<PAGE>
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, 1999 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, 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 requirements 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. [X]
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 and non-voting stock held
by non-affiliates of the registrant at June 30, 1999
$8,889,336
2,222,300 shares of no par value Common Stock outstanding as of June 30, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its September 27, 1999,
Annual Meeting of Shareholders are incorporated into Parts II and III of this
annual report on Form 10-K.
Total of Sequentially Numbered Pages: 32
Exhibit Index is Located at Page 29
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WESTAR FINANCIAL SERVICES INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
INDEX
<TABLE>
PART I
<S> <C>
ITEM 1. BUSINESS
- - General Page 3
- - Business Strategy Page 4
- - Business Overview Page 4
- - Geographic Expansion Page 5
- - Seasonal Trends Page 6
- - Internet Expansion Page 6
- - Competition Page 6
- - Risk Management Page 6
- - Credit Practices, Delinquency and Credit Loss Experience Page 7
- - Financing Page 8
- - Regulatory Matters Page 8
- - Employees Page 9
- - Executive Officers Page 9
ITEM 2. PROPERTIES Page 10
ITEM 3. LEGAL PROCEEDINGS Page 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Page 10
PART II
ITEM 5. MARKET FOR THE COMPANY'S STOCK AND DIVIDEND POLICY Page 10
ITEM 6. SELECTED FINANCIAL DATA Page 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
- - Forward-Looking Statements Page 11
- - Results of Operations and Changes in Financial Conditions Page 11
- - Computer/Year 2000 Page 13
- - Inflation and Changing Prices Page 13
- - Liquidity and Capital Resources Page 13
- - Subsequent Events Page 14
- - Recent Accounting Pronouncements Page 15
REPORTS OF INDEPENDENT ACCOUNTANTS Page 16
FINANCIAL STATEMENTS Page 17-20
NOTES TO FINANCIAL STATEMENTS Page 21-27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE Page 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Page 28
ITEM 11. EXECUTIVE COMPENSATION Page 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Page 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Page 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K Page 29
</TABLE>
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<PAGE>
[LOGO]
ITEM 1. BUSINESS
GENERAL
Westar Financial Services Incorporated (OTCBB:WEST) is an innovative, fast
growing, prime credit finance company offering automobile leases to
consumers, primarily through franchised new car dealers in ten western
states. The Company has announced its intention to open shortly at least one
additional market, serving consumers in the states of Minnesota, Wisconsin,
North Dakota and South Dakota, its Northcentral Region. The Company has also
agreed with DriveOff.com, a wholly-owned subsidiary of Navidec, Inc.
(OTC:NVDC) to provide financial administration, lease and loan funding and
titling documentation services to DriveOff.com's Internet site. At the same
time the Company has signed a letter of intent with First Union Capital
Markets Group ("First Union"), a division of First Union (NYSE:FTU) to finance
up to $1 billion annually in loans and leases originated through the
DriveOff.com web site. Westar intends to retain the leases originated through
this channel for its own account.
[GRAPH]
Lease volumes from Westars traditional dealer distribution channel grew at a
rate of 340% over the previous year due to demand from the Company's
established dealer network, growth in new dealer relationships and geographic
expansion into its new Southwestern Region late in the 3rd Quarter. Revenues
and gross margins also increased substantially.
Westar Financial Services Incorporated ("Westar") is a successor to Republic
Leasing Incorporated, and is a Washington corporation headquartered in
Olympia, Washington with offices in Phoenix, Arizona and Houston, Texas.
Westar's management team has extensive experience in the auto financing
industry, as well as the commercial and investment banking industries.
Applying this knowledge, Westar has developed a number of financing, lease
servicing and risk
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management innovations which, in management's opinion, allows it to compete
effectively with major financial institutions and manufacturer's captive
financing companies.
BUSINESS STRATEGY
THE COMPANY'S BUSINESS STRATEGY IS TO:
- significantly increase shareholder value through rapid expansion of
its finance programs through dealer originated and e-commerce channels
- provide unsurpassed levels of service to the manufacturer-franchised
automobile dealers in the Westar network
- finance prime quality lease transactions that are properly structured
and priced
- create a lease portfolio with minimal performance volatility
- use technology to offer prime credit auto consumers value
- finance lease originations through a combination of warehouse
financings, securitizations and Securities-Based Asset Sales ("SBAS")
- manage residual value risk on leased assets through innovative
residual value assurance strategies, tax benefit transactions and
through conservative residual estimation strategies and re-marketing
expertise
- expand into new markets, and
- seek additional opportunities and alliances.
THE COMPANY'S PRIMARY STRENGTHS ARE ITS:
- technological capabilities and operating leverage
- emphasis on risk management
- proprietary credit management systems
- commitment to quality dealer service
- unique position as an independent company concentrating solely on the
prime credit auto finance market
- management's extensive experience in the automobile finance business
- sophisticated liability management innovations including the Carlson
Trust, tax benefit transfers "TBT" and SBAS technologies, and
- track record and reputation.
BUSINESS OVERVIEW
Westar has been financing automobiles for more than 20 years. Unlike nearly
all of its competitors, Westar is focussed on the prime credit consumer
automobile finance market. Senior management is not distracted by business
lines outside of the Company's core market. Westar is able to attract the
highest quality personnel and dedicate them to the auto finance market. This
focus is designed to produce high quality portfolios and corporate
profitability.
Emphasis on technology has provided the Company with what it believes to be
industry-leading credit approval, tracking and analytical tools designed
around a customized combination of credit scoring systems. Westar's systems
have been created to yield targeted credit approval rates while
simultaneously: managing Westar's portfolio, driving aggressive market
penetration, limiting the Company's risk and optimizing its margins. The
Company's technology increases efficiency through substantial operating
leverage. Westar's expenses are fixed to a very large degree. Origination
volumes can increase substantially with only fractional increases in overhead.
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Senior management has almost 75 years of experience in automobile finance. In
addition, management has extensive experience in the commercial and
investment banking industries. This knowledge and experience enables Westar
to compete effectively in its industry and to capitalize on opportunities as
they arise.
The Company has developed a number of different types of lease programs that
provide its dealers with very competitive financing tools to sell vehicles,
simultaneously maximizing Westar's returns while minimizing its risk. These
programs are designed to enhance the ability of Westar's dealers to sell
vehicles, which result in high levels of dealer satisfaction with Westar's
products and services.
Westar will continue to employ a diversified funding strategy utilizing
traditional securitizations and SBASs as well as interim debt financing to
fund its growth. Westar believes that the largest part of its funding needs
will be satisfied through term and commercial paper securitizations
(traditional asset backed securitizations "ABS" and asset backed commercial
paper "ABCP" programs). In addition to securitizations, Westar intends to
periodically utilize SBASs on a flow and on a portfolio basis. While SBASs
are typically not as profitable as securitizations, they do generally result
in more up-front cash. In addition to utilizing a variety of different
financing methodologies the Company will seek to diversify its financing
sources.
The Company presently markets its services and acquires automobile leases
through its Dealer-Direct Retail Leasing "DDRL" program. The DDRL program is
offered to selected automobile dealers based on their reputation, location
and size. Each participating dealer is required to sign a non-exclusive
dealer agreement which is primarily designed to protect Westar against
potential dealer misrepresentations and some forms of fraud. The Company
attempts to meet the needs of its dealers through responsive customer service
to the dealer, extended hours operating across 361 business days a year,
rapid funding, consistent buying practices and competitive pricing. At
March 31, 1999 and 1998 the Company had 358 and 312 dealers signed,
respectively.
The Company intends to increase its lease originations by continuing to
expand its existing dealer relationships within its current geographic
market, by moving into new geographic markets and by expanding its marketing
and origination channels, including e-commerce.
Leases are approved by the Company's experienced lease production officers
("LPOs") and must meet the Company's credit and documentation standards prior
to funding. Lessees are evaluated using the Company's established debt/income
and payment ratios and are required to possess a credit history exhibiting a
willingness to pay creditors on an as agreed basis. The Company has
implemented a proprietary and sophisticated risk management system which
further enables the Company to control the consistency of the credit quality
of the applications approved and to segment its portfolio by risk.
GEOGRAPHIC EXPANSION
While Westar presently
operates only its
Northwestern and
Southwestern Regions
("NWR" and "SWR"),
other regions have
been scheduled for
expansion based on
favorable demographics
and competitive
factors, growth trends
and consumer credit
profiles. Each region [MAP]
is an area with
automobile lease
volumes of at least
$2 billion per year. The
Company has announced
its intention to open
the North Central,
Rocky Mountain,
Midwestern and
Southeastern regions
of the United States
for expansion.
Lease volumes are accelerating due to increasing demand from the established
dealer network and strong growth in new dealer relations. The new
Southwestern Region, which opened in December 1998, is exceeding early
forecasts and achieving quick acceptance by both dealers and consumers. The
ability to rapidly penetrate new geographic
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markets has been demonstrated by the expansion in the Southwestern Region,
where the Company captured approximately 2% of new car lease originations in
Arizona within the first 90 days of doing business in this region. The
Company is increasing the volume of business from existing dealers as well as
signing up new dealers. The Company expects to ultimately capture
approximately a 5% market share in each market in which it competes.
SEASONAL TRENDS
The automobile finance industry typically experiences lower volumes during
periods of extreme temperatures. The mix of geographic and Internet expansion
is expected to allow the Company to compensate for the small fluctuations and
continue to steadily increase lease volumes. The scheduled geographic
expansion plan has been created to strategically offset seasonal effects of
different regions.
INTERNET EXPANSION
In response to consumer demand for high quality customer service, low prices
and immediate response, the Company is entering the e-commerce market by
offering new car financing through the Internet beginning this summer. This
3rd generation Internet automobile acquisition channel is focused on
significantly increasing consumer satisfaction with the automobile
acquisition process while decreasing prices to the consumer. The proprietary,
industry-leading, risk management techniques, innovative lease products and
diversified funding strategy allow the Company to price its products to yield
an above average return on investment while offering the most credit worthy
consumers lower effective finance rates. The program is designed to empower
consumers, allowing them to negotiate new car purchases and financing
completely online. Consumers will be able to select the vehicle at a firm
price, arrange the financing and schedule an appointment to accept delivery of
the vehicle.
The Company has agreed to a strategic partnership with DriveOff.com and a
letter of intent with First Union Capital Markets Group ("First Union").
After months of discussion with several money center banks and other
potential partners, DriveOff.com selected Westar to fill the financial and
titling administration roles in its new venture. Westar will underwrite,
approve, fund and document for a fee all of the financial transactions
generated through the DriveOff.com sites. Westar will also originate all
delivery documents for the enterprise. The letter of intent with First Union
provides for its support of the venture through a loan purchase arrangement
with Westar for up to $1 billion of loans originated through the DriveOff.com
Internet site annually. Westar will retain for its own account the leases
originated by the venture.
COMPETITION
The automobile leasing industry is a $110 billion segment of the $400 billion
per year automobile finance market and presents an attractive opportunity to
participants. The Company competes in the prime portion of the automobile
finance market, which represents approximately 70% of industry originations.
Relative to the non-prime portion of the auto finance market, the prime
segment has experienced relatively few new competitors. A number of barriers
to entry exist, including substantial technological and capital requirements.
A few very large banks and the captive finance subsidiaries of the vehicle
manufacturers dominate the retail automobile leasing industry. Vehicle
manufacturers typically sponsor either a subsidiary finance program or a
bank-sponsored program. They can and do compete 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. Other models are priced at competitive rather
than super-competitive levels. Manufacturers' subvention programs often
substantially restrict the profit margin available to the selling dealer. The
remaining competitors--dealer leasing companies, independent leasing
companies, other banks, credit unions--split the remaining market among
themselves and exercise neither significant leadership or dominance.
The Company's competitive advantages are its risk-based pricing;
technological sophistication; operating leverage; and the lower costs made
possible by its multiple-use securitization structure and funding strategies;
as well as lower overhead, regulatory burdens and transaction costs, all
coupled with superior consumer and Dealer satisfaction levels. Management
believes that the Company is fully competitive with its largest competitors
and that it exceeds in terms of service and responsiveness.
RISK MANAGEMENT
The Company's ability to grow a portfolio of prime-credit financings with
minimal delinquency, volatility and credit loss experience affords the
Company a relatively high degree of liquidity and access to low-cost capital
resources.
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The Company believes its leading-edge risk management capabilities set the
standard in the industry. The risk management techniques and reporting tools
employed by Westar, including its proprietary Lease Accounting,
Securitization and Income Reporting "LASIR" system, enable competitive
pricing while enhancing profitability. Furthermore, by financing only prime
credits the Company realizes efficiencies and cost benefits throughout the
entire organization while lowering its portfolio volatility and overall
business risk.
The Company's risk models incorporate a wide variety of different variables
that focus on steady-state, life cycle experience. Daily, the Company
analyzes the performance of its existing portfolios as well as the quality
and composition of its new originations. Extensive performance reports are
continually analyzed for risk-based performance. The Company is constantly
analyzing demographics, credit and portfolio performance correlations and
trends to further refine its risk management.
As a result of its risk management, the Company has increased its average
yield and increased its gross margins while decreasing related origination,
servicing, collection and credit loss costs. The Company's prices are based
on the complete life cycle of a contract and take into account both the
credit risks and the cost of servicing over its term in order to achieve the
desired margin. The Company believes that this is the most sophisticated
approach to pricing and risk management employed in the market today.
CREDIT PRACTICES, DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's success is, in part, dependent on its ability to develop a
portfolio of prime-credit leases so as to minimize its delinquency and credit
loss experience. Each lease applicant must pass the scrutiny of the Company's
semi-automated credit evaluation system and the review of its experienced
lease production personnel, both of which are components of Westar's
proprietary LASIR system.
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 credit losses at a rate which management believes will adequately
provide for current and probable future losses.
The Company considers a lease delinquent when the lessee fails to make a
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.
Although the Company's credit quality is at or above that of other
prime-credit producers based on a Consumer Banker Association survey, the
loss experience rate depicted in the table below is higher than management's
expectation for future periods. Beginning in early 1998, the Company
introduced risk-based pricing which has had the effect of attracting a
stronger book of business as measured by Fair Isaac Company "FICO" scores,
delinquencies, and static pool loss rates. The improvement in credit quality
is expected to result in lower credit losses in the future as well as lower
collection costs. However, there are other factors that influence the final
performance of the portfolio including residual value gains and the
collection of termination fees.
The credit loss and repossession experience on the Company's DDRL leases
serviced for the years ended March 31, is as follows:
DELINQUENCY EXPERIENCE:
(In thousands except percentages)
<TABLE>
<CAPTION>
Originated Originated Originated Originated
in 1999 in 1998 in 1997 in 1996 Total Portfolio
------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
Ending net lease receivables serviced $52,379 $9,946 $11,800 $1,459 $75,584
Delinquencies Summary: (1)
31-60 days $600 $59 $133 $0 $792
61-90 days 108 0 16 0 124
91 days or more days 134 78 55 15 283
------- ------- ------- ------ -------
Total delinquent 31 or more days past due $842 $137 $204 $15 $1,199
------- ------- ------- ------ -------
------- ------- ------- ------ -------
Total delinquent 30+ days past due 1.61% 1.38% 1.73% 1.06% 1.59%
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CREDIT LOSS SUMMARY:
Static pool $55,514 $12,849 $23,131 $5,295 $96,790
Gross charge-offs $182 $97 $1,009 $266 $1,554
Recoveries 113 65 708 193 1,079
------- ------- ------- ------ -------
Net Credit Losses $69 $32 $301 $73 $475
------- ------- ------- ------ -------
------- ------- ------- ------ -------
Net losses as a % of static pool 0.13% 0.25% 1.30% 1.37% 0.49%
Annualized lifetime static pool losses
at 3-31-99 (2) 0.25% 0.17% 0.52% 0.39%(3) 0.31%
</TABLE>
(1) Delinquency figures include assets held in repossession inventory
(2) Assumes all leases originated mid-fiscal year, 9-1 of each year
(3) Weighted average by leases originated
FINANCING
The Company has and will continue to employ a diversified funding strategy
which balances the advantages of securitizations, SBASs and interim debt
warehouse financing. In addition to completing periodic term securitizations,
the Company is in the process of setting up several ABCP facilities with a
number of banks. Such ABCP facilities are intended to reduce costs, diversify
the Company's funding sources and provide the Company the flexibility to draw
down on such facilities both as assets are originated as well as on a pooled
basis.
The Company completed five SBAS transactions totaling $63.6 million during
fiscal 1999. The Company retains all servicing rights and responsibilities
through the life of the sold portfolios.
The Company entered into an agreement in November 1997 with Bank One,
Columbus NA for a warehouse facility in the amount of $25 million. In July
1998, the Company re-evaluated its interim financing needs considering the
expected future timing of sales and securitizations and re-negotiated the
financing facility to $15 million. This revolving credit warehouse facility
is utilized as interim financing for the acquisition of vehicle leases until
sufficient volume is achieved to securitize such leases through selected
facilities or to sell in a SBAS transaction.
The warehouse facility allows short-term borrowing of 95% to 97% of the cost
of the leased vehicles and is secured by a security interest in the lease and
the related vehicle. The interest rate is LIBOR plus 300bps, which approximates
the prime rate. Under the terms of the agreement, Bank One has the option of
reviewing each credit and rejecting any lease which it, in its sole
discretion, believes does not meet standards appropriate to prime credits.
Cash for principal and interest payments on the warehouse credit facility are
generated by the monthly lease payments. All leases included in a
securitization or sale and any non-performing leases covered by the credit
facility is repaid 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.
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 Company 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 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 Reserve
Board and 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,
fines and penalties, injunctions against illegal practices, license
revocation or
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the potential forfeiture of rights to repayment of amounts due under leases.
The Company has established internal controls to ensure that it is in
compliance with all legal and regulatory requirements. 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, 1999 and 1998 the Company had 30 and 19, employees,
respectively. 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. To date, the Company
has been successful in its efforts to recruit qualified employees. The
Company offers a competitive compensation package including salaries,
insurance, incentive stock options and growth opportunities within the
organization. The Company's employees are not 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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert W. Christensen, Jr. 50 President and CEO
Robert E. Kanatzar 47 Senior-Vice President, Risk Management
Warren Kornfeld 37 Senior-Vice President, Finance
Cindy A. Kay 34 Controller
</TABLE>
R. W. CHRISTENSEN, JR. (age 50), is the President (since 1978) and Chairman
of the Board of Directors (since 1995) of the Company. Prior to 1978 he held
positions 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.
ROBERT E. KANATZAR (age 47), is Senior Vice President--Risk Management with
responsibilities for all credit, collection and remarketing activities
(1997). Prior to joining the Company, he was Senior Vice President of Credit
Policy and Risk Management for NationsCredit Corporation, the largest
bank-owned finance company in the United States (since 1996). Prior to
joining NationsCredit, he was Vice President of Risk Management with Bank One
Credit Company (since 1992). Previously, he served as Vice President of
Consumer Lending for Texas Commerce Bank and Vice President-Finance with
Citicorp Acceptance Company's Automobile Finance Division. Mr. Kanatzar
received both his B.S. in Business Administration and MBA from the University
of Kansas.
WARREN KORNFELD (age 37), is Senior Vice President--Finance with
responsibility for the design and implementation of Westar's financial
management strategies, policies and procedures and external financial
relationships (since 1998). Prior to joining the Company, he was Vice
President with the Industrial Bank of Japan, Ltd. ("IBJ") in New York,
responsible for heading up their term asset backed efforts (since 1994).
Prior to joining IBJ, he was co-founder/partner of Bickford & Partners, Inc.,
an investment banking firm specializing in asset backed securities (since
1991). Previously, he served as First Vice President at Trepp & Company, Inc.,
where he headed up the asset backed consulting group (since 1983). Mr. Kornfeld
received his B.S. in Economics with a dual concentration in Finance and
Decision Sciences from the University of Pennsylvania.
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CINDY A. KAY (age 34), is Controller with primary responsibility for
accounting and internal finance functions (since 1997). Prior to joining the
Company, she was a Partner in Kay and Company, CPA's, responsible for
financial management consulting, taxation and audit engagements (since 1990).
Prior to joining Kay and Company, CPA's she began her career with Coopers and
Lybrand in Tucson, Arizona. Ms. Kay is a Certified Public Accountant and is a
member of the Washington Society of CPA's and the American Institute of
CPA's. Ms. Kay received her B.A. in Accounting from Saint Martins College.
ITEM 2. PROPERTIES
The general and administrative offices of the Company are located at The
Republic Building, 505 East Union, Suite 300, Olympia, Washington 98501, on
leased premises with approximately 4,400 square feet. The lease expires
November 30, 2000. The facilities are adequate for the Company's current
operations. The Company is currently seeking additional space to accommodate
its plans for expansion.
ITEM 3. LEGAL PROCEEDINGS
There are no reportable events.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Shareholder's was held on April 26,
1999. Robert L. Lovely and Michael A. Price were re-elected to the Board of
Directors for a three-year term. Directors, whose terms of office continued
subsequent to the meeting were R.W. Christensen, Jr., David C. Soward, Joel I.
Davis and Charles S. Seel. The 1994 Stock Option Plan was amended to increase
by 750,000 the number of shares reserved for issuance.
The number of votes cast for, against, withheld or abstained, as applicable,
for the Directors voted upon are summarized in the following table:
<TABLE>
<CAPTION>
Proposal #1 Election of Directors For Withhold
--------------------- --- --------
<S> <C> <C> <C>
Robert L. Lovely 1,433,662 21,850
Michael A. Price 1,434,662 20,850
</TABLE>
The number of votes cast for, withheld and not voted, as applicable for
the amendment to the 1994 Stock Option Plan are summarized in the following
table:
<TABLE>
<CAPTION>
Proposal #2 Amendment of 1994 Stock Option Plan
-----------------------------------
For Withhold Not Voted
--- -------- ---------
<S> <C> <C>
958,903 185,080 311,529
</TABLE>
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
facilitated through the NASD OTC Bulletin Board (OTC:WEST). As of March 31,
1999, the Company had 349 stockholders of record. As a matter of policy, the
Company has not paid any dividends on the common stock. Additionally, the
borrowing agreement with Bank One, discussed previously, and the redeemable
preferred stock agreements (see note 7 to the Financial Statements) restrict
the payment of dividends on the common stock. The Company intends to retain
its earnings for use in its business and therefore, does not plan to pay
dividends on the common stock in fiscal 2000.
The following table summarizes the high and low prices of the Company's stock
for fiscal years ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
High Low
Fiscal 1999 ---- ---
-----------
<S> <C> <C>
First quarter ended June 30, 1998 $3.50 $2.25
Second quarter ended September 30, 1998 3.375 1.75
Third quarter ended December 31, 1998 3.25 2.00
Fourth quarter ended March 31, 1999 3.00 1.50
Page 10
<PAGE>
Fiscal 1998
-----------
First quarter ended June 30, 1997 $8.00 $3.50
Second quarter ended September 30, 1997 7.00 2.75
Third quarter ended December 31, 1997 7.00 1.50
Fourth quarter ended March 31, 1998 3.25 1.88
</TABLE>
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 CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data as of and for the five years ended March
31, is as follows:
<TABLE>
<CAPTION>
In thousands except per share data
1999 1998 1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $67,103 $2,246 $20,743 $1,629 $2,138
Loss before cumulative effect of change in
accounting principle & extraordinary item (1,824) (5,062) (1,898) (895) (468)
Loss per common share before cumulative
effect of change in accounting principle &
extraordinary item per common share, basic (.91) (2.99) (1.48) (.85) (.43)
Net Loss (1,824) (5,062) (1,898) (852) (468)
Net Loss per common share, basic & diluted (.91) (2.99) (1.48) (.82) (.43)
Total assets 12,495 20,495 12,292 8,210 4,311
Total liabilities 19,739 23,228 10,134 5,813 3,263
Redeemable preferred stock 1,548 4,073 4,248 4,250 1,800
Shareholders' equity/(deficit) (8,792) (6,806) (2,090) (1,853) (752)
</TABLE>
The loss per common share for 1999, 1998, 1997, 1996 and 1995 has been
calculated after giving effect to preferred stock dividends of $161,274,
$390,673, $392,940, $275,324 and $134,549, respectively and have been
adjusted for the 2-for-1 stock split in June 1996.
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
Westar Financial Services Incorporated and its Subsidiaries provide prime
credit quality consumer automobile lease financing through franchised
automobile dealers in the Northwest and Southwest Regions of the United
States. Westar has designed and developed a number of financing, lease
servicing and risk management innovations. The Company has invested
significant personnel, time and resources its Dealer Direct Retail Leasing
("DDRL") program. While the Company's statement of operations reports a net
loss of approximately $1,824,000 and $5,062,000 for fiscal years 1999 and
1998, respectively, it is management's opinion that DDRL is one of the most
sophisticated and marketable retail leasing programs currently available and
a valuable investment in the Company's future.
Page 11
<PAGE>
Volumes of lease originations increased 340% over the prior year, from
455 leases costing $12.8 million in the prior year to 1,999 leases costing
$55.5 million in fiscal 1999. The credit quality of originated leases
improved, with average FICO scores of 688 in the prior period compared to 695
in the current period. The face value of leases serviced increased $48 million,
from $37 million to $85 million at March 31, 1998 and 1999, respectively.
Total gross revenue increased $64,858,000 (2,888%), from $2,245,000 to
$67,103,000 from fiscal 1998 to 1999. The increase in total gross revenue was
primarily due to the Company completing five asset backed securitizations for
approximately $63,559,000. The Company did not complete any securitizations
or SBASs in fiscal 1998. Revenues from operating leases of $1,113,000 were
reported in fiscal 1999 as the Company stopped obtaining residual insurance
or guarantees in August 1998 and the originated leases no longer qualified as
direct financing leases. As a result revenues from direct financing leases
decreased $483,000 (43%). As a result of the increased volumes,
administration fee income also increased by $776,000 (513%) over the prior
period. The decrease in revenues of $18,497,000 (89%) from fiscal 1997 to
1998 was mainly due to the lack of the Company's completion of asset backed
securitizations. In the prior year, two asset backed securitization
transactions of approximately $18,600,000 of lease contracts in private
placements took place. Due to the increased holding period of the
unsecuritized leases, earned income on direct financing leases increased
$608,000 (120%) in 1998 from 1997. Administrative income decreased $107,000
(42%) due to fewer leases funded in 1998 compared to 1997. Service fee income
rose $96,000 (2,403%) due to service fee's charged on the securitized assets
for a full fiscal year and other income decreased by $47,000 (38%) due to
fewer assets sold.
Direct costs increased $62,816,000 (2,730%) from fiscal 1998 to 1999
primarily due to the five securitizations completed in fiscal 1999. During
1999 the increase of direct costs is primarily due to an increase in cost of
assets securitized of $62,041,000 resulting from SBASs completed in fiscal
1999. Depreciation expense increased $737,000 (100%) due to the company
originating operating leases. Securitization fees increased $105,000 as a
result of the SBASs completed in fiscal 1999. Other direct expenses which
increased due to volumes are GAP insurance and lease commissions. Interest
costs related to warehousing leases decreased $209,000 (16%) due to a reduced
length of time assets are held prior to securitization. Direct costs
decreased $19,427,000 (89%) from fiscal 1997 to 1998. During 1998, the
decrease in direct costs is due primarily to the Company not completing any
asset backed securitizations. Interest costs related to warehousing leases
increased by $784,000 due to the increased length of time assets are held
prior to securitization. Provision for credit losses decreased $54,000 from
1997 to 1998 due to fewer assets funded. Other major decreases in direct
costs related also to volumes, were lease commissions and lease value
deficiency ("GAP") insurance expense.
Gross margins
increased $2,042,000
from $(55,000) to
$1,987,000 in fiscal
1998 to 1999. This is
due primarily to the
gain of $1,420,000
recognized on the five
securitizations [GRAPH]
completed in fiscal
1999 as well as
reduced interest costs
of $209,000 and
increased
administrative fee
income of $776,000
received on these
portfolios.
General and administrative expenses increased $1,005,000 (45%) from fiscal
1998 to 1999 primarily due to the increase in personnel costs of $368,000
(36%), resulting from additional personnel in risk management, MIS, finance
and operations in anticipation of greater lease origination volumes and
geographic expansion of the Company's operations outside the Northwestern
Region. Depreciation expense for fixed assets increased $136,000 (168%) as
additional equipment and fixed assets were acquired in anticipation of
increased volumes and geographic expansion. Accounting costs increased
$99,000 (203%) due to increased corporate finance and tax activity. Travel
expenses increased $98,000 (139%) as a result of the relocation of personnel,
an increase of the number of personnel traveling, and the opening of the
Southwestern Region with an office in Phoenix. These increases are partially
offset by a $47,000 (29%) decrease in amortization of private placement as
they became fully expensed. General and administrative expenses increased
$151,000 (7%) from fiscal 1997 to 1998. During 1998, a risk management
function was added to the Company's operations. Other expenses were incurred
related to LASIR development and costs pertaining to business expansion.
Other Expenses increased $61,000 (12%) from fiscal 1998 to 1999 due to
$433,000 (312%) increase of subordinated-debt interest expense. This increase
is partially offset by a $371,000 (100%) decrease in non-cash interest
expense resulting from original issuance discount expense related to
subordinated debt borrowing in fiscal 1998. Other expenses increased $490,000
(2,386%) from fiscal 1997 to 1998 due to subordinated debt borrowings.
Page 12
<PAGE>
Income tax expense decreased $2,263,000 (100%) due to a 100% valuation
allowance recorded in fiscal 1999 and 1998.
The Company has crafted a strategy using current products and services to
continue geographic expansion and to offer its products and services through
e-commerce. Substantial time, monies and efforts have been and will continue
to be invested for implementation. Management believes that future revenues
derived from this structure will allow recovery of the Company's initial
investment and return operating profits on a quarterly basis before the end
of fiscal 2000.
COMPUTER/YEAR 2000
RISKS OF YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
DEPENDENCE ON MAJOR CLIENTS
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. The Company has found no material problems to date with any of its
significant suppliers or customers. However, there can be no guarantee that
the systems of other companies (including financial institutions,
telecommunications and particularly agencies of the US Government) on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company or the government, or a conversion that is
incompatible with the Company's systems, would not have material adverse
effect on the Company.
CONTINGENCY PLANS
Based on a recent assessment, the Company determined that since it uses an
Apple Macintosh based system, and all related upgrades and system changes
have been made, the Company's systems are currently Year 2000 compliant. The
Company has replaced its phone and voicemail systems with new, Year
2000-compliant systems to better provide for the expanding communication
needs of the organization. Additionally, the Company is currently operating
in its fiscal year 2000 and has not experienced any material problems.
COSTS ASSOCIATION WITH YEAR 2000 ISSUES
The Company's total Year 2000 project costs have been minimal including the
estimated costs and time associated with the impact of third party Year 2000
issues. The decision by the Company to acquire new phone software and
equipment, and the timing thereof, arose in the ordinary course of the growth
of the Company, and is not considered a cost associated with the Year 2000
issue.
INFLATION AND CHANGING PRICES
The Company's leases are written with fixed terms at fixed implicit rates.
Interim financing for the leases is provided through the Bank One warehouse
facility until sufficient volumes are pooled for securitization or sold
through portfolio sale transactions. The Company is at risk from interest
rate fluctuations during the time it owns the leases it originates.
Management has various tools available, such as interest rate swaps and
pre-funding 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 generated $8.9 million in cash flow from operations during the
year as compared to $(12.0) million in the prior year. This represents the
Company's principal source of cash. The increase in 1999 of $20.9 million was
driven primarily by the five SBAS transactions completed in fiscal 1999 and
the corresponding $8.8 million net reduction in direct financing and
operating assets retained by the Company. Cash flow in fiscal 1999 was also
affected by the increased lease origination volume. The Company invested
$.5 million in property and equipment during fiscal 1999, the majority of
which is focussed on geographic and e-commerce expansion. Total debt at
March 31, 1999 was $19.7 million, down $3.5 million (15%) from the prior
fiscal year. This reduction reflects decreased
Page 13
<PAGE>
holdings of leases which are funded using the warehousing facility.
Increasing the number of SBAS transactions or securitizations during the year
affords the company additional opportunities to fund leases and reduce
interest expense on the warehouse line while maintaining lower average
balances in the warehousing facility.
Capital spending plans currently provide for outlays of approximately
$1 million in fiscal 2000. Following the Company's growth strategy, the plan
outlines a significant percentage of the fiscal 2000 capital outlays to be
used for geographic and Internet expansion. It is expected that funds
necessary for these expenditures will be generated internally, through
Private Placements and/or credit facilities.
The Company requires substantial cash to implement its business strategy,
including cash to: (i) acquire vehicles; (ii) pay sales or securitization
costs; (iii) satisfy requirements for working capital; (iv) pay operating
expenses; (v) satisfy debt service; (vi) pay preferred stock dividends;
(vii) implement its geographic expansion; and, (viii) invest in technology,
systems and personnel. A substantial portion of the Company's revenues in any
period results from sales or securitizations of leases in such period but in
a securitization transaction a portion of the cash underlying such revenues
is received over the life of the leases. The Company has historically been
successful in meeting its liquidity needs through internal cash flow,
borrowings from financial institutions, securitizations and SBASs, portfolio
sales and sales of equity and debt securities.
To diversify funding strategies, the Company is negotiating several Asset
Backed Commercial Paper ("ABCP") facilities with a number of banks. The
diversification of funding strategies will improve long-term business
performance, strengthen the Company's competitive position and build a
sustainable competitive advantage.
Westar was the third Company in the nation to structure a free standing lease
securitization and the first to originate multiple securitizations from
within a single bankruptcy remote structure and to originate a tax benefit
transfer from within a securitization. As of March 31, 1999, the Company has
completed seven securitizations while it retains the servicing of the
portfolios and receives servicing income through the life of the lease.
The Company entered into an agreement with Bank One, Columbus NA in July 1995
which was expanded in November 1996 from the initial $12 million limit to
$25 million. In July 1998, the Company re-evaluated its interim financing
needs considering the expected future timing of sales and securitizations.
Based on this information, Management re-negotiated the financing facility to
$15 million. This revolving credit warehouse facility is to be utilized as
interim financing for the acquisition of vehicle leases until sufficient
volume is achieved to sell such leases through an ABS or SBAS transaction.
After repayment of the related borrowings from Bank One, the net proceeds
from the sales of originated leases provide a source of cash for future
originations of vehicle leases and general and administrative expenses. At
March 31, 1999 the unused portion of the warehouse line is $6.6 million. The
Company must comply with certain loan covenants. At March 31, 1999 the
Company exceeded the fixed asset purchase covenant and the lender has waived
this event through April 1, 2000.
Since 1994, the Company has raised $4,250,000 from redeemable preferred stock
offerings. The proceeds were used for the development of DDRL and to fund
current operations and initial lease acquisitions. During the year ended
March 31, 1999 the Company redeemed 2,525 shares of preferred stock for
$2,525,000 using proceeds from the issuance of a $4 million convertible
subordinated note.
It is the opinion of Management that, as of March 31, 1999, the liquidity
sources discussed above in conjunction with subsequent events noted below 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. The Company
is currently in negotiations to obtain additional capital through both
private and public financings to provide for the Company's planned growth
over the next several years. There can be no assurance that such negotiations
will be successful.
SUBSEQUENT EVENTS
In April 1999, the Shareholders approved an amendment to the Stock Option
Plan to increase the number of shares of the Company's common stock reserved
for issuance from 600,000 shares to 1,350,000 shares.
In April 1999, the Company amended a line of credit agreement with Bank One
dated June 25, 1998. The due date has been extended to September 30, 1999.
In April 1999, the Company amended a subordinated debt agreement with a
related party dated August 31, 1998. The
Page 14
<PAGE>
due date has been extended to December 1, 1999.
In April 1999 the Company amended a convertible-subordinated debt agreement
with a related party dated August 31, 1998. The due date has been extended to
December 1, 1999. The Note shall bear interest at the rate of 9%.
In April 1999, the Company's origination/issuer trust, Westar Lease
Origination Trust, completed its eighth securitization of $5.2 million of
automobile lease-backed securities in a private-placement offering. The
Company's proceeds were reduced by a reserve in the amount of $35,200, which
is to be received in 60 monthly payments in the amount of $585.96. The
Company continues to service the leases securitized.
In May 1999, the Company entered into a subordinated debt agreement with a
related party to borrow $250,000 subordinated debt. The note is to be repaid
no later than December 1, 1999. The note bears interest at the rate of 9%.
In May 1999, the Company's origination/issuer trust, Westar Lease Origination
Trust, completed its ninth securitization of $12.3 million of automobile
lease-backed securities in a private-placement offering. The Company's
proceeds were reduced by a reserve in the amount of $84,400, which is to be
received in 60 monthly payments in the amount of $1406.57. The Company
continues to service the leases securitized.
In June 1999, the Company's origination/issuer trust, Westar Lease
Origination Trust, completed its tenth securitization of $6.6 million of
automobile lease-backed securities in a private-placement offering. The
Company's proceeds were reduced by a reserve in the amount of $45,100, which
is to be received in 60 monthly payments in the amount of $751.75. The Company
continues to service the leases securitized.
In June 1999, the Company entered into a subordinated debt agreement with a
related party to borrow $600,000 subordinated debt. The note is to be repaid
no later than December 1, 1999. The note bears a variable rate of interest of
prime plus one percent. The rate is currently 8.75%.
In June 1999, the Company signed an agreement with DriveOff.com, a
wholly-owned subsidiary of Navidec, Inc to provide financing, administration,
lease and loan funding and titling to DriveOff.com's Internet site. In
connection with the DriveOff.com agreement, the Company signed a letter of
intent with First Union Capital Markets Group ("First Union") to provide loan
purchase arrangement whereby loans originated through the DriveOff.com
website of up to $1 billion annually.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position No. 98-5 "Reporting on the Costs of Start-Up Activities",
effective for Westar, April 1, 1999, requires costs of start-up activities
and organization costs to be expensed as incurred. It is not expected that
the adoption of this statement will have a material effect on the Company's
operating results or financial condition.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This
statement will be effective for all fiscal quarters of Westar's fiscal years
ending March 31, 2002, at the earliest. Initial application of this statement
should be as of the beginning of an entity's fiscal quarter; on that date,
hedging relationships must be designated anew and documented pursuant to the
provisions of this statement. This statement may not be applied retroactively
to financial statements of prior periods. Management has not yet determined
the effects if any of this accounting pronouncement on the Company's
operating results or financial condition.
Page 15
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Westar Financial Services Incorporated
We have audited the accompanying consolidated balance sheet of Westar
Financial Services Incorporated and its subsidiaries as of March 31, 1999 and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the years ended March 31, 1999 and 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide 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 and its subsidiaries as of March 31, 1999 and
the consolidated results of their operations and their cash flows for the
years ended March 31, 1999 and 1997, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Seattle, Washington
June 25, 1999
Board of Directors and Shareholders
Westar Financial Services Incorporated
We have audited the accompanying consolidated balance sheet of Westar
Financial Services Incorporated and subsidiaries as of March 31, 1998 and the
related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement 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 misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Westar
Financial Services Incorporated and subsidiaries as of March 31, 1998 and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
KPMG LLP
Seattle, Washington
February 17, 1999
Page 16
<PAGE>
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash and cash equivalents $ 925,204 $ 475,275
Accounts and other receivables, net of allowance for credit losses
of $20,613 and $21,000 (Notes 2 & 9) 253,697 147,092
Credit enhancement receivable, net of allowance for credit losses
of $90,894 for both years (Note 3) 1,039,895 855,848
Net investment in direct financing leases (Notes 4 & 5) 102,539 18,533,096
Operating leases held for sale (Notes 4 & 5) 9,640,013
Deferred tax asset, net of valuation allowance of $3,482,518 and
$2,936,206 (Note 6)
Other 533,937 484,066
------------ ------------
$ 12,495,285 $ 20,495,377
------------ ------------
------------ ------------
Accounts payable $ 1,670,233 $ 692,126
Notes payable to banks (Note 5) 9,942,938 19,057,701
Notes payable affiliates (Note 5) 6,438,359 2,756,635
Other liabilities 1,687,211 722,401
------------ ------------
19,738,741 23,228,863
------------ ------------
Redeemable preferred stock (Notes 7 & 8) 1,548,000 4,073,000
------------ ------------
Shareholders' Equity (Deficit):
Common stock, no par value; 35,000,000 shares authorized;
2,187,300 shares issued and outstanding (Note 8) 3,239,795 3,239,795
Paid in capital - stock warrants (Notes 5 & 8) 371,495 371,495
Accumulated deficit (12,402,746) (10,417,776)
------------ ------------
(8,791,456) (6,806,486)
------------ ------------
$ 12,495,285 $ 20,495,377
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 17
<PAGE>
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Revenues from sales and securitizations
(Note 3) $64,210,552 $ 804,160 $19,850,681
Earned income on direct financing leases 631,102 1,114,050 505,889
Revenues from operating leases 1,112,845
Administrative fee income 927,364 151,353 259,104
Service fee income 132,888 100,114 4,000
Other 88,746 75,912 123,213
----------- ----------- -----------
Total Revenues 67,103,497 2,245,589 20,742,887
----------- ----------- -----------
Direct costs:
Costs related to sales and securitizations 62,790,337 766,589 20,850,971
Interest 1,086,983 1,296,261 512,760
Depreciation on operating leases 737,436
Provision for credit losses 62,289 65,000 118,889
Other 439,923 173,009 244,566
----------- ----------- -----------
Total Direct Costs 65,116,968 2,300,859 21,727,186
----------- ----------- -----------
Gross margin 1,986,529 (55,270) (984,299)
General and administrative expenses (Note 9) 3,238,639 2,233,612 2,062,242
----------- ----------- -----------
Loss before non-cash interest expense & subordinated
debt (1,252,110) (2,288,882) (3,046,541)
Non-cash interest expense (Note 5) 371,496
Subordinated debt interest expense 571,586 138,674 20,522
----------- ----------- -----------
Loss before federal income tax benefit (1,823,696) (2,799,052) (3,067,063)
Income tax benefit (expense) (Note 6) (2,263,073) 1,168,666
----------- ----------- -----------
Net loss (1,823,696) (5,062,125) (1,898,397)
Dividends on redeemable preferred stock (161,274) (390,673) (392,940)
----------- ----------- -----------
Net loss applicable to common stock $(1,984,970) $(5,452,798) $(2,291,337)
----------- ----------- -----------
----------- ----------- -----------
Net loss per basic and diluted common share $ (0.91) $ (2.99) $ (1.48)
------- ------- -------
------- ------- -------
Weighted average number of basic and diluted shares
outstanding 2,187,300 1,825,400 1,548,200
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 18
<PAGE>
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Paid in Accumulated
Shares Amount Capital Deficit Total
--------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 1,430,500 $ 820,195 $ (2,673,641) $(1,853,446)
Dividends on redeemable preferred stock (392,940) (392,940)
Net loss (1,898,397) (1,898,397)
Common stock issued 281,800 2,054,600 2,054,600
--------- ---------- -------- ------------ -----------
Balance, March 31, 1997 1,712,300 $2,874,795 $ (4,964,978) $(2,090,183)
Dividends on redeemable preferred stock (390,673) (390,673)
Net loss (5,062,125) (5,062,125)
Exercise of common stock warrants 475,000 365,000 365,000
Paid in capital-detachable stock warrants $371,495 371,495
--------- ---------- -------- ------------ -----------
Balance, March 31, 1998 2,187,300 $ 3,239,795 $371,495 $(10,417,776) $(6,806,486)
--------- ---------- -------- ------------ -----------
Dividends on redeemable preferred stock (161,274) (161,274)
Net loss (1,823,696) (1,823,696)
--------- ---------- -------- ------------ -----------
Balance, March 31, 1999 2,187,300 $ 3,239,795 $371,495 $(12,402,746) $(8,791,456)
--------- ---------- -------- ------------ -----------
--------- ---------- -------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 19
<PAGE>
WESTAR FINANCIAL SERVICES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,823,696) $ (5,062,125) $ (1,898,397)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred tax (benefit) provision 2,263,075 (1,168,666)
Depreciation and amortization 1,083,841 480,106 82,373
Provision for and write-off of credit losses 62,289 65,000 118,889
Changes in assets and liabilities:
Accounts receivable (106,226) 186,405 (176,087)
Credit enhancement receivable (184,047) 210,167 (1,156,909)
Net investment in direct financing leases 18,430,650 (10,603,596) (2,688,836)
Operating leases held for sale (10,440,209)
Accounts payable 932,626 38,291 343,358
Other liabilities 964,812 463,324 154,279
Other 24,621 (43,764) (68,507)
------------ ------------ ------------
Net cash provided by (used in) operating activities 8,944,661 (12,003,117) (6,458,503)
------------ ------------ ------------
Cash flows from investing activities:
Other (308,069) (105,465) (176,477)
------------ ------------ ------------
Net cash used in investing activities (308,069) (105,465) (176,477)
------------ ------------ ------------
Cash flows from financing activities:
Redemption of redeemable preferred stock (2,525,000) (175,000) (2,000)
Proceeds from issuance of common stock 365,000 2,054,600
Additions to notes payable 58,150,281 16,043,943 23,877,554
Payments on notes payable (63,583,319) (3,544,274) (18,886,525)
Dividends paid on redeemable preferred stock (115,793) (297,192) (385,922)
Other (112,832) _________ (22,188)
------------ ------------ ------------
Net cash provided by (used in) financing activities (8,186,663) 12,392,477 6,635,519
------------ ------------ ------------
Net increase in cash and cash equivalents 449,929 283,895 539
Cash and cash equivalents:
Beginning of year 475,275 191,380 190,841
------------ ------------ ------------
End of year $ 925,204 $ 475,275 $ 191,380
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,713,829 $ 723,203 $ 413,518
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- 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. The
merger effected the reincorporation of RLI in the State of Washington and the
change of name to Westar Financial Services Incorporated.
- OPERATIONS
Westar's business operations focus solely on the prime-credit sector of the
consumer automobile leasing market utilizing a network of auto dealers. The
Company employs diversified funding strategies utilizing securitizations and
Securities Based Asset Sales ("SBAS") as well as interim warehouse financing.
The Company services the leases during their term and remarkets used
automobiles upon the expiration of the leases. With increasing volumes and
market share, the Company holds a lease servicing portfolio in excess of $100
million.
- PRINCIPLES OF 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.
(WestAH), their 100% owned subsidiary Westar Auto Finance, LLC (WestAF) and
the Westar Lease Origination Trust (WestLOT), a Massachusetts business trust
registered in the State of Washington, beneficially owned by WestAF. All
intercompany accounts and transactions have been eliminated in consolidation.
- CONCENTRATION OF CREDIT AND FINANCIAL INSTRUMENT RISK
The Company controls its credit risk through stringent credit standards,
limits on exposure, and by monitoring the financial condition of its lessees.
The Company uses a proprietary credit scoring system to evaluate the credit
risk of applicants in the all Dealer Direct Retail Leasing Program ("DDRL")
program. The Company retains the servicing of the leases sold.
One dealer accounted for 22% of lease originations in the current year. No
dealers accounted for more than 10% of lease volume in 1998 or 1997.
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 it maintains lease
value deficiency ("GAP") insurance on "DDRL" contracts which protects the
lessee and the Company from losses associated with deficiencies between the
leased vehicle's value and the balance on the related lease contract.
A significant portion of the Company's business activity is with customers
located in the states of Washington, Oregon and Arizona. There were no other
significant regional, industrial or group concentrations during the three
years ended March 31, 1999.
- CASH AND CASH EQUIVALENTS
The Company considers all investments with a maturity of three months or less
when purchased to be cash equivalents.
- CREDIT ENHANCEMENT RECEIVABLE
The Company may be required to maintain spread accounts to protect investors
and credit enhancers in securitization transactions against credit losses.
The initial deposit, if required, and excess cash flows from securitization
transactions are typically retained for each securitization until the spread
account balance reaches a specified percentage of the underlying minimum
lease payments included in the securitization. Funds in excess of specified
percentages are remitted to the Company over the remaining life of the
securitization. For each securitization, there is no recourse to the Company
beyond the balance in the spread accounts.
- LEASES
For contracts determined to be operating leases, rental income on operating
leases is recognized as revenue as it becomes due. Depreciation on operating
leases is provided over the term of the lease in an amount necessary to
reduce the cost of the leased vehicle to its estimated residual value at the
end of the lease term. Residual values are at levels set by the Automotive
Lease Guide ("ALG").
For direct financing leases, unearned lease income (representing total
minimum lease payments receivable, including the residual
Page 21
<PAGE>
value of the leased asset, in excess of the cost of the leased asset) is
amortized to income using the interest method over the term of the lease.
At the end of the lease term or upon premature termination of the lease, the
leased asset is sold. Proceeds from the sales of warehoused leased assets are
included in revenues and the carrying costs of warehoused leased assets at
time of sale are included in direct costs.
- FURNITURE, FIXTURES AND EQUIPMENT
At March 31, 1999 and 1998, furniture, fixtures and equipment of $419,573
(net of accumulated depreciation of $427,520) and $148,898 (net of
accumulated depreciation of $250,945), respectively, are included in other
assets. They are stated at cost less accumulated depreciation and are
depreciated on a straight-line basis over their estimated useful lives of 2
to 5 years. Included in this total are assets subject to capital leases in
the amount of $177,842 (net of accumulated amortization of $228,218) and
$128,799 (net of accumulated amortization of $102,443) for the years ended
March 31, 1999 and 1998, respectively. These assets are stated at cost less
accumulated amortization and are amortized over the term of the lease.
- INTANGIBLE ASSETS
At March 31, 1999 and 1998, intangible assets of $11,312 (net of accumulated
amortization of $129,423) and $27,948 (net of accumulated amortization of
$110,925), respectively 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 and a private placement are amortized on a straight-line basis over
the remaining term of the agreements.
- STOCK BASED COMPENSATION
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, effective for years beginning after December 15,
1995. The statement requires expanded disclosure of stock-based compensation
arrangements and encourages (but does not require) application of the fair
value recognition provision in the statement. SFAS No. 123 does not require
alteration of the existing accounting rules for employee stock-based
programs. Companies may continue to follow rules outlined in APB Opinion
No. 25, but are now required to disclose the pro forma amounts of net income
(loss) and earnings (loss) per share that would have been reported had they
elected to follow the fair value recognition provision of SFAS No. 123.
Effective January 1, 1996, the Company adopted the disclosure requirements of
SFAS No. 123, but has determined that it will continue to measure its
employee stock-based compensation arrangements under the provisions of APB
Opinion No. 25. As the Company continues to apply APB Opinion No. 25 and
related interpretations, no compensation cost has been recognized.
- FEDERAL INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established to the extent that
recovery of net deferred tax assets fail to meet the more likely than not
standard imposed by FAS 109.
- EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, which
establishes standards for computing and presenting earnings (loss) per share
("EPS") and has the effect of simplifying the standards for computing
earnings (loss) per share and makes them comparable to international EPS
standards. It replaces presentation of primary EPS with a presentation of
basic EPS. Basic EPS excludes dilution for the effect of common stock
equivalents such as options or warrants. SFAS No. 128 was effective for
financial statements issued for periods ending after December 15, 1997
(earlier application was not permitted) and required restatement of all prior
period EPS data presented.
Loss per share is computed using the weighted-average number of common shares
outstanding and has been retroactively adjusted to give effect to the 2-for-1
stock split declared on May 10, 1996. Net loss used in the computation of
loss per share has been increased to include the required amount of dividends
on the redeemable preferred stock of $161,274, $390,673 and $392,940 for the
years ended March 31, 1999, 1998 and 1997, respectively. Loss per share
calculations do not include 399,833, 242,000 and 296,800 shares for fiscal
years 1999, 1998 and 1997, respectively of 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
- COMPREHENSIVE INCOME
In February 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for annual and interim periods beginning after
December 15, 1997. This statement requires that all items that are required to
be recognized under accounting standards as comprehensive income be reported
in a financial statement displayed with the same prominence as other financial
statements. Currently, the Company does not have any items which would be
required to be reported under SFAS No. 130.
- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable, credit
enhancement receivables and notes payable, which due to the nature and
duration of these financial instruments, approximates fair value. The fair
value is determined by using the percentage of book gain on the Company's
portfolios. The following represents the book value and fair value of the net
investment of direct financing leases at March 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Investment in Direct Financing
Leases:
Book Value $102,539 $18,533,096
Page 22
<PAGE>
Fair Value $105,070 $18,782,978
</TABLE>
- EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This
statement will be effective for all fiscal quarters of Westar's fiscal years
ending March 31, 2002, at the earliest. Initial application of this statement
should be as of the beginning of an entity's fiscal quarter; on that date,
hedging relationships must be designated anew and documented pursuant to the
provisions of this statement. This statement may not be applied retroactively
to financial statements of prior periods. Management has not yet determined
the effects if any of this accounting pronouncement on the Company's
operating results or financial condition.
Statement of Position No. 98-5 "Reporting on the Costs of Start-Up
Activities," effective April 1, 1999, requires costs of start-up activities
and organization costs to be expensed as incurred. Upon adoption of the
statement any such unamortized costs which had previously been capitalized is
to be charged to expense as the cumulative effect of a change in accounting
principle. It is not expected that the adoption of this statement will have a
material effect on the Company's operating results or financial condition.
- RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been reclassified
to conform to current year classifications.
ACCOUNTS AND OTHER RECEIVABLES:
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, 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, 1999 and 1998, accounts receivable includes a remaining balance
of approximately $155,000, associated with a customer which is now operating
under Chapter 11 of the Federal Bankruptcy Act. The court-appointed Trustee
in that case 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). The Trustee appointed for the reorganizing company is a related
party (see note 9). The Company expects full recovery as a result of the
plan. The Trust is presently liquidating and preparing to distribute cash
assets.
SECURITIZATIONS AND SBAS:
The Company relies upon sales of leases into various forms of traditional
securitizations, SBAS and ABCP facilities to generate cash proceeds for
repayment of its warehouse credit facility and to create the availability of
capital to originate additional leases. Revenues generated by the Company's
securitizations are likely to represent a significant portion of the
Company's revenues.
During the fiscal year ended March 31, 1999, the Company completed five asset
backed securitization transactions which generated approximately $63.6 million
of proceeds from private-placement offerings referred to as 1998 PIC-A to
1998 PIC-D and 1999 PIC-A. The Company's proceeds were reduced by a portion
of future cash flows related to the pool of contracts sold. Such un-remitted
portion of proceeds represents servicing income and a credit enhancement to
the purchase of trust certificates, as it provides additional collateral.
Recourse to the Company is limited to the extent of the credit enhancement.
The Company anticipates receiving the unremitted proceeds over the term of
the securitizations, which have a maximum term of 63 months. As part of the
securitization transaction, the Company sells the tax benefit to a third
party. The Company retains all servicing rights and responsibilities through
the life of the portfolio.
The Company's proprietary Carlson Trust Structure is a multi-use, reusable,
"titling trust" structure to be used to facilitate auto lease
securitizations, as well as a variety of other financing mechanisms such as
warehouse financing, pooled SBASs and flow funding facilities. Additionally,
the simplified trust structure reduces costs by eliminating the need to
establish new trusts for each securitization. The Carlson Trust is a "titling
trust" whereby for leases the vehicles are titled once and only once in the
name of the trust regardless of how the lease and vehicle will be ultimately
financed. Eliminating the need for re-titling dramatically reduces the
administration costs for financing leases.
LEASES:
Components of the operating leases held for sale as of March 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Operating Leases Held For Sale 9,845,103
Less: accumulated depreciation 142,330
--------- ---------
Sub-total 9,702,773
--------- ---------
Page 23
<PAGE>
Allowance for losses (62,760)
Net operating leases 9,640,013
--------- ---------
--------- ---------
</TABLE>
Components of the net investment in direct financing leases as of March 31,
including guaranteed residual values, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Total minimum lease payments
receivable $119,418 $22,226,851
Unearned income (15,599) (3,607,239)
-------- -----------
Sub-total 103,819 18,619,612
Allowance for losses (1,280) (86,516)
-------- -----------
Net investment in direct financing $102,539 $18,533,096
leases -------- -----------
-------- -----------
</TABLE>
The future annual minimum lease payments related to the 1999 lease receivables,
including guaranteed residual values, approximated $1.7, $1.8, $2.0, $2.1,
$2.1 million for the five years ending 2004. The remaining balance of
$2.6 million is to be received thereafter.
The leases have options to purchase the underlying asset at the end of the
lease term at 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 operating leases, direct financing leases and other receivables
for each of the years in period ended March 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance $198,410 $151,894
Provision:
Operating leases 61,008
Direct financing leases 1,281 65,000
-------- --------
62,289 65,000
Net charge-offs:
Operating leases (6,048)
Direct financing leases (79,096) (18,484)
-------- --------
Balance, end of year $175,555 $198,410
-------- --------
-------- --------
</TABLE>
NOTES PAYABLE BANKS AND OTHERS
- NOTES PAYABLE BANKS
The Company entered into a credit facility agreement "credit facility" with
Bank One, Columbus, NA in August 1998 which set the warehouse credit facility
of $26 million. The credit facility provides short term borrowing from 95% to
97% of the cost of a lease and is secured only by the pledge of the Asset
Specific Trust Instrument ("ASTI") generated upon the origination of the
lease. The credit facility 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 securitization
or SBAS of the underlying lease contracts. The credit facility calls for
interest, payable quarterly, at three percent (3%) above the 30-day LIBOR
rate. The credit facility requires the Company to comply with quarterly
debt/equity ratios, net worth minimums (as defined) and prohibits the payment
of dividends on common stock. The Company is in compliance with these
requirements.
At March 31, 1999 and 1998, $9.4 million and $18.3 million was outstanding
under the line, respectively. The highest outstanding balance throughout the
year was $25.9 million in August of 1998. The weighted average rate of
interest paid under the credit facility was 8.43% and 8.79% during the years
ended March 31, 1999 and 1998, respectively (calculated using the number of
days each rate was outstanding for the fiscal year). The interest rate at
March 31, 1999 and 1998 was 7.96% and 8.68%, respectively. Additionally, the
credit facility requires payment of a quarterly non-utilization fee of .125%
on the unused portion of the line, which at March 31, 1999 was $8.9 million.
In July 1998, a new amended and restated agreement, with terms and conditions
similar to the original agreement, was reached which set the warehouse line
at $15 million. The note is due September 30, 1999.
In August 1997, the Company entered into a working capital loan for $750,000
with Bank One. The loan is collateralized by a perfected first security
position in the Company's interest in 1996 PIC-A & 1996 PIC-B. The interest
rate is three percent (3%) above the 30-day LIBOR rate. The note was due
April 30, 1999 and was extended to September 30, 1999. The balance at March 31,
1999 and 1998 was $500,000 and $750,000, respectively.
The Company paid cash for interest on notes payable to banks of $1,348,684,
$698,801 and $400,013 for the years ended March 31, 1999, 1998 and 1997,
respectively.
The future annual repayments related to notes payable to banks approximated
$9.9 million and is due in fiscal year 2000.
- NOTES PAYABLE AFFILIATES
LINE OF CREDIT: In January 1997, the Company entered into a subordinated note
agreement to borrow up to $750,000 due to a related party. The note is
subordinated to the bank borrowings and is due June 15, 1999. Interest is
payable at the rate of 8%. The balance at March 31, 1999 and 1998 was $4,040
and $527,297, respectively.
SUBORDINATED DEBT: At March 31, 1998, the Company had a 120-day 11%
subordinated note payable of $100,000 due to a related party. The note was
paid in full in May 1998. The balance at March 31, 1999 and 1998 was $0 and
$100,000, respectively
SUBORDINATED CONVERTIBLE DEBT: In April 1997, the Company entered into an
agreement to borrow $1,500,000 from a related party. The loan is due at the
earlier of (i) April 1, 1999 or (ii) receipt by the Company of not less than
$5,000,000 in proceeds from one or more closings of its current offerings of
Units, consisting of convertible subordinated notes or any other similar
financing. The note 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
then outstanding common stock for $.01 a share. The difference between the
fair market value of the then outstanding common stock and the strike price
of the warrants was recorded as non-cash interest and
Page 24
<PAGE>
amortized over the original term of the note. The note balance at March 31,
1999 and 1998 was $1,500,000.
SUBORDINATED DEBT: In January 1998, the Company entered into an agreement to
borrow $500,000 from a related party. The note is due April 1, 1999. The note
bears interest at the rate of 9.5%. The borrowings are subordinated to bank
borrowings. The balance at March 31, 1999 and 1998 was $250,000 and $500,000,
respectively.
SUBORDINATED DEBT: In April 1998, the Company entered into an agreement with
a related party to borrow $400,000 subordinated debt. The note was to be
repaid no later than June 30, 1998 and bears interest at the rate of 9%. The
note was repaid in full in May 1998.
SUBORDINATED CONVERTIBLE DEBT: In May 1998, the Company entered into an
agreement with a related party to borrow $4,000,000 subordinated convertible
debt. A portion of the proceeds were used to redeem Preferred Stock. The note
is convertible into 20% of the Company's common stock. The note is to be
repaid no later than May 2003 and bears interest at the rate of 10.5%. The
balance at March 31, 1999 was $4,000,000.
NOTE PAYABLE: In May 1998, the Company entered into an agreement with a
related party to redeem his Series 3 Preferred Stock with a par value of
$500,000 for a note payable in the amount of $500,000. The note bears
interest at the rate of 9.25% which is paid quarterly. The note matures
April 1, 1999. The note was amended on March 31, 1999 and reflects the
maturity date to be one-eighth of the principal balance paid quarterly,
beginning fourth quarter of fiscal 1999.
The future annual repayments related to notes payable to affiliates
approximated $1.9, $.3, $.1, $0 and $4.0 million for the five years ending
2004.
REPURCHASE CREDIT FACILITY:
In July 1998, the Company entered into an agreement with a related party, to
establish a $2 million non-recourse lease repurchase credit facility. In July
1998 the Company sold $1.6 million of leases into the facility at an average
interest rate of 9.5% per year. The Company repurchased the $1.6 million of
leases in August 1998. The balance on this facility as of March 31, 1999 was $0.
OBLIGATIONS UNDER CAPITAL LEASES:
At March 31, 1999 the Company had several sale/leaseback transactions with
T&W Financial Corporation, a related party (see note 9). Payments of principal
and interest are due in 36 monthly installments of $12,923. Interest is
imputed at the rate of approximately 9.3%. The balance at March 31, 1999 and
1998 was $184,317 and $129,338, respectively.
At March 31, 1999 the future minimum lease payments are as follows:
<TABLE>
<S> <C>
March 31, 2000 $ 97,919
March 31, 2001 69,982
March 31, 2002 16,416
--------
Total $184,317
--------
--------
</TABLE>
The Company paid cash for interest on notes payable affiliates, repurchase
credit facility and obligations under capital leases of $355,626 and $24,402
for the years ended March 31, 1999 and 1998, respectively.
FEDERAL INCOME TAXES:
The provision for income tax expense (benefit) consists of the following for
the years ended March 31, 1999, 1998 and 1997:
<TABLE>
<S> <C> <C> <C>
Deferred Benefit- Federal: $63,164 $2,263,073 $(1,168,666)
</TABLE>
The components of deferred taxes were as follows for the years ended March 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
NOL carryforward $3,340,979 $2,753,523 $2,176,543
Bad debt allowance 59,689 67,459 51,644
Other 104,314 146,990 52,314
---------- ---------- ----------
Total gross deferred tax assets 3,504,982 2,967,972 2,280,501
Less: valuation allowance 3,482,518 2,936,206
---------- ---------- ----------
22,464 31,766 2,280,501
Direct financing leases (8,160) (16,399)
Accelerated depreciation and other (14,304) (15,367) (17,426)
---------- ---------- ----------
Total gross deferred tax liabilities (22,464) (31,766) (17,426)
---------- ---------- ----------
Net deferred tax assets $ 0 $ 0 $2,263,075
---------- ---------- ----------
</TABLE>
The valuation allowance for deferred tax assets as of March 31, 1999, 1998 and
1997 was $3,482,518, $2,936,206, and $0 respectively.
At March 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $9.8 million. These are
available to offset future federal taxable income through 2019. The Company
recorded a 100% valuation allowance against the deferred tax asset in fiscal
1999 and 1998.
REDEEMABLE PREFERRED STOCK:
The Company's authorized capital stock includes 2,000,000 shares of preferred
stock; current designations consist of redeemable preferred stock. The
redeemable preferred stock series has a $1,000 per share face value and pays
a cumulative quarterly dividend of $23.125 per share.
Originally the shares of Series 1, 2 and 3 Preferred Stock were to be
redeemed by December 31, 2000. In May 1998, shareholders accepted the
Company's offer to redeem or exchange their shares of Series 1, 2 and 3
Preferred Stock at face value for cash. As part of the redemption, the
preferred shareholders exercised their warrants to purchase Westar's common
stock.
Page 25
<PAGE>
The following represents the Company's preferred stock activity for the years
ended March 31,:
<TABLE>
<CAPTION>
Series
------
In thousands 1 2 3 4 Total
<S> <C> <C> <C> <C> <C>
March 31, 1996 $ 1,500 $ 300 $ 1,200 $ 1,250 $ 4,250
Shares redeemed (2) (2)
------- ------- ------- ------- -------
March 31, 1997 1,500 300 1,198 1,250 4,248
Shares redeemed (100) (69) (6) (175)
------- ------- ------- ------- -------
March 31, 1998 1,400 231 1,191 1,250 4,073
Shares redeemed (1,125) (231) (1,169) (2,525)
------- ------- ------- ------- -------
March 31, 1999 275 0 23 1,250 1,548
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Shares authorized 1,500 300 1,200 1,250 4,250
& issued
</TABLE>
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 Preferred Stock remains issued and outstanding,
the holders of the outstanding Series 4 Preferred Stock, voting as a class,
are entitled to elect one member to the Company's Board of Directors.
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 are automatically convertible at such
time that the Company participates in a public offering, as defined.
COMMON STOCK, OPTIONS AND WARRANTS:
- WARRANTS
Warrants for the purchase of 480,000 shares of the Company's common stock
were attached to the Series 1, 2 and 3 Preferred Stock offerings. Upon the
redemption of the Company's Preferred Stock the Preferred Stockholders
exercised their warrants. The warrants carried an exercise price of $.50 per
common share. Warrants to purchase 390,000 shares of common stock were
exercised in March 1998. The remaining warrants expired at March 31, 1998.
The Company has agreed to issue warrants for the purchase of 71,000 shares @
$.50 per share of the Company's common stock to The Industrial Bank of Japan,
Limited.
The Company entered into a note agreement with & Capital, Inc., a related
party (see Note 5 and Note 9) that grants to the lender warrants exercisable
for five years to purchase 3.75% of the Company's then outstanding common
stock for $.01 a share. The Company recorded the 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 difference was amortized over the life of
the note and charged to non-cash interest expense.
- STOCK OPTIONS
In April 1994, the Board of Directors approved the adoption of the 1994 Stock
Option Plan (the "Plan") for employees, outside directors and certain
independent contractors of the Company. The Plan was amended by the
Shareholders in April 1999 to increase the number of shares of the Company's
common stock reserved for issuance from 600,000 shares to 1,350,000 shares.
For each grant, exercise prices approximated or exceeded fair market value on
the date of grant.
The following summarizes the activity related to options and warrants excluding
IBJ warrants and the & Capital, Inc. warrants (see Note 5 and Note 9):
<TABLE>
<CAPTION>
Weighted
Average
Shares Price Per Share Exercise Price
<S> <C> <C> <C>
March 31, 1996 748,800 $1.06
Granted 20,000 $7.25 $7.25
Exercised (56,800) $0.50 to $2.00 $0.52
Expired (21,200) $2.00 $2.00
--------
March 31, 1997 690,800 $0.50 to $7.25 $1.25
Granted 37,000 $5.00 to $11.00 $8.24
Exercised (475,000) $0.50 to $2.00 $0.77
Expired (10,800) $0.50 to $2.00 $1.44
--------
March 31, 1998 242,000 $0.50 to $11.00 $3.26
Granted 237,833 $2.625-$4.00 $3.41
Exercised
Expired (80,000) $.50 to $7.25 $2.94
--------
March 31, 1999 399,833 $2.00 to $11.00 $3.41
--------
--------
</TABLE>
Information relating to stock options at March 31, 1999 summarized by
exercise price is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Outstanding Exercisable
- --------------------------------------------------------------------
Weighted Average
- --------------------------------------------------------------------
Exercise Weighted
Price Per Exercise Average
Share Shares Life (Years) Price Shares Exercise Price
--------- ------- ------------ -------- ------- --------------
<S> <C> <C> <C> <C> <C>
$2.00 125,000 0.615 $2.00 125,000 $2.00
$2.625 84,500 10.00 $2.625
$2.75 20,000 2.75 $2.75 20,000 $2.75
$4.00 133,333 9.79 $4.00 33,334 $4.00
$5.00 7,000 0.375 $5.00 7,000 $5.00
$7.00 10,000 2.375 $7.00
$9.00 10,000 3.375 $9.00
$11.00 10,000 3.375 $11.00
Page 26
<PAGE>
- --------------------------------------------------------------------
399,833 6.02 $3.41 185,334 $2.40
- --------------------------------------------------------------------
</TABLE>
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant. In
accordance with accounting for such options utilizing the intrinsic value
method there is no related compensation expense recorded in the Company's
financial statements. Effective for fiscal 1996, the Company adopted the
disclosure requirements of SFAS 123 "Accounting for Stock Based
Compensation." SFAS 123 requires that compensation under a fair value method
be determined and disclosed in a pro forma effect on earnings and earnings
per share. The fair value of the options granted during fiscal years 1999,
1998 and 1997 is estimated using the Black-Scholes option pricing model. Had
compensation cost for stock based compensation been determined based on the
fair value at the grant dates beginning in 1996, consistent with the method
of SFAS 123, the Company's net loss applicable to common stock and loss per
common share for the years ended March 31, 1999, 1998 and 1997, would have
been increased to the pro forma amounts presented below:
<TABLE>
<CAPTION>
(in thousands, except per share data):
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET LOSS APPLICABLE TO COMMON
STOCK
As reported $(1,985) $(5,453) $(2,291)
Pro Forma $(2,032) $(5,543) $(2,385)
LOSS PER COMMON SHARE, BASIC
As reported $(.91) $(2.99) $(1.48)
Pro Forma $(.93) $(3.03) $(1.54)
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1999, 1998 and 1997, respectively: expected life of
the options 4, 5 and 3 years for 1999, 1998 and 1997, respectively, risk-free
interest rate of approximately 5.43%, 6.2% and 6.6%, no dividend yield, and
volatility of 2.45%, 136% and 73%. The weighted average fair value at date of
grant for options granted during 1999, 1998 and 1997 approximated $2.35,
$4.05 and $4.72 per option, respectively.
OTHER RELATED PARTY TRANSACTIONS:
The Company leases office space from a limited partnership in which it had a
10% interest. The Company sold the limited partnership interest in July 1998.
The lease expires November 30, 2000. Annual rental expense was approximately
$64,260, $63,840 and $62,000 in 1999, 1998 and 1997.
The Company entered into certain related party transactions related to debt
and other transactions (See Note 5).
The Company entered in certain related party transactions related to debt and
debt amendments subsequent to year end (See Note 10).
The Company holds a receivable in the amount of approximately $155,000 as of
March 31, 1999 and 1998 from All Season's Resort. An officer/director of the
Company is the court appointed trustee of CASR Trust. The trust was
established by the bankruptcy court for the benefit of the creditors of All
Season's Resort.
SUBSEQUENT EVENTS:
In April 1999, the Shareholders approved an amendment to the Stock Option
Plan to increase the number of shares of the Company's common stock reserved
for issuance from 600,000 shares to 1,350,000 shares.
In April 1999, the Company amended a line of credit agreement with Bank One
dated June 25, 1998. The due date has been extended to September 30, 1999.
In April 1999, the Company amended a subordinated debt agreement with a
related party dated August 31, 1998. The due date has been extended to
December 1, 1999.
In April 1999, the Company amended a convertible-subordinated debt agreement
with a related party dated August 31, 1998. The due date has been extended to
December 1, 1999. The note shall bear interest at the rate of 9%.
In April 1999, the Company's origination/issuer trust, Westar Lease
Origination Trust, completed its eighth securitization of $5.2 million of
automobile lease-backed securities in a private-placement offering. The
Company's proceeds were reduced by a reserve in the amount of $35,200, which
is to be received in 60 monthly payments in the amount of $585.96. The
Company continues to service the leases securitized.
In May 1999, the Company entered into a subordinated debt agreement with a
related party to borrow $250,000 subordinated debt. The note is to be repaid
no later than December 1, 1999. The note shall bear interest at the rate of
9%.
In May 1999, the Company's origination/issuer trust, Westar Lease Origination
Trust, completed its ninth securitization of $12.3 million of automobile
lease-backed securities in a private-placement offering. The Company's
proceeds were reduced by a reserve in the amount of $84,400, which is to be
received in 60 monthly payments in the amount of $1406.57. The Company
continues to service the leases securitized.
In June 1999, the Company's origination/issuer trust, Westar Lease
Origination Trust, completed its tenth securitization of $6.6 million of
automobile lease-backed securities in a private-placement offering. The
Company's proceeds were reduced by a reserve in the amount of $45,100, which
is to be received in 60 monthly payments in the amount of $751.75. The Company
continues to service the leases securitized.
In June 1999, the Company entered into a subordinated debt agreement with a
related party to borrow $600,000 subordinated debt. The note is to be repaid
no later than December 1, 1999. The note bears a variable rate of interest of
prime plus one percent. The rate is currently 8.75%.
In June 1999, the Company signed an agreement with DriveOff.com, a
wholly-owned subsidiary of Navidec, Inc to provide financing, administration,
lease and loan funding and titling to DriveOff.com's Internet site. In
connection with the DriveOff.com agreement, the Company signed a letter of
intent with First Union Capital Markets Group ("First Union") to provide loan
purchase arrangement whereby loans originated through the DriveOff.com
website of up to $1 billion annually.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information called for by Part ll, Item 9, is included in the Company's Proxy
Statement relating to the Company's annual meeting of Shareholders to be held
on September 27, 1999, 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.
Page 27
<PAGE>
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 Committees of the Board" in the Company's
Proxy Statement relating to the Company's annual meeting of shareholders to
be held on September 27, 1999, 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 September 27, 1999, 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 September 27, 1999, 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 Notes 5 and 9 to the Consolidated Financial Statements.
Page 28
<PAGE>
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 23)
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets as of March 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997 Consolidated Statement of
Shareholder's Equity (Deficit) for the years ended March
31, 1999, 1998 and 1997 Consolidated Statements of Cash
Flows for the years ended March 31, 1999, 1998 and 1997
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 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.
Page 29
<PAGE>
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, LLC. as Borrower, Republic Leasing
Incorporated as Guarantor and Bank One,
Columbus, N.A., as the 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 19, 1997.
10.6 The Promissory Note between Westar Financial
Services Incorporated and & Capital Inc., as
a lender dated April 15, 1997 incorporated
by reference to the Exhibit to Form 10-K
dated September 22, 1997.
10.7 The Amended and Restated Revolving Credit
Loan Agreement between Westar Financial
Services Incorporated and Bank One, as the
lender dated July 22, 1997 incorporated by
reference to the Exhibit to Form 10-K dated
November 13, 1997.
10.8 The Amended agreement between Westar
Financial Services Incorporated and &
Capital, Inc., as the lender dated October
20, 1997 incorporated by reference to the
Exhibit to Form 10-K dated November 13,
1997.
10.9 The Amended agreement between Westar
Financial Services Incorporated and &
Capital, Inc., as the lender dated February
9, 1998 incorporated by reference to the
Exhibit to Form 10-Q dated February 17,
1998.
10.10 The Amended agreement between Westar
Financial Services Incorporated and Bank
One, as the lender dated October 27, 1997
incorporated by reference to the Exhibit to
Form 10-Q dated February 17, 1998.
10.11 The Amended agreement between Westar
Financial Services Incorporated and Bank
One, as the lender dated March 31, 1998
incorporated by reference to the Exhibit to
Form 10-K dated February 17, 1999.
10.12 The Amended agreement between Westar
Financial Services Incorporated and Mud Bay,
as the lender dated August 31, 1998
incorporated by reference to the Exhibit to
Form 10-K dated February 17, 1999.
10.13 The Amended agreement between Westar
Financial Services Incorporated and Cathy
Carlson, as the lender dated April 30, 1998
incorporated by reference to the Exhibit to
Form 10-K dated February 17, 1999.
10.14 The Amended agreement between Westar
Financial Services Incorporated and &
Capital, Inc., as the lender dated August
31, 1998 incorporated by reference to the
Exhibit to Form 10-K dated February 17,
1999.
10.15 The Amended agreement between Westar
Financial Services Incorporated and &
Capital, Inc., as the lender dated August
31, 1998 incorporated by reference
incorporated by reference to Form 10-K dated
February 17, 1999.
Page 30
<PAGE>
10.16 The Amended agreement between Westar
Financial Services Incorporated and Summit
Capital Resources as the lender dated May 1,
1998 incorporated by reference to Form 10-K
dated February 17, 1999.
10.17 The promissory note between Westar Financial
Services Incorporated and PLMC, LLC, as a
lender dated April 30, 1998 incorporated in
reference to Form 10-Q dated March 1, 1999.
10.18 The promissory note between Westar Financial
Services Incorporated and PLMC, LLC, as a
lender dated May 11, 1998 incorporated by
reference to the Exhibit to Form 10-Q dated
March 1, 1999.
10.19 The Amended agreement between Westar
Financial Services Incorporated and Bank
One, as a lender dated June 25, 1998
incorporated by reference to the Exhibit to
Form 10-Q dated March 1, 1999.
10.20 The Second Amended agreement between Westar
Financial Services Incorporated and Bank
One, as the lender dated July 22, 1998
incorporated by reference to the Exhibit to
Form 10-Q dated March 1, 1999.
10.21 The purchase/repurchase agreement between
Westar Financial Services Incorporated and
T&W Financial Services, dated July 23, 1998
incorporated by reference to the Exhibit to
Form 10-Q dated March 1, 1999.
10.22 The amended agreement for the Westar
Financial Services Incorporated 1994 Stock
Option Plan dated April 26, 1999.
10.23 The amended agreement between Westar
Financial Services Incorporated and Bank
One, as the lender dated May 1, 1999.
10.24 The amended agreement between Westar
Financial Services Incorporated and &
Capital, Inc., as the lender dated April 1,
1999.
10.25 The amended agreement between Westar
Financial Services Incorporated and &
Capital, Inc., as the lender dated April 1,
1999.
10.26 The amended agreement between Westar
Financial Services Incorporated and a
director, as the lender dated May 24, 1999.
10.27 The agreement between Westar Financial
Services Incorporated and Puget Sound
Investors, as the lender dated June 1, 1999.
16. Letter regarding change in Certifying Accountant
16.1 Letter dated May 21, 1998, incorporated by
reference to the Exhibit to the Current
Report on Form 8-K dated May 18, 1998.
16.2 Letter dated May 14, 1999, incorporated by
reference to the Exhibit to the Current
Report on Form 8-K(A) dated March 11, 1999
and filed May 25, 1999.
21. Subsidiaries of the Registrant
21.1 Schedule of Subsidiaries incorporated by
reference to the Exhibit for Form 10-K dated
June 11, 1996.
14 (b) REPORTS ON FORM 8-K
Form 8-K(A) with respect to change in and disagreements
with predecessor accountants was filed with the Securities
and Exchange Commission on May 25, 1999.
Page 31
<PAGE>
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.
Dated: June 25, 1999 WESTAR FINANCIAL SERVICES INCORPORATED
(successor to Republic Leasing Incorporated)
//S// R.W. Christensen, Jr.
--------------------------------------------
By: R.W. Christensen, Jr., President
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.
Dated: June 25, 1999 //S// R.W. Christensen, Jr.
--------------------------------------------
R.W. Christensen, Jr., Director and
Principal Executive Officer
Dated: June 25, 1999 //S// W. Kornfeld
----------------------------------------------
Warren Kornfeld, Senior Vice President Finance
Dated: June 25, 1999 //S// Joel I. Davis
----------------------------------------------
Joel I. Davis, Director and
Assistant Secretary
Dated: June 25, 1999 //S// Robert L. Lovely
----------------------------------------------
Robert L. Lovely, Director
Page 32
<PAGE>
Exhibit 10.22
WESTAR FINANCIAL SERVICES INCORPORATED
1994 STOCK OPTION PLAN
[Last Amended Effective as of October 6, 1998]
Page 33
<PAGE>
APPROVED By
Board of Directors
April 27, 1994
AMENDED By
Board of Directors
October 30, 1996
APPROVED By
Shareholders
July 22, 1996
AMENDED By
Board of Directors
October 6, 1998
APPROVED by
Shareholders
April 26, 1999
Page 34
<PAGE>
TABLE OF CONTENTS
1994 STOCK OPTION PLAN
<TABLE>
<S> <C> <C>
1. PURPOSE 1
2. DEFINITIONS 1
2.1 1
2.2 1
2.3 1
2.4 1
2.5 1
2.6 1
2.7 1
2.8 2
2.9 2
2.10 2
3. ADMINISTRATION 2
3.1 2
3.2 2
3.3 2
3.4 2
3.5 2
3.6 2
3.7 3
4. SHARES SUBJECT TO THE PLAN 3
4.1 Number 3
4.2 Changes in Capitalization 3
5. ELIGIBLE PARTICIPANTS 3
5.1 Incentive Stock Options 3
5.2 Non-Statutory Stock Options 3
6. GRANT OF OPTIONS 4
7. OPTION PRICE AND FORM OF PAYMENT 4
8. EXERCISE OF OPTIONS 6
8.1 Manner of Exercise 6
8.2 Limitations and Conditions on Exercise of Options 6
8.2.1 6
8.2.2 6
9. INVESTMENT PURPOSES 6
10. TRANSFERABILITY OF OPTIONS 7
11. TERMINATION OF EMPLOYMENT 7
11.1 Generally 7
11.2 Death or Disability of Optionee 8
11.2.1 8
11.2.2 8
11.2.3 8
11.3 Termination for Cause 8
12. AMENDMENT AND TERMINATION OF PLAN 8
12.1 8
12.2 9
12.3 9
</TABLE>
Page i
<PAGE>
<TABLE>
<S> <C> <C>
12.4 9
13. MISCELLANEOUS PROVISIONS 9
13.1 Right to Continued Employment 9
13.2 Withholding Taxes 10
13.3 Governing Law 10
14. EFFECTIVE DATE 10
</TABLE>
Page ii
<PAGE>
WESTAR FINANCIAL SERVICES INCORPORATED
1994 STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1994 Stock Option Plan (the "Plan") is to promote
the interests of Westar Financial Services Incorporated, a Washington
corporation (the "Company"), by providing employees and non-employee
directors of the Company and certain independent contractors with an
opportunity to acquire a proprietary interest in the Company, and thereby
develop a stronger incentive to contribute to the Company's continued success
and growth. In addition, the opportunity to acquire a proprietary interest
in the Company by the offering and availability of stock options will assist
the Company in attracting and retaining key personnel and consultants of
outstanding ability.
2. DEFINITIONS
Wherever used in the Plan, the following terms have the meaning set forth
below:
2.1 "Board" means the Board of Directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
2.3 "Committee" means the Committee which may be designated from time to
time by the Board to administer the Plan pursuant to Section 3.5.
2.4 "Incentive Stock Option" or "ISO" means a stock option which is
intended to qualify as an Incentive Stock Option as defined in Section 422A of
the Code.
2.5 "Non-Statutory Stock Option" or "NSO" means a stock option that is not
intended to, or does not, qualify as an Incentive Stock Option as defined in
Section 422A of the Code.
2.6 "Option" means, where required by the context of the Plan, an ISO
and/or NSO granted pursuant to the Plan.
2.7 "Optionee" means a Participant in the Plan who has been granted one or
more Options under the Plan.
2.8 "Participant" means an individual described in Section 5 of the Plan
who may be granted Options under the Plan.
2.9 "Stock" means the Common Stock, no par value, of the Company.
2.10 "Subsidiary" means any corporation, other than the Company, in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns 50% or
more of the voting stock in one of the other corporations in such chain.
3. ADMINISTRATION
3.1 The Plan shall be administered by the Board, which shall have full
power, subject to the provisions of the Plan, to grant Options, construe and
interpret the Plan, establish rules and regulations with respect to the Plan and
Options granted hereunder, and perform all other acts, including the delegation
of administrative responsibilities, that it believes reasonable and necessary.
3.2 The Board shall have the sole discretion, subject to the provisions of
the Plan, to determine the participants eligible to receive Options pursuant to
the Plan and the amount, type, and terms of any Option and the terms and
conditions of option agreements relating to any Option.
3.3 The Board may correct any defect, supply any omission, or reconcile
any inconsistency in the Plan or in any Option granted hereunder in the manner
and to the extent it shall deem necessary to carry out the terms of the Plan.
Page 1
<PAGE>
3.4 Any decision made, or action taken, by the Board arising out of or
in connection with the interpretation and administration of the Plan shall be
final, conclusive and binding upon all Optionees.
3.5 The Board may designate a Committee from time to time to administer
the Plan. If designated, the Committee shall be composed of not less than
two persons (who need not be members of the Board) who are appointed from
time to time by the Board. If the Board has appointed a Committee pursuant
to this Section 3.5 of the Plan, then the Committee may administer the Plan
and exercise all of the rights and powers granted to the Board in this Plan,
including, without limitation, the right to grant Options pursuant to the
Plan and to establish the Option price as provided in the Plan.
3.6 To the extent that a Committee determines it to be desirable to
qualify awards granted hereunder as "performance-based compensation" within
the meaning of Section 162(m) of the Code, the Plan shall be administered by
a Committee consisting solely of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
3.7 To the extent desirable to qualify transactions hereunder as exempt
under Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"), the
transactions contemplated hereunder shall be structured to satisfy
requirements for exemption under Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER. The total number of shares of Stock reserved for issuance
upon exercise of Options under the Plan is 1,350,000. Such shares shall
consist of authorized but unissued Stock. If any Option granted under the
Plan lapses or terminates for any reason before being completely exercised,
the shares covered by the unexercised portion of such Option may again be
subject to Options under the Plan.
4.2 CHANGES IN CAPITALIZATION. In the event of any change in the
outstanding shares of Stock of the Company by reason of any stock dividend,
split, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, or rights offering to purchase stock at a price
substantially below fair market value, or other similar corporate change, the
aggregate number of shares which may be subject to Options under the Plan and
the terms of any outstanding Option, including the number and kind of shares
subject to such Options and the purchase price per share thereof, shall be
appropriately adjusted by the Board, consistent with such change and in such
manner as the Board, in its sole discretion, may deem equitable to prevent
substantial dilution or enlargement of the rights granted to or available for
Optionees. Notwithstanding the preceding sentence, in no event shall any
fraction of a share of Stock be issued upon the exercise of an Option.
5. ELIGIBLE PARTICIPANTS
The following persons are Participants eligible to participate in the
Plan:
5.1 INCENTIVE STOCK OPTIONS. Incentive Stock Options may be granted
only to employees of the Company or any Subsidiary, including officers and
directors who are also employees of the Company or any Subsidiary.
5.2 NON-STATUTORY STOCK OPTIONS. Non-statutory stock options may be
granted to (i) any employee of the Company or any Subsidiary, including any
officer or director who is also an employee of the Company or any Subsidiary;
(ii) any non-employee director of the Company or any Subsidiary; and (iii)
any consultant to, or other independent contractor of the Company.
6. GRANT OF OPTIONS
Subject to the terms, conditions, and limitations set forth in this
Plan, the Company, by action of its Board, may from time to time grant
Options to purchase shares of the Company's Stock to those eligible
Participants as may be selected by the Board, in such amounts and on such
other terms as the Board in its sole discretion shall determine.
Notwithstanding any other terms applicable to the grant of Options under this
Plan, no Option may be exercised within six months of the time such Option
was granted. Such Options may be (i) "Incentive Stock Options" ("ISO") so
designated by the Board and which, when granted, are intended to qualify as
Incentive Stock Options as defined in Section 422A of the Code; (ii)
"Non-Statutory Stock Options" ("NSO") so designated by the Board and which,
when granted, are not intended to, or do not, qualify as Incentive Stock
Options under Section 422A of the Code; or (iii) a combination of both. The
date on which the Board approves the granting of an Option shall be the date
of grant of such Option, unless a different date is specified by the Board on
such date of approval. Notwithstanding the foregoing, with respect to the
grant of any Incentive Stock Option under the Plan,
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the aggregate fair market value of Stock (determined as of the date the
Option is granted) with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee in any calendar year (under all
such stock option plans of the Company or Subsidiaries) shall not exceed
$100,000. Each grant of an Option under the Plan shall be evidenced by a
written Stockholder Award Agreement (the "Stockholder Award Agreement")
between the Company and the Optionee setting forth the terms and conditions,
not inconsistent with the Plan, under which the Option so granted may be
exercised pursuant to the Plan and containing such other terms with respect
to the Option as the Board in its sole discretion may determine.
7. OPTION PRICE AND FORM OF PAYMENT
The purchase price for a share of Stock subject to an Option granted
hereunder shall not be less than 100% of the fair market value of the Stock
as of the date of grant. For purposes of this Section 7, the "fair market
value" of the Stock shall be determined as follows:
(a) if the Stock of the Company is listed or admitted to unlisted
trading privileges on a national securities exchange, the fair market value
on any given day shall be the closing sale price for the Stock, or if no
sale is made on such day, the closing bid price for such day on such
exchange;
(b) if the Stock is not listed or admitted to unlisted trading
privileges on a national securities exchange, the fair market value on any
given day shall be the closing sale price for the Stock as reported on the
NASDAQ National Market System on such day, or if no sale is made on such
day, the closing bid price for such day as entered by a market maker for
the Stock;
(c) if the Stock is not listed on a national securities exchange, is
not admitted to unlisted trading privileges on any such exchange, and is
not eligible for inclusion in the NASDAQ National Market System, the fair
market value on any given day shall be the average of the closing
representative bid and asked prices as reported by the National Quotation
Bureau, Inc. or, if the Stock is not quoted on the National Association of
Securities Dealers Automated Quotations System, then as reported in any
publicly available compilation of the bid and asked prices of the Stock in
any over-the-counter market on which the Stock is traded; or
(d) if there exists no public trading market for the Stock, the fair
market value on any given day shall be an amount determined in good faith
by the Board in such manner as it may reasonably determine in its
discretion, provided that such amount shall not be less than the book value
per share as reasonably determined by the Board as of the date of
determination or less than the par value of the Stock.
Notwithstanding the foregoing, in the case of an Incentive Stock Option
granted to any Optionee then owning more than 10% of the voting power of all
classes of the Company's stock, the purchase price per share of the Stock
subject to such Option shall not be less than 110% of the fair market value
of the Stock on the date of grant of the Incentive Stock Option, determined
as provided above.
Except as provided herein, the purchase price of each share of Stock
purchased upon the exercise of any Option shall be paid:
(a) in United States dollars in cash or by check, bank draft or money
order payable to the order of the Company; or
(b) at the discretion of the Board, through the delivery of shares of
Stock, having initially or as a result of successive exchanges of shares,
an aggregate fair market value (as determined in the manner provided under
this Plan) equal to the aggregate purchase price for the Stock as to which
the Option is being exercised; or
(c) at the discretion of the Board, by a combination of both (a) and
(b) above; or
(d) by such other method as may be permitted in the written stock
option agreement between the Company and the Optionee.
If such form of payment is permitted, the Board shall determine
procedures for tendering Stock as payment upon exercise of an Option and may
impose such additional limitations and prohibitions on the use of Stock as
payment upon the exercise of an Option as it deems appropriate.
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If the Board in its sole discretion so agrees, the Company may finance
the amount payable by an Optionee upon exercise of any Option upon such terms
and conditions as the Board may determine at the time such Option is granted
under this Plan.
8. EXERCISE OF OPTIONS
8.1 MANNER OF EXERCISE. An Option, or any portion thereof, shall be
exercised by delivering a written notice of exercise to the Board and paying
to the Company the full purchase price of the Stock to be acquired upon the
exercise of the Option. Until certificates for the Stock acquired upon the
exercise of an Option are issued to an Optionee, such Optionee shall not have
any rights as a shareholder of the Company.
8.2 LIMITATIONS AND CONDITIONS ON EXERCISE OF OPTIONS. In addition to
any other limitations or conditions contained in this Plan or that may be
imposed by the Board from time to time or in the stock option agreement to be
entered into with respect to Options granted hereunder, the following
limitations and conditions shall apply to the exercise of Options granted
under this Plan:
8.2.1 No Incentive Stock Option may be exercisable by its terms after
the expiration of ten years from the date of the grant thereof.
8.2.2 No Incentive Stock Option granted pursuant to the Plan to an
eligible Participant then owning more than 10% of the voting power of all
classes of the Company's stock may be exercisable by its terms after the
expiration of five years from the date of the grant thereof.
9. INVESTMENT PURPOSES
Unless a registration statement under the Securities Act of 1933 is in
effect with respect to Stock to be purchased upon exercise of Options to be
granted under the Plan, the Company shall require that an Optionee agree and
represent to the Company in writing that he or she is acquiring such shares
of Stock for the purpose of investment and with no present intention to
transfer, sell or otherwise dispose of such shares of Stock other than by
transfers which may occur by will or by the laws of descent and distribution,
and no shares of Stock may be transferred unless, in the opinion of counsel
to the Company, such transfer would be in compliance with applicable
securities laws. In addition, unless a registration statement under the
Securities Act of 1933 is in effect with respect to the Stock to be purchased
under the Plan, each certificate representing any shares of Stock issued to
an Optionee hereunder shall have endorsed thereon a legend in substantially
the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT")
AND WITHOUT REGISTRATION UNDER ANY APPLICABLE STATE SECURITIES LAWS,
IN RELIANCE UPON EXEMPTION(S) CONTAINED THEREIN. NO TRANSFER OF THESE
SHARES OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO
EFFECTIVE REGISTRATION STATEMENTS UNDER SAID LAWS UNLESS THE COMPANY
HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH
TRANSFER OR DISPOSITION DOES NOT REQUIRE REGISTRATION UNDER SAID LAWS
AND, FOR ANY SALES UNDER RULE 144 OF THE ACT, SUCH EVIDENCE AS IT
SHALL REQUEST FOR COMPLIANCE WITH THAT RULE, OR APPLICABLE STATE
SECURITIES LAWS.
10. TRANSFERABILITY OF OPTIONS
The Board may, in its discretion, authorize all or a portion of the
options to be granted to an optionee to be on terms which permit transfer by
such optionee to (i) the spouse, children or grandchildren of the optionee
("Immediate Family Members"), (ii) a trust or trusts for the exclusive
benefit of such Immediate Family Members, or (iii) a partnership in which
such Immediate Family Members are the only partners, provided that (x) there
may be no consideration for any such transfer, (y) the stock option agreement
pursuant to which such options are granted must be approved by the Board and
must expressly provide for transferability in a manner consistent with this
Section, and (z) subsequent transfers of transferred options shall be
prohibited except by will or the laws of descent and distribution. Following
transfer, any such options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer.
11. TERMINATION OF EMPLOYMENT
11.1 GENERALLY. Except as otherwise provided in this Section 11, if an
Optionee's employment (including service as a member of the Board of
Directors) with the Company or Subsidiary is terminated (hereinafter
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"Termination") other than by death or Disability (as hereinafter defined),
the Optionee may exercise any Option granted under the Plan, only to the
extent the Optionee was entitled to exercise the Option at the date of
Termination, for a period of three months after the date of Termination or
until the term of the Option has expired, whichever date is earlier.
11.2 DEATH OR DISABILITY OF OPTIONEE. In the event of the death or
Disability of an Optionee prior to expiration of an Option held by him or
her, the following provisions shall apply:
11.2.1 If the Optionee is at the time of his or her Disability
employed by the Company or a Subsidiary and has been in continuous
employment (as determined by the Board in its sole discretion) since the
date of grant of the Option, then the Option may be exercised by the
Optionee until the earlier of one year following the date of such
Disability or the expiration date of the Option, but only to the extent the
Optionee was entitled to exercise such Option at the time of his or her
Disability. For the purpose of this Section 11, the Term "Disability"
shall mean a permanent and total disability as defined in Section 22(e)(3)
of the Code. The determination of whether an Optionee has a Disability
within the meaning of Section 22(e)(3) shall be made by the Board in its
sole discretion.
11.2.2 If the Optionee is at the time of his or her death employed by
the Company or a Subsidiary and has been in continuous employment (as
determined by the Board in its sole discretion) since the date of grant of
the Option, then the Option may be exercised by the Optionee's estate or by
a person who acquired the right to exercise the Option by will or the laws
of descent and distribution, until the earlier of one year from the date of
the Optionee's death or the expiration date of the Option, but only to the
extent the Optionee was entitled to exercise the Option at the time of
death.
11.2.3 If the Optionee dies within three months after Termination,
the Option may be exercised until the earlier of nine months following the
date of death or the expiration date of the Option, by the Optionee's
estate or by a person who acquires the right to exercise the Option by will
or the laws of descent or distribution, but only to the extent the Optionee
was entitled to exercise the Option at the time of Termination.
11.3 TERMINATION FOR CAUSE. If the employment of an Optionee is
terminated by the Company or a Subsidiary for cause, then the Board shall
have the right to cancel any Options granted to the Optionee under the Plan.
12. AMENDMENT AND TERMINATION OF PLAN
12.1 The Board, may at any time and from time to time suspend or
terminate the Plan in whole or in part or amend it from time to time in such
respects as may be in the best interests of the Company; provided, however,
that no such amendment shall be made without the approval of the shareholders
if it would: (a) materially modify the eligibility requirements for
Participants as set forth in Section 5 hereof; (b) increase the maximum
aggregate number of shares of Stock which may be issued pursuant to Options,
except in accordance with Section 4.2 of the Plan; (c) reduce the minimum
Option price per share as set forth in Section 7 of the Plan, except in
accordance with Section 4.2 of the Plan; (d) extend the period of granting
Options; or (e) materially increase in any other way the benefits accruing to
Optionees.
12.2 No amendment, suspension or termination of this Plan shall, without
the Optionee's consent, alter or impair any of the rights or obligations
under any Option theretofore granted to him or her under the Plan.
12.3 The Board may amend the Plan, subject to the limitations cited
above, in such manner as it deems necessary to permit the granting of
Incentive Stock Options meeting the requirements of future amendments to the
Code.
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12.4 Upon the dissolution or liquidation of the Company, or upon a
merger, consolidation, acquisition of property or stock, or reorganization as
a result of which the Company is not the surviving corporation or upon a sale
of substantially all the property or stock of the Company to another
corporation, any option granted hereunder shall terminate and no such event
shall cause any option to be exercisable for any shares other than those as
to which it was exercisable prior to such termination in accordance with its
terms; provided, however, that the Company may in its discretion and
immediately prior to any such transaction, cause a new option to be
substituted for such option or cause such old option to be assumed, by an
employer corporation, or a parent or subsidiary of such corporation; and such
new or substituted option shall apply to all shares issued in addition to or
in substitution, replacement or modification of the shares theretofore
covered by such option; provided that:
(a) the excess of the aggregate fair market value of the shares
subject to the option immediately after the substitution or assumption over
the aggregate option price of such shares shall not be more than the excess
of the aggregate fair market value of all shares subject to the option
immediately before such substitution or assumption over the aggregate
option price of such shares,
(b) the new option or the assumption of the existing option shall
not give the optionee additional benefits which he did not have under the
old option or prior to such assumption, and
(c) a propriety adjustment of the original option price shall be
made among original shares subject to the option and any additional share
or shares issued in substitution, replacement or modification thereof.
13. MISCELLANEOUS PROVISIONS
13.1 RIGHT TO CONTINUED EMPLOYMENT. No person shall have any claim or
right to be granted an Option under the Plan, and the grant of an Option
under the Plan shall not be construed as giving an Optionee the right to
continued employment with the Company. The Company further expressly
reserves the right at any time to dismiss an Optionee or reduce an Optionee's
compensation with or without cause, free from any liability, or any claim
under the Plan, except as provided herein or in a stock option agreement.
13.2 WITHHOLDING TAXES. The Company shall have the right to require
that payment or provision for payment of any and all withholding taxes due
upon the grant or exercise of an Option hereunder or the disposition of any
Stock or other property acquired upon exercise of an Option be made by an
Optionee. In connection therewith, the Board shall have the right to
establish such rules and regulations or impose such terms and conditions in
any agreement relating to an Option granted hereunder with respect to such
withholding as the Board may deem necessary and appropriate.
13.3 GOVERNING LAW. The Plan shall be administered in the State of
Washington, and the validity, construction, interpretation, and
administration of the Plan and all rights relating to the Plan shall be
determined solely in accordance with the laws of such state, unless
controlled by applicable federal law, if any.
14. EFFECTIVE DATE
The effective date of the Plan is April 27, 1994, as amended on June 4,
1996 and as further amended on October 30, 1996, to be effective November 1,
1996, and as further amended on October 6, 1998. No Option may be granted
after ten (10) years from the effective date of the adoption of the Plan
relative to said Options, provided, however, that the Plan and all
outstanding Options shall remain in effect until such outstanding Options
have expired or been cancelled.
Exhibit 10.23
LOAN MODIFICATION AGREEMENT
THIS LOAN MODIFICATION AGREEMENT (the "Agreement") is made and entered
into as of May 1, 1999 by and among WESTAR FINANCIAL SERVICES INCORPORATED, a
Washington corporation ("Westar"), ROBERT W. CHRISTENSEN, JR. ("Christensen")
and BANK ONE, NA, a national banking association formerly named Bank One,
Columbus, NA (the "Lender").
RECITALS
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The following recitals are representations with respect to certain
factual matters that form the basis of this Agreement and are an integral
part of this Agreement.
A. The Lender loaned to Westar the sum of $750,000 (the "Loan")
pursuant to the terms and conditions of a certain Loan Agreement dated as of
August 13, 1997 by and between Westar and the Lender (the "Loan Agreement");
B. To evidence the Loan, Westar executed a certain Promissory Note
dated August 13, 1997 (the "Note"), whereby Westar promised to pay the
outstanding principal balance of the Loan, together with interest as set
forth in the Note, on or before October 27, 1997;
C. To secure the Loan Agreement and the Note, the Lender and Westar
entered into a certain Security Agreement dated as of August 13, 1997 (the
"Security Agreement");
D. In consideration of the Lender making the Loan to Westar,
Christensen (the "Indemnitor") severally, agreed by a certain Validity
Agreement dated as of August 13, 1997 to indemnify the Lender as set forth
therein (the "Validity Agreement");
E. In further consideration of the Lender making the Loan to Westar,
the Lender and Westar entered into a certain Agreement with Respect to
Prevention and Resolution of Disputes dated as of August 13, 1997 (the
"Dispute Resolution Agreement");
F. Lender is still the holder and beneficiary of the Loan Agreement,
Note, Security Agreement, Validity Agreement, Dispute Resolution Agreement
and certain other agreements, documents and instruments related thereto
(collectively, the "Loan Documents"); and
G. Westar, the Lender and the Indemnitor desire to amend the Loan
Documents to extend the maturity date of the Note from April 30, 1999 to
September 30, 1999 and the principal balance not to exceed $500,000.
AGREEMENT
NOW, THEREFORE, in consideration of the agreement and undertakings of
the parties to amend the Loan Documents, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
1. All terms and conditions of the Loan Documents shall remain in full
force and effect without change, except that, in order to reflect the
extension of the maturity date of the Note to September 30, 1999 and the
principal balance not to exceed $500,000:
1. Payments of Principal and Interest.
The total principal sum and interest hereunder shall be due and
payable and shall be paid by Westar to the Lender in one lump sum
payment on or before September 30, 1999.
The unpaid principal balance of this Note shall bear interest as
follows:
(a) from the date of the initial disbursement to and including
September 30, 1999, at a fluctuating rate per annum equal to three
percent (3.0%) above the LIBOR Rate (defined below);
As used herein, "LIBOR Rate" shall mean the interest rate at which
deposits in immediately available funds in U.S. dollars are offered by
prime banks in the interbank market for a thirty (30) day period as
published in the Wall Street Journal. The initial LIBOR Rate shall be
the LIBOR Rate in effect as of the date of disbursement of the loan
proceeds by the Lender and thereafter shall be the LIBOR Rate in
effect as of the first Business Day of each month (the "Interest
Determination Date") and such LIBOR Rate shall be effective until the
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next succeeding Interest Determination Date. Any change in the LIBOR
Rate shall be effective immediately upon and after the related
Interest determination Date
All interest payable in accordance with this Note shall be calculated
on the basis of a 360-day year for the actual number of days principal
is outstanding."
2. Westar covenants that it will (i) pay the balance of the principal,
together with the interest from the dates of disbursement thereof, as
specified in the Loan Documents, as amended hereby, and (ii) perform and
observe all covenants, agreements, stipulations and conditions on its part to
be performed under the Loan Documents.
3. Except as specifically modified herein, the Loan Documents shall
remain in full force and effect in all respects according to their original
terms, covenants and conditions as security for the unpaid balance of the
indebtedness and interest thereon evidenced by the Loan Agreement and the
Note, as if the unpaid balance of the principal, with the interest accrued
thereon, had originally been payable as provided for herein. Except as
specifically set forth herein, nothing in this Agreement shall affect or
impair any rights and powers which the Lender may have thereunder.
4. Each of the parties hereto consents to the provisions of this
Agreement and represents and warrants to the Lender that as of the date
hereof the Loan Documents to which such party remain in full force and effect
and are enforceable in accordance with their respective terms, as amended
hereby.
5. This Agreement may be simultaneously executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
6. This Agreement is binding upon, and shall inure to the benefit of,
the parties hereto and their respective successors and assigns; provided,
however, that Westar and the Indemnitors may not assign or transfer their
respective rights or duties under this Agreement or the Loan Documents
without the prior written consent of the Lender.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as
of the date first above written.
BANK ONE, NA WESTAR FINANCIAL SERVICES INCORPORATED,
a Washington corporation
By:__________________________ By:__________________________
Robert N. Kent, Jr., Robert W. Christensen,
Vice President President
Exhibit 10.24
AGREEMENT
This Agreement is made as of April 1, 1999 between WESTAR FINANCIAL
SERVICES INCORPORATED, a Washington corporation (the "Company") and &
CAPITAL, PARTNERS, L.P. (the "Lender").
RECITALS
A. The Company executed and delivered to Lender a promissory note in
the principal amount of $500,000 dated January 26, 1998 (the
"Note").
B. The Note matured on March 26, 1998 and was extended.
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C. The Parties are entering into this Agreement to extend the
maturity date for payment of the Note.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
31 MATURITY DATE. The maturity date of the Note is hereby extended to
December 1, 1999.
2. SUBORDINATION. The Bank One Security Interest shall be and remain
at all times a lien or charge on the Residual Interest, prior and superior to
the lien or charge of Lender under the Lender Security Agreement.
3. ACKNOWLEDGMENT OF SUBORDINATION. Lender acknowledges that it hereby
intentionally waives, relinquishes and subordinates the priority and
superiority of the lien or charge of the Lender Security Agreement in favor
of the lien or charge of the Bank One Security Interest upon the Residual
Interest, and understands that in reliance upon and in consideration of this
waiver, relinquishment and subordination, specific loans and advances are
being and will be made and specific monetary and other obligations are being
and will be entered into by third parties which would not be made or entered
into but for such reliance upon this waiver, relinquishment and subordination.
Lender agrees to execute such further documents as either Bank One or the
Company may reasonably request to reflect, implement or confirm such
subordination.
4. ENTIRE AGREEMENT. This Agreement contains the whole agreement
between the parties hereto with respect to its subject matter, and supersedes
all prior agreements whether written or oral.
5. BINDING EFFECT. This Agreement shall enure to the benefit of and be
binding upon the legal representatives, heirs, successors and assigns of the
parties.
6. CONTINUING EFFECT. Except as specifically modified or amended
hereby, the Note and the Lender Security Agreement shall continue in full
force and effect in accordance with their terms.
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the date first written above.
WESTAR FINANCIAL SERVICES INC.
By:___________________________
R.W. Christensen, Jr.
Its President
& CAPITAL, PARTNERS, L.P.
By:___________________________
David C. Soward
Managing General Partner
Exhibit 10.25
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AGREEMENT
This Agreement is made as of April 1, 1999 between WESTAR FINANCIAL
SERVICES INCORPORATED, a Washington corporation (the "Company") and &
CAPITAL, PARTNERS, L.P. (the "Lender").
RECITALS
A. The Company executed and delivered to Lender a promissory note in
the principal amount of $1,500,000 dated April 15, 1997 (the
"Note").
B. The Note matured on July 31, 1997 and was extended .
C. To provide security for repayment of the Note, the Company
executed a Security Agreement dated April 15, 1997, granting to
Lender a security interest in certain assets of the Company (the
"Lender Security Agreement").
D. The Parties are entering into this Agreement to again extend the
maturity date for payment of the Note, change the interest rate
and reflect a change in the preferred stock agreement.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
32 MATURITY DATE. The maturity date of the Note is hereby extended to the
earlier of (i) December 1, 1999 or (ii) receipt by the Company of not less
than $5,000,000 in proceeds from one or more closings of its current
offerings of Units, consisting of convertible subordinated notes or any other
similar financing or financings involving securities.
33 INTEREST. The interest rate of the Note is hereby changed to 9%.
3. SUBORDINATION. The Bank One Security Interest shall be and remain
at all times a lien or charge on the Residual Interest, prior and superior to
the lien or charge of Lender under the Lender Security Agreement.
4. ACKNOWLEDGMENT OF SUBORDINATION. Lender acknowledges that it hereby
intentionally waives, relinquishes and subordinates the priority and
superiority of the lien or charge of the Lender Security Agreement in favor
of the lien or charge of the Bank One Security Interest upon the Residual
Interest, and understands that in reliance upon and in consideration of this
waiver, relinquishment and subordination, specific loans and advances are
being and will be made and specific monetary and other obligations are being
and will be entered into by third parties which would not be made or entered
into but for such reliance upon this waiver, relinquishment and subordination.
Lender agrees to execute such further documents as either Bank One or the
Company may reasonably request to reflect, implement or confirm such
subordination.
10 AGREEMENT. This Amendment reflects changes to the interest rate and due
date of the original "Note". All other parts of the "Note" remain as
previously stated.
6. BINDING EFFECT. This Agreement shall enure to the benefit of and be
binding upon the legal representatives, heirs, successors and assigns of the
parties.
7. CONTINUING EFFECT. Except as specifically modified or amended
hereby, the Note and the Lender Security Agreement shall continue in full
force and effect in accordance with their terms.
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8. In return for amending this agreement, the Company waives section 5(d)
of the Designation of Rights and Preferences of Republic Leasing Incorporated
Series 4 Preferred Stock.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
WESTAR FINANCIAL SERVICES
INCORPORATED
By:_________________________________
R.W. Christensen, Jr., Its President
& CAPITAL, PARTNERS, L.P.
By:__________________________________________
David C. Soward, Its Managing General Partner
Exhibit 10.26
PROMISSORY NOTE
$250,000.00 Olympia, Washington
May __, 1999
FOR VALUE RECEIVED, the undersigned, WESTAR FINANCIAL SERVICES
INCORPORATED, a Washington corporation (the "Company"), promises to pay to
the order of CHARLES S. SEEL (the "Lender"), at its principal place of
business at 24105 Sno-Woodinville Road, P.O. Box 646, Woodinville,
Washington, 98072-0646, or to the holder hereof at such address as the holder
may designate by written notice, the principal sum of Two Hundred Fifty
Thousand Dollars ($250,000.00), 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) December 1, 1999
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
nine percent (9%). 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.
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(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:______________________________
R. W. Christensen, Jr.
President
Exhibit 10.27
PROMISSORY NOTE
$600,000 Olympia, Washington
June 1, 1999
FOR VALUE RECEIVED, the undersigned, WESTAR FINANCIAL SERVICES
INCORPORATED, a Washington corporation (the "Company"), promises to pay to
the order of PUGET SOUND INVESTORS. (the "Lender"), the principal sum of Six
Hundred Thousand Dollars ($600,000.00), together
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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 hereunder
shall be due and payable and shall be paid by the Company to the Lender in
one lump sum payment on December 1, 1999. This Note shall bear interest on
the unpaid principal balance at a variable rate per annum equal to prime plus
one percent (currently 8.75%). 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. Interest shall be due and payable and shall
be paid by the Company to the Lender on a monthly basis.
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. ACKNOWLEDGMENT OF SUBORDINATION. Lender acknowledges that it hereby
intentionally waives, relinquishes and subordinates the priority and
superiority of the lien or charge of the Lender Security Agreement in favor
of the lien or charge of the Bank One Security Interest upon the Residual
Interest, and understands that in reliance upon and in consideration of this
waiver, relinquishment and subordination, specific loans and advances are
being and will be made and specific monetary and other obligations are being
and will be entered into by third parties which would not be made or entered
into but for such reliance upon this waiver, relinquishment and subordination.
Lender agrees to execute such further documents as either Bank One or the
Company may reasonably request to reflect, implement or confirm such
subordination.
4. NOTICE. In case of a lawsuit or action is commenced to collect this
note or any portion thereof, Westar promises to pay, in addition to the costs
provided by statute, such sum as the court may adjudge reasonable as attorney's
fees therein, (including any action to enforce the judgement and this provision
as to attorney's fees and costs shall survive the judgement.) Venue in any
action to enforce this Note shall, at holder's option, shall be in Thurston
County, Washington.Lender acknowledges that it
5. GOVERNING LAW. This Note shall be governed and construed in
accordance with the laws of the State of Washington.
Puget Sound Investors Westar Financial Services Inc.
By:___________________________ By:___________________________
Robert W. Christensen, Jr. Cindy A. Kay
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