FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
For Quarter Ended: June 30, 1997
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 Identification Number)
Incorporation or organization)
The Republic Building; Olympia, WA 98501
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (360) 754-6227
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 requirements for the past 90 days.
Yes: X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common Stock 1,765,300
Class Number of Shares Issued at July 31, 1997
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Westar Financial Services Incorporated and Subsidiaries
Consolidated Balance Sheet
as of June 30, 1997 and March 31, 1997
June 30 March 31
(Unaudited)
--------- --------
Cash $ 282,386 $ 191,380
Accounts receivable, net of allowance
for credit losses 176,918 333,497
Credit enhancement receivable, net of
allowance for credit losses 1,009,215 1,066,015
Net investment in direct finance leases, net of
allowance for credit losses 12,472,378 7,962,805
Deferred tax asset 2,479,801 2,263,075
Other assets 408,283 475,144
---------- ---------
$ 16,828,981 $12,291,916
========== ==========
Accounts payable $ 514,740 $ 560,356
Notes payable - bank 11,832,195 8,287,619
Notes payable - subordinated 1,861,636 1,027,048
Other liabilities 504,036 259,076
--------- ---------
14,712,607 10,134,099
---------- ----------
Redeemable preferred stock 4,248,000 4,248,000
--------- ---------
Common stock, no par value 2,980,795 2,874,795
Paid in capital - stock warrants 371,495
Accumulated deficit (5,483,916) (4,964,978)
---------- ---------
(2,131,626) (2,090,183)
---------- ---------
$ 16,828,981 $12,291,916
========== ==========
See accompanying notes to consolidated financial statements.
Westar Financial Services Incorporated and Subsidiaries
Consolidated Statement of Operations
For the three months ended June 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
Revenues:
Earned income-direct financing
leases $ 214,457 $ 149,580
Revenues from sales and
securitizations 133,366 756,344
Administrative fee income 52,938
Service fee income 23,870
Other income 5,939 26,581
---------- ---------
Total revenues 430,570 932,505
---------- ---------
Direct Costs:
Interest 221,743 149,072
Costs related to sales and
securitizations 118,582 756,210
Provision for credit losses 25,315 23,889
Other 39,494 6,044
---------- ---------
Total direct costs 405,134 935,215
---------- ---------
25,436 (2,710)
General and administrative expenses 508,583 540,457
---------- -------
Operating loss before other expense
and income tax benefit (483,147) (543,167)
Non-cash interest expense (154,282)
-------- -------
Loss before income tax benefit (637,429) (543,167)
Income tax benefit 216,726 178,058
------- -------
Net Loss (420,703) (365,109)
Dividends on redeemable
preferred stock (98,235) (98,235)
------- -------
Net loss applicable to
common stock $(518,938) $(463,344)
========= ========
Net loss per common share $ ( .30) $ (.32)
=== ===
Weighted average number of shares 1,736,633 1,450,000
========= =========
See accompanying notes to consolidated financial statements.
Westar Financial Services Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
For the three months ended June 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
Net cash provide by (used in) operating activities $ 4,823 $ (201,364)
----------- ---------
Cash flows from investing activities:
Recovery of equipment costs and residual
interests 337,559 952,575
Purchases of equipment for lease (4,872,131) (4,152,252)
Other 16,613 (38,519)
--------- -------
Net cash used in investing activities (4,517,959) (3,238,196)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 106,000 7,600
Additions to notes payable to banks 4,624,733 4,104,462
Payments on notes payable to banks (1,080,157) (661,528)
Additions to notes payable - subordinated 1,515,690
Payments on notes payable - subordinated (463,889)
Increase in advances from affiliate 168,119
Dividends paid on preferred stock (98,235) (91,217)
--------- ---------
Net cash provided by financing activities 4,604,142 3,527,436
--------- ---------
Net increase in cash 91,006 87,876
Cash:
Beginning of period 191,380 190,841
--------- -------
End of period $ 282,386 $ 278,717
========= =======
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company's consolidated annual financial statements presented in the 1997
Annual Report on Form 10-K of the Company includes a summary of significant
accounting policies and should be read in conjunction with this Form 10-Q.
The consolidated financial statements include the accounts of Westar Auto
Holding Co., Inc. ("WestAH"), a 100%-owned subsidiary of the Company, Westar
Auto Finance L.L.C. ("WestAF"), a limited liability company owned 99% by the
Company and 1% by WestAH, and Westar Lease Origination Trust, a Washington
business trust whose beneficiary is WestAF. The statements for the three
months ended June 30, 1997 and 1996, are unaudited, condensed and do
not contain all information required by generally accepted accounting principles
to be included in a full set of annual financial statements. In the opinion of
Management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results of operations for such periods have been
included. All significant inter-company balances and transactions have been
eliminated. The results of operations for the three months ended June 30,
1997, are not necessarily indicative of the results of operations for the
entire year.
2. The Company paid cash for interest of $122,101 and $8,937 for the three
months ended June 30, 1997 and 1996, respectively.
3. During April of 1997, the Company entered into an agreement to borrow
$1,500,000 from a Preferred Shareholder/Director. The loan is to be repaid
no later than October 20, 1997 and bears interest at the rate of 6%. The
borrowings are subordinated to bank borrowings, guaranteed by one of the
Company's executive officers and are secured by certain Company assets. The
agreement grants the lender warrants exercisable for five years to purchase
3.75% of the Company's common stock for $.01 a share. The Company recorded
a discount for the fair value of the warrants, which is the difference between
the fair value of the common stock and the exercise price. This is amortized
over the life of the note and charged to non-cash interest expense.
4. During the three months ended June 30, 1997, the Company issued 53,000
shares in various option transactions for $106,000
5. Earnings per share are computed using the weighted-average number of common
shares outstanding for the three months ended June 30, 1997 and 1996,
respectively. Net loss used in the computation of earnings per share has
been increased to include the redeemable preferred stock dividends. The
outstanding shares used in the earnings per share calculation have been adjusted
for the 2-for-1 stock split paid in June 1996. Earnings per share does not
include common stock warrants or common stock options as the effect is anti-
dilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL POSITION
Three months ended June 30, 1997 compared to three months ended June 30, 1996
- -----------------------------------------------------------------------------
Net sales decreased by approximately $502,000, from $933,000 to $431,000.
The decrease was caused by a reduction in revenues from sales and
securitizations of $623,000 offset by an increase of earned income from direct
financing leases of $65,000 and an increase of other income of $56,000.
The decrease in revenues from sales and securitizations is due primarily to
fewer miscellaneous assets sold. The increase in direct financing lease
income is due to the increased volume of leases written. Other revenues
increased primarily due to the increased revenues generated by administrative
and service fee income.
Direct costs decreased by $530,000, from $935,000 to $405,000. The decrease
was attributable to a decrease of costs related to sales and securitizations of
approximately $638,000 and to an increase of direct interest of approximately
$73,000. The decrease in costs related to sales and securitizations is explained
in the preceding paragraph. Interest costs related to warehousing leases prior
to securitization increased due to the increased volume of leases written.
General and administrative expenses decreased by approximately $32,000, from
$540,000 to $508,000.
The Company incurred a non-cash interest charge of $154,282 due to the
realization of a discount related to subordinated debt issued with warrants.
The warrants are convertible into common stock at a discount from market price
of the common stock. The difference is recorded as non-cash interest and is
amortized over the term of the note and, when fully amortized, will have no
effect on stockholder's equity and operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires substantial cash to implement its business
strategy, including cash to: (i) acquire vehicles, (ii) pay securitization
costs, including amounts required for credit enhancement (iii) satisfy working
capital requirements (iv) pay operating expenses, (v) satisfy debt service and
(vi) pay preferred stock dividends. Many of these cash requirements increase as
the Company's volume of leases increases. A substantial portion of the
Company's revenues in any period is represented by revenues from
securitizations of leases in such period but a portion of the cash
underlying such revenues is received over the life of the leases. The
Company expects to continue to have a negative cash flow as long as the volume
of leases continues to grow. The Company has historically funded
negative operating cash flows principally through borrowings from financial
institutions and sales of equity and debt securities.
The Company completed securitizations in both the second and third quarter of
fiscal year 1997 and has approximately $18.6 million of leases securitized as
of June 30, 1997. As the Company retains the servicing of leases securitized,
it receives servicing income from the securitized pools. The Company intends
to have its securitization transactions in larger denominations in fiscal
year 1998.
The revolving credit facility provided by Bank One is the primary source of
cash to finance the acquisition of vehicle leases until they are securitized
through the facility made available by the Industrial Bank of Japan (IBJ).
During the third quarter of fiscal year ended 1997, Bank One agreed to increase
the revolving warehouse line of credit, subject to certain conditions, from
$12,000,000 to $25,000,000. Final documents related to this increase are
currently being completed. After repayment of the related borrowings from Bank
One, the net proceeds from the IBJ securitizations provide a source of cash for
future acquisition of vehicle leases and general and administrative expenses.
The Company records a deferred tax asset related to its operating losses as it
believes that it has the ability to provide funding for the lease volumes
necessary to generate sufficient taxable income for realization of the deferred
tax asset.
During the three months ended June 30, 1997, the Company issued 53,000 shares
in various option transactions for $106,000.
In April 1997, the Company entered into an agreement to borrow $1,500,000 of
subordinated debt from a Preferred Shareholder/Director. The agreement grants
the lender warrants exercisable for five years to purchase 3.75% of the
Company's common stock for $.01 a share. The proceeds of the note were used
primarily to reduce notes payable - banks and notes payable - subordinated debt.
In August 1997, the Company reached an agreement in principle to sell Secured
Subordinated Notes ("Notes") with an initial $10 million face value, due 2002,
plus warrants, (collectively referred to as the "Securities") to an unrelated
third party (the "Buyer"). The Notes will bear interest at a fixed rate of the
greater of 10.5% or the bid side yield of U.S. Treasury Securities with a
average life plus 4.5% or at a variable rate of three month LIBOR
plus 4.25%. The Buyer will elect which rate applies and interest will be
payable quarterly. The Notes will be secured by a subordinated lien on the
Company's assets.
The Warrants will provide the Buyer an option to purchase 49.9% of the
Company's common stock on a fully diluted basis at an exercise price of $.01
per share (exercise price not to exceed $100 in the aggregate). These warrants
will expire 20 years from issuance.
The sale of these Securities is subject to, among other things, the Company and
the Buyer reaching final agreement upon specific terms of the related documents,
the completion of certain due diligence procedures by the Buyer, the Company
issuing an additional $3 million of common stock and the Buyer's satisfaction
with the Company's business plan for 1998, 1999 and 2000. This agreement in
principle expires October 1, 1997, unless extended by the Buyer.
It is the opinion of management that, as of June 30, 1997, 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 financing to provide for the Company's planned growth
over the next several years.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
In May of 1997 the Company issued 20,000 shares of common stock in an option
transaction for $40,000 and in June of 1997 the Company issued 33,000 shares
of common stock in various option transactions for $66,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
incorporated by reference to the Exhibit to Form 10-K
dated June 11, 1996.
3. Articles of Incorporation and Bylaws
3.1 The Articles of Incorporation of Westar Financial
Services Incorporated filed on February 13, 1996
incorporated by reference to the Exhibit to Form 10-K
dated June 11, 1996.
3.2 The Bylaws of Westar Financial Services Incorporated
adopted on February 21, 1996 incorporated by reference to
the Exhibit to Form 10-K dated June 11, 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 incorporated by
reference to the Exhibit to Form 10-K dated
June 11, 1996.
4.2 Designation of Rights and Preferences of Republic Leasing
Incorporated Series 2 Preferred Stock incorporated by
reference to the Exhibit to Form 10-K dated
June 11, 1996.
4.3 Designation of Rights and Preferences of Republic Leasing
Incorporated Series 3 Preferred Stock incorporated by
reference to the Exhibit to Form 10-K dated
June 11, 1996.
4.4 Designation of Rights and Preferences of Republic Leasing
Incorporated Series 4 Preferred Stock incorporated by
reference to the Exhibit to Form 10-K dated
June 11, 1996.
10. Material Contracts.
10.1 Republic Leasing Incorporated 1994 Stock Option Plan
incorporated by reference to the Exhibit to Form 10-K
dated June 11, 1996.
10.2 The Letter Agreement between Republic Leasing
Incorporated and The Industrial Bank of Japan, Limited
dated March 3, 1995 incorporated by reference to the
Exhibit to Form 10-K dated June 11, 1996.
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 incorporated by reference to the Exhibit
to Form 10-K dated June 11, 1996.
10.4 Amendment, dated February 15, 1996, to the Revolving
Credit Agreement with Bank One, Columbus, N.A., dated
July 12, 1995 incorporated by reference to the Exhibit
to Form 10-K dated June 11, 1996.
10.5 The Promissory Note between Westar Financial Services
Incorporated and Mud Bay Holdings Ltd., as a lender
dated January 15, 1997 incorporated by reference to the
Exhibit to Form 10-K dated September 9, 1997.
10.6 The Promissory Note between Westar Financial Services
Incorporated and & Capital Inc., as the lender dated
April 15, 1997.
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the Regi-
strant has duly caused this Report to be signed on its behalf by the under-
signed, thereunto duly authorized.
WESTAR FINANCIAL SERVICES INCORPORATED
September 22, 1997 R. W. Christensen, Jr., President
(Date) (Signature)
September 22, 1997 T. M. Foley, Vice President, Finance
(Date) (Signature)
PROMISSORY NOTE
$1,500,000.00 Olympia, Washington
April 15, 1997
FOR VALUE RECEIVED, the undersigned, WESTAR FINANCIAL SERVICES
INCORPORATED, a Washington corporation (the "Company"), promises to pay to the
order of & CAPITAL INC. (the "Lender"), at its principal place of business at
600 California Street, Suite 1850, San Francisco, CA 94108, or to the holder
hereof at such address as the holder may designate by written notice, the
principal sum of One Million Five Hundred Thousand Dollars ($1,500,000.00),
together with interest on the unpaid principal balance hereof from the date of
disbursement by the Lender at the rate and in the manner hereinafter set
forth.
1. Payments of Principal and Interest. The total principal
sum and interest hereunder shall be due and payable and shall be paid by the
Company to the Lender in one lump sum payment on the earlier of (i) July 31,
1997 or (ii) receipt by the Company of not less than Five Million Dollars
($5,000,000.00) in proceeds from one or more closings of its current offering
of Units, consisting of senior subordinated notes and warrants or any other
similar financing or financing involving equity securities. This Note shall
bear interest on the unpaid principal balance at a rate per annum equal to six
percent (6%). All interest payable in accordance with this Note shall be
calculated on the basis of a 365 day year for the actual number of days
principal is outstanding. Payment shall be made by wire transfer of
immediately available funds as specified by Lender.
2. Pre-Payments. The indebtedness evidenced or created by this
Note may at any time prior to maturity be prepaid in full or in part without
any premium or penalty.
3. Collateral. This Note is secured by a lien on and security
interest in certain assets of the Company pursuant to a Security Agreement of
even date herewith between the Lender and the Company (the "Security
Agreement").
4. Remedies.
(a) The failure of the Lender to exercise any option upon any
default shall not constitute a waiver of the right to exercise such option in
the event of any continuing or subsequent default. The Company hereby agrees
that the maturity of all or any part of the loan may be postponed or extended
and that any covenants and conditions contained in this Note, or the Security
Agreement or in any instrument given as security for the Indebtedness
evidenced or created hereby may be waived or modified without prejudice to the
liability of the Company on said Note or instrument.
(b) Presentment for payment, notice or dishonor, protest, notice
of protest and diligence in bringing suit against the Company or any guarantor
of the Company's obligations are hereby severally waived by the Company.
5. Maximum Interest. Nothing herein contained, nor in any
instrument or transaction relating hereto, shall be construed as to require
the Company, or any person liable for the payment of the loan made pursuant to
this Note, to pay interest in an amount or at a rate greater than the highest
rate permissible under applicable law. Should any interest or other charges
paid by the Company or any parties liable for the payment of the loan made
pursuant to this Note, result in the computation of earning of interest in
excess of the highest rate permissible under applicable law, then any and all
such excess shall be and the same is hereby waived by Lender, and all such
excess shall be automatically credited against and in reduction of the
principal balance, and any portion of said excess which exceeds the principal
balance shall be paid by the Lender to the Company or any parties liable for
the payment of the loan made pursuant to this Note as their respective
interests appear, it being the intent of the parties hereto that under no
circumstances shall the Company or any parties liable for the payment of the
loan hereunder be required to pay interest in excess of the highest rate
permissible under applicable law.
6. Notices. Except for any notice required under applicable law
to be given in another manner, (a) any notice to the Company provided for
hereunder shall be delivered by mailing such notice by certified mail or
registered mail, return receipt requested, or overnight courier addressed to
the Company at its address as shown on Lender's records or at such address as
the Company may designate by notice to the Lender as provided herein, and (b)
any notice to the Lender shall be delivered by certified or registered mail,
return receipt requested, or by overnight courier to the Lender's address set
forth above, or to such other address as the Lender may designate by notice to
the Company as provided herein. Any notice provided for hereunder shall be
deemed to have been delivered to the Company or the Lender three days after
the same has been deposited with the United States Postal Service or overnight
courier in the above manner. Actual notice and receipt of any written notice
shall constitute notice in all events. Payment, however, shall be deemed
received only upon actual receipt.
7. Governing Law. This Note shall be governed and construed in
accordance with the laws of the State of Washington.
WESTAR FINANCIAL SERVICES
INCORPORATED
By:_______________________
Robert W. Christensen, Jr.
President
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<PERIOD-END> JUN-30-1997
<CASH> 282,386
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4,248,000
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