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WESTAR FINANCIAL SERVICES INCORPORATED
(successor to Republic Leasing Incorporated
-------------------------------------------
(Name of Registrant as Specified In Its Charter)
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Appendix D
Annual Report to Shareholders
[FRONT COVER]
Fiscal 1996
Annual Report/10-K
--------------------------------------
Westar Financial Services Incorporated
[Graphical presentation: Republic Leasing logo fading into Westar Leasing logo]
[INSIDE FRONT COVER]
The following statement is offset in left margin with a border surrounding the
text:
STATEMENT REGARDING "FORWARD LOOKING STATEMENTS"
Statements in this report concerning future performance, developments or events,
including expansion plans, various statements, tables and graphics concerning
expectations for growth and market forecasts for the Company's products and for
its industry, adequacy of working capital, and any other guidance on future
periods, constitute forward-looking statements which are subject to a number of
risks and uncertainties which might cause actual results to differ materially
from stated expectations.
CORPORATE PROFILE
Westar Financial Services Incorporated (OTC:WEST) is a fast-growing,
Washington-based automobile finance company focused solely on the prime-credit
segment of the huge auto-finance market. Prime credits are those individuals
qualifying for the highest credit rating based on credit history, cash flow, and
personal stability.
The company was formed as a limited partnership, Republic Leasing, in 1985
and incorporated in 1989 in Delaware. Its original business was leasing
equipment and vehicles to commercial clients. From 1984 through 1994, the
company sold approximately $13 million of leases and the underlying assets to
various financial institutions, while retaining the servicing.
[bullet] Initial testing of the company's innovative Dealer-Direct Retail
Leasing (DDRL) program began in March 1994. DDRL provides automobile dealers
with a financing alternative to traditional loan and lease programs. Market
test acceptance was seven times expectations, confirming the company's
potential.
[bullet] Throughout 1994, 1995, and 1996 management identified and engaged
key personnel. Westar also developed marketing strategy and information
systems, and identified and secured access to capital markets necessary to fund
the company's growing auto lease activity.
[bullet] Full-scale activities through the DDRL program began in October
1995. At fiscal year end March 31, 1996, Westar served more than 100 high-
quality auto dealers throughout Washington, Oregon and Idaho; giving it
agreements with nearly 1/3 of Washington's auto dealers in its first six months-
- -exceeding early goals.
[bullet] Over $5 million of automobile leases were written during the
first two full quarters of DDRL operations (ended 3/31/96). Current capacity is
geared to handle more than 250 dealers, or $10 million of new leases monthly.
[bullet] Relationships with Bank One, Columbus, NA, a subsidiary of Banc
One Corp. and The Industrial Bank of Japan (IBJ) -- two of the world's most
respected financial companies -- are flourishing. Lease and securitization
accounting expert, BDO Seidman LLP, has been retained as the company's outside
auditor. Westar's first securitization through IBJ is expected to be completed
in late June/early July 1996.
[bullet] Westar meets dealer needs through responsive customer service,
extended hours, rapid funding, consistent buying practices and competitive
pricing. Westar can approve prime financings in less than 23 minutes.
[bullet] Common shares began trading publicly as Republic Leasing
(OTC:REPH) in November 1995. The new name Westar Financial Services and stock
symbol (OTC:WEST) took effect in April 1996.
[bullet] A 2-for-1 stock split was paid June 14, 1996, boosting
outstanding shares to 1.4 million.
FIRST PAGE
[Photograph of Steven R. Murphy, Cathy L. Carlson and Robert W. Christensen on
location at an auto dealership is inset in text on first page and bears the
following caption: "Westar's executive officers from left to right: Steven R.
Murphy, VP, National Marketing Director; Cathy L. Carlson, VP, Operations;
Robert W. Christensen, Chairman and CEO."]
LETTER TO SHAREHOLDERS
Dynamic and successful are the words which best describe fiscal 1996 and
early fiscal 1997.
We have achieved or surpassed our major goals outlined a year ago. Early
results are proving Westar is an effective competitor.
Our marketing mechanism was refined and is up and operating, credit lines
were established, lease securitization structures were defined, outstanding
staff members joined us, more than 100 dealers had signed leasing agreements,
and our shares began trading publicly over-the-counter.
The most experienced companies in the world in their respective fields --
Bank One, The Industrial Bank of Japan, and BDO Seidman -- joined the team.
The events and accomplishments of fiscal 1996 will define our corporate
path well into the future.
On the first day of our present fiscal year (April 1, 1996), our company
name changed to Westar Financial Services from Republic Leasing -- giving us a
cohesive corporate identity and allowing us to capitalize on the impressive
growth opportunities we see.
At the same time, our authorized common shares increased to 35 million from
two million -- adding flexibility in structuring for growth through stock
splits, share dividends, private financings, or a public offering. In addition,
the company re-incorporated in Washington from Delaware.
These changes reflect the vision and strategies we outlined last fall.
Reflecting our progress and performance, we paid a 2-for-1 stock split on
June 14. Following the stock split, Westar has 1,435,300 common shares issued
and outstanding, with approximately 940,000 shares in the "float". This action,
along with our improved equity position and increased market capitalization,
moves Westar along its strategic path.
Operating Results
Independent automobile financing has been one of this year's most exciting
growth stories. Nearly every company in the industry has been publicly-held
less than five years. All have achieved substantial results in terms of market
volumes, profits, and stock market values.
Westar is one of only two independent U.S. companies predominantly in auto
leasing. We acquired over $2 million in automobile leases during the company's
first full quarter of such operations (12/31/95) and acquired over $3 million in
the fourth quarter ended March 31, 1996. Such dramatic corporate change and
growth has a price before the investment begins to pay off.
Primarily because we left the commercial capital equipment leasing business
early in fiscal 1996, revenues were $1.6 million compared to $2.1 million during
fiscal 1995. We recorded a net loss of $852,000 or $.82 per common share for
the year, compared to a net loss of $468,000, or $.43 per common share in fiscal
1995. Per share figures are adjusted for the 2-for-1 split effected June 14.
We expect selling and administrative expenses to remain at a comparable
level during the early high-growth phase of building our auto lease financing
operations, but they will pay off as we expand operations and create increased
volumes from our markets.
Dynamic Market
There are more than 22,000 franchised automobile dealers in the United
States. Clearly, there is much room for growth and the success we have had to
date indicates Westar's potential is exceptional.
At $350 billion annually, automobiles represent the second-largest consumer
finance market in the U.S., after home mortgages. Of this huge market, industry
sources estimate more than $55 billion is composed of new car leasing. Within
Washington state, we estimate the new car leasing market exceeds $600 million,
with another $600 million per year in Idaho and Oregon.
Rising car prices and consumer awareness are stimulating leasing. In 1995,
industry sources indicated approximately 30% of all new vehicles delivered in
the US were leased -- compared to only 14% in 1988. From nearly nothing eight
years ago, the auto component of securitized consumer debt outstanding is
estimated at over $200 billion.
New vehicle price increases have outpaced gains in median family income.
For example, in 1975, cost of a new vehicle was said to equal 36% of median
family income. In 1995, it reached 51%. Leasing enables consumers to obtain
vehicles they desire by offering lower monthly payments.
SECOND PAGE
[Contains two insets: (1) The following statement: "Westar has already signed
more than 20% of the auto dealers throughout Washington, Oregon and Idaho." (2)
A bar graph entitled, "Dealer Growth (first six months of DDRL program),"
presenting months on the X-axis and quantities on the Y-axis of the following
data:
Month end Dealer Count
10/95 48
11/95 53
12/95 58
1/96 62
2/96 68
3/96 101 ]
To serve this fast-growing market, Westar signed up more than 100 high-
quality automobile dealers throughout Washington, Oregon and Idaho as of our
March fiscal year end, compared to 60 at December 31. That success gave us
agreements with nearly one-third of the dealers in Washington in our first six
months, far exceeding early expectations. At May 31, 140 dealers in the three
Northwest states had signed up with Westar, nearly double our original
expectations.
Auto dealers are choosing us because Westar meets their needs through
responsive customer service, extended hours, 7-days-a-week operations, rapid
funding, consistent buying practices and competitive pricing.
Management
Both Westar's President and National Marketing Director are past presidents
of the National Vehicle Leasing Association (NVLA); each has received the
Clemens-Pender award, an annual honor recognizing the industry's most
outstanding leaders. Both were instrumental in the NVLA's evolution into the
largest trade association in its industry.
The NVLA's "Murphy Cup" award for competitive marketing success was named
for our National Marketing Director Steve Murphy, who joined Westar in July
1995. He is a nationally recognized expert in the creation and management of
professional sales forces dedicated to serving auto dealer needs and the
consumer leasing market. Steve is responsible for all aspects of marketing the
DDRL program. In his 20 years of relevant marketing experience, he has been
responsible for creating $1.9 billion of outstanding consumer lease assets in 22
western states and managed dealer relations with more than 1,500 auto dealers.
Cathy Carlson was name Vice President of Operations in May after serving as
Vice President/Finance and Chief Financial Officer since 1987. A CPA, Cathy
previously was with Coopers & Lybrand, a "Big Six" accounting firm. She has
been responsible for getting our LASIR (Lease Accounting and Securitization
Income Reporting) technology up and running. The LASIR system provides the best
service in the business. Cathy led the creation of our combined origination and
issuer trust, the Westar Lease Origination Trust. A US "first"; this structure
for asset based securitizations (ABS) is significantly improved over the older,
complex, and expensive ABS structures used by others. Its impact is so striking
and has such widespread potential application that we named it the "Carlson
Trust" and request future users of this ABS structure to call it that.
Fast Service and Simplicity
Westar's DDRL program is helping auto dealers write leases faster and
provide better service.
We work auto dealer hours -- evenings, weekends and holidays -- not
banker's hours. Westar is closed just four days a year: Thanksgiving,
Christmas, New Year's and Easter.
Dealers transmit completed applications to us; they are reviewed through
our LASIR system by lease production officers (LPOs). Employment and
residential history, bank account and income information, debts and credit
reference data are entered into Westar's centralized computer network.
After receiving an independent credit bureau report, the application is
"scored" with a proprietary scorecard designed by Fair, Isaac & Co. This
scorecard -- together with several other LASIR tools focused on the applicant's
relative stability, past payment history and current liquidity -- allows our
LPOs to closely review and evaluate the application.
All Westar leases pass through the LASIR system. The scorecard's weighting
system and other LASIR decision points are especially significant because they
are objective and cannot be easily manipulated. After credit approval, the
dealer provides a lease funding package for final approval by our funding
specialists.
LASIR is much more than just a proprietary scorecard, more than just a
credit approval system. It is the engine which drives our ability to grow into
the future by allowing a dramatic increase in lease volumes without a
corresponding increase in overhead expense or expansion beyond acceptable credit
risk.
THIRD PAGE
[Contains two insets: (1) The following statement: "Westar is positioning
itself to capture a leading share of the $55 billion new car leasing market
nationwide." (2) A bar graph entitled, "Personal Use Leasing Quantity of Leases
(in millions)" presenting years on the X-axis and quantity increments on the Y-
axis of the following data:
Year Quantity of Leases
1990 1.06
1991 1.25
1992 1.72
1993 2.48
1994 3.22
1995 3.44
1996 3.78 (est) ]
Designed as a state-of-art, fully-automated, multi-functional, multi-user
computer system, LASIR enables us to approve financing in as little as 23
minutes -- substantially faster than the leasing industry standard of one hour.
Emphasis on Quality
Westar's entire focus is on prime quality borrowers -- a market that, we
believe, continues to hold tremendous growth opportunities.
Our standards for credit decisions are very selective; our goal is solid
portfolio performance with minimal credit losses. It is essential that we
produce leases for only the most creditworthy consumers.
This focus on quality is important to Westar's ongoing success. Quality
not only in terms of prime credit consumer borrowers and top-notch auto dealers,
but in every aspect of our business -- our people, training programs,
compensation plans, internal policies, and the respected bankers and
professionals who have been willing to align with us and our vision.
Our typical dealer is a franchised new car dealer located in one of our
three states, leasing a new or recent model year used car to a resident of those
states or Utah or Montana. We are selective about the dealers we recruit. Not
all qualify initially, not all continue to qualify over time. We believe the
best lease customers originate from the best car dealers. It's a synergism we
actively pursue.
Securitization Strategy
The strength of our original market test indicated we needed much greater
financial capacity than first thought.
Developing the ability to sell automobile leases in the secondary market
through securitized packages was vital to Westar's vision.
Securitization -- packaging, sale and servicing pools of financial assets
for investors -- can create access to large amounts of less expensive capital.
It allows us to price leases competitively against our largest and most
sophisticated competitors.
Formerly limited to the largest banks, other financial institutions and
Fortune 100 companies, securitization is now available to smaller firms.
Primary buyers of Asset Backed Securities (ABS) are financial institutions,
pension funds or other professional investors. Most securitizations, large and
small, are rated AAA or other investment grade. Thus, even smaller firms (such
as Westar) can place financial instruments at prices and terms previously
available only to the largest, most credit-worthy companies.
They told us it couldn't be done. Westar was too small, our track record
wasn't long enough, our name was unknown. Based on the quality of our program,
our product and our partners, we have overcome every objection.
The very nature of leases can make lease securitizations extraordinarily
complex. Westar has simplified the process with its innovative Carlson Trust --
a single trust serving as both originator and issuer. Our network of three
subsidiaries, while simplifying servicing and maintaining the "bankruptcy
remote" corporate aspects required of any ABS issuer, eliminates the need to
constantly change vehicle titles.
Securitization allows us to recycle our capital. We acquire leases, using
our credit line from Bank One, then sell the leases in a securitized pool placed
by IBJ and pay down the Bank One line. We are paid by the investors who buy the
securitized pools. When a securitization package is completed, we can repeat
the entire process, and increase our lease pools using the Bank One credit line.
We protect our business and our shareholders' interests against the risk of
lease charge-offs through a policy of prudent and conservative reserves for
credit losses.
Quality partnerships
The Industrial Bank of Japan is the world's sixth largest bank. Based on
the strength of our team, plans and vision, IBJ agreed to place $100 million of
securitizations for our company, in increments of $10 million or more. We
anticipate this facility will become available in larger amounts as needed. IBJ
is invested in our success.
Bank One is the eighth largest bank in the US, one of the biggest bank
lessors in the nation, and a highly respected consumer lender. We asked them
FOURTH PAGE
[A photograph of Bob Christensen and dealership owner, Ed McCarroll, on location
at a dealership is inset in text. The caption below the photograph reads,
"Westar has signed the highest quality dealers. Here, Bob Christensen speaks
with Ed McCarroll."]
for $10 million for one year; they gave us $12 million for three years. This
allows us to 'warehouse' DDRL leases prior to securitization. Bank One is a
tremendous help in all areas; they've told us they're committed to helping
Westar succeed.
Northwestern Trust is the official Trustee for Westar Lease Origination
Trust (WestLOT), a critical component of our Carlson Trust technology.
Northwestern Trust is a $1 billion Seattle institution that provides us an
entree into the Pacific Northwest's top financial circles.
BDO Seidman LLP, our outside auditor, has extensive leasing industry
experience and securitization expertise which is extremely valuable in our fast-
paced challenge to the status quo.
Down the Road
We will continue our expansion into new geographic markets, as well as
increase penetration of our present regional market. Likewise, we will continue
to nurture relationships with existing dealers. Our enhanced standing in the
financial markets will provide additional flexibility and efficiencies in
raising capital and securitizing leases.
In addition to the financing facilities provided by IBJ and Bank One,
Westar has issued four series of preferred stock to build its capital position.
As a result, we have created nearly $115 million of financial capacity for our
DDRL program. The opportunities available to Westar, plus our appetite for fast
growth, will demand further infusions of additional capital through both private
and public financings.
As our cost structure is leveraged over a larger base of operations, we
will see enormous efficiencies of scale from our substantial early investments
in people and systems. We believe that LASIR can provide the capacity for
substantial growth without comparable increases in overhead.
Above all, dedicated people are the key to our success. Our staff is
experienced and motivated; our personnel programs are designed to reward
initiative and ensure continuing growth. Because we also offer an employee
stock option plan, our employees are even further motivated toward success. Our
people performed superbly during fiscal 1996's tremendous growth and change.
Our current 140 dealers in Washington, Oregon, and Idaho represent 20% of
the dealers in those states. Our growth has been solid and impressive; it is
only beginning.
Westar's aspirations are national. Obviously, building a national company
is expensive. The costs of growth are front-loaded and we are investing heavily
in the future. We believe the existing infrastructure at our Olympia
headquarters will support more than $100 million in annual lease acquisitions.
Already, we are planning our expansion strategy. We expect to add regional
offices as quickly as resources can be brought to bear. We intend to site new
offices in areas where research indicates we have an opportunity to build
relationships with high quality dealers serving a healthy local economy.
We expect to be a low-cost, high-tech, high-touch, service-oriented
producer of prime consumer leases. Our people, product, systems, processes,
strategic allies, and partners are fully worthy of our ambitions.
As Westar continues to grow, we expect that we will look back on fiscal
1996 as a breakthrough year, characterized by solid achievements that provide a
firm foundation for further success.
We appreciate your continuing support.
Sincerely,
R.W. Christensen, Jr.
Chairman
Chief Executive Officer
June 14, 1996
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For the fiscal year ended March 31, 1996 Commission File Number 2-95465-S
Westar Financial Services Incorporated
(successor to Republic Leasing Incorporated)
(Exact name of registrant as specified in its charter)
Washington 91-1715252
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
The Republic Building, Suite 300, Olympia, WA 98501
(address of principal executive office, zip code)
Registrant's telephone number, including area code (360) 754-6227
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing require-
ments for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Aggregate market value of voting stock held
by non-affiliates of the registrant at May 31, 1996
$10,335,116
1,435,300 shares of no par value Common Stock outstanding as of May 31, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its July 22, 1996,
Annual Meeting of Shareholders are incorporated into Parts II and III of this
annual report on Form 10-K.
Total of Sequentially Numbered Pages:
Exhibit Index is Located at Page:
PART I
ITEM 1. BUSINESS
- -----------------
General
- -------
Westar Financial Services Incorporated ("Westar"), successor to Republic Leasing
Incorporated ("RLI"), was originally formed in 1985 as Republic Leasing VI, a
limited partnership, and incorporated in 1989 in the state of Delaware. At a
special shareholders' meeting held on March 25, 1996, the shareholders of RLI
approved a plan of merger between Westar and RLI (see Item 4). The merger
effected the reincorporation of RLI in the state of Washington and the change of
name to Westar.
In March 1994, the Company began acquiring leases from automobile dealers under
its new Dealer-Direct Retail Leasing ("DDRL") program. DDRL provides automobile
dealers a financing alternative to the traditional loan and lease programs
offered by financial institutions and auto manufacturers and other captive
finance companies. Throughout fiscal 1994 and 1995 and the first half of fiscal
1996, Company management was identifying key personnel, developing marketing
strategy and information systems and identifying the necessary capital markets
needed to fund such a program. In addition to DDRL, the Company continued to
service leases of equipment and vehicles sold to other financial institutions
(see Lease Servicing). It is management's intent to focus future business
growth efforts on DDRL. The Company launched full-scale DDRL operations in
October 1995.
In July 1995, three new companies were formed constituting a structure designed
to better facilitate lease securitizations. The companies consist of Westar
Auto Holding Company, Inc. ("WestAH"), a 100% owned subsidiary of RLI; Westar
Auto Finance, LLC ("WestAF"), a limited liability company owned 99% by RLI and
1% by WestAH; and Westar Lease Origination Trust ("WestLOT"), a Washington state
business trust beneficially owned by WestAF. The accompanying financial state-
ments represent the consolidated results of Westar, RLI, WestAH, WestAF and
WestLOT which are collectively referred to as the "Company".
The Company conducted business as an operating company under the trade name of
"Republic Leasing" registered in the state of Washington. In April 1996, the
Company began using the tradename "Westar Leasing" in addition to Republic
Leasing. Westar Leasing is also registered in the state of Washington.
The Company's business activities are currently concentrated in the Pacific
Northwest, but may take place in other areas of the United States.
Forward-Looking Statements
- --------------------------
Although most of the information contained in this report is historical, certain
of the statements contain forward-looking information. To the extent these
statements involve, without limitation, product development and introduction
plans, the Company's expectations for growth, estimates of future revenues,
expenses, profit, cash flow, balance sheet items, forecasts of demand or market
trends for the Company's products and for the auto finance industry or any other
guidance on future periods, these statements are forward-looking and involve
matters which are subject to a number of risks and uncertainties that could
cause actual results to differ materially from those expressed in such forward-
looking statements. Readers of this report should consider, along with other
relevant information, the risks identified in this report, and other risks
identified from time to time in the Company's filings with the Securities and
Exchange Commission, press releases and other communications.
Business Strategy
- -----------------
DDRL Leases
- -----------
The Company's primary strengths are its existing dealer network, its financing
capabilities and its 18 years in the leasing industry. The Company's strategy
for growth is to utilize its strengths to (i) increase lease acquisitions by
continuing to develop existing dealer relationships within its existing geogra-
phic market and by expanding into new geographic markets and (ii) expand and
further develop its servicing and used automobile remarketing operations.
The Company's business strategy is to (i) provide personal and attentive service
to the manufacture-franchised automobile dealers in its network, (ii) lease
primarily to high quality credit applicants in order to build a lease portfolio
with low delinquency and credit loss rates, (iii) finance its lease portfolio in
the short-term through warehouse credit facilities and in the long-term through
asset-back securitizations and (iv) manage its residual value risk through the
initial utilization of primary residual value insurance policies and tax benefit
transactions and ultimately through residual estimation strategy and remarketing
expertise.
The Company offers its DDRL program to selected automobile dealers based on
their reputation, location and size. Each dealer that chooses to participate is
required to sign a nonexclusive Dealer Agreement. The Company attempts to meet
the needs of its dealers through responsive customer service, extended hours,
rapid funding, consistent buying practices and competitive pricing. The Company
currently offers the DDRL program to automobile dealers in the states of
Washington, Oregon and Idaho. At March 31, 1996, the Company had 101 signed
dealers.
Leases acquired from dealers through DDRL are pre-approved by the Company's
experienced Lease Production Officers ("LPO") and must meet the Company's credit
and documentation standards prior to funding. Lessees must not exceed
established debt/income and payment ratios and must possess a credit history
exhibiting their willingness to pay creditors on an as agreed basis. The
Company has implemented a proprietary credit scoring system which further
enables the Company to control the consistency of the credit quality of the
applications approved.
Commercial Leases
- -----------------
Although the Company has ceased marketing its commercial lease product, the
Company continues to service the leases sold to other financial institutions.
The Company's previous commercial client relationships have all been referred
to T&W Leasing, Inc., a preferred stock shareholder.
Lease Servicing
- ---------------
Over the last ten years the Company has sold, primarily to financial institu-
tions with servicing retained, approximately $14 million of leases and the
underlying assets for purposes of managing its credit exposure and to provide a
source of capital for funding new lease acquisitions. Services provided by the
Company to purchasers of its leases include, but are not limited to, monthly
billing, collecting and remarketing. At March 31, 1996, leased assets out-
standing which are not held in the Company's portfolio but are serviced by the
Company for others approximated $2,000,000.
Competition
- -----------
The retail automobile leasing industry within Washington, Oregon and Idaho is
dominated by large banks and captive finance companies of the vehicle manufac-
turers. The banks currently dominate the overall market for new vehicle leases.
Vehicle manufacturers, each of which sponsors either a subsidiary finance
program or a bank-sponsored program, can and do compete extremely aggressively
on price, but on a very selective basis, typically promoting one model or
another at price levels roughly equivalent to, or even below, their cost of
funds (these are known as "subvention" programs); while their other dealer
models are priced at competitive, rather than super-competitive, levels. Manu-
facturer's subvention programs typically restrict, often substantially, the
profit margin available to the selling dealer. The remaining competitors --
dealer-affiliated leasing companies, independent leasing companies, other banks,
credit unions -- split the remaining market among themselves, exercising neither
significant leadership nor dominance. Through the use of lower costs made
possible by securitization and lower overhead, lack of regulatory burden, and
lower transaction costs, management believes it can position the Company to be
fully price competitive with its largest competitors and to surpass them with
better service and responsiveness.
Credit Practices and Delinquency and Credit Loss Experience
- -----------------------------------------------------------
The Company's success is, in part, dependent on its ability to develop a port-
folio of prime-credit quality leases so as to minimize its delinquency and
credit loss experience. The Company's operating performance, financial
condition, liquidity and capital resources are materially affected by the per-
formance of the leases acquired by the Company. Each lease applicant must pass
the scrutiny of the Company's automated credit evaluation system and the review
of our experienced lease production personnel.
In connection with the servicing of leases, the Company is responsible for
managing delinquent accounts, repossessing the underlying collateral in the
event of default and selling repossessed collateral. The Company provides an
allowance for lease credit losses at a rate, which in the opinion of management,
provides adequately for current and probable future losses that may be incurred
by the Company.
The Company considers a lease delinquent when the lessee fails to make an
installment payment by the due date. A delinquent lease may result in the
repossession and foreclosure of the collateral underlying the lease contract.
Losses resulting from repossession and foreclosure of leases are charged against
applicable allowances. The Company had $5,417,000 and $772,000 in DDRL leases
outstanding, at March 31, 1996 and 1995, respectively. At March 31, 1996 and
1995, none of the leases were delinquent for 31 or more days and there were no
leases in repossession.
Although we expect our delinquency and credit loss experience to be at or below
other prime-credit producers, the loss experience rate depicted in the table
below is much higher than management's expectation for future periods. The
leases contributing to the losses in 1996 and 1995 were all acquired during the
Company's development and test phase and were not approved using the credit
policies, guidelines and procedures currently in place and which the Company has
been using since full-scale operations began in October 1995.
The credit loss and repossession experience of the Company's DDRL lease port-
folio for the years ended March 31, 1996 and 1995 was as follows:
Credit Loss/Repossession Experience (1) 1996 1995
- --------------------------------------- ----------- ---------
Average amount outstanding during period $ 3,094,000 $ 386,000
Average number of contracts outstanding 141 23
Number of repossessions 4 1
Repossessions as a percentage of average
number of leases outstanding 2.85% 4.44%
Gross charge-offs (2) $ 85,000 $ 12,000
Recoveries (57,000) (8,000)
------ ------
Net losses $ 28,000 $ 4,000
====== ======
Net losses as a percentage of average
DDRL lease portfolio .90% 1.04%
(1) All amounts and percentages are based on the net investment amount scheduled
to be paid on each lease.
(2) Amount charged off includes the remaining net investment balance in the
lease, but not unearned income.
Financing
- ---------
DDRL
- ----
The Company's plan provides for the securitization of leases acquired through
the DDRL program as asset-backed securities. The Company intends to service the
securitized leases. Various forms of financing are used to fund leases until a
sufficient "pool" has been generated for securitization. Forms of financing in-
clude traditional wholesale lease lines from banks, repurchase arrangements with
banks and internal capital.
In March 1995, the Company entered into an agreement with The Industrial Bank of
Japan, Limited ("IBJ") whereby IBJ agreed to assist the Company in arranging the
placement of up to $100 million in securities backed by auto lease receivables
generated through the DDRL program. In July 1995, the Company entered into an
agreement with Bank One, Columbus, NA ("Bank One") for a $12 million revolving
credit facility to be utilized as interim financing for the acquisition of auto
leases until sufficient volume is achieved to securitize such leases through the
IBJ facility. The IBJ facility has been structured to allow for securitized
transactions in $10 million pools. Initial funding under the Bank One facility
began in November, 1995. The Company must comply with quarterly debt/equity
ratios and net worth requirements.
In June 1994, the Company entered into an arrangement with a bank for the pur-
pose of financing leases acquired through the DDRL program pursuant to which
the bank agreed to purchase from the Company up to $1.5 million of leases so
acquired. The Company has the right under this arrangement to repurchase such
leases at anytime and may do so, in whole or in part, prior to entering into its
first securitization transaction. Leases sold under this arrangement are
recorded as lease repurchase agreements at their amortized cost basis using the
rate implicit in the underlying lease contract. Proceeds received upon sale of
the lease contracts are recorded as amounts payable under repurchase agreements,
which bear interest at rates between 7.5% and 8%, and are subsequently reduced
for principal payments received by the bank on such contracts.
Commercial
- ----------
Until July 1994, the Company utilized wholesale lines of credit with financial
institutions for financing the purchase of assets for lease. The Company bor-
rowed from 90% to 100% of the cost of the asset purchased. Beginning in July
1994, the Company began selling all of it's commercial lease production to T & W
Leasing, Inc. ("T&W"), a preferred stock shareholder, and management has
referred its commercial relationships to T&W. During the year ended March 31,
1996, total revenues from leases sold to T&W approximated $892,000. Leases sold
are serviced by the Company.
Regulatory Matters
- ------------------
The Company's operations are subject to regulation under federal, state and
local laws, rules and regulations. In addition, the Company is required to
obtain and maintain certain licenses and qualifications in the states in which
it operates and is subject to laws, rules and regulations in each state.
Several states and the federal government have enacted "lemon laws" and similar
statutes containing warranty protections for consumers who purchase or lease new
or used motor vehicles. The application of these statutes may give rise to a
claim or defense by a consumer against the manufacturer of a purchased vehicle
or the dealer from or through whom such consumer leased such vehicle. The Com-
pany may be required to cancel a lease contract with a consumer who successfully
asserts such a claim or defense, and while the Company would have a claim
against the manufacturer or such dealer, there can be no assurance that the
Company will be made whole in every case in which the consumer successfully
asserts such rights.
The Company is also subject to numerous federal laws, including the Consumer
Leasing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act
and the rules and regulations promulgated thereunder, and certain rules of the
Federal Trade Commission. These laws require the Company to provide certain
disclosures to prospective lessees, prohibit misleading advertising and protect
against discriminatory financing or unfair credit practices.
Violations of the federal and state laws, rules and regulations described above
may result in actions for damages, claims for refunds of payments made, certain
fines and penalties, injunctions against certain practices, license revocation
and the potential forfeiture of rights to repayment of amounts due under leases.
The Company maintains internal controls to ensure that all legal and regulatory
requirements which apply to its business are complied with. Further, the
Company maintains internal systems and controls to monitor, respond to and
resolve informal and formal complaints raised by the lessees of its vehicles.
Employees
- ---------
As of March 31, 1996 the Company had 18 employees. Many of Westar's employees
are highly skilled and the Company's continued success depends in part upon its
ability to attract and retain employees who are in great demand within our
industry. At times, the Company may experience difficulty in hiring and
retaining experienced personnel. To date, the Company believes it has been suc-
cessful in its efforts to recruit qualified employees, but there is no assurance
that it will continue to be as successful in the future. None of the Company's
employees are represented by a collective bargaining unit and the Company
believes relations with its employees are favorable.
Executive Officers
- ------------------
Set forth below is certain information concerning the executive officers of the
Company as of March 31, 1996:
Name Age Position
- -------------------------- --- ------------------------------------
Robert W. Christensen, Jr. 47 President and CEO
Cathy L. Carlson 40 Vice President, Operations
Chief Finance and Accounting Officer
Steven R. Murphy 56 Vice President
National Marketing Director
R.W. Christensen, Jr., age 47, is the President (since 1978) and Chairman of
the Board of Directors (since 1995) of the Company. Prior to 1978 he held posi-
tions as a financial analyst with Olympia Brewing Company, Assistant to the
President of Pacific Hide & Fur, a natural resources and steel distribution
firm, and as Corporate Pilot with Buttrey Food Stores. Mr. Christensen served
as Vice Chairman (1989-1990) and a member of the Board of Directors (1987-1990)
of Heritage Federal Savings & Loan Association. He is President and director of
Mud Bay Holdings Ltd., a privately held investment firm. Mr. Christensen has
previously served as an officer, director and President of the National Vehicle
Leasing Association (1981-1988) in which capacities he presented dozens of
articles and scores of speeches on the state and future of the automobile
leasing industry, subjects in which he is regarded as expert. He was awarded
the industry's most prestigious recognition, the Clemens-Pender Award, in 1988.
He has served as director of Washington Independent Bankshares (1982). Mr.
Christensen serves as the court-appointed Trustee of CASR Trust, a multi-year,
multi-million dollar fund established by the bankruptcy court for the benefit of
the creditors of All Seasons Resorts. He graduated from the College of Great
Falls (B.A. with Honors, Management and Economics) and received an MBA from the
University of Puget Sound.
Cathy L. Carlson, age 40, is a director of the Company (since 1992), Vice
President-Operations with responsibilities for Dealer Support, Lease Servicing,
Operations and Management Information Systems (since 1996), Vice President-
Finance with responsibility for accounting, finance and administration (since
1991) and has also served as Controller and Chief Financial Officer (since
1987). Ms. Carlson is a Certified Public Accountant and was with Coopers &
Lybrand from 1980 to 1987. She is a member of the Washington Society of CPAs
and the American Institute of CPAs. Ms. Carlson graduated from Seattle
University (B.A., Accounting.)
Steven R. Murphy, age 56, is the Vice President - National Marketing Director of
the Company with responsibility for all aspects of marketing, including the
recruitment, training and supervision of local, regional and national marketing
representatives (since 1995). Prior to joining the Company, he was Vice
President, National Marketing Director of Credit Union Leasing of San Diego,
California (since 1992). Prior to joining Credit Union Leasing, Mr. Murphy was
found and CEO of Bank Inventory Disposal Systems, Inc. of Ontario, California
(since 1989) which he sold in 1991. Previously he was with First Leasing
Corporation of Alameda, California, and its successor, Marine Midland Automotive
Financial Corp. for fourteen years, where he was responsible for the creation of
$1.9 billion of outstanding consumer lease assets from 1,500 dealers in 22
western states (since 1970). Mr. Murphy is a past president of the National
Vehicle Leasing Association, recipient of the Clemens-Pender Award, and is the
namesake of the "Murphy Cup," an award which recognizes the NVLA's most
competitive chapter's marketing success.
ITEM 2. PROPERTIES
The general and administrative offices of the Company are located at The
Republic Building, Olympia, Washington 98501, on leased premises with approx-
imately 4,400 square feet. The lease expired March 31, 1996. The Company is
currently in negotiations for renewal of the lease. The facilities are ade-
quate for the Company's current and planned operations.
ITEM 3. LEGAL PROCEEDINGS
There are no reportable events.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special shareholders' meeting on March 25, 1996. The matters
voted upon at the meeting were (i) the proposal to reincorporate the Company in
Washington and (ii) a proposal for an increase in the Company's authorized
shares to 35,000,000. The tabulation of votes was as follows:
Reincorporation Increase in Shares
--------------------- ------------------------
In Favor Against In Favor Against
466,701 4,710 444,676 26,735
Pursuant to the Merger Agreement, RLI was merged with and into Westar. As of
the effective date of the Merger Agreement, the owner of each outstanding share
of common stock of RLI owns one common share of Westar. Similarly, the owner of
each outstanding share of preferred stock of RLI owns one Westar preferred share
of the corresponding series. Each outstanding certificate representing a RLI
common or preferred share represents the same classification and number of
shares in Westar. All outstanding warrants and options of RLI are warrants and
options of Westar.
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK AND DIVIDEND POLICY
Trading of the Company's common stock began on November 28, 1995, and is facili-
tated through the NASDAQ OTC Bulletin Board (OTC:WEST). As of March 31, 1996,
the Company had 382 stockholders of record. The Company has not paid any divi-
dends on the common stock. The borrowing agreement with Bank One, discussed
previously, and the redeemable preferred stock agreements (see Note 10 to the
Financial Statements) restricts the payment of dividends on the common stock.
Management does not expect to pay dividends on the common stock in fiscal 1997.
The following table summarizes the high and low bid prices of the Company's
stock for the quarters ended December 31, 1995 and March 31, 1996, adjusted for
the two-for-one stock split declared on May 10, 1996 (see Note 15 to the
Financial Statements).
March 31, 1996 December 31, 1995
-------------- -----------------
High $ 4.312 $ 3.50
Low $ 3.50 $ 3.00
The above over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data as of and for the five years ended March 31, 1996 are as
follows (all amounts in thousands except per share data):
Years Ended March 31
---------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------- ------- -------
Total revenues $1,629 $2,138 $ 1,054 $ 4,903 $ 5,557
Income (loss) before cumulative
effect of change in accounting
principle and extraordinary item (895) (468) (649) (159) 15
Income (loss) per common share (.82) (.43) (.48) (.12) .01
Total assets 8,210 4,311 4,059 7,050 12,450
Total liabilities 5,814 3,263 3,283 6,521 11,761
Redeemable preferred stock 4,250 1,800 925
The loss per common share for 1996, 1995 and 1994 has been calculated on a basis
after giving effect to preferred stock dividends of approximately $275,000,
$120,000 and $14,000, respectively and have been adjusted for the 2-for-1 stock
split (see Note 15 to the Financial Statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
- --------------------------
See the similarly captioned section in Item 1 regarding the existence of
forward-looking statements herein.
Results of Operations and Changes in Financial Position
- -------------------------------------------------------
After approximately two and a half years of planning and development, the
Company began full-scale operations under its Dealer-Direct Retail Leasing
("DDRL") program in October 1995. This new program is a significant change in
the way the Company markets, performs credit analysis, finances and services
leases. As a result, the Company committed significant personnel time and
resources to its development. Throughout most of the last three fiscal years,
management was identifying key personnel, developing internal policies and
procedures, enhancing data processing systems, developing the marketing and
pricing literature for the dealers, obtaining the necessary financing, and
testing system capability and capacities. While the Company's statement of
operations reports a net loss of approximately $852,000, $468,000 and $679,000
in fiscal 1996, 1995 and 1994, respectively, it is management's opinion, that
DDRL is one of the most sophisticated and marketable retail leasing programs
currently available and represents an investment in the Company's future
operations.
The increase in revenues of $1,084,000 (103%) from fiscal 1994 to 1995 was due
to renewed activity in sales from its commercial lease portfolio and the
beginning of the final phase of its transition from commercial direct lease
originations to the DDRL program. The subsequent decline in revenues of
$509,000 (24%) from fiscal 1995 to fiscal 1996 is due to the hiatus between the
beginning of full-scale DDRL operations in October 1995 and the completion of
the sale of the remaining commercial direct lease portfolio in the first quarter
of fiscal 1996.
Direct costs as a percentage of revenues (88% in 1996, 90% in 1995 and 100% in
1994) have been declining over the three year period. There are two primary
contributors to this decline. First, the Company expects an improvement in the
credit performance of its portfolio with the change from commercial lessees to
prime-credit consumer lessees which can be translated into a lesser amount of
credit losses. With the disposition of significantly all of its commercial
direct portfolio, the Company realized a significant reduction in the provision
for credit losses in fiscal 1996. The second major contributor to the decline
in direct costs as a percentage of revenues is the decline in interest expense
($91,000 (36%) in 1996 and $156,000 (38%) in 1995). This decline is caused
primarily by the decline in the amount of outstanding bank debt on which the
Company was paying interest and by a decrease in the rate of interest. It is
expected that this decrease in interest as a percentage of revenues will not
continue with the significant expansion of the DDRL program as the earnings
spread (the difference between the rate implicit in the lease and the Company's
interest cost of funds) on leases acquired through the DDRL program is less than
that earned on the commercial leases. However, the smaller spread to be
realized in the DDRL portfolio is expected to be offset by the significantly
greater volumes achievable through the program and by the ability to reduce its
interest cost of funds through asset-backed securitizations of the leases
generated through the program.
General and administrative expenses increased $622,000 (55%) and $239,000 (27%)
during fiscal 1996 and 1995, respectively, primarily as a result of the start-up
costs of developing the DDRL program and additional recurring expenses incurred
to administer the program such as additional personnel, system maintenance
contracts, and marketing. Management expects the current level of general and
administrative expense, designed to support increased operations as additional
dealers are signed to the program, will begin to level off as we continue to
operate in its current market area, but will increase further as geographic
expansion occurs.
The provision for Federal income taxes as a percentage of the net loss has
fluctuated significantly over the three year period primarily due to a net
deferred tax asset resulting from net operating loss carryforwards generated in
1994, 1995 and 1996. The net deferred tax asset was reduced by a valuation
allowance of $107,000 at March 31, 1994, as it was not concluded that it was
more likely than not that future tax benefits would be realized. However, at
March 31, 1995 it was determined that with the addition of the IBJ and Bank One
financing facilities and available tax planning strategies which include port-
folio sales, revised lease structures where the tax benefits do not accrue to
the benefit of the lessor and sales of tax benefits, it is more likely than not
that the Company has the ability to provide funding for the lease volumes
necessary to generate sufficient taxable income for realization of the net
deferred tax assets resulting in the net deferred tax asset being recorded with
no valuation allowance. Realization of the deferred tax asset is dependent upon
the ability of the Company to produce minimum future taxable income of
approximately $3,200,000 or $250,000 annually on average over the next 13 years.
Operating loss carryforwards do not begin to expire until fiscal 2009. The
Company generated net taxable income of approximately $1 million during the
eight years prior to 1994 (an average of $125 thousand per year). Approximately
$1,200,000 of future taxable income will result from reversal of existing
temporary differences during the next five years and $2,200,000 of future
taxable income will result from the excess of cash rents received over tax
deductions (remaining depreciable tax basis) for existing leases.
Inflation and Changing Prices
- -----------------------------
The Company's leases are written with fixed-terms and at fixed-rates. Interim
financing for the leases is provided through the Bank One revolving credit
facility until sufficient volumes are pooled for securitization through the IBJ
facility. The Company is at risk from interest rate fluctuation during the time
it is pooling leases for securitization. Management has various tools available
such as interest rate swaps and rate caps to minimize the risks associated with
the effect of changing prices.
The effect of inflation on general and administrative expenses over the last
three years has been negligible.
Liquidity and Capital Resources
- -------------------------------
The Company's business requires substantial cash to support its activities. The
principal cash requirements include (i) amounts necessary to acquire leases,
(ii) general and administrative expenses, (iii) debt service and (iv) preferred
stock dividends. For the foreseeable future, the Company expects to continue to
use financing activities as its primary source of funds for operating and
investing activities.
Acquisitions of automobile leases, general and administrative expenses and
interest on debt represent the Company's primary uses of cash in its operating
and investing activities. As discussed previously, general and administrative
costs have increased substantially in 1996 as compared to prior years, primarily
due to the development and start-up of the DDRL program.
Lease rentals are a primary source of cash. At March 31, 1996, the Company had
future lease payments and residuals of approximately $6,600,000. The net
proceeds from securitizations in the IBJ facility will provide cash for future
operating and investing activities. As the Company will retain the servicing of
leases securitized, it will also be receiving servicing income from the
securitized pool.
The revolving credit facility provided by Bank One provides the primary source
of cash to finance the acquisition of automobile leases until securitization
through the IBJ facility. After repayment of the related borrowings from Bank
One, the net proceeds from the IBJ securitizations will provide a source of cash
for future acquisition of automobile leases and general and administrative
expenses.
Since 1994, the Company has raised $4,250,000 from redeemable preferred stock
offerings. The proceeds from which were used for the development of DDRL and to
fund current operations and initial lease acquisitions.
It is the opinion of management that, as of March 31, 1996, the liquidity
sources discussed above are sufficient to meet the Company's immediate cash flow
needs for operations and for the acquisition of leases in the normal course of
business. It will be necessary, however, to obtain additional capital through
both private and public financings to provide for the Company's anticipated
growth over the next several years.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
Report of BDO Seidman, LLP
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Westar Financial Services Incorporated
We have audited the accompanying consolidated balance sheet of Westar Financial
Services Incorporated (successor to Republic Leasing Incorporated) as of March
31, 1996 and 1995, and the related consolidated statements of operations, common
stock equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our responsi-
bility is to express an opinion on these financial statements based on our
audits. The financial statements as of March 31, 1994, and for the year then
ended were audited by other auditors whose report dated June 20, 1994 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstate-
ment. 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Westar Financial
Services Incorporated (successor to Republic Leasing Incorporated) as of March
31, 1996 and 1995, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
As disclosed in Note 8, the Company changed its method of accounting for income
taxes during the year ended March 31, 1994.
BDO SEIDMAN, LLP
(Signature)
BDO Seidman, LLP
May 31, 1996
- --------------------------------------------------------------------------------
Report of Coopers & Lybrand
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Westar Financial Services Incorporated
We have audited the statements of operations, cash flows and common stock equity
for the year ended March 31, 1994 of Republic Leasing Incorporated (predecessor
to Westar Financial Services Incorporated). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstate-
ment. 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Republic
Leasing Incorporated for the year ended March 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 8 of the financial statements, the Company changed its
method of accounting for income taxes effective April 1, 1993.
COOPERS & LYBRAND
(Signature)
Seattle, Washington
June 20, 1994
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of March 31, 1996 and 1995
1996 1995
----------- -----------
Cash and cash equivalents $ 190,841 $ 55,277
Accounts and other receivables, net of allowance
for credit losses of $400 and $7,700 178,585 157,370
Due from affiliate 34,291 43,526
Lease receivables (Notes 3 and 7) 124,233
Lease repurchase agreements (Note 4) 948,537 1,133,992
Net investment in direct
financing leases (Notes 5, 6 and 7) 5,477,866 1,789,712
Equipment held for lease, net of accumulated
depreciation of $29,088 and $136,308
(Notes 5, 6 and 7) 31,977 199,157
Deferred tax asset (Note 8) 1,094,407 451,664
Other 253,681 356,077
--------- ---------
$ 8,210,185 $ 4,311,008
========= =========
Accounts payable $ 409,681 $ 123,027
Notes Payable to banks:
Recourse (Note 6) 4,357,929 1,485,773
Nonrecourse (Note 7) 394,835
Amounts payable under lease repurchase
agreements (Note 4) 941,224 1,129,031
Other liabilities 104,797 129,907
--------- ---------
5,813,631 3,262,573
--------- ---------
Commitments and Contingencies (Note 4)
Redeemable preferred stock (Note 10) 4,250,000 1,800,000
Preferred stock (Note 11)
Common Stock (Note 12):
Common stock, no par value; 35,000,000 shares
authorized; 1,430,500 and 1,380,500 shares
issued and outstanding (Note 15) 820,195 795,195
Accumulated deficit (2,673,641) (1,546,760)
--------- ---------
(1,853,446) (751,565)
--------- ---------
$ 8,210,185 $ 4,311,008
========= =========
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended March 31, 1996, 1995 and 1994
1996 1995 1994
--------- --------- ---------
Revenues:
Earned income on direct financing leases $ 191,746 $ 255,403 $ 242,095
Earned income from lease receivables 2,913 32,615 109,575
Operating leases 27,068 215,923 269,935
Proceeds from sale of equipment
and leases (Note 14) 1,299,809 1,503,439 261,022
Other 106,990 130,254 171,498
--------- --------- ---------
1,628,526 2,137,634 1,054,125
--------- --------- ---------
Direct costs:
Depreciation of equipment held for lease 13,633 134,609 193,592
Interest 159,180 250,484 406,828
Provision for credit losses 5,944 6,260 120,000
Cost of equipment and leases sold 1,247,023 1,459,257 223,100
Other 11,984 26,649 30,409
--------- --------- ---------
1,437,764 1,877,259 973,929
--------- --------- ---------
190,762 260,375 80,196
General and administrative expenses (Note 14) 1,751,297 1,129,677 890,404
--------- --------- ---------
Loss before income tax, cumulative effect
of change in accounting principle and
extraordinary item (1,560,535) (869,302) (810,208)
Income tax benefit (Note 8) 665,263 401,664 160,735
--------- --------- ---------
Loss before cumulative effect of change in
accounting principle and extraordinary item (895,272) (467,638) (649,473)
Cumulative effect on prior years of change
in accounting for income taxes (Note 8) (29,334)
--------- --------- ---------
Loss before extraordinary item (895,272) (467,638) (678,807)
Gain on early extinguishment of debt (net of
income tax of $22,520) (Note 7) 43,715
--------- --------- ---------
Net loss (851,557) (467,638) (678,807)
Dividends on redeemable preferred stock (275,324) (120,441) (14,108)
Net loss applicable to common stock $(1,126,881) $ (588,079) $ (692,915)
========= ========= =========
Loss per common share before extraordinary item $ (.85) $ (.43) $ (.48)
=== === ===
Loss per common share $ (.82) $ (.43) $ (.48)
=== === ===
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLDIATED STATEMENT OF COMMON STOCK EQUITY
for the years ended March 31, 1996, 1995 and 1994
Common Stock
-------------------- Accumulated
Shares Amount Deficit Total
--------- -------- ----------- -----------
Balance, April 1, 1993 1,380,500 $795,195 $ (265,766) $ 529,429
Net loss (678,807) (678,807)
--------- ------- ---------- ----------
Balance, March 31, 1994 1,380,500 795,195 (944,573) (149,378)
Dividends on redeemable
preferred stock (134,549) (134,549)
Net loss (467,638) (467,638)
--------- ------- ---------- ----------
Balance, March 31, 1995 1,380,500 795,195 (1,546,760) (751,565)
Exercise of common
stock warrants 50,000 25,000 25,000
Dividends on redeemable
preferred stock (275,324) (275,324)
Net loss (851,557) (851,557)
--------- ------- ---------- ----------
Balance, March 31, 1996 1,430,500 $820,195 $(2,673,641) $(1,853,446)
========= ======= ========== ==========
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended March 31, 1996, 1995 and 1994
1996 1995 1994
------------ ---------- ---------
Cash flows from operating activities:
Net loss $ (851,557) $(467,638) $(678,807)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Early extinguishment of debt, net of tax (43,715)
Depreciation and amortization 206,947 246,327 213,641
Provision for and write-off of
credit losses 5,944 6,260 120,000
Decrease (increase) in accounts receivable (19,863) 50,836 83,232
Increase (decrease) in accounts payable 49,060 17,839 (144,997)
Increase (decrease) in other liabilities (25,110) 18,290 (43,198)
Increase in deferred income tax benefit (665,263) (401,664) (131,401)
Other 77,268 34,504 45,471
---------- --------- ---------
Net cash used in operating activities (1,266,289) (495,246) (536,059)
---------- --------- ---------
Cash flows from investing activities:
Recovery of equipment costs and
residual interests 1,598,216 2,235,187 2,841,715
Purchases of equipment for lease (5,088,286) (2,993,721) (1,817,590)
Reduction of lease receivables
(recovery of principal) 124,233 426,030 899,757
Other (89,245) (158,653) (106,165)
---------- --------- ---------
Net cash provided by (used in)
investing activities (3,455,082) (491,157) 1,817,717
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of redeemable
preferred stock 2,450,000 875,000 925,000
Additions to notes payable to banks 5,128,878 1,135,205 1,739,303
Proceeds from lease repurchase agreements 115,849 1,283,685
Proceeds from issuance of common stock 25,000
Payments on notes payable to banks (2,585,323) (2,339,220) (4,688,636)
Dividends paid on redeemable
preferred stock (221,814) (96,842)
Debt origination costs (55,655)
---------- --------- ---------
Net cash provided by (used in)
financing activities 4,856,935 857,828 (2,024,333)
---------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 135,564 (128,575) (742,675)
Cash and cash equivalents:
Beginning of year 55,277 183,852 926,527
---------- --------- ---------
End of year $ 190,841 $ 55,277 $ 183,852
========== ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies:
- ---------------------------------------------------------------------------
Consolidation
- -------------
The consolidated financial statements include the results of operations of
Westar Financial Services Incorporated (successor to Republic Leasing
Incorporated), its 100% owned subsidiary Westar Auto Holding Company, Inc.,
their 100% owned subsidiary Westar Auto Finance, LLC and the Westar Lease
Origination Trust, a Washington business trust, beneficially owned by Westar
Auto Finance, LLC. All intercompany transactions have been eliminated.
Lease Operations
- ----------------
The Company specializes in producing lease products that meet the needs of its
customers. Prior to 1994, the Company offered lease products, on a direct-
origination basis, to commercial clients only. In December 1993, the Company
expanded its product line by introducing its Dealer Direct Retail Leasing
("DDRL") program to a select group of dealers through which the first leases
were acquired from the program in March 1994. Through DDRL, the Company
acquires leases from selected automobile dealers which have been pre-approved by
the Company's experienced retail lease personnel. The Company attempts to meet
the needs of its dealers through responsive customer service, extended hours,
rapid funding, consistent buying practices and competitive pricing. The Company
currently offers the DDRL program to automobile dealers in the states of
Washington, Oregon and Idaho.
The Company's plan provides for the securitization of leases acquired through
the DDRL program as asset-backed securities. The Company intends to service the
securitized leases. Various forms of financing are used to fund leases until a
sufficient "pool" has been generated for securitization. Forms of financing
include traditional wholesale lease lines from banks, repurchase arrangements
with banks and internal capital.
Over the last ten years, the Company has sold, with servicing retained,
approximately $14 million of leases and the underlying assets to various third
parties, primarily financial institutions, for purposes of managing its credit
exposure and to provide a source of capital for funding new lease acquisitions.
Services provided by the Company to purchasers of its leases include, but are
not limited to, monthly billing, collecting and remarketing. At March 31, 1996,
leased assets outstanding which are not held in the Company's portfolio but are
serviced by the Company for others totaled approximately $2,000,000.
Concentration of Credit and Financial Instrument Risk
- -----------------------------------------------------
The Company controls its credit risk through credit standards, limits on
exposure, and by monitoring the financial condition of its lessees. The Company
uses a proprietary credit scoring system in evaluating the credit risk of
applicants in the DDRL program. The Company generally requires the leased
asset, consisting primarily of autos, to serve as collateral for the leases.
Additionally, the Company controls its credit exposure to any one client or
industry through sales of leases. The Company generally retains the servicing
of the leases sold.
Inherent to leasing is the residual value risk associated with closed-end lease
contracts. Traditionally, the Company has managed this residual risk through
adherence to a residual valuation procedure at lease inception which has
historically resulted in net gains at scheduled lease termination. In
anticipation of selling the lease receivables (including the residual interest)
acquired through the DDRL program to the asset-backed securities markets,
management decided to manage the residual value risk through the purchase of
residual value insurance on all DDRL contracts.
The Company requires all lessees to provide adequate collateral protection and
liability insurance throughout the term of the lease contracts. The Company
also has contingent collateral and liability insurance which protects the
Company from lapses in the lessee's insurance and maintains lease value
deficiency insurance on all DDRL contracts which protects the lessee and the
Company from casualty losses associated with deficiencies between an insured
collateral's value and the balance on the related lease contract.
A significant portion of the Company's business activity is with customers and
businesses located in Washington. In 1994, one lessee contributed approximately
10% to the Company's total revenue. There were no other significant regional,
industrial or group concentrations at March 31, 1996.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments as defined by Financial Accounting Standards
No. 107, "Disclosures about Fair Value of Financial Instruments," including cash
and cash equivalents, lease repurchase agreements, notes payable to banks and
amounts payable under lease repurchase agreements, are accounted for on a
historical cost basis which, due to the nature of these financial instruments,
approximates fair value.
Cash and Cash Equivalents
- -------------------------
The Company considers all investments with a maturity of three months or less
when purchased to be cash equivalents.
Leases
- ------
For contracts determined to be direct financing leases, unearned lease income
(representing total minimum lease payments receivable, including the residual
value of the leased equipment, in excess of the cost of leased equipment) is
amortized to income using the interest method over the term of the lease.
Equipment associated with lease contracts determined to be operating leases is
accounted for as equipment held for lease. Lease revenue related to these
contracts is recognized over the lease term as earned and the cost of the leased
equipment, less estimated residual value, is depreciated on the straight-line
method over the term of the lease.
Initial incremental costs directly associated with the acquisition of new leases
are capitalized and classified with the related leased asset. Initial
incremental costs are amortized over the related lease term.
At the end of the lease term or upon premature termination of the lease, the
leased equipment is either sold or released under a new lease contract.
Proceeds from the sales of leased equipment are included under revenues and the
carrying costs of the leased equipment at time of sale are included under direct
costs. Gains resulting from rewriting leases at a value in excess of the
carrying amount of the leased equipment are included in other revenues.
Furniture, Fixtures and Equipment
- ---------------------------------
At March 31, 1996, furniture, fixtures and equipment of $77,313 (net of
accumulated depreciation of $105,227) are included in other assets and stated
at cost less accumulated depreciation and are depreciated on a straight-line
basis over their estimated useful lives.
Intangible Assets
- -----------------
At March 31, 1996, intangible assets of $63,119 (net of accumulated
amortization of $13,914) are included in other assets, and consist of
unamortized debt origination costs and organization costs. The debt
origination costs (incurred in relation to the revolving credit agreement with
Bank One) are amortized on a straight-line basis over the three-year term of the
revolving credit agreement and the organization costs (associated with the
reincorporation of the Company into the state of Washington) are amortized on a
straight-line basis over five years.
Federal Income Taxes
- --------------------
Deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by applying
current statutory tax rates to the periods in which the differences are expected
to reverse and by giving effect to any available net operating loss
carryforwards.
Earnings Per Share
- ------------------
Earnings per share are computed using the weighted-average number of common
shares outstanding and have been retroactively adjusted to give effect to the
2-for-1 stock split declared on May 10, 1996 (see Note 15). Net loss used in
the computation of earnings per share has been increased to include the
required amount of dividends on the redeemable preferred stock of $275,324,
$120,441 and $14,108 for the years ended March 31, 1996, 1995 and 1994,
respectively. Earnings per share does not include common stock warrants or
common stock options as the effect would be anti-dilutive.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, actual results could differ from
these estimates.
Effect of Recently Issued Accounting Standards
- ----------------------------------------------
Recently issued accounting standards having relevant applicability to the
Company consist primarily of Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), which establishes accounting standards for, among other
things, the impairment of long-lived assets and certain identifiable
intangibles, and Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), which establishes standards for accounting for stock-based compensation.
SFAS No. 121 will be effective for financial statements reporting on fiscal
years beginning after December 15, 1995, and is not expected to have a
significant effect, if any, on the Company's financial condition or results of
operations. SFAS No. 123 will also be effective for financial statements
reporting on fiscal years beginning after December 15, 1995, and requires pro
forma disclosures to be included in such statements. It is not expected that
the Company will adopt the "fair value based method" of accounting for stock
options, which is encouraged by SFAS No. 123, but rather will continue to
account for such stock-based compensation, utilizing the "intrinsic value based
method" as is allowed by that statement.
Reclassifications
- -----------------
Certain amounts in the March 31, 1995 and 1994, financial statements have been
reclassified to conform to current year classifications. Such reclassifications
had no effect on previously reported net loss.
2. Accounts Receivable:
- ------------------------
Under terms of its leases, the Company, as lessor, is entitled to recover from
the lessee certain costs incurred upon termination of such leases prior to
expiration of the initial lease term. It is the Company's policy to
aggressively pursue collection under these provisions. Those costs include past
due lease payments, late charges and applicable taxes, losses realized on
disposition of repossessed equipment, and legal and administrative costs
incurred to pursue recovery. Such costs are included in accounts receivable.
If successful recovery of an amount is uncertain, a provision is made in the
allowance for credit losses.
At March 31, 1996 and 1995, accounts receivable includes a remaining balance of
approximately $166,000 associated with a client which is now operating under
Chapter 11 of the Federal Bankruptcy Act. The court-appointed Trustee managing
that company proposed to the Unsecured Creditors' Committee a plan which
provides for full recovery of the Company's remaining balance plus interest over
an extended term. That plan was approved on October 15, 1993. A trust was
formed on behalf of the unsecured creditors benefiting from the plan (of which
the Company is a participating beneficiary) and payments to the trust have
generally been made on a timely basis since the effective date of the plan. The
Company expects full recovery as a result of the plan.
3. Lease Receivables:
- ----------------------
Lease receivables consisted of the discounted value of remaining lease payments
and end of term residuals which were purchased from a bank in 1991. Title to
the property subject to the leases remained with the bank. The Company's
interest in the lease receivables was unsecured. The lease contracts
collateralized the nonrecourse term note obtained from the bank to finance the
purchase. Income was earned using the interest method over the remaining term
of the lease at the discount rate used in determining the present value of the
contracts at time of purchase. Gains on sale of lease receivables and
remarketing fees earned upon disposition of the underlying equipment are
included in other revenues.
4. Lease Repurchase Agreements:
- --------------------------------
In June 1994, the Company entered into an arrangement with a bank for the
purpose of financing leases acquired through the DDRL program pursuant to which
the bank agreed to purchase from the Company up to $1,500,000 of leases so
acquired. The Company has the right under this arrangement to repurchase such
leases at anytime, and may do so in whole or in part, prior to entering into a
securitization transaction. Leases sold under this arrangement are recorded as
lease repurchase agreements at their amortized cost basis using the rate
implicit in the underlying lease contract. Proceeds received upon sale of the
lease contracts are recorded as amounts payable under repurchase agreements,
which bear interest at rates between 7.5% and 8%, and are subsequently reduced
for principal payments received by the bank on such contracts. The market
value of such lease contracts approximates the recorded value of the lease
repurchase agreements.
5. Leases:
- -----------
Components of the net investment in direct financing leases as of March 31, 1996
and 1995, as well as the future minimum lease payments receivable, including
residual values, are as follows:
1996 1995
---------- ----------
1996 $ 760,037
1997 $1,180,307 539,656
1998 1,322,229 356,940
1999 1,648,080 325,044
2000 1,206,762 183,652
2001 1,206,820
Thereafter 51,320
--------- ---------
Total minimum lease payments receivable 6,615,518 2,165,329
Initial direct costs, net of amortization 69,769 28,743
Unearned income (1,161,021) (337,060)
Provision for net credit losses (46,400) (67,300)
--------- ---------
Net investment in direct financing leases $5,477,866 $1,789,712
========= =========
At March 31, 1996 and 1995, total future minimum lease rentals receivable under
noncancelable operating leases approximated $11,000 and $99,000, respectively.
Certain of the leases have options to purchase the underlying equipment at the
end of the lease term at fair value or the stated residual which is not less
than the book value at termination.
A summary of activity in the Company's allowance for credit losses, which
relates to direct financing leases and other receivables for each of the years
in the three year period ended March 31, 1996 is as follows:
1996 1995 1994
------- ------- --------
Balance, beginning of year $75,000 $93,516 $120,000
Provision charged to expense 5,944 6,260 120,000
Charge offs, net of recoveries (34,144) (24,776) (146,484)
------ ------ -------
Balance, end of year $46,800 $75,000 $ 93,516
====== ====== =======
6. Notes Payable to Banks, Recourse:
- -------------------------------------
In July 1995, the Company entered into an agreement with Bank One for a $12
million revolving credit facility (the "Credit Agreement") to be utilized as
interim financing for the acquisition of auto leases until sufficient volume is
achieved to securitize. The amount borrowed under the Credit Agreement
generally may not exceed 90% of the outstanding principal amount of eligible
auto leases collateralizing the notes. The Credit Agreement expires in July
1998. Initial funding under the Credit Agreement occurred in November 1995.
The Credit Agreement calls for principal reductions on amounts borrowed
corresponding to the payment due dates of the underlying lease contracts.
Repayment of amounts borrowed is required from the proceeds upon securiti-
zation of the underlying lease contracts, but generally not later than six
months from the date of borrowing. The Credit Agreement originally called for
interest, payable quarterly, at four percent (4%) above the 30-day LIBOR rate,
but declines in .5% decrements upon the acquisition of 250 and 500 leases,
respectively. The weighted-average rate of interest paid under the Credit
Agreement was 9.58% (calculated using the number of days each rate was
outstanding since borrowings began in November 1995). The Credit Agreement
requires the Company to comply with quarterly debt/equity ratios and net worth
minimums of which the Company is in compliance. At March 31, 1996, $4,032,785
was outstanding under the line and was the highest amount outstanding during the
period. Amounts borrowed under the Credit Agreement averaged $2,140,000 since
November 1995. Additionally, the Credit Agreement requires payment of a
quarterly non-utilization fee of .125% on the unused portion of the line which
at March 31, 1996 was $7,967,215.
In November 1995, the Company entered into a term loan agreement for $363,832
with Bank One collateralized by certain lease contracts and the underlying
vehicles not intended to be included in a securitization. The notes are due in
monthly installments including interest at 15% and matures February 28, 1999.
Future obligations due under the agreement are $63,660, $90,897 and $170,587 for
the years ending March 31, 1997, 1998 and 1999, respectively.
At March 31, 1995, notes payable to banks consisted of notes collateralized by
equipment held for lease, equipment under direct financing leases, and the
underlying leases. The notes were due in monthly installments including
interest at rates ranging from 7.5% to 12.5% and were guaranteed by Republic
Management, Inc. (now known as Mud Bay Holdings, Ltd.), an affiliated company
which owns approximately 30% of the Company's common stock, and individually by
an officer of the Company, who is a significant shareholder of Mud Bay Holdings,
Ltd. The debt was retired in August 1995.
The Company paid cash for interest on recourse notes of $163,817, $171,039 and
$237,039 for the years ended March 31, 1996, 1995 and 1994, respectively.
7. Notes Payable to Bank, Nonrecourse:
- --------------------------------------
At March 31, 1995, the Company had certain nonrecourse notes payable to banks
collateralized solely by the lease contracts. The notes carried interest rates
ranging from 7% to 12%, per annum. The balance outstanding of $394,835 was
retired in August 1995 at a gain of $43,715 (net of deferred income taxes of
$22,520).
The Company paid cash for interest on nonrecourse notes of $24,753, $71,422 and
$191,167 for the years ended March 31, 1996, 1995 and 1994.
8. Federal Income Taxes:
- -------------------------
The components of the deferred tax asset were as follows for the years ended
March 31, 1996 and 1995:
1996 1995
---------- --------
Deferred tax assets:
NOL Carryforward $1,449,149 $529,282
Bad debt allowance 15,912 25,500
Investment tax credit carryforward 12,165 12,165
Alternative minimum tax
credit carryforward 31,515 31,515
Other 119 1,339
--------- -------
Total deferred tax assets 1,508,860 599,801
--------- -------
Deferred tax liabilities:
Accelerated depreciation (12,344) (18,204)
Direct financing leases (362,834) (105,395)
Initial direct costs (23,735) (10,440)
Other (15,540) (14,098)
--------- -------
Total deferred tax liabilities (414,453) (148,137)
--------- -------
$1,094,407 $451,664
The income tax benefit is as follows for the years ended March 31, 1996, 1995
and 1994:
1996 1995 1994
-------- -------- --------
Deferred $665,263 $294,290 $268,109
Change in valuation allowance 107,374 (107,374)
------- ------- -------
Total Federal income tax benefit $665,263 $401,664 $160,735
The Federal income tax benefit for the years ended March 31, 1996, 1995 and
1994, differs from the Federal income tax benefit computed by applying the
statutory corporate income tax rate of 34% to the loss before Federal income
taxes. Principal causes of the differences are as follows:
1996 1995 1994
-------- -------- --------
Computed "expected" tax benefit $508,062 $295,563 $275,471
Tax effect of:
Valuation allowance 107,374 (107,374)
Preferred stock dividends 126,637
Other 30,564 (1,273) (7,362)
------- ------- -------
Federal income tax benefit $665,263 $401,664 $160,735
======= ======= =======
In fiscal 1994, due primarily to the net operating loss, the Company realized a
net deferred tax benefit of $268,109 resulting in a net deferred tax asset of
$157,374. The net deferred tax asset was reduced by a valuation allowance of
$107,374 at March 31, 1994, as it was not concluded that it was more likely than
not that future tax benefits would be realized. During the first three quarters
of fiscal 1995, the Company continued to provide a valuation allowance against
the net deferred tax asset generated during that period.
It is management's opinion that with the addition of the IBJ and Bank One
facilities and available tax planning strategies which include portfolio sales,
revised lease structures where the tax benefits do not accrue to the benefit of
the lessor and sales of tax benefits, it is more likely than not that the
Company has the ability to provide funding for the lease volumes necessary to
generate sufficient taxable income for realization of the net deferred tax
assets within their carryforward period. The net deferred tax asset is recorded
with no valuation allowance provided at March 31, 1996 and 1995.
At March 31, 1996, for regular tax purposes, the Company has an NOL carryforward
of approximately $4,262,000, an ITC carryforward of approximately $12,100 and an
AMT credit carryforward of approximately $31,500 available to offset future
Federal income taxes. The ITC carryforward expires through 2001. The NOL
carryforward expires in 2009, 2010 and 2011. The AMT credit carryforward has no
expiration date.
The Company received a Federal income tax refund of $11,857 during the year
ended March 31, 1994.
Effective April 1, 1993, the Company adopted Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes." This change in
accounting increased fiscal 1994 net loss by $29,334 ($.02 per share) which
represents the cumulative effect on prior years' deferred income tax liability.
9. Securitization:
- -------------------
In March 1995, the Company entered into an agreement with The Industrial Bank of
Japan, Limited ("IBJ") whereby IBJ agreed to assist the Company in arranging the
placement of up to $100 million in securities backed by auto lease receivables
generated through the DDRL program. The IBJ facility has been structured to
allow for securitized transactions in $10 million pools. The agreement entitles
IBJ to warrants for the purchase of 4% of the Company's common stock (approx-
imately 71,000 shares) at no less than $.50 per share.
10. Redeemable Preferred Stock
- -------------------------------
The redeemable preferred stock series have a $1,000 per share face value and pay
a cumulative quarterly dividend of $23.125 per share. There are 1,500, 300,
1,200 and 1,250 shares authorized, issued and outstanding of the Series 1
Preferred Stock ("Series 1"), the Series 2 Preferred Stock ("Series 2"), the
Series 3 Preferred Stock ("Series 3") and the Series 4 Preferred Stock
("Series 4"), respectively and collectively the "Redeemable Preferred Stock."
All series of preferred stock may be redeemed at any time by the Company, but
must be redeemed at its face value beginning in fiscal 1998. At March 31, 1996,
future redemptions of the Redeemable Preferred Stock consist of $900,000 in each
of the years ending March 31, 1998 and 1999 and $1,225,000 in each of the years
ending March 31, 2000 and 2001.
At March 31, 1996 and 1995, the following represents the Company's preferred
stock activity:
Series 1 Series 2 Series 3 Series 4
---------- --------- ---------- ----------
Balance, April 1, 1995 $ 925,000
Shares issued at face value 575,000 $300,000
Balance, March 31, 1995 1,500,000 300,000
Shares issued at face value $1,200,000 $1,250,000
--------- ------- --------- ---------
Balance, March 31, 1996 $1,500,000 $300,000 $1,200,000 $1,250,000
========= ======= ========= =========
In the event of any liquidation, dissolution or winding up of the Company, the
holders of the outstanding shares of Redeemable Preferred Stock shall be
entitled to be paid an amount equal to the face value per share held before any
sums shall be paid or assets distributed to the holders of the common stock. If
assets are insufficient to fully liquidate the Redeemable Preferred Stock, then
a pro-rata liquidation will be made.
Holders of Redeemable Preferred Stock are not entitled to vote on matters
submitted to the common shareholders unless required by Washington state law, a
proposed amendment to the Company's Articles of Incorporation that materially
alters the Redeemable Preferred Stock shareholders' rights or authorizes a class
of stock senior to the Redeemable Preferred Stock, or any proposed amendment to
the Company's By-Laws which materially alters the rights and preferences of the
Redeemable Preferred Stock shareholders. As long as 25% of the Series 4 remains
issued and outstanding, the holders of the outstanding Series 4, voting as a
class, are entitled to elect one member to the Company's board of directors.
11. Preferred Stock
- --------------------
The Company's authorized capital stock includes 2,000,000 shares of preferred
stock and current designations consist of the Redeemable Preferred Stock.
12. Common Stock:
- ------------------
The Company has issued warrants for the purchase of the 480,000 shares of the
Company's common stock which were attached to the Series 1, 2 and 3 Preferred
Stock offerings (see Note 10). The warrants carry an exercise price of $.50 per
common share. Warrants to purchase 50,000 shares of common stock were exercised
in March 1996. The Board of Directors determined that the exercise prices
approximated or exceeded fair market value on date of grant.
At March 31, 1996, the Company had warrants outstanding for 288,000 shares and
142,000 shares which expire in 1999 and 2001, respectively.
At the option of the holder, 60 shares of the Series 4 Preferred Stock are
convertible into 10% of the outstanding common stock of the Company. The shares
are convertible at any time and will automatically be converted at such time
that the Company participates in a public offering.
The Company has also committed to the issuance of warrants for the purchase of
4% of the Company's common stock (approximately 71,000 shares) by The Industrial
Bank of Japan, Limited (see Note 9).
13. Stock Option Plan:
- -----------------------
In April 1994, the Board of Directors approved the adoption of the 1994 Stock
Option Plan (the "Plan") for employees, outside directors and independent
contractors of the Company. A total of 360,000 shares of the Company's common
stock were reserved for issuance under the Plan. Exercise prices approximated
or exceeded fair market value on date of grant. There were no options exercised
during the years ended March 31, 1996 and 1995. The following summarizes the
stock options granted at March 31, 1996:
Date Granted Date Exercisable Expiration Date Exercise Price Shares Granted
------------ ---------------- --------------- -------------- --------------
Fiscal 1995 Fiscal 1995 Fiscal 2000 $2.00 160,000
Fiscal 1995 Fiscal 1996 Fiscal 2001 $.50 20,000
Fiscal 1995 Fiscal 1997 Fiscal 2002 $2.00 20,000
Fiscal 1996 Fiscal 1997 Fiscal 2002 $.50 20,000
Fiscal 1996 Fiscal 1998 Fiscal 2003 $2.00 20,000
Fiscal 1996 Fiscal 1996 Fiscal 2001 $2.00 40,000
Fiscal 1996 Fiscal 1996 Fiscal 1999 $2.00 36,000
Fiscal 1996 Fiscal 1997 Fiscal 1999 $2.00 2,800
-------
318,800
=======
14. Related Party Transactions:
- --------------------------------
During the years ended March 31, 1996 and 1995, the Company sold leases to T & W
Leasing, Inc. ("T&W"), a Preferred Stock shareholder. Revenues from the sales
which are included in total revenues were approximately $892,000 (54% of total
revenues) and $650,000 (30%) in 1996 and 1995, respectively.
The Company leased office space from a limited partnership in which it has a 10%
interest. The lease expired in March 1996 and the Company is currently renting
the office space on a month-to-month basis. Management is in negotiations for
renewal of the lease. Annual rental expense was approximately $60,000 in 1996,
1995 and 1994.
The Company had a management agreement with Mud Bay Holdings, Ltd. ("Mud Bay"),
formerly known as Republic Management Incorporated, which provided management
services necessary for the leasing activities of the Company. The management
agreement provided for a monthly management fee equal to a percentage of gross
revenues. The management fee is included in general and administrative expenses
and totaled $13,088 and $64,189 for the years ended March 31, 1995 and 1994,
respectively.
In June 1994, the respective boards of directors of Mud Bay and the Company
agreed to terminate the management agreement and Mud Bay agreed to sell the
Republic Leasing trade name to the Company and agreed to a non-compete agreement
in consideration for a combined purchase price of $200,000. The Company
obtained a report from an independent valuation expert in support of the
purchase price. Mud Bay used the proceeds from the sale to repay the amount due
affiliate. The amount due from affiliate at March 31, 1996 and 1995 represents
advances made to Mud Bay for normal operating expenses and were repaid in full
in May, 1996.
15. Subsequent Event:
- ----------------------
On May 10, 1996, the Board of Directors declared a 2-for-1 stock split for
holders of record as of May 31, 1996. Certificates will be issued on or about
June 14, 1996. Total shares outstanding as of the record date was 717,650.
Holders of options and warrants also benefit from the split through a 50%
reduction in their exercise price and a 2-for-1 increase in the exercisable
shares. The shares issued, outstanding and reserved for issuance presented in
these Financial Statements and Notes hereto have been retroactively adjusted to
give effect to the stock split.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Information called for by Part II, Item 9, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
July 22, 1996, and is incorporated herein by reference. The information appears
in the Proxy Statement under the caption "Other Matters." Such Proxy Statement
will be filed within 120 days of the Company's year end.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding the Company's directors is set forth under "Information
About the Board of Directors and Committes of the Board" in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
July 22, 1996, and is incorporated herein by reference. Such Proxy Statement
will be filed within 120 days of the Company's year end. Information regarding
the Company's executive officers is set forth in Item 1 of Part I herein under
the caption "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Part III, Item 11, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
July 22, 1996, and is incorporated herein by reference. The information appears
in the Proxy Statement under the caption "Executive Compensation." Such Proxy
Statement will be filed within 120 days of the Company's year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Part III, Item 12, is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders to be held on
July 22, 1996, and is incorporated herein by reference. The information appears
in the Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management." Such Proxy Statement will be filed within
120 days of the Company's year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 14 to the Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14 (a) Documents filed as part of this report:
(1) Financial Statements (Pages 10 to 22)
Reports of Independent Certified Public Accountants
Consolidated Balance Sheet as of March 31, 1996 and 1995
Consolidated Statement of Operations for the years ended March 31,
1996, 1995 and 1994
Consolidated Statement of Common Stock Equity for the years ended
March 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended March 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Index to Financial Statement Schedules
All schedules are omitted since the required information is not
present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
financial statements and notes thereto.
(3) Index to Exhibits
2. Plan of acquisition, reorganization, arrangement, liquidation
or succession
2.1 Plan and Agreement of Merger between Westar Financial
Services Incorporated and Republic Leasing Incorporated.
3. Articles of Incorporation and Bylaws
3.1 The Articles of Incorporation of Westar Financial Services
Incorporated filed on February 13, 1996.
3.2 The Bylaws of Westar Financial Services Incorporated
adopted on February 21, 1996.
4. Instruments defining the rights of security holders, including
indentures.
4.1 Designation of Rights and Preferences of Republic Leasing
Incorporated Series 1 Preferred Stock.
4.2 Designation of Rights and Preferences of Republic Leasing
Incorporated Series 2 Preferred Stock.
4.3 Designation of Rights and Preferences of Republic Leasing
Incorporated Series 3 Preferred Stock.
4.4 Designation of Rights and Preferences of Republic Leasing
Incorporated Series 4 Preferred Stock.
10. Material Contracts.
10.1 Republic Leasing Incorporated 1994 Stock Option Plan.
10.2 The Letter Agreement between Republic Leasing
Incorporated and The Industrial Bank of Japan, Limited
dated March 3, 1995.
10.3 Revolving Credit Agreement among Westar Auto Finance,
L.L.C. as Borrower, Republic Leasing Incorporated as
Guarantor and Bank One, Columbus, N.A., as Lender dated
July 12, 1995.
10.4 Amendment, dated February 15, 1996, to the Revolving
Credit Agreement with Bank One, Columbus, N.A., dated
July 12, 1995.
16. Letter re Change in Certifying Account
16.1 Letter dated February 3, 1995, incorporated by reference
to the Exhibit to the Current Report on Form 8-K dated
February 1, 1995
21. Subsidiaries of the Registrant
21.1 Schedule of Subsidiaries
14 (b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Westar Financial Services Incorporated
(successor to Republic Leasing Incorporated)
June 11, 1996 R.W. Christensen, Jr.
(Dated) (Signature)
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
June 11, 1996 R.W. Christensen, Jr.,
Director and Principal Executive Officer
(Dated) (Signature)
June 11, 1996 Cathy L. Carlson
Director and Vice President, Operations
Chief Financial and Accounting Officer
(Dated) (Signature)
June 11, 1996 Joel I. Davis
Director and Assistant Secretary
(Dated) (Signature)
June 11, 1996 Robert L. Lovely, Director
(Dated) (Signature)
INSIDE BACK COVER
CORPORATE INFORMATION
Board of Directors General Counsel
Robert W. Christensen, Jr., 47 (2) Owens Davies Mackie
Chairman, Chief Executive Officer Olympia, Washington
Cathy L. Carlson, 40 (1) Securities Counsel
Vice President, Operations
Williams, Kastner & Gibbs
Joel I. Davis, 61 (1) Seattle, Washington
President of MasterForms, Inc.
President of Davis Construction Investor Relations Counsel
and Development Corporation
Len Cereghino & Co.
Robert L. Lovely, 59 (2) Seattle, Washington
President of the Lovely 206-448-1996
Corporation
Independent Auditors
Charles S. Seel, 47 (1)
Secretary, President & Chief BDO Seidman, LLP
Operating Officer of Seattle, Washington
Summit Management Company 206-624-2020
David Soward, 39 (2) Transfer Agent and Registrar
Senior Vice President,
& Capital Partners Inc. TranSecurities International Inc.
2510 North Pines, Suite 202
(1) Member of Audit Committee Spokane, WA 99206-7624
(2) Member of Compensation Committee 509-927-1255
Annual Meeting
Executive Officers
The annual shareholders' meeting will be
Robert W. Christensen, Jr. held Monday, July 22, 1996 at 9:00 am at
Chairman, Chief Executive Officer the West Coast Tyee Inn, 500 Tyee Road,
Tumwater, Washington. All shareholders
Cathy L. Carlson are cordially invited to attend.
Vice President, Operations
Form 10-K
Steven R. Murphy
Vice President, National Marketing Form 10-K is included in this Annual
Director Report and is filed with the Securities
and Exchange Commission. Additional
copies may be obtained from the
Shareholders Relations Department, PO Box
919, Olympia, WA 98507 or from Len
Cereghino & Co., 2605 Western Ave.,
Seattle, WA 98121.
Corporate Executive Office
Westar Financial Services Incorporated
505 East Union - Suite 300
PO Box 919
Olympia, WA 98507
Phone: 360-754-6227
Fax: 360-754-7028
Press releases are available through
internet at http://www.prnewswire.com/
cnoc/exec/menu?110282 or call News on
Call fax service at 1-800-IRNEWS-9
(1-800-476-3979), extension 110282
BACK COVER
Logo of Westar Financial Services Incorporated
Westar Financial Services Incorporated
505 East Union -- Suite 300
P.O. Box 919
Olympia, WA 98507
Phone: 360-754-6227
Fax: 360-754-7028
