of the
Currency.
Family Relationships
--------------------
There are no familial relationships between the Company's officers and
directors.
Significant Employees
----------------------
None
Involvement in Other Public Companies
-------------------------------------
None of the Company's officer and directors hold any positions with any
companies which would be considered "reporting" public companies.
Involvement in Certain Legal Proceedings
----------------------------------------
No present or former director, executive officer, or person nominated to
become a director or executive officer of the Company:
(1) Filed a petition under federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an
executive officer at or within two years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offences);
(3) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him or her from or
otherwise limiting his/her involvement in any type of business, securities or
banking activities;
(4) Was found by a court of competent jurisdiction in a civil
action, by the Securities and Exchange Commission or the Commodity Futures
Trading Commission, to have violated any federal or state securities law, and
the judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended, or vacated.
ITEM 6. EXECUTIVE COMPENSATION
Executive officers of the Company were paid an aggregate of $56,400 in the
fiscal year ended December 31, 1999 of which the Company's CEO, Donald
Riesterer received $21,900. Compensation through December 31, 1999 was paid
by the Company's subsidiaries.
The following table sets forth certain information as to compensation
received by the Company's Chief Executive Officer, who is also a director of
the Company, as of December 31, 1997, 1998 and 1999. None the Company's
<PAGE> 34
executive officers received more than $100,000 US per year. Don Riesterer is
also CEO of NWF. The CEO of WHY USA NA is David O. Thomas.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------- ------------------------
Annual Compensation Awards Payouts
------------------------------- ---------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Re- All
Name Annual stricted Other
and Compensa- Stock Underlying LTIP Compensa-
Principal sation Awards Options/ Payouts tion
Position Year Salary($) Bonus($) ($) ($) SAR's(#) ($) ($)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald Riesterer(1) 1999 -0- -0- $ 21,900(1) -0- -0- -0- -0-
Chief Executive 1998 -0- -0- -0- -0- -0- -0- -0-
Officer, Director 1997 -0- -0- -0- -0- -0- -0- -0-
CEO, Director,
President of NWF
------------------------------------------------------------------------------------------------
(1) Mr. Riesterer became CEO of the Company on December 31, 1999. Compensation reported was
received from the Company's subsidiary prior to its acquisition by the Company. He did not
receive any compensation during 1998 and 1997. His compensation was received as a result of
services performed for NWF; there are no specific understandings with Riesterer as of this date
regarding compensation during 2000 although it is likely he will be compensated for any services
he provides to the Company.
</TABLE>
Options/SAR Grants
-------------------
None.
Aggregated Option/SAR Exercises and Fiscal Year End Option/SAR Value Table
--------------------------------------------------------------------------
None
Long Term Incentive Plans
-------------------------
There are no long term incentive plans in effect and therefore no awards
have been given to any executive officer in the past year.
Compensation of Directors
-------------------------
Beginning May 5, 2000, the Company's directors are paid $250 for each
Board of Directors meeting they attend; the Company pays no other fees to
members of the Board of Directors for the performance of their duties as
directors. It is anticipated that they may receive additional compensation in
the future for such service in the form of a stock option plan. The Company
has not established committees of the Board of Directors.
Employment Contracts and Termination of Employment
---------------------------------------------------
and Change in Control Arrangements
----------------------------------
There are no written employment contracts in effect nor are there any
termination of employment or change of control arrangements in effect. The
Company has an understanding with two of its executive officers, Leslie
Pearson and Greg Miller, who each receive a nominal monthly salary/retainer of
$500. In addition, Lisa Gunberg originates loans for one of the subsidiaries
<PAGE> 35
and receive compensation that is normal and usual for the work performed.
Future Compensation of Executive Personnel
------------------------------------------
Although it is likely that at some time in the future the Company will
enter into formal employment agreements with some or all of its executive
officers, or may initiate some form of compensation or incentive plan which
might include restricted stock awards or stock options, no such agreements or
understandings have been entered into.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two years, transactions or series of transactions or
currently proposed transactions, to which the Company, or any its subsidiaries
was or is to be a party, in which the amount exceeds $60,000 and in which any
executive officer or director or any 5% security holder or any member of the
immediate family of any of the foregoing persons had a material interest are
as follows:
WHY USA Note to Quality Investments.
------------------------------------
Prior to the Company's acquisition of WHY USA NA, from December 1996
through February 1998, WHY USA NA's three founders, Douglas Larson, Emil Gluck
and David O. Thomas, contributed capital sufficient to purchase the WHY USA
System, copyrights, trademarks and existing franchise agreements equaling
approximately $1,300,000. Each of these gentlemen individually made a cash
contributions of $162,000; the balance of the funds contributed for the
franchise acquisition were loaned to WHY USA NA by Thomas/Larson/Gluck and
other persons through a separate entity, Quality Investments. In connection
with the loans, a promissory note was executed by WHY USA NA in the principal
amount of $847,500, payable to Quality Investments, Inc., dated April 15,
1999, with interest of 8%. The note was paid in full as of December 30, 1999.
Each of the principals of Quality Investments is therefore considered "paid"
for his proportionate share of the principal and interest due under the note,
including Mr. Thomas. Thomas is currently a director of the Company.
Share Issuance to Donald Riesterer as Part of the Acquisition of NWF and
------------------------------------------------------------------------
Transfer to Other Affiliated Parties
------------------------------------
On December 31, 1999, at the acquisition of NWF by the Company, Donald
Riesterer, NWF's sole shareholder, became the beneficial owner of 10,000,000
shares of the Company issued in exchange for all of the outstanding shares of
NWF. The certificate was issued to NWF on December 16, 1999, the date of the
Acquisition Agreement, although all of the transactions necessary to
consummate the acquisition were not accomplished until December 31, 1999. The
10,000,000 shares were transferred to Riesterer as NWF's sole shareholder in
January of 2000. Riesterer was elected to the Company's Board of Directors at
the consummation of the transaction and also serves as its CEO and is a
director of each of its subsidiaries.
Three other officer/directors of the Company derived benefit from the
Company acquisition transaction; each was given a portion of Riesterer's
10,000,000 shares. Leslie Pearson, Secretary/Treasurer and a director of the
Company received 500,000 shares. Gregory Miller, President and a director of
the Company received 300,000 shares. Lisa Gunberg, the Company's Executive
Vice President and a director received 1.1 Million Shares. Riesterer
transferred the shares as compensation for services provided by those
individuals in the transactions leading up to the acquisition transaction as
<PAGE> 36
well as in the transition phases of the reorganized entity. The Company has
accounted for this transaction as a $ 390,000 compensation expense on its
March 31, 2000 financial statements.
Castlewood Shares Transferred to Entity Controlled by Don Riesterer
-------------------------------------------------------------------
Between December 16, 1999 and January 24, 2000, Castlewood Corporation, a
majority shareholder of the Company prior to its acquisition, transferred
5,116,000 of its shares to Northwest Financial Group, Inc., a corporation 100%
owned by Don Riesterer. Castlewood was an affiliate of the Company up through
the acquisition transaction. Riesterer paid Castlewood $150,000 for the shares
which Castlewood agreed to sell as an to inducement to enter into the
transaction. The transfer reduced Castlewood's ownership to 222,232 shares.
Riesterer & Thomas: Their Relationships to the NWF Purchase of WHY USA NA
-------------------------------------------------------------------------
Background
On December 31, 1999, NWF, through its sole shareholder, Don Riesterer,
acquired WHY USA NA. The transaction was originally commenced between
Northwest Financial Group, Inc. (a company founded by Donald Riesterer who is
its sole shareholder) and WHY USA NA. Northwest Financial Group, Inc. was a
party to the Stock Purchase Agreement with WHY USA NA on September 24, 1999,
and a party to the amended agreement on December 30, 1999. On December 30,
1999, Northwest Financial Group, Inc. assigned its interest in the purchase
agreements to Donald Riesterer, its sole shareholder, who completed the
acquisition including the payment made to the three WHY USA NA shareholders.
The acquisition was accomplished through the purchase of all of the
outstanding shares of WHY USA NA from its three selling shareholders: Douglas
Larson, Emil Gluck and David O Thomas for a total of $2,026,400. (David O.
Thomas is a director of the Company and its subsidiaries.) Donald Riesterer
individually paid the $2,026,400 WHY USA NA purchase price in a combination of
$650,000 cash and three promissory notes. Two of the notes are made to the
original selling shareholders of WHY USA NA: Larson, Gluck and Thomas: one
for $500,000, and one for $850,000. The third note is to Riesterer for $26,400
and has been repaid. David O. Thomas' proportionate interest in the
transaction is $675,466. Thomas, who is a director of the Company, and an
officer and director of each of its subsidiaries, is one of the founders of
the initial WHY USA NA partnership in January 1997 (which funded the
acquisition of the WHY USA System), a principal in Mid America Realty (a
predecessor party in interest to the WHY USA franchise system acquisition),
and a founder of and principal in WHY USA NA, the corporation.
Immediately upon the completion of Riesterer's acquisition of WHY USA NA,
he contributed the acquired WHY USA NA shares to NWF for 90,000 of its shares;
all of his shares of NWF (which equaled all of NWF's outstanding shares) were
acquired by the Company in its acquisition of NWF, discussed above.
Northwest Financial Group, Inc. is an affiliate of the Company based
upon its common control by Donald Riesterer.
Riesterer's Promissory Notes to Larson/Gluck/Thomas
Donald Riesterer individually executed two notes on December 30, 1999 to
WHY USA NA's three selling shareholders including David O. Thomas, a current
Director of the Company.
The terms of the notes are as follows:
<PAGE> 37
Note 1: is in the principal amount of $850,000 with an interest rate
of 8.75%. It is due and payable on December 31, 2000 and requires interest
only monthly payments of $6,197.92 until such date. The note is secured with
a mortgage on real property owned by Riesterer and is guaranteed by Northwest
Financial Group, Inc., a company in which Riesterer is the sole shareholder
but which is unaffiliated with the Company and its subsidiaries. As an
incentive to enter into the Note, Riesterer gave 850,000 shares of his stock
in the Company to the lenders. Thomas/Larson/Gluck also agreed that the
principal would be forgiven if at any time during the one year following the
date of the Note the bid price of the Company's common stock in the over-the-
counter market averages $1.00 for a 4 week period and a buyer is available for
the shares. There is no public market for the Company's common stock at this
date. Riesterer is current in his obligations under the Note.
Note 2: is in the principal amount of $500,000 and bears an interest rate
of 8.75%. Payments are interest only and are $3,645.83 per month. The
principal is due on December 31, 2000. The note is secured by 1,000,000 of
Riesterer's shares of the Company which are currently escrowed for this
purpose and may be sold by lenders if Riesterer defaults under the Note.
Riesterer is current with his obligations under this Note.
Ownership of WHY USA Franchises by David O. Thomas
--------------------------------------------------
David O. Thomas is the owner of Mid America Realty; Mid America Realty is
party to some of the agreements through which the rights to the WHY USA System
were initially acquired. Mid America is an independently owned and operated
franchise. Dave Thomas owns a total of three (3) WHY USA franchises in
Wisconsin. The three franchises generated less than 1% of total revenues from
transaction fees received by the Company in 1999 and less than 2% in 1998.
Compensation to Officers and Directors.
--------------------------------------
The Company has agreed to compensate David O. Thomas and Donald Riesterer
who are officers and/or directors of the Company and its subsidiaries $7,500
or 76% of the initial franchise fees for any franchise sold by them; the
Company, therefore, will compensate these individuals at a higher rate for
franchise sales then other sales representatives. Although the possibility
exists that these gentlemen could earn substantial compensation related to
such sales activities, they would need to sell more than eight (8) franchises
a year to earn $60,000 in franchise sales commissions; these individuals have
sold no franchises in 1999 and received no franchise commissions during 1999.
The Company also pays a monthly salary of $500 each to both Leslie Pearson and
Greg Miller. Miller and Pearson also provided legal services to the Company in
1999 for which they were compensated. These individuals will also likely
provide legal services for the Company or its subsidiaries in the future for
which they will be compensated at a rate that is standard for the type of
legal services performed.
Rents and Subleases
-------------------
The Company subleases its office space in Menomonie from a former director
of WHY USA NA, Douglas Larson. Douglas Larson resigned as a director of WHY
USA NA on December 30, 1999. The Company rents office space from Donald
Riesterer for both the Company's office in Bloomington and a satellite
telemarketing office in Sebeka. The Company accrued its rental payments to
Donald Riesterer during its first two quarters; however, the same were paid in
full during its third fiscal quarter.
<PAGE> 38
Affiliation of Northwest Financial Group, Inc. with NWF and the Company
-----------------------------------------------------------------------
Both Northwest Financial Group Inc. and NWF were founded by Donald
Riesterer who was also each corporation's sole shareholder. Up until the
acquisition of NWF on December 31, 1999, both entities were in the business of
loan origination; and, in fact, Northwest Financial Group Inc. was responsible
for payroll for both entities which has been repaid by NWF. The business
affiliation of the two entities ceased on April 1,2000 when Northwest
Financial Group, Inc., changed its business purpose to real estate holding.
Donald Riesterer remains Northwest Financial Group, Inc.'s sole shareholder,
and Northwest Financial Group, Inc. is still considered an affiliate of the
Company.
Transactions with Promoters
----------------------------
None.
ITEM 8. DESCRIPTION OF SECURITIES
Authorized Capital
------------------
The authorized capital stock of the Company consists of 350,000,000 shares
of stock: 300,000,000 shares of common stock, par value $0.001 and 50,000,000
shares of preferred stock, no par value.
Common Stock
------------
The authorized common stock of the Company consists of 300,000,000 shares
of Common Stock, $0.001 par value per share. The holders of Common Stock (i)
have equal ratable rights to dividends from funds legally available therefore,
when, as and if declared by the Board of Directors of the Company; (ii) are
entitled to share ratably in all of the assets of the Company available for
distribution or winding up of the affairs of the Company; (iii) do not have
preemptive subscription or conversion rights and there are no redemption or
sinking fund applicable thereto; and (iv) are entitled to one non-cumulative
vote per share, on all matters which shareholders may vote on at all meetings
of shareholders.
Preferred Stock
---------------
The Company also has 50,000,000 Preferred Shares authorized, no par value,
and with no voting power. There are no preferred shares outstanding. As of
the date hereof, the Company has not designated a class or series of preferred
shares.
Non-Cumulative Voting
----------------------
The holders of shares of Common Stock of the Company do not have
cumulative voting rights which means that the holders of more than fifty
percent (50%) of such outstanding shares, voting for the election of
directors, can elect all of the directors to be elected, if they so choose,
and, in such event, the holders of the remaining shares will not be able to
elect any of the Company's directors. The Board of Directors holds
approximately 44% of the issued and outstanding shares of the Company.
Provisions Regarding Changes in Control
None.
<PAGE> 39
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
The Company has no public market for its common stock. The Company intends
to apply for a listing on the National Association of Securities Dealers
("NASD") Over-the-Counter Bulletin Board ("OTCBB"). Under current NASD rules,
an issuer cannot maintain or apply for a listing unless it is current in its
reporting obligations under Sections 13 or 15(d) of the Securities and
Exchange Act of 1934 (the "1934 Act"). The filing of this registration
statement will trigger reporting obligations for the Company
under the 1934 Act sixty (60) days from the filing date. Once the Company
clears SEC comments it will be entitled to make application to the OTCBB.
Holders
At April 30, 2000, the Company had approximately 859 shareholders.
Dividends
The payment by the Company of dividends, if any, in the future, rests
within the discretion of its Board of Directors and will depend among other
things, upon the Company's earnings, its capital requirements and its
financial condition, as well as other relevant factors. The Company has not
paid or declared any dividends to date due to its present financial status.
The Company does not anticipate paying dividends on its Common Stock in the
foreseeable future but plans to retain earnings, if any, for the operation and
expansion of its business.
Shares Subject to Rule 144
Of the 32,900,460 common shares of the Company's common stock issued and
outstanding as of the current date, 779,480 are owned by public investors and
32,120,980 shares are restricted. Of these restricted shares, 13,866,000
shares are held by officers, directors and affiliates of the Company.
All of the currently issued and outstanding restricted shares were issued
in reliance on the "private placement" exemption of Section 4(2) of the
Securities Act of 1933, as amended, or the exemption provided for under Rule
506 of Regulation D. If a market for the Company's common shares were to
develop, such "restricted" shares would not be available for sale in the open
market without registration, except in reliance upon Rule 144 under the Act or
some other applicable exemption. In general, under Rule 144, a person or
persons whose shares are aggregated, who beneficially owned shares acquired in
a non-public transaction for at least one year, including persons who may be
deemed "affiliates" of the Company as that term is defined under the 1933 Act,
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly reported trading volume on all national
securities exchanges and through NASDAQ during the four calendar weeks
preceding such sale provided current public information is then available.
Of the restricted shares owned by officer/directors/affiliates equaling
<PAGE> 40
13,866,000 shares, none have been beneficially owned for more than one year.
The officer/director/affiliate shares will be eligible for resale under the
provisions of Rule 144 applicable to affiliate transactions beginning with
6,000,000 shares on December 31, 2000 with the balance being beneficially
owned for a year at the end of January 2001. The remaining restricted shares
are held by non-affiliates and equals 18,254,980 shares, which includes the
1,500,000 shares issued at the close of the Company's recent private placement
offering. 15,504,980 shares are available for immediate resale in accordance
with Rule 144 provisions applicable to non-affiliate transactions, provided a
public market exists; 1,250,000 of these non-affiliate restricted shares are
eligible for resale on January 24, 2001; the balance of the non-affiliate
restricted shares, the 1,500,000 shares issued in the private placement, will
be available for resale under Rule 144 on varying dates beginning on January
25, 2001 through August 31, 2001.
The Company has an additional 1,500,000 shares of common stock reserved
for issuance to warrant holders upon exercise of warrants.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings and, to the
best of its knowledge, no such action by or against the Company has been
threatened. None of the Company's officers, directors, or beneficial owners
of 5% or more of the Company's outstanding securities is a party to a
proceeding adverse to the Company nor do any of the foregoing individuals have
a material interest in a proceeding adverse to the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Subsequent to the change of control of the Company, the Company's Board
of Directors recommended that the public company's independent public
accountant, Randy Simpson CPA PC, continue to audit the Company's financial
statements; the Board also recommended Randy Simpson CPA PC become the
independent public accountant for the subsidiaries. Prior to that date, NWF
did not have a certifying accountant and WHY USA NA utilized the services of
Kubick and Warren. For these reasons, in January 2000, the Company's
subsidiary, WHY USA NA dismissed Kubick & Warren as their independent public
accountants. Kubick & Warren's report WHY USA NA's financial statements dated
January 22, 1999, did not contain an adverse opinion or disclaimer of opinion,
nor were they modified as to uncertainty, audit scope, or accounting
principles. The decision to change accountants was recommended and approved
by the Board of Directors of the Company. There were no disagreements with the
former WHY USA NA accountants on matters of accounting principles, or
practices, financial disclosure or auditing scope.
The Company retained Randy Simpson, C.P.A.,P.C. as the certified public
accountant for WHY USA NA on February 1, 2000.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued the following unregistered common shares in the
past three years.
Year April 1997 - April 1998
------------------------------
On June 30, 1997, the Company issued 1,982,000 at par value to Castlewood
Corporation for general administrative services performed. Castlewood
performed such services to the Company since 1987. The shares were issued
<PAGE> 41
pursuant to Section 4(2) of the Securities Act of 1933 as amended as a
"transaction not involving a public offering." These shares were issued at par
value or $1,982.
Year April 1998 - April 1999
-----------------------------
On June 30, 1998, 1,492,000 shares of common stock to Castlewood
Corporation for services at par value. The shares were issued pursuant to
Section 4(2) of the Securities Act of 1933 as amended as a "transaction not
involving a public offering." The shares were issued at par value or $1,492.
Year April 1999 - October 30, 2000
----------------------------------
On June 30, 1999, the Company issued 1,642,000 shares of the Company to
Castlewood Corporation for services rendered at par value. The shares were
issued pursuant to Section 4(2) of the Securities Act of 1933 as amended as a
"transaction not involving a public offering." The shares were issued at par
value or $1,642.
On December 16, 1999, the Company issued 10,000,000 shares of its common
stock to Northwest Financial, Ltd. in exchange for all the issued and
outstanding shares of NWF (100,000 shares at the closing of the transaction on
December 31, 1999). The shares were issued pursuant to Section 4(2) of the
Securities Act of 1933 as amended as a "transaction not involving a public
offering." The shares were beneficially owned by NWF's sole shareholder,
Donald Riesterer, and NWF transferred the shares to him in January of 2000.
The shares were valued at the fair market value of the NWF exchanged shares or
$2,081,814 (based on $2,000,000 net paid for the stock of WHY USA NA and the
net assets of NWF of $81,814). Riesterer distributed 4,000,000 of the
10,000,000 shares to six (6) parties: three of the parties are current
officers and directors of the Company, Greg Miller, Leslie Pearson, and Lisa
Gunberg; two are business associates of Mr. Riesterer, and the third party is
comprised of three individuals who were the selling shareholders of WHY USA
NA. The individuals, one of whom is a director of the Company, each
beneficially own one-third of 850,000 shares in their combined record name.
Riesterer also relied upon Section 4(2) in his transfer of the 4,000,000
shares.
On August 31, 2000, the Company closed its private placement offering
which commenced in January of 2000, with 1,500,000 Units subscribed for (and
$1,500,000 in proceeds); the shares and warrants have been issued. The
offering was scheduled to close on March 31, 2000 but was extended by the
Board of Directors to August 31. 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 was
entitled to rely on the Regulation D Rule 506 exemption because it did not
publicly solicit investors who were largely individuals or entities with a
business or personal association with management. The Company believes that
the investors: (1) had 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) acquired 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 securities. The Company is paid no commissions for sales of the
<PAGE> 42
Units. The Units were purchased by a total of 54 investors of which 52 were
"accredited" and two (2) were considered "sophisticated."
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The only statutes, charter provisions, by-laws, contracts or other
arrangements under which any controlling person, director or officer of the
Company is insured or indemnified in any manner against any liability which he
may incur in his capacity as such, are as follows:
Sections 78.037, 78.751 and 78.752 of the Nevada Revised Statutes offer
limitation of liability protection for officers and directors and/or
indemnification protection of officers, directors, employees and agents of the
Company, and provide as follows:
78.037. Articles of incorporation: Optional provisions.
The articles of incorporation may also contain:
1. A provision eliminating or limiting the personal liability of a
director officer to the corporation or its stockholders for damages for breach
of fiduciary duty as a director or officer, but such a provision must not
eliminate or limit the liability of a director or officer for:
(a) Acts or omissions which involve intentional misconduct, fraud
or a knowing violation of law; or
(b) The payment of distributions in violation of NRS 78.300.
2. Any provision, not contrary to the laws of this state, for the
management of the business and for the conduct of the affairs of the
corporation, and any provision creating, defining, limiting or regulating the
powers of the corporation or the rights, powers or duties of the directors,
and the stockholders, or any class of the stockholders, or the holders of
bonds or other obligations of the corporation, or governing the distribution
or division of the profits of the corporation.
78.751. Indemnification of officers, directors, employees and agents;
advancement of expenses.
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with the action, suit or proceeding if he acted in good faith
and in a manner which is reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
<PAGE> 43
proceeding, he had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or settlement of
the action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter
as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense
of any claim, issue or matter therein, he must be indemnified by the
corporation against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered by a
court or advanced pursuant to subsection 5, must be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
a. By the stockholders;
b. By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit or proceeding;
c. If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by independent
legal counsel in a written opinion; or
d. If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent legal counsel
in a written opinion.
5. The articles of incorporation, the bylaws or an agreement made
by the corporation may provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking
by or on behalf of the director or officer to repay the amount if it is
ultimately determined by a court of competent jurisdiction that he is not
entitled to be indemnified by the corporation. The provisions of this
subsection do not affect any rights to advancement of expenses to which
corporate personnel other than directors or officers may be entitled under any
contract or otherwise by law.
<PAGE> 44
6. The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
a. Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the articles
of incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except
that indemnification, unless ordered by a court pursuant to subsection 2 or
for the advancement of expenses made pursuant to subsection 5, may not be made
to or on behalf of any director or officer if a final adjudication establishes
that his acts or omissions involved intentional misconduct, fraud or a knowing
violation of the law and was material to the cause of action.
b. Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors
and administrators of such a person.
78.752. Insurance and other financial arrangements against liability of
directors, officers, employees and agents.
1. A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise for
any liability asserted against him and liability and expenses incurred by him
in his capacity as a director, officer, employee or agent, or arising out his
status as such, whether or not the corporation has the authority to indemnify
him against such liability and expenses.
2. The other financial arrangements made by the corporation pursuant
to subsection 1 may include the following:
a. The creation of a trust fund.
b. The establishment of a program of self-insurance.
c. The securing of its obligation of indemnification by
granting a security interest or other lien on any assets of the corporation.
d. The establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to this subsection may provide
protection for a person adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable for intentional misconduct,
fraud or a knowing violation of law, except with respect to the advancement of
expenses or indemnification ordered by a court.
3. Any insurance or other financial arrangement made on behalf of a
person pursuant to this section may be provided by the corporation or any
other person approved by the board of directors, even if all or part of the
other person's stock or other securities is owned by the corporation.
4. In the absence of fraud:
a. The decision of the board of directors as to the propriety of
the terms and conditions of any insurance or other financial arrangement made
pursuant to this section and the choice of the person to provide the insurance
<PAGE> 45
or other financial arrangement is conclusive; and
b. The insurance or other financial arrangement:
(1) Is not void or voidable; and
(2) Does not subject any director approving it to
personal liability for his action, even if a director approving the insurance
or other financial arrangement is a beneficiary of the insurance or other
financial arrangement.
5. A corporation or its subsidiary which provides self-insurance for
itself or for another affiliated corporation pursuant to this section is not
subject to the provisions of Title 57 of NRS.
The Company's Articles of Incorporation have no specific indemnification
provisions.
Article IV, Section 11 of the Company's newly adopted Bylaws provide
indemnification as follows: that the Corporation shall indemnify each of its
Directors and Officers (and secure appropriate liability insurance) whether or
not the in office (and his/her executor, administrator and heirs), against all
reasonable expenses actually and necessarily incurred by him/her in connection
with the defense of any litigation to which he/she is or was a director or
officer of the Corporation. He/she shall have no right to reimbursement,
however, in relation to matters as to which he/she has been adjudged liable to
the Corporation for negligence or misconduct in the performance of his/her
duties. The right to indemnity for expenses shall also apply to the expenses
of suites that are compromised or settled if the court having jurisdiction of
the matter shall approve such settlement. This right of indemnification is in
addition to and not exclusive of all other rights to which such director or
officer may be entitled. The Company has not yet secured liability insurance.
PART F/S
The following financial statements are provided:
* The consolidated audited financial statements for WHY USA Financial
Group, Inc. for its years ended December 31, 1999 and 1998
* The audited financial statements for WHY USA North America, Inc. for
its years ended December 31, 1999 and 1998
* Unaudited pro forma financial data WHY USA Financial Group, Inc. and
WHY USA North America
<PAGE> 46
Randy Simpson CPA, P.C.
11775 South Nicklaus Road
Sandy, Utah 84092
Fax & Phone (801) 572-3009
Board of Directors and Stockholders
WHY USA Financial Group, Inc.
Minneapolis, Minnesota
INDEPENDENT AUDITORS' REPORT
I have audited the accompanying consolidated balance sheet of WHY USA
Financial Group, Inc., (a Nevada Corporation), as of December 31, 1999, and
the related consolidated statements of income and retained earnings and cash
flows for the years ended December 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit of the financial statements
provides a reasonable basis for my opinion.
In my opinion, based on my audit, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of WHY USA Financial Group, Inc. as of December 31, 1999, and the results of
its consolidated operations and cash flows for the years ended December 31,
1999 and 1998 in conformity with generally accepted accounting principles.
/s/ Randy Simpson CPA PC
Randy Simpson CPA, P.C.
A Professional Corporation
April 5, 2000
Salt Lake City, Utah
<PAGE> 47
WHY USA FINANCIAL GROUP, INC.
Consolidated Balance Sheet
December 31,
1999
-------------
Assets
Current Assets:
Cash $ -
Accounts receivable 32,407
Notes receivable 3,210
-------------
Total Current Assets 35,617
-------------
Fixed Assets:
Furniture and equipment 14,572
Accumulated depreciation (4,863)
-------------
Net Fixed Assets 9,709
-------------
Other Assets:
Franchise acquisition costs 1,994,589
Amortization of franchise costs -
-------------
Net Franchise Acquisition Cost 1,994,589
Patent application 5,000
Advances to a former officer 70,619
-------------
Total Assets $ 2,115,534
=============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable $ 200
Deferred revenue on future conference 5,729
Due to Northwest Financial Group, Inc. 18,391
Loan from officer/shareholder 26,400
-------------
Total Current Liabilities 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 31,400
Additional paid-in capital 2,022,698
Retained earnings 7,716
-------------
Total Shareholders' Equity 2,061,814
-------------
Total Liabilities and Shareholders' Equity $ 2,115,534
=============
See accompanying notes to consolidated financial statements
<PAGE> 48
WHY USA FINANCIAL GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
From Inception
Year Ended (June 15,1998)
December 31, through
1999 Dec. 31,1998
------------- -------------
Revenue:
Mortgage loan originations $ 546,200 $ -
Franchise fees - real estate - -
------------- -------------
Total Revenue 546,200 -
------------- -------------
Expenses:
General & Administrative 125,234 -
Mortgage loan origination fees 399,230 -
Marketing costs and travel 17,511 -
Interest expense 3,334 -
Depreciation 1,947 -
------------- -------------
Total Expenses 547,256 -
------------- -------------
Loss from continuing operations (1,056) -
Income from discontinued operations 9,372 -
(net of income taxes of $2,400)
Income taxes - continuing operations (600) -
------------- -------------
Net Income 7,716 -
Retained Earnings, beginning of period - -
------------- -------------
Retained Earnings, end of period $ 7,716 $ -
============= =============
Weighted average shares outstanding 10,058,630 10,000,000
============= =============
Net loss per share, continuing operations
(basic and diluted) $ - $ -
============= =============
Net income per share, discontinued operations
(basic and diluted) $ - $ -
============= =============
Net income per common share
(basic and diluted) $ - $ -
============= =============
The Company has no dilutive common stock equivalents outstanding at December
31, 1999. The Company has 31,400,460 outstanding at December 31, 1999 and the
earnings per share if calculated based upon this number would result in no
significant income per share on a continuing, discontinued or total basis.
The above weighted average shares outstanding is based upon the prior
privately held stock outstanding of Northwest Financial Ltd.
See accompanying notes to the Financial Statements
<PAGE> 49
WHY USA FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
From inception
Year Ended (June 15 1998)
December 31, Through
1999 Dec. 31,1998
------------- -------------
Cash Flows from Operating Activities:
Net Income $ 7,716 $ -
Adjustments to reconcile net income to
net cash flow - -
Provision for depreciation and amortization 1,947 -
Deferred tax provision 3,000 -
------------- -------------
Increase in Cash Flow from Operating Activities 12,663 -
------------- -------------
Changes in Operating Assets and Liabilities:
Increase in accounts payable 200 -
------------- -------------
Total Change to Operating Assets and Liabilities 200 -
------------- -------------
Net Cash from Operations 12,863 -
------------- -------------
Cash Flows Used in Investing Activities:
Patent application (5,000) -
Capital expenditures - computers (6,009) (3,724)
------------- -------------
Net Cash Used in Investing Activities (11,009) (3,724)
------------- -------------
Cash Flows (Used in) Provided by Financing
Activities:
Advances from Northwest Financial Group, Inc. 18,391 -
Capital contributed by shareholders 6,598 47,500
Advances to officers and ex-officers (49,573) (21,046)
------------- -------------
Net Cash (Used in) Provided by
Financing Activities (24,584) 26,454
------------- -------------
Net Increase (Decrease) in Cash and
Cash Equivalents (22,730) 22,730
Cash and Cash Equivalents at Beginning of Period 22,730 -
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 22,730
============= =============
Supplemental Non-Cash Activities
Contribution of WHY USA North America, Inc.
assets by Don Riesterer to Why USA Financial
Group, Inc. at cost of $2,026,400 net of a
Promissory loan to Mr. Riesterer of $ 26,400 $ 2,000,000 $ -
============= =============
Supplemental Cash Flow Information
Cash Paid During the Year for:
Interest Expense $ 3,334 $ -
============= =============
Income Taxes $ - $ -
============= =============
See accompanying notes to consolidated financial statements.
<PAGE> 50
WHY USA FINANCIAL GROUP, INC.
Consolidated Statement of Changes in Stockholders Equity
From Inception (June 15, 1998) through December 31, 1999
Common Common
Stock Stock Paid-In Retained Total
Shares Amount Capital Earnings Equity
------------- ------- ------------ -------- ------------
Incorporated
June 15, 1998 - $ - $ - $ - $ -
Funded November 1998 10,000,000 10,000 37,500 - 47,500
------------- ------- ------------ -------- ------------
Balances at
December 31, 1998 10,000,000 10,000 37,500 - 47,500
Additional Capital
Contributions - - 6,598 - 6,598
Capital Contribution
of Why USA N.A. Inc.
Common stock and
assets - - 2,000,000 - 2,000,000
Recapitalization and
reorganization of
private company into
public entity 21,400,460 21,400 (21,400) - -
Net income for
year ended
December 31, 1999 - - - 7,716 7,716
------------- ------- ------------ -------- ------------
Balances at
December 31, 1999 31,400,460 $31,400 $ 2,022,698 $ 7,716 $ 2,061,814
============= ======= ============ ======== ============
See accompanying notes to consolidated financial statements
<PAGE> 51
WHY USA FINANCIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. COMBINATION ACCOUNTING AND HISTORY:
The financial statement of WHY USA Financial Group, Inc. ("the Company") are
reflected in the accompanying financial statements as a recapitalization
between a private company, Northwest Financial, Ltd., a Minnesota corporation
("NWF") and Triam, Inc., a Nevada public shell corporation. On December 31,
1999, Triam, Inc. issued 10,000,000 shares to acquire 100% (100,000) of the
shares of NWF. The shareholders of Triam, Inc. retained over 50% control of
the Company; however, the officers and directors of NWF became the officers
and directors of the Company. In connection with the acquisition the name of
the Company was changed to WHY USA Financial Group from Triam, Inc. (the
"Company"). There were no net monetary assets of Triam, Inc., therefore the
financial statements of the Company reflect only the operations, assets and
liabilities of NWF on a historical basis. No goodwill or other intangible
assets were recorded as a result of the merger with Triam, Inc. The
stockholders' equity of the Company reflect the equity of NWF with an
adjustment to paid in capital to reflect the outstanding shares of Triam, Inc.
as the surviving stockholders' equity outstanding.
NWF acquired WHY USA NA on December 30, 1999, via its contribution to NWF by
Mr. Don Riesterer who was the sole shareholder of NWF both before and after
the contribution of WHY USA NA. The contribution of WHY USA NA to NWF has been
accounted for as a purchase. The consolidated balance sheet of the Company
includes the assets and liabilities of WHY USA NA at their fair market values
at December 30, 1999, which are identical to the historical cost basis to WHY
USA NA or Donald Riesterer. There were no operations of WHY USA NA on
December 31, 1999, therefore the consolidated income statements and cash flows
do not reflect any activity associated with the operations of WHY USA NA. The
contribution of WHY USA NA to NWF has been accounted for as follows:
WHY USA Assets and Liabilities - at fair market value
-----------------------------------------------------
Fair market value assets $ 37,540
Less: fair market value liabilities (5,729)
Value assigned to franchise 1,994,589
------------
Total Contribution by Don Riesterer $ 2,026,400
============
Total Acquisition price to Don Riesterer $ 2,026,400
Less: Note to Don Riesterer (26,400)
------------
Net Contribution by Don Riesterer $ 2,000,000
============
History of Triam, Inc.
----------------------
Triam, Inc. was incorporated as Black Butte Petroleum, Ltd. on September
10,1980 as a Utah corporation. The Company's incorporators received 4,500,000
shares for cash of $7,500. The Company conducted an intrastate offering of its
common stock in November, 1980, selling 15,000,000 shares of its common stock
<PAGE> 52
for gross proceeds of $150,000 to the Company. On March 23,1983, the Company
entered into a plan of reorganization with Triam, Ltd., a Nevada Corporation,
whereby Black Butte Petroleum Ltd. conveyed its assets to Triam, Ltd. in
exchange for shares of Triam, Ltd. Black Butte Petroleum was dissolved in the
reorganization and Triam, Ltd. became the survivor entity, and the domicile of
the Company became Nevada. The original Black Butte shareholders received
19,500,000 shares of Triam, Ltd. in connection with reorganization.
History of Northwest Financial Ltd. (NWF)
-----------------------------------------
NWF was organized in 1998, however, it did not commence operations until 1999.
NWF originates mortgage loans, principally for residential housing, in the
Minnesota and Wisconsin area, for which it receives service release and or
other origination fees. Typically, NWF processes the loan application,
underwrites, and sells the loan to a third party who usually funds the loan
directly to the borrower. NWF generally pays for the credit report, appraisal
of the property, and processing and underwriting of the loan. NWF does not
service its loans, and in the majority of cases may not be responsible for the
underwriting or funding of the loan. NWF has applied for a provisional patent
for its packaging process of combining its mortgage underwriting process, with
real estate brokerage operations, appraisals, and insurance brokering, as it
relates the process of a home buyer acquiring a residency. NWF acquired 100%
of the operations and stock of WHY USA North America Inc. ("WHY USA NA) on
December 30,1999.
History of WHY USA NA
---------------------
WHY USA NA is engaged in the business of selling franchises for the real
estate brokerage businesses. NWF acquired the operations, stock, and assets of
WHY USA via a contribution by its sole shareholder, who paid $2,026,400 for
the acquisition. He funded the purchase via cash of $650,000 and two
promissory notes, one for $850,000 and one for $500,000. The paid in capital
of the Company reflects this $2,000,000 contribution.
The WHY USA real estate franchise was originally founded in Phoenix, Arizona
in the late 1980's. Approximately 75 franchises were sold throughout the
United States with a concentration in the Midwestern states of Minnesota,
Wisconsin, Nebraska and Iowa. The franchise emphasizes a reduced commission
structure if the individual listing their home participates in the sale of
their property. There are currently 76 active brokers (65 at December 31,
1999) operating under the WHY USA franchise. WHY USA's three founding
stockholders acquired the WHY USA franchise from the originator of the
franchise in December 1996. The originator of the franchise had sold various
components/territories of the franchise to other individuals. The founders
have re-acquired various territories and other components of the franchise in
1997, 1998 and 1999 in an effort to consolidate the franchise into one entity.
WHY USA now controls over 95% of the franchise revenues and territories.
NOTE 2 - ACCOUNTING POLICIES
Principles of Consolidation
----------------------------
Consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary NWF and its wholly owned subsidiary WHY USA NA. The
financial statements of WHY USA NA are included under the purchase method of
accounting and therefore do not include any operations in 1999 as they were
not acquired until the end of 1999. All material intercompany accounts and
<PAGE> 53
transactions have been eliminated.
Accounting Method
-----------------
The Company's financial statements are prepared using the accrual method of
accounting.
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
include accruals for estimated receivables on real estate transaction fees,
depreciation, and amortization of franchise costs. The economic life and
value of its franchise costs may be impacted by renewal rates, name
recognition, and the real estate/residential loan market in general.
Cash Equivalents
-----------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company does not
have any cash or cash equivalents as of December 31, 1999.
Accounts and Notes Receivable, Allowances and Fair Market Value
----------------------------------------------------------------
In accordance with Financial Accounting Statement No. 107, the Company's
receivables and notes represent credit risks associated with real estate
transactions originating with its franchisees. The Company extends credit as
a result of its franchise agreements with its franchisees. The franchisee's
ability to repay is generally predicated upon their ability to earn income
from their real estate transactions. Franchisees are generally paid a
commission on real estate transactions and must then remit a portion of that
income to the Company. The Company is subject to a geographic concentration of
risk in the Midwestern states. The Company has no allowance for doubtful
accounts at December 31, 1999 as the Company realized all of its receivables
outstanding by collection during the year 2000. The recorded amounts of cash,
accounts receivable, and accounts payable approximate fair value because of
the short-term maturity of these items.
Property, Plant and Equipment Capitalization Policies
------------------------------------------------------
The Company depreciates its computers and office equipment under accelerated
methods over five years.
Property and equipment is stated on the basis of cost. Maintenance and
repairs are charged to expense. Renewals and betterments, which substantially
extend the useful life of property, are capitalized. Accumulated allowances
for depreciation of furniture, equipment, and leasehold improvements retired,
or otherwise disposed of, are eliminated from the accounts on disposition.
Profits and losses resulting from such disposition are included in income.
Depreciation is computed using the accelerated method over the estimated
useful lives of the assets (five to seven years).
<PAGE> 54
Franchise Amortization and Impairment of Long Term Assets
----------------------------------------------------------
The franchise acquisition fee of $1,994,589 will be amortized over 12 years
under the straight-line method starting in the year 2000. The Company will
monitor its real estate franchising operations to determine whether it can
recover the value of its unamortized franchise costs. In the event the
Company believes that its investment in franchise costs may not be fully
recoverable, the Company will recognize an impairment loss equal to the amount
by which the asset's carrying amount exceeds its fair market value. The fair
market value shall be determined by utilizing the expected future cash flows
using a discount commensurate with the risks involved. The value at December
31, 1999 is based upon a third party transaction on this date of this amount
and is therefore the fair market value of this asset.
Deferred Revenues and Liability
--------------------------------
The company holds an annual conference for its franchisees in January of 2000.
Expenses and revenues related to the conference are deferred and realized at
the time the conference is held.
Long Term Obligations - FASB 47 and 129
---------------------------------------
The Company is not currently obligated in the form of any take or pay or
through put contracts. The Company is not obligated under any contract or
other financial arrangement for the repayment of the notes totaling $1,350,000
in the name of Donald Riesterer, the Company's CEO, which secured the
acquisition of WHY USA NA. Mr. Riesterer's personal stockholdings in the
Company and his commercial property holdings secure the performance under the
Notes. The Company has been assured by its CEO that it will not utilize the
assets of the Company in any form to liquidate, collateralize or otherwise
assist in the repayment of these obligations.
Franchise Revenue Recognition
-----------------------------
In accordance with Financial Accounting Standard no. 45, the Company defers
the recognition of new franchise sales until the commencement of operations by
the new franchisee. The new franchisee opens his real estate sales office in
his "protected" territory and receives training and marketing support, real
estate documents and other sales aids from the Company. These activities
generally occur within the time frame of one month. All costs, services and
conditions related to new franchise sales have been incurred or performed
prior to the recognition of income from new franchise sales.
The Company has not sold any area franchises or multiple location franchises.
The franchise agreement does not include or provide for any tangible or real
property (ie. signs, equipment, inventory, buildings or real estate). The
Company has not purchased or operated any of its franchisees operations nor
has it repossessed any of its previously operated franchises.
The Company recognizes franchise fees on real estate transactions at the date
the real estate transaction is closed by the franchisee. The franchisee
incurs a liability to the Company at this time and the Company records a
receivable.
Derivative Instruments
----------------------
<PAGE> 55
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
At December 31, 1999 the Company has not engaged in any transactions that
would be considered derivative instruments or hedging activities.
Stock Based Employee Compensation.
---------------------------------
The Company has not yet implemented any stock purchase plans, common stock
options, restricted stock grants or issuances or stock appreciation rights.
The Company intends to utilize the fair value based method of accounting for
employee options, or similar equity instruments in the future
Earnings Per Share- FASB 128
----------------------------
The Company does not have any common stock equivalents of a dilutive nature at
Dec. 31, 1999. The basic and diluted earnings per share are the same. The
Company's capital structure was modified via the merger with Triam, Inc. on
December 31, 1999 thereby increasing the total outstanding shares from
10,000,000 to 31,400,460 on December 31, 1999. The weighted average
outstanding shares was 10,058,630 for 1999 and 10,000,000 for 1998 which
represents the private company's (NWF's) portion of the capitalization of the
public shell.
NOTE 3 - INCOME TAXES
The Company accounts for its income taxes under financial accounting standard
109. The Company has expensed for tax purposes under Section 179 fixed assets
which is capitalized for book purposes and depreciated. The Company has
recorded a deferred tax liability of $3,000 at December 31, 1999 of which
$2,400 has been allocated to discontinued operations.
NOTE 4 - LIABILITIES AND CONTINGENT LIABILITIES
Long-term debt
--------------
NWF issued a promissory note to Don Riesterer for $26,400 in connection with
this contribution of WHY USA to Northwest. The note bears interest at 8% and
was repaid in early 2000.
Deferred Revenues
-----------------
The Company had $5,729 in fees at December 31, 1999 from its franchise members
in excess of expenses paid out for the Company's annual conference which was
held in January of 2000. The Company deferred and realized this income at the
time the conference was held.
NOTE 5 - DISCONTINUED OPERATIONS
NWF owned and operated an office building in Minnesota during 1999. The
building's ownership was transferred out of NWF just prior to its acquisition
by the Company. The rental operations have been accounted for as a
<PAGE> 56
discontinued operation. The results of the rental activities for 1999 are
summarized as follows: (Note: NWF was not active until 1999.)
Rental income $ 76,132
Rental expenses 43,924
Interest expenses 13,630
Depreciation expenses 6,806
-----------
Total expenses 64,360
Net income from discontinued operations 11,772
Income tax attributable to
discontinued operations 2,400
-----------
Net income - discontinued operations $ 9,372
===========
NOTE 6 -RELATED PARTY TRANSACTIONS
NWF rented its office from an affiliated entity, Northwest Financial Group,
Inc. (NFG). Rent was charged at $2,000 per month, for a total rent expense of
$22,000. Rent expense was calculated at the same rate per square foot as other
tenants in the building. NWF shared employees with NFG. The entire payroll of
NWF was paid by NFG, and then reimbursed by NWF based upon utilization of
employees by entity. NWF's operations include all of the mortgage loan
originations generated by its Woodlake office. NWF and NFG competed for
similar customers and business. The revenue was allocated between the
companies based upon the employee who generated the business. The discontinued
rental operations were transferred to Mr. Riesterer, who was the sole
shareholder of both NWF and NFG prior to NWF's acquisition by the Company.
NWF also paid $3,334 in interest to relatives of Mr. Riesterer for temporary
funds advanced to NWF during 1999. Interest was paid at 8%.
NWF has advanced $70,619 to a former officer of NWF. These advances are non-
interest bearing and will be repaid via future services of the ex-officer. In
the first quarter of 2000, an affiliated entity of Don Riesterer assumed this
liability to the former officer.
NOTE 7 - THE ACQUISITION OF WHY USA NORTH AMERICA INC. - UNAUDITED
The Company acquired WHY USA NA on December 30, 1999. The Company issued
10,000,000 common shares for all of the issued and outstanding stock of NFW
which included all of the assets of WHY USA NA. WHY USA NA was actually
purchased by Don Riesterer who then contributed it to NWF. Total purchase
price of WHY USA NA was $2,064,400 less a promissory note given to Don
Riesterer for $26,400 for a non-capital contribution of $2,000,000 to the
Company by Don Riesterer, which is the amount paid by Mr. Riesterer. The
acquisition has been accounted for using the purchase method of accounting.
The acquisition values were assigned as follows:
Accounts and notes receivable $ 35,617
Net value of equipment 1,923
Liabilities accrued (5,729)
Value assigned to franchise 1,994,589
------------
$ 2,026,400
============
<PAGE> 57
The franchise acquisition cost will be amortized over 12 years under the
straight line method which is the longest duration a franchise agreement can
be currently renewed under the franchise licensing agreement.
The following pro formas have been prepared assuming the purchase
occurred at the beginning of the period or on January 1, 1999. The financial
information for the year ended December 31, 1999 has been used because it
represents the results of operations of WHY USA NA prior to its acquisition on
December 31, 1999. WHY USA NA did not conduct operations on December 31,
1999.
Unaudited Selected Pro Forma (1)
Combined Financial Data
YEAR ENDED DECEMBER 31
-----------------------------
1999 1998
------------- -------------
Revenues $ 924,835 $ 378,635
Net loss $ (65,710) (105,695)
Net loss per common share basic & diluted $ (.004) (.011)
Weighted average shares outstanding 10,000,000 10,000,000
(1) The unaudited pro forma combined financial data is presented for
informational purposes only. They are not necessarily indicative of the
results of operations, or the financial position which would have
occurred had the acquisition of WHY USA NA been completed at January 1,
1999 and 1998. They are also not necessarily indicative of the
Company's future results of operations or financial position.
<PAGE> 58
Randy Simpson CPA, P.C.
11775 South Nicklaus Road
Sandy, Utah 84092
Fax & Phone (801) 572-3009
Board of Directors and Stockholders
WHY USA North America, Inc.
Minneapolis, Minnesota
INDEPENDENT AUDITORS' REPORT
I have audited the accompanying balance sheet of WHY USA North America, Inc.,
(a Wisconsin Corporation), as of December 31, 1999, and the related statements
of income and accumulated deficit and cash flows for the years ended December
31, 1999 and 1998. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit of the financial statements
provides a reasonable basis for my opinion.
In my opinion, based on my audit, the financial statements referred to above
present fairly, in all material respects, the financial position of WHY USA
North America, Inc. as of December 31, 1999, and the results of its operations
and cash flows for the years ended December 31, 1999 and 1998 in conformity
with generally accepted accounting principles.
/s/ Randy Simpson CPA
Randy Simpson CPA, P.C.
A Professional Corporation
April 5, 2000
Sandy, Utah
<PAGE> 59
WHY USA NORTH AMERICA, INC.
Balance Sheet
Assets
December 31,
1999
-------------
Current Assets:
Cash $ -
Accounts Receivable 32,407
Notes Receivable 3,210
-------------
Total Current Assets 35,617
-------------
Fixed Assets
Furniture and Equipment 4,839
Accumulated Depreciation (2,916)
-------------
Net Fixed Assets 1,923
-------------
Other Assets:
Franchise Acquisition Costs 1,305,518
Amortization of Franchise Costs (207,125)
-------------
Net Franchise Acquisition Cost 1,098,393
Deferred income tax benefit 1,000
-------------
Total Assets $ 1,136,933
=============
Liabilities and Shareholders' Equity
Current Liabilities:
Deferred Revenue on Future Conference $ 5,729
-------------
Total Current Liabilities 5,729
-------------
Shareholders' Equity
Common Stock,- No Par Value; 9,000 Shares Authorized;
3,000 Shares Issued and Outstanding -
Additional Paid in Capital 1,147,815
Accumulated Deficit (16,611)
-------------
Total Shareholders' Equity 1,131,204
-------------
Total Liabilities and Shareholders' Equity $ 1,136,933
=============
See accompanying notes to financial statements.
<PAGE> 60
WHY USA NORTH AMERICA, INC.
STATEMENT OF INCOME AND ACCUMULATED DEFICIT
Year Ended Year Ended
December 31, December 31,
1999 1998
------------- ------------
Revenue:
Franchise Fees on Transactions $ 365,014 $ 288,898
New Franchise Sales 11,805 24,075
Interest Income 1,816 737
------------- ----------
Total Revenue 378,635 313,710
------------- ------------
Expenses:
Commission on Franchise Fees 39,021 19,119
Uncollectible Franchise fees - 16,314
Advertising and Recruiting 29,150 38,401
Marketing Costs and Travel 13,607 35,545
Professional Fees and Licenses 21,933 43,212
Office and Administrative 29,385 19,256
Personnel Costs 101,605 30,893
Interest Expense 50,464 49,232
Depreciation 1,281 1,218
Amortization Franchise Acquisition Cost 108,800 72,225
------------- ------------
Total Expenses 395,246 325,415
------------- ------------
Loss from Operations (16,411) (11,705)
Income Taxes - benefit - -
------------- ------------
Net Loss (16,611) (11,705)
Accumulated deficit, Beginning of Period - -
Net loss reclassified to paid-in capital upon
termination of Sub-S election & prior partnership - 11,705
------------- ------------
Accumulated deficit, End of Period $ (16,611) $ -
============= ============
See accompanying notes to financial statements.
<PAGE> 61
WHY USA NORTH AMERICA, INC.
STATEMENT OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
1999 1998
------------ -----------
Cash Flows from Operating Activities:
Net Loss $ (16,611) (11,705)
Adjustments to Reconcile Net Income to Net Cash Flow
Provision for Depreciation and Amortization 110,081 73,443
Deferred Income Tax Benefit (1,000) -
------------ -----------
Increase in cash flow from operating activities 92,470 61,738
Changes In Operating Assets and Liabilities:
Decrease (Increase) in Accounts and Notes Receivable 9,115 (32,649)
Increase (Decrease) in Accounts Payable (317) 317
Increase (Decrease) in Accrued Payroll Liabilities (2,141) 2,141
Increase in Deferred Conference Revenues 5,729 -
------------ -----------
Total Change to Operating Assets and Liabilities 12,386 (30,191)
------------ -----------
Net Cash From Operating Activities 104,856 31,547
------------ -----------
Cash Flows Used In Investing Activities:
Capital Expenditures - Franchise Cost (5,000) (675,000)
Purchase of office equipment - 2,755
------------ -----------
Net Cash Used In Investing Activities (5,000) (677,755)
------------ ------------
Cash Flows Used in Financing Activities:
Payment of debt Incurred in franchise acquisition
- 1998 debt incurred (300,000) 300,000
Loans from affiliate - Quality Investments 260,000 202,500
Additional capital contributed by shareholders
partners pre 6/30/98 - 157,500
Distribution of cash shareholders-reduces amount
of debt assumed by shareholders (82,481) -
Income distributed to shareholders -sub s earnings (16,956) -
------------ -----------
Net Cash Used In Financing Activities (139,437) 660,000
------------ -----------
Net Increase In Cash and Cash Equivalents (39,581) 13,792
Cash and Cash Equivalents at Beginning of Period 39,581 25,789
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 39,581
============ ===========
Supplemental Non cash Activities:
Conversion of long term debt into paid in capital in
connection with sale to Mr. Riesterer on 12/31/99 $ 847,500 $ -
============ ===========
Supplemental Cash Flow Information:
Cash Paid During the Year for:
Interest Expense $ 50,464 $ 49,232
============ ===========
Income Taxes $ 1,000 $ -
============ ===========
See accompanying notes to financial statements.
<PAGE> 62
WHY USA NORTH AMERICA, INC.
Statement of Partner's Capital and Stockholders' Equity
From January 1, 1998 through December 31, 1999
<TABLE>
<CAPTION>
Shares Sub-chapter S Additional Total
Common Stock Partnership Stockholders' Paid-in Accumulated Stockholders'
No par Capital Equity Capital Deficit Equity
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balances -
January 1, 1998 - $ 253,957 $ - $ - $ - $ 253,957
Partnership contributions
from January 1, 1998
through partnership
termination on June 30,
1998 - 157,500 - - - 157,500
Net loss of partnership
from January 1, 1998
through June 30, 1998
absorbed to partnership
capital - (18,065) - - - (18,065)
Conversion of partnership
to a Sub-chapter S
corporation in July 1,
1998 3,000 (393,392) 393,392 - - -
Net income of Sub-chapter
S from July 1, 1998
through December 31, 1998 - - 6,360 - - 6,360
------------ ------------ ------------- ------------ ------------ ------------
Balance - December 31,1998 3,000 - 399,752 - - 399,752
Distribution of Sub-chapter
S earnings - - (16,956) - - (16,956)
Termination of Sub-chapter
S election (conversion to
regular corporation tax
treatment) - - (382,796) 382,796 - -
Distribution of corporate
assets - net of assumption
of Quality Investment
debt by shareholders - - - 765,019 - 765,019
Net loss for year ended
December 31, 1999 - - - - (16,611) (16,611)
------------ ------------ ------------- ------------ ------------ ------------
Balance- December 31, 1999 3,000 $ - $ - $ 1,147,815 $ (16,611) $ 1,131,204
============ ============ ============= ============ ============ ============
</TABLE>
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS
1. HISTORY AND NATURE OF OPERATIONS
History - The WHY USA real estate franchise was originally founded in Phoenix,
Arizona in 1988. Approximately 75 franchises were sold throughout the United
States with a concentration in the Midwestern states of Minnesota, Wisconsin,
Nebraska and Iowa. The franchise emphasizes a reduced commission structure if
the individual listing their home participates in the sale of their property.
There are currently 76 active brokers, (65 at December 31, 1999) operating
under the WHY USA franchise. The Company's three founding stockholders
acquired the WHY USA franchise from the originator of the franchise in
December, 1996. The originator of the franchise had sold various
components/territories of the franchise to other individuals. The founders
have re-acquired various territories and other components of the franchise in
1996, 1997, 1998 and 1999 in an effort to consolidate the franchise into one
entity. The Company now controls over 95% of the franchise revenues and
territories. The Company operated as a partnership during 1997, and the first
half of 1998. The Company converted its operations into a Sub S corporation in
the second half of 1998, and operated in this entity form through December
1998. The Company terminated its Sub-S election effective December 31, 1998.
The Company stockholders sold their interests in the franchise on December 30,
1999 to Donald Riesterer for $2,026,400. Mr. Riesterer contributed his
interest in the corporation to Northwest Financial Ltd. in exchange for 90,000
shares of Northwest Financial Ltd. Mr. Riesterer was the sole shareholder of
Northwest Financial Ltd. at the time of the transaction. Northwest Financial
Ltd. merged with Triam Ltd. on December 31,1999. Triam Ltd. changed its name
to WHY USA Financial Group, Inc. in connection with the merger and is now the
sole shareholder of WHY USA North America Inc.
Franchise History- The Company acquired the rights to use the WHY USA
trademark and the franchising and real estate system from the founder of the
franchise who operated under an entity named USA, Inc. The Company originally
acquired components to the franchise for $625,518 in late 1996/ early 1997.
The Company acquired additional franchise rights from the founder in 1998 for
$275,000. The Company acquired a significant number of the other territories
from an unrelated individual in 1998 for $400,000. The Company acquired a
portion of the state of Arizona franchise rights in 1999 for $5,000. The
Company now believes it owns over 95% of the franchise rights and revenues,
and has the ability subject to the state franchise laws to sell the franchise
in all 50 states. The total acquisition price of the franchise is $1,305,518.
The Company has amortized its franchise acquisition costs for over 12 years on
a straight-line basis. The Company amortized to expense $108,800 in 1999, and
$72,225 in 1998, and has amortized on a cumulative basis, $207,125 of its
franchise acquisition costs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of WHY USA North America, Inc.
is presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial statements.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
<PAGE> 64
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates include accruals for estimated receivables on real
estate transaction fees, depreciation, and amortization of franchise costs.
The economic life and value of its franchise costs may be impacted by renewal
rates, name recognition, and the real estate/residential loan market in
general.
Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. The
Company does not have any cash or cash equivalents as of December 31, 1999.
Accounts and Notes Receivable, Allowances and Fair Market Value - In
accordance with Financial Accounting Statement No. 107, the Company's
receivables and notes represent credit risks associated with real estate
transactions originating with its franchisees. The Company extends credit as
a result of its franchise agreements with its franchisees. The franchisee's
ability to repay is generally predicated upon their ability to earn income
from their real estate transactions. Franchisees are generally paid a
commission on real estate transactions and must then remit a portion of that
income to the Company. The Company is subject to a geographic concentration of
risk in the Midwestern states. The Company did not provide for an allowance
for doubtful accounts at December 31, 1999 as the Company collected
substantially all of its receivables in 2000.
Property, Plant and Equipment Capitalization Policies - The Company
depreciates its computers and office equipment under accelerated methods over
five years. Property and equipment is stated on the basis of cost.
Maintenance and repairs are charged to expense. Renewals and betterments,
which substantially extend the useful life of property, are capitalized.
Accumulated allowances for depreciation of furniture, equipment, and leasehold
improvements retired, or otherwise disposed of, are eliminated from the
accounts on disposition. Profits and losses resulting from such disposition
are included in income.
Depreciation is computed using the accelerated method over the estimated
useful lives of the assets (five to seven years).
Deferred Revenues and Liability - The company holds an annual conference for
its franchisees in January of 2000. Expenses and revenues related to the
conference are deferred and realized at the time the conference is held.
Franchise Revenue Recognition - In accordance with Financial Accounting
Standard no. 45, the Company defers the recognition of new franchise sales
until the commencement of operations by the new franchisee. The new
franchisee opens his real estate sales office in his "protected" territory and
receives training and marketing support, real estate documents and other sales
aids from the Company. These activities generally occur within the time frame
of one month. All costs, services and conditions related to new franchise
sales have been incurred or performed prior to the recognition of income from
new franchise sales. The Company has amortized its franchise acquisition costs
of $1,305,515 over 15 years on a straight line. The economic value of the
franchise costs is a function of the present value of the income streams to be
earned from franchise fees.
The Company has not sold any area franchises or multiple location franchises.
<PAGE> 65
The franchise agreement does not include or provide for any tangible or real
property (ie. signs, equipment, inventory, buildings or real estate). The
Company has not purchased or operated any of its franchisees operations nor
has it repossessed any of its previously operated franchises.
The Company recognizes franchise fees on real estate transactions at the date
the real estate transaction is closed by the franchisee. The franchisee
incurs a liability to the Company at this time and the Company records a
receivable.
Stock Based Employee Compensation -The Company has not yet implemented any
stock purchase plans, common stock options, restricted stock grants or
issuances or stock appreciation rights.
3. INCOME TAXES
Throughout 1998, the Company operated as either a general partnership or a
Sub-chapter S corporation. Under both entity forms the partners/stockholders
are responsible for the income taxes attributable to the operations of the
Company. The Company has provided no income tax expense on the income in 1998
from its operations. The individual stockholders or partners are individually
liable for the income taxes of either the corporation or the partnership. The
individual partners or shareholders have made personal payment for the related
income tax liabilities of the Company or prior partnership for 1998. The
Company paid $1,000 for its income taxes in 1999, and the Company recognized
as a $1,000 deferred income tax benefit to offset the income taxes paid and
realized benefits of the financial loss . The Company did not recognize a
deferred tax asset in the amount of $4,000 at December 31, 1999 because it has
provided for a valuation allowance in the same amount due to the uncertainty
of the realization of the loss carryforward.
3. LONG-TERM DEBT
In connection with the sale of the Company to Mr. Riesterer, all debt owed to
Quality Investments, Inc. was assumed by the stockholders and reclassified as
contributed capital of the Company. The Company paid Quality Investments, Inc.
$50,464 in interest in 1999 and $49,232 in 1998 for loans advanced for the
purposes of acquiring the franchise rights. The debt bore interest at 6.0% to
8.0% and was unsecured. The majority control of Quality Investments, Inc. was
identical to the ownership of the Company.
4. RELATED PARTY TRANSACTIONS
The Company leased office facilities throughout 1999 and 1998 for $6,600 from
Douglas Larson, who owned 33 1/3% of the Company's stock. The Company leased
new office space in the year 2000 from Douglas Larsen for $2,000 per month
until October 2000.
5. BASIS OF PRESENTATION
The Company operated as a general partnership from its inception in December,
1996 through June 30, 1998, when it converted its entity form from a general
partnership to a corporation. The assets, liabilities, equity and operations
were directly transferred into the corporation. The 1998 income statement
includes both the operations of the partnership for the first six months of
the 1998 and the operations of the corporation from July 1, 1998 through
December 31, 1998. The Company's ownership or the nature of its operations did
not change as a result of the change in entity form.
<PAGE> 66
Unaudited Pro Forma Financial Data
Pro Forma Consolidated Balance Sheet
December 31, 1999
WHY USA WHY USA NORTH
FINANCIAL AMERICA Pro forma
GROUP, INC. INC. Adjustments Combined
----------- ------------ ----------- -----------
ASSETS
Current Assets:
Cash $ - $ - $ - $ -
Accounts Receivable - 32,407 - 32,407
Notes Receivable - 3,210 - 3,210
----------- ------------ ----------- -----------
Total Current Assets - 35,617 - 35,617
Fixed Assets:
Furniture & Equipment 9,733 4,839 - 14,572
Accumulated Depreciation (1,947) (2,916) - (4,863)
----------- ------------ ----------- -----------
Net Fixed Assets 7,786 1,923 - 9,709
Other Assets:
Franchise Acquisition Costs - 1,305,518 689,071 1,994,589
Amortization of Franchise
Costs - (207,125) 207,125 -
----------- ------------ ----------- -----------
Net Franchise Acquisition
Costs - 1,098,393 896,196 1,994,589
Patent application 5,000 - - 5,000
Advances to former officer 70,619 - - 70,619
Deferred income tax benefit - 1,000 (1,000) -
----------- ------------ ----------- -----------
Total Assets $ 83,405 $ 1,136,933 $ 895,196 $ 2,115,534
=========== ============ =========== ===========
<PAGE> 67
Pro Forma Consolidated Balance Sheet (Continued)
December 31, 1999
WHY USA WHY USA NORTH
FINANCIAL AMERICA Pro forma
GROUP, INC. INC. Adjustments Combined
----------- ------------ ----------- -----------
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable $ 200 $ - $ - $ 200
Deferred revenue on future
conference - 5,729 - 5,729
Due to Northwest Financial
Group Inc. 18,391 - - 18,391
Loan from officer - - 26,400 26,400
----------- ------------ ----------- -----------
Total Current Liabilities 18,591 5,729 26,400 50,720
Deferred income taxes payable 3,000 - - 3,000
Stockholders' Equity
Preferred stock: no par value,
authorized 50,000,000, no
shares issued & outstanding - - - -
Common Stock: $.001 par value,
authorized 250,000,000
31,400,460 issued and
outstanding at December 31,
2000 31,400 - - 31,400
Paid in capital 22,698 1,147,815 852,185 2,022,698
Retained Earnings 7,716 (16,611) 16,611 7,716
----------- ------------ ----------- -----------
Total Stockholder's Equity 61,814 1,131,204 868,796 2,061,814
----------- ------------ ----------- -----------
Total Liabilities and
Stockholder's Equity $ 83,405 $ 1,136,933 $ 895,196 $ 2,115,534
=========== ============ =========== ===========
<PAGE> 68
Pro Forma Consolidated Statement of Operations
Year ended December 31, 1999
WHY USA WHY USA NORTH
FINANCIAL AMERICA Pro forma
GROUP, INC. INC. Adjustments Combined
----------- ------------ ----------- -----------
Revenues:
Mortgage Loan Originations $ 546,200 $ - $ - $ 546,200
Franchise fees- real estate - 365,014 - 365,014
New franchise sales - 11,805 - 11,805
Interest Income - 1,816 - 1,816
----------- ------------ ----------- -----------
Total Revenues 546,200 378,635 - 924,835
Expenses:
General & Administrative 125,234 152,923 - 278,157
Mortgage loan originations
fees 399,230 - - 399,230
Franchise fees - real estate - 39,021 - 39,021
Marketing costs and travel 17,511 42,757 - 60,268
Interest Expense 3,334 50,464 - 53,798
Depreciation 1,947 1,281 - 3,228
Amortization franchise
acquisition cost - 108,800 57,415 166,215
----------- ------------ ----------- -----------
Total Expenses 547,256 395,246 57,415 999,917
Income from continuing
operations (1,056) (16,611) (57,415) (75,082)
Income from discontinued
operations 9,372 - - 9,372
(Income Taxes) benefit -
continuing operations (600) - 600 -
----------- ------------ ----------- -----------
Net Loss $ 7,716 $ (16,611) $ (56,815) $ (65,710)
=========== ============ =========== ===========
Net Loss per Common share
basic and diluted $ 0.00 $ 0.00 $ (0.01)
=========== ============ =========== ===========
Weighted average number of
shares outstanding -basic
and fully diluted 10,000,000 10,000,000
=========== ===========
<PAGE> 69
Notes to Pro Forma Financial Data
The unaudited pro forma combined financial data is presented for
informational purposes only. They are not necessarily indicative of the
results of operations, or the financial position which would have occurred had
the acquisition of WHY USA NA been completed at January 1, 1999. They are
also not necessarily indicative of the Company's future results of operations
or financial position.
The adjustments consists of an increase in amortization expense of
franchise costs to $166,216 from $108,800 for an increase of $57,415 for WHY
USA NA; this is due to the increase in franchise value to $1,994,589 from
$1,305,518. The loss due to the increase in franchise expense creates an
income tax benefit of $600. The net adjustment is an increase in expense of
$56,815 which is reflected in the adjustments column and in the pro forma
combined column.
<PAGE> 70
PART III
Item 1. Index to 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)
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 Form 10SB/A No. 1 on August 28, 2000
(3) Filed with the Company's Form 10SB/A No. 2 on October 31, 2000
<PAGE> 71
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Why USA Financial Group, Inc.
(Registrant)
11/24/2000
Date: ________________ /s/ Donald Riesterer
________________________________
Donald Riesterer
Chief Executive Officer
Chairman of the Board
