WHY USA FINANCIAL GROUP INC (WUFG) - Description of business

Company Description
Introduction ------------WHY USA Financial Group, Inc. (the "Company"), a Nevada corporation, is engaged in the business of providing real estate and mortgage financial services primarily for transactions involving sales, purchases or financing of residential properties. Our business is conducted through three wholly-owned subsidiaries, Discover Mortgage Corporation and TCS Mortgage, Inc. which operate in the mortgage brokerage and mortgage banking business; and WHY USA North America Inc. which operates in the real estate franchise business. Our primary mission is to develop and provide professional residential real estate and mortgage banking services and support both to our network of franchise real estate brokers and their customers and to new home, resale home and refinancing mortgage borrowers dealing directly with our mortgage lending offices.Background ----------The Company was incorporated in Utah in 1980 and in 1983 was reorganized as a Nevada corporation. Prior to acquiring our real estate franchise subsidiary and our initial Minneapolis mortgage brokerage business in December 1999, the Company was an inactive public company under a former name with no assets, which had not been engaged in active operations for many years.The Company acquired both its real estate business, WHY USA North America, Inc. and its initial mortgage brokerage business, Northwest Financial LTD., through its 1999 reorganization merger. Incident to this merger, the former shareholders of these two subsidiaries acquired a substantial majority of the outstanding common stock of the Company through stock exchange and purchase transactions. This reorganization was effected as a reverse merger for financial statement and operational purposes, and WHY USA North America, Inc and Northwest Financial Ltd. became wholly-owned subsidiaries of the Company. Northwest Financial Ltd. transferred its operations to Discover Mortgage Corporation in the first quarter of 2002.Acquisition Strategy and Transactions -------------------------------------Since our reorganization was completed in late 1999, a principal element of our business strategy has been to expand our business through acquisitions of established businesses in our industry. The primary goal of our acquisition strategy is to enable us to become a national presence in our industry over the coming years, which we believe will provide considerable economies of scale in our operations due to increases in our revenue base whenever we complete an acquisition. Moreover, we believe we will be able to access more favorable terms from financial institutions providing our mortgage funding as our lending transactions increase.During 2001 through 2003, we conducted a number of acquisition transactions including: i) completion of acquisitions of three Arizona mortgage lending companies; ii) acquiring a significant Minneapolis mortgage broker. iii) acquiring a significant San Diego mortgage banker/broker.This acquisition activity is described as follows:AMERICA'S CASHLINE CORPORATION ("Cashline") - In February 2001 we completed acquiring all of the outstanding capital stock of Cashline, which conducted business from Scottsdale, AZ primarily dealing with subprime mortgage lending transactions. Consideration given by us to acquire Cashline consisted of 600,000 shares of our common stock and cash in the amount of approximately $500,000. By the summer of 2001, it became clear to us that this Cashline acquisition had resulted in a substantial loss to us, that the former owners of Cashline had misrepresented its business and financial position significantly, and that Cashline was basically insolvent. Accordingly, we terminated any further business operations or activities of Cashline and rescinded this transaction in order to recover the common stock we issued in the transaction. The recission of the common stock was recorded in 2002.VALLEY FINANCIAL AND MORTGAGEBANC - In June, 2001 we acquired two affiliated Arizona mortgage lenders, Valley Financial Funding LLC ("Valley") and First National MortgageBanc, LLC ("MortgageBanc"), which were engaged in residential mortgage lending and originations primarily in the Phoenix, AZ vicinity. Assets acquired by us in this transaction included significant mortgage broker and banker licenses, leased office facilities in Arizona, considerable office furniture and equipment, and perceived substantial goodwill related to their established and ongoing businesses.We did not expend any cash to acquire Valley and MortgageBanc, since they were acquired through stock exchange agreements whereby we agreed to issue an aggregate of 830,000 shares of our common stock for all of the outstanding capital stock of Valley and MortgageBanc, plus warrants to purchase up to 1,000,000 additional shares at exercise prices ranging from $1 to $5 per share, and stock options for 450,000 shares exercisable at $1 per share.While consolidating the business of Valley and MortgageBanc into our overall mortgage origination business, we discovered they had misrepresented significantly their current and projected mortgage origination revenues. There were also substantial material omissions in the financial statements provided to us during our acquisition negotiations which resulted in Valley and MortgageBanc having material business losses rather than the substantial profits they had represented to us. Moreover, we were unable to obtain marketable title to material real estate assets in Arizona, which were represented on their financial statements to be owned by them.We continued to operate Valley and MortgageBanc for about 16 months, during which we committed significant resources toward attempting to attain profitability in Arizona. We were unable to improve the business enough to realize future profitability, and accordingly we terminated our Arizona mortgage origination business in late 2002. Valley and MortgageBanc incurred operating losses of approximately $212,000 in 2002.At the time of termination we had issued a total of 694,999 of the agreed 830,000 shares of our common stock. When we formally rescinded the Valley and MortgageBanc acquisition, we were relieved of substantial liabilities relating to their subsidiary operations, and also allowed to cancel and rescind 611,666 shares of common stock of our Company issued incidental to these two acquisitions. Business conducted by us in Arizona through our Valley and MortgageBanc acquisitions constituted approximately 17% of revenues in 2002.DISCOVER MORTGAGE CORP. - From November 2001 through January 2002, we negotiated to acquire Discover Mortgage Corp. ("Discover") a Minnesota corporation engaged in mortgage lending in the Minneapolis, St. Paul metropolitan area and certain other regions of Minnesota and Wisconsin. Discover has its main office in suburban Minneapolis and three branch offices in Duluth MN, St. Cloud MN and La Crosse, WI. Discover has a broad mortgage origination business ranging from jumbo mortgages, to prime borrowers, to small difficult-to-place mortgages for subprime or nonconforming customers. Discover is a HUD approved mortgage broker who generated in excess of $250 million of loan originations in 2002, resulting in profitable revenues exceeding $3.9 million. In 2003, Discover generated approximately $277 million of loan originations resulting in profitable revenues approximating $4,749,000.Consideration given by us for Discover was limited to equity without requiring any cash outlay from us for this acquisition. We agreed to issue two times the net worth of Discover as of December, 2001 based on a common share price of $.30 per share, which resulted in a total of 1,177,140 common shares. In addition, the former shareholders of Discover were issued an additional 12,000,000 common shares related to Discover earnings in 2002 and their release of certain override and severance terms for which we were liable.The agreement to acquire Discover was executed and closed in early February 2002, after which Discover became a wholly-owned subsidiary of our company. For accounting and operational purposes, the effective date of the Discover acquisition was January 1, 2002. We entered into employment agreements to retain the services of the principal former owners and executive officers of Discover. During 2003 one of the former owners and executive officers terminated his employment agreement with Discover in a private transaction sold all of his common stock in the Company to Daryl Dinkla, Bruce Clausen, Don Riesterer and James Kylstad. The remaining individual continues to be in charge of conducting and providing mortgage lending services for Discover. They also completed integrating the personnel and operations of Northwest Financial, Ltd., our prior suburban Minneapolis Mortgage loan originator, into the structure and policies of Discover.Assets acquired by us incident to the Discover acquisition include active mortgage broker licenses, leased office facilities, considerable computer and other office equipment, furniture and substantial goodwill derived from the ongoing, profitable and growing business of Discover.During 2002, revenues from Discover business constituted approximately 84.4% of our total revenues from continuing operations.TCS MORTGAGE, INC. - On December 31, 2003 we acquired one hundred percent of the outstanding equity securities of TCS Mortgage, Inc. ("TCS"), a California corporation. TCS is a mortgage banker and broker with offices in San Diego, California and Las Vegas, Nevada. TCS has its corporate office in San Diego. TCS has a broad mortgage origination business ranging from jumbo mortgages, to prime borrowers, to small difficult-to-place mortgages for subprime or nonconforming customers. TCS is a HUD approved mortgage banker who generated in excess of $298 million of loan originations in 2002, resulting in profitable revenues of approximately $5.6 million. In 2003, TCS generated approximately $316 million of loan originations resulting in profitable revenues of approximately $5.9 million.Consideration for the shares in TCS was financed through a promissory note from Quality Investments in the original principal amount of $1.3 million, the issuance of $300,000 of debentures and the issuance of warrants to purchase 1,309,321 shares of the Company's common stock at $.20 per share. The stock purchase warrants have been valued at $10,000.On December 31, 2003, TCS became a wholly-owned subsidiary of our Company. For accounting and operational purposes, the effective date of the TCS acquisition was December 31, 2003. We have entered into employment agreements to retain the services of the principal former executive officers of TCS, and they continue to be in charge of conducting and providing mortgage banking and broker services for TCS.Assets acquired by us incident to the TCS acquisition include active mortgage broker licenses, leased office facilities, considerable computer and other office equipment, furniture and substantial goodwill derived from the ongoing growing business of TCS.Assuming on a pro forma basis that TCS had been owned by us during all of 2002 and 2003, its revenues would have constituted approximately 53.6% and 54.5% of our total pro forma revenues for 2003 and 2002, respectively.Future Acquisition Policy -------------------------We intend to continue seeking and evaluating acquisition targets of perceived profitable companies which can be readily integrated into our business model and operations.Sale of Real Estate Businesses ------------------------------We sold our WHY USA real estate business offices in Phoenix, AZ. and Janesville, WI. We had acquired these two locations from former WHY USA franchisees to be operated directly by us. We realized that becoming involved in the direct operations of real estate sales offices diverted our attention materially from our more important overall WHY USA franchise management and administration.WHY USA Franchise Program -------------------------Through our WHY USA franchise system we offer independent real estate brokers and agents a unique proprietary real estate management and marketing program. Our WHY USA national franchise system, which is registered in 41 states, was developed in the 1980's by an Arizona company. Its operations were moved to Wisconsin in the 1990's and we acquired this franchise program incidental to our 1999 reorganization. This business is owned and operated by us under a wholly-owned subsidiary, WHY USA North America, Inc. a Wisconsin corporation. Our WHY USA franchise operations are headquartered in suburban Minneapolis.The WHY USA franchise is available to qualified licensed real estate brokers and their agents, who must enter into a WHY USA Franchise Agreement in order to conduct business under the WHY USA name and proprietary operational system. WHY USA provides a unique, confidential plan for operating a real estate office, consisting of a number of successful listing, selling, marketing and management techniques developed over the years and supported by training programs, copyrighted marketing methods, and educational materials.The initial franchise fee for a WHY USA real estate office is $19,990 for a designated territory. Franchisees also pay ongoing transaction fees to us based on the lesser of $100 per transaction or 6% of commission revenues, providing they must pay at least a monthly minimum of $400. Transactions are defined as any closing or rental as a listing or selling agent, any referral or advance fees received from a client, and any consulting, assistance or materials purchase fees related to leasing or selling a property. The estimated initial investment to commence business as a WHY USA franchisee is approximately $50,000 including the initial franchise fee. We provide substantial initial and ongoing support to our franchisees including, assistance with locating an office, provision of a confidential comprehensive 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 regarding Internet access capabilities and procedures.The basic WHY USA method for listing real property offers the selling owner two options, the first being a "for sale by owner" plan and the other being a full service listing of the property for a discounted commission of 5.9%. Under the for sale by owner option, the seller pays a flat fee of $990 for which the WHY USA franchise office provides signage, professional real estate forms, and general advice regarding the sale of the property. The full listing option has a further option to reduce commissions by paying a set nonrefundable fee. The property owner also retains the right to sell the property to a friend, relative or acquaintance without paying anything more than the $990 flat fee amount.We currently have 64 WHY USA franchisees, having a total of 71 WHY USA offices with about half located in Minnesota and nearby Midwestern states, a few in California and the rest spread across the country. We currently do not have a material presence in Eastern and Southern states, although our future marketing plan includes directing substantial efforts toward certain states such as California and Florida. We estimate that our current franchisees include more than 350 licensed real estate agents who in the aggregate generate between 250 and 275 monthly real estate transactions.Our revenues from real estate franchise operations in 2003 constituted approximately 7.2% of our total operating revenues, and in 2002 such revenues were 12.2% of total operating revenues.Mortgage Lending Services -------------------------Our mortgage origination services are conducted from our wholly-owned Discover Mortgage subsidiary in suburban Minneapolis and our wholly-owned TCS Mortgage subsidiary in San Diego, California. Mortgage origination revenues and fees constituted approximately 92.8% of our total operating revenues in 2003 and 87.8% of total operating revenues in 2002. Assuming the acquisition of TCS as of January 1, 2002, our mortgage origination revenues, on a proforma basis, in 2003 and 2002 would have been 95.8% and 93.5%, respectively. Our mortgage loan officers typically act as brokerage agents and process their mortgage loan applications through one of a number of banking or other lending institutions which provide the actual funding. We normally pay for the credit report, property appraisal and processing expenses of the mortgage loan. We do not service any of the mortgage loans we originate.Marketing ---------We expend considerable financial and personnel resources toward conducting an ongoing advertising and marketing program to promote our WHY USA franchise brand awareness and develop customer loyalty, as well as to assist our real estate franchisees in obtaining new prospective customers. Our franchise marketing program focuses primarily on support of existing WHY USA franchisees, including marketing activities such as advertising in selected general print and other media, placing ads in certain industry periodicals, providing on-site training and technical assistance to our franchisees, preparation of professional brochures, videos and other sales materials portraying the services and advantages of WHY USA franchises, participation in selected industry trade shows, and maintaining a WHY USA Internet website.Marketing of our mortgage lending services is conducted by our loan officers who rely principally on leads and referrals developed by them personally or through our telemarketers. While the implementation of the recent "do not call" legislation has caused some concern, the Company has found that by purchasing scrubbed lists from third party providers it has been able to mitigate any liability for fines back to the provider of the scrubbed lists. The use of purchased scrubbed lists has also resulted in a higher quality leads for marketing and sales purposes.Incidental to our mortgage origination business in Minnesota, we also have an experienced telemarketing center in Sebeka, Minnesota which was established in 1998 solely to develop leads to target customers seeking initial mortgage loans or refinancing. Our telemarketing center is equipped with modern telemarketing equipment.We believe that our telemarketing center has been very effective as a marketing tool for our mortgage lending services in Minnesota and we intend to expand it in order to develop leads and serve our various loan officers in all other areas where we offer our mortgage lending services.Personnel ---------As of January 1, 2004, we employed 85 people and retained the services of 4 independent contractors. WHY USA Financial Group employed 2 executives. WHY USA North America, the franchise division, employed 1 executive, 1 manager and 2 administrative personnel. Northwest Financial Ltd, the telemarketing division, employed 1 manager and 5 telemarketers. Discover Mortgage employed 1 executive, 36 loan officers, 4 processors and 5 administrative personnel. TCS Mortgage employed 5 executives, 6 processors/funders, 5 administrative personnel, 11 loan officers and 4 loan officer/contractors. None of our employees belong to a labor union. We consider our employee relations to be good.