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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES ACT OF 1934**

 

**For Quarter Ended:  June 30, 2001**

**Commission File Number:  2-95465-S**

**WESTAR FINANCIAL SERVICES 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 Financial Center**                | **98501**                            |
|                                         |                                      |
| 150 Israel Road SW; Tumwater, WA        |                                 |
| (Address of principal executive office) | (Zip Code)                           |

Registrant's telephone number, including areacode: ** (360) 754-6227**

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15 (d) of the Securities Exchange Act of 1934 during the preceding 12 monthsand (2) has been subject to such filing requirements for the past 90 days.Yes:   ý           No: o

Indicate thenumber of shares outstanding of each of the issuer's classes of common stock asof the latest practicable date:

Common Stock 2,348,210Class Number of Shares Issued at August 3, 2001

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WestarFinancial Services Incorporated and SubsidiariesConsolidated Balance SheetsAs Of June 30, 2001 and March 31, 2001

|                                                                                           | June 30  (Unaudited) |          | March 31  2001 |   |
|------------------------------------------------------------------------------------------------|----------------------|---------------|----------------|--------|
|                                                                                           |                 |          |           |   |
| Assets                                                                                         |                 |          |           |   |
|                                                                                           |                 |          |           |   |
| Cash                                                                                           | $                    | 3,980,315     |           | $      | 4,728,664 |   |
| Accounts receivable, net of allowance                                                          | 1,343,218            |          | 774,356        |   |
| Credit enhancement receivable and net  servicing asset                                         | 2,704,278            |          | 2,624,796      |   |
| Vehicles under operating leases held for sale,  net                                            | 1,388,870            |          | 19,481,587     |   |
| Net investment in direct financing leases,  net                                                | 1,226,946            |          | 1,878,762      |   |
| Deferred tax asset, net of valuation  allowance    Of $5,305,171 and $5,599,662 |                 |     |           |   |
| Fixed and other assets, net                                                                    | 2,080,253            |          | 1,986,873      |   |
|                                                                                           |                 |          |           |   |
| Total Assets                                                                                   | $                    | 12,723,880    |           | $      | 31,475,038 |   |
|                                                                                           |                      |          |                |   |
|                                                                                           |                 |          |           |   |
| Liabilities, Redeemable Preferred Stock and  Shareholders’ Deficit                        |                 |          |           |   |
|                                                                                           |                 |          |           |   |
| Accounts payable                                                                               | $                    | 9,505,484     |           | $      | 8,142,562 |   |
| Notes payable to banks                                                                         | 2,274,632            |          | 20,655,101     |   |
| Convertible, subordinated Notes payable to  affiliates and others                              | 9,313,577            |          | 11,651,942     |   |
| Other liabilities                                                                              | 4,825,401            |          | 5,086,792      |   |
|                                                                                           |                      |          |                |   |
|                                                                                           |                 |          |           |   |
| Total Liabilities                                                                              | 25,919,094           |          | 45,536,397     |   |
|                                                                                           |                 |          |           |   |
| Redeemable preferred stock                                                                     | 1,250,000            |          | 1,250,000      |   |
|                                                                                           |                 |          |           |   |
| Shareholders’ Deficit                                                                     |                 |          |           |   |
| Common stock, no par value                                                                     | 3,716,427            |          | 3,716,427      |   |
| Paid in capital - stock warrants                                                               | 371,495              |          | 371,495        |   |
| Accumulated deficit                                                                            | (18,533,136          | )             | (19,399,281    | )      |
|                                                                                           |                      |          |                |   |
|                                                                                           |                 |          |           |   |
| Total Shareholders’ Deficit                                                               | (14,445,214          | )             | (15,311,359    | )      |
|                                                                                           |                      |          |                |   |
|                                                                                           |                 |          |           |   |
| Total Liabilities, Redeemable Preferred  Stock and Shareholders’ Deficit                  | $                    | 12,723,880    |           | $      | 31,475,038 |   |
|                                                                                           |                      |          |                |   |

See accompanying notes toconsolidated financial statements.
WestarFinancial Services Incorporated and SubsidiariesConsolidated Statements of OperationsFor the three months ended June 30, 2001 and 2000(Unaudited)
 Three Months Ended  2001 2000 Revenues         Revenues from originations, sales and  securitizations$143,425,366 $36,210,340 Revenues from operating leases1,936,729 838,127 Earned interest on direct financing leases30,678   Service fee income259,682 150,953 Other income48,592 15,689         Total revenues145,701,047 37,215,109         Direct Costs    Costs related to originations, sales and  securitizations139,885,507 36,697,118 Interest179,378 277,066 Depreciation expense on operating leases1,421,359 500,561 Provision for credit losses7,500 7,500 Other828,408 146,200         Total direct costs142,322,152 37,628,445         Gross margin3,378,895 (413,336)     General and administrative expenses2,236,840 1,578,438          Income (Loss) before subordinated interest$1,142,055 $(1,991,774)     Subordinated debt interest expense247,313 216,812         Income (loss) before federal income tax894,742 (2,208,586)     Deferred federal income tax benefit(294,491)750,919, Less: change in valuation allowance294,491 (750,919)        Net income (loss)894,742 (2,208,586)     Dividends on redeemable preferred stock(28,592)(28,592)        Net income (loss) applicable to common  stock$866,150 $(2,237,178)        Weighted average number of shares2,348,170 2,348,120         Basic earnings (loss) per share$.37 $(.95)   Fully diluted earnings (loss) per share$.29 $(.95)   
See accompanying notes toconsolidated financial statements.

 

WestarFinancial Services Incorporated and SubsidiariesConsolidated Statements of Cash FlowsFor the three months ended June 30, 2001 and 2000(Unaudited)
Increase (Decrease) in Cash     2001 2000                Net cash provided by  (used in) operating activities$20,270,025 $(18,736,391)        Net cash used in investing activities(299,541)(809,538)             Cash flows from financing activities:    Additions to notes payable to banks115,550,101 40,282,517 Payments on notes payable to banks(133,930,569)(22,945,002)Additions to notes payable – subordinated  debt2,514,944   Payments on notes payable – subordinated  debt(2,338,365)(480,298)        Net cash provided by (used in) financing    Activities(20,718,833)19,372,161         Net (decrease) in cash(748,349)(173,768)     Cash:    Beginning of period4,728,664 1,401,243         End of period$3,980,315 $1,227,475    
See accompanying notes toconsolidated financial statements.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

**Basis of Presentation**

The Company's consolidatedannual financial statements presented in the 2001 Annual Report on Form 10-K ofthe Company includes a summary of significant accounting policies and should beread in conjunction with this Form 10-Q. The consolidated financial statementsinclude the results of operations of Westar Financial Services Incorporated(“Westar”) its 100% owned subsidiaries Westar Finance Holding Co. (“WestFH”), ,Westar Auto Finance L.L.C. ("WestAF"), a limited liability companyowned 99% by the Company and 1% by WestAH, and Westar Lease Origination Trust,a Massachusetts business trust registered in the state of Washington, beneficiallyowned by WestAF.

The statements for the threemonths ended June 30, 2001 and 2000, are unaudited, condensed and do notcontain all information required by accounting principles generally accepted inthe United States of America to be included in a full set of annual financialstatements.  In the opinion ofManagement, all adjustments (consisting only of normal recurring adjustments)necessary to present fairly the results of operations for such periods are included.  All significant inter-company accounts andtransactions have been eliminated.  Theresults of operations for the three months ended June 30, 2001, are notnecessarily indicative of the results of operations for the entire year.  This information included in this Form 10-Qshould be read in conjunction with Management’s Discussion and Analysis and theconsolidated financial statements and notes thereto included in WestarFinancial Services Incorporated’s 2001 Annual Report on Form 10-K.

**Forward-Looking Statements**

Although most of the informationcontained in this report is historical, certain statements contain forward–lookinginformation. To the extent these statements involve, without limitation,product development and introduction plans, the Company’s expectations forgrowth, estimates of future revenues, expenses, profit, cash flow, balancesheet items, forecasts of demand or market trends for the Company’s productsand for the auto finance industry or any other guidance on future periods,these statements are forward–looking and involve matters which aresubject to a number of risks and uncertainties that could cause actual resultsto differ materially from those expressed in such forward–lookingstatements. Readers of this report should consider, along with other relevantinformation, the risks identified in this report and other risks identifiedfrom time to time in the Company’s filings with the Securities and ExchangeCommission, press releases and other communications.

**Direct Financing Receivables**

The Company repurchased theremaining stream of cash flows from the 1996-A and 1996-B Securitization fromthe Industrial Bank of Japan in August 2000. The Company expects collection ofthe estimated net future cash flows of $1,226,946 by November 2001. The Companyhas an allowance for uncollectable future cash flows in the amount of $25,000.

**Fixed Assets and Other**

At June 30, 2001 and March 31,2001, furniture, fixtures and equipment of $1,976,078 (net of accumulateddepreciation of $1,806,393) and $1,922,268 (net of accumulated depreciation $1,563,800)respectively, are included in fixed assets and other. They are stated at costless accumulated depreciation and are depreciated on a straight-line basis overtheir estimated useful lives of 2 – 5 years. Included in this total are assetssubject to capital leases in the amount of $563,577 (net of accumulatedamortization of $448,613) and $623,174 (net of accumulated amortization of$389,017) for the periods ended June 30, 2001 and March 31, 2001, respectively.These assets are stated at cost and amortized over the term of the lease.

**Federal Income Tax**

The Companyprovides a 100% valuation allowance against the deferred tax asset balance.Increases in the deferred tax asset allowance offset the tax benefit related tothe temporary differences creating the deferred tax asset and result in nofederal income tax benefit for the corresponding period. Likewise, decreases inthe deferred tax asset and related valuation allowance are offset by the taxexpense on the book income and result in no federal income tax expense for thecorresponding period. The deferred tax asset is primarily comprised of tax netoperating losses, which are available for an average of 13 years to offsetfuture reported tax liabilities.

**Interest Paid**

The Company paid cash forinterest of $844,487 and $382,268 for the three months ended June 30, 2001 and2000, respectively.

**IncomePer Common Share**

Basic net income per commonshare is net income less preferred stock dividend requirements divided by theaverage number of common shares outstanding. Diluted net income per commonshare assumes issuance of the net incremental shares from stock options,warrants and full conversion of all dilutive convertible securities at thelater of the beginning of the year or date of issuance.

A reconciliation of the dataused in the calculation of basic and diluted earnings per share computationsfor income from continuing operations is as follows:
 3 months  ended 06/30/01 3 months  ended 06/30/00 **Basic Earnings  (Loss) Per Share**     Net income (loss) applicable to common stock$866,150 $(2,237,178) Average common shares    outstanding2,348,170 2,348,120 Basic earnings (loss) per share$.37 $(.95)     **Dilutive Earnings  (Loss) Per Share**     Net income (loss) applicable to common stock$866,150 (2,237,178) Dividends on redeemable preferred stock28,592    Interest on 10.5% convertible subordinated notes105,000   Net income (loss) applicable to common stock plus assumed    conversions$999,742   $(2,237,178)      Average common shares outstanding2,348,170 2,348,120  Add: Stock Options228,767    Stock Warrants159,256    Convertible subordinated notes payable753,701       Average common shares outstanding on a fully diluted basis3,489,894 2,348,120 Diluted earnings (loss) per share$.29 $(.95)
**Notes PayableAffiliates and Others**

In May 2001,the Company paid in full the March 31, 2000 $1,200,000 subordinated notepayable plus accrued interest to Navidec, Inc.

In June 2001, the Company paidin full the June 2000 $1,000,000 subordinated note payable plus accruedinterest to Navidec, Inc.

In June 2001, the Companyextended S. Seel’s subordinated note payable in the amount of $250,000 fromApril 30, 2001 to November 15, 2001.

In April 2001, the Companyentered into an agreement with & Capital, Partners LP, to extend its April15,1997, $1,500,000 convertible, subordinated note payable from April 30, 2001to August 15, 2001. All other terms and conditions remain the same.

In April 2001, the Companyentered into an agreement with & Capital, Partners LP, to extend itsJanuary 1998, $500,000 subordinated note payable from April 30, 2001 to August15, 2001. All other terms and conditions remain the same.

In April 2001, the Company enteredinto an agreement with & Capital, Partners LP to extend its June 2000,$1,000,000 subordinated note payable from September 5, 2000 to August 15, 2001.All other terms and conditions remain the same.

At June 30, 2001 and March 31,2001, accrued interest in the amounts of $877,469 and $805,071 respectively,are due on subordinated notes payable to related parties and are included inOther Liabilities.

**Other Liabilities**

Other liabilities consist ofthe following at June 30, 2001 and March 31, 2001:
 June 2001 March 2001 Accrued Interest$1,060,000 $1,403,000 Sales/use tax596,000 538,000 Cash/accounts receivable investors2,452,000 2,416,500 Others717,401 729,292    Totals$4,825,401 $5,086,792 
**Securitization (ABS) or SBAS Transactions**

The Company completed eightSecurities Based Asset Sales (“SBAS”) in the first quarter of fiscal 2002 forthe total proceeds of $139.2M. The Company established servicing cash reservesin the amount of $1M, which is to be received in 60 monthly payments. TheCompany will also receive other fees depending upon the actual performance ofthe underlying assets. The Company continues to service the leases securitized.

The leases sold in the abovetransactions were operating leases and they were accounted for in accordancewith SFAS 13 until the time of sale. Accordingly, rental payments collectedbefore the sale of the operating leases were recognized as revenues fromoperating leases and depreciation on equipment subject to these operating leaseswas recorded through the date of sale.

**Subsequent Events**

In July 2001, the Company’sorigination/issuer/titling securitization structure, Westar Lease OriginationTrust, completed its forty-seventh security based asset sales involving $21.9Mof automobile lease-backed securities in private-placement offerings. TheCompany’s proceeds from the securitization were reduced by a cash reserve inthe amount of $149,855, which is to be received in 60 monthly payments. TheCompany continues to service the leases securitized. The leases sold in theabove transactions were operating leases and they were accounted for inaccordance with SFAS 13 until the time of sale.

**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

BUSINESSOVERVIEW

In the lastfive years, Westar has recreated itself from a traditional commercial equipmentlessor to a prime credit consumer auto lessor competing within autodealerships, to a leading Internet financier, and, presently, a four-channelfinancial portal.

As a financial portal, Westaroriginates, decisions, commits to and fulfills consumer financings for its ownaccount or the accounts of others, using sophisticated decisioning tools andhigh speed communications to assure transparency to all parties in the process.Westar has created a business model where it is relatively indifferent as tothe nature of both the originator and the ultimate investor.

Westar Financial ServicesIncorporated and its Subsidiaries provide prime credit quality consumerautomobile lease financing through franchised automobile dealers in the westernstates and through its e-commerce origination channels throughout the UnitedStates. Westar has designed and developed a number of financing, leaseservicing and risk management innovations. It is Management’s opinion thatWestar’s proprietary decisioning and fulfillment capabilities are among themost scalable and marketable programs currently available and a valuedinvestment in the Company’s future.  Itis these capabilities that Management believes will lead to continuedimprovement in financial operations.

**ORIGINATION**

**Dealer Direct Retail Leasing**

Westar acquires automobileleases through its Dealer Direct Retail Leasing (“DDRL”) program.  Westar offers DDRL to selected manufacturer-franchisedautomobile dealerships based on reputation, location and size.  The Company attempts to meet the needs ofits dealers through responsive customer service, extended hours operatingacross 361 business days a year, rapid funding, consistent buying practices andthrough competitive pricing.

**Internet**

The Company had formed astrategic alliance with DriveOff.com, Inc., in which WEST was the exclusivefinancial portal for all of the transactions generated through the DriveOff.comsite. The Company began originating transactions through DriveOff.com onSeptember 28, 1999. The focus of this 3rd generation Internet automobileacquisition channel was to significantly increase consumer satisfaction withthe process while decreasing prices. The program empowered consumers tonegotiate new car purchases and financing 100% online. Consumers could designand "build" a vehicle purchase at a firm price, arrange the financingand schedule an appointment to accept delivery of the vehicle from a dealer.Westar proved its ability to originate, decision, commit to and fulfill loansand leases in a near-real time environment and with high degrees of consumersatisfaction.

DriveOff.com, Inc. waspurchased by Microsoft's CarPoint, Inc. in September 2000 and closed inFebruary 2001. The revenues generated through DriveOff.com, Inc. wereapproximately 1% of Westar's total revenues during the alliance period, lessthan the related expenses.

**Intranet**

The Intranet conduit duplicatesthe operation of Westar’s Internet channel except that the business model andtechnology are placed within the webspace of another organization, only visibleto and usable by members of the host organization. This business model alignsitself with organizations that have extraordinary consumer credibility andintensely loyal constituents. It seeks organizations that wish to deliver valuethrough a positive auto purchasing experience. Likely candidates for Intranetalliances include large affinity membership organizations, banks or insurance companies.Westar would earn a fee each time a consumer transaction passes through itsdecisioning process.

Westar retains for its ownaccount the prime credit leases originated by the Internet and Intranetchannels.

**Private Label**

Westar’s Private Label channelis designed to offer other financial service firms access to Westar’s *LASIRpro* decisioning technology andprocesses. With LASIRpro, a bank with a need for consumer automobile financing,but without its own capability, can use Westar’s technology and processes forreal-time, real-world decisioning and commitments. This allows the originatingentity to preserve its market presence by serving its dealers and consumerswhile making nearly instantaneous credit, asset, and pricing decisions. Westarreceives fee income or all or a portion of the originated assets for itsservices. Westar’s Private Label partners currently include AmSouthBancorporation, Mellon Bank and USAA Federal Savings Bank.

Managementbelieves the diversification provided by multiple origination channels allowsthe Company to build a sustainable competitive advantage by using itsproprietary leading edge decisioning and communications technologies and itsproprietary lease securitization capabilities.

**RESULTS OF OPERATIONSAND CHANGES IN FINANCIAL POSITION**

**Three  months ended  June 30, 2001compared  to three months  ended June 30, 2000.**
****
The Company’s statement ofoperations reports net income in the first quarter of approximately $866,000,up $3.1M from a net loss of $2.2M in the comparable period, an increase of$460,000 from the previous quarter net gain of $406,000.

Lease originations increasedfrom 1,253 leases costing $40.6M to 4,224 leases costing $121M for the threemonths ended June 30, 2001 and 2000. The outstanding face value of leasesserviced totaled 19,965 accounts for $568M. The credit quality of originatedleases remained steady, with average FICO scores of 732 in the current period.

Gross revenuesfor the quarter ended June 30, 2001 increased 292% from $37.2M in the comparablequarter to $145.7M. The increase in total gross revenues was directly relatedto the 236% increase in lease volumes for the three months. The significantincrease in volumes enabled WEST to complete $139.2M in Origination's,Securitizations and Security Based Asset Sales in the first quarter of fiscal2002. Origination fee income increased $1.8M or 239% for the quarter from $740Kin the comparable quarter to $2.5M. Also as a result of the increased volumes,revenues from operating leases held prior to sale increased $1.1M or 131% forthe quarter ended June 30, 2001 from $838K in the comparable quarter to $1.9M.The Company retains all servicing rights to the assets sold, servicing incomefor the quarter ended June 30, 2001 was $260K and increase of $109K or 72% fromthe previous comparable quarter.

Direct costs increased $104.7Mor 278% for the quarter ended June 30, 2001 from $37.6M in the comparablequarter to $142.3M primarily due to the increase in lease origination volumes.As a result of the increased volumes, costs from sales and securitizationsincreased $103.2M or 281% for the quarter from $36.7M in the comparable quarterto $139.9M. Depreciation expense also increased $921K or 184% for the threemonths from $501K in the comparable quarter to $1.4M. Due to the increase infrequency of securitization or sales, interest costs decreased $98K or 35% forthe quarter from $277K in the comparable quarter to $179K. Origination feespaid to channel partners increased $559K or 513% for the quarter ended June 30,2001 from $109K in the comparable quarter to $668K due to the increase in leaseorigination volumes. Other expenses such as insurance expense increased $560kfor the quarter ended June 30,2001, from $38k in the comparable quarter to$598k also due to volume.

Gross marginsincreased approximately $3.8M or 917%, from ($413K) to $3.4M for the quarterended June 30, 2001. The increase is primarily due to increased originationvolume, particularly in its Private Label and DDRL business. Also, the Company’scost of funds decreased, particularly towards the end of the quarter.

General and administrative expenses increased by approximately $658K or42%, from $1.6M in the first quarter of 2000 to $2.2M. The most significantincreases in general and administrative expenses occurred in salariesand benefits, rent expense and depreciation expense. Although, General andadministrative expenses increased in relationship to prior years, the expensesactually only increased by approximately $40K from the previous quarter endingMarch 31, 2001.

During thenext year, the Company expects to create relatively substantial growth inoriginations, decisionings, commitments and fulfillments as well as in managedassets. Management expects margins from fee income and income earned from itsportfolio to increase more rapidly than volumes. A significant portion of thedifference will be the result of scalability, which Management believes Westarwill realize from its significant investments in technology, innovativeprocesses and alliance channels and its highly skilled and motivated TeamMembers.

While Westarexpects to continue to face intense competition from other firms, particularlythe largest banks, financial services companies and the financial subsidiariesof automobile manufacturers, the Company is presently unaware of any directcompetitor with the same breadth of enterprise as the Company.

**LIQUIDITY AND CAPITAL RESOURCES**

The Company requiressubstantial cash to implement its business strategy, including cash to: (i) acquirevehicles; (ii) satisfy requirements for working capital; (iii) pay operatingexpenses; (iv) satisfy debt service; (v) pay preferred stock dividends; (vi)implement its expansion; and, (vii) invest in technology, systems andpersonnel. A substantial portion of the Company’s revenues in any periodresults from sales or securitizations of leases in such period but in asecuritization transaction a portion of the cash underlying such revenues isreceived over the life of the leases. The Company has historically beensuccessful in meeting its liquidity needs through internal cash flow,borrowings from financial institutions, ABS and SBAS transactions, and sales ofequity and debt securities. Westar was the third Company in the nation tostructure a free standing lease securitization and the first to originatemultiple securitizations from within a single bankruptcy remote structure andto originate a tax benefit transfer from within a securitization. As of June30, 2001, the Company has completed forty-six securitizations and sales whileit retains the servicing of the portfolios and receives servicing incomethrough the life of the lease.

Net cash flows from operationswere $20.3M for the quarter ended June 30, 2001, up from $(18.7)M  in the prior year. This increase reflectsthe $866K in net income up from the $(2.2)M loss from the comparable period inthe prior year. The change is also reflected in the timing of $12M of proceedsfrom securitizations that were a receivable on June 30, 2000, but were not receiveduntil the following month. Cash flow from operations was also impacted by thetiming of a Securities Based Asset Sale that was completed during the firstquarter of 2001. The transaction involved leases totaling over $19M that wereheld for resale as of March 31, 2001. The corresponding notes payable to banksbalance was reduced as a result of the sale.

The Company invested $300K inproperty and equipment during the three months ended June 30 2001, the majorityof which is focussed on its LASIRpro enhancements.

Total liabilities as of June30, 2001 were $25.9M, down from $45.5M from the prior fiscal year. Thisdecrease reflects the timing of asset sales and repayment of subordinate debt.

The Company entered into anagreement in November 1995 with Bank One, Columbus NA for a $12M warehousefacility. On an annual basis, the Company re-evaluates its interim financingneeds considering the expected future timing of sales and securitizations. InNovember 2000, the Company renewed the financing facility for $25M. The Companyuses this revolving credit warehouse facility as interim financing for theacquisition of vehicle leases until sufficient volume allows the Company tosecuritize such leases or to sell them in a SBAS. The Company must comply withcertain loan covenants. At June 30, 2001, the Company remained out ofcompliance with certain covenants and the lender waived them through June 30,2001.

This revolving credit warehousefacility is utilized as interim financing for the acquisition of vehicle leasesuntil sufficient volume is achieved to sell such leases through an ABS or SBAStransaction. After repayment of the related borrowings from Bank One, the netproceeds from the sales of originated leases provide a source of cash forfuture originations of vehicle leases, short-term liabilities and general andadministrative expenses. Increased originations coupled with higher marginsgenerate additional cash flows to be utilized for working capital requirements.At June 30, 2001 the unused portion of the warehouse line was $23.2 million.

During the quarter ended June30,2001, the Company entered into an agreement with & Capital Partners, LPto extend three notes totaling $3M. The notes are due on August 15, 2001 andmanagement intends to renegotiate the due date. Management believes it willhave the necessary liquidity reserves available to pay these notes or be ableto renegotiate extensions.

At June 30, 2001, the Companyhad two notes payable to Navidec which total $1,500,000. One note payable inthe amount of $1,000,000 was due July 5, 2001, and is now due on demand. Thesecond note payable in the amount of $500,000 is due on August 25, 2001.Management also believes it will have the necessary liquidity reservesavailable to pay these notes or be able to renegotiate extensions.

It is the opinion of Management that, as of June 30, 2001, theliquidity sources discussed above in conjunction with subsequent events notedbelow are sufficient to meet the Company’s immediate cash flow needs foroperations and for the acquisition of leases in the normal course ofbusiness. The Company is currently in negotiations to obtain additional capitalthrough both private and public financings to provide for the Company’s plannedgrowth over the next several years. There can be no assurance that suchnegotiations will be successful.

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

The Company is exposed to avariety of market risks, including the effects of changes in interest rates,inflation and used automobile valuations. The Company monitors the effect ofchanges in interest rates relative to other factors that also affect earnings,such as unit lease production. The Company monitors and manages these financialexposures as an integral part of its overall risk management program.

The Company originates andwarehouses, until sufficient volumes are pooled for securitization or soldthrough portfolio sale transactions, fixed-rate assets. The Company is at riskfrom interest rate fluctuations while the assets are being warehoused. TheCompany recognizes the unpredictability of financial markets and seeks toreduce the potentially adverse effect of interest rate fluctuations onearnings. Assuming an instantaneous increase or decrease of one percentagepoint in interest rates applied to all leased assets pooled in a typical $25Msecuritization, the Company’s after-tax earnings on the transaction wouldchange by approximately $575K. The Company has developed sophisticated modelsto assess the sensitivity of its earnings to changes in market interest ratesand will be able to use various tools available, such as interest rate swapsand pre-funding rate caps, to minimize the risks associated with the effect ofchanging prices. These models and tools provide Management both the informationneeded to make timely pricing decisions as well as market alternatives tomanage and minimize risk. In a rising rate environment the Company’s grossmargin will tend to narrow.

Fluctuations in used vehicleprices are another market risk to which the Company is exposed. Unexpectedchanges in the used vehicle market not only impact credit losses, but alsoresidual values. The Company minimizes credit loss exposure through its SBAStransactions and minimizes residual exposure through a residual value insuranceprogram.

The effect of inflation ongeneral and administrative expenses over the past several years has beennegligible. Inflation is not expected to impact earnings in the ensuingtwelve-month period.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None

ITEM 2.  CHANGES IN SECURITIES

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

None.

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

        (a) Index to Exhibits

              2.  Plan of acquisition, reorganization,arrangement, liquidation                  or succession

                  2.1  Plan and Agreement of Merger between WestarFinancial                       ServicesIncorporated and Republic Leasing Incorporated                       incorporated byreference to the Exhibit to Form 10-K                       dated June 11,1996.

              3.  Articles of Incorporation and Bylaws

                  3.1  The Articles of Incorporation of WestarFinancial                       ServicesIncorporated filed on February 13, 1996                       incorporated byreference to the Exhibit to Form 10-K                       dated June 11,1996.

                  3.2  The Bylaws of Westar Financial ServicesIncorporated                       adopted onFebruary 21, 1996 incorporated by reference to                       the Exhibit toForm 10-K dated June 11, 1996.

              4.  Instruments defining the rights of securityholders, including                  indentures.

                  4.1  Designation of Rights and Preferences ofRepublic Leasing                       IncorporatedSeries 1 Preferred Stock incorporated by                       reference to theExhibit to Form 10-K dated                       June 11, 1996.

                  4.2  Designation of Rights and Preferences ofRepublic Leasing                       IncorporatedSeries 2 Preferred Stock incorporated by                       reference to theExhibit to Form 10-K dated                       June 11, 1996.

                  4.3  Designation of Rights and Preferences ofRepublic Leasing                       IncorporatedSeries 3 Preferred Stock incorporated by                       reference to theExhibit to Form 10-K dated                       June 11, 1996.

                  4.4  Designation of Rights and Preferences ofRepublic Leasing                       IncorporatedSeries 4 Preferred Stock incorporated by

                       reference to theExhibit to Form 10-K dated                       June 11, 1996.

 

10.  Material Contracts.
 10.1Republic Leasing Incorporated 1994 Stock Option Plan incorporated by  reference to the Exhibit to Form 10–K dated June 11, 1996.    10.2The 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.    10.3Revolving 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.    10.4Amendment, 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.    10.5The 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.    10.6The  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.    10.7The 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.    10.14The 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.    10.15The 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.    10.10The 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.    10.11The 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.    10.12The 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.    10.14The 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.    10.15The 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.    10.16The 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.
 
    10.17The 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.    10.18The 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.    10.19The 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.    10.20The 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.    10.21The 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.    10.22The amended agreement for the Westar Financial Services Incorporated  1994 Stock Option Plan dated April 26, 1999 incorporated by reference to the  Exhibit to Form 10-K dated June 25, 1999.    10.23The amended agreement between Westar Financial Services Incorporated  and Bank One, as the lender dated May 1, 1999 incorporated by reference to  the Exhibit to Form 10-K dated June 25, 1999.    10.24The amended agreement between Westar Financial Services Incorporated  and & Capital, Inc., as the lender dated April 1, 1999 incorporated by  reference to the Exhibit to Form 10-K dated June 25, 1999.    10.25The amended agreement between Westar Financial Services Incorporated  and & Capital, Inc., as the lender dated April 1, 1999 incorporated by  reference to the Exhibit to Form 10-K dated June 25, 1999.    10.26The amended agreement between Westar Financial Services Incorporated  and a director, as the lender dated May 24, 1999 incorporated by reference to  the Exhibit to Form 10-K dated June 25, 1999. 10.27The agreement between Westar Financial Services Incorporated and  Puget Sound Investors, as the lender dated June 1, 1999 incorporated by  reference to the Exhibit to Form 10-K dated June 25, 1999.    10.28The amended agreement between Westar Financial Services Incorporated  and & Capital, Partners, L.P., as the lender dated December 1, 1999  incorporated by reference to the Exhibit to Form 10-Q dated January 28, 2000.    10.29The amended agreement between Westar Financial Services Incorporated  and & Capital, Partners, L.P., as the lender dated December 1, 1999  incorporated by reference to the Exhibit to Form 10-Q dated January 28, 2000.    10.30The amended agreement between Westar Financial Services Incorporated  and a director, as the lender dated December 1, 1999 incorporated by  reference to the Exhibit to Form 10-Q dated January 28, 2000.    10.31The amended agreement between Westar Financial Services Incorporated  and Puget Sound Investors, dated December 1, 1999 incorporated by reference  to the Exhibit to Form 10-Q dated January 28, 2000.    10.32The amended agreement between Westar Financial Services Incorporated  and Bank One, dated December 1, 1999 incorporated by reference to the Exhibit  to Form 10-Q dated January 28, 2000.    10.33The amended agreement between Westar Financial Services Incorporated  and & Capital, Partners, L.P., as the lender dated March 10, 2000  incorporated by reference to the Exhibit to Form 10-K dated July 14, 2000.
 
    10.34The amended agreement between Westar Financial Services Incorporated  and & Capital, Partners, L.P., as the lender dated March 10, 2000  incorporated by reference to the Exhibit to Form 10-K dated July 14, 2000.    10.35The amended agreement between Westar Financial Services Incorporated  and a director, as the lender dated March 10, 2000 incorporated by reference  to the Exhibit to Form 10-K dated July 14, 2000.    10.36The amended agreement between Westar Financial Services Incorporated  and Puget Sound Investors, dated March 10, 2000 incorporated by reference to  the Exhibit to Form 10-K dated July 14, 2000.    10.37The amended agreement between Westar Financial Services Incorporated  and Bank One, dated March 10, 2000 incorporated by reference to the Exhibit  to Form 10-K dated July 14, 2000.    10.38The amended agreement between Westar Financial Services Incorporated  and Bank One, as the lender dated July 31, 1999 incorporated by reference to  the Exhibit to Form 10-K dated July 14, 2000.    10.39The agreement between Westar Financial Services Incorporated and  Navidec, Inc., as the lender dated  January 7, 2000 incorporated by reference  to the Exhibit to Form 10-K dated July 14, 2000.    10.40The amended agreement between Westar Financial Services Incorporated  and Navidec, Inc., as the lender dated March 31, 2000 incorporated by  reference to the Exhibit to Form 10-K dated July 14, 2000.    10.41The agreement between Westar Financial Services Incorporated and  & Capital, Partners L.P., as the lender dated June 5, 2000, incorporated  by reference to the Exhibit to form 10-Q dated August, 21, 2000.
 

        14 (b) Reports onForm 8-K

                None

 

 

SIGNATURES

 

Pursuant to the requirement ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
 WESTAR  FINANCIAL SERVICES INCORPORATED    August 10,  2001 /s/ R. W. Christensen, Jr., President(Date)R. W.  Christensen, Jr., President  (Signature)  August 10,  2001 /s/ Kenneth W. Lamb(Date)Kenneth W.  Lamb, Controller (Signature)