<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1997
REGISTRATION NO. 333-25843
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WFS FINANCIAL 1997-B OWNER TRUST
WFS FINANCIAL AUTO LOANS, INC.
(ORIGINATOR OF THE TRUST DESCRIBED HEREIN)
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<S> <C> <C>
CALIFORNIA 9999 33-0149603
(STATE OR OTHER JURISDICTION OF (PRIMARY SIC (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
23 PASTEUR ROAD
IRVINE, CALIFORNIA 92618
(714) 753-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES R. DOWLAN
PRESIDENT
WFS FINANCIAL AUTO LOANS, INC.
23 PASTEUR ROAD
IRVINE, CALIFORNIA 92618
(714) 753-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ANDREW E. KATZ, ESQ. DALE W. LUM, ESQ.
MITCHELL, SILBERBERG & KNUPP LLP BROWN & WOOD LLP
11377 W. OLYMPIC BOULEVARD 555 CALIFORNIA STREET
LOS ANGELES, CALIFORNIA 90064-1683 SAN FRANCISCO, CALIFORNIA 94104-1715
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
=====================================================================================================
PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE*
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Auto Receivable Backed Securities....... $590,000,000 100% $590,000,000 $178,787.87
=====================================================================================================
</TABLE>
* Estimated solely for the purpose of calculating the registration fee on the
basis of the proposed maximum offering price per unit. Of this amount, $303.03
was previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 17, 1997
$590,000,000
WFS FINANCIAL 1997-B OWNER TRUST
$ % AUTO RECEIVABLE BACKED NOTES, CLASS A-1
$ % AUTO RECEIVABLE BACKED NOTES, CLASS A-2
$ % AUTO RECEIVABLE BACKED NOTES, CLASS A-3
$ % AUTO RECEIVABLE BACKED NOTES, CLASS A-4
$ % AUTO RECEIVABLE BACKED CERTIFICATES
WFS FINANCIAL AUTO LOANS, INC. (SELLER)
WFS FINANCIAL INC (MASTER SERVICER)
The WFS Financial 1997-B Owner Trust Auto Receivable Backed Securities will
consist of four Classes of notes (respectively, the "Class A-1 Notes", the
"Class A-2 Notes", the "Class A-3 Notes" and the "Class A-4 Notes" and
collectively, the "Notes") and one Class of certificates (the "Certificates"
and, together with the Notes, the "Securities"). Principal, in the amounts set
forth herein, and interest at the Interest Rates and Pass-Through Rate specified
above for each Class of Notes and the Certificates will be distributed to the
related Securityholders on 20, 20, 20 and
20 of each year (or, if any such day is not a Business Day, on the
immediately succeeding Business Day), beginning 20, 1997.
Distributions on the Certificates will be subordinated to payments due on the
Notes to the extent described herein. Each Class of Notes and the Certificates
will be payable in full on the Final Distribution Dates specified herein for
such Securities.
The WFS Financial 1997-B Owner Trust (the "Trust") will be formed pursuant
to a Trust Agreement to be entered into among WFS Financial Auto Loans, Inc.
(the "Seller"), Financial Security Assurance Inc. ("Financial Security"), WFS
Investments, Inc. and Chase Manhattan Bank Delaware, as Owner Trustee. The
Seller is a wholly owned, limited purpose operating subsidiary of WFS Financial
Inc ("WFS"). The Certificates will be issued pursuant to the Trust Agreement and
will represent fractional undivided interests in the Trust. The Notes will be
issued and secured pursuant to an Indenture to be entered into among the Trust,
Financial Security and Bankers Trust Company, as Indenture Trustee, and will
represent obligations of the Trust. Financial Security will issue a financial
guaranty insurance policy for the exclusive benefit of the Notes (the "Note
Policy") and a financial guaranty insurance policy for the exclusive benefit of
the Certificates (the "Certificate Policy" and, together with the Note Policy,
the "Policies").
The Trust property will primarily include a pool of retail installment sales
contracts and installment loans secured by new and used automobiles and light
duty trucks (the "Contracts"). The Contracts were primarily originated by motor
vehicle dealers and purchased by WFS. WFS will act as Master Servicer of the
Contracts and will have certain other limited obligations with respect thereto.
The Notes will be secured by the assets of the Trust pursuant to the Indenture.
It is a condition of issuance that the Class A-1 Notes be rated A-1+ by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's" and, together
with S&P, the "Rating Agencies"), and the Class A-2 Notes, Class A-3 Notes,
Class A-4 Notes and the Certificates each be rated AAA by S&P and Aaa by
Moody's. The ratings by S&P of the Notes will be issued without regard to the
benefit afforded by the Note Policy. The rating by Moody's of the Class A-1
Notes will be substantially based upon the issuance of the Note Policy by
Financial Security, and the rating by Moody's of the Class A-2 Notes, the Class
A-3 Notes and the Class A-4 Notes will be based on the issuance of the Note
Policy by Financial Security. The ratings by each Rating Agency of the
Certificates will be based on the issuance of the Certificate Policy by
Financial Security.
Each Class of Notes and the Certificates will be represented by one or more
certificates registered in the name of Cede & Co., as nominee of The Depository
Trust Company ("DTC"). The interests of beneficial owners of the Securities will
be represented by book entries on the records of participating members of DTC.
Definitive Securities will be available only under the limited circumstances
described herein.
THE NOTES WILL REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES WILL REPRESENT
BENEFICIAL INTERESTS IN, THE TRUST AND WILL NOT REPRESENT OBLIGATIONS OF OR
INTERESTS IN WFS FINANCIAL AUTO LOANS, INC., WESTERN FINANCIAL BANK, F.S.B., WFS
FINANCIAL INC OR ANY OF THEIR RESPECTIVE AFFILIATES, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL ENTITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO THE DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) THE SELLER(1)(3)
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<S> <C> <C> <C>
Per Class A-1 Note.................................................... % % %
Per Class A-2 Note.................................................... % % %
Per Class A-3 Note.................................................... % % %
Per Class A-4 Note.................................................... % % %
Per Certificate....................................................... % % %
Total................................................................. $ $ $
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</TABLE>
(1) Plus accrued interest, if any, from June 1, 1997.
(2) See "Underwriting" for indemnification arrangements with the Underwriters.
(3) Before deducting expenses payable by the Seller estimated at $ .
The Securities are offered by Donaldson, Lufkin & Jenrette Securities
Corporation and BancAmerica Securities, Inc. (the "Underwriters") subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to various prior conditions, including their right to reject orders in
whole or in part. It is expected that the Securities will be delivered in
book-entry form on or about June , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BANCAMERICA SECURITIES, INC.
WESTFIN SECURITIES
CORPORATION
<PAGE> 3
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of any Class of
Securities. Specifically, the Underwriters may overallot in connection with the
offering and may bid for and purchase the Securities in the open market. For a
description of these activities, see "Underwriting."
THE FINANCIAL GUARANTY INSURANCE POLICIES ARE NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed a registration statement
on Form S-1 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended, with the
Securities and Exchange Commission (the "Commission") with respect to the
Securities offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information included in the
Registration Statement and the exhibits thereto. The Registration Statement,
including exhibits thereto, may be inspected and copied at the public reference
facilities maintained by the Commission in Washington, D.C. at Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 or at the regional
offices of the Commission at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at http://www.sec.gov.
Statements made in this Prospectus as to the contents of any agreement or other
document referred to herein are not necessarily complete and reference is made
to the copy of such agreement or other document filed as an exhibit or schedule
to the Registration Statement and to the exhibits and schedules filed therewith,
each such statement being qualified in all respects by such reference.
REPORTS TO SECURITYHOLDERS
The Master Servicer, on behalf of the Trust, will prepare and the Indenture
Trustee and the Owner Trustee will provide to Securityholders of record (which
shall be Cede & Co. as the nominee of DTC unless Definitive Securities are
issued under the limited circumstances described herein) unaudited quarterly and
annual reports concerning the Contracts. See "Certain Information Regarding the
Securities -- Statements to Securityholders" and "-- Evidence as to Compliance."
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES OR
THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE> 4
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. See the Index of
Principal Definitions for the location herein of certain capitalized terms.
Trust...................... WFS Financial 1997-B Owner Trust (the "Trust").
Seller..................... WFS Financial Auto Loans, Inc. (the "Seller"), a
wholly owned, limited-purpose operating subsidiary
of WFS Financial Inc. The principal executive
offices of the Seller are located at 23 Pasteur
Road, Irvine, California 92618 and its telephone
number is (714) 753-3000. Prior to May 29, 1996,
the Seller was known as Western Financial Auto
Loans, Inc. See "The Seller."
WFS........................ WFS Financial Inc ("WFS" or, in its capacity as
Master Servicer, the "Master Servicer"), a majority
owned, operating subsidiary of Western Financial
Bank, F.S.B. (the "Bank"), a federally chartered
savings association. The principal offices of WFS
are located at 23 Pasteur Road, Irvine, California
92618 and its telephone number is (714) 753-3000.
See "WFS."
WII........................ WFS Investments, Inc. ("WII"), a California
corporation and a wholly owned operating subsidiary
of WFS. The principal office of WII is 23 Pasteur
Road, Irvine, California 92618 and its telephone
number is (714) 727-1000. See "WII."
Securities Offered......... The securities offered are as follows:
A. General................. The WFS Financial 1997-B Owner Trust Auto
Receivable Backed Notes (the "Notes") will
represent obligations of the Trust secured by the
assets of the Trust (other than the Certificate
Distribution Account and the Certificate Policy).
The WFS Financial 1997-B Owner Trust Auto
Receivable Backed Certificates (the "Certificates"
and, together with the Notes, the "Securities")
will represent fractional undivided interests in
the Trust.
The Trust will issue four Classes of Notes pursuant
to an indenture to be dated as of , 1997
(the "Indenture"), between the Trust and Bankers
Trust Company, as trustee (the "Indenture
Trustee"), as follows: (i) $ aggregate
principal amount of % Auto Receivable Backed
Notes, Class A-1 (the "Class A-1 Notes"), (ii)
$ aggregate principal amount of %
Auto Receivable Backed Notes, Class A-2 (the "Class
A-2 Notes"), (iii) $ aggregate principal
amount of % Auto Receivable Backed Notes,
Class A-3 (the "Class A-3 Notes") and (iv)
$ aggregate principal amount of %
Auto Receivable Backed Notes, Class A-4 (the "Class
A-4 Notes"). Payments of principal and interest on
the Notes will be made in accordance with the
priorities set forth under "Certain Information
Regarding the Securities -- Distributions on the
Securities."
The Trust will issue $ aggregate
principal amount of % Auto Receivable Backed
Certificates (the "Certificates") pursuant to a
trust agreement (the "Trust Agreement") to be dated
as of the date of initial issuance of the
Securities (the "Closing Date"), among the Seller,
Financial Security Assurance Inc. ("Financial
Security"), WII and Chase Manhattan Bank Delaware,
as trustee (the "Owner Trustee" and,
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<PAGE> 5
together with the Indenture Trustee, the
"Trustees"). Payments in respect of the
Certificates will be subordinated to payments on
the Notes to the extent described herein.
Each Class of Notes and the Certificates will be
issued in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof.
Definitive Securities will be issued only under the
limited circumstances described herein. See
"Certain Information Regarding the
Securities -- Book-Entry Registration" and
"-- Definitive Securities."
B. Property of the Trust... Each Note will represent an obligation of, and each
Certificate will represent a fractional undivided
interest in, the Trust. The property of the Trust
will primarily include (i) a pool of retail
installment sales contracts and installment loans
(the "Contracts") secured by the new and used
automobiles and light-duty trucks financed thereby
(the "Financed Vehicles"); (ii) certain monies due
under the Contracts on and after , 1997
(the "Cut-Off Date"); (iii) security interests in
the Financed Vehicles; (iv) a financial guaranty
insurance policy (the "Note Policy") to be issued
by Financial Security for the exclusive benefit of
Noteholders, which will unconditionally and
irrevocably guarantee payment of the Scheduled
Payments on each Distribution Date; (v) a financial
guaranty insurance policy (the "Certificate Policy"
and, together with the Note Policy, the "Policies")
to be issued by Financial Security for the
exclusive benefit of Certificateholders, which will
unconditionally and irrevocably guarantee payment
of the Guaranteed Distributions on each
Distribution Date; (vi) amounts on deposit in the
Collection Account, the Note Distribution Account,
the Certificate Distribution Account, the Spread
Account and the Holding Account, including all
Eligible Investments therein and all income from
the investment of funds therein and all proceeds
therefrom; (vii) proceeds from claims under certain
insurance policies in respect of individual
Financed Vehicles or obligors under the Contracts
(the "Obligors"); and (viii) certain rights under
the sale and servicing agreement to be dated as of
, 1997 (the "Sale and Servicing
Agreement"), among the Trust, the Seller and the
Master Servicer. Pursuant to the Indenture, the
property of the Trust (other than the Certificate
Distribution Account and the Certificate Policy)
will be held by the Master Servicer for the benefit
of the Indenture Trustee and Financial Security on
behalf of the holders of the Notes.
C. Distribution Dates...... Distributions of interest and principal on the
Securities will be made on 20,
20, 20 and 20 of each
year (or, if any such day is not a Business Day, on
the next succeeding Business Day) (each, a
"Distribution Date"), commencing 20,
1997. Payments on the Securities on each
Distribution Date will be paid to the holders of
record of the related Securities on the Business
Day immediately preceding such Distribution Date
or, in the event that Definitive Securities are
issued, as of the 15th day of the month immediately
preceding the month in which such Distribution Date
occurs (each, a "Record Date").
A "Business Day" will be any day other than a
Saturday, a Sunday or a day on which banking
institutions in New York, New York, Wilmington,
Delaware, or Los Angeles, California are authorized
or obligated by law, executive order or government
decree to be closed.
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<PAGE> 6
To the extent not previously paid prior to such
dates, the outstanding principal amount of (i) the
Class A-1 Notes will be payable on 20,
1998 (the "Class A-1 Final Distribution Date"),
(ii) the Class A-2 Notes will be payable on
20, (the "Class A-2 Final
Distribution Date"), (iii) the Class A-3 Notes will
be payable on 20, (the "Class A-3
Final Distribution Date") and (iv) the Class A-4
Notes will be payable on 20, 200 (the
"Class A-4 Final Distribution Date" and, together
with the Class A-1 Final Distribution Date, the
Class A-2 Final Distribution Date and the Class A-3
Final Distribution Date, the "Note Final
Distribution Dates"). To the extent not previously
paid in full prior to such date, the unpaid
principal balance of the Certificates will be
payable on , 200 (the "Certificate Final
Distribution Date" and, together with the Note
Final Distribution Dates, the "Final Distribution
Dates").
Terms of the Notes......... The principal terms of the Notes will be as
described below:
A. Interest Rates.......... Interest will be borne on (i) the Class A-1 Notes
at the rate of % per annum (the "Class A-1
Rate"), (ii) the Class A-2 Notes at the rate of
% per annum (the "Class A-2 Rate"), (iii) the
Class A-3 Notes at the rate of % per annum
(the "Class A-3 Rate") and (iv) the Class A-4 Notes
at the rate of % per annum (the "Class A-4
Rate" and, together with the Class A-1 Rate, the
Class A-2 Rate and the Class A-3 Rate, the
"Interest Rates").
B. Interest................ Interest on the outstanding principal amount of
each Class of Notes will accrue at the related
Interest Rate from and including the most recent
Distribution Date on which interest has been paid
(or from and including the Cut-Off Date with
respect to the first Distribution Date) to but
excluding the current Distribution Date (each, an
"Interest Period"). Interest on the Class A-1 Notes
will be calculated on the basis of the actual
number of days elapsed in an Interest Period and a
360-day year. Interest on the Class A-2, Class A-3
and Class A-4 Notes will be calculated on the basis
of a 360-day year consisting of twelve 30-day
months. Interest on the Notes for any Distribution
Date due but not paid on such Distribution Date
will be due on the next Distribution Date, together
with, to the extent permitted by applicable law,
interest on such shortfall at the related Interest
Rate. See "The Notes -- Payments of Interest" and
"Certain Information Regarding the
Securities -- Distributions on the Securities."
C. Principal............... Principal of the Notes will be payable on each
Distribution Date in an amount generally equal to
the Note Principal Distributable Amount for such
Distribution Date, calculated as described under
"Certain Information Regarding the
Securities -- Distributions on the
Securities -- Deposits to the Distribution
Accounts; Priority of Payments." The Note Principal
Distributable Amount will include an amount equal
to the Accelerated Principal Distributable Amount
for such Distribution Date. On each Distribution
Date, the Note Principal Distributable Amount will
be applied in the following priority: first to
reduce the principal amount of the Class A-1 Notes;
second, after the principal amount of the Class A-1
Notes has been reduced to zero, to reduce the
principal amount of the Class A-2 Notes; third,
after the principal amount of the Class A-2 Notes
has been reduced to zero, to reduce the principal
amount of the Class A-3 Notes; and fourth, after
the principal amount of
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<PAGE> 7
the Class A-3 Notes has been reduced to zero, to
reduce the principal amount of the Class A-4 Notes.
Notwithstanding the foregoing, if the principal
amount of a Class of Notes has not been paid in
full prior to its Note Final Distribution Date, the
Note Principal Distributable Amount for such Note
Final Distribution Date will include an amount
sufficient to reduce the unpaid principal amount of
such Class of Notes to zero on such Note Final
Distribution Date. See "The Notes -- Payments of
Principal" and "Certain Information Regarding the
Securities -- Distributions on the
Securities -- Deposits to the Distribution
Accounts; Priority of Payments."
D. Optional Redemption..... In the event of an Optional Purchase, each Class of
outstanding Notes will be redeemed in whole, but
not in part, at a redemption price equal to the
unpaid principal amount of such Class of Notes plus
accrued interest thereon at the related Interest
Rate. See "The Notes -- Optional Redemption."
E. Mandatory Redemption.... Under certain conditions, the Notes may be
accelerated upon the occurrence of an Event of
Default under the Indenture. So long as no Insurer
Default shall have occurred and be continuing,
under certain circumstances Financial Security will
have the right (in addition to its obligation to
make Scheduled Payments on the Notes in accordance
with the terms of the Note Policy) but not the
obligation, to elect to accelerate the principal of
the Notes and to cause the Master Servicer or the
Trustee to sell or otherwise liquidate the property
of the Trust and to deliver the proceeds to the
Indenture Trustee for distribution in accordance
with the terms of the Indenture. See "The
Notes -- Events of Default."
Terms of the
Certificates............... The principal terms of the Certificates will be as
described below:
A. Interest................ On each Distribution Date, the Owner Trustee or any
paying agent as the Owner Trustee may designate
from time to time (the "Paying Agent") will
distribute pro rata to Certificateholders of record
as of the related Record Date accrued interest at
the rate of % per annum (the "Pass-Through
Rate") on the Certificate Balance, as defined
below, as of the immediately preceding Distribution
Date (after giving effect to distributions of
principal to be made on such immediately preceding
Distribution Date) or, in the case of the first
Distribution Date, the Original Certificate
Balance. Interest in respect of a Distribution Date
will accrue from and including the Cut-Off Date (in
the case of the first Distribution Date), or from
and including the most recent Distribution Date on
which interest has been paid, to but excluding the
current Distribution Date. Interest on the
Certificates for any Distribution Date due but not
paid on such Distribution Date will be due on the
next Distribution Date, together with, to the
extent permitted by applicable law, interest on
such shortfall at the Pass-Through Rate. See "The
Certificates -- Distributions of Interest" and
"Certain Information Regarding the
Securities -- Distributions on the Securities."
The "Certificate Balance" will equal $
(the "Original Certificate Balance") on the Closing
Date and on any date thereafter will equal the
Original Certificate Balance reduced by all
distributions of principal previously made in
respect of the Certificates. Distributions on the
Certificates will be subordinated to payments of
interest and principal on the Notes as described
under "The Certificates" and "Certain
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<PAGE> 8
Information Regarding the
Securities -- Distributions on the Securities."
B. Principal............... No principal will be paid on the Certificates until
the Distribution Date on which the principal amount
of the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes has been reduced to zero. On such
Distribution Date and each Distribution Date
thereafter, principal of the Certificates will be
payable in an amount equal to the Certificate
Principal Distributable Amount for such
Distribution Date, calculated as described under
"Certain Information Regarding the
Securities -- Distributions on the
Securities -- Deposits to the Distribution
Accounts; Priority of Payments." On each
Distribution Date on or after the Distribution Date
on which the Class A-4 Notes have been paid in
full, any Accelerated Principal Distributable
Amount will be included in the Certificate
Principal Distributable Amount. If not paid in full
prior to the Certificate Final Distribution Date,
the remaining Certificate Balance, if any, will be
payable on that date. See "The
Certificates -- Distributions of Principal."
C. Optional Prepayment..... In the event of an Optional Purchase, the
Certificates will be repaid in whole, but not in
part, at a repayment price equal to the Certificate
Balance plus accrued interest thereon at the
Pass-Through Rate. See "The
Certificates -- Optional Prepayment."
Security for the
Securities................. The principal security for the Securities will be
as described below:
A. The Contracts........... The Contracts will consist of retail installment
sales contracts and installment loans, secured by
liens on the Financed Vehicles, purchased from WFS
by the Seller and from the Seller by the Trust,
including the right to receive the payments
thereunder on and after the Cut-Off Date. The
Seller will be required to repurchase Contracts
under certain circumstances if certain
representations and warranties made by the Seller
are incorrect in a manner that materially and
adversely affects the Securityholders, the
Indenture Trustee, the Owner Trustee or Financial
Security. The Contracts were purchased from new and
used car dealers or originated directly from
consumers by WFS. The Contracts were originated in
California and 32 other states by new and used car
dealers not affiliated with WFS, except for a
limited number of Contracts originated directly
from consumers by WFS. The Contracts will be
selected by WFS from its portfolio of retail
installment sales contracts and installment loans
based upon the criteria to be specified in the Sale
and Servicing Agreement. As of the Cut-Off Date,
the Aggregate Scheduled Balance will be
$590,000,000 (the "Cut-Off Date Aggregate Scheduled
Balance") and the Contracts will have an expected
weighted average annual percentage rate of
approximately 15.33% and an expected weighted
average remaining maturity of approximately 57
months. See "The Contracts Pool."
Approximately 38.73% of the aggregate principal
amount of the Contracts will be Rule of 78's
Contracts and approximately 61.27% will be Simple
Interest Contracts, based upon the anticipated
Scheduled Balances of the Contracts as of the
Cut-Off Date.
All net collections received by the Master Servicer
on or in respect of the Contracts, any Advances
made by the Master Servicer and all amounts paid
under the Policies will be deposited in or credited
to the Collection
7
<PAGE> 9
Account or, in certain limited instances, the
Holding Account. On each Distribution Date, the
Indenture Trustee will distribute the amounts on
deposit in the Collection Account with respect to
such Distribution Date to the Note Distribution
Account and, to the extent applicable, the
Certificate Distribution Account. All payments to
Noteholders will be made from the Note Distribution
Account and to Certificateholders from the
Certificate Distribution Account. See "Certain
Information Regarding the Securities -- The
Accounts and Eligible Investments" and
"-- Distributions on the Securities."
B. The Spread Account...... The Securityholders will be afforded certain
limited protection, to the extent described herein,
against losses in respect of the Contracts by the
establishment of a segregated trust account in the
name of the Indenture Trustee for the benefit of
the Securityholders (the "Spread Account"). The
Spread Account will be part of the Trust.
The Spread Account will be created with an initial
deposit by the Seller of $ (the "Spread
Account Initial Deposit"). The funds in the Spread
Account will thereafter be supplemented on each
Distribution Date by the deposit of any Excess
Amounts (as defined below), until the cash on
deposit in the Spread Account is at least equal to
the Minimum Funded Amount and the sum of the Funded
Amount and the Overcollateralization Amount is at
least equal to the Specified Spread Account
Balance. "Excess Amounts" in respect of a
Distribution Date will be calculated as described
under "Certain Information Regarding the
Securities -- Distributions on the
Securities -- Deposits to the Distribution
Accounts; Priority of Payments" and will equal the
funds on deposit in the Collection Account in
respect of such Distribution Date, after giving
effect to all distributions required to be made on
such Distribution Date. The Specified Spread
Account Balance, the Minimum Funded Amount and the
Overcollateralization Amount will be calculated as
described under "Certain Information Regarding the
Securities -- Payment Priorities of the Notes and
the Certificates; The Spread Account -- Calculation
of Specified Spread Account Balance." On each
Distribution Date, funds will be withdrawn from the
Spread Account for distribution to Securityholders
to cover any shortfalls in interest and principal
required to be paid on the Securities (before
giving effect to any claim under the Policies).
If on the last day of any month (each, a
"Calculation Day") or on any Distribution Date the
Spread Account is fully funded, any excess cash on
deposit therein will be released therefrom and upon
such distribution Securityholders will have no
further rights in, or claims to, such amounts. See
"Certain Information Regarding the
Securities -- Withdrawals from the Spread Account."
C. The Policies............ On the Closing Date, Financial Security will issue
the Note Policy to the Indenture Trustee and the
Certificate Policy to the Owner Trustee pursuant to
the insurance, indemnity and pledge agreement to be
dated as of , 1997 (the "Insurance
Agreement"), among Financial Security, the Trust,
the Seller, Bankers Trust Company as Collateral
Agent for Financial Security, WII and WFS. Pursuant
to the Note Policy, Financial Security will
unconditionally and irrevocably guarantee to the
Noteholders payment of the Scheduled Payments for
each Distribution Date. Pursuant to the Certificate
Policy, Financial Security
8
<PAGE> 10
will unconditionally and irrevocably guarantee to
the Certificateholders payment of the Guaranteed
Distributions for each Distribution Date. See "The
Policies" and "Financial Security Assurance Inc."
Optional Purchase.......... The Seller may, but will not be obligated to,
purchase all of the Contracts in the Trust, and
thereby cause early retirement of all outstanding
Securities, on any Distribution Date as of which
(i) the Aggregate Scheduled Balance is 10% or less
of the Cut-Off Date Aggregate Scheduled Balance and
(ii) the aggregate outstanding principal amount of
the Securities is 5% or less of the initial
aggregate amount of the Securities (an "Optional
Purchase"). See "Certain Information Regarding the
Securities -- Termination."
The Master Servicer........ WFS, as Master Servicer, will be obligated pursuant
to the Sale and Servicing Agreement, subject to the
limitations set forth therein, to service the
Contracts and to repurchase certain of the
Contracts under certain circumstances if certain
representations and warranties made by WFS are
incorrect or if WFS, as Master Servicer, breaches
certain of its servicing obligations under the Sale
and Servicing Agreement, in either case in a manner
that materially and adversely affects such
Contracts. See "The Master Servicer."
Ratings.................... It is a condition of issuance that the Class A-1
Notes be rated A-1+ by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") and P-1 by Moody's Investors Service,
Inc. ("Moody's" and, together with S&P, the "Rating
Agencies"), and the Class A-2, Class A-3 and Class
A-4 Notes and the Certificates each be rated AAA by
S&P and Aaa by Moody's. See "Ratings of the
Securities."
Tax Status................. In the opinion of special tax counsel to the
Seller, for both federal and California income tax
purposes, the Notes will be characterized as debt,
and the Trust will not be characterized as an
association (or a publicly traded partnership)
taxable as a corporation. Each Noteholder, by the
acceptance of a Note, will agree to treat the Notes
as indebtedness, and each Certificateholder, by the
acceptance of a Certificate, will agree to treat
the Trust as a partnership in which the
Certificateholders are partners for federal income
tax purposes. See "Certain Federal Income Tax
Consequences" and "Certain California Income Tax
Consequences."
ERISA Considerations....... Subject to the considerations discussed under
"ERISA Considerations," the Notes will be eligible
for purchase by employee benefit plans that are
subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
Since the Certificates will be subordinated to the
Notes to the extent described herein, employee
benefit plans subject to ERISA will not be eligible
to purchase the Certificates. Any benefit plan
fiduciary considering purchase of the Securities
should, among other things, consult with its
counsel in determining whether all required
conditions have been satisfied. See "ERISA
Considerations."
Legal Investment........... The Class A-1 Notes have been structured to be
eligible securities for purchase by money market
funds under Rule 2a-7 under the Investment Company
Act of 1940, as amended. A money market fund should
consult its legal advisors regarding the
eligibility of the Class A-1 Notes under Rule 2a-7,
the fund's investment policies and objectives and
an investment in the Class A-1 Notes.
9
<PAGE> 11
FORMATION OF THE TRUST
GENERAL
The Trust will be a business trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement for the transactions described herein.
After its formation, the Trust will not engage in any activity other than (i)
acquiring, holding and managing the Contracts and the other assets of the Trust
and proceeds therefrom; (ii) issuing the Notes and the Certificates; (iii)
making payments on the Notes and the Certificates; and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing purposes or are incidental thereto or connected therewith.
On the Closing Date, the Seller will establish the Trust by selling and
assigning the property of the Trust to the Trust. WFS will act as Master
Servicer of the Contracts and will receive compensation and fees for such
services. See "The Master Servicer -- Servicing Compensation." WFS, as Master
Servicer, may retain physical possession of the original executed Contracts, and
certain other documents or instruments relating to the Contracts, as custodian
for the Owner Trustee pursuant to the Sale and Servicing Agreement, or may
employ one or more Subservicers as custodians. In order to protect the Trust's
ownership interest in the Contracts, the Seller will file UCC-1 financing
statements in the State of California to give notice of the Trust's ownership of
the Contracts. Under the Sale and Servicing Agreement and the Indenture, WFS
will be obligated to take all necessary steps to preserve and protect the
interests of the Trustees in the Contracts. Neither the Indenture Trustee nor
the Owner Trustee will be responsible for the legality, validity or
enforceability of any security interest in respect of any Contract. WFS will not
physically segregate the Contracts from the other retail installment sales
contracts and installment loans owned or serviced by it and will not stamp the
Contracts with notice of the sale to the Seller or the Trust. See "Certain Legal
Aspects of the Contracts."
Simultaneously with the issuance of the Securities, Financial Security will
issue the Note Policy to the Indenture Trustee and the Certificate Policy to the
Owner Trustee for the benefit of the related Securityholders. Under the Note
Policy and the Certificate Policy, Financial Security will unconditionally and
irrevocably guarantee to the related Securityholders full and complete payment
of the Scheduled Payments and the Guaranteed Distributions, respectively, for
each Distribution Date. Financial Security will have a lien on the Contracts and
other documents relating to the Contracts subordinate to the interest of the
Securityholders, which lien cannot be executed upon until all required payments
under the Policies have been made. See "The Policies."
After the sale and assignment of the Contracts to the Trust, so long as WFS
acts as Master Servicer, WFS's obligations to the Trust with respect to the
Contracts will be limited to the repurchase of Contracts in the event of a
breach of (i) certain representations and warranties made by it as Master
Servicer or (ii) certain servicing obligations, in either case that materially
and adversely affects such Contracts.
The Trust's principal offices will be in Wilmington, Delaware, in care of
Chase Manhattan Bank Delaware, as Owner Trustee, at the address listed below
under "The Owner Trustee."
CAPITALIZATION
The Trust will initially be capitalized with equity equal to the Original
Certificate Balance. WII will purchase Certificates with an original Certificate
Balance of approximately 1% of the Original Certificate Balance and the
remaining equity interests will be sold to third party investors that are
expected to be unaffiliated with the Seller, the Master Servicer or the Trust.
10
<PAGE> 12
The following table illustrates the capitalization of the Trust as of the
Cut-Off Date, as if the issuance and sale of the Securities had taken place on
such date:
<TABLE>
<S> <C>
Class A-1 Notes................................................ $
Class A-2 Notes................................................
Class A-3 Notes................................................
Class A-4 Notes................................................
Certificates...................................................
-------------
Total................................................ $ 590,000,000
===========
</TABLE>
THE OWNER TRUSTEE
Chase Manhattan Bank Delaware will be the Owner Trustee under the Trust
Agreement. Chase Manhattan Bank Delaware is a Delaware corporation and its
Corporate Trust Office is located at 1201 Market Street, Wilmington, Delaware
19801.
The Owner Trustee will have the rights and duties set forth herein under
"Certain Information Regarding the Securities -- The Trustees" and "-- Duties of
the Trustees."
THE CONTRACTS POOL
Each Contract is a retail installment sales contract originated by a new or
used car dealer located in California or one of the other 32 states listed below
and purchased by WFS (except for a limited number of Contracts in the form of
installment loans originated by branch offices of WFS directly to consumers).
Each Contract is secured by a Financed Vehicle. Except as otherwise noted, all
references to contracts include installment loans.
WFS will select the Contracts from its portfolio of fixed-interest rate
retail installment sales contracts which are secured by new and used automobiles
or light-duty trucks. The Contracts were underwritten and purchased by WFS in
the ordinary course of its business operations. It is currently anticipated,
based on the Cut-Off Date Aggregate Scheduled Balance, that not more than
approximately 44.81% of the Contracts will have been originally underwritten by
the Branch Division of WFS. Approximately 44.48% of the aggregate principal
amount of the Contracts will have been originated in California and
approximately 55.52% of the aggregate principal amount of the Contracts will
have been originated in states other than California. Each of the Contracts is
fully amortizing and provides for level payments over its term, with the
portions of principal and interest of each such level payment being determined
on the basis of the Rule of 78's or the simple interest (actual number of days)
method. The amortization of the Rule of 78's Contracts will result in the
outstanding principal balance on each such Contract being in excess of the
Scheduled Balance of that Contract. See "Index of Principal Definitions" for an
explanation of the Rule of 78's and Simple Interest Contracts.
The aggregate outstanding principal amount of the Contracts will be
$590,000,000. Based on the anticipated Cut-Off Date Aggregate Scheduled Balance,
approximately 38.73% of the Contracts will be Rule of 78's Contracts and
approximately 61.27% will be Simple Interest Contracts.
The information concerning the Contracts presented in this Prospectus is
based upon a pool of retail installment sales contracts and installment loans
originated through May 31, 1997. While information as of the Cut-Off Date for
the Contracts that will be actually sold to the Trust may differ somewhat from
the Contract information presented herein, WFS does not expect that the
characteristics of the Contracts that will be sold to the Trust will vary
materially from the information concerning the Contracts presented.
For Contracts originated through May 31, 1997, approximately 18.12% of the
aggregate principal amount of the Contracts relate to the purchase of new
vehicles and approximately 81.88% of the Contracts relate to the purchase of
used vehicles. Approximately 65.1% of the aggregate principal amount of these
Contracts consists of contracts secured by automobiles and approximately 34.9%
of the aggregate principal amount consists of contracts secured by light-duty
trucks. These Contracts have an annual percentage rate ("APR")
11
<PAGE> 13
of at least 7.25% and not more than 30.00%, and the weighted average APR of
these Contracts is approximately 15.33%. These Contracts have remaining
maturities of at least 6 months but not more than 84 months and original
maturities of at least 6 months but not more than 84 months. The weighted
average original maturity of these Contracts was 58 months and the weighted
average remaining maturity of these Contracts as of May 31, 1997 was 57 months.
It is currently anticipated that not more than 23.02% of the aggregate principal
amount of the Contracts (by Cut-Off Date Aggregate Scheduled Balance) will have
had original maturities of more than 60 months. The average principal amount
outstanding per Contract as of May 31, 1997 was $11,291 and the outstanding
principal balance of these Contracts as of May 31, 1997 ranged from $1,000 to
$55,549.
DISTRIBUTION OF CONTRACTS BY APR(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
APR RANGE CONTRACTS BALANCE BALANCE(2)
- --------------------------------------------------- ---------- --------------- --------------
<S> <C> <C> <C>
7.00% to 7.99%.................................... 252 $ 4,199,900.99 0.71%
8.00% to 8.99%.................................... 1,481 23,401,052.97 3.97
9.00% to 9.99%.................................... 2,821 43,276,738.04 7.34
10.00% to 10.99%................................... 3,495 51,475,947.74 8.72
11.00% to 11.99%................................... 3,282 47,702,591.02 8.09
12.00% to 12.99%................................... 3,928 53,572,435.19 9.08
13.00% to 13.99%................................... 3,114 40,038,598.67 6.79
14.00% to 14.99%................................... 2,682 32,825,371.28 5.56
15.00% to 15.99%................................... 3,752 39,234,667.80 6.65
16.00% to 16.99%................................... 2,393 27,353,074.38 4.64
17.00% to 17.99%................................... 2,593 29,371,210.70 4.98
18.00% to 18.99%................................... 4,111 46,342,417.16 7.85
19.00% to 19.99%................................... 2,883 29,721,799.74 5.04
20.00% to 20.99%................................... 4,864 45,956,872.39 7.79
21.00% and over.................................... 10,603 75,527,550.61 12.80
---------- --------------- -------
Total......................................... 52,254 $590,000,228.68 100.00%
======== ============== ==========
</TABLE>
- ---------------
(1) Information as of May 31, 1997 for Contracts originated through May 31,
1997. Contracts having Cut-Off Date Aggregate Scheduled Balances of
$590,000,000 will be included in the Trust.
(2) Percentages may not add to 100.00% due to rounding.
12
<PAGE> 14
GEOGRAPHIC CONCENTRATION OF THE CONTRACTS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
STATE(2) CONTRACTS BALANCE BALANCE(3)
- --------------------------------------------------- ---------- --------------- --------------
<S> <C> <C> <C>
California......................................... 23,452 $262,446,725.54 44.48%
Arizona............................................ 2,817 34,018,745.01 5.77
Oregon............................................. 3,121 29,990,053.17 5.08
Washington......................................... 2,789 28,546,437.48 4.84
Nevada............................................. 2,025 27,130,635.25 4.60
Texas.............................................. 2,346 25,124,878.87 4.26
Colorado........................................... 1,618 18,154,824.89 3.08
Missouri........................................... 1,413 17,682,384.44 3.00
Ohio............................................... 1,366 16,080,781.33 2.73
Illinois........................................... 960 11,153,433.67 1.89
Florida............................................ 980 10,922,831.31 1.85
Utah............................................... 753 8,741,398.84 1.48
Idaho.............................................. 828 8,547,736.89 1.45
Tennessee.......................................... 719 8,504,151.36 1.44
Pennsylvania....................................... 724 8,426,034.46 1.43
North Carolina..................................... 740 8,297,268.03 1.41
New Mexico......................................... 650 8,072,072.99 1.37
Indiana............................................ 568 6,407,500.12 1.09
Virginia........................................... 520 6,214,093.31 1.05
South Carolina..................................... 526 6,009,493.62 1.02
Oklahoma........................................... 520 5,153,391.56 0.87
Georgia............................................ 391 4,950,186.86 0.84
Wisconsin.......................................... 414 4,427,868.56 0.75
Kansas............................................. 299 4,401,462.14 0.75
New Jersey......................................... 276 3,511,618.50 0.60
Kentucky........................................... 313 3,462,044.51 0.59
Maryland........................................... 244 3,130,922.61 0.53
Iowa............................................... 271 3,102,214.56 0.53
Alabama............................................ 165 2,155,582.38 0.37
Wyoming............................................ 148 1,980,919.20 0.34
Hawaii............................................. 123 1,317,353.59 0.22
Michigan........................................... 126 1,275,100.96 0.22
Mississippi........................................ 49 660,082.67 0.11
---------- --------------- -------
Total......................................... 52,254 $590,000,228.68 100.00%
======== ============== ==========
</TABLE>
- ---------------
(1) Information as of May 31, 1997 for Contracts originated through May 31,
1997. Contracts having Cut-Off Date Aggregate Scheduled Balances of
$590,000,000 will be included in the Trust.
(2) Based upon the state in which the new or used car dealer which originated a
Contract is located, or in the case of an installment loan made by WFS, the
state in which the office of WFS which originated the loan is located.
(3) Percentages may not add to 100.00% due to rounding.
UNDERWRITING PROCEDURES RELATING TO THE CONTRACTS
WFS and its predecessors and affiliates have underwritten and purchased
motor vehicle installment sales contracts and installment loans (collectively
"contracts") since 1973. The contracts secured by automobiles and light-duty
trucks included in the Contracts were underwritten through regional contract
purchasing offices ("dealer centers") or through a branch office. Prior to May
1, 1995, all dealer centers were operated by the Bank. Effective May 1, 1995, as
more fully described under "WFS," all such dealer centers were transferred to
WFS, at which time they became part of the Dealer Center Division. All contracts
originated after May 1, 1995, with minor exceptions, were originated by WFS
through either the Dealer Center Division or the
13
<PAGE> 15
Branch Division. See "WFS." Each contract is fully amortizing and provides for
level payments over its term with the portion of principal and interest of each
level payment determined generally on the basis of the sum of the digits (also
known as the Rule of 78's), or on a simple interest basis otherwise.
The contracts are purchased primarily through the dealer centers and branch
offices as part of WFS' program to provide diversified financial services and
develop multiple relationships with consumers. A limited number of contracts are
originated directly from consumers through the dealer centers or through branch
offices, as described below. The purchased contracts are generated by
experienced sales managers. Additional approval by a credit officer is required
for purchase through a dealer center, or by a branch manager, when purchased
through a branch office. Typically, for a contract purchased through a dealer
center, a credit officer, depending on his or her experience and training, will
have approval authority ranging from $15,000 to $30,000. A senior vice president
reviews and approves all such contracts in excess of $30,000. Additionally, for
contracts purchased through a branch office, a branch manager, depending on his
or her experience and training, will typically have approval authority ranging
from $10,000 to $25,000. A regional vice president or a senior vice president
reviews and approves all such contracts in excess of $25,000.
As noted, a limited number of contracts, in the form of installment loans,
are originated from consumers directly by dealer centers and by branch offices.
The credit application is reviewed by a loan officer, the manager of the dealer
center or the branch manager of the originating branch, as the case may be.
Depending upon his or her experience and training, a loan officer or the manager
of the dealer center will typically have approval authority ranging from $10,000
to $20,000 or $10,000 to $30,000, respectively. A regional vice president
reviews and approves all such auto loans in excess of $30,000. The approval
process and limits for loans originated directly from consumers at branch
offices is identical to that for contracts purchased through branch offices from
dealers. The underwriting standards for such loans are the same as for contracts
purchased from new or used car dealers through the dealer centers or branch
offices.
The sales managers at the dealer centers work as product specialists in
generating motor vehicle contracts through franchised new car dealers. The
branch manager of a branch office is responsible for generating motor vehicle
contracts through franchised new car dealers and from reputable used car
dealers. Marketing is accomplished through personal calls to auto dealerships as
well as referrals.
In order to maintain its competitive position in the marketplace, WFS,
through its Dealer Center Division and its Branch Division, emphasizes a fast
approval process and, under normal circumstances, an approval or declination is
given on the same day that the application is received. A sample of all
contracts purchased through the dealer centers is reviewed to insure proper
documentation as well as adherence to the dealer center's underwriting
guidelines. Similarly, all contracts originated by new branch offices, and a
sample of contracts originated through established branch offices, are reviewed
and reunderwritten to insure proper documentation as well as adherence to
underwriting standards. The Dealer Center Division's underwriting standards are
stricter than those of the Branch Division. Substantially all contracts are
nonrecourse to the originating dealer. In the case of new car contracts, the
original amount financed does not exceed the sum of the dealer's cost, taxes,
license fees, service warranty cost and, if applicable, premium for credit life
or credit disability insurance, and in some cases, miscellaneous costs.
Over-advances (i.e., advances in excess of the amount specified in the previous
sentence) may be made under certain circumstances to assist a dealer in selling
an automobile or light duty truck by permitting a lower down payment, and in
some cases no down payment, based on the creditworthiness of the applicant. For
contracts originated through the dealer centers, such over-advances generally do
not exceed $1,500. For used cars, the amount financed does not exceed the
wholesale "blue book" value for the car plus the related expenses and the
over-advances just described. For contracts originated through branch offices,
WFS offers the dealers a more flexible program of over-advances on both new and
used vehicles, based on the creditworthiness of the applicant, at a higher rate
of interest.
WFS does not have minimum maturity requirements; however, contracts of less
than three years maturity are seldom purchased or made due to low customer
demand.
14
<PAGE> 16
DELINQUENCY AND CONTRACT LOSS INFORMATION
The following tables set forth (i) the delinquency experience in regard to
contracts originated and serviced by WFS and its affiliates, including contracts
subsequently sold to WFS Financial Auto Loans, Inc., and WFS Financial Auto
Loans 2, Inc. as of and for the years ended December 31, 1992 through 1996 and
for the 3 months ended March 31, 1997 and (ii) the loss experience for such
contracts originated and serviced by WFS and its affiliates, including contracts
subsequently sold to WFS Financial Auto Loans, Inc. and WFS Financial Auto Loans
2, Inc. as of and for the years ended December 31, 1992 through 1996 and for the
3 months ended March 31, 1997. There is no assurance that the future delinquency
and loss experience of the Contracts will be similar to that set forth below.
CONTRACT DELINQUENCY EXPERIENCE(1)
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1997 1996 1995 1994
---------------------- --------------------- --------------------- ---------------------
NUMBER NUMBER NUMBER NUMBER
OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT
CONTRACTS (2) CONTRACTS (2) CONTRACTS (2) CONTRACTS (2)
--------- ----------- --------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio............................ 358,659 $ 3,215,105 341,486 $3,046,585 258,665 $2,209,594 201,957 $1,633,177
======= ========== ======= ========== ======= ========== ======= ==========
Period of delinquency(3)
31-59 days.......................... 3,409 $ 29,211 4,511 $ 38,173 2,180 $ 18,557 1,136 $ 8,510
60-89 days.......................... 1,248 11,025 1,305 11,470 690 6,143 336 2,616
90 days or more..................... 667 5,955 567 5,144 308 2,701 145 998
------- ---------- ------- ---------- ------- ---------- ------- ----------
Total contracts delinquent........... 5,324 $ 46,191 6,383 $ 54,787 3,178 $ 27,401 1,617 $ 12,124
======= ========== ======= ========== ======= ========== ======= ==========
Delinquencies as a percentage of
number and amount of contracts
outstanding......................... 1.48 1.44% 1.87% 1.80% 1.23% 1.24% 0.80% 0.74%
======= ========== ======= ========== ======= ========== ======= ==========
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1993 1992
--------------------- ---------------------
NUMBER NUMBER
OF AMOUNT OF AMOUNT
CONTRACTS (2) CONTRACTS (2)
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Portfolio............................ 164,516 $1,233,732 148,467 $1,058,267
======= ========== ======= ==========
Period of delinquency(3)
31-59 days.......................... 818 $ 5,239 1,112 $ 7,311
60-89 days.......................... 254 1,849 435 2,803
90 days or more..................... 138 983 349 2,504
------- ---------- ------- ----------
Total contracts delinquent........... 1,210 $ 8,071 1,896 $ 12,618
======= ========== ======= ==========
Delinquencies as a percentage of
number and amount of contracts
outstanding......................... 0.74% 0.65% 1.28% 1.19%
======= ========== ======= ==========
</TABLE>
- ---------------
(1) Includes delinquency information relating to those contracts that are owned
by WFS and contracts that were sold to grantor trusts beginning in 1990, but
which are serviced by WFS.
(2) This amount is net of unearned add-on interest.
(3) The period of delinquency is based on the number of days payments are
contractually past due.
CONTRACT LOSS EXPERIENCE(1)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------- -------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Portfolio
At end of period (net of unearned add-on interest)........................ $3,215,105 $3,046,585 $2,209,594
=========== =========== ===========
Average during period (net of unearned add-on interest)................... $3,111,682 $2,627,622 $1,886,359
=========== =========== ===========
Gross chargeoffs of contracts during period............................... $ 31,422 $ 86,464 $ 48,999
Recoveries during period of contracts charged off......................... $ 7,798 25,946 18,715
Net chargeoffs............................................................ $ 23,624 $ 60,518 $ 30,284
=========== =========== ===========
Net chargeoffs as a percentage of contracts outstanding during period..... 3.04%(2) 2.30%(2) 1.61%(2)
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Portfolio
At end of period (net of unearned add-on interest)........................ $1,633,177 $1,233,732 $1,058,267
=========== =========== ===========
Average during period (net of unearned add-on interest)................... $1,438,582 $1,132,538 $1,025,682
=========== =========== ===========
Gross chargeoffs of contracts during period............................... $ 27,620 $ 24,612 $ 20,950
Recoveries during period of contracts charged off......................... 11,927 7,308 3,226
Net chargeoffs............................................................ $ 15,693 $ 17,304 $ 17,724
=========== =========== ===========
Net chargeoffs as a percentage of contracts outstanding during period..... 1.09% 1.53% 1.73%
</TABLE>
- ---------------
(1) Includes loss information for contracts that are owned by WFS and contracts
that were sold to grantor trusts beginning in 1990, but which are serviced
by WFS.
(2) The loss experience in the first quarter of 1997, 1996 and 1995 was impacted
by a variety of factors, including, in particular, an increase in the
percentage of the outstanding contracts which were originated by the Branch
Division of WFS and by general economic conditions.
15
<PAGE> 17
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each Class of Notes will be a six-digit decimal
which the Master Servicer will compute prior to each Distribution Date with
respect to the Notes indicating the unpaid principal amount of such Class of
Notes, after giving effect to payments to be made on such Distribution Date, as
a fraction of the initial outstanding principal amount of such Class of Notes.
The "Certificate Pool Factor" for the Certificates will be a six-digit decimal
which the Master Servicer will compute prior to each Distribution Date
indicating the remaining Certificate Balance after giving effect to
distributions to be made on such Distribution Date, as a fraction of the
Original Certificate Balance. Each Note Pool Factor and the Certificate Pool
Factor will be 1.000000 as of the Closing Date, and thereafter will decline to
reflect reductions in the outstanding principal amount of the applicable Class
of Notes, or the reduction of the Certificate Balance, as the case may be. A
Noteholder's portion of the aggregate outstanding principal amount of the
related Class of Notes will be the product of (i) the original denomination of
such Noteholder's Note and (ii) the applicable Note Pool Factor at the time of
determination. A Certificateholder's portion of the aggregate outstanding
Certificate Balance will be the product of (i) the original denomination of such
Certificateholder's Certificate and (ii) the Certificate Pool Factor at the time
of determination.
The Noteholders will receive reports on or about each Distribution Date
concerning payments received on the Contracts, the Pool Balance, each Note Pool
Factor and various other items of information, and the Certificateholders will
receive reports on or about each Distribution Date concerning payments received
on the Contracts, the Pool Balance, the Certificate Pool Factor and various
other items of information. In addition, Securityholders of record during any
calendar year will be furnished information for tax reporting purposes not later
than the latest date permitted by law. See "Certain Information Regarding the
Securities -- Statements to Securityholders."
USE OF PROCEEDS
The net proceeds from the sale of the Securities (i.e., the proceeds of the
public offering of the Securities minus expenses relating thereto) will be
applied by the Seller to the purchase of the Contracts from WFS.
THE NOTES
GENERAL
The Notes will be issued pursuant to the Indenture, a form of which has
been filed as an exhibit to the Registration Statement. Copies of the Indenture
(without exhibits) may be obtained by Noteholders upon request in writing to the
Indenture Trustee at its Corporate Trust Office. Citations to the relevant
Sections of the Indenture appear below and under "Certain Information Regarding
the Securities" in parentheses. The following summary does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Notes and the Indenture. Where particular provisions
or terms used in the Notes or the Indenture are referred to, the actual
provisions of such documents (including definitions of terms and Section
references) are incorporated by reference as part of such summaries.
PAYMENTS OF INTEREST
Interest on the outstanding principal amount of each Class of Notes will
accrue at the applicable Interest Rate and will be payable to the Noteholders of
such Class on each Distribution Date. Interest on the Class A-1 Notes will be
calculated on the basis of the actual days elapsed in an Interest Period and a
360-day year. Interest on the Class A-2, Class A-3 and Class A-4 Notes will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Interest accrued but not paid on any Distribution Date will be due on the
immediately succeeding Distribution Date, together with, to the extent permitted
by applicable law, interest on such shortfall at the related Interest Rate.
Interest payments on the Notes will be made from Net Collections after all
accrued and unpaid Trustees' fees and other administrative fees of the Trust and
payment of all applicable servicing compensation to the Master Servicer
(collectively, "Trust Fees and Expenses") have been paid. See "Certain
Information Regarding the Securities -- Distributions on the Securities --
Deposits to the Distribution Accounts; Priority of Payments."
16
<PAGE> 18
PAYMENTS OF PRINCIPAL
Principal payments will be made to the Noteholders, to the extent described
below, on each Distribution Date in an amount equal to the Note Percentage of
the related Principal Distributable Amount, in each case calculated as described
under "Certain Information Regarding the Securities -- Distributions on the
Securities -- Deposits to the Distribution Accounts; Priority of Payments."
Principal payments on the Notes will be made from Net Collections after all
Trust Fees and Expenses have been paid, and after the Note Interest
Distributable Amount has been distributed. See "Certain Information Regarding
the Securities -- Distributions on the Securities -- Deposits to the
Distribution Accounts; Priority of Payments."
Principal payments on the Notes will be applied on each Distribution Date
from the Note Distribution Account as follows: first to the holders of the Class
A-1 Notes until the principal amount of the Class A-1 Notes has been reduced to
zero and in no event later than the Class A-1 Final Distribution Date, second to
the holders of the Class A-2 Notes until the principal amount of the Class A-2
Notes has been reduced to zero, third to the holders of the Class A-3 Notes
until the principal amount of the Class A-3 Notes has been reduced to zero, and
fourth to the holders of the Class A-4 Notes until the principal amount of the
Class A-4 Notes has been reduced to zero. No amount of principal will be paid on
the Certificates until the principal amount of each Class of Notes has been
reduced to zero. The Note Principal Distributable Amount for each Distribution
Date will include an amount equal to the Accelerated Principal Distributable
Amount for such Distribution Date, if any. See "Certain Information Regarding
the Securities -- Deposits to the Distribution Accounts; Priority of Payments."
The principal amount of each Class of Notes, to the extent not previously
paid, will be due on the related Note Final Distribution Date for that Class of
Notes.
The actual date on which the outstanding principal amount of any Class of
Notes is paid may be earlier than its Note Final Distribution Date based on a
variety of factors, including the factors described under "Certain Information
Regarding the Securities -- Prepayment Considerations."
OPTIONAL REDEMPTION
Each Class of outstanding Notes will be subject to redemption in whole, but
not in part, on any Distribution Date relating to an Optional Purchase. The
redemption price will equal the unpaid principal amount of such Class of Notes
plus accrued interest thereon at the applicable Interest Rate.
THE INDENTURE TRUSTEE
Bankers Trust Company will be the Indenture Trustee. The Indenture Trustee
is a New York corporation and its Corporate Trust Office is located at Four
Albany Street, New York, New York 10006.
The Indenture Trustee will have the rights and duties set forth under
"Certain Information Regarding the Securities -- The Trustees" and "-- Duties of
the Trustees."
EVENTS OF DEFAULT
"Events of Default" under the Indenture will consist of: (i) a default by
the Trust for five days or more in the payment of any interest on the Notes of
any Class when the same becomes due and payable; (ii) a default by the Trust in
the payment of the principal of or any installment of the principal of the Notes
of any Class when the same becomes due and payable; (iii) a default in the
observance or performance of any covenant or agreement of the Trust made in the
Indenture or any representation or warranty made by the Trust in the Indenture
or in any certificate delivered pursuant thereto or in connection therewith
having been incorrect in a material respect as of the time made, and the
continuation of any such default for a period of 30 days after notice thereof is
given to the Issuer by the Indenture Trustee or to the Issuer and the Indenture
Trustee by the
17
<PAGE> 19
holders of Notes evidencing at least 25% of the voting interest thereof, voting
together as a single class; and (iv) certain events of bankruptcy, insolvency,
receivership or liquidation relating to the Trust (each, a "Trust Insolvency").
(Indenture, Section 5.01)
Upon the occurrence of an Event of Default, so long as an Insurer Default
(as defined below) shall not have occurred and be continuing, Financial Security
will have the right (in addition to its obligation to make Scheduled Payments on
the Notes in accordance with the terms of the Note Policy) but not the
obligation, to elect (i) to accelerate the principal of the Notes and to cause
the Master Servicer or the Trustee to sell or otherwise liquidate the property
of the Trust, in whole or in part on any date or dates following such
acceleration as Financial Security, in its sole discretion, shall elect, and to
deliver the proceeds thereof to the Indenture Trustee for distribution in
accordance with the terms of the Indenture or (ii) to make Scheduled Payments on
the Notes in accordance with the terms of the Note Policy. If an Insurer Default
has occurred and is continuing, upon the occurrence of an Event of Default, the
Trustee may, or if so requested in writing by holders of Notes evidencing at
least 66 2/3% of the voting interests thereof, voting together as a single
class, shall, declare the Notes due and payable at par, together with accrued
interest thereon. Notwithstanding the foregoing, upon the occurrence of a Trust
Insolvency, if an Insurer Default shall have occurred and be continuing, the
Notes will become immediately due and payable at par, together with accrued
interest thereon. (Indenture, Section 5.02) An "Insurer Default" will consist of
(i) a default by Financial Security of its obligations under either Policy or
(ii) certain events of bankruptcy, insolvency, receivership or liquidation
relating to Financial Security.
No sale or liquidation of the property of the Trust described in the
immediately preceding paragraph may be made if the proceeds thereof are not
sufficient to pay all outstanding principal of and accrued interest on the
Notes, unless (i) no Insurer Default has occurred and is continuing and the
related Event of Default arose as described in clauses (i), (ii) or (iv) of the
second preceding paragraph or (ii) an Insurer Default shall have occurred and be
continuing and (a) holders of Notes evidencing 100% of the voting interests
thereof, voting together as a single class, consent to such sale or liquidation,
or (b) (1) the Trustee determines that the property of the Trust will not
continue to provide sufficient funds for the payment of principal of and
interest on the Notes, (2) the Trustee provides prior written notice of such
sale or liquidation to each Rating Agency, and (3) holders of Notes evidencing
66 2/3% of the voting interests thereof, voting together as a single class,
consent to such sale or liquidation. (Indenture, Section 5.04)
Further, in the event that no Insurer Default has occurred and is
continuing, following the occurrence of an Event of Default, if Financial
Security has not elected to accelerate the principal of the Notes and such Event
of Default is subsequently cured, Financial Security shall not thereafter have
the right to elect to accelerate the principal of the Notes or to cause the
property of the Trust to be sold or liquidated by reason of that Event of
Default and the rights of all parties shall thereupon be restored as though such
Event of Default had not occurred.
Following the occurrence of an Event of Default and provided that (i) no
Insurer Default has occurred and is continuing and (ii) Financial Security has
not elected to accelerate the principal of the Notes, the Indenture Trustee and
the Owner Trustee will continue to submit claims under the Policies for any
shortfalls in Scheduled Payments on the Notes and Guaranteed Distributions on
the Certificates, respectively. (Indenture, Section 5.02 and 5.04) See "The
Policies."
THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Trust Agreement, a form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Copies of the Trust Agreement (without exhibits) may be
obtained by holders of Certificates upon request in writing to the Owner Trustee
at its Corporate Trust Office. Citations to the relevant Sections of the Trust
Agreement appear below and under "Certain Information Regarding the Securities"
in parentheses. The following summary describes certain terms of the
Certificates and the Trust Agreement and does not purport to be complete and is
subject to, and
18
<PAGE> 20
qualified in its entirety by, reference to all of the provisions of the
Certificates and the Trust Agreement. Where particular provisions or terms used
in the Trust Agreement are referred to, the actual provisions (including
definitions of terms and Section references) are incorporated by reference as
part of such summaries.
DISTRIBUTIONS OF INTEREST
Interest on the Certificate Balance will accrue at the Pass-Through Rate
and will be payable to Certificateholders on each Distribution Date. Interest
accrued but not paid on any Distribution Date will be due on the immediately
succeeding Distribution Date, together with, to the extent permitted by
applicable law, interest on such amount at the Pass-Through Rate. Interest
distributions with respect to the Certificates will be made from Net Collections
after all Trust Fees and Expenses have been paid and after the Note
Distributable Amount has been distributed. See "Certain Information Regarding
the Securities -- Distributions on the Securities -- Deposits to the
Distribution Accounts; Priority of Payments."
DISTRIBUTIONS OF PRINCIPAL
No principal will be paid on the Certificates until the Distribution Date
on which the principal amount of the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes has been reduced to zero. On such Distribution Date and each
Distribution Date thereafter, the Certificateholders will be entitled to
distributions in an amount equal to the Certificate Percentage of the Principal
Distributable Amount, in each case calculated as described under "Certain
Information Regarding the Securities -- Distributions on the
Securities -- Deposits to the Distribution Accounts; Priority of Payments."
Distributions with respect to principal payments will be made from Net
Collections after all Trust Fees and Expenses have been paid and after the Note
Distributable Amount and the Certificate Interest Distributable Amount have been
distributed. On each Distribution Date on or after the Distribution Date on
which the principal amount of the Class A-4 Notes is reduced to zero, the
Accelerated Principal Distributable Amount will be included in the Certificate
Principal Distributable Amount. See "Certain Information Regarding the
Securities -- Distributions on the Securities -- Deposits to the Distribution
Accounts; Priority of Payments."
If not paid in full prior to the Certificate Final Distribution Date, the
remaining Certificate Balance, if any, will be payable on such Distribution
Date.
The actual date on which the Certificate Balance is reduced to zero may be
earlier than the Certificate Final Distribution Date based on a variety of
factors, including the factors described under "Certain Information Regarding
the Securities -- Prepayment Considerations."
OPTIONAL PREPAYMENT
The Certificates will be subject to prepayment in whole, but not in part,
on any Distribution Date relating to an Optional Purchase. Certificateholders
will receive an amount in respect of the Certificates equal to the Certificate
Balance, together with accrued interest at the Pass-Through Rate. Any such
distribution will effect early retirement of the Certificates. See "Certain
Information Regarding the Securities -- Termination."
MANDATORY PREPAYMENT
As more fully described under "The Notes -- Events of Default," upon the
occurrence of an Event of Default (so long as an Insurer Default shall not have
occurred and be continuing), under certain circumstances Financial Security will
have the right, but not the obligation, to cause the property of the Trust to be
sold or liquidated in whole or in part, on any date or dates as Financial
Security, in its sole discretion, shall elect prior to the date on which such
Event of Default is cured. Any such sale or liquidation may cause a full or
partial prepayment of the Certificates.
19
<PAGE> 21
PAYING AGENTS
Distributions of principal of and interest on the Certificates will be made
by the Owner Trustee or any Paying Agent or Paying Agents as the Owner Trustee
may designate from time to time. The Chase Manhattan Bank, N.A. will be
designated as the initial Paying Agent with respect to the Certificates. (Trust
Agreement, Section 3.10)
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
DTC, New York, New York, will act as securities depository for the
Securities. Each Class of Notes and the Certificates will be issued as fully
registered securities registered in the name of Cede & Co. ("Cede"), the nominee
of DTC. As such, it is anticipated that the only Noteholders or
Certificateholders, as the case may be, will be Cede, as nominee of DTC. Note
Owners will not be recognized by the Indenture Trustee as "Noteholders," as such
term will be used in the Indenture. Certificate Owners will not be recognized by
the Owner Trustee as "Certificateholders," as such term will be used in the
Trust Agreement. Security Owners will only be permitted to exercise the rights
of Securityholders indirectly through DTC and its Participants, as further
described below.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code (the "UCC") in effect in the
State of New York and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). DTC was created to hold securities for its participating members
("Participants") and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers (including
the Underwriters), banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (the "Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Commission.
Security Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or an interest in,
Securities may do so only through Participants and Indirect Participants.
Participants will receive a credit for the related Securities on DTC's records.
The ownership interest of each Security Owner will in turn be recorded on the
respective records of Participants and Indirect Participants. Security Owners
will not receive written confirmation from DTC of their purchase, but Security
Owners are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Participant or Indirect Participant through which the Security Owner entered
into the transaction. Transfers of ownership interests in the Securities will be
accomplished by entries made on the books of Participants acting on behalf of
Security Owners.
To facilitate subsequent transfers, all Securities deposited by
Participants with DTC will be registered in the name of Cede, as nominee of DTC.
The deposit of Securities with DTC and their registration in the name of Cede
will effect no change in beneficial ownership. DTC will have no knowledge of the
actual Security Owners and its records will reflect only the identity of the
Participants to whose accounts such Securities are credited, which may or may
not be the Security Owners. Participants and Indirect Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants and by Participants and Indirect
Participants to Security Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
20
<PAGE> 22
DTC's practice is to credit Participants' accounts on each Distribution
Date in accordance with their respective holdings of Securities shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such Distribution Date. Payments by Participants and Indirect Participants to
Security Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
such Participant or Indirect Participant and not of DTC, the Indenture Trustee,
the Owner Trustee, Financial Security or the Seller, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
principal of and interest on the Securities to DTC will be the responsibility of
the related Trustee, disbursement of such payments to Participants will be the
responsibility of DTC and disbursement of such payments to Security Owners will
be the responsibility of Participants and Indirect Participants. As a result,
under the book-entry format, Security Owners may experience some delay in their
receipt of payments. DTC will forward such payments to its Participants which
thereafter will forward them to Indirect Participants or Security Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge Securities to persons or entities that do not participate in the
DTC system, or otherwise take actions with respect to such Securities, may be
limited due to the lack of a physical certificate for such Securities.
Neither DTC nor Cede will consent or vote with respect to the Securities.
Under its usual procedures, DTC will mail an "Omnibus Proxy" to the Indenture
Trustee or the Owner Trustee, as the case may be, as soon as possible after each
applicable record date for such a consent or vote. The Omnibus Proxy will assign
Cede's consenting or voting rights to those Participants to whose accounts the
related Securities will be credited on that record date (identified in a listing
attached to the Omnibus Proxy).
None of the Master Servicer, the Seller, Financial Security, the Indenture
Trustee or the Owner Trustee will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Securities held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
DEFINITIVE SECURITIES
Definitive Securities representing any Class of Notes or the Certificates
will be issued to the related Security Owners rather than to DTC, only if (i)
DTC is no longer willing or able to discharge its responsibilities as depository
with respect to the Securities, and neither the Indenture Trustee nor the Owner
Trustee, as the case may be, nor the Administrator is able to locate a qualified
successor, (ii) the Administrator, at its option, elects to terminate the
book-entry system with respect to the related Securities through DTC or (iii)
after an Event of Default or Servicer Default, Security Owners evidencing not
less than 51% of the voting interests of the related Securities advise the
related Trustee through DTC and its Participants in writing that the
continuation of a book-entry system through DTC or its successor is no longer in
the best interests of the related Security Owners. (Indenture, Section 2.11;
Trust Agreement, Section 3.14)
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Owner Trustee or Indenture Trustee, as the case may be,
will be required to notify the related Security Owners, through Participants, of
the availability through DTC of Definitive Securities. Upon surrender by DTC of
the certificates representing all Securities of any affected Class and the
receipt of instructions for re-registration, such Trustee will issue Definitive
Securities to the related Security Owners, who thereupon will become Noteholders
or Certificateholders, as the case may be, for all purposes of the Indenture or
the Trust Agreement, respectively. (Indenture, Section 2.11; Trust Agreement,
Section 3.14)
Distributions on the Definitive Securities will thereafter be made by the
related Trustee directly to holders of such Definitive Securities in accordance
with the procedures described herein and to be set forth in the Indenture and
the Trust Agreement. Interest payments and any principal payments on the
Securities on each Distribution Date will be made to holders in whose names the
Definitive Securities were registered at the close of business on the Record
Date with respect to such Distribution Date. Distributions will be made by check
mailed to the address of such holders as they appear on the register specified
in the Trust Agreement or
21
<PAGE> 23
the Indenture, as the case may be. The final payment on any Securities (whether
Definitive Securities or Securities registered in the name of Cede), however,
will be made only upon presentation and surrender of such Securities at the
office or agency specified in the notice of final distribution to
Securityholders. The Owner Trustee or the Indenture Trustee will mail such
notice to registered Securityholders within five Business Days of receipt from
the Master Servicer of notice of termination of the Trust. (Indenture, Section
2.07; Trust Agreement, Section 9.01)
Definitive Securities will be transferable and exchangeable at the offices
of the Owner Trustee or the Indenture Trustee (or any security registrar
appointed thereby), as will be set forth in the Trust Agreement or the
Indenture, as the case may be. No service charge will be imposed for any
registration of transfer or exchange, but such Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith. (Indenture, Section 2.04; Trust Agreement, Section 3.04)
PAYMENTS ON THE CONTRACTS
All Net Collections on or in respect of the Contracts will be deposited in
or credited to the Collection Account or, in limited instances, the Holding
Account described under "The Accounts and Eligible Investments." Such "Net
Collections" will include all payments received by the Master Servicer on or in
respect of the Contracts due on or after the Cut-Off Date, net of late payments
in respect of which the Master Servicer has previously made an Advance or
reimbursement to the Master Servicer for Nonrecoverable Advances, and will
include (i) prepayments, Net Liquidation Proceeds and Net Insurance Proceeds;
(ii) any amounts deposited in the Collection Account (a) by the Seller to
purchase Contracts because of certain material defects in the related Contract
Documents or certain breaches in representations or warranties regarding the
Contracts to be made by the Seller in the Sale and Servicing Agreement, in
either case that materially and adversely affect the interests of the
Securityholders, the Indenture Trustee, the Owner Trustee or Financial Security,
or (b) by the Master Servicer to purchase Contracts because of certain breaches
in representations and warranties to be made by the Master Servicer in the Sale
and Servicing Agreement or certain breaches by the Master Servicer in servicing
procedures relating to the Contracts, in each case that materially and adversely
affect such Contracts; (iii) any amounts deposited by the Seller in the
Collection Account as a result of exercising its right under certain
circumstances to purchase all of the outstanding Contracts; and (iv) any
Advances that may be made by the Master Servicer in respect of delinquent
Contracts. "Net Liquidation Proceeds" will be proceeds received by the Master
Servicer (net of Liquidation Expenses) upon liquidation of any Defaulted
Contract. "Liquidation Expenses" will be the reasonable out-of-pocket expenses
(exclusive of overhead expenses) incurred by the Master Servicer in realizing
upon a defaulted Contract. "Net Insurance Proceeds" will be proceeds paid by any
insurer under a comprehensive and collision or limited dual interest insurance
related to a Contract (other than funds used for the repair of the related
Financed Vehicle or otherwise released to the related Obligor in accordance with
normal servicing procedures), after reimbursement to the Master Servicer of
expenses recoverable under such insurance policy. (Sale and Servicing Agreement,
Section 5.02)
Subject to the remainder of this paragraph, distributions on the Securities
will be made on each Distribution Date out of Net Collections (exclusive of
amounts representing payments due in the Due Period in which such Distribution
Date occurs and any future Due Periods) for the related Due Period plus certain
reinvestment earnings on Eligible Investments and any Advance made by the Master
Servicer as described under "The Master Servicer -- Advances." The amount of
such Net Collections, reinvestment earnings and Advances on each Distribution
Date will be applied as described under "Distributions on the Securities."
Amounts, to the extent available, will be withdrawn from the Spread Account to
cover any shortfalls in distributions to Securityholders. Under the Policies,
Financial Security will be obligated to provide for distribution on the
Securities on each Distribution Date the amount, if any, by which the amount of
such Net Collections and funds available in the Spread Account is less than the
sum of the interest and principal due on the Securities for such Distribution
Date and will be obligated to provide for the payment of Guaranteed
Distributions on the Certificates on the Certificate Final Distribution Date.
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<PAGE> 24
THE ACCOUNTS AND ELIGIBLE INVESTMENTS
The Collection Account. The Master Servicer will cause all collections made
on or in respect of the Contracts during a Due Period (other than amounts to be
deposited in the Holding Account as described below), net of late payments in
respect of which the Master Servicer has previously made an Advance and
reimbursements to it for Nonrecoverable Advances, to be deposited in or credited
to an account (the "Collection Account") to be established by the Master
Servicer under the Sale and Servicing Agreement. The Collection Account may,
upon prior written approval of Financial Security, be an uninsured general
ledger account or a deposit account at the Bank. Funds in the Collection Account
will be invested in a reinvestment contract (the "Reinvestment Contract") under
which the Bank will be the obligor, so long as the Reinvestment Contract is an
Eligible Investment as described below. The reinvestment earnings on the
Reinvestment Contract for each Distribution Date will be equal to the amount, if
any, by which the related payment of interest for such Distribution Date exceeds
the aggregate amount of interest (adjusted to the Pass-Through Rate) accrued on
the Contracts during the related Due Period. If the Reinvestment Contract does
not qualify as an Eligible Investment, the Indenture Trustee shall invest the
funds on deposit in the Collection Account in one or more other Eligible
Investment or Investments. Payments under the Reinvestment Contract will be
deposited in the Collection Account no later than the fifth Business Day
immediately preceding each Distribution Date. (Sale and Servicing Agreement,
Section 5.01)
If an Event of Default under the Sale and Servicing Agreement has occurred
and is continuing, funds in the Collection Account eligible to be invested in
Eligible Investments will be invested at the direction of the Indenture Trustee.
"Eligible Investments" will be specified in the Sale and Servicing Agreement and
will be limited to investments which meet the criteria of each Rating Agency as
being consistent with their then-current ratings of the Securities. All income
or other gain from such investments will be promptly deposited in, and any loss
resulting from such investments shall be charged to, the Collection Account.
(Sale and Servicing Agreement, Section 5.01)
The Distribution Accounts. The Master Servicer will establish and maintain
with the Indenture Trustee (i) an account, in the name of the Indenture Trustee
on behalf of the Noteholders, in which amounts released from the Collection
Account for distribution to Noteholders will be deposited and from which all
distributions to Noteholders will be made (the "Note Distribution Account") and
(ii) an account, in the name of the Owner Trustee on behalf of the
Certificateholders, in which amounts released from the Collection Account for
distribution to Certificateholders will be deposited and from which all
distributions to Certificateholders will be made (the "Certificate Distribution
Account" and, together with the Note Distribution Account, the "Distribution
Accounts"). (Sale and Servicing Agreement, Section 5.01; Trust Agreement,
Section 5.01)
The Holding Account. The Master Servicer will establish an account (the
"Holding Account") into which it will deposit during each Due Period payments on
Rule of 78's Contracts that are due in one or more Due Periods subsequent to
such Due Period. Funds in the Holding Account due in the next Due Period will be
transferred to the Collection Account immediately after the next succeeding
Distribution Date. (Sale and Servicing Agreement, Sections 5.01 and 5.02)
DISTRIBUTIONS ON THE SECURITIES
General. On or before the fifth Business Day prior to each Distribution
Date (each such date, a "Determination Date"), the Master Servicer will deliver
to the Indenture Trustee, the Owner Trustee, Financial Security and each Rating
Agency a statement (the "Distribution Date Statement") setting forth, among
other things, the following amounts with respect to the related Due Period and
such Distribution Date: (i) the amount of funds in the Collection Account
allocable to collections on the Contracts in the preceding Due Period (excluding
any Advances and Repurchase Amounts); (ii) the Repurchase Amount of all
Contracts repurchased by the Seller or the Master Servicer during the related
Due Period; (iii) the Advances made by the Master Servicer and the amounts for
which the Master Servicer is entitled to be reimbursed for unreimbursed
Advances; (iv) the amount of Net Collections; (v) the Note Interest
Distributable Amount; (vi) the Note Principal Distributable Amount; (vii) the
Certificate Interest Distributable Amount; (viii) the Certificate Principal
Distributable Amount; and (ix) the Servicing Fee.
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Deposits to the Distribution Accounts; Priority of Payments. On each
Distribution Date, the Master Servicer will allocate amounts on deposit in the
Collection Account with respect to the related Due Period and such Distribution
Date as described below and will instruct the Indenture Trustee to make the
following deposits and distributions in the following amounts and order of
priority:
(i) to the Master Servicer, the Servicing Fee, including any unpaid
Servicing Fees with respect to one or more prior Due Periods;
(ii) to the Indenture Trustee and the Owner Trustee, any accrued and
unpaid Trustees' fees, in each case to the extent such fees have not been
previously paid by the Master Servicer;
(iii) to the Note Distribution Account, from Net Collections (after
giving effect to the reduction in Net Collections described in clauses (i)
and (ii) above), the Note Interest Distributable Amount to be distributed
to the holders of the Notes at their respective Interest Rates;
(iv) to the Note Distribution Account, from Net Collections (after
giving effect to the reduction in Net Collections described in clauses (i)
through (iii) above), the Note Principal Distributable Amount to the
holders of the Class A-1 Notes until the principal amount of the Class A-1
Notes has been reduced to zero, second to the holders of the Class A-2
Notes until the principal amount of the Class A-2 Notes has been reduced to
zero, third to the holders of the Class A-3 Notes until the principal
amount of the Class A-3 Notes has been reduced to zero, and fourth to the
holders of the Class A-4 Notes until the principal amount of the Class A-4
Notes has been reduced to zero;
(v) to the Note Distribution Account, if such Distribution Date is a
Note Final Distribution Date, the remaining principal amount of the related
Class of Notes (after giving effect to the reduction in Net Collections
described in clauses (i) through (iv) above) to be distributed to the
holders of such Class of Notes;
(vi) to the Certificate Distribution Account, from Net Collections
(after giving effect to the reduction in Net Collections described in
clauses (i) through (v) above), the Certificate Interest Distributable
Amount to be distributed to the holders of the Certificates;
(vii) to the Certificate Distribution Account, from Net Collections
(after giving effect to the reduction in Net Collections described in
clauses (i) through (vi) above), the Certificate Principal Distributable
Amount to be distributed to the holders of the Certificates;
(viii) to the Certificate Distribution Account, if such Distribution
Date is the Certificate Final Distribution Date, from Net Collections
(after giving effect to the reduction in Net Collections described in
clauses (i) through (vii) above), the Certificate Balance, as such balance
has been reduced by payments thereon in respect of such Distribution Date
to be distributed to the holders of the Certificates;
(ix) to Financial Security, from Net Collections (after giving effect
to the reduction in Net Collections described in clauses (i) through (viii)
above), any amounts owing to Financial Security in respect of all payments,
if any, made under the Policies for which reimbursement has not yet been
made to Financial Security and any unreimbursed fees, expenses or other
amounts owing to Financial Security under the Insurance Agreement
(collectively, "Unreimbursed Insurer Amounts"); and
(x) in the event that the distributions described in clauses (i)
through (ix) above have been funded exclusively from Net Collections, any
Net Collections remaining after distribution of the Accelerated Principal
Distributable Amount as part of the Note Principal Distributable Amount or
the Certificate Principal Distributable Amount, as the case may be ("Excess
Amounts"), will be deposited into the Spread Account, until the amount on
deposit therein equals the Minimum Funded Amount and the sum of the Funded
Amount and the Overcollateralization Amount equals the Specified Spread
Account Balance, with any remaining Excess Amounts being distributed as
described under "-- Withdrawals from the Spread Account."
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If the Notes are accelerated following an Event of Default, amounts
collected following the sale or liquidation of the property of the Trust will be
distributed in the priority described above. See "The Notes -- Events of
Default."
For the purposes hereof, the following terms will have the following
meanings:
The "Accelerated Principal Distributable Amount" will mean, with respect to
any Distribution Date, an amount equal to the lesser of (i) the sum of
one-twelfth of 2.00% of the Aggregate Scheduled Balance as of the opening of
business on the first day of each month of the Due Period relating to a
Distribution Date, and (ii) amounts remaining on deposit in the Collection
Account for such Distribution Date after giving effect to distributions pursuant
to clauses (i) through (ix) above without regard to the inclusion of such amount
as part of the Note Principal Distributable Amount or the Certificate Principal
Distributable Amount, as the case may be. The Accelerated Principal
Distributable Amount shall be included in the Note Principal Distributable
Amount until the Class A-4 Notes have been paid in full, and thereafter shall be
included in the Certificate Principal Distributable Amount.
The "Aggregate Scheduled Balance" will equal the sum of the Scheduled
Balances of each outstanding Contract. At the time of initial issuance of the
Securities, the initial aggregate principal amount of the Securities will equal
the Aggregate Scheduled Balance.
The "Aggregate Scheduled Balance Decline" will mean, with respect to any
Distribution Date, the amount by which the Aggregate Scheduled Balance as of the
Distribution Date immediately preceding such Distribution Date (or as of the
Cut-Off Date in the case of the first Distribution Date) exceeds the Aggregate
Scheduled Balance as of such Distribution Date.
The "Certificate Distributable Amount" will mean, with respect to any
Distribution Date, the sum of the Certificate Principal Distributable Amount and
the Certificate Interest Distributable Amount for such Distribution Date.
The "Certificate Interest Carryover Shortfall" will mean, with respect to
any Distribution Date, the excess of the sum of the Certificate Quarterly
Interest Distributable Amount for the immediately preceding Distribution Date
and any outstanding Certificate Interest Carryover Shortfall on such preceding
Distribution Date, over the amount in respect of interest on the Certificates
that is actually deposited in the Certificate Distribution Account on such
preceding Distribution Date, plus interest on such excess, to the extent
permitted by law, at the Pass-Through Rate for the related Interest Period.
The "Certificate Interest Distributable Amount" will mean, with respect to
any Distribution Date, the sum of the Certificate Quarterly Interest
Distributable Amount for such Distribution Date and the Certificate Interest
Carryover Shortfall for such Distribution Date.
The "Certificate Percentage" will mean (i) for each Distribution Date to
and including the Distribution Date on which the principal amount of the Class
A-4 Notes is reduced to zero, 0% and (ii) for each Distribution Date on and
after the Distribution Date on which the principal amount of the Class A-4 Notes
is reduced to zero, a percentage equal to 100% minus the Note Percentage for
such Distribution Date.
The "Certificate Principal Carryover Shortfall" will mean, as of the close
of any Distribution Date, the excess of the sum of the Certificate Quarterly
Principal Distributable Amount and any outstanding Certificate Principal
Carryover Shortfall for the immediately preceding Distribution Date, over the
amount in respect of principal that is actually deposited in the Certificate
Distribution Account on such Distribution Date.
The "Certificate Principal Distributable Amount" will mean, with respect to
any Distribution Date, the sum of the Certificate Quarterly Principal
Distributable Amount for such Distribution Date and any outstanding Certificate
Principal Carryover Shortfall for the immediately preceding Distribution Date
and, on and after the Distribution Date on which the Class A-4 Notes are paid in
full, the Accelerated Principal Distributable Amount, if any, for such
Distribution Date; provided, however, that the Certificate Principal
Distributable Amount shall not exceed the Certificate Balance. In addition, on
the Certificate Final Distribution Date, the principal required to be deposited
into the Certificate Distribution Account will include the amount necessary to
reduce the Certificate Balance to zero.
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The "Certificate Quarterly Interest Distributable Amount" will mean, with
respect to any Distribution Date, 90 days of interest (or, in the case of the
first Distribution Date, interest accrued from and including the Cut-Off Date to
but excluding such Distribution Date) at the Pass-Through Rate on the
Certificate Balance on the immediately preceding Distribution Date, after giving
effect to all payments of principal on such preceding Distribution Date (or, in
the case of the first Distribution Date, the Original Certificate Balance).
The "Certificate Quarterly Principal Distributable Amount" will mean, with
respect to any Distribution Date, the Certificate Percentage of the Principal
Distributable Amount for such Distribution Date.
A "Defaulted Contract" will mean, with respect to any Due Period, a
Contract (i) which is, at the end of such Due Period, delinquent in the amount
of at least two monthly payments or (ii) with respect to which the related
Financed Vehicle has been repossessed or repossession efforts have been
commenced.
A "Due Period" will mean, with respect to any Distribution Date, the
three-month period commencing on the first day of the third month preceding the
month in which such Distribution Date occurs (or commencing on the Cut-Off Date
in the case of the first Distribution Date) to the last day of the month
immediately preceding the month in which such Distribution Date occurs.
A "Liquidated Contract" will be a Contract that (i) is the subject of a
Full Prepayment; (ii) is a Defaulted Contract with respect to which the related
Financed Vehicle was repossessed and, after any cure period required by law has
expired, the Master Servicer has charged-off any losses prior to the four-month
period referenced in clause (iv) below; (iii) has been paid in full on or after
its Maturity Date; or (iv) is delinquent as to all or part of four or more
payments of Monthly P&I. Contracts that become Liquidated Contracts pursuant to
clause (ii) or (iv) above and any collections thereon will thereupon no longer
be part of the Trust, although collections thereon will be deposited in the
Collection Account.
The "Note Distributable Amount" will mean, with respect to any Distribution
Date, the sum of the Note Principal Distributable Amount and the Note Interest
Distributable Amount for such Distribution Date.
The "Note Interest Carryover Shortfall" will mean, with respect to any
Distribution Date and a Class of Notes, the excess, if any, of the sum of the
Note Interest Distributable Amount for such Class for the immediately preceding
Distribution Date plus any outstanding Note Interest Carryover Shortfall for
such Class on such preceding Distribution Date, over the amount in respect of
interest that is actually deposited in the Note Distribution Account with
respect to such Class on such preceding Distribution Date, plus, to the extent
permitted by applicable law, interest on the amount of interest due but not paid
to Noteholders of such Class on such preceding Distribution Date at the related
Interest Rate for the related Interest Period.
The "Note Interest Distributable Amount" will mean, with respect to any
Distribution Date and a Class of Notes, the sum of the Note Quarterly Interest
Distributable Amount and the Note Interest Carryover Shortfall for such Class of
Notes for such Distribution Date.
The "Note Percentage" will mean (i) for each Distribution Date to and
including the Distribution Date on which the principal amount of the Class A-4
Notes is reduced to zero, 100% (ii) on the Distribution Date on which the
principal amount of the Class A-4 Notes is reduced to zero, (a) 100% until the
principal amount of the Class A-4 Notes has been reduced to zero and (b) with
respect to any remaining portion of the Principal Distributable Amount, 0%;
(iii) for each Distribution Date after the principal amount of the Class A-4
Notes is reduced to zero, 0%.
The "Note Principal Carryover Shortfall" will mean, as of the close of any
Distribution Date, the excess of the sum of the Note Quarterly Principal
Distributable Amount and any outstanding Note Principal
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Carryover Shortfall for the immediately preceding Distribution Date over the
amount in respect of principal that is actually deposited in the Note
Distribution Account on such Distribution Date.
The "Note Principal Distributable Amount" will mean, with respect to any
Distribution Date, the sum of the Note Quarterly Principal Distributable Amount
and the Accelerated Principal Distributable Amount, if any, for such
Distribution Date and any outstanding Note Principal Carryover Shortfall for the
immediately preceding Distribution Date; provided, however, that the Note
Principal Distributable Amount with respect to a Class of Notes shall not exceed
the outstanding principal amount of such Class of Notes. Notwithstanding the
foregoing, the Note Principal Distributable Amount on each Note Final
Distribution Date shall not be less than the amount that is necessary (after
giving effect to other amounts to be deposited in the Note Distribution Account
on such Distribution Date and allocable to principal) to reduce the outstanding
principal amount of the related Class of Notes to zero.
The "Note Quarterly Interest Distributable Amount" will mean, with respect
to any Distribution Date, 90 days of interest (or in the case of the first
Distribution Date, interest accrued from and including the Cut-Off Date to but
excluding such Distribution Date, or in the case of the Class A-1 Notes,
interest for the actual number of days in the applicable Interest Period) at the
related Interest Rate for each Class of Notes on the outstanding principal
amount of the Notes of such Class on the immediately preceding Distribution
Date, after giving effect to all payments of principal to Noteholders of such
Class on or prior to such Distribution Date (or, in the case of the first
Distribution Date, on the original principal amount of such Class of Notes).
The "Note Quarterly Principal Distributable Amount" will mean, with respect
to any Distribution Date, the Note Percentage of the Principal Distributable
Amount for such Distribution Date.
The "Principal Distributable Amount" will mean, with respect to any
Distribution Date, the sum of (i) the Aggregate Scheduled Balance Decline for
such Distribution Date, plus (ii) the aggregate Scheduled Balances as of such
Distribution Date of all Rule of 78's Contracts that became Liquidated Contracts
pursuant to clause (i), (ii) or (iv) of the definition of the term "Liquidated
Contract" during the related Due Period.
The "Scheduled Balance" of a Rule of 78's Contract will represent the
present value of the remaining scheduled payments of Monthly P&I due on such
Contract discounted on a monthly basis as described below, while the Scheduled
Balance of a Simple Interest Contract will be its actual principal balance. The
"Monthly P&I" for a Contract will be the installment of principal and interest
due thereunder each month (each such date, a "Due Date") and will be
substantially equal for the term of the Contract. The Scheduled Balance of a
Rule of 78's Contract for the Cut-Off Date and each Due Date will be set forth
in a schedule to the Sale and Servicing Agreement and will be equal to the
present value (determined as discussed below) at each such date of all payments
of Monthly P&I on the Contract that are due after such Due Date. Such present
value will be determined by discounting (on a monthly basis) each payment of
Monthly P&I from the last day of the month in which such payment of Monthly P&I
is due to the first day of the month in which such Due Date occurs using a
discount rate that will produce a present value at the Cut-Off Date equal to
the outstanding principal balance of the Contract as of the Cut-Off Date. The
interest rate borne by each Contract will at least equal the sum of the
weighted average of the Interest Rates and the Pass-Through Rate on the Closing
Date plus the Servicing Fee Percent.
PAYMENT PRIORITIES OF THE NOTES AND THE CERTIFICATES; THE SPREAD ACCOUNT
General. The rights of the Securityholders to receive distributions with
respect to the Contracts will be subordinated to the rights of the Master
Servicer (to the extent that the Master Servicer has not been reimbursed for any
outstanding Advances and has not been paid all Servicing Fees), the Trustees and
certain other entities (to the extent the Trustees and such other entities have
not received all Trust Fees and Expenses payable to them). In addition, the
rights of the Noteholders to receive distributions with respect to the Contracts
will be subject to the priorities set forth under "-- Distributions on the
Securities -- Deposits to the Distribution Accounts; Priority of Payments," and
the rights of the Certificateholders to receive distributions with respect to
the Contracts will be subordinated to the rights of the Noteholders, in each
case to the extent
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described above. Such priorities and subordination are intended to enhance the
likelihood of timely receipt by senior Securityholders of the full amount of
interest and principal required to be paid to them, and to afford such senior
Securityholders limited protection against losses in respect of the Contracts.
In the event of delinquencies or losses on the Contracts, the foregoing
protection will be effected both by the preferential right of the Noteholders to
receive, to the extent described herein, current distributions with respect to
the Contracts and by the establishment of the Spread Account. The Spread Account
will be a part of the Trust and will be a segregated trust account in the name
of the Indenture Trustee and the Indenture Trustee will have a perfected
security interest therein and in all amounts deposited in or credited to the
Spread Account as well as all Eligible Investments made with such deposits and
earnings. The Spread Account will be created with an initial deposit by the
Seller on the Closing Date of an amount equal to the Spread Account Initial
Deposit. The Spread Account will thereafter be funded by the deposit therein of
all Excess Amounts, if any, in respect of each Distribution Date.
Amounts held from time to time in the Spread Account will continue to be
held for the benefit of holders of the Securities and Financial Security and may
be invested in Eligible Investments. Investment income on monies on deposit in
the Spread Account will be credited to the Spread Account. Any loss on such
investment will be charged to the Spread Account. (Sale and Servicing Agreement,
Section 5.03)
Calculation of Specified Spread Account Balance. The "Specified Spread
Account Balance" will be calculated as of each Calculation Day and will equal
% of the Aggregate Scheduled Balance on such Calculation Day, except that
if on any Calculation Day (i) the Charge-Off Percentage for the three calendar
month period ending on such Calculation Day exceeds % or (ii) the
Delinquency Percentage for the three calendar month period ending on such
Calculation Day exceeds %, then the Specified Spread Account Balance shall
equal % of the Aggregate Scheduled Balance on such Calculation Day (but
only for so long as such Charge-Off Percentage or Delinquency Percentage
thresholds continue to be exceeded on any subsequent Calculation Day).
Notwithstanding the foregoing, in no event can the Specified Spread Account
Balance be greater than $ or less than $ ; provided, however,
it shall not be greater than the outstanding aggregate principal amount of the
Securities if such amount is less than $ .
The "Charge-Off Percentage" will mean, with respect to any three calendar
month period, the annualized percentage equivalent of the average of the
percentages of charged-off Contracts for each month in such period. For each
month, the percentage of charged-off Contracts shall be the percentage
equivalent of a fraction, the numerator of which is the aggregate Scheduled
Balance for such month of all Contracts that have become Liquidated Contracts
(as specified in clause (ii) or (iv) of the definition of Liquidated Contracts)
during such month, less any Net Liquidation Proceeds received during such month
(and not reflected in prior periods) with respect to such Contracts or from any
Contracts charged-off in prior periods, and the denominator of which is the
aggregate Scheduled Balances of all outstanding Contracts as of the end of the
immediately preceding month. The "Delinquency Percentage" will mean, with
respect to any three calendar month period, the average of the percentages of
delinquent Contracts for each month in such period. For each month the
percentage of delinquent Contracts shall be the percentage equivalent of a
fraction, the numerator of which is the sum of (i) the aggregate Scheduled
Balance of all outstanding Contracts 61 days or more delinquent (after taking
into account permitted extensions), plus (ii) the aggregate Scheduled Balance of
all Contracts in respect of which the related Financed Vehicles have been
repossessed but have not been liquidated (to the extent the related Contract is
not otherwise reflected in clause (i) above), and the denominator of which is
the aggregate Scheduled Balance of all outstanding Contracts, in each case on
the last day of such calendar month.
The Spread Account will be considered fully funded on any Calculation Day
or Distribution Date if (i) the Funded Amount equals or exceeds the greater of
(A) % of the Aggregate Scheduled Balance on such date of calculation or (B) %
of the Cut-Off Date Aggregate Scheduled Balance (the "Minimum Funded Amount")
and (ii) the sum of the Funded Amount and the Overcollateralization Amount
equals or exceeds the Specified Spread Account Balance. The "Funded Amount" on
any Calculation Day or Distribution Date
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will be the amount of cash on deposit in the Spread Account. The
"Overcollateralization Amount" on any Calculation Day or Distribution Date will
equal the amount by which (i) the sum of (A) the Aggregate Scheduled Balance as
of such date of calculation plus (B) the portion of Net Collections constituting
principal payments on or in respect of the Contracts on deposit in the
Collection Account on such date of calculation plus (C) amounts on deposit in
the Holding Account constituting principal payments as of such date of
calculation exceeds (ii) the aggregate unpaid principal amount of the Securities
on such date of calculation. At no time after the Closing Date will the Seller,
WII, the Master Servicer, Financial Security or any other entity be required to
deposit funds into the Spread Account.
The Master Servicer may, from time to time after the date of this
Prospectus, and with the approval of Financial Security, request each Rating
Agency to approve a formula for determining the Specified Spread Account Balance
or for determining that the Spread Account is fully funded that is different
from that described above and would result in a decrease in the amount of the
Specified Spread Account Balance, the Minimum Funded Amount or the
Overcollateralization Amount or the manner by which the Spread Account is
funded. If each Rating Agency delivers a letter to the Indenture Trustee, the
Owner Trustee and Financial Security to the effect that the use of any such new
formulation will not in and of itself result in a qualification, reduction or
withdrawal of its then-current rating of any Class of Securities (without giving
effect to the guaranty under either Policy of payments owing to the
Securityholders), then the Specified Spread Account Balance, the Minimum Funded
Amount or the Overcollateralization Amount, as the case may be, will be
determined in accordance with such new formula. The Sale and Servicing Agreement
will accordingly be amended to reflect such new calculation without the consent
of any Securityholder.
WITHDRAWALS FROM THE SPREAD ACCOUNT
Amounts held from time to time in the Spread Account will continue to be
held for the benefit of the Noteholders, the Certificateholders and Financial
Security. On each Distribution Date funds will be withdrawn from the Spread
Account to the extent that the amount on deposit in the Note Distribution
Account with respect to any Distribution Date is less than the Note
Distributable Amount and will be deposited in the Note Distribution Account. In
addition, after giving effect to such withdrawal, funds will be withdrawn from
the Spread Account to the extent that the amount on deposit in the Certificate
Distribution Account is less than the Certificate Distributable Amount and will
be deposited in the Certificate Distribution Account. See "Payments from the
Spread Account and Under the Policies."
On any Calculation Day or Distribution Date on which the Spread Account is
fully funded, as more fully described under "Payment Priorities of the Notes and
the Certificates; The Spread Account -- Calculation of Specified Spread Account
Balance" (after giving effect to all deposits thereto or withdrawals therefrom
on such Distribution Date), the Indenture Trustee will distribute an amount of
cash equal to the lesser of (i) the amount by which the sum of the Funded Amount
and the Overcollateralization Amount exceeds the Specified Spread Account
Balance and (ii) the amount by which the Funded Amount exceeds the Minimum
Funded Amount, first to Financial Security, to the extent of any Unreimbursed
Insurer Amounts, then to the Seller until the Seller has received from the
Spread Account an aggregate amount equal to the Spread Account Initial Deposit
and then to the Seller and WII in the proportions of 99% and 1%, respectively.
Upon any such distributions to Financial Security, the Seller or WII, the
Securityholders will have no further rights in, or claims to, such amounts.
(Sale and Servicing Agreement, Section 5.06)
None of Securityholders, the Indenture Trustee, the Owner Trustee, the
Seller, WII or Financial Security will be required to refund any amounts
properly distributed or paid to them, whether or not there are sufficient funds
on any subsequent Distribution Date to make full distributions to the
Securityholders. The obligations of Financial Security under the Policies will
not be diminished or otherwise affected by any amounts distributed to Financial
Security.
PAYMENTS FROM THE SPREAD ACCOUNT AND UNDER THE POLICIES
On each Distribution Date on which the Note Distributable Amount exceeds
the amount then on deposit in the Note Distribution Account, the Noteholders
will be entitled to receive such deficiency (including
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amounts necessary to reduce the outstanding principal balance of a given Class
of Notes to zero on the related Note Final Distribution Date), first, from
amounts on deposit in the Spread Account, second, if such amounts are
insufficient, from amounts otherwise payable to Certificateholders in respect of
the Certificate Distributable Amount and third, if such amounts are still
insufficient, then from the payment of a claim under the Note Policy. (Sale and
Servicing Agreement, Section 5.05)
On each Distribution Date on which the Certificate Distributable Amount
exceeds the amount then on deposit in the Certificate Distribution Account, the
Certificateholders will be entitled to receive such deficiency (including
amounts necessary to reduce the Certificate Balance to zero on the Certificate
Final Distribution Date), first, from amounts on deposit in the Spread Account,
and second, if such amounts are insufficient, from the payment of a claim under
the Certificate Policy. (Sale and Servicing Agreement, Section 5.05)
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Master Servicer will prepare and
provide to the Indenture Trustee a statement to be delivered to each Noteholder
and to the Owner Trustee a statement to be delivered to each Certificateholder
on such Distribution Date (the "Statement to Securityholders"), setting forth
with respect to the related Distribution Date or Due Period, as applicable,
among other things, the following information:
(i) the amount of the Noteholder's or Certificateholder's distribution
allocable to principal (stated separately for each Class of Notes and the
Certificates);
(ii) the amount of the Noteholder's or Certificateholder's
distribution allocable to interest (stated separately for each Class of
Notes and the Certificates);
(iii) the Aggregate Scheduled Balance as of the close of business on
the last day of such Due Period;
(iv) the amount of the Servicing Fee paid to the Master Servicer with
respect to the related Due Period;
(v) the amount of any Note Interest Carryover Shortfall, Note
Principal Carryover Shortfall, Certificate Interest Carryover Shortfall and
Certificate Principal Carryover Shortfall on such Distribution Date and the
change in such amounts from those with respect to the immediately preceding
Distribution Date;
(vi) the Note Pool Factor for each Class of Notes and the Certificate
Pool Factor, in each case as of such Distribution Date; and
(vii) the balance on deposit in the Spread Account on such
Distribution Date, after giving effect to distributions made on such
Distribution Date, and the change in such balance from the immediately
preceding Distribution Date.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (v) above
will be expressed in the aggregate and as a dollar amount per $1,000 of original
principal amount of a Note or the original Certificate Balance of a Certificate,
as the case may be. Copies of such statements may be obtained by Security Owners
by a request in writing addressed to the related Trustee at its Corporate Trust
Office. In addition, within the prescribed period of time for tax reporting
purposes after the end of each calendar year during the term of the Sale and
Servicing Agreement, the Indenture Trustee and the Owner Trustee will mail to
each person who at any time during such calendar year shall have been a
Noteholder or a Certificateholder, as the case may be, a statement containing
the sum of the amounts described in clauses (i), (ii), (iv) and (v) above for
the purposes of such holder's preparation of federal income tax returns. See
"Certain Federal Income Tax Consequences." (Sale and Servicing Agreement,
Section 5.07)
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EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement. The Sale and Servicing Agreement will
provide that a firm of independent public accountants will furnish to the
Indenture Trustee and the Owner Trustee and Financial Security, on or before 90
days after the end of each fiscal year of the Master Servicer, beginning with
the fiscal year ended December 31, 1997, a statement as to compliance by the
Master Servicer during the preceding fiscal year (or since the Closing Date in
the case of the first such statement) with certain standards relating to the
servicing of the Contracts. (Sale and Servicing Agreement, Section 4.11)
The Sale and Servicing Agreement will also provide for delivery to the
Indenture Trustee and the Owner Trustee and Financial Security, on or before 90
days after the end of each fiscal year of the Master Servicer, commencing with
the fiscal year ended December 31, 1997, of a certificate signed by two officers
of the Master Servicer stating that the Master Servicer has fulfilled its
obligations under the Sale and Servicing Agreement throughout the preceding
fiscal year (or since the Closing Date in the case of the first such
certificate) or, if there has been a default in the fulfillment of any such
obligation, describing each such default. (Sale and Servicing Agreement, Section
4.10)
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the related Trustee at its
Corporate Trust Office.
The Indenture. The Trust will be required to file annually with the
Indenture Trustee and Financial Security a written statement as to the
fulfillment of its obligations under the Indenture. (Indenture, Section 3.09)
The Indenture Trustee will be required to mail each year to all related
Noteholders a brief report relating to, among other things, its eligibility and
qualification to continue as Indenture Trustee under the Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity date
of certain indebtedness owing by the Trust to the Indenture Trustee in its
individual capacity, the property and funds physically held by such Indenture
Trustee as such and any action taken by it that materially affects the Notes and
that has not been previously reported. (Indenture, Section 7.04)
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Sale and Servicing Agreement will provide that the Master Servicer may
not resign from its obligations and duties as Master Servicer thereunder except
upon determination that the Master Servicer's performance of such duties is no
longer permissible under applicable law. No such resignation will become
effective until (i) the Indenture Trustee or a successor servicer has assumed
the Master Servicer's servicing obligations and duties under the Sale and
Servicing Agreement and (ii) each Rating Agency confirms that the selection of
such successor master servicer will not result in the qualification, reduction
or withdrawal of its then-current rating of any Class of Securities. (Sale and
Servicing Agreement, Section 7.04)
The Sale and Servicing Agreement will further provide that neither the
Master Servicer nor any of its directors, officers, employees and agents shall
be under any liability to the Trust or the Securityholders for taking any action
or for refraining from taking any action pursuant to the Sale and Servicing
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer nor any such person will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in the performance of duties or by reason of reckless disregard of obligations
and duties thereunder. In addition, the Sale and Servicing Agreement will
provide that the Master Servicer will be under no obligation to appear in,
prosecute or defend any legal action that is not incidental to its servicing
responsibilities under the Sale and Servicing Agreement and that, in its
opinion, may cause it to incur any expense or liability. The Master Servicer
may, however, undertake any reasonable action that it may deem necessary or
desirable in respect of the Sale and Servicing Agreement and the rights and
duties of the parties thereto and the interests of the Securityholders
thereunder. In any event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust, and the Master Servicer will be entitled to be reimbursed therefor out of
funds on deposit in the Collection Account. Any such indemnification or
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reimbursement could reduce the amount otherwise available for distribution to
Securityholders. (Sale and Servicing Agreement, Section 7.05)
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer is a party or any corporation
succeeding to the business of the Master Servicer, or, with respect to the
Master Servicer's obligation as the Master Servicer, will be the successor of
the Master Servicer under the Sale and Servicing Agreement. (Sale and Servicing
Agreement, Sections 7.02 and 7.04)
SERVICER DEFAULT
"Servicer Defaults" under the Sale and Servicing Agreement will consist of
(i) a claim being made under either the Note Policy or the Certificate Policy,
(ii) any failure by the Master Servicer to deposit in or credit to the
Collection Account, either Distribution Account, the Spread Account or the
Holding Account any amount required to be so deposited or credited or to make
the required distributions therefrom, which failure continues unremedied for
three Business Days after written notice from the Indenture Trustee, the Owner
Trustee or Financial Security is received by the Master Servicer or discovery by
the Master Servicer; (iii) any failure by the Master Servicer to deliver to
Financial Security, the Indenture Trustee, or the Owner Trustee certain reports
required by the Sale and Servicing Agreement by the fourth Business Day prior to
the related Distribution Date or to perform certain other covenants under the
Sale and Servicing Agreement; (iv) any failure by the Master Servicer or the
Seller duly to observe or perform in any material respect any other covenant or
agreement in the Sale and Servicing Agreement, which failure materially and
adversely affects the rights of Securityholders, Financial Security, the
Indenture Trustee or the Owner Trustee and which continues unremedied for 30
days after the giving of written notice of such failure (A) to the Master
Servicer or the Seller, as the case may be, by the Owner Trustee, the Indenture
Trustee or Financial Security or (B) to the Master Servicer or the Seller, as
the case may be, and to the Indenture Trustee or the Owner Trustee by holders of
Notes evidencing not less than 25% of the voting interests thereof, voting
together as a single class, or, if the Notes have been paid in full, by the
holders of Certificates evidencing not less than 25% of the voting interests
thereof or, so long as no default under either Policy has occurred and is
continuing and no insolvency of Financial Security has occurred, by Financial
Security; (v) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by the Seller
or the Master Servicer indicating its insolvency, reorganization pursuant to
bankruptcy or similar proceedings or inability to pay its obligations (each, an
"Insolvency Event"); and (vi) any material breach of any of the representations
and warranties of the Master Servicer or the Seller (except for any breaches
relating to Contracts repurchased by the Seller or the Master Servicer) that has
a material adverse effect on the Noteholders or the Certificateholders and,
within 30 days after written notice thereof shall have been given to the Master
Servicer or the Seller by the Indenture Trustee or the Owner Trustee or by
holders of Notes (voting together as a single class) or Certificates evidencing
not less than 25% of the respective voting interests thereof or, so long as no
default under either Policy has occurred and is continuing and no insolvency of
Financial Security has occurred, by Financial Security. (Sale and Servicing
Agreement, Section 8.01)
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default remains unremedied, the Indenture Trustee,
Financial Security or holders of Notes representing not less than 25% of the
voting interests thereof (or, if the Notes have been paid in full and the
Indenture has been discharged in accordance with its terms, by holders of
Certificates evidencing not less than 25% of the voting interests thereof),
voting together as a single class, may terminate all the rights and obligations
of the Master Servicer under the Sale and Servicing Agreement, whereupon the
Indenture Trustee will succeed, without further action, to all the
responsibilities, duties and liabilities of the Master Servicer in its capacity
as such under such agreement and will be entitled to similar compensation
arrangements. If, however, a bankruptcy trustee or similar official has been
appointed for the Master Servicer, and no Servicer Default other than such
appointment has occurred, such trustee or official may have the power to prevent
the Indenture Trustee, Financial Security or the Noteholders (or
Certificateholders) from effecting a transfer of servicing. In the event that
the Indenture Trustee is unwilling or unable so to act, it may appoint or
petition a
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court of competent jurisdiction to appoint a successor with a net worth of at
least $50,000,000 and whose regular business includes the servicing of motor
vehicle receivables. The Indenture Trustee may make such arrangements for
compensation to be paid, which in no event may be greater than the servicing
compensation paid to the Master Servicer under the Sale and Servicing Agreement.
Notwithstanding such termination, the Master Servicer shall be entitled to
payment of certain amounts payable to it prior to such termination, for services
rendered prior to such termination. (Sale and Servicing Agreement, Sections 8.01
and 8.02)
So long as Financial Security is not in default under either Policy it may
direct the actions of the Indenture Trustee upon an Event of Default. (Sale and
Servicing Agreement, Section 8.06)
WAIVER OF PAST DEFAULTS
The holders of Notes evidencing at least 51% of the voting interests
thereof, voting together as a single class (or, if all of the Notes have been
paid in full and the Indenture has been discharged in accordance with its terms,
the holders of Certificates evidencing not less than 51% of the voting interests
thereof), may, on behalf of all Securityholders, with the consent of Financial
Security, waive any default by the Master Servicer in the performance of its
obligations under the Sale and Servicing Agreement and its consequences, except
a default in making any required deposits to or payments from the Collection
Account, the Holding Account, the Spread Account, the Certificate Distribution
Account or the Note Distribution Account in accordance with that agreement or in
respect of a covenant or provision of that agreement that cannot be modified or
amended without the consent of each Securityholder (in which event the related
waiver will require the approval of holders of all of the Securities). No such
waiver will impair the Securityholders' rights with respect to subsequent
Servicer Defaults. (Sale and Servicing Agreement, Section 8.05)
VOTING INTERESTS
The "voting interests" of the (i) Notes of a Class or Classes will be
allocated among the Noteholders or related Note Owners, as the case may be, in
accordance with the unpaid principal amount of the Notes of such Class or
Classes represented thereby and (ii) Certificates will be allocated among the
Certificateholders or related Certificate Owners, as the case may be, in
accordance with the Certificate Balance represented thereby; except that in
certain circumstances any Securities held by the Seller, WFS or any of their
respective affiliates shall be excluded from such determination.
AMENDMENT
Amendment of the Sale and Servicing Agreement. The Sale and Servicing
Agreement may be amended, with the consent of Financial Security but without the
consent of the Noteholders or the Certificateholders, to cure any ambiguity,
correct or supplement any provision therein which may be inconsistent with any
other provision therein, to add any other provisions with respect to matters or
questions arising under such agreement which are not inconsistent with the
provisions thereof, to add or provide for any credit enhancement for any Class
of Securities or to permit certain changes with respect to the Specified Spread
Account Balance, the Minimum Funded Amount or the Overcollateralization Amount;
provided, that any such action will not, in the opinion of counsel satisfactory
to the related Trustee, materially and adversely affect the interests of any
such Securityholder; and provided further, that in the case of a change with
respect to the Specified Spread Account Balance, the Minimum Funded Amount or
the Overcollateralization Amount, the Trustee receives a letter from S&P to the
effect that its then-current rating on each Class of Securities will not be
qualified, reduced or withdrawn due to such amendment and the Master Servicer
shall provide Moody's notice of such amendment. (Sale and Servicing Agreement,
Section 10.01)
The Sale and Servicing Agreement may also be amended from time to time with
the consent of the holders of Notes and Certificates evidencing not less than
51% of the respective voting interests thereof, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such agreement or of modifying in any manner the rights of the related
Securityholders of each Class; provided, that no such amendment may (i) except
as described above, increase or reduce in any manner the amount of or accelerate
or delay the timing of collections of payments on or in respect of the
Contracts, required distributions on the Notes or the Certificates, or the
Specified Spread Account Balance, the Minimum Funded
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Amount, the Overcollateralization Amount or the manner in which the Spread
Account is funded, or (ii) reduce the aforesaid percentage of the voting
interests of which the holders of any Class of Securities are required to
consent to any such amendment, without the consent of Financial Security and the
holders of all of the relevant Class of Securities. (Sale and Servicing
Agreement, Section 10.01)
Amendment of the Trust Agreement. The Trust Agreement may be amended, with
the consent of Financial Security but without the consent of the
Securityholders, to cure any ambiguity, to correct or supplement any provision
therein which may be inconsistent with any other provision therein, or to add
any other provisions with respect to matters or questions arising thereunder
which are not inconsistent with the provisions thereof; provided, that any such
action will not, in the opinion of counsel satisfactory to the related Trustee,
materially and adversely affect the interests of any such Noteholder or
Certificateholder. (Trust Agreement, Section 11.01)
The Trust Agreement may also be amended from time to time with the consent
of Securityholders evidencing not less than 51% of the respective voting
interests thereof, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such agreement or of
modifying in any manner the rights of the Noteholders or the Certificateholders;
provided, that no such amendment may increase or reduce in any manner the amount
of or accelerate or delay the timing of (i) collections of payments on or in
respect of the Contracts or required distributions on the Notes or the
Certificates or any Interest Rate or the Pass-Through Rate or (ii) reduce the
aforesaid percentage of the voting interests of which the holders of any Class
of Securities are required to consent to any such amendment, without the consent
of Financial Security and the holders of all of the relevant Class of
Securities. (Trust Agreement, Section 11.01)
Amendment of the Indenture. The Trust and the Indenture Trustee (on behalf
of such Trust) may, without the consent of the Noteholders but with the consent
of Financial Security, enter into one or more supplemental indentures for any of
the following purposes: (i) to correct or amplify the description of the
property subject to the lien of the Indenture or to subject additional property
to the lien of the Indenture; (ii) to provide for the assumption of the Notes
and the Indenture obligations by a permitted successor to the Trust; (iii) to
add additional covenants for the benefit of the related Noteholders or to
surrender any rights or powers conferred upon the Trust; (iv) to convey,
transfer, assign, mortgage or pledge any property to the Indenture Trustee; (v)
to cure any ambiguity or correct or supplement any provision in the Indenture or
in any supplemental indenture which may be inconsistent with any other provision
in the Indenture, any supplemental indenture, the Sale and Servicing Agreement
or certain other agreements; provided, that any action specified in clause (v)
shall not adversely affect the interests of any Noteholder; (vi) to provide for
the acceptance of the appointment of a successor Indenture Trustee or to add to
or change any of the provisions of the Indenture as shall be necessary and
permitted to facilitate the administration by more than one trustee; (vii) to
modify, eliminate or add to the provisions of the Indenture in order to comply
with the Trust Indenture Act of 1939, as amended; and (viii) to add any
provisions to, change in any manner, or eliminate any of the provisions of, the
Indenture or modify in any manner the rights of Noteholders under such
Indenture; provided that any action specified in clause (viii) shall not, as
evidenced by any opinion of counsel, adversely affect in any material respect
the interests of any Noteholder unless such Noteholder's consent is otherwise
obtained as described below. (Indenture, Section 9.01)
Without the consent of the holder of each outstanding Note affected
thereby, no supplemental indenture may: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate thereon (or the method by which such interest
or principal is calculated) or the redemption price with respect thereto or
change any place of payment where or the coin or currency in which any such Note
or any interest thereon is payable; (ii) impair the right to institute suit for
the enforcement of provisions of the Indenture regarding payment; (iii) reduce
the percentage of the voting interests of the Notes, the consent of the holders
of which is required for any such supplemental indenture or the consent of the
holders of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust, any
other obligor on such Notes, the Seller, or any of their respective affiliates;
(v) reduce the percentage of the voting interests of the Notes, the consent of
the holders of which is required to direct the Indenture Trustee to sell or
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liquidate the property of the Trust if the proceeds of such sale or liquidation
would be insufficient to pay the principal amount and accrued but unpaid
interest on the outstanding Notes; (vi) decrease the percentage of the voting
interests of such Notes required to amend the provisions of the Indenture which
specify the applicable percentage of voting interests of the Notes necessary to
amend such Indenture or certain other related agreements; or (vii) permit the
creation of any lien ranking prior to or on a parity with the lien of the
Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Indenture, terminate the lien of such
Indenture on any such collateral or deprive the holder of any such Note of the
security afforded by the lien of such Indenture. (Indenture, Section 9.02)
LIST OF SECURITYHOLDERS
Upon the written request of the Master Servicer, the Owner Trustee will
provide to the Master Servicer within 15 days after receipt of such request, a
list of the names and addresses of all Certificateholders. In addition, three or
more holders of Certificates or holders of Certificates evidencing not less than
25% of the voting interests of the Certificates, upon compliance by such
Certificateholders with certain provisions of the Trust Agreement, may request
that the Owner Trustee afford such Certificateholders access during business
hours to the current list of Certificateholders for purposes of communicating
with other Certificateholders with respect to their rights under the Trust
Agreement. (Trust Agreement, Section 3.07)
Three or more holders of Notes may, by written request to the Indenture
Trustee, obtain access to the list of all Noteholders maintained by such
Indenture Trustee for the purpose of communicating with the other Noteholders
with respect to their rights under the Indenture or under the Notes. The
Indenture Trustee may elect not to afford the requesting Noteholders access to
the list of Noteholders if it agrees to mail the desired communication or proxy,
on behalf of and at the expense of the requesting Noteholders, to all
Noteholders. (Indenture, Section 7.02)
Neither the Trust Agreement nor the Indenture will provide for the holding
of any annual or other meetings of Securityholders.
TRUST; INSOLVENCY EVENT
The Trust Agreement will provide that, in the event that WII becomes
insolvent, withdraws or is expelled as the general partner of the Trust or is
terminated or dissolved, the Trust will terminate in 90 days and thereafter
effect redemption of the Notes (if any) and prepayment of the Certificates
following the winding-up of the affairs of the Trust, unless within such 90 day
period holders of Certificates evidencing more than 50% of the voting interests
thereof agree in writing to the continuation of the business of the Trust and to
the appointment of a successor to the general partner, and the Owner Trustee is
able to obtain an opinion of counsel satisfactory to Financial Security to the
effect that the Trust will not thereafter be an association (or publicly traded
partnership) taxable as a corporation for federal or California income tax
purposes. (Trust Agreement, Section 9.02)
The Trust Agreement will provide that the Owner Trustee, each
Certificateholder, the Indenture Trustee and each Noteholder shall agree that
they will not at any time institute, or join in any institution against, the
Trust, the Seller or WII, any bankruptcy proceedings relating to the
Certificates, the Notes, the Trust Agreement, the Indenture or certain other
agreements. (Trust Agreement, Section 11.08)
TERMINATION
The obligations of the Master Servicer, the Seller, the Owner Trustee and
Indenture Trustee with respect to the related Securityholders pursuant to the
Trust Agreement, Sale and Servicing Agreement or Indenture will terminate upon
the earliest to occur of (i) the maturity or other liquidation of the last
Contract and the disposition of any amounts received upon liquidation of any
property remaining in the Trust, (ii) the payment to such Securityholders of all
amounts required to be paid to them pursuant to such agreement and (iii) the
occurrence of the event described below.
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In order to avoid excessive administrative expenses, the Seller will be
permitted to purchase the remaining Contracts from the Trust on any Distribution
Date as of which (i) the Aggregate Scheduled Balance is less than 10% of the
Cut-Off Date Aggregate Scheduled Balance and (ii) the aggregate outstanding
principal amount of Securities is 5% or less of the initial aggregate principal
amount of Securities at a price equal to the aggregate unpaid principal balances
of the related Contracts, together with accrued interest thereon to the last Due
Date in the Due Period in which such repurchase occurs. (Sale and Servicing
Agreement, Section 9.01)
The Owner Trustee and Indenture Trustee will give written notice of
termination to each Securityholder of record. The final distribution to each
Securityholder will be made only upon surrender and cancellation of such
holder's Securities at the office or agency of the related Trustee specified in
the notice of termination. Any funds remaining in the Trust, after such Trustee
has taken certain measures to locate a Securityholder and such measures have
failed, will be distributed to a charity designated by the Master Servicer.
Any outstanding Notes will be redeemed concurrently with any Optional
Purchase described above, and the subsequent distribution to the related
Certificateholders of all amounts required to be distributed to them pursuant to
the Trust Agreement will effect early retirement of the Certificates.
PAYMENT IN FULL OF NOTES
Upon the payment in full of all outstanding Notes and the satisfaction and
discharge of the Indenture, the Owner Trustee will succeed to all the rights of
the Indenture Trustee, and the Certificateholders will succeed to all the rights
of the Noteholders, under the Sale and Servicing Agreement, except as otherwise
provided therein. (Sale and Servicing Agreement, Section 9.01)
THE TRUSTEES
A Trustee may resign at any time, in which event the Administrator, or its
successor, will be obligated to appoint a successor trustee. The Administrator
may also remove the Owner Trustee or the Indenture Trustee, in each case if such
Trustee becomes insolvent or ceases to be eligible to continue as such under the
Trust Agreement or Indenture, as the case may be. In such event, the
Administrator will be obligated to appoint a successor Trustee. Any resignation
or removal of a Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee. (Trust
Agreement, Section 10.02; Indenture, Section 6.08)
Each Trustee and any of its affiliates may hold Securities in their own
names or as pledgees. For the purpose of meeting the legal requirements of
certain jurisdictions, the Administrator and the Owner Trustee or Indenture
Trustee acting jointly (or in some instances, the Owner Trustee and Indenture
Trustee acting without the Administrator) will have the power to appoint
co-trustees or separate trustees of all or any part of the Trust. In the event
of such an appointment, all rights, powers, duties and obligations conferred or
imposed upon such Trustee by the Indenture, Sale and Servicing Agreement or
Trust Agreement will be conferred or imposed upon such Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which such Trustee
will be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of such Trustee. (Trust
Agreement, Section 10.05; Indenture, Section 6.10)
The Trust Agreement will further provide that WII will pay the fees of the
Owner Trustee and the Trust will, or will cause the Administrator to, pay the
fees of the Indenture Trustee. The Trust Agreement will further provide that the
Owner Trustee will be entitled to indemnification by the Master Servicer for,
and will be held harmless against, any loss, liability or expense incurred by
such Trustee not resulting from its own willful misconduct, bad faith or
negligence (other than by reason of a breach of any of its representations or
warranties set forth in such agreement). The Indenture will further provide that
the Indenture Trustee will be entitled to indemnification by the Trust or the
Administrator for any loss, liability or expense incurred by such Trustee not
resulting from its own willful misconduct, negligence or bad faith. (Trust
Agreement, Section 8.02; Indenture, Section 6.07)
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DUTIES OF THE TRUSTEES
Neither Trustee will make any representations as to the validity or
sufficiency of the Trust Agreement or Indenture, the Securities issued pursuant
thereto (other than the execution and authentication thereof), or of any
Contracts or related documents, and will not be accountable for the use or
application by the Seller, WII or the Master Servicer of any funds paid to the
Seller, WII or the Master Servicer in respect of such Securities or the related
Contracts, or the investment of any monies by the Master Servicer before such
monies are deposited into the Collection Account. The Trustees will not
independently verify the existence or characteristics of the Contracts. If no
Event of Default or Servicer Default has occurred and is continuing, each
Trustee will be required to perform only those duties specifically required of
it under the Indenture, Trust Agreement or Sale and Servicing Agreement, as the
case may be. Generally those duties will be limited to the receipt of the
various certificates and reports or other instruments required to be furnished
to such Trustee under such agreements, in which case it will only be required to
examine them to determine whether they conform to the requirements of such
agreements. No Trustee will be charged with knowledge of a failure by the Master
Servicer to perform its duties under the relevant agreements which failure
constitutes an Event of Default or a Servicer Default unless such Trustee
obtains actual knowledge of such failure as specified in such agreements.
No Trustee will be under any obligation to exercise any of the rights or
powers vested in it by the Indenture, Trust Agreement or Sale and Servicing
Agreement, as the case may be, or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request order or direction of any of the
Securityholders, unless such Securityholders have offered to such Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No Securityholder will have any right
under any such agreement to institute any proceeding with respect to such
agreement, unless such holder previously has given to such Trustee written
notice of default and (i) the default arises from the Master Servicer's failure
to remit payments when due or (ii) the holders of Securities evidencing not less
than 25% of the voting interests of all of the related Securities, voting
together as a single class, have made written request upon such Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to such Trustee reasonable indemnity and such Trustee for 60 days has neglected
or refused to institute any such proceedings.
THE TRUST; WII LIABILITY
The Trust Agreement will require WII to agree to be liable directly to an
injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a Securityholder in the capacity of an
investor with respect to the Trust) arising out of or based on the arrangement
created by the Trust Agreement as though such arrangement created a partnership
under the Delaware Revised Uniform Limited Partnership Act in which WII was a
general partner. (Trust Agreement, Section 2.07)
ADMINISTRATION AGREEMENT
WFS, in its capacity as administrator (the "Administrator"), will enter
into an agreement (the "Administration Agreement") with the Trust, the Seller,
WII and the Indenture Trustee pursuant to which the Administrator will agree, to
the extent provided in the Administration Agreement, to provide the notices and
to perform other administrative obligations required to be provided or performed
by the Trust or the Owner Trustee under the Indenture. As compensation for the
performance of the Administrator's obligations under the Administration
Agreement and as reimbursement for its expenses related thereto, the
Administrator will be entitled to a monthly administration fee (the
"Administration Fee"), which fee will be paid by the Seller.
PREPAYMENT CONSIDERATIONS
Because the rate of distribution of principal on the Securities will depend
on the rate of payment on the Contracts (including prepayments, liquidations and
repurchases of Contracts by the Seller or the Master Servicer under certain
conditions, the payment of Accelerated Principal Distributable Amounts and the
sale or liquidation of the property of the Trust under certain conditions
following the occurrence of an Event of
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Default), the final distribution on each Class of Notes or the Certificates may
occur earlier than the related Final Distribution Date. The right of the Seller
to repurchase all of the Contracts upon certain events prior to the Certificate
Final Distribution Date is described under "-- Termination" and "The Master
Servicer -- Repurchases of Certain Contracts by the Master Servicer and the
Seller."
The law of California and most other states generally requires that retail
installment sales contracts such as the Contracts permit full and partial
prepayment without penalty, although a minimum finance charge may be applicable
in some circumstances. Any prepayments (including certain partial prepayments
not designated as advance payments by the Obligor on the related Contract) can
reduce the average life of the Contracts. The Master Servicer will permit the
sale or other transfer of a Financed Vehicle without accelerating the maturity
of the related Contract if such Contract is assumed by a person satisfying WFS'
then-current underwriting standards. See "The Master Servicer." Partial
prepayments not designated as advance payments by the Obligor on a Contract and
all partial prepayments as to Simple Interest Contracts will affect the average
life of the Contracts because those partial prepayments will be passed through
to Securityholders on the Distribution Date following the Due Period in which
they are received, while those partial prepayments designated as advance
payments for Rule of 78's Contracts only will be held until passed through in
accordance with the original schedule of payments for the related Contract or
until the amount of such partial prepayment equals the remaining principal
amount plus accrued interest due on the related Contract. Any reinvestment risk
resulting from the rate of prepayments of the Contracts and the distribution of
such prepayments to Securityholders will be borne entirely by the
Securityholders.
Purchases by the Seller of Contracts because of certain material defects in
Contract documentation or due to breaches of its respective representations and
warranties in respect thereof, in either case that materially and adversely
affect the interests of Securityholders, the Indenture Trustee, the Owner
Trustee or Financial Security, and purchases by the Master Servicer of Contracts
due to certain breaches in representations and warranties made by the Master
Servicer or due to certain breaches by the Master Servicer in servicing
procedures, in either case that materially and adversely affect such Contracts
can reduce the average life of the Contracts. Any reduction in the average life
of the Securities will reduce the aggregate amount of interest received by the
Securityholders over the life of the Securities. See "The Master Servicer."
While WFS does not maintain specific records for this purpose, it estimates
that, based on its experience over the past five years, the monthly prepayment
rate on the outstanding principal amount of the retail installment sales
contracts and installment loans secured by automobiles and light duty trucks it
has originated and serviced, for itself or others, has been approximately 1.5%.
However, no assurance can be given that the Contracts will experience this rate
of prepayment or any greater or lesser rate. WFS does not maintain specific
records which would suggest any difference in prepayment rate for Rule of 78's
Contracts as compared with Simple Interest Contracts.
THE POLICIES
The following summary of the terms of the Policies does not purport to be
complete and is qualified in its entirety by reference to the Note Policy and
the Certificate Policy included as exhibits to the Registration Statement.
THE NOTE POLICY
Simultaneously with the issuance of the Notes, Financial Security will
deliver the Note Policy to the Indenture Trustee for the benefit of each
Noteholder. Under the Note Policy, Financial Security will unconditionally and
irrevocably guarantee to the Indenture Trustee for the benefit of each
Noteholder the full and complete payment of (i) Scheduled Payments (as defined
below) on the Notes and (ii) the amount of any Scheduled Payment which
subsequently is avoided in whole or in part as a preference payment under
applicable law.
"Scheduled Payments" will mean, with respect to any Distribution Date,
payments which are scheduled to be made on the Notes during the term of the Note
Policy in accordance with the original terms of the Notes
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when issued and without regard to any subsequent amendment or modification of
the Notes or of the Indenture except amendments or modifications to which
Financial Security has given its prior written consent in an amount equal to (i)
the Note Interest Distributable Amount and (ii) the Note Principal Distributable
Amount. Scheduled Payments will not include payments which become due on an
accelerated basis as a result of (a) a default by the Trust, (b) any election to
pay principal on an accelerated basis, (c) the occurrence of an Event of Default
under the Indenture or (d) any other cause, unless Financial Security elects, in
its sole discretion, to pay in whole or in part such principal due upon
acceleration, together with any accrued interest to the date of acceleration. In
the event Financial Security does not so elect, the Note Policy will continue to
guarantee Scheduled Payments on the Notes in accordance with their original
terms. Scheduled Payments shall not include any portion of a Note Interest
Distributable Amount due to Noteholders because a notice and certificate in
proper form was not timely Received (as defined below) by Financial Security
unless, in each case, Financial Security elects, in its sole discretion, to pay
such amount in whole or in part. Scheduled Payments shall not include any
amounts due in respect of the Notes attributable to any increase in interest
rate, penalty or other sum payable by the Trust by reason of any default or any
event of default in respect of the Notes, or by reason of any deterioration of
the creditworthiness of the Trust, nor shall Scheduled Payments include, nor
shall coverage be provided under the Note Policy in respect of, any taxes,
withholding or other charge with respect to any Noteholder imposed by any
governmental authority due in connection with the payment of any Scheduled
Payment to a Noteholder.
Payment of claims on the Note Policy made in respect of Scheduled Payments
will be made by Financial Security following Receipt (as defined below) by
Financial Security of the appropriate notice for payment on the later to occur
of (a) 12:00 noon, New York City time, on the fourth Business Day following
Receipt of such notice for payment, and (b) 12:00 noon, New York City time, on
the date on which such payment was due on the Notes.
THE CERTIFICATE POLICY
Simultaneously with the issuance of the Certificates, Financial Security
will deliver the Certificate Policy to the Owner Trustee for the benefit of each
Certificateholder. Under the Certificate Policy, Financial Security will
unconditionally and irrevocably guarantee to the Owner Trustee for the benefit
of each Certificateholder the full and complete payment of (i) Guaranteed
Distributions (as defined below) with respect to the Certificates and (ii) the
amount of any Guaranteed Distribution which subsequently is avoided in whole or
in part as a preference payment under applicable law.
"Guaranteed Distributions" will mean, with respect to each Distribution
Date, the distributions to be made to Certificateholders (other than to WII) in
an aggregate amount equal to the Certificate Distributable Amount due and
payable on such Distribution Date in accordance with the original terms of the
Certificates when issued and without regard to any amendment or modification of
the Certificates, the Sale and Servicing Agreement or the Trust Agreement to
which Financial Security has not given its prior written consent. Guaranteed
Distributions shall not include, nor shall coverage be provided under the
Certificate Policy in respect of, any taxes, withholding or other charge imposed
with respect to any Certificateholder by any governmental authority.
Payment of claims on the Certificate Policy made in respect of Guaranteed
Distributions will be made by Financial Security following Receipt (as defined
below) by Financial Security of the appropriate notice for payment on the later
to occur of (a) 12:00 noon, New York City time, on the fourth Business Day
following Receipt of such notice for payment, and (b) 12:00 noon, New York City
time, on the date on which such payment was due on the Certificates.
OTHER TERMS OF THE POLICIES
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
either Policy, Financial Security shall cause such payment to be made on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following Receipt
by Financial Security from the Indenture Trustee or
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the Owner Trustee, as the case may be, of (A) a certified copy of the order (the
"Order") of the court or other governmental body which exercised jurisdiction to
the effect that the Noteholder is required to return principal or interest paid
on the Notes during the term of the Note Policy or the Certificateholder is
required to return principal or interest distributed with respect to the
Certificates during the term of the Certificate Policy, in either case because
such distributions were avoidable as preference payments under applicable
bankruptcy law, (B) a certificate of the Noteholder or Certificateholder, as the
case may be, that the Order has been entered and is not subject to any stay and
(C) an assignment duly executed and delivered by such Noteholder or
Certificateholder, as the case may be, in such form as is reasonably required by
Financial Security and provided to such Securityholder by Financial Security,
irrevocably assigning to Financial Security all rights and claims of such
Securityholder relating to or arising under the related Class of Notes or the
Certificates, as the case may be, against the debtor which made such preference
payments or otherwise with respect to such preference payment, or (ii) the date
of Receipt by Financial Security from the Indenture Trustee or the Owner
Trustee, as the case may be, of the items referred to in clauses (A), (B) and
(C) above if, at least four Business Days prior to such date of Receipt,
Financial Security shall have Received written notice from the related Trustee
that such items were to be delivered on such date and such date was specified in
such notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
related Trustee or any Securityholder directly (unless a Securityholder has
previously paid such amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order in which case such payment shall be
disbursed to the related Trustee for distribution to such Securityholder upon
proof of such payment reasonably satisfactory to Financial Security). In
connection with the foregoing, and as will be provided in the Indenture and Sale
and Servicing Agreement, Financial Security will have certain rights to direct
proceedings regarding the seeking to avoid payments made on or in respect of the
Contracts, the Notes or the Certificates as preferential.
The terms "Receipt" and "Received," with respect to either Policy, shall
mean actual delivery to Financial Security and to its fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day and delivery either
on a day that is not a Business Day or after 12:00 noon, New York City time,
shall be deemed to be Receipt on the next succeeding Business Day. If any notice
or certificate given under a Policy by the Indenture Trustee or the Owner
Trustee, as the case may be, is not in proper form or is not properly completed,
executed or delivered, it shall be deemed not to have been Received, and
Financial Security or its fiscal agent shall promptly so advise the Indenture
Trustee or the Owner Trustee, as the case may be, and such Trustee may submit an
amended notice.
Under the Policies, "Business Day" will mean any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in The City of
New York, New York are authorized or obligated by law or executive order to be
closed.
Financial Security's obligations under the Note Policy in respect of
Scheduled Payments and under the Certificate Policy in respect of Guaranteed
Distributions shall in each case be discharged to the extent funds are
transferred to the Indenture Trustee or the Owner Trustee, as the case may be,
as provided in the related Policy whether or not such funds are properly applied
by the Indenture Trustee or the Owner Trustee.
Financial Security shall be subrogated to the rights of each Noteholder or
Certificateholder, as the case may be, to receive payments of principal and
interest to the extent of any payment by Financial Security under the related
Policy.
Claims under the Policies will constitute direct, unsecured and
unsubordinated obligations of Financial Security ranking not less than pari
passu with other unsecured and unsubordinated indebtedness of Financial Security
for borrowed money. Claims against Financial Security under each other financial
guaranty insurance policy issued thereby constitute pari passu claims against
the general assets of Financial Security. The terms of the Policies cannot be
modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Trust. The Note Policy may not be cancelled
or revoked prior to distribution in full of all Scheduled Payments and the
Certificate Policy may not be canceled or revoked prior to distribution in full
of all Guaranteed Distributions with respect to the Certificates. The Policies
are not covered
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by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law. The Policies are governed by the laws of the State of
New York.
FINANCIAL SECURITY ASSURANCE INC.
GENERAL
Financial Security is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer.
Financial Security and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. Financial Security insures both newly issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
U S WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by Financial Security or any
of its domestic operating insurance company subsidiaries are reinsured among
such companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
Financial Security's claims-paying ability is rated "Aaa" by Moody's and
"AAA" by S&P, Nippon Investors Service Inc. and Standard & Poor's (Australia)
Pty. Ltd. Such ratings reflect only the views of the respective rating agencies,
are not recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies. See "Ratings of the
Securities."
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CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------
(UNAUDITED)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)..... $ 361,589
-----------
Shareholder's Equity:
Common Stock..................................................... 15,000
Additional Paid-In Capital....................................... 654,127
Unrealized Gain (Loss) on Investments
(net of deferred income taxes)................................ (2,030)
Accumulated Earnings............................................. 157,842
-----------
Total Shareholder's Equity......................................... 824,939
-----------
Total Deferred Premium Revenue and Shareholder's Equity............ $ 1,186,528
===========
</TABLE>
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiaries, and the notes
thereto, included at page A-2 et seq. of this Prospectus. Copies of the
statutory quarterly and annual statements filed with the State of New York
Insurance Department by Financial Security are available upon request to the
State of New York Insurance Department.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York,
Financial Security is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
THE MASTER SERVICER
The Contracts will be serviced by WFS in its capacity as Master Servicer.
While WFS may or may not use a Subservicer in servicing the Contracts, WFS is
referred to as the Master Servicer herein.
WFS, as Master Servicer, will be obligated pursuant to the Sale and
Servicing Agreement, subject to the limitations set forth therein, to service
the Contracts and to repurchase certain of the Contracts under certain
circumstances if certain representations and warranties made by WFS are
incorrect or if WFS, as Master Servicer, breaches certain of its servicing
obligations under the Sale and Servicing Agreement, in either case in a manner
that materially and adversely affects the Securityholders. WFS, as Master
Servicer, may perform its servicing duties through one or more subservicers
(each, a "Subservicer"), provided that the employment of a Subservicer shall not
relieve the Master Servicer from any liability of the Master Servicer under the
Sale and Servicing Agreement.
If WFS uses a Subservicer, WFS, as Master Servicer, will enter into a
subservicing agreement with that Subservicer. Such subservicing agreements must
not be inconsistent with the terms of the Sale and Servicing Agreement. The
Master Servicer may terminate a subservicing agreement and either service the
related
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Contracts directly or enter into a new subservicing agreement for such Contracts
with a Subservicer that need not be an affiliate of the Master Servicer.
Notwithstanding any subservicing agreement, the Master Servicer will remain
obligated and liable to the Indenture Trustee, the Owner Trustee and the
Securityholders for servicing and administering the Contracts in accordance with
the Sale and Servicing Agreement as if the Master Servicer alone were servicing
the Contracts. References herein to actions required or permitted to be taken by
the Master Servicer include such actions by a Subservicer. (Sale and Servicing
Agreement, Section 4.01)
COLLECTION OF PAYMENTS
The Master Servicer will service the Contracts and will provide certain
accounting and reporting services with respect to the Contracts and the
Securities. The Master Servicer must take all actions necessary to maintain
continuous perfection of the security interests granted by the Obligors in the
Financed Vehicles. The Master Servicer will be obligated to service the
Contracts in accordance with the customary and usual servicing procedures
employed by financial institutions that service retail installment sales
contracts and/or installment loan agreements secured by motor vehicles and, to
the extent more exacting, the procedures used for such contracts owned by the
Master Servicer. In its judgment, the Master Servicer may reduce the APR of a
delinquent Contract (but not below the sum of the Pass-Through Rate and the
Servicing Fee Percent), may reduce the principal balance and may extend the
scheduled maturity of a delinquent Contract for up to 90 days in the aggregate
past the originally scheduled date of the last payment on such Contract, so long
as the Master Servicer makes an appropriate Advance as will be required in the
Sale and Servicing Agreement. (Sale and Servicing Agreement, Sections 4.01 and
4.02)
The Master Servicer shall deposit in or credit to the Collection Account or
the Holding Account, within two Business Days of receipt, all Net Collections
received on or in respect of the Contracts (except that as to Contracts serviced
by a Subservicer, such proceeds shall be deposited within three Business Days of
receipt by the Subservicer). The Master Servicer will also deposit in or credit
to the Collection Account or the Holding Account, within two Business Days of
receipt, all Net Liquidation Proceeds and Net Insurance Proceeds, after
deducting therefrom the amount of any outstanding and unreimbursed Advances.
(Sale and Servicing Agreement, Section 4.01) See "Certain Information Regarding
the Securities -- The Accounts and Eligible Investments."
ADVANCES
The Master Servicer will be obligated to advance delinquent payments of
Monthly P&I on individual Rule of 78's Contracts and to advance 30 days of
interest at the sum of the Pass-Through Rate and the Servicing Fee Percent for
each month of delinquency in that Due Period on individual Simple Interest
Contracts (each, an "Advance") to the extent that any such Advance, if made,
would not, in the good faith judgment of the Master Servicer, constitute a
Nonrecoverable Advance. A "Nonrecoverable Advance" will be an Advance previously
made or to be made by the Master Servicer which, in the good faith judgment of
the Master Servicer, may not be ultimately recoverable by the Master Servicer
from Liquidation Proceeds, Insurance Proceeds or otherwise. Concurrently with
the furnishing of the related Distribution Date Statement to the Indenture
Trustee and the Owner Trustee, the Master Servicer will deposit in the
Collection Account all Advances, if any, in respect of the related Due Period.
The Master Servicer will not be entitled to any interest on Advances when it is
reimbursed for Advances. The amount of Advances deposited in the Collection
Account for any Distribution Date may be net of amounts otherwise payable to the
Master Servicer on such Distribution Date. (Sale and Servicing Agreement,
Section 5.04)
In making Advances, the Master Servicer will be endeavoring to maintain a
regular flow of interest and principal payments to the Securityholders rather
than to guarantee or insure against losses. Advances will be reimbursed to the
Master Servicer out of recoveries on the related Contracts (e.g., late payments
by the Obligor, Net Liquidation Proceeds and Net Insurance Proceeds) or, to the
extent any portion of an Advance is determined to be a Nonrecoverable Advance,
out of unrelated installments of Monthly P&I or prepayment proceeds.
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INSURANCE ON FINANCED VEHICLES
Each Obligor on a Contract is required to maintain insurance covering
physical damage to the Financed Vehicle of such Obligor in an amount not less
than the lesser of its maximum insurable value or the unpaid principal balance
under such Contract; provided, however, that the Master Servicer will not be
obligated to enforce this requirement when the principal balance of a Contract
is less than $4,000. The Master Servicer or a Subservicer is required to be
named as a loss payee under the policy of insurance obtained by the Obligor. In
addition, to the extent required by applicable law, the policy of insurance will
be delivered to the Master Servicer or Subservicer, as appropriate. The Financed
Vehicle is required to be insured against loss and damage due to fire, theft,
transportation, collision and other risks covered by comprehensive coverage. The
Master Servicer shall maintain a limited dual interest insurance policy in
respect of each Financed Vehicle that provides coverage for physical damage to,
or loss of, a Financed Vehicle; provided, however, that the Master Servicer
shall not be required to maintain such insurance in respect of any Financed
Vehicle as to which the related Contract has an unpaid principal balance of less
than $4,000. (Sale and Servicing Agreement, Section 4.04) Since Obligors may
choose their own insurers to provide the required coverage, the specific terms
and conditions of their policies vary. If the Obligor fails to obtain or
maintain the required insurance, the Master Servicer will be obligated, except
in certain limited circumstances, to obtain such insurance and may add the
premium for such insurance to the balance due on the Contract to the extent
permitted by applicable law. The Scheduled Balance of a Contract will not
include any amount for such premium, and payments by an Obligor in respect of
such financed premium will not be applied to distributions on the Securities.
SERVICER DETERMINATION AND REPORTS TO TRUSTEES
The Master Servicer will perform certain monitoring and reporting functions
for the Owner Trustee, the Indenture Trustee and Financial Security, including
the preparation and delivery to the Owner Trustee, the Indenture Trustee and
Financial Security of each Statement to Securityholders and an additional report
covering the aggregate amount, if any, paid by or due from it or the Seller for
the purchase of Contracts which it or the Seller has become obligated to
purchase and the net amount of funds which have been deposited in or credited to
the Collection Account or Holding Account. (Sale and Servicing Agreement,
Section 4.09)
REPURCHASES OF CERTAIN CONTRACTS BY THE MASTER SERVICER AND THE SELLER
The Seller will have the option to purchase the remaining Contracts, and
thereby cause early retirement of the Securities, on any Distribution Date as of
which (i) the Aggregate Scheduled Balance is less than 10% of the Cut-Off Date
Aggregate Scheduled Balance and (ii) the aggregate outstanding principal amount
of Securities is 5% or less of the initial aggregate principal amount of
Securities. See "Certain Information Regarding the Securities -- Termination."
In addition, the Seller will be required to repurchase certain Contracts under
certain circumstances if certain representations and warranties made by the
Seller are incorrect and materially and adversely affect the interests of the
Securityholders, the Indenture Trustee, the Owner Trustee or Financial Security.
The Master Servicer will be required to purchase a Contract if it breaches
certain of its servicing obligations with respect to such Contract such that the
Contract is materially and adversely affected. Any such repurchase must be
effected at a price (the "Repurchase Amount") equal to the outstanding principal
balance of such Contract plus accrued interest thereon to the last Due Date in
the Due Period in which such repurchase occurs. (Sale and Servicing Agreement,
Sections 3.02, 4.07 and 9.01)
SERVICING COMPENSATION
The Master Servicer will be entitled to compensation for the performance of
its obligations under the Sale and Servicing Agreement. The Master Servicer
shall be entitled to receive for each Contract from the Monthly P&I paid on or
in respect of such Contract an amount (the "Servicing Fee") equal to one-twelfth
of 1.00% per annum (the "Servicing Fee Percent") of the Scheduled Balance of
such Contract for the related month in respect of which the Monthly P&I for such
month has been collected or advanced. As additional compensation, the Master
Servicer or its designee shall be entitled to retain all late payment charges,
extension fees (the Master Servicer will determine when an extension is to be
granted, subject to the
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limitations described under "Collection of Payments") and similar items paid in
respect of the Contracts. The Master Servicer or its designee will receive as
additional servicing compensation the amount, if any, by which the outstanding
principal balance of a Contract that is prepaid in full prior to its maturity
exceeds the Scheduled Balance of such Contract. The Master Servicer shall pay
all expenses incurred by it in connection with its servicing activities under
the Sale and Servicing Agreement and shall not be entitled to reimbursement of
such expenses except to the extent they constitute Liquidation Expenses or
expenses recoverable under an applicable insurance policy. (Sale and Servicing
Agreement, Section 4.08)
The Servicing Fee will compensate the Master Servicer for performing the
functions of a third party servicer of the Contracts as an agent for the
Indenture Trustee and the Owner Trustee, including collecting and posting all
payments, responding to inquiries of Obligors, investigating delinquencies,
sending payment statements and reporting tax information to Obligors, paying
costs of collections and policing the collateral. The Servicing Fee will also
compensate the Master Servicer for administering the Contracts, including making
Advances, accounting for collections, furnishing quarterly and annual statements
to the Indenture Trustee and the Owner Trustee with respect to distributions and
generating federal income tax information and certain taxes, accounting fees,
outside auditor fees, data processing costs and other costs incurred in
connection with administering the Contracts.
REALIZATION UPON DEFAULTED CONTRACTS
The Master Servicer will liquidate any Contract that comes into and
continues in default and as to which no satisfactory arrangements can be made
for collection of delinquent payments. Such liquidation may be through
repossession or sale of the Financed Vehicle securing such Contract or
otherwise. In connection with such repossession or other conversion, the Master
Servicer will follow such procedures as are normal and usual for holders of
motor vehicle retail installment sales contracts and installment loans. In this
regard, the Master Servicer may sell the Financed Vehicle at a repossession or
other sale. (Sale and Servicing Agreement, Section 4.03)
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
GENERAL
The Contracts are "chattel paper" as defined in the Uniform Commercial Code
as in effect in California and the other states in which the Contracts are
originated ("UCC"). Pursuant to the UCC, an ownership interest in chattel paper
may be perfected by possession of the chattel paper or filing a UCC-1 financing
statement with the Secretary of State or other central filing office in the
appropriate state as required by the applicable UCC.
WFS and the Seller will take or cause to be taken such action as is
required to perfect the Trust's rights in the Contracts and will represent and
warrant that the Trust, subject to the interest of Financial Security under the
Insurance Agreement pursuant to which the Policies will be issued, has good
title, free and clear of liens and encumbrances, to each Contract on the Closing
Date. Under the Sale and Servicing Agreement, WFS, as Master Servicer (or one or
more Subservicers), will have custody of the Contracts following the sale of the
Contracts to the Trust and will hold the Contracts as bailee for the benefit of
the Trust. However, the Contracts will not be physically marked to indicate the
ownership interest thereof by the Trust. UCC-1 financing statements will be
filed with the California Secretary of State to perfect by filing and give
notice of the Trust's ownership interest in the Contracts. If, through
inadvertence or otherwise, any of the Contracts were sold to another party who
purchased such Contracts in the ordinary course of its business and took
possession of such Contracts, the purchaser would acquire an interest in the
Contracts superior to the interests of the Trust if the purchaser acquired the
Contracts in good faith, for value and without actual knowledge of the Trust's
ownership interest in the Contracts. The Master Servicer will agree in the Sale
and Servicing Agreement to take all necessary action to preserve and protect the
Trust's ownership interest in the Contracts. The Seller will represent and
warrant that each Contract is secured by a Financed Vehicle. Notwithstanding the
failure of the Trust to have obtained a valid, first priority ownership interest
in a Contract, Financial Security will remain unconditionally and irrevocably
obligated on its guarantee of Scheduled Payments
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payable to Noteholders and Guaranteed Distributions payable to
Certificateholders on each Distribution Date. See "The Policies."
SECURITY INTERESTS IN THE FINANCED VEHICLES
All of the Financed Vehicles were registered in the State of California or
another of the states listed above under "The Contracts Pool" at the time of
origination of the related Contracts. Perfection of security interests in motor
vehicles is generally governed by state certificate of title statutes or by the
motor vehicle registration laws of the state in which each vehicle is located.
Security interests in vehicles registered in the State of California (the state
in which the largest number of Financed Vehicles is located) may be perfected by
depositing with the California Department of Motor Vehicles a properly endorsed
certificate of title showing the secured party as legal owner or an application
for an original registration together with an application for registration of
the secured party as legal owner. Security interests in vehicles registered in
most other states are perfected, generally, in a similar manner. California and
some other states permit the required documents to perfect a security interest
to be filed electronically as well as physically. The Seller will represent and
warrant to the Trust in the Sale and Servicing Agreement that all steps
necessary to obtain a perfected first priority security interest with respect to
the Financed Vehicles securing the Contracts have been taken. If the Master
Servicer fails, because of clerical error or otherwise, to effect or maintain
such notation for a Financed Vehicle, the Trust may not have a first priority
security interest in such Financed Vehicle.
All retail installment sales contracts purchased by WFS name WFS as obligee
or assignee and as the secured party. WFS also takes all actions necessary under
the laws of the state in which the related vehicles are located to perfect its
security interest in such vehicles, including, where applicable, having a
notation of its lien recorded on the related certificate of title and obtaining
possession of the certificates of title.
The Seller will sell the Contracts and assign its security interests in the
Financed Vehicles to the Trust and Financial Security. However, because of the
administrative burden and expense, neither the Trust nor Financial Security will
amend any certificate of title to identify the Trust or Financial Security as
the new secured party nor will the certificates of title be delivered to the
Trustee. Accordingly, WFS will continue to be named as the secured party on the
certificates of title for the Financed Vehicles relating to Contracts originated
by it. Under the law of California and most other states, the assignment of the
Contracts is an effective conveyance of a security interest without amendment of
any lien noted on a vehicle's certificate of title, and the new secured party
succeeds thereby to the assignor's rights as secured party. However, there
exists a risk in not identifying the Trust as the new secured party on the
certificates of title that, through fraud or negligence, the security interest
of the Trust in one or more Financed Vehicles could be released.
In the absence of fraud or forgery by the Financed Vehicle owner or
administrative error by state recording officials, notation of the lien of WFS
on the certificates of title or in the electronic records of the state officials
where electronic titles are permitted, should be sufficient to protect the Trust
against the rights of subsequent purchasers of a Financed Vehicle or subsequent
lenders who take a security interest in such Financed Vehicle. If there are any
Financed Vehicles as to which WFS has failed to perfect the security interest
assigned to the Trust, such security interest would be subordinate to, among
others, subsequent purchasers of the Financed Vehicles and holders of perfected
security interests.
In the event that the owner of a Financed Vehicle relocates to a state
other than the state in which the Financed Vehicle is registered, under the laws
of most states the perfected security interest in the Financed Vehicle would
continue for four months after such relocation and thereafter, in most
instances, until the owner registers the Financed Vehicle in such state. A
majority of states, including California, generally require surrender of a
certificate of title to initially register in that state a vehicle originally
registered in another state. Therefore, the Master Servicer on behalf of the
Trust must surrender possession, if it holds the certificate of title to such
Financed Vehicle, for the Financed Vehicle owner to effect the registration. If
the Financed Vehicle owner moves to a state that provides for notation of lien
on the certificate of title to perfect the security interests in the Financed
Vehicle, WFS, absent clerical errors or fraud, would receive notice of surrender
of the certificate of title if WFS' lien is noted thereon. Accordingly, WFS will
have notice and the opportunity to reperfect the security interest in the
Financed Vehicle in the state of relocation. If the Financed
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Vehicle owner moves to a state which does not require surrender of a certificate
of title for registration of a motor vehicle, registration in that state could
defeat perfection. In the ordinary course of servicing its portfolio of motor
vehicle loans, WFS takes steps to effect such reperfection upon receipt of
notice of reregistration or information from the obligor as to relocation.
Similarly, when an Obligor under a Contract sells a Financed Vehicle, the Master
Servicer must surrender possession of the certificate of title or will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related Contract before release of
the lien. Under the Sale and Servicing Agreement, the Master Servicer, at its
cost, will be obligated to maintain the continuous perfection of security
interests in the Financed Vehicles.
Under the law of California and most other states, liens for unpaid taxes
and possessory liens for storage of and repairs performed on a motor vehicle
take priority even over a perfected security interest in such vehicle. The
Internal Revenue Code of 1986, as amended, also grants priority to certain
federal tax liens over the lien of a secured party. The laws of certain states
and federal law permit the confiscation of motor vehicles by governmental
authorities under certain circumstances if used in unlawful activities, which
may result in the loss of a secured party's perfected security interest in a
confiscated vehicle. The Seller will represent in the Sale and Servicing
Agreement that, as of the Closing Date, the security interest in each Financed
Vehicle is prior to all other present liens upon and security interests in such
Financed Vehicle. However, liens for repairs or taxes could arise at any time
during the term of a Contract. No notice will be given to the Trustees, the
Master Servicer or Securityholders in the event such a lien or confiscation
arises and any such lien or confiscation arising after the Closing Date would
not give rise to the Seller's repurchase obligations under the Sale and
Servicing Agreement.
ENFORCEMENT OF SECURITY INTERESTS IN FINANCED VEHICLES
The Master Servicer, on behalf of the Trust, may take action itself or
through one or more Subservicers to enforce its security interest with respect
to defaulted Contracts by repossession and resale of the Financed Vehicles
securing such defaulted Contracts. In addition to the provisions of the UCC,
under California law the Contracts originated in California are subject to the
provisions of its Rees-Levering Motor Vehicle Sales and Finance Act (the
"Rees-Levering Act"). Contracts originated in other states are subject to retail
installment sales laws and similar laws of those states including in many of
those states their version of the Uniform Consumer Credit Code. The provisions
of the Rees-Levering Act and similar laws of other states control in the event
of a conflict with the provisions of the UCC. Under the UCC and laws applicable
in most states, a creditor can, without prior notice to the debtor, repossess a
motor vehicle securing a loan by voluntary surrender, by "self-help"
repossession without breach of peace, and by judicial process. The Rees-Levering
Act and similar laws of other states place restrictions on repossession sales,
including notice to the debtor of the intent to sell and of the debtor's right
to redeem the vehicle. In addition, the UCC requires commercial reasonableness
in the conduct of the sale.
In the event of repossession and resale of a Financed Vehicle, the Master
Servicer for the benefit of the Trust would be entitled to be paid out of the
sale proceeds before such proceeds could be applied to the payment of the claims
of unsecured creditors or the holders of subsequently perfected security
interests or, thereafter, to the debtor.
Under the UCC and laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the motor vehicle securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments. Under
California law the proceeds from the resale of the motor vehicle securing the
debtor's loan are required to be applied first to the expenses of resale and
repossession, and if the remaining proceeds are not sufficient to repay the
indebtedness, the creditor may seek a deficiency judgment for the balance. The
priority of application of proceeds of sale as to repossessed vehicles under the
Contracts originated in most other states is similar.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws, may limit or delay the ability of a creditor to repossess
and resell collateral or enforce a deficiency judgment.
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In the event that deficiency judgments are not satisfied or are satisfied
at a discount or are discharged in whole or in part in bankruptcy proceedings,
including proceedings under Chapter 13 of the Bankruptcy Reform Act of 1978, as
amended, the loss will be borne by the Trust.
OTHER MATTERS
The so-called "holder-in-due-course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which give rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule, which would be
applicable to the Trust and Financial Security, is limited to amounts paid under
a Contract; however, the Obligor may also assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trustee against such
Obligor.
The courts have imposed general equitable principles on repossession and
litigation involving deficiency balances. These equitable principles may have an
effect of relieving an Obligor from some or all of the legal consequences of a
default.
Numerous other federal and state consumer protection laws, regulations and
rules impose requirements applicable to the origination and servicing of the
Contracts, including the Truth-in-Lending Act (and Federal Reserve Board
Regulation Z), the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Equal Credit Opportunity Act (and Federal
Reserve Board Regulation B), the Fair Debt Collection Practices Act, the
Magnuson-Moss Warranty Act, state adaptations of the National Consumer Act and
of the Uniform Consumer Credit Code and the California Rees-Levering Act and
motor vehicle retail installment sale acts in other states, and similar laws and
rules. Also, the laws of certain states impose finance charge ceilings and other
restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. These requirements impose specific
statutory liabilities upon creditors who fail to comply with their provisions.
In some cases, this liability could affect the ability of an assignee such as
the Trustee to enforce consumer finance contracts such as the Contracts. The
Seller will represent and warrant in the Sale and Servicing Agreement that each
of the Contracts, and the sale of the Financed Vehicles sold thereunder,
complied with all material requirements of such laws.
REPURCHASE OBLIGATION
Under the Sale and Servicing Agreement, the Seller will make
representations and warranties relating to validity, subsistence, perfection and
priority of the security interest in each Financed Vehicle as of the Closing
Date. Accordingly, if any defect exists in the perfection of the security
interest in any Financed Vehicle as of the Closing Date, including any defect
arising from the violation of laws or rules, and such defect materially and
adversely affects the interests of the Securityholders, the Indenture Trustee,
the Owner Trustee or Financial Security, such defect would constitute a breach
of a representation and warranty under the Sale and Servicing Agreement and, if
uncured, would create an obligation of the Seller to repurchase such Contract
unless the breach is cured. Additionally, in the Sale and Servicing Agreement
the Master Servicer will make certain representations, warranties and
affirmative covenants regarding, among other things, the maintenance of the
security interest in each Financed Vehicle, the breach of which would create an
obligation of the Master Servicer to repurchase any affected Contract unless the
breach is cured.
THE SELLER
The Seller is a wholly owned, limited-purpose operating subsidiary of WFS
which was incorporated under the laws of the State of California on October 24,
1985. The principal office of the Seller is 23 Pasteur Road, Irvine, California
92618.
The Seller was organized principally for the purpose of purchasing retail
installment sales contracts and installment loans from the Bank in connection
with its activities as a finance subsidiary of the Bank. Effective
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May 1, 1995, ownership of the Seller was transferred to WFS and it is now a
limited purpose operating subsidiary of WFS. The Seller has not and will not
engage in any activity other than (i) acquiring, owning, holding, selling,
transferring, assigning, pledging or otherwise dealing in installment sales
contracts and installment loans secured by automobiles and light-duty trucks or
(ii) authorizing, issuing, selling and delivering one or more series of
obligations consisting of one or more classes of bonds or pass-through
certificates collateralized by installment sales contracts and installment loans
secured by automobiles and light-duty trucks, which bonds or pass-through
certificates are rated in the highest available category by at least one
nationally recognized statistical rating agency.
The Seller's Articles of Incorporation limit the activities of the Seller
to the above purposes and to any activities incidental to and necessary for such
purposes.
BREACH OF REPRESENTATIONS AND WARRANTIES; DEFECTIVE CONTRACT DOCUMENTATION
In the Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to each Contract as of the Closing
Date, including but not limited to, perfection, validity, enforceability of and
the absence of liens prior to the security interest granted pursuant to each
Contract, title of the Trust in and to such Contracts, validity and
enforceability of the Contracts as against the related Obligor, and collision
and comprehensive insurance coverage related to each Financed Vehicle. (Sale and
Servicing Agreement, Section 3.01) If (i) any of such representations and
warranties is found to have been incorrect as of the time it was made or any
document evidencing or securing a Contract is found to be defective or not to be
contained in the Contract files, and (ii) the same materially and adversely
affects the interest of the Certificateholders, the Indenture Trustee, the Owner
Trustee or Financial Security in and to such Contract, the Seller must cure the
defect or eliminate or otherwise cure the circumstances or condition in respect
of which such representation or warranty is incorrect within 90 days of the
discovery thereof. If the defect is not cured within such 90-day period, the
Seller must purchase the Contract affected by the defect at a price equal to the
outstanding principal amount of such Contract plus accrued interest thereon to
the last Due Date in the Due Period in which such repurchase occurs. (Sale and
Servicing Agreement, Section 3.02)
WFS
GENERAL
WFS is an auto finance company incorporated in California in 1988. WFS was
formerly known as Westcorp Financial Services, Inc. ("Westcorp Financial"), a
wholly owned subsidiary of the Bank and a licensed consumer finance company.
Prior to May 1, 1995, the auto finance activities described in this Prospectus
were conducted separately by the Bank, through its auto finance division, and by
Westcorp Financial. Effective May 1, 1995, the Bank's auto finance division was
combined with the consumer auto finance activities of Westcorp Financial, with
Westcorp Financial then changing its corporate name to WFS Financial Inc. The
Bank's former auto finance division now operates as the "Dealer Center
Division." WFS' pre-existing auto finance operation now operates as the "Branch
Division." In August 1995, WFS completed an initial public offering of 19.7% of
its common stock. WFS is now a majority owned operating subsidiary of the Bank.
WFS purchases Contracts that fall within the full spectrum of prime and
non-prime credit quality Contracts through two divisions, the Dealer Center
Division and the Branch Division. The Dealer Center Division operates through
Dealer Centers located primarily in larger metropolitan areas and accounts for
approximately 55% of the total dollar amount of Contracts purchased. The Branch
Division operates through Branch offices located in smaller cities or suburbs of
larger metropolitan cities, or where there is insufficient loan volume to
support a full Dealer Center, and accounts for the remaining 45% of Contracts
purchased. WFS purchases the majority of its Contracts from franchised dealers
and to a lesser extent from independent dealers.
WFS is an operating subsidiary of the Bank. As an operating subsidiary, WFS
is subject to regulation and supervision by the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). At March 31,
1997, WFS had total assets of $771 million, total liabilities of $615 million
and
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stockholders' equity of $156 million. As of March 31, 1997, WFS' net portfolio
of contracts totalled approximately $261 million.
WFS' revenues are derived principally from contractual servicing fees, the
retained interest on contracts sold for which servicing is retained, interest on
contracts not sold and fee income including late fees, deferment fees,
documentation fees and other fees, interest charged on its portfolio of
contracts and, to a lesser extent, gain on other investments. Interest on
borrowings and general and administrative costs are WFS' major expense items.
The principal executive offices of WFS are located at 23 Pasteur Road,
Irvine, California 92618.
BUSINESS ACTIVITIES
WFS is engaged principally in the business of originating contracts secured
by automobiles and light duty trucks from new and used car dealers and the
public. WFS currently conducts its operations through its principal office, 18
dealer centers and 126 branch offices serving 33 states.
WII
WII is a wholly owned limited-purpose, operating subsidiary of WFS. WII was
incorporated in California on June 11, 1996, for the purpose of purchasing an
ownership interest in the Trust and similar trusts. WII is limited by its
Articles of Incorporation from engaging in any business activities not
incidental or necessary to its stated purpose.
The principal executive office of WII is located at 23 Pasteur Road,
Irvine, California 92618 and its telephone number is (714) 727-1000.
THE BANK
GENERAL
The Bank is a federally chartered savings association the principal office
of which is located in Irvine, California. As of March 31, 1997, the Bank had
total assets of $3.4 billion, total deposits of $1.9 billion and stockholder's
equity of $343 million on a generally accepted accounting principles basis. The
Bank is a wholly owned subsidiary of Westcorp. Westcorp is a broadly based
financial services holding company which operates principally through the Bank,
its wholly owned subsidiary, and through WFS.
As a federally chartered savings association, the Bank is subject to
regulation and supervision by the OTS and the FDIC. The Bank is a member of the
Federal Home Loan Bank of San Francisco.
The principal executive office of the Bank is located at 16485 Laguna
Canyon Road, Irvine, California 92618 and its telephone number is (714)
727-1000.
BUSINESS ACTIVITIES
The Bank is engaged principally in the business of attracting deposits
from, and making real estate secured loans to the public. The Bank currently
operates 26 retail banking offices, 10 wholesale mortgage banking offices and 23
retail mortgage banking offices located throughout California and 11 other
states. Funds for lending are obtained from deposits, borrowings, payments on
existing loans and contracts and sales of loans and contracts.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences of the purchase, ownership and disposition of the Securities. This
summary is based upon laws, regulations, rulings and decisions currently in
effect, all of which are subject to change. The discussion does not deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. In addition, this summary is generally
limited to investors who will hold the Securities as "capital assets"
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(generally, property held for investment) within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code").
Investors should consult their own tax advisors to determine the federal,
state, local and other tax consequences of the purchase, ownership and
disposition of the Securities. Prospective investors should note that no rulings
have been or will be sought from the Internal Revenue Service (the "IRS") with
respect to any of the federal income tax consequences discussed below, and no
assurance can be given that the IRS will not take contrary positions. Moreover,
there are no cases or IRS rulings on transactions similar to those described
herein with respect to the Trust, involving both debt and equity interests
issued by a trust with terms similar to those of the Notes and the Certificates.
Prospective investors are urged to consult their own tax advisors in determining
the federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Securities.
TAX CHARACTERIZATION OF TRUSTS
In the opinion of Mitchell, Silberberg & Knupp LLP, special tax counsel to
the Seller, the Trust will not be an association (or a publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Trust Agreement
and related documents will be complied with, and on such counsel's conclusions
that (i) the Trust will not have certain characteristics necessary for a
business trust to be classified as an association taxable as a corporation and
(ii) the nature of the income of the Trust will exempt it from the rule that
certain publicly traded partnerships are taxable as corporations.
If the Trust were taxable as a corporation for federal income tax purposes,
it would be subject to corporate income tax on its taxable income. The Trust's
taxable income would include all its income on the related Contracts, which may
be reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Mitchell, Silberberg & Knupp LLP, special tax
counsel to the Seller, will render an opinion that the Notes will be classified
as debt for federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
OID. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under Treasury regulations relating to original issue discount ("OID"), and that
any OID on the Notes (i.e., any excess of the principal amount of the Notes over
their issue price) does not exceed a de minimis amount (i.e., 1/4% of their
principal amount multiplied by the number of full years included in their term),
all within the meaning of such OID regulations.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
However, because a failure to pay interest currently on the Notes is not a
default and does not give rise to a penalty, under the OID regulations the Notes
might be viewed as having been issued with OID. This interpretation would not
significantly affect accrual basis holders of Notes, although it would somewhat
accelerate taxable income to cash basis holders by in effect requiring them to
report interest income on the accrual basis.
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Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign holders. Interest payments made (or accrued) to a Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest," and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of outstanding Notes or
Certificates) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) provides the Trustee or other person who is otherwise required to withhold
U.S. tax with respect to the Notes with an appropriate statement (on Form W-8 or
a similar form), signed under penalty of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. If a Note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder such
as a corporation, tax exempt organization, qualified pension and profit sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalty of perjury, a certificate containing the holder's name, address, correct
federal taxpayer identification number and a statement that the holder is not
subject to backup withholding. Should a nonexempt Noteholder fail to provide the
required certification, the Trust will be required to withhold 31% of the amount
otherwise payable to the holder, and remit the withheld amount to the IRS as a
credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special tax counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust. If so treated, the Trust might be
taxable as a corporation with the adverse consequences described above (and the
resulting taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of special tax counsel, the Trust
might be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
certain tax-exempt entities (including pension funds) would be "unrelated
business taxable income", income to foreign holders generally would be subject
to U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders might be subject to certain limitations on their ability to
deduct their share of Trust expenses.
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TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of Trust as a Partnership. The Seller and the Master Servicer
will agree, and the related Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders, and the
Notes being debt of the partnership. However, the proper characterization of the
arrangement involving the Trust, the Certificates, the Notes, the Seller and the
Master Servicer is not certain because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Seller or the Trust. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership and that all payments on the Certificates are denominated in U.S.
dollars.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the related Contracts
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of such Contracts. The Trust's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (i.e., the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the related Contracts that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Contracts that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Seller and WII, in the proportion of 99% and 1%,
respectively. Based on the economic arrangement of the parties, this approach
for allocating Trust income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Certificateholders. Moreover, even
under the foregoing method of allocation, Certificateholders may be allocated
income equal to the entire Pass-Through Rate plus the other items described
above, even though the Trust might not have sufficient cash to make current cash
distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Certificates on the accrual basis and
Certificateholders may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay such taxes. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees to
the Master Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the
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individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Contract, the Trust
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Contracts will not be issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust for the related Contracts may be greater or
less than the remaining principal balance of the Contracts at the time of
purchase. If so, the Contracts will have been acquired at a premium or discount,
as the case may be. As indicated above, the Trust will make this calculation on
an aggregate basis, but might be required to recompute it on a Contract-by-
Contract basis.
If the Trust acquires the Contracts at a market discount or premium, it
will elect to include any such discount in income currently as it accrues over
the life of such Contracts or to offset any such premium against interest income
on such Contracts. As indicated above, a portion of such market discount income
or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. The Trust will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of an Certificate attributable to the holder's share
of unrecognized accrued market discount on the related Contracts would generally
be treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
54
<PAGE> 56
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller will
be authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to holders and the IRS on Schedule K-1. The Trust will
provide the Schedule K-l information to nominees that fail to provide the Trust
with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (a) the name, address and identification number of such person, (b)
whether such person is a United States person, a tax-exempt entity, a foreign
government or an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
WII will be designated as the tax matters partner for the Trust in the
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the
55
<PAGE> 57
portion of its taxable income that is allocable to foreign Certificateholders
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. These rates
may be increased by proposed tax legislation. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalty of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust. If these interest payments are properly characterized
as guaranteed payments, then the interest will not be considered "portfolio
interest". As a result, Certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
CERTAIN CALIFORNIA INCOME TAX CONSEQUENCES
In the opinion of Mitchell, Silberberg & Knupp LLP, special tax counsel to
the Seller, the Trust will not be an association taxable as a corporation for
California income tax purposes. This opinion will be based on the assumption
that the terms of the Trust Agreement and related documents will be complied
with, and such counsel's conclusions that the Trust will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation. Mitchell, Silberberg & Knupp LLP will
further render an opinion that Certificateholders and Noteholders who are not
residents of or otherwise subject to tax in California will not, solely by
reason of their acquisition of an interest in the Certificates or any Class of
Notes, respectively, be subject to California income, franchise, excise or
similar taxes with respect to interest on the Certificates or any Class of
Notes, respectively, or with respect to any of the other Trust Property.
Investors should consult their own tax advisors to determine the state,
local and other tax consequences to them of the purchase, ownership and
disposition of the Securities.
ERISA CONSIDERATIONS
OVERVIEW
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA
("Plans") and on persons who are parties in interest or disqualified persons
("parties in interest") with respect to such Plans which would affect purchases
of Securities by or on behalf of Plans. Certain employee benefit plans, such as
governmental plans and church plans (if no election has been made under Section
410(d) of the Code), are not subject to the requirements of ERISA and assets of
such plans may be invested in Certificates without regard to the ERISA
considerations described below, subject to the provisions of other applicable
federal and state law, including, for any such government or church plan
qualified under Section 401(a) of the Code and exempt from taxation under
Section 501(a) of the Code, the prohibited transaction rules set forth in
Section 503 of the Code.
56
<PAGE> 58
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification,
requirements respecting delegation of investment authority and the requirement
that a Plan's investment be made in accordance with the documents governing the
Plan.
PROHIBITED TRANSACTIONS
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code and Section 502(i) of ERISA impose certain excise taxes on such
prohibited transactions. Securities purchased by a Plan would be assets of the
Plan. Under regulations issued by the U.S. Department of Labor, the Contracts in
certain circumstances may also be deemed to be assets of each Plan that
purchases Securities. If this were so, persons that cause a Plan to acquire
Securities or that sponsor or insure the related Contracts or manage, control or
service the Contracts may be subject to the fiduciary responsibility provisions
of ERISA and the prohibited transaction provisions of Section 4975 of the Code
in the absence of a statutory or administrative exemption.
THE NOTES
The Notes may be purchased by a Plan subject to ERISA or Section 4975 of
the Code. A fiduciary of a Plan must determine that the purchase of a Note is
consistent with its fiduciary duties under ERISA and does not result in a
nonexempt prohibited transaction as defined in Section 406 of ERISA or Section
4975 of the Code.
The Notes may not be purchased with the assets of a Plan if the Seller, the
Master Servicer, the Indenture Trustee, the Owner Trustee or any of their
affiliates (i) has investment or administrative discretion with respect to such
Plan assets; (ii) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to an
agreement or understanding that such advice (a) will serve as a primary basis
for investment decisions with respect to such Plan assets and (b) will be based
on the particular investment needs for such Plan; or (iii) is an employer
maintaining or contributing to such Plan.
THE CERTIFICATES
The Certificates may not be acquired by (i) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title I
of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code (other than a
governmental plan described in Section 4975(g)(2) of the Code) or (iii) any
entity whose underlying assets include plan assets by reason of a plan's
investment in the entity or which uses plan assets to acquire Certificates. By
its acceptance of a Certificate or a beneficial interest therein, each
Certificateholder or Certificate Owner will be deemed to have represented and
warranted that it is not subject to the foregoing limitation.
Due to the complexities of the foregoing rules and the penalties imposed
upon persons involved in prohibited transactions, it is important that the
fiduciary of an employee benefit plan considering the purchase of Certificates
consult with its counsel regarding the applicability of the prohibited
transaction provisions of ERISA and the Code to such investment.
Prohibited Transaction Class Exemption ("PTCE") 95-60 was issued by the
Department of Labor on July 12, 1995 in response to the United States Supreme
Court decision John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank, 510 U.S. 86 (1993), in which the Court held that assets held in an
insurance company's general account may be deemed to be "plan assets" for ERISA
purposes under certain circumstances. Subject to certain conditions, PTCE 95-60
provides general relief from the prohibited transaction rules that would
otherwise be applicable to assets held in an insurance company's general
account. Prospective insurance company purchasers should consult with their
counsel to determine whether the decision in John Hancock, as modified by PTCE
95-60, affects their ability to make purchases of the Certificates.
57
<PAGE> 59
UNDERWRITING
Subject to certain conditions contained in an underwriting agreement (the
"Underwriting Agreement"), Donaldson, Lufkin & Jenrette Securities Corporation
and BancAmerica Securities Corporation (the "Underwriters") have agreed to
severally purchase from the Trust, and the Trust has agreed to sell to the
Underwriters, the respective principal amounts of each Class of Notes and the
Certificates as set forth opposite their names below:
CLASS A-1, A-2 AND A-3 NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
UNDERWRITERS OF CLASS A-1 NOTES OF CLASS A-2 NOTES OF CLASS A-3 NOTES
- ------------------------------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation............................. $ $ $
BancAmerica Securities Corporation........
------------ ------------ ------------
Total........................... $ $ $
============ ============ ============
</TABLE>
CLASS A-4 NOTES AND CERTIFICATES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
UNDERWRITERS OF CLASS A-4 NOTES OF CERTIFICATES
- ------------------------------------------------------------ ------------------ ----------------
<S> <C> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... $ $
BancAmerica Securities Corporation..........................
------------ ------------
Total............................................. $ $
============ ============
</TABLE>
The Seller has been advised by the Underwriters that they propose initially
to offer the Notes to the public at the respective public offering prices set
forth on the cover page of this Prospectus and to certain dealers at such prices
less a concession not in excess of % of the principal amount of the Class
A-1 Notes, % of the principal amount of the Class A-2 Notes, % of the
principal amount of the Class A-3 Notes and % of the principal amount of
the Class A-4 Notes. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of % of the principal amount of the Class A-1 Notes,
% of the principal amount of the Class A-2 Notes, % of the principal
amount of the Class A-3 Notes and % of the principal amount of the Class
A-4 Notes on sales to certain other dealers. After the initial public offering,
the public offering prices of the Notes and such concessions and discounts may
be changed.
The Seller has been advised by the Underwriters that they propose initially
to offer the Certificates to the public at the public offering price set forth
on the cover page of this Prospectus and to certain dealers at such prices less
a concession not in excess of % of the principal amount thereof. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of % of the principal amount of the Certificates. After the initial public
offering, the public offering price of the Certificates and such concessions and
discounts may be changed.
The Underwriting Agreement provides that the Underwriters' obligations
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions.
WestFin Securities Corporation ("WestFin"), a registered broker/dealer
affiliate of the Seller, is participating in the offering of the Securities by
acting as a financial advisor for the Seller. For its services, WestFin will
receive a fee of $ to be paid from the underwriting discounts and
commissions.
The Seller and WFS have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under applicable securities laws, or
contribute to payments the Underwriters may be required to make in respect
thereof.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of any Class
of Securities. Specifically, the Underwriters may overallot the offering,
58
<PAGE> 60
creating a short position. The Underwriters may bid for and purchase the
Securities in the open market to cover short positions. In addition, the
Underwriters may bid for and purchase the Securities in the open market to
stabilize the price of the Securities. These activities may stabilize or
maintain the market price of the Securities above independent market levels. The
Underwriters are not required to engage in these activities, and may end these
activities at any time.
RATINGS OF THE SECURITIES
It is a condition of issuance that the Class A-1 Notes be rated A-1+ by S&P
and P-1 by Moody's, and the Class A-2 Notes, Class A-3 Notes, Class A-4 Notes
and the Certificates each be rated AAA by S&P and Aaa by Moody's. The ratings by
S&P of the Notes will be issued without regard to the benefit afforded by the
Note Policy. The rating by Moody's of the Class A-1 Notes will be substantially
based on the issuance of the Note Policy by Financial Security, and the rating
by Moody's of the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes
will be based on the issuance of the Note Policy by Financial Security. The
ratings by each Rating Agency of the Certificates will be based on the issuance
of the Certificate Policy by Financial Security. Although the ratings of the
Notes by S&P do not take into account the benefit of the Note Policy, the Notes
will have the benefit of the Note Policy.
There is no assurance that any such rating will continue for any period of
time or that it will not be revised or withdrawn entirely by the assigning
rating agency if, in its judgment, circumstances (including, in the case of the
Certificates and, with respect to Moody's in the case of the Class A-2 Notes,
the Class A-3 Notes and the Class A-4 Notes, as a result of any change in the
claims-paying ability of Financial Security) so warrant. A revision or
withdrawal of such rating may have an adverse effect on the market price of the
Notes and the Certificates. A security rating is not a recommendation to buy,
sell or hold the Securities.
LEGAL MATTERS
Certain legal matters with respect to the Securities, including certain
federal and California income tax matters, will be passed upon for the Seller by
Mitchell, Silberberg & Knupp LLP, Los Angeles, California. Brown & Wood LLP, San
Francisco, California will act as counsel for the Underwriters. Certain legal
matters relating to the Policies will be passed upon for Financial Security by
Bruce E. Stern, Esq., General Counsel, Financial Security or an Associate
General Counsel of Financial Security and by Rogers & Wells, New York, New York.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1996, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
59
<PAGE> 61
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
A. 1996 YEAR END FINANCIAL STATEMENTS
Report of Independent Accountants........................................... A-1
Consolidated Balance Sheets as of December 31, 1996 and 1995................ A-2
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994.............................................................. A-3
Consolidated Statements of Changes in Shareholder's Equity for the Years
Ended December 31, 1996, 1995 and 1994..................................... A-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994.............................................................. A-5
Notes to Consolidated Financial Statements for the Years Ended December 31,
1996, 1995 and 1994........................................................ A-6-A-23
B. 1997 QUARTERLY FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996.......................................................... A-24
Condensed Consolidated Statements of Income for the Three Months Ended March
31, 1997 and 1996 (unaudited).............................................. A-25
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1997 and 1996 (unaudited)........................................ A-26
Notes to Condensed Consolidated Financial Statements for the Three Months
Ended March 31, 1997 and 1996 (unaudited).................................. A-27
</TABLE>
The New York State Insurance Department recognizes only statutory
accounting practices for determining and reporting the financial condition and
results of operations of an insurance company, for determining its solvency
under the New York Insurance Law, and for determining whether its financial
condition warrants the payment of a dividend to its stockholders. No
consideration is given by the New York State Insurance Department to financial
statements prepared in accordance with generally accepted accounting principles
in making such determinations.
61
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
of Financial Security Assurance Inc.:
We have audited the accompanying consolidated balance sheets of Financial
Security Assurance Inc. and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, changes in shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
1996. 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 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 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 Financial
Security Assurance Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
January 24, 1997
A-1
<PAGE> 63
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Bonds at market value (amortized cost of $1,054,678 and
$1,006,084)...................................................... $1,068,677 $1,036,382
Equity investments at market value (cost of $1,000)................ 1,000
Short-term investments............................................. 39,570 14,568
Cash equivalents................................................... 16,129 35,277
------------ ------------
Total investments........................................ 1,125,376 1,086,227
Cash............................................................... 7,517 555
Deferred acquisition costs......................................... 146,233 132,951
Prepaid reinsurance premiums....................................... 151,224 133,548
Reinsurance recoverable on unpaid losses........................... 29,875 61,532
Other assets....................................................... 69,705 61,825
------------ ------------
TOTAL ASSETS............................................. $1,529,930 $1,476,638
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Deferred premium revenue........................................... $ 511,196 $ 463,897
Losses and loss adjustment expenses................................ 72,079 111,759
Deferred federal income taxes...................................... 41,682 43,205
Ceded reinsurance balances payable................................. 12,599 13,664
Payable for securities purchased................................... 14,142 9,516
Accrued expenses and other liabilities............................. 62,900 44,611
------------ ------------
TOTAL LIABILITIES........................................ 714,598 686,652
------------ ------------
COMMITMENTS AND CONTINGENCIES
Common stock (1,000 shares authorized; 660 and 750 shares issued
and outstanding; par value of $22,727 and $20,000 per share)..... 15,000 15,000
Additional paid-in capital......................................... 654,470 681,470
Unrealized gain on investments (net of deferred income tax
provision of $4,899 and $10,604)................................. 9,099 19,694
Accumulated earnings............................................... 136,763 73,822
------------ ------------
TOTAL SHAREHOLDER'S EQUITY............................... 815,332 789,986
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............... $1,529,930 $1,476,638
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
A-2
<PAGE> 64
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Net premiums written (net of premiums ceded of $55,965,
$33,166 and $28,692, of which $35,299, $20,582 and
$15,999 were ceded to affiliates)..................... $121,000 $ 77,576 $ 77,757
Increase in deferred premium revenue..................... (30,552) (8,229) (12,003)
-------- -------- --------
Premiums earned (net of premiums ceded of $38,723,
$38,013 and $35,051).................................. 90,448 69,347 65,754
Net investment income.................................... 62,728 47,083 45,282
Net realized gains (losses).............................. 1,851 5,032 (3,829)
Other income............................................. 502 4,722 732
-------- -------- --------
TOTAL REVENUES................................... 155,529 126,184 107,939
-------- -------- --------
EXPENSES:
Losses and loss adjustment expenses:
Related to merger..................................... 15,400
Other (net of reinsurance recoveries of ($2,249),
$9,101 and $56,895, of which ($3,084), $7,111 and
$50,839 were ceded to affiliates)................... 6,874 6,258 3,024
Policy acquisition costs................................. 23,829 16,888 15,057
Other operating expenses................................. 14,852 12,352 11,574
-------- -------- --------
TOTAL EXPENSES................................... 45,555 50,898 29,655
-------- -------- --------
INCOME BEFORE INCOME TAXES................................. 109,974 75,286 78,284
-------- -------- --------
Provision (benefit) for income taxes:
Current.................................................. 28,208 23,353 13,338
Deferred................................................. 911 (3,055) 4,682
-------- -------- --------
Total provision.......................................... 29,119 20,298 18,020
-------- -------- --------
NET INCOME....................................... $ 80,855 $ 54,988 $ 60,264
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
A-3
<PAGE> 65
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON PAID-IN GAINS ON RETAINED
STOCK CAPITAL INVESTMENTS EARNINGS TOTAL
------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... $15,000 $497,506 $ 34,892 $ (4,930) $542,468
Net income for the year.............. 60,264 60,264
Dividends paid on common stock....... (17,500) (17,500)
Net change in unrealized loss on
investments (net of deferred income
tax benefit of $30,292)............ (56,256) (56,256)
------- -------- -------- -------- --------
BALANCE, December 31, 1994........... 15,000 497,506 (21,364) 37,834 528,976
Net income........................... 54,988 54,988
Dividends paid on common stock....... (19,000) (19,000)
Net change in unrealized gain on
investments (net of deferred income
taxes of $22,108).................. 41,058 41,058
Capital contribution of CGIC......... 233,964 233,964
Stock repurchase..................... (50,000) (50,000)
------- -------- -------- -------- --------
BALANCE, December 31, 1995........... 15,000 681,470 19,694 73,822 789,986
Net income........................... 80,855 80,855
Dividends paid on common stock....... (18,000) (18,000)
Net change in unrealized loss on
investments (net of deferred income
tax benefit of $5,705)............. (10,595) (10,595)
Stock repurchase..................... (27,000) (27,000)
Adjustment to prior year disposal of
subsidiary......................... 86 86
------- -------- -------- -------- --------
BALANCE, December 31, 1996........... $15,000 $654,470 $ 9,099 $136,763 $815,332
======= ======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
A-4
<PAGE> 66
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums received, net............................... $ 124,540 $ 85,481 $ 58,191
Policy acquisition and other operating expenses paid,
net............................................... (49,261) (41,730) (31,696)
Recoverable advances received (paid)................. 10,213 (9,419) (939)
Losses and loss adjustment expenses paid............. (15,473) (4,954) (5,124)
Net investment income received....................... 59,923 40,160 41,429
Federal income taxes received (paid)................. (33,297) (17,295) (14,358)
Interest paid........................................ (22) (38) (72)
Other................................................ 1,330 2,552 (4,314)
----------- --------- ---------
Net cash provided by operating activities.... 97,953 54,757 43,117
----------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds......................... 1,095,929 603,545 790,517
Proceeds from maturities of bonds.................... 2,965 606 55
Purchases of bonds................................... (1,139,129) (685,984) (758,254)
Purchases of property and equipment.................. (2,081) (958) (937)
Cash of contributed subsidiary....................... 199
Net decrease (increase) in short-term investments.... (3,675) 94,727 (58,095)
----------- --------- ---------
Net cash provided by (used for) investing
activities................................. (45,991) 12,135 (26,714)
----------- --------- ---------
Cash flows from financing activities:
Stock repurchase..................................... (27,000) (50,000)
Dividends paid....................................... (18,000) (19,000) (17,500)
----------- --------- ---------
Net cash used for financing activities....... (45,000) (69,000) (17,500)
----------- --------- ---------
Net increase (decrease) in cash........................ 6,962 (2,108) (1,097)
Cash at beginning of year.............................. 555 2,663 3,760
----------- --------- ---------
Cash at end of year.................................... $ 7,517 $ 555 $ 2,663
=========== ========= =========
Reconciliation of net income to net cash flows from
operating activities:
Net income............................................. $ 80,855 $ 54,988 $ 60,264
Decrease (increase) in accrued investment income..... (842) 14 1,773
Increase in deferred premium revenue and related
foreign exchange adjustment....................... 29,622 8,141 12,585
Decrease (increase) in deferred acquisition costs.... (13,282) (10,305) (9,847)
Increase (decrease) in current federal income taxes
payable........................................... (5,090) 6,057 (1,020)
Increase (decrease) in unpaid losses and loss
adjustment expenses............................... (8,023) 14,587 (376)
Increase (decrease) in amounts withheld for others... 52 30 (24,675)
Provision (benefit) for deferred income taxes........ 911 (3,055) 4,682
Net realized losses (gains) on investments........... (1,851) (5,032) 3,829
Depreciation and accretion of bond discount.......... (1,616) (5,564) (4,082)
Change in other assets and liabilities............... 17,217 (5,104) (16)
----------- --------- ---------
Cash provided by operating activities.................. $ 97,953 $ 54,757 $ 43,117
=========== ========= =========
</TABLE>
In addition to the cash received from the contribution of the
subsidiary, the Company also received net assets of $233,765.
In 1996, the Company has recharacterized its cash equivalents
as short-term investments. The amount of cash equivalents
recharacterized were $16,129, $35,277 and $13,457 as of
December 31, 1996, 1995 and 1994, respectively.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
A-5
<PAGE> 67
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), a wholly owned subsidiary
of Financial Security Assurance Holdings Ltd. (the Parent), is an insurance
company domiciled in the State of New York. The Company is engaged in providing
financial guaranty insurance on asset-backed financings and municipal
obligations. The Company's underwriting policy is to insure asset-backed and
municipal obligations that would otherwise be investment grade without the
benefit of the Company's insurance. The asset-backed obligations insured by the
Company are generally issued in structured transactions and are backed by pools
of assets such as residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
The municipal obligations insured by the Company consist primarily of general
obligation bonds that are supported by the issuers' taxing power and special
revenue bonds and other special obligations of states and local governments that
are supported by the issuers' ability to impose and collect fees and charges for
public services or specific projects. Financial guaranty insurance written by
the Company guarantees payment when due of scheduled payments on an issuer's
obligation. In the case of a payment default on an insured obligation, the
Company is generally required to pay the principal, interest or other amounts
due in accordance with the obligation's original payment schedule or, at its
option, to pay such amounts on an accelerated basis.
The Company expects to continue to emphasize a diversified insured
portfolio characterized by insurance of both asset-backed and municipal
obligations, with a broad geographic distribution and a variety of revenue
sources and transaction structures. The Company's insured portfolio consists
primarily of asset-backed and municipal obligations originated in the United
States, but the Company has also written and continues to pursue business in
Europe and the Pacific Rim.
At December 31, 1993, the Parent was owned 92.5% by U S WEST and 7.5% by
Tokio Marine. The Parent completed an initial public offering of common shares
on May 13, 1994. In connection with the initial public offering, Fund American
Enterprises Holdings, Inc. (Fund American) acquired an interest in the Parent,
together with rights to acquire additional shares of the Parent from U S WEST
and shares of the Parent's Series A preferred stock. At December 31, 1994, the
Parent was owned 60.9% by U S WEST, 7.7% by Fund American, 7.4% by Tokio Marine
and 24.0% by the public and employees.
On December 20, 1995, a subsidiary of the Parent merged (the Merger) with
Capital Guaranty Corporation (CGC). The Merger provided for each CGC share to be
exchanged for 0.6716 share of the Parent's common stock and cash of $5.69. The
Parent issued in the aggregate 6,051,661 common shares and paid aggregate cash
consideration of $51,300,000. In conjunction with the Merger, the Parent
contributed (the Contribution) the common stock of Capital Guaranty Insurance
Company (CGIC), a subsidiary of CGC, to the Company. As a result of the
Contribution, the Company's net assets increased by $233,964,000. Net premiums
written by CGIC in 1995 prior to the Contribution were $26,070,000. At December
31, 1995, the Parent was owned 50.3% by U S WEST, 7.8% by Fund American, 6.1% by
Tokio Marine and 35.8% by the public and employees. At December 31, 1996, the
Parent was owned 40.4% by U S WEST, 11.5% by Fund American, 6.4% by Tokio Marine
and 41.7% by the public and employees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP), which differ in certain
material respects from the accounting practices prescribed or permitted by
insurance regulatory authorities (see Note 6). 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
A-6
<PAGE> 68
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
contingent assets and liabilities in the Company's consolidated balance sheets
at December 31, 1996 and 1995 and the reported amounts of revenues and expenses
in the consolidated statements of income during the years ended December 31,
1996, 1995 and 1994. Such estimates and assumptions include, but are not limited
to, losses and loss adjustment expenses and the deferral and amortization of
deferred policy acquisition costs. Actual results may differ from those
estimates. Significant accounting policies under GAAP are as follows:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Financial Security Assurance of Maryland Inc.
(which was named Capital Guaranty Insurance Corporation until the Merger),
Financial Security Assurance International Inc., Financial Security Assurance of
Oklahoma, Inc. and Financial Security Assurance (U.K.) Limited (collectively,
the Subsidiaries). All intercompany accounts and transactions have been
eliminated. Certain prior-year balances have been reclassified to conform with
the 1996 presentation. The Merger, and the related Contribution to the Company,
were accounted for on a purchase accounting basis. In view of the short period
between the date of the Merger, December 20, 1995, and the year-end, the date of
the Contribution for accounting purposes is considered to be December 31, 1995.
As a result, the accounting for the Contribution has no effect on the Company's
consolidated statement of income for the year ended December 31, 1995, except
for the recording of $15,400,000 in losses and loss adjustment expenses to
increase the Company's general reserve to provide for the insured portfolio
assumed by the Company as a result of the Contribution (see Note 16).
INVESTMENTS
Investments in debt securities designated as available for sale are carried
at market value. Any resulting unrealized gain or loss is reflected as a
separate component of shareholder's equity, net of applicable deferred income
taxes. All of the Company's long-term investments are classified as available
for sale.
Bond discounts and premiums are amortized on the effective yield method
over the remaining terms of the securities acquired. For mortgage-backed
securities, and any other holdings for which prepayment risk may be significant,
assumptions regarding prepayments are evaluated periodically and revised as
necessary. Any adjustments required due to the resultant change in effective
yields are recognized in current income. Short-term investments, which are those
investments with a maturity of more than three months but less than one year at
time of purchase, are carried at market value, which approximates cost. Realized
gains or losses on sale of investments are determined on the basis of specific
identification. Investment income is recorded as earned.
To manage adverse movements in interest rates, the Company uses exchange
traded futures and options. These contracts are designated as hedges of specific
identified securities and any gains or losses on these hedges are deferred and
included as part of the Company's unrealized gains or losses in stockholder's
equity until the disposition of the hedged assets. The Company will discontinue
to account for these contracts as hedges if there ceases to be a high
correlation between the change in price of the hedged assets and the hedge.
Cash equivalents represent amounts deposited in money market funds and
investments with a maturity at time of purchase of three months or less.
PREMIUM REVENUE RECOGNITION
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. Deferred premium revenue and
prepaid reinsurance premiums represent that portion of
A-7
<PAGE> 69
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
premium which is applicable to coverage of risk to be provided in the future on
policies in force. When an insured issue is retired or defeased prior to the end
of the expected period of coverage, the remaining deferred premium revenue and
prepaid reinsurance premium, less any amount credited to a refunding issue
insured by the Company, are recognized.
LOSSES AND LOSS ADJUSTMENT EXPENSES
A case basis reserve for unpaid losses and loss adjustment expenses is
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. The estimated loss on a transaction is discounted using
current risk-free rates.
The general reserve is calculated by applying a loss factor to the total
net par amount outstanding of the Company's insured obligations outstanding over
the term of such insured obligations and discounting the result at risk-free
rates. The loss factor used for this purpose has been determined based upon an
independent rating agency study of bond defaults and the Company's portfolio
characteristics and history. The general reserve is available to be applied
against future additions or accretions to existing case basis reserves or to new
case basis reserves to be established in the future.
Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the ultimate net cost of claims; the reserves are
necessarily based on estimates, and there can be no assurance that the ultimate
liability will not differ from such estimates. The Company will, on an ongoing
basis, monitor these reserves and may periodically adjust such reserves based on
the Company's actual loss experience, its future mix of business, and future
economic conditions.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs comprise those expenses that vary with and are
primarily related to the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium taxes and certain other
underwriting expenses, reduced by ceding commission income on premiums ceded to
reinsurers. Deferred acquisition costs and the cost of acquired business are
amortized over the period in which the related premiums are earned.
Recoverability of deferred acquisition costs is determined by considering
anticipated losses and loss adjustment expenses.
FEDERAL INCOME TAXES
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods
reflected at current income tax rates.
3. INVESTMENTS
Bonds at amortized cost of $17,669,000 and $11,969,000 at December 31, 1996
and 1995, respectively, were on deposit with state regulatory authorities as
required by insurance regulations.
A-8
<PAGE> 70
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Consolidated net investment income consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Long-term bonds............................... $61,130 $43,114 $46,517
Equity securities............................. 14
Short-term investments and cash equivalents... 3,525 5,705 778
Investment expenses........................... (1,941) (1,736) (2,013)
------- ------- -------
Net investment income......................... $62,728 $47,083 $45,282
======= ======= =======
</TABLE>
The credit quality of the investment portfolio at December 31, 1996 was as
follows:
<TABLE>
<CAPTION>
PERCENT OF
RATING INVESTMENT PORTFOLIO
------ --------------------
<S> <C>
AAA................................. 69.9%
AA.................................. 20.0
A................................... 10.1
</TABLE>
The amortized cost and estimated market value of long-term bonds were as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................... $ 55,319 $ 1,103 $ (557) $ 55,865
Obligations of states and political
subdivisions............................... 661,657 15,164 (2,887) 673,934
Foreign securities........................... 15,019 196 (70) 15,145
Mortgage-backed securities................... 177,818 1,432 (906) 178,344
Corporate securities......................... 76,632 335 (319) 76,648
Asset-backed securities...................... 68,233 680 (172) 68,741
---------- ------- ------- ----------
Total.............................. $1,054,678 $ 18,910 $ (4,911) $1,068,677
========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
- ----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................... $ 44,873 $ 2,231 $ -- $ 47,104
Obligations of states and political
subdivisions............................... 635,872 20,112 (330) 655,654
Foreign securities........................... 28,691 1,909 (17) 30,583
Mortgage-backed securities................... 262,936 5,949 (51) 268,834
Corporate securities......................... 1,254 51 1,305
Asset-backed securities...................... 32,458 444 32,902
---------- ------- ------- ----------
Total.............................. $1,006,084 $ 30,696 $ (398) $1,036,382
========== ======= ======= ==========
</TABLE>
A-9
<PAGE> 71
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The change in net unrealized gains (losses) consisted of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Long-term bonds............................................. $(16,299) $63,166 $(86,564)
Short-term investments...................................... 16
-------- ------- --------
Change in net unrealized gains (losses)................... $(16,299) $63,166 $(86,548)
======== ======= ========
</TABLE>
The amortized cost and estimated market value of long-term bonds at
December 31, 1996 and 1995, by contractual maturity, are shown below (in
thousands). Actual maturities could differ from contractual maturities because
borrowers have the right to call or prepay certain obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less................... $ 38,003 $ 38,325 $ 2,776 $ 2,778
Due after one year through five years..... 57,406 57,623 25,735 26,075
Due after five years through ten years.... 105,494 105,849 157,161 162,573
Due after ten years....................... 607,724 619,795 525,018 543,220
Mortgage-backed securities (stated
maturities of 16 to 30 years)........... 177,818 178,344 262,936 268,834
Asset-backed securities (stated maturities
of 2 to 5 years)........................ 68,233 68,741 32,458 32,902
---------- ---------- ---------- ----------
Total................................... $1,054,678 $1,068,677 $1,006,084 $1,036,382
========== ========== ========== ==========
</TABLE>
Proceeds from sales of long-term bonds during 1996, 1995 and 1994 were
$1,096,568,000, $587,516,000 and $808,143,000, respectively. Gross gains of
$13,420,000, $12,346,000 and $13,919,000 and gross losses of $11,569,000,
$7,314,000 and $17,748,000 were realized on sales in 1996, 1995 and 1994,
respectively.
To hedge against changes in yields on certain one-year corporate
securities, the Company has entered into a series of Eurodollar futures
contracts, which are marked-to-market on a daily basis. These contracts are
accounted for as a hedge. As of year-end, the net unrealized loss on the
contracts, included in the Company's unrealized gains in stockholder's equity
section, is not material. The aggregate notional amount of these contracts is
$83,728,000 as of December 31, 1996.
A-10
<PAGE> 72
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. DEFERRED ACQUISITION COSTS
Acquisition costs deferred for amortization against future income and the
related amortization charged to expenses are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of period............................... $132,951 $ 91,839 $ 81,992
-------- -------- --------
Costs deferred during the period:
Ceding commission income................................... (15,956) (9,836) (8,476)
Assumed commission expense................................. 38 55 84
Premium taxes.............................................. 3,718 2,537 2,589
Compensation and other acquisition costs................... 49,311 34,437 30,707
-------- -------- --------
Total............................................ 37,111 27,193 24,904
-------- -------- --------
Costs amortized during the period.......................... (23,829) (16,888) (15,057)
-------- -------- --------
Balance of contributed subsidiary.......................... 30,807
--------
Balance, end of period..................................... $146,233 $132,951 $ 91,839
======== ======== ========
</TABLE>
5. OTHER OPERATING EXPENSES
Total salary expense and related benefits included in other operating
expenses were $10,135,000, $10,976,000 and $9,187,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
6. STATUTORY ACCOUNTING PRACTICES
GAAP for the Company differs in certain significant respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The principal differences result from the following statutory
accounting practices:
- Upfront premiums on municipal business are recognized as earned when
related risk has expired rather than over the expected coverage period;
- Acquisition costs are charged to operations as incurred rather than as
related premiums are earned;
- A contingency reserve is computed based on the following statutory
requirements (rather than establishing a general loss reserve):
a. For all policies written prior to July 1, 1989, an amount equal to
50% of cumulative earned premiums less permitted reductions, plus;
b. For all policies written on or after July 1, 1989, an amount equal
to the greater of 50% of premiums written for each category of insured
obligation or a designated percent of principal guaranteed for that
category. These amounts are provided each quarter as either 1/60th or
1/80th of the total required for each category, less permitted reductions;
- Certain assets designated as "non-admitted assets" are charged directly
to statutory surplus but are reflected as assets under GAAP;
- Federal income taxes are provided only on taxable income for which income
taxes are currently payable;
A-11
<PAGE> 73
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- Accruals for deferred compensation are not recognized;
- Purchase accounting adjustments are not recognized;
- Bonds are carried at amortized cost.
A reconciliation of the Company's net income for the calendar years 1996,
1995 and 1994 and shareholder's equity at December 31, 1996, 1995 and 1994,
prepared on a GAAP basis, to the amounts reported on a statutory basis, is as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net Income (Loss):
GAAP BASIS......................................... $ 80,855 $ 54,988 $ 60,264
Premium revenue recognition........................ (5,518) (4,805) (5,425)
Losses and loss adjustment expenses incurred....... (2,138) 10,871 (13,908)
Deferred acquisition costs......................... (12,482) (10,305) (9,847)
Deferred income tax provision (benefit)............ 911 (3,055) 4,682
Amortization of bonds.............................. 566 1,195 520
Accrual of deferred compensation................... 12,737 5,663 (9,062)
Other.............................................. 1,404 (1,580) (274)
-------- -------- --------
STATUTORY BASIS.................................... $ 76,335 $ 52,972 $ 26,950
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Shareholder's Equity:
GAAP BASIS......................................... $815,332 $789,986 $528,976
Premium revenue recognition........................ (51,760) (46,248) (29,891)
Loss and loss adjustment expense reserves.......... 29,660 31,798 20,927
Deferred acquisition costs......................... (146,233) (132,951) (91,839)
Contingency reserve................................ (227,139) (183,967) (121,414)
Unrealized loss (gain) on investments, net of
tax.............................................. (14,084) (30,298) 32,868
Deferred income taxes.............................. 41,682 43,205 10,222
Accrual of deferred compensation................... 18,390 5,653
Other.............................................. (17,043) (16,492) (5,475)
-------- -------- --------
STATUTORY BASIS (SURPLUS).......................... $448,805 $460,686 $344,374
======== ======== ========
SURPLUS PLUS CONTINGENCY RESERVE................... $675,944 $644,653 $465,788
======== ======== ========
</TABLE>
7. FEDERAL INCOME TAXES
For periods prior to May 13, 1994, the date of initial public offering when
the Parent became less than 80% owned by U S WEST, the Parent, the Company and
its Subsidiaries joined with U S WEST and its subsidiaries in filing a
consolidated federal income tax return. For the Company, under a written tax
sharing agreement with U S WEST, the allocation of income taxes was based upon
separate return calculations which provided that benefits or liabilities created
by the Company are allocated to the Company regardless of whether the benefits
were usable or additional liabilities were incurred in the U S WEST tax returns.
For periods subsequent to May 12, 1994, the Parent and all members of its group
elected to file consolidated
A-12
<PAGE> 74
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
federal tax returns. The calculation of each member's tax benefit or liability
by the Company was controlled by a tax sharing agreement that based the
allocation of such benefit or liability upon a separate return calculation.
The cumulative balance sheet effects of deferred tax consequences are (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred acquisition costs............................. $ 51,182 $ 46,533
Deferred premium revenue adjustments................... 3,520 2,905
Contingency reserve.................................... 29,492 11,542
Unrealized capital gains............................... 7,915 14,950
Market discounts....................................... 1,955 900
-------- --------
Total deferred tax liabilities............... 94,064 76,830
-------- --------
Loss and loss adjustment expense reserves.............. (10,381) (11,129)
Deferred compensation.................................. (9,791) (5,529)
Tax credits............................................ (7,842) (3,795)
Tax and loss bonds..................................... (22,526) (11,116)
Other, net............................................. (1,842) (2,056)
-------- --------
Total deferred tax assets.................... (52,382) (33,625)
-------- --------
Total deferred income taxes............................ $ 41,682 $ 43,205
======== ========
</TABLE>
No valuation allowance was necessary at December 31, 1996 or 1995.
A reconciliation of the effective tax rate with the federal statutory rate
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Tax at statutory rate................................ 35.0% 35.0% 35.0%
Tax-exempt interest.................................. (8.9) (8.3) (12.0)
Other................................................ 0.4 0.3
---- ---- ----
Provision for income taxes........................... 26.5% 27.0% 23.0%
==== ==== ====
</TABLE>
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York Insurance Law, the Company may pay a dividend without the
prior approval of the Superintendent of the New York State Insurance Department
only from earned surplus subject to the maintenance of a minimum capital
requirement, and the dividend, which together with all dividends declared or
distributed by it during the preceding twelve months, may not exceed the lesser
of 10% of its policyholders' surplus shown on its last filed statement, or
adjusted net investment income, as defined, for such twelve-month period. As of
December 31, 1996, the Company had $45,184,000 available for the payment of
dividends over the next twelve months. As a customary condition for approving
the application of Fund American for a change in control of the Company, the
prior approval of the Superintendent of the New York State Insurance Department
was required for any payment of dividends by the Company to the Parent for a
period of two years following such changed control. Such approval was provided
for the payment of dividends by the Company to the Parent in 1996, 1995 and 1994
in the ordinary course of business. Such prior approval requirement lapsed in
September 1996. In addition, the New York Superintendent has approved the
repurchase by the Company of up to $75,000,000 of its shares from the Parent
through December 31, 1998, pursuant to which the
A-13
<PAGE> 75
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Company has repurchased $27,000,000 of its shares through December 31, 1996.
Future share repurchases may not exceed cumulative statutory net income
beginning January 1, 1996.
9. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES
The Company has a credit arrangement aggregating $150,000,000 at December
31, 1996, which is provided by commercial banks and intended for general
application to transactions insured by the Company and the Subsidiaries. At
December 31, 1996, there have been no borrowings under this arrangement. In
addition, there are credit arrangements assigned to specific insured
transactions. In August 1994, the Company entered into a facility agreement with
Canadian Global Funding Corporation and Hambros Bank Limited. Under the
agreement, the Company can arrange financing for transactions subject to certain
conditions. The amount of this facility was $186,911,000, of which $100,911,000
was unutilized at December 31, 1996.
The Company has a standby line of credit commitment in the amount of
$125,000,000 with an international Aaa/AAA-rated bank to provide loans to the
Company after it has incurred, during the term of the facility, cumulative
municipal losses (net of any recoveries) in excess of the greater of
$200,000,000 or 5.75% of average annual debt service. The obligation to repay
loans made under this agreement is a limited recourse obligation payable solely
from, and collateralized by, a pledge of recoveries realized on defaulted
insured obligations including certain installment premiums and other collateral.
This commitment has a term beginning on April 30, 1996 and expiring on January
31, 2003 and contains an annual renewal provision subject to approval by the
bank.
10. EMPLOYEE BENEFIT PLANS
The Company maintains both a qualified and a non-qualified non-contributory
defined contribution pension plan for the benefit of all eligible employees. The
Company's contributions are based upon a fixed percentage of employee
compensation. Pension expense, which is funded as accrued, amounted to
$1,977,000, $1,784,000 and $1,888,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company has an employee retirement savings plan for the benefit of all
eligible employees. The plan permits employees to contribute a percentage of
their salaries up to limits prescribed by the Internal Revenue Service (IRS
Code, Section 401(k)). The Company's contributions are discretionary, and none
have been made.
During 1991, the Company established the Profit Participation Plan as a
long-term incentive compensation plan for the benefit of certain of its
employees. Prior to the initial public offering, the Parent adopted a
Supplemental Restricted Stock Plan. Pursuant to this plan, awards of outstanding
units to existing employees under the Profit Participation Plan were valued at
$0.20 per dollar of award ($0.70 per dollar of award in the case of 1994 regular
units granted thereunder) and, at the election of each outstanding employee,
were exchanged for restricted shares of the Parent's common stock valued at the
initial public offering price of $20.00 per share. All employees of the Company,
including all senior executives, exchanged their outstanding interests in the
Profit Participation Plan for restricted shares of the Parent's common stock at
the public offering price under the Supplemental Restricted Stock Plan. In
settlement of an accrued balance of $7,126,000 in such Profit Participation
Plan, the Company purchased 356,345 shares of restricted stock from the Parent
and awarded the shares to employees. The stock was restricted because ownership
of the shares by employees required continued employment; the shares vested
ratably over a three-year period on July 1, 1994, 1995 and 1996.
A-14
<PAGE> 76
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Pursuant to the 1993 Equity Participation Plan, 1,810,780 shares of the
Parent's common stock, subject to anti-dilutive adjustment, were reserved for
awards of options, restricted shares of common stock, and performance shares to
employees for the purpose of providing, through the grant of long-term
incentives, a means to attract and retain key personnel and to provide to
participating officers and other key employees long-term incentives for
sustained high levels of performance. Shares available under the 1993 Equity
Participation Plan were increased from 1,810,780 to 2,110,780 in May 1995. The
1993 Equity Participation Plan also contains provisions that permit the Human
Resources Committee to pay all or a portion of an employee's bonuses in the form
of shares of the Parent's common stock credited to the employees at a 15%
discount from current market value and paid to employees five years from the
date of award. Up to an aggregate of 10,000,000 shares may be allocated to such
equity bonuses. Common stock to pay equity bonus awards will be acquired by the
Parent through open-market purchases by a trust established for such purpose.
During 1994, under the Parent's 1993 Equity Participation Plan, the Parent
granted to officers and employees, in respect of future performance,
non-qualified options to purchase an aggregate of 1,099,000 shares of the
Parent's common stock, of which 39,000 were forfeited and 1,060,000 were still
outstanding at December 31, 1994, substantially all of which have an exercise
price of $20.00 per share. (As described below, 1,025,500 of these options will
be converted to performance shares.) The foregoing options vest, subject to
continuation of employment and other terms of the option grants, at the rate of
20% per year, for five one-year periods, with the first period ending on July 1,
1994. Such options expire ten years after the effective dates of their grant. In
the fourth quarter of 1994, holders of outstanding stock options under the 1993
Equity Participation Plan were offered the right to exchange such stock options
for an equal number of performance shares under such Plan. Also, as a result of
the Merger, the Parent granted 169,956 of stock options with strike prices
ranging from $18.63 to $23.53 per share to employees of CGC in exchange for
outstanding stock options of CGC. Giving effect to such exchange, at December
31, 1996, there were outstanding 1,374,340 performance shares and 201,956
options to purchase shares of common stock.
Performance shares granted under the 1993 Equity Participation Plan were as
follows:
<TABLE>
<CAPTION>
OUTSTANDING
AT GRANTED FORFEITED OUTSTANDING MARKET
BEGINNING DURING DURING AT END PRICE AT
OF YEAR THE YEAR THE YEAR OF YEAR GRANT DATE
----------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1994............... 1,025,500 1,025,500 $ 21.875
1995............... 1,025,500 83,650 1,109,150 19.250
1996............... 1,109,150 282,490 17,300 1,374,340 25.250
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for the Parent's performance shares. The Company estimates the final
cost of these performance shares and accrues for this expense over the
performance period. The accrued expense for the performance shares was
$12,737,000 and $5,663,000 for the years ended December 31, 1996 and 1995,
respectively. In tandem with this accrued expense, the Parent estimates those
performance shares that it expects to settle in stock and records this amount in
stockholders' equity as deferred compensation. The remainder of the accrual,
which represents the amount of performance shares that the Parent estimates it
will settle in cash, is recorded in accrued expenses and other liabilities. In
1996, the Company adopted disclosure provisions of FASB Statement 123. Had the
compensation cost for the Parent's performance shares been determined based upon
fair value at the grant dates for the awards consistent with the method of FASB
Statement 123, the effect on the Company's net income and earnings per share
would have been immaterial.
A-15
<PAGE> 77
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In November 1994, the Parent appointed an independent trustee authorized to
purchase shares of the Parent's common stock in open market transactions, at
times and prices determined by the trustee. These purchases are intended to fund
future obligations relating to equity bonuses, performance shares and stock
options under the 1993 Equity Participation Plan. During 1996, 1995 and 1994,
the total number of shares purchased by this trust was 529,131, 591,714 and
182,562, respectively, at a cost of $14,111,000, $14,444,000 and $3,730,000,
respectively. The Parent also repurchased stock from its employees in
satisfaction of withholding taxes on shares distributed under its restricted
stock plan.
The Company does not currently provide post-retirement benefits, other than
pensions to its employees, nor does it provide post-employment benefits to
former employees.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under non-cancelable
operating leases, which expire at various dates through 2005.
Future minimum rental payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
<S> <C>
1996............................................... $ 2,257
1997............................................... 2,267
1998............................................... 2,229
1999............................................... 2,169
2000............................................... 2,014
Thereafter......................................... 6,810
-------
Total.................................... $17,746
=======
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$3,383,000, $3,493,000 and $3,430,000, respectively.
During the ordinary course of business, the Company and its Subsidiaries
have become parties to certain litigation. Management believes that these
matters will be resolved with no material financial impact on the Company.
12. REINSURANCE
The Company reinsures portions of its risks with affiliated (see Note 14)
and unaffiliated reinsurers under quota share treaties and on a facultative
basis. The Company's principal ceded reinsurance program consisted in 1996 of
three quota share treaties and three automatic facultative facilities. One
treaty covers all of the Company's approved regular lines of business, except
municipal obligation insurance. Under this treaty in 1996, the Company ceded
11.35% of each covered policy, up to a maximum of $22,700,000 insured principal
per policy. At its sole option, the Company could have increased, and in certain
instances did increase, the ceding percentage to 22.7% up to $45,400,000 of each
covered policy. A second treaty covers the Company's municipal obligation
insurance business. Under this treaty in 1996, the Company ceded 10% of each
covered policy that is classified by the Company as providing municipal bond
insurance as defined by Article 69 of the New York Insurance Law up to a limit
of $26,667,000 per single risk, which is defined by revenue source. At its sole
option, the Company could have increased, and in certain instances did increase,
the ceding percentage to 30% up to $80,000,000 per single risk. Under the third
treaty in 1996, the Company ceded 5% of its retention (i.e., after cessions of
policies under the municipal obligation insurance treaty) covering substantially
A-16
<PAGE> 78
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
all teaching hospital and higher education risks, up to limits that range from
$7,500,000 to $30,000,000 per single risk (depending on the type of obligation).
At its sole option, the Company could have increased, and in certain instances
did increase, the ceding percentage from 5% to 15% of its retention, subject to
the same limits. This third treaty was canceled on a run-off basis as of
December 31, 1996. Under the three automatic facultative facilities in 1996, the
Company at its option could allocate up to $20,000,000 or $25,000,000 for each
reinsurer (depending on the reinsurer) for each transaction, subject to limits
and exclusions, in exchange for which the Company agreed to cede in the
aggregate a specified percentage of gross par insured by the Company. Each of
the three treaties and automatic facultative facilities allows the Company to
withhold a ceding commission to defray its expenses.
In the event (which management considers to be highly unlikely) that any or
all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The Company has
also assumed reinsurance of municipal obligations from unaffiliated insurers.
Amounts reinsured were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Written premiums ceded........................................ $55,965 $33,166 $28,692
Written premiums assumed...................................... 1,873 1,684 1,973
Earned premiums ceded......................................... 38,723 38,013 35,051
Earned premiums assumed....................................... 6,020 2,759 7,059
Loss and loss adjustment expense payments ceded............... 29,408 3,060 1,483
Loss and loss adjustment expense payments assumed............. 3 3 3
Incurred losses and loss adjustment expenses ceded............ (2,249) 9,101 56,895
Incurred losses and loss adjustment expenses assumed.......... 38 81 137
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Principal outstanding ceded....................................... $20,292,615 $14,355,664
Principal outstanding assumed..................................... 1,995,752 2,347,122
Deferred premium revenue ceded.................................... 151,224 133,548
Deferred premium revenue assumed.................................. 18,929 5,027
Loss and loss adjustment expense reserves ceded................... 29,875 61,532
Loss and loss adjustment expense reserves assumed................. 705 670
</TABLE>
13. OUTSTANDING EXPOSURE AND COLLATERAL
The Company's policies insure the scheduled payments of principal and
interest on asset-backed and municipal obligations. The principal amount insured
(in millions) as of December 31, 1996 and 1995 (net of
A-17
<PAGE> 79
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
amounts ceded to other insurers of $9,601 and $6,093 of asset-backed and $10,691
and $8,263 of municipal, respectively) and the terms to maturity are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
TERMS TO MATURITY ASSET-BACKED MUNICIPAL ASSET-BACKED MUNICIPAL
- --------------------------------------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
0 to 5 Years................................. $ 7,424 $ 1,571 $ 5,931 $ 3,293
5 to 10 Years................................ 3,920 3,841 3,679 4,713
10 to 15 Years............................... 1,461 6,272 1,183 4,299
15 to 20 Years............................... 714 11,433 423 6,986
20 Years and Above........................... 9,681 12,877 5,847 9,625
------- ------- ------- -------
Total.............................. $ 23,200 $35,994 $ 17,063 $28,916
======= ======= ======= =======
</TABLE>
The principal amount ceded as of December 31, 1996 and 1995 and the terms
to maturity are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
TERMS TO MATURITY ASSET-BACKED MUNICIPAL ASSET-BACKED MUNICIPAL
- --------------------------------------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
0 to 5 Years................................. $ 3,695 $ 769 $ 2,297 $ 1,103
5 to 10 Years................................ 2,413 1,192 1,503 1,775
10 to 15 Years............................... 452 1,479 403 1,020
15 to 20 Years............................... 302 2,345 126 1,514
20 Years and Above........................... 2,739 4,906 1,764 2,851
------- ------- ------- -------
Total.............................. $ 9,601 $10,691 $ 6,093 $ 8,263
======= ======= ======= =======
</TABLE>
The Company limits its exposure to losses from writing financial guarantees
by underwriting investment-grade obligations, by diversifying its portfolio and
by maintaining rigorous collateral requirements on asset-backed obligations. The
gross principal amounts of insured obligations in the asset-backed insured
portfolio are backed by the following types of collateral (in millions):
<TABLE>
<CAPTION>
NET OF AMOUNTS
CEDED CEDED
DECEMBER 31, DECEMBER 31,
------------------- -----------------
TYPES OF COLLATERAL 1996 1995 1996 1995
- ------------------------------------------------------ ------- ------- ------ ------
<S> <C> <C> <C> <C>
Residential mortgages................................. $10,987 $ 6,740 $3,077 $1,909
Consumer receivables.................................. 7,548 5,105 3,735 1,320
Government securities................................. 1,477 1,651 449 263
Pooled corporate obligations.......................... 1,663 1,819 852 732
Commercial mortgage portfolio:
Commercial real estate.............................. 113 148 463 640
Corporate secured................................... 66 98 619 801
Investor-owned utility obligations.................... 791 821 266 292
Other asset-backed obligations........................ 555 681 140 136
------- ------- ------ ------
Total asset-backed obligations.............. $23,200 $17,063 $9,601 $6,093
======= ======= ====== ======
</TABLE>
The asset-backed insured portfolio, which aggregated $32.8 billion
principal before reinsurance at December 31, 1996, was collateralized by assets
with an estimated fair value of $38.3 billion. At December 31, 1995, it
aggregated $23.2 billion principal before reinsurance and was collateralized by
assets with an estimated fair value of $28.0 billion. Such estimates of the
collateral's fair value, which is reduced as exposure
A-18
<PAGE> 80
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
expires, are based upon information at the inception of the insurance policy. At
December 31, 1996, the estimated fair value of collateral and reserves over the
principal insured averaged from 100% for commercial real estate to 168% for
corporate secured obligations. At December 31, 1995, the estimated fair value of
collateral and reserves over the principal insured averaged from 100% for
commercial real estate to 164% for corporate secured obligations. Collateral for
specific transactions is generally not available to pay claims related to other
transactions. The amounts of losses ceded to reinsurers are determined net of
collateral.
The gross principal amount of insured obligations in the municipal insured
portfolio includes the following types of issues (in millions):
<TABLE>
<CAPTION>
NET OF AMOUNTS CEDED
CEDED DECEMBER 31, DECEMBER 31,
------------------- ------------------
TYPES OF ISSUES 1996 1995 1996 1995
- ----------------------------------------------------- ------- ------- ------- ------
<S> <C> <C> <C> <C>
General obligation bonds............................. $12,523 $ 8,738 $ 2,423 $1,764
Housing revenue bonds................................ 1,794 1,674 1,033 685
Municipal utility revenue bonds...................... 4,671 3,873 1,472 1,107
Health care revenue bonds............................ 2,854 2,587 2,049 1,718
Tax-supported bonds (non-general obligation)......... 8,805 7,090 2,152 1,741
Transportation revenue bonds......................... 1,479 1,365 436 293
Other municipal bonds................................ 3,868 3,589 1,126 955
------- ------- ------- ------
Total municipal obligations................ $35,994 $28,916 $10,691 $8,263
======= ======= ======= ======
</TABLE>
In its asset-backed business, the Company considers geographic
concentration as a factor in underwriting insurance covering securitizations of
pools of such assets as residential mortgages or consumer receivables. However,
after the initial issuance of an insurance policy relating to such
securitization, the geographic concentration of the underlying assets may not
remain fixed over the life of the policy. In addition, in writing insurance for
other types of asset-backed obligations, such as securities primarily backed by
government or corporate debt, geographic concentration is not deemed by the
Company to be significant given other more relevant measures of diversification
such as issuer or industry.
The Company seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
following table sets forth, by state, those states in
A-19
<PAGE> 81
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
which municipalities located therein issued an aggregate of 2% or more of the
Company's net par amount outstanding of insured municipal securities as of
December 31, 1996:
<TABLE>
<CAPTION>
NET PAR CEDED PAR
AMOUNT AMOUNT
OUTSTANDING PERCENT OF TOTAL OUTSTANDING
NUMBER OF ----------- MUNICIPAL NET PAR -----------
STATE ISSUES AMOUNT OUTSTANDING
--------------------------------- --------- (IN ------------------ (IN
MILLIONS) MILLIONS)
<S> <C> <C> <C> <C>
California....................... 337 $ 5,669 15.8% $ 1,091
Florida.......................... 96 2,189 6.1 772
New York......................... 218 3,508 9.7 1,733
Pennsylvania..................... 157 2,106 5.9 551
New Jersey....................... 175 1,733 4.8 461
Louisiana........................ 81 908 2.5 379
Michigan......................... 118 1,145 3.2 361
Minnesota........................ 113 1,080 3.0 102
Massachusetts.................... 84 1,093 3.0 393
Illinois......................... 193 1,320 3.7 210
Texas............................ 248 1,804 5.0 412
Wisconsin........................ 114 762 2.1 186
All Other States................. 923 11,698 32.5 3,413
Non-U.S.......................... 26 979 2.7 627
----- ------- ----- -------
Total.................. 2,883 $35,994 100.0% $10,691
===== ======= ===== =======
</TABLE>
14. RELATED PARTY TRANSACTIONS
Allocable expenses are shared by the Company and its Parent on a basis
determined principally by estimates of respective usage as stated in an expense
sharing agreement. The agreement is subject to the provisions of the New York
Insurance Law. Amounts included in other assets at December 31, 1996 and 1995
are $4,205,000 and $3,322,000, respectively, for unsettled expense allocations
due from the Parent.
The Company ceded premiums of $19,890,000, $13,061,000 and $6,609,000 to
Tokio Marine for the years ended December 31, 1996, 1995 and 1994, respectively.
The amounts included in prepaid reinsurance premiums at December 31, 1996 and
1995 for reinsurance ceded to Tokio Marine were $44,634,000 and $33,382,000,
respectively. Reinsurance recoverable on unpaid losses ceded to Tokio Marine was
$477,000 and $323,000 at December 31, 1996 and 1995, respectively.
The Company ceded premiums of $15,409,000, $7,522,000 and $9,390,000 on a
quota share basis to affiliates of U S WEST for the years ended December 31,
1996, 1995 and 1994, respectively, of which $372,000, $629,000 and $1,838,000,
respectively, were ceded to Commercial Reinsurance Company (Commercial Re). The
amounts included in prepaid reinsurance premiums for reinsurance ceded to these
affiliates were $49,649,000 and $39,918,000 at December 31, 1996 and 1995,
respectively, of which $8,728,000 and $10,720,000, respectively, were ceded to
Commercial Re. The amounts of reinsurance recoverable on unpaid losses ceded to
these affiliates at December 31, 1996 and 1995 were $23,473,000 and $55,024,000,
respectively, of which $19,170,000 and $42,918,000, respectively, were ceded to
Commercial Re. The Commercial Re reinsurance agreement was subject to, and
received, the non-disapproval of the State of New York Insurance Department due
to its nature as an affiliate transaction. The Company has taken credit for the
reinsurance ceded to Commercial Re.
A-20
<PAGE> 82
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret the data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Long-term bonds -- The carrying amount of long-term bonds represents fair
value. The fair value of long-term bonds is based upon quoted market price.
Short-term investments -- The carrying amount is fair value, which
approximates cost due to the short maturity of these instruments.
Cash and cash equivalents, receivable for investments sold and payable for
investments purchased -- The carrying amount approximates fair value because of
the short maturity of these instruments.
Deferred premium revenue, net of prepaid reinsurance premiums -- The
carrying amount of deferred premium revenue, net of prepaid reinsurance
premiums, represents the Company's future premium revenue, net of reinsurance,
on policies where the premium was received at the inception of the insurance
contract. The fair value of deferred premium revenue net of prepaid reinsurance
premiums is an estimate of the premiums that would be paid under a reinsurance
agreement with a third party to transfer the Company's financial guaranty risk,
net of that portion of the premium retained by the Company to compensate it for
originating and servicing the insurance contract.
Installment premiums -- Consistent with industry practice, there is no
carrying amount for installment premiums since the Company will receive premiums
on an installment basis over the term of the insurance contract. Similar to
deferred premium revenue, the fair value of installment premiums is the
estimated present value of the future contractual premium revenues that would be
paid under a reinsurance agreement with a third party to transfer the Company's
financial guaranty risk, net of that portion of the premium retained by the
Company to compensate it for originating and servicing the insurance contract.
A-21
<PAGE> 83
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Losses and loss adjustment expenses, net of reinsurance recoverable on
unpaid losses -- The carrying amount is fair value, which is the present value
of the expected cash flows for specifically identified claims and potential
losses in the Company's insured portfolio.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Long-term bonds......................... $1,068,677 $1,068,677 $1,036,382 $1,036,382
Short-term investments.................. 39,570 39,570 14,568 14,568
Cash and cash equivalents............... 23,646 23,646 35,832 35,832
Receivable for securities sold.......... 2,326 2,326
Liabilities:
Deferred premium revenue, net of prepaid
reinsurance premiums................. 359,972 251,980 330,349 263,618
Losses and loss adjustment expenses, net
of reinsurance recoverable on unpaid
losses............................... 42,204 42,204 50,227 50,227
Payable for investments purchased....... 14,142 14,142 9,516 9,516
Off-balance-sheet instruments:
Installment premiums.................... 102,988 82,212
</TABLE>
16. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company's liability for losses and loss adjustment expenses consists of
the case basis and general reserves. Activity in the liability for losses and
loss adjustment expenses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Balance at January 1........................ $111,759 $ 91,130 $36,094
Less reinsurance recoverable................ 61,532 55,491 79
-------- -------- -------
Net balance at January 1.................... 50,227 35,639 36,015
Incurred losses and loss adjustment
expenses:
Current year.............................. 5,300 3,000 3,024
Prior years............................... 1,574 3,258
Related to Merger......................... 15,400
Paid losses and loss adjustment expenses:
Current year.............................. (3,397)
Prior years............................... (14,897) (7,070) (3)
-------- -------- -------
Net balance December 31..................... 42,204 50,227 35,639
Plus reinsurance recoverable................ 29,875 61,532 55,491
-------- -------- -------
Balance at December 31............ $ 72,079 $111,759 $91,130
======== ======== =======
</TABLE>
In 1994, the Company increased its general reserve by $3,024,000 for
origination of new business and transferred $16,932,000 of the general reserve
to its case basis reserves for projected losses on certain transactions, the
majority of which are in its discontinued commercial mortgage portfolio.
A-22
<PAGE> 84
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
During 1995, the Company increased its general reserve by $6,258,000, of
which $3,000,000 was for originations of new business and $3,258,000 was to
reestablish the general reserve for transfers from general reserves to case
basis reserves. During 1995, the Company transferred $10,788,000 from its
general reserve to case basis reserves associated predominantly with certain
residential mortgage and timeshare receivables transactions. Also in December
1995, FSA recognized a one-time increase of $15,400,000 to the general reserve
to provide for the insured portfolio it had assumed in the Merger with CGC in a
manner consistent with the Company's reserving methodology. Prior to the Merger,
CGC did not maintain a general reserve. Giving effect to all the 1995 events,
the general reserve totaled $31,798,000 at December 31, 1995.
During 1996, the Company increased its general reserve by $6,874,000, of
which $5,300,000 was for originations of new business and $1,574,000 was to
reestablish the general reserve for transfers from general reserves to case
basis reserves. During 1996, the Company transferred $9,012,000 from its general
reserve to case basis reserves associated predominantly with certain residential
mortgage and timeshare receivables transactions. Giving effect to these
transfers, the general reserve totaled $29,660,000 at December 31, 1996.
Reserves for losses and loss adjustment expenses are discounted at
risk-free rates. The amount of discount taken was approximately $17,944,000,
$15,276,000 and $14,588,000 at December 31, 1996, 1995 and 1994, respectively.
A-23
<PAGE> 85
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Bonds at market value (amortized cost of $1,049,121 and
$1,054,678)...................................................... $1,046,010 $1,068,677
Equity investments at market value (cost of $2,492 and $1,000)..... 2,480 1,000
Short-term investments............................................. 89,619 55,699
---------- ----------
Total investments........................................ 1,138,109 1,125,376
Cash............................................................... 8,497 7,517
Deferred acquisition costs......................................... 150,218 146,233
Prepaid reinsurance premiums....................................... 155,934 151,224
Reinsurance recoverable on unpaid losses........................... 29,843 29,875
Other assets....................................................... 73,315 69,705
---------- ----------
TOTAL ASSETS............................................. $1,555,916 $1,529,930
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Deferred premium revenue........................................... $ 517,523 $ 511,196
Losses and loss adjustment expenses................................ 73,101 72,079
Deferred federal income taxes...................................... 37,507 41,682
Ceded reinsurance balances payable................................. 14,656 12,599
Payable for securities purchased................................... 36,807 14,142
Accrued expenses and other liabilities............................. 51,383 62,900
---------- ----------
TOTAL LIABILITIES........................................ 730,977 714,598
---------- ----------
Common stock (1,000 shares authorized: 648 and 660 shares issued
and outstanding; par value of $23,136 and $22,727 per share)..... 15,000 15,000
Additional paid-in-capital......................................... 654,127 654,470
Unrealized gain (loss) on investments (net of deferred income tax
provision (benefit) of ($1,093) and $4,899)...................... (2,030) 9,099
Accumulated earnings............................................... 157,842 136,763
---------- ----------
TOTAL SHAREHOLDER'S EQUITY............................... 824,939 815,332
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY......................... $1,555,916 $1,529,930
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
A-24
<PAGE> 86
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
REVENUES:
Net premiums written (net of premiums ceded of $13,927 and $18,441).... $27,184 $34,139
Increase in deferred premium revenue................................... (2,410) (11,405)
------- -------
Premiums earned (net of premiums ceded of $8,865 and $12,979........... 24,774 22,734
Net investment income.................................................. 16,087 15,224
Net realized gains..................................................... 127 1,534
Other income........................................................... 325 1
------- -------
TOTAL REVENUES................................................. 41,313 39,493
------- -------
EXPENSES:
Losses and loss adjustment expenses (net of reinsurance recoveries
of $442 and $560).................................................. 2,285 1,625
Policy acquisition costs............................................ 6,209 7,655
Other operating expenses............................................ 4,280 3,660
------- -------
TOTAL EXPENSES................................................. 12,774 12,940
------- -------
INCOME BEFORE INCOME TAXES............................................... 28,539 26,553
Provision for income taxes............................................... 7,460 6,931
------- -------
NET INCOME..................................................... $21,079 $19,622
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
A-25
<PAGE> 87
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Premiums received, net............................................. $ 27,895 $ 35,371
Policy acquisition and other operating expenses paid, net.......... (24,410) (33,443)
Recoverable advances paid.......................................... 15 (8,100)
Loss and LAE recovered (paid), net................................. (1,052) 105
Net investment income received..................................... 16,734 16,613
Federal income taxes paid.......................................... 3,198 (1,799)
Other, net......................................................... 699 5,044
--------- ---------
Net cash provided by operating activities.................. 23,079 13,791
--------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds....................................... 227,025 179,715
Purchase of bonds.................................................. (211,254) (157,486)
Purchases of property and equipment................................ (909) (540)
Net increase in short-term securities.............................. (33,461) (24,159)
--------- ---------
Net cash used for investing activities..................... (18,599) (2,470)
--------- ---------
Cash flows from financing activities:
Stock repurchase................................................... (3,500)
Dividends paid..................................................... (10,000)
--------- ---------
Net cash used for financing activities..................... (3,500) (10,000)
--------- ---------
Net increase in cash................................................. 980 1,321
Cash at beginning of period.......................................... 7,517 555
--------- ---------
Cash at end of period................................................ $ 8,497 $ 1,876
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
A-26
<PAGE> 88
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), a wholly owned subsidiary
of Financial Security Assurance Holdings Ltd. (the Parent), is an insurance
company domiciled in the State of New York. The Company is primarily engaged in
the business of providing financial guaranty insurance on asset-backed
financings and municipal obligations.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company and are unaudited. In the opinion of management, all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
March 31, 1997 and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These statements should be read in conjunction
with the Company's December 31, 1996 consolidated financial statements and notes
thereto. The year-end condensed balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The results of operations for the periods ended March 31,
1997 and 1996 are not necessarily indicative of the operating results for the
full year.
Certain amounts in the 1996 financial statements have been reclassed to
conform to the 1997 presentation.
A-27
<PAGE> 89
INDEX OF PRINCIPAL DEFINITIONS
Set forth below is a list of certain of the more significant capitalized
terms used in this Prospectus and the pages on which the definitions of such
terms may be found.
<TABLE>
<CAPTION>
TERM PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
Accelerated Principal Distributable Amount............................................ 25
Administration Agreement.............................................................. 37
Advances.............................................................................. 43
Aggregate Scheduled Balance........................................................... 25
Aggregate Scheduled Balance Decline................................................... 25
Bank.................................................................................. 3
Business Day.......................................................................... 4
Calculation Day....................................................................... 8
Certificate Balance................................................................... 6
Certificate Distributable Amount...................................................... 25
Certificate Distribution Account...................................................... 23
Certificate Final Distribution Date................................................... 5
Certificate Interest Carryover Shortfall.............................................. 25
Certificate Interest Distributable Amount............................................. 25
Certificate Percentage................................................................ 25
Certificate Policy.................................................................... 1,4
Certificate Pool Factor............................................................... 16
Certificate Principal Carryover Shortfall............................................. 25
Certificate Principal Distributable Amount............................................ 25
Certificate Quarterly Interest Distributable Amount................................... 26
Certificate Quarterly Principal Distributable Amount.................................. 26
Certificates.......................................................................... 1,3
Class A-1 Final Distribution Date..................................................... 5
Class A-1 Notes....................................................................... 1,3
Class A-1 Rate........................................................................ 5
Class A-2 Final Distribution Date..................................................... 5
Class A-2 Notes....................................................................... 1,3
Class A-2 Rate........................................................................ 5
Class A-3 Final Distribution Date..................................................... 5
Class A-3 Notes....................................................................... 1,3
Class A-3 Rate........................................................................ 5
Class A-4 Final Distribution Date..................................................... 5
Class A-4 Notes....................................................................... 1,3
Class A-4 Rate........................................................................ 5
Closing Date.......................................................................... 3
Code.................................................................................. 51
Collection Account.................................................................... 23
Commission............................................................................ 2
Contracts............................................................................. 1,4
Cut-Off Date.......................................................................... 4
Cut-Off Date Aggregate Scheduled Balance.............................................. 7
Defaulted Contract.................................................................... 26
Determination Date.................................................................... 23
Distribution Date..................................................................... 4
DTC................................................................................... 1
Due Date.............................................................................. 27
Due Period............................................................................ 26
Eligible Investments.................................................................. 23
ERISA................................................................................. 9,56
</TABLE>
B-1
<PAGE> 90
<TABLE>
<CAPTION>
TERM PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
Events of Default..................................................................... 17
Excess Amounts........................................................................ 8,24
Final Distribution Dates.............................................................. 5
Financed Vehicles..................................................................... 4
Financial Security.................................................................... 1,3
Funded Amount......................................................................... 28
Guaranteed Distributions.............................................................. 39
Holding Account....................................................................... 23
Indenture............................................................................. 3
Indenture Trustee..................................................................... 3
Insolvency Event...................................................................... 32
Insurance Agreement................................................................... 8
Insurer Default....................................................................... 18
Interest Period....................................................................... 5
Interest Rates........................................................................ 5
Liquidated Contract................................................................... 26
Master Servicer....................................................................... 3
Minimum Funded Amount................................................................. 28
Monthly P&I........................................................................... 27
Moody's............................................................................... 1,9
Net Collections....................................................................... 22
Nonrecoverable Advance................................................................ 43
Note Distributable Amount............................................................. 26
Note Distribution Account............................................................. 23
Note Final Distribution Date.......................................................... 5
Note Interest Carryover Shortfall..................................................... 26
Note Interest Distributable Amount.................................................... 26
Note Percentage....................................................................... 26
Note Policy........................................................................... 1,4
Note Pool Factor...................................................................... 16
Note Principal Carryover Shortfall.................................................... 26
Note Principal Distributable Amount................................................... 27
Note Quarterly Interest Distributable Amount.......................................... 27
Note Quarterly Principal Distributable Amount......................................... 27
Noteholders........................................................................... 20
Notes................................................................................. 1,3
Obligors.............................................................................. 4
Optional Purchase..................................................................... 9
Original Certificate Balance.......................................................... 6
Overcollateralization Amount.......................................................... 29
Owner Trustee......................................................................... 3
Pass-Through Rate..................................................................... 6
Paying Agent.......................................................................... 6
Policies.............................................................................. 1,4
Principal Distributable Amount........................................................ 27
Rating Agencies....................................................................... 1,9
Record Date........................................................................... 4
Repurchase Amount..................................................................... 44
</TABLE>
B-2
<PAGE> 91
<TABLE>
<CAPTION>
TERM PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
Rule of 78's.............. Contract that provides for the payment by the Obligor of a
specified total amount of payments, payable in equal
monthly installments, which total represents the principal
amount financed plus add-on interest in an amount of 78's,
the amount of a payment allocable to interest on a
Contract is determined by multiplying the total amount of
add-on interest payable over the term of the Contract by a
fraction derived as described below. The fraction used in
the calculation of add- on interest earned each month
under a Rule of 78's Contract has as its denominator a
number equal to the sum of a series of numbers
representing the number of each monthly payment due under
the Contract. For example, with a Contract providing for
12 payments, the denominator of each month's fraction will
be 78, the sum of a series of numbers from 1 to 12. The
numerator of the fraction for a given month is the number
of payments remaining before giving effect to the payment
to which the fraction is being applied. Accordingly, in
the example of a twelve payment Contract, the fraction for
the first payment is 12/78, for the second payment 11/78,
for the third payment 10/78, and so on through the final
payment, for which the fraction is 1/78. The applicable
fraction is then multiplied by the total add-on interest
payment over the entire term of the Contract, and the
resulting amount is the amount of add-on interest earned
that month. The difference between the amount of the
monthly payment by the Obligor and the amount of earned
add-on interest calculated for the month is applied to
principal reduction. Under the law of Texas, a similar
procedure is permitted for calculating the amount of
add-on interest earned, except the fraction is derived by
using the sum of the monthly payments rather than the sum
of the number of months (the "sum of the balances"). As a
Contract using either the Rule of 78's or the sum of the
balances method to compute interest earned is payable in
equal monthly payments, the mathematical result is
substantially identical under either system. Accordingly,
for purposes of convenience, the term "Rule of 78's" is
used herein in referring to Contracts with add-on interest
regardless of which system is used to calculated interest
earned.
S&P................................................................................... 1,9
Sale and Servicing Agreement.......................................................... 4
Scheduled Balance..................................................................... 27
Scheduled Payments.................................................................... 38
Securities............................................................................ 1,3
Seller................................................................................ 1,3
Servicer Default...................................................................... 32
Servicing Fee......................................................................... 44
Simple Interest Contract .. A Contract as to which interest is calculated each day on
the basis of the actual principal balance of such
Contract on such day.
Specified Spread Account Balance...................................................... 28
Spread Account........................................................................ 8
Spread Account Initial Deposit........................................................ 8
Statement to Securityholders.......................................................... 30
Trust................................................................................. 1,3
Trust Agreement....................................................................... 3
Trust Fees and Expenses............................................................... 16
Trustees.............................................................................. 4
UCC................................................................................... 20,45
Underwriters.......................................................................... 58
Unreimbursed Insurer Amounts.......................................................... 24
voting interests...................................................................... 33
WFS................................................................................... 1,3
WII................................................................................... 3
</TABLE>
B-3
<PAGE> 92
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER,
THE UNDERWRITERS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION SET
FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.................. 2
Reports to Securityholders............. 2
Summary of Prospectus.................. 3
Formation of the Trust................. 10
The Contracts Pool..................... 11
Delinquency and Contract Loss
Information.......................... 15
Pool Factors and Trading Information... 16
Use of Proceeds........................ 16
The Notes.............................. 16
The Certificates....................... 18
Certain Information Regarding the
Securities........................... 20
The Policies........................... 38
Financial Security Assurance Inc....... 41
The Master Servicer.................... 42
Certain Legal Aspects of the
Contracts............................ 45
The Seller............................. 48
WFS.................................... 49
WII.................................... 50
The Bank............................... 50
Certain Federal Income Tax
Consequences......................... 50
Certain California Income Tax
Consequences......................... 56
ERISA Considerations................... 56
Underwriting........................... 58
Ratings of the Securities.............. 59
Legal Matters.......................... 59
Experts................................ 59
Index to Consolidated Financial
Statements........................... 60
Report of Independent Accountants...... A-1
Index of Principal Definitions......... B-1
=============================================
</TABLE>
======================================================
$590,000,000
WFS FINANCIAL
1997-B OWNER TRUST
$
% AUTO RECEIVABLE
BACKED NOTES, CLASS A-1
$
% AUTO RECEIVABLE
BACKED NOTES, CLASS A-2
$
% AUTO RECEIVABLE
BACKED NOTES, CLASS A-3
$
% AUTO RECEIVABLE
BACKED NOTES, CLASS A-4
$
% AUTO RECEIVABLE
BACKED CERTIFICATES
--------------------
PROSPECTUS
--------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BANCAMERICA SECURITIES, INC.
WESTFIN SECURITIES
CORPORATION
, 1997
======================================================
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the offering of the Securities being registered
hereby are estimated as follows:
<TABLE>
<S> <C>
Registration Fee................................................ $178,787.87
Printing and Engraving.......................................... *
Trustees' Fees.................................................. *
Accounting Fees................................................. *
Legal Fees and Expenses......................................... *
Blue Sky Fees and Expenses...................................... *
Rating Agency Fees.............................................. *
Miscellaneous Fees.............................................. *
-----------
Total................................................. $ *
==========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317(b) of the California Corporations Code (the "Corporations
Code") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any "proceeding" (as defined in
Section 317(a) of the Corporations Code), other than an action by or in the
right of the corporation to procure a judgment in its favor, by reason of the
fact that such person is or was a director, officer, employee or other agent of
the corporation (collectively, an "Agent"), against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding if the Agent acted in good faith and in a manner the Agent
reasonably believed to be in the best interest of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful.
Section 317(c) of the Corporations Code provides that a corporation shall
have power to indemnify any Agent who was or is a party or is threatened to be
made a party to any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor by reason of the fact that
such person is or was an Agent, against expenses actually and reasonably
incurred by the Agent in connection with the defense or settlement of such
action if the Agent acted in good faith and in a manner such Agent believed to
be in the best interest of the corporation and its shareholders.
Section 317(c) further provides that no indemnification may be made
thereunder for any of the following: (i) in respect of any matter as to which an
Agent shall have been adjudged to be liable to the corporation, unless the court
in which such proceeding is or was pending shall determine that such Agent is
fairly and reasonably entitled to indemnity for expenses, (ii) of amounts paid
in settling or otherwise disposing of a pending action without court approval
and (iii) of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
Section 317(d) of the Corporations Code requires that an Agent be
indemnified against expenses actually and reasonably incurred to the extent the
Agent has been successful on the merits in the defense of proceedings referred
to in subdivisions (b) or (c) of Section 317.
Except as provided in Section 317(d), and pursuant to Section 317(e),
indemnification under Section 317 shall be made by the corporation only if
specifically authorized and upon a determination that indemnification is proper
in the circumstances because the Agent has met the applicable standard of
conduct, by any of the following: (i) a majority vote of a quorum consisting of
directors who are not parties to the proceeding, (ii) if such a quorum of
directors is not obtainable, by independent legal counsel in a written
II-1
<PAGE> 94
opinion, (iii) approval of the shareholders, provided that any shares owned by
the Agent may not vote thereon, or (iv) the court in which such proceeding is or
was pending.
Pursuant to Section 317(f) of the Corporations Code, the corporation may
advance expenses incurred in defending any proceeding upon receipt of an
undertaking by the Agent to repay such amount if it is ultimately determined
that the Agent is not entitled to be indemnified.
Section 317(h) provides, with certain exceptions, that no indemnification
shall be made under Section 317 where it appears that it would be inconsistent
with a provision of the corporation's articles, bylaws, a shareholder resolution
or an agreement which prohibits or otherwise limits indemnification, or where it
would be inconsistent with any condition expressly imposed by a court in
approving a settlement.
Section 317(i) authorizes a corporation to purchase and maintain insurance
on behalf of an Agent for liabilities arising by reason of the Agent's status,
whether or not the corporation would have the power to indemnify the Agent
against such liability under the provisions of Section 317.
Registrant's Bylaws (the "Bylaws") provide for the indemnification of
officers and directors of the Registrant, to the maximum extent permitted by the
Corporations Code, against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding
arising by reason of the fact that such person is or was an officer or director
of the Registrant, and further provides for the advance to such officer or
director of expenses incurred by such officer or director in any such proceeding
to the maximum extent permitted by law. The Bylaws also provide that
Registrant's Board of Directors may provide for the indemnification of, or
advancement of expenses to, other Agents. Registrant's Articles of Incorporation
provide that the liability of directors of the Registrant shall be eliminated to
the fullest extent permissible under California law, but contain no specific
provisions with respect to the indemnification of, or advancement of expenses
to, Agents.
Reference is also made to Section 7 of the Underwriting Agreement among
Donaldson, Lufkin & Jenrette Securities Corporation, BancAmerica Securities,
Inc., the Registrant and WFS (see Exhibit 1.1), which provides for
indemnification of the Registrant under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of WFS Financial Auto Loans, Inc.*
3.2 Bylaws of WFS Financial Auto Loans, Inc.*
4.1 Form of Trust Agreement among WFS Financial Auto Loans, Inc., as Seller, WFS
Investments, Inc., Financial Security Assurance Inc. and Chase Manhattan Bank
Delaware, as Owner Trustee (including form of Certificates)*
4.2 Form of Indenture among WFS Financial 1997-B Owner Trust, Financial Security
Assurance Inc. and Bankers Trust Company, as Indenture Trustee (including
forms of Notes)*
5.1 Opinion of Mitchell, Silberberg & Knupp LLP with respect to legality**
8.1 Opinion of Mitchell, Silberberg & Knupp LLP with respect to tax matters**
10.1 Form of Reinvestment Contract*
10.2 Form of Sale and Servicing Agreement*
10.3 Form of Insurance Agreement*
10.4 Form of Financial Guaranty Insurance Policy (Notes)*
</TABLE>
II-2
<PAGE> 95
<TABLE>
<C> <S>
10.5 Form of Financial Guaranty Insurance Policy (Certificates)*
10.6 Form of Indemnification Agreement*
10.7 Form of Administration Agreement among WFS Financial 1997-B Owner Trust, WFS
Financial Inc, and Bankers Trust Company, as Indenture Trustee*
23.1 Consent of Mitchell, Silberberg & Knupp LLP (included as part of Exhibit
5.1)**
23.2 Consent of Mitchell, Silberberg & Knupp LLP (included as part of Exhibit
8.1)**
23.3 Consent of Coopers & Lybrand, L.L.P.**
24.1 Power of Attorney*
25.1 Statement of Eligibility and Qualification of Indenture Trustee
</TABLE>
- ---------------
* Previously filed.
** To be supplied by amendment.
B. FINANCIAL STATEMENT SCHEDULES
Not applicable.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing date specified in
the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to provide prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of such Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(c) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act will be deemed to be part of this registration
statement as of the time it was declared effective.
(d) For purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus will be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to
be the initial bona fide offering thereof.
II-3
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine
and State of California, on the 16th day of June, 1997.
WFS FINANCIAL AUTO LOANS, INC.,
as originator of
WFS FINANCIAL 1997-B OWNER TRUST
By: /s/ JAMES R. DOWLAN
-------------------------------------
James R. Dowlan
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement on Form S-1 has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ---------------
<C> <C> <S>
/s/ JAMES R. DOWLAN President and Chief Executive June 16, 1997
- --------------------------------------------- Officer, Director (Principal
James R. Dowlan Executive Officer)
/s/ LEE A. WHATCOTT Chief Financial Officer, June 16, 1997
- --------------------------------------------- Director
Lee A. Whatcott (Principal Financial and
Accounting Officer)
* Director June 16, 1997
- ---------------------------------------------
Joy Schaefer
Director June , 1997
- ---------------------------------------------
James R. May
* Director June 16, 1997
- ---------------------------------------------
Jeffrey B. Davis
*By: /s/ JAMES R. DOWLAN
- ---------------------------------------------
James R. Dowlan
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
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<C> <S> <C>
1.1 Form of Underwriting Agreement*............................................
3.1 Articles of Incorporation of WFS Financial Auto Loans, Inc.*...............
3.2 Bylaws of WFS Financial Auto Loans, Inc.*..................................
4.1 Form of Trust Agreement among WFS Financial Auto Loans, Inc., as Seller,
WFS Investments, Inc., Financial Security Assurance Inc. and Chase
Manhattan Bank Delaware, as Owner Trustee (including form of
Certificates)*.............................................................
4.2 Form of Indenture among WFS Financial 1997-B Owner Trust, Financial
Security Assurance Inc. and Bankers Trust Company, as Indenture Trustee
(including forms of Notes)*................................................
5.1 Opinion of Mitchell, Silberberg & Knupp LLP with respect to legality**.....
8.1 Opinion of Mitchell, Silberberg & Knupp LLP with respect to tax
matters**..................................................................
10.1 Form of Reinvestment Contract*.............................................
10.2 Form of Sale and Servicing Agreement*......................................
10.3 Form of Insurance Agreement*...............................................
10.4 Form of Financial Guaranty Insurance Policy (Notes)*.......................
10.5 Form of Financial Guaranty Insurance Policy (Certificates)*................
10.6 Form of Indemnification Agreement*.........................................
10.7 Form of Administration Agreement among WFS Financial 1997-B Owner Trust,
WFS Financial Inc, and Bankers Trust Company, as Indenture Trustee*........
23.1 Consent of Mitchell, Silberberg & Knupp LLP (included as part of Exhibit
5.1)**.....................................................................
23.2 Consent of Mitchell, Silberberg & Knupp LLP (included as part of Exhibit
8.1)**.....................................................................
23.3 Consent of Coopers & Lybrand, L.L.P.**.....................................
24.1 Power of Attorney*.........................................................
25.1 Statement of Eligibility and Qualification of Indenture Trustee............
</TABLE>
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* Previously filed.
** To be supplied by amendment.
<PAGE> 1
EXHIBIT 25.1
- -----------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF
1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2) ___________
------------------------------
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank)
Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
---------------------------------
WFS FINANCIAL 1997-B OWNER TRUST
(Exact name of obligor as specified in its charter)
CALIFORNIA 33-0149603
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) Identification no.)
23 PASTEUR ROAD
IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
WFS FINANCIAL 1997-B OWNER TRUST
AUTO RECEIVABLE BACKED SECURITIES
(Title of the indenture securities)
<PAGE> 2
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising
authority to which it is subject.
NAME ADDRESS
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust
powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
ITEM 3. -15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1- Restated Organization Certificate of Bankers Trust
Company dated August 7, 1990, Certificate of Amendment
of the Organization Certificate of Bankers Trust Company
dated June 21, 1995 - Incorporated herein by reference
to Exhibit 1 filed with Form T-1 Statement, Registration
No. 33-65171, and Certificate of Amendment of the
Organization Certificate of Bankers Trust Company dated
March 20, 1996, copy attached.
EXHIBIT 2- Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2 filed with
Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 3- Authorization of the Trustee to exercise corporate trust
powers - Incorporated herein by reference to Exhibit 2
filed with Form T-1 Statement, Registration No.
33-21047.
EXHIBIT 4- Existing By-Laws of Bankers Trust Company, as amended on
February 18, 1997, Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 333-24509-01.
-2-
<PAGE> 3
EXHIBIT 5- Not applicable.
EXHIBIT 6- Consent of Bankers Trust Company required by Section
321(b) of the Act. - Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 22-18864.
EXHIBIT 7- A copy of the latest report of condition of Bankers
Trust Company dated as of March 31, 1997.
EXHIBIT 8- Not Applicable.
EXHIBIT 9- Not Applicable.
-3-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 10th day
of June, 1997.
BANKERS TRUST COMPANY
By: Jenna Kaufman
-------------
Jenna Kaufman
Vice President
-4-
<PAGE> 5
EXHIBIT 1
State of New York,
Banking Department
I, PETER M. PHILBIN, Deputy Superintendent of Bank of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER SECTION
8005 OF THE BANKING LAW," dated March 20, 1996, providing for an increase in
authorized capital stock from $1,351,666,670 consisting of 85,166,667 shares
with a par value of $10 each designated as Common Stock and 500 shares with a
par value of $1,000,000 each designated as Series Preferred Stock to
$1,501,666,670 consisting of 100,166,667 shares with a par value of $10 each
designated as Common Stock and 500 shares with a par value of $1,000,000 each
designated as Series Preferred Stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York,
this 21ST day of MARCH in the Year of our Lord one thousand
nine hundred and NINETY-SIX.
Peter M. Philbin
------------------------------
Deputy Superintendent of Banks
<PAGE> 6
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
-----------------------------
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a Managing
Director and an Assistant Secretary of Bankers Trust Company, do hereby certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of March, 1903.
3. The organization certificate as heretofore amended is hereby amended to
increase the aggregate number of shares which the corporation shall have
authority to issue and to increase the amount of its authorized capital stock in
conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Three Hundred Fifty One Million, Six Hundred
Sixty-Six Thousand, Six Hundred Seventy Dollars ($1,351,666,670), divided
into Eighty-Five Million, One Hundred Sixty-Six Thousand, Six Hundred
Sixty-Seven (85,166,667) shares with a par value of $10 each designated as
Common Stock and 500 shares with a par value of One Million Dollars
($1,000,000) each designated as Series Preferred Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Five Hundred One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($1,501,666,670), divided into One
Hundred Million, One Hundred Sixty Six Thousand, Six Hundred Sixty-Seven
(100,166,667) shares with a par value of $10 each designated as Common
Stock and 500 shares with a par value of One Million Dollars ($1,000,000)
each designated as Series Preferred Stock."
<PAGE> 7
6. The foregoing amendment of the organization certificate was authorized
by unanimous written consent signed by the holder of all outstanding shares
entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate this 20th
day of March , 1996.
James T. Byrne, Jr.
--------------------------------
James T. Byrne, Jr.
Managing Director
Lea Lahtinen
--------------------------------
Lea Lahtinen
Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is an Assistant
Secretary of Bankers Trust Company, the corporation described in the foregoing
certificate; that she has read the foregoing certificate and knows the contents
thereof, and that the statements herein contained are true.
Lea Lahtinen
--------------------------------
Lea Lahtinen
Sworn to before me this 20th day
of March, 1996.
Sandra L. West
- --------------------------
Notary Public
SANDRA L. WEST Counterpart filed in the
Notary Public State of Office of the Superintendent of
New York Banks, State of New York,
No. 31-4942101 This 21st day of March, 1996
ualified in New York County
Commission Expires
September 19, 1996
<PAGE> 8
EXHIBIT 7
<TABLE>
Legal Title of Bank: Bankers Trust Company Call Date: 3/31/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-1
City, State ZIP: New York, NY 10006 11
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS MARCH 31, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the quarter.
SCHEDULE RC--BALANCE SHEET
| C400 |
Dollar Amounts in Thousands | RCFD Bil Mil Thou |
ASSETS | / / / / / / / / / / |
<S> <C>
1. Cash and balances due from depository institutions (from Schedule RC-A): | / / / / / / / / / / |
a. Noninterest-bearing balances and currency and coin(1)............. | 0081 1,589,000|1.a.
b. Interest-bearing balances(2)...................................... | 0071 2,734,000|1.b.
2. Securities: | / / / / / / // / / / |
a. Held-to-maturity securities (from Schedule RC-B, column A) ....... | 1754 0 |2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)...... | 1773 4,433,000|2.b.
3 Federal funds sold and securities purchased under agreements to resell... | 1350 26,490,000|3
4. Loans and lease financing receivables: | / / / / / / / / / / |
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 15,941,000 | / / / / / / / / / / |4.a.
b. LESS: Allowance for loan and lease losses...................RCFD 3123 708,000 | / / / / / / / / / / |4.b.
c. LESS: Allocated transfer risk reserve ......................RCFD 3128 0 | / / / / / / / / / / |4.c.
d. Loans and leases, net of unearned income, | / / / / / / / / / / |
allowance, and reserve (item 4.a minus 4.b and 4.c) .............. | 2125 15,233,000 |4.d.
5. Assets held in trading accounts ......................................... | 3545 38,115,000 |5.
6. Premises and fixed assets (including capitalized leases) ................ | 2145 924,000 |6.
7. Other real estate owned (from Schedule RC-M) ............................ | 2150 188,000 |7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) | 2130 175,000 |8.
9. Customers' liability to this bank on acceptances outstanding ............ | 2155 618,000 |9.
10. Intangible assets (from Schedule RC-M) .................................. | 2143 17,000 |10.
11. Other assets (from Schedule RC-F)........................................ | 2160 4,424,000 |11.
12. Total assets (sum of items 1 through 11)................................. | 2170 94,940,000 |12.
- --------------------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held in trading accounts.
</TABLE>
<PAGE> 9
<TABLE>
Legal Title of Bank: Bankers Trust Company Call Date: 3/31/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-2
City, State ZIP: New York, NY 10006 12
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
SCHEDULE RC--Continued
Dollar Amounts in Thousands | / / / Bil Mil Thou |
LIABILITIES | / / / / / / / / / / |
<S> <C>
13. Deposits: | / / / / / / / / / / |
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I) |RCON 2200 14,450,000 |13.a.
(1) Noninterest-bearing(1) ......RCON 6631 2,917,000....... | / / / / / / / |13.a.(1)
(2) Interest-bearing .......... .RCON 6636 11,533,000...... | / / / / / / |13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E | / / / / / / / / / / |
part II) |RCFN 2200 23,456,000 |13.b.
(1) Noninterest-bearing .........RCFN 6631 1,062,000 | / / / / / / / / / / |13.b.(1)
(2) Interest-bearing ............RCFN 6636 22,394,000 | / / / / / / / / / / |13.b.(2)
14. Federal funds purchased and securities sold under agreements to repurchase |RCFD 2800 15,195,000 |14
15. a. Demand notes issued to the U.S. Treasury.......................... |RCON 2840 0 |15.a.
b. Trading liabilities (from Schedule RC-D).......................... |RCFD 3548 18,911,000 |15.b.
16. Other borrowed money: (includes mortgage indebtedness nd obligations under | / / / / / / / / / / |
capitalized leases): | / / / / / / / / / / |
a. With original maturity of one year or less........................ |RCFD 2332 7,701,000 |16.a.
b. With original maturity of more than one year...................... |RCFD 2333 4,438,000 |16.b.
17. Not applicable ................................ | |17.
18. Bank's liability on acceptances executed and outstanding ................ |RCFD 2920 618,000 |18.
19. Subordinated notes and debentures........................................ |RCFD 3200 1,226,000 |19.
20. Other liabilities (from Schedule RC-G)................................... |RCFD 2930 3,971,000 |20.
21. Total liabilities (sum of items 13 through 20)........................... |RCFD 2948 89,966,000 |21.
| / / / / / / / / / / |
22. Not applicable | |22
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus............................ |RCFD 3838 600,000 |23.
24. Common stock............................................................. |RCFD 3230 1,002,000 |24.
25. Surplus (exclude all surplus related to preferred stock) ................ |RCFD 3839 540,000 |25.
26. a. Undivided profits and capital reserves.............................. |RCFD 3632 3,241,000 |26.a.
b. Net unrealized holding gains (losses) on available-for-sale securities |RCFD 8434 ( 31,000) |26.b.
27. Cumulative foreign currency translation adjustments ..................... |RCFD 3284 ( 378,000) |27.
28. Total equity capital (sum of items 23 through 27) ....................... |RCFD 3210 4,974,000 |28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of items 21, 22, | / / / / / / / / / / |
and 28).................................................................. |RCFD 3300 94,940,000 |29.
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best describes the
most comprehensive level of auditing work performed for the bank by independent external Number
auditors as of any date during 1996....................................... |RCFD 6724 1 | M.1
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by a certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by external
submits a report on the consolidated holding company auditors
(but not on the bank separately) 7 = Other audit procedures (excluding tax preparation work)
3 = Directors' examination of the bank conducted in 8 = No external audit work
accordance with generally accepted auditing standards
by a certified public accounting firm (may be required
by state chartering authority)
- ----------------------
(1) Including total demand deposits and noninterest-bearing time and savings deposits.
</TABLE>
