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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 2000
REGISTRATION NO. 333-91277
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WFS FINANCIAL INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6141
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
33-0291646
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
23 PASTEUR ROAD
IRVINE, CALIFORNIA 92618-3816
(949) 727-1002
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOY SCHAEFER
CHIEF EXECUTIVE OFFICER
WFS FINANCIAL INC
23 PASTEUR ROAD
IRVINE, CALIFORNIA 92618-3816
(949) 727-1002
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ANDREW E. KATZ, ESQ.
MITCHELL, SILBERBERG & KNUPP LLP
11377 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90064-1683
(310) 312-2000
PETER F. ZIEGLER, ESQ.
GIBSON, DUNN & CRUTCHER LLP
333 S. GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071-3197
(213) 229-7000
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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 the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, 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, please 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value............. 2,300,000 Shares(1) $20.50 $47,150,000 $12,788.00*
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</TABLE>
(1) Includes 300,000 shares of common stock that the underwriters have the
option to purchase from WFS to cover over-allotments, if any.
* Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES 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.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 20, 2000
PROSPECTUS
2,000,000 SHARES
WFS LOGO
COMMON STOCK
------------------------
WFS Financial Inc is offering 2,000,000 shares of its common stock to be
sold in the offering. Our common stock is traded on the Nasdaq National Market
under the symbol "WFSI". The last reported sale price of our common stock on the
Nasdaq National Market on January 18, 2000 was $20.50 per share.
Western Financial Bank has expressed a non-binding interest in purchasing
shares at the public offering price. As of the date of this prospectus, Western
Financial Bank holds 22,367,036 shares of our common stock, or approximately 87%
of the total outstanding shares. As Western Financial Bank has expressed an
interest in maintaining at least an 80% ownership interest, at our request, the
underwriters will reserve at the public offering price sufficient shares for
sale to the Bank to allow it to maintain at least an 80% interest.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AUTHORITY OR AGENCY.
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<TABLE>
<CAPTION>
PER
SHARE TOTAL
----- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
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We have granted the underwriters a 30-day option to purchase up to 300,000
additional shares of common stock from us at the public offering price less the
underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares in New York, New York, on
, 2000.
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BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
Map of the United States showing states in which WFS originates contracts and
location of offices.
Pie chart showing relative percentage of prime and non-prime borrowers and pie
chart showing relative percentage of new and used cars financed by WFS.
Bar chart showing dollar amount of contracts outstanding in 1994, 1995, 1996,
1997, 1998 and 1999, and line showing dollar amounts of contracts originated in
1994, 1995, 1996, 1997, 1998 and 1999.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights certain information found in greater detail
elsewhere in this prospectus. In addition to this summary, we urge you to read
the entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors," before deciding to invest in shares of our
common stock. Unless we indicate otherwise, all information in this prospectus
assumes the underwriters will not exercise their over-allotment option.
WFS FINANCIAL INC
OUR COMPANY
We are one of the nation's largest independent automobile finance companies
with 27 years of experience in the auto finance industry. We originate, service
and securitize new and used automobile installment sales contracts which are
generated through our relationships with over 8,000 franchised and independent
automobile dealers in 43 states. During 1999, we originated $3.3 billion of
automobile contracts and serviced a portfolio of $5.4 billion at December 31,
1999.
We provide outstanding service to dealers through our nationwide network of
business development representatives. Our business development representatives
provide dealers with a single contact to whom they can sell most of their
automobile contracts. Unlike many of our competitors, we offer programs for both
prime and non-prime borrowers. Approximately 70% of our contract originations
are with borrowers who have strong credit histories, otherwise known as prime
borrowers, and approximately 30% of our contracts are with borrowers who have
overcome past credit difficulties, otherwise known as non-prime borrowers. Our
programs do not include contracts with borrowers who currently are experiencing
or recently have experienced credit difficulties, otherwise known as sub-prime
borrowers.
We underwrite contracts through a credit approval process that is supported
and controlled by a centralized, automated front-end system. This system
incorporates proprietary credit scoring models, an industry credit scoring model
and tools which enhance our credit analysts' ability to tailor each contract's
pricing and structure to maximize risk-adjusted returns. Our underwriters earn
incentives based on the profitability rather than the volume of the contracts
that they purchase.
We structure our business to minimize operating costs while providing high
quality service to our dealers. Those aspects of our business that require a
local market presence are performed on a decentralized basis in our 45 offices.
All other operations are centralized.
We fund our initial purchases of contracts with borrowings under our $1.3
billion committed line of credit with our parent company, Western Financial
Bank, and through our positive operating cash flows. The line of credit is
indirectly supported at the Bank by FDIC-insured retail deposits. We securitize
the contracts we have purchased on a regular basis. Since 1985, we have
securitized over $14 billion of automobile contracts in 46 public offerings of
asset-backed securities, making us the fourth largest issuer of such securities
in the nation.
To improve our long-term profitability, we restructured our operations in
1998. As a result, we incurred a net loss of $16.6 million due to higher credit
losses and a $15.0 million charge related to the restructuring. The higher
credit losses were due to purchasing a higher percentage of non-prime contracts
during 1996 and 1997, as well as servicing disruptions created by our
restructuring. As part of this restructuring, we merged our prime and non-prime
operations and offices, changed our purchasing strategy to emphasize prime
contracts, eliminated unprofitable dealer relationships, implemented new
underwriting and servicing technology, closed 96 underperforming offices and
reduced our number of employees by approximately 20%.
As a result of this restructuring, we have:
- returned to profitability, realizing net income of $49.4 million in 1999;
- increased operating cash flows from $13.6 million in 1997, to $16.4
million in 1998 and to $110 million in 1999;
- increased contract originations from $2.3 billion in 1997, to $2.7
billion in 1998 and to $3.3 billion in 1999;
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<PAGE> 5
- increased prime contract originations from 54% in 1997, to 68% in 1998
and to 69% in 1999;
- improved the percentage of applications funded to applications received
from 13% in the first quarter of 1998 to 19% for the fourth quarter of
1999;
- lowered operating expenses as a percentage of average serviced contracts
from 5.0% in 1997, to 4.1% in 1998 and to 3.6% in 1999; and
- reduced net chargeoffs as a percentage of average serviced contracts from
3.0% in 1997 and 3.4% in 1998 to 2.1% in 1999.
OUR INDUSTRY
We believe that the automobile finance industry is the second largest
consumer finance industry in the United States with approximately $635 billion
of loan and lease originations during 1999. The industry is generally segmented
according to the type of car sold, new or used, and the credit characteristics
of the borrower, prime, non-prime or sub-prime. Based upon industry data we
believe that during 1999, prime, non-prime and sub-prime loan originations in
the United States were $341 billion, $105 billion and $86 billion respectively.
Competition in the field of automobile finance is intense. The United States
captive auto finance companies, General Motors Acceptance Corporation, Ford
Motor Credit Company and Chrysler Credit Corporation, account for up to 30% of
the auto finance market. We believe that the balance of the market is highly
fragmented and that no other single entity has greater than a 1% market share.
Other market participants include the captive auto finance companies of other
manufacturers, banks, credit unions, independent auto finance companies and
other financial institutions.
OUR STRATEGY
Our business objective is to maximize long term profitability by
efficiently purchasing and servicing prime and non-prime credit quality
contracts. We believe we will be able to achieve this objective by:
- producing measured growth in contract originations;
- leveraging technology to improve our business; and
- effectively pricing contracts relative to risk.
OUR ADDRESS
Our principal executive office and mailing address is 23 Pasteur Road,
Irvine, California 92618-3816, and our telephone number is (949) 727-1002. Our
website address is http://www.wfsfinancial.com. The information contained in our
website does not constitute part of this prospectus.
THE OFFERING
Common stock offered by us.......... 2,000,000 shares
Common stock to be outstanding after
the offering........................ 27,771,956 shares
Use of proceeds..................... The net proceeds of the offering will
be used by us to finance our growth in
automobile contracts purchased and for
general corporate purposes. Pending
those uses, we will use the net
proceeds to reduce the outstanding
balance on the line of credit with our
parent company.
Nasdaq National Market Symbol....... WFSI
2
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SUMMARY FINANCIAL DATA
The following table presents summary audited financial data for the years
ended December 31, 1999, 1998, 1997, 1996, and 1995. Since the information in
this table is only a summary and does not provide all of the information
contained in our financial statements, including the related notes, you should
read "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements contained elsewhere in
this prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income........................................ $ 99,376 $ 64,978 $ 52,657 $ 53,533 $ 44,248
Servicing income........................................... 140,780 76,110 137,753 111,969 71,824
Gain on sale of contracts.................................. 54,977 25,438 39,399 41,518 18,856
---------- ---------- ---------- ---------- ----------
Total revenues..................................... 295,133 166,526 229,809 207,020 134,928
Provision for credit losses................................ 36,578 15,146 8,248 10,275 6,483
Operating expenses......................................... 173,600 165,042 167,418 130,325 77,315
Restructuring charge(1).................................... 15,000
---------- ---------- ---------- ---------- ----------
Total expenses..................................... 210,178 195,188 175,666 140,600 83,798
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax (benefit).................. 84,955 (28,662) 54,143 66,420 51,130
Income tax (benefit)....................................... 35,580 (12,095) 22,829 27,779 20,963
---------- ---------- ---------- ---------- ----------
Net income (loss).......................................... $ 49,375 $ (16,567) $ 31,314 $ 38,641 $ 30,167
========== ========== ========== ========== ==========
Net income (loss) per common share -- diluted(2)........... $ 1.91 $ (0.64) $ 1.22 $ 1.50 $ 1.33
========== ========== ========== ========== ==========
OPERATING DATA:
Prime contract purchases................................... $2,313,573 $1,808,013 $1,245,027 $1,129,314 $ 936,429
Non-prime contract purchases............................... 1,026,573 862,683 1,040,252 992,375 591,220
---------- ---------- ---------- ---------- ----------
Total contract purchases........................... $3,340,146 $2,670,696 $2,285,279 $2,121,689 $1,527,649
========== ========== ========== ========== ==========
Contracts securitized(3)................................... $2,500,000 $1,885,000 $2,190,000 $2,090,000 $1,480,000
Operating cash flows(4).................................... $ 109,589 $ 16,380 $ 13,567 $ 22,746 $ 25,636
Operating expenses (annualized) as a percentage of average
serviced contracts....................................... 3.6% 4.1% 5.0% 5.0% 4.1%
Number of states in which contracts were purchased......... 43 42 37 31 16
Number of dealers from which contracts were purchased...... 8,722 11,323 11,978 9,372 6,247
SERVICING DATA:
Contracts serviced at end of period........................ $5,354,385 $4,367,099 $3,680,817 $3,046,585 $2,209,594
Average contracts serviced during the period............... $4,839,514 $4,006,185 $3,383,570 $2,627,622 $1,886,359
Contracts delinquent 60 days or greater as a percentage of
amount of contracts outstanding at end of period(5)...... 0.83% 1.07% 0.72% 0.55% 0.40%
Net chargeoffs as a percentage of the average amount of
contracts outstanding during the period(5)............... 2.13% 3.42% 3.02% 2.30% 1.61%
</TABLE>
3
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<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31,
------------------------------- ------------
ACTUAL AS ADJUSTED(6) 1998
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Contracts receivable, net................................... $1,459,035 $1,459,035 $ 884,825
Retained interest in securitized assets..................... 167,277 167,277 171,230
Total assets................................................ 2,130,927 2,130,927 1,444,340
Secured lines of credit..................................... 1,012,293 973,843 554,836
Notes payable -- parent..................................... 178,908 178,908 160,000
Total equity................................................ 212,188 250,638 164,341
</TABLE>
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(1) See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Overview".
(2) Restated to reflect a 10% stock dividend in 1996.
(3) Information for 1999 does not include $500 million of contracts securitized
in a privately placed conduit facility recorded within secured lines of
credit.
(4) Operating cash flows are defined as cash flows from securitizations, net
interest margin on owned loans and other fee income less dealer
participation and operating costs.
(5) Includes delinquency and loss information relating to contracts that were
sold, but which were originated and serviced by us. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Asset Quality".
(6) As adjusted to reflect the receipt by us of the net proceeds of this
offering.
4
<PAGE> 8
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. Our business, operating
results and financial condition could be adversely affected by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you could lose all or part of your investment. You should
also refer to the other information set forth in this prospectus, including our
consolidated financial statements and the related notes.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expects," "anticipates," "intends," and "plans" and similar expressions. Our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include, but are not limited
to, those discussed below and elsewhere in this prospectus.
RISKS RELATED TO US
THE OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED, WHICH MAY RESULT IN CONFLICTS
OF INTEREST AND ACTIONS THAT ARE NOT IN THE BEST INTERESTS OF OTHER
STOCKHOLDERS.
Immediately following the completion of the offering, our parent entity,
Western Financial Bank, will own not less than approximately 80% of our
outstanding shares of common stock and will be able to exercise significant
control of our company. In addition, Ernest S. Rady, a founder and the Chairman
of the Board of Directors and the Chief Executive Officer of Westcorp, the
parent entity of the Bank, is the beneficial owner of approximately 66% of the
outstanding shares of common stock of Westcorp.
Mr. Rady is also the Chairman of the Board of Directors of the Bank and our
company. Additionally, the Bank intends to retain control of at least 80% of the
outstanding shares of our common stock to ensure that it may consolidate with us
for federal tax purposes. Accordingly, the common stock ownership of the Bank
and Mr. Rady will enable the Bank, and Mr. Rady, to elect all of our directors
and effectively control the vote on all matters submitted to a vote of our
stockholders, including mergers, sales of all or substantially all of our assets
and "going private" transactions. The ongoing relationships between Mr. Rady,
the Bank and us, could result in conflicts of interest between the Bank and our
company. Because of the significant block of common stock controlled by the Bank
and Mr. Rady, decisions may be made that, while in the best interests of the
Bank and Mr. Rady, may not be in the best interests of other stockholders. See
"Management", "Description of Capital Stock" and "Business -- Transactions with
Related Parties".
THE AVAILABILITY OF OUR FINANCING SOURCES DEPENDS ON FACTORS OUTSIDE OF OUR
CONTROL.
We depend on a significant amount of financing from our parent entity to
operate our business and to fund the purchase of contracts pending
securitization. We have three separate borrowing arrangements with our parent
entity. The senior note and the promissory note are longer term, unsecured debt,
while our $1.3 billion line of credit agreement is designed to provide
short-term financing for the purchases of contracts. See
"Business -- Transactions with Related Parties". The availability of these
financing sources depends on factors outside of our control, including
regulatory issues such as the capital requirements of the Bank and availability
of funds at our parent entity. If the Bank were unable to extend this financing,
we would have to replace it with outside sources or curtail our contract
purchasing activities, which would have a material adverse effect on our
financial position, liquidity and results of operations.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO RUN OUR BUSINESS.
Our business requires substantial cash. Cash requirements include amounts
paid to dealers for acquisition of contracts, expenses incurred in connection
with the securitization of contracts, capital
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<PAGE> 9
expenditures for new technologies and ongoing operating costs. Our primary
source of operating cash comes from the excess cash flows received from
securitization trusts and contracts held on the balance sheet. The timing and
amount of excess cash flow from contracts varies based on a number of factors,
including but not limited to:
- the rates of loan delinquencies, defaults and net losses;
- how quickly and at what price repossessed vehicles can be resold;
- ages of the loans in the portfolio; and
- levels of voluntary prepayments.
Any adverse change in these factors could reduce or eliminate excess cash flows
to us. Although we currently have positive operating cash flows, we cannot
assure you that we will continue to generate positive cash flows in the future
which could have a material adverse effect on our financial position, liquidity
and results of operations.
CHANGES IN OUR SECURITIZATION PROGRAM COULD ADVERSELY AFFECT OUR LIQUIDITY AND
EARNINGS.
Our business depends on our ability to aggregate and sell automobile
contracts in the form of publicly offered asset-backed securities. These sales
generate cash proceeds that allow us to repay amounts outstanding under our line
of credit with our parent and to purchase additional contracts. In addition, the
sale of contracts to a securitization trust in preparation for securitization,
creates an accounting gain on sale that forms a material part of our reported
earnings for each quarter. Changes in our asset-backed securities program could
materially adversely affect our earnings or ability to purchase and resell
contracts on a timely basis. Such changes could include a:
- change in the securitization structure which results in gain on sale not
being recognized;
- delay in the completion of a planned securitization;
- negative market perception of us; and
- failure of the contracts we intend to sell to conform to insurance
company and rating agency requirements.
If we are unable to use a securitization program, we may have to curtail
our contract purchasing activities, which would have a material adverse effect
on our financial position, liquidity and results of operations and may cause our
market price to drop.
WE DEPEND ON OUR CREDIT ENHANCEMENTS TO MAINTAIN FAVORABLE INTEREST RATES AND
CASH REQUIREMENTS FOR OUR SECURITIZATIONS.
To date, all of our securitizations have used credit enhancement in the
form of financial guaranty insurance policies issued by Financial Security
Assurance Inc., which is known as FSA. These insurance policies are currently
one of the most effective and least capital intensive forms of credit
enhancement. We use this credit enhancement to achieve "AAA/Aaa" ratings on our
securitizations, which reduces the overall costs of a transaction relative to
alternative forms of financing available to us. FSA is not required to insure
our securitizations and we cannot assure you that it will continue to do so or
that our future securitizations will be similarly rated. Likewise, we are not
required to use financial guaranty insurance policies issued by FSA or any other
form of credit enhancement in connection with our securitizations. A downgrading
of FSA's credit rating, FSA's withdrawal of credit enhancement or the lack of
availability of reinsurance or other alternative credit enhancements could
result in higher interest costs for our future securitizations and/or larger
initial cash deposit requirements if we are unable to obtain similar policies on
similar terms. These events could have a material adverse effect on our
financial position, liquidity and results of operations.
6
<PAGE> 10
IF WE LOSE OUR REINVESTMENT CONTRACT RELATIONSHIP OR IF OUR REINVESTMENT
CONTRACTS ARE NO LONGER DEEMED ELIGIBLE INVESTMENTS, WE MAY NOT BE ABLE TO
OBTAIN COMPARABLE FINANCING.
We have access to the cash flows of the automobile contracts sold to the
securitization trust in each of the outstanding securitization transactions,
including the cash held in each spread account, through a series of agreements
into which we, our parent company, the Bank, our subsidiary, WFS Financial Auto
Loans 2, Inc., or WFAL2 as we refer to it, and other parties have entered. We
are permitted to use that cash as we determine, including in the ordinary
business activities of originating contracts.
In each securitization transaction, the securitization agreements require
that all cash flows of the relevant trust and the associated spread accounts be
invested in an eligible investment. The Bank and WFAL2 have entered into a
reinvestment contract in connection with each securitization transaction, which
is deemed to be an eligible investment under the relevant securitization
agreements.
A limited portion of the funds invested in reinvestment contracts may be
used by WFAL2 and the balance may be used by the Bank. The Bank makes its
portion of the invested funds available to us through a reinvestment contract.
Under our reinvestment contract with the Bank, we receive access to all of the
cash available to the Bank under each trust reinvestment contract. We are
obligated to repay to the Bank an amount equal to the cash we used, when needed
by the Bank, to meet its obligations under the individual trust reinvestment
contracts. With the portion of the cash available to WFAL2 under the individual
trust reinvestment contracts, WFAL2 purchases contracts from us according to the
terms of sale and servicing agreements entered into with us. If the reinvestment
contracts were no longer deemed an eligible investment, which determination
could be made by either of the securitization rating agencies or FSA in their
sole discretion, we would no longer have the ability to use this cash in the
ordinary course of business and would need to obtain alternative financing,
which may only be available on less attractive terms. If we were unable to
obtain additional financing, we may have to curtail our contract purchasing
activities, which would also have a material adverse effect on our financial
position, liquidity and results of operations.
PREPAYMENTS AND LOSSES MAY HAVE A MATERIAL EFFECT ON THE VALUE OF OUR RETAINED
INTEREST IN SECURITIZED ASSETS.
We usually sell contracts to a grantor or owner trust in a manner which
requires that we account for the transaction as a sale. This gain on sale is not
an actual amount of cash received, but rather an asset which represents the
expected future earnings we will receive based upon the amount of interest we
expect to receive from our borrowers less the interest we expect to pay our
investors in the securitization. The benefit of this difference is then reduced
by the servicing and guarantor fees we must pay as well as the prepayment and
credit losses expected to occur on the contracts in the trust. We make
assumptions about prepayment rates and credit losses based upon our historical
experience and other factors. The resulting gain on sale asset is called
retained interest in securitized assets, or RISA. The RISA is amortized on a
monthly basis over the life of the securitization. We reevaluate the assumptions
we use to calculate the RISA every quarter. We adjust those assumptions and the
RISA to the extent our actual experience with the performance of the contracts
in a securitization trusts deviates from the experience we initially
anticipated. If actual prepayment and credit loss rates are higher than the
assumptions we initially used, we must write-down the value of the RISA. If the
write-down is large enough, it will have a material adverse effect on our
earnings and capital.
A LOSS OF CONTRACT SERVICING RIGHTS COULD HAVE A MATERIAL EFFECT ON OUR
BUSINESS.
As servicer of all our securitized contracts, we are entitled to receive
contractual servicing fees. Contractual servicing fees are earned at rates
ranging from 1.0% to 1.25% per annum on the outstanding balance of contracts
securitized. FSA, as guarantor, can terminate our right to act as servicer upon
the occurrence of events defined in the pooling and servicing agreements for
securitized contracts such as our bankruptcy or material breach of warranties or
covenants. Any loss of such servicing rights could have a material adverse
effect on our financial position, liquidity and results of operations.
7
<PAGE> 11
WE EXPECT OUR OPERATING RESULTS TO CONTINUE TO FLUCTUATE WHICH MAY ADVERSELY
IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
Our results of operations have fluctuated in the past and are expected to
fluctuate in the future principally as a result of the timing, size, pricing and
structure of our securitizations. Other factors that could affect our quarterly
earnings include but are not limited to:
- variations in the volume of contracts purchased which historically tend
to be lower in the first and fourth quarters of the year;
- interest rate spreads;
- the effectiveness of our hedging strategies;
- credit losses which historically tend to be higher in the first and
fourth quarters of the year;
- operating costs; and
- whether a securitization is treated as a sale or a financing.
FAILURE TO IMPLEMENT OUR BUSINESS STRATEGY COULD ADVERSELY AFFECT OUR
OPERATIONS.
Our financial position and results of operations depend on our ability to
execute our business strategy, which includes the following key elements:
- producing measured growth in contract originations;
- leveraging technology to improve our business; and
- effectively pricing contracts relative to risk.
Our failure or inability to execute any element of our business strategy could
materially adversely affect our financial position, liquidity and results of
operations.
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS FROM THIS OFFERING AND MAY
USE THEM IN WAYS WITH WHICH YOU DISAGREE.
We have not allocated specific amounts of the net proceeds to any
particular growth plans. Accordingly, our management will have significant
flexibility in applying the net proceeds of this offering. The failure of
management to use such funds effectively could have a material adverse effect on
our financial position, liquidity and results of operations.
RISKS RELATED TO FACTORS OUTSIDE OUR CONTROL
INTEREST RATE FLUCTUATIONS CAN HARM OUR PROFITABILITY.
Our profitability is largely determined by the difference between the
effective rate of interest earned on contracts purchased by us and the interest
paid on our lines of credit prior to securitization as well as the interest rate
paid for notes and certificates issued in securitization transactions. Several
factors affect our ability to manage interest rate risk. Our contracts are
purchased at fixed interest rates, while our lines of credit bear interest at
variable rates that are subject to frequent adjustment to reflect prevailing
market rates for short-term borrowings. To protect against changes in interest
rates, we hedge contracts by purchasing two-year Treasury securities forward
agreements until the contracts are securitized. Generally, we enter into forward
agreements in amounts that correspond to the principal amount of the contracts
originated. The market value of these forward agreements is designed to respond
inversely to the market value changes of the underlying contracts. Because of
this inverse relationship, we can effectively lock in a gross interest rate
spread at the time of entering into the hedge transaction. We cannot assure you,
however, that this strategy will consistently or completely offset adverse
changes in interest rates or that we will not sustain losses on hedging
transactions. In addition, in a rising interest rate environment we may
8
<PAGE> 12
not be able to increase rates charged to borrowers fast enough to compensate for
an increase in the interest rates we pay.
ECONOMIC SLOWDOWNS OR RECESSIONS MAY AFFECT OUR BUSINESS.
Periods of economic slowdown or recession, whether general, regional or
industry-related, may increase the default probability on automobile contracts.
These periods may also be accompanied by decreased consumer demand for
automobiles which would result in reduced demand for automobile contracts and
could reduce business for us. Decreased consumer demand for automobiles also
contributes to a decline in the value of automobiles securing outstanding
contracts, which weakens collateral coverage and increases the possibility of
losses in the event of a default. We cannot assure you that we could remain
profitable under any such conditions or that such conditions will not result in
such severe reductions in the cash flows available to us to permit us to remain
current on our current financings.
ADVERSE CHANGES IN USED CAR PRICES MAY HARM OUR BUSINESS.
Significant increases in the inventory of used automobiles may depress the
prices at which we can sell our inventory of repossessed vehicles or may delay
sales. Factors that may affect the level of used car inventory include consumer
preferences, leasing programs offered by captive finance companies and
seasonality. In addition, average used car prices have fluctuated in the past,
and any softening in the future of the used car market could cause our recovery
rate on repossessed vehicles to decline below current levels. Lower recovery
rates would increase the level of credit losses incurred by us that would, in
turn, lower the amount of cash flows received.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN OUR INDUSTRY.
The auto finance business is highly competitive. We compete with captive
auto finance companies owned by major automobile manufacturers, banks, credit
unions, savings associations and independent consumer finance companies that
conduct business in the geographic regions in which we operate. Many of these
competitors have greater financial and marketing resources than us.
Additionally, on occasion the captive finance companies provide financing on
terms significantly more favorable to auto purchasers than we can offer. For
example, the captive finance companies can offer special low interest loan
programs as incentives to purchasers of selected models of automobiles
manufactured by their respective parent manufacturers.
Many of our competitors also have long standing relationships with
automobile dealers and may offer dealers or their customers other forms of
financing, including dealer floor plan financing and leasing, which we do not
provide. Providers of automobile financing have traditionally competed on the
basis of interest rate charged, the quality of credit accepted, the flexibility
of loan terms offered and the quality of service provided to dealers and
customers. In seeking to establish ourself as one of the principal financing
sources of the dealers we serve, we compete predominately on the basis of our
high level of dealer service and strong dealer relationships and by offering
flexible loan terms. We cannot assure you that we will be able to compete
successfully in this market or against these competitors.
LEGAL AND REGULATORY REQUIREMENTS MAY RESTRICT OUR ABILITY TO DO BUSINESS.
As an "operating subsidiary" of a bank, we are subject to inspection and
regulation by the Office of Thrift Supervision, the primary federal banking
agency responsible for the supervision and regulation of the Bank. The most
significant impact of such regulation and supervision is that absent approval by
the OTS, we are precluded from holding, on balance sheet, consumer loans,
including contracts, in an aggregate principal balance in excess of 30% of the
total consolidated assets of the Bank. The limitation is increased to 35% of the
Bank's consolidated assets if all of the consumer loans in excess of the 30%
limit are obtained by us or the Bank and its other subsidiaries directly from
consumers. Our securitization activities, however, enable us to remove contracts
that are securitized from our balance sheet for regulatory purposes.
9
<PAGE> 13
As a result, those securitized contracts are not included in the calculation of
the percentage of the Bank's consolidated assets subject to either the 30% or
35% limitation on consumer loans.
We are also subject to numerous federal and state consumer protection laws
and regulations, which, among other things may affect:
- the interest rates, fees and other charges which we may impose;
- the terms and conditions of the contracts;
- the disclosures which must be made to obligors; and
- the collection, repossession and foreclosure rights with respect to
delinquent obligors.
The extent and nature of such laws and regulations vary from state to state. We
believe that we are in compliance in all material respects with all such
applicable laws. Prospective changes in such laws or the enactment of new laws
may have an adverse effect on our business or the results of our operations. See
"Supervision and Regulation".
ADVERSE OUTCOMES OF LITIGATION AGAINST US COULD HAVE A MATERIAL EFFECT UPON OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
We are involved in and will likely continue to be a party to litigation. As
a result of the consumer-oriented nature of the industry in which we operate and
uncertainties with respect to the application of various laws and regulations in
some circumstances, industry participants are named from time to time as
defendants in litigation, including class action suits, involving alleged
violations of federal and state consumer lending or other similar laws and
regulations. A significant judgment against us in connection with any litigation
could have a material adverse effect on our financial condition and results of
operations. In addition, a decision that a material number of contracts
purchased by us involved violations of applicable lending laws by automobile
dealers could materially adversely affect our financial condition and results of
operations.
WE EXPECT OUR STOCK PRICE TO CONTINUE TO FLUCTUATE.
The market price of our common stock has fluctuated in the past and is
likely to fluctuate in the future. In addition, the securities markets have
experienced significant price and volume fluctuations and the market prices of
the securities of finance-related companies including automobile finance
companies have been especially volatile. Such fluctuations can result from:
- quarterly variations in operating results;
- changes in analysts' estimates;
- short-selling of our common stock;
- events affecting other companies that investors deem to be comparable to
us;
- fluctuations in interest rates; or
- factors which have the effect of increasing, or which investors believe
may have the effect of increasing, our cost of funds and general economic
trends and conditions.
Investors may be unable to resell their shares of our common stock at or
above the offering price. In the past, companies that have experienced
volatility in the market price of their stock have been subject to securities
class action litigation.
OUR OPERATIONS MIGHT SUFFER FROM YEAR 2000 COMPUTER PROBLEMS.
The Year 2000 issue is the result of computer programs and embedded
hardware systems having been developed using two digits rather than four to
define the applicable year. Computer programs or hardware that have
date-sensitive software or embedded chips and define a year using "00" may
interpret the year to
10
<PAGE> 14
be 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions or failure to our operations including,
among other things, a temporary inability to transact new business or
communicate with our customers online. We believe that we are Year 2000
compliant. However, we may experience degradation in the performance of our
systems or complete systems failure if our assessment is erroneous or if we
encounter unforeseen difficulties. Any of these events, whether occurring in our
systems, or the systems of others with whom we transact business, such as
outside vendors, could have a material adverse effect on our business, financial
condition and results of operations. We have not experienced any year 2000
problems to date, but we continue to monitor our operations for year 2000
effects.
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the 2,000,000 shares of
common stock offered by us of $38.5 million (or $44.3 million if the
underwriters' over-allotment option is exercised in full) after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by us based upon an assumed offering price of $20.50 per share. The
primary purpose of the offering is to provide us with additional capital to fund
our growth, including increasing the amount of contracts we can acquire and hold
prior to sale in the asset-backed securities market, and for other working
capital needs and general corporate purposes. The net proceeds may be used to
reduce the $551 million outstanding balance as of December 31, 1999, on our line
of credit from the Bank which terminates on December 31, 2004. When secured, the
line of credit carries an interest rate equal to one-month London Interbank
Offer Rate (LIBOR) plus 62.5 basis points. When unsecured, the line of credit
carries an interest rate equal to one-month LIBOR plus 112.5 basis points.
PRICE RANGE OF COMMON STOCK
The common stock of our company has been publicly traded since August 8,
1995 on the Nasdaq National Market identified by the symbol WFSI. The following
table illustrates the high and low sale prices by quarter in 1999, 1998 and
1997, as reported by Nasdaq, which prices are believed to represent actual
transactions.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter......................... $ 8.31 $ 5.13 $14.88 $9.00 $23.25 $10.75
Second Quarter........................ 14.56 7.81 11.85 7.00 16.75 8.69
Third Quarter......................... 21.50 14.50 8.50 5.00 22.50 16.31
Fourth Quarter........................ 23.00 19.75 6.94 4.63 22.13 8.63
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on January 18, 2000 was $20.50 per share and on that date there were
approximately 500 stockholders of our common stock. The number of stockholders
was determined by the number of record holders, including the number of
individual participants, in security position listings.
DIVIDEND POLICY
We have never declared or paid any cash dividend on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
11
<PAGE> 15
CAPITALIZATION
The following table sets forth certain information regarding our debt and
capitalization as of December 31, 1999, and as adjusted to reflect the receipt
by us of the estimated net proceeds of this offering assuming a public offering
price of $20.50 per share. This table should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
prospectus. The notes payable -- parent is the balance due to our parent under
notes executed by us for general corporate purposes. Secured lines of credit
represent the balance due to our parent under a line of credit which we use for
liquidity purposes in the amount of $551 million and $513 million (as adjusted)
as of December 31, 1999 and amounts due under our conduit facility in the amount
of $461 million.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Liabilities:
Secured lines of credit..................................... $1,012,293 $ 973,843
Notes payable -- parent................................... 178,908 178,908
---------- ----------
Total liabilities................................. $1,191,201 $1,152,751
========== ==========
Stockholders' equity:
Common stock (no par value; authorized 50,000,000 shares;
issued and outstanding, actual 25,771,956 and as
adjusted 27,771,956 shares)............................ $ 74,010 $ 112,460
Paid-in capital........................................... 4,327 4,327
Retained earnings......................................... 134,690 134,690
Accumulated other comprehensive loss, net of tax.......... (839) (839)
---------- ----------
Total stockholders' equity........................ $ 212,188 $ 250,638
========== ==========
</TABLE>
12
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents summary audited financial data for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995. Since the information in
this table is only a summary and does not provide all of the information
contained in our financial statements, including the related notes, you should
read "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements contained elsewhere in
this prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income.................................. $ 99,376 $ 64,978 $ 52,657 $ 53,533 $ 44,248
Servicing income..................................... 140,780 76,110 137,753 111,969 71,824
Gain on sale on contracts............................ 54,977 25,438 39,399 41,518 18,856
---------- ---------- ---------- ---------- ----------
Total revenues.............................. 295,133 166,526 229,809 207,020 134,928
Provision for credit losses.......................... 36,578 15,146 8,248 10,275 6,483
Operating expenses................................... 173,600 165,042 167,418 130,325 77,315
Restructuring charge(1).............................. 15,000
---------- ---------- ---------- ---------- ----------
Total expenses.............................. 210,178 195,188 175,666 140,600 83,798
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax (benefit)............ 84,955 (28,662) 54,143 66,420 51,130
Income tax (benefit)................................. 35,580 (12,095) 22,829 27,779 20,963
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 49,375 $ (16,567) $ 31,314 $ 38,641 $ 30,167
========== ========== ========== ========== ==========
Net income (loss) per common share -- diluted(2)..... $ 1.91 $ (0.64) $ 1.22 $ 1.50 $ 1.33
========== ========== ========== ========== ==========
OPERATING DATA:
Prime contract purchases............................. $2,313,573 $1,808,013 $1,245,027 $1,129,314 $ 936,429
Non-prime contract purchases......................... 1,026,573 862,683 1,040,252 992,375 591,220
---------- ---------- ---------- ---------- ----------
Total contract purchases....................... $3,340,146 $2,670,696 $2,285,279 $2,121,689 $1,527,649
========== ========== ========== ========== ==========
Contracts securitized(3)............................. $2,500,000 $1,885,000 $2,190,000 $2,090,000 $1,480,000
Operating cash flows(4).............................. $ 109,589 $ 16,380 $ 13,567 $ 22,746 $ 25,636
Operating expenses as a percentage of average
serviced contracts................................. 3.6% 4.1% 5.0% 5.0% 4.1%
Number of states in which contracts were purchased... 43 42 37 31 16
Number of dealers from which contracts were
purchased.......................................... 8,722 11,323 11,978 9,372 6,247
SERVICING DATA:
Contracts serviced at end of period.................. $5,354,385 $4,367,099 $3,680,817 $3,046,585 $2,209,594
Average contracts serviced during the period......... $4,839,514 $4,006,185 $3,383,570 $2,627,622 $1,886,359
Contracts delinquent 60 days or greater as a
percentage of amount of contracts outstanding at
end of period(5)................................... 0.83% 1.07% 0.72% 0.55% 0.40%
Net chargeoffs as a percentage of the average amount
of contracts outstanding during the period(5)...... 2.13% 3.42% 3.02% 2.30% 1.61%
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Contracts receivable, net......................... $1,459,035 $ 884,825 $ 229,338 $231,942 $316,036
Retained interest in securitized assets........... 167,277 171,230 181,177 121,597 78,045
Total assets...................................... 2,130,927 1,444,340 878,160 675,572 583,588
Secured lines of credit........................... 1,012,293 554,836
Notes payable -- parent........................... 178,908 160,000 175,000 125,000 125,000
Total equity...................................... 212,188 164,341 179,893 147,692 109,051
</TABLE>
- ---------------
(1) See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Overview".
(2) Restated to reflect a 10% stock dividend in 1996.
(3) Information for 1999 does not include $500 million of contracts securitized
in a privately placed conduit facility recorded within secured lines of
credit.
(4) Operating cash flows are defined as cash flows from securitizations, net
interest margin on owned loans and other fee income less dealer
participation and operating costs.
(5) Includes delinquency and loss information relating to contracts that were
sold, but which were originated and serviced by us. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Asset Quality".
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are one of the nation's largest independent automobile finance companies
with 27 years of experience in the auto finance industry. We originate,
securitize and service new and used retail automobile installment sales
contracts generated through our relationships with over 8,000 franchised and
select independent automobile dealers in 43 states. At December 31, 1999, we
serviced a portfolio of $5.4 billion which consisted of approximately 65% prime
and 35% non-prime contracts.
Unlike many of our competitors, we finance both what are generally referred
to as prime and non-prime borrowers, providing dealers with a single contact to
whom they can sell most of their automobile contracts. The following chart
represents selected key events in the purchase and servicing of contracts and
their respective financial statement impact:
<TABLE>
<CAPTION>
EVENT FINANCIAL STATEMENT IMPACT
----- --------------------------
<S> <C>
Purchase and fund contract from dealer - Pay principal amount of contract to dealer and
record contract receivable
- Pay dealer participation to dealer and record dealer
participation as part of contract receivable
- Establish allowance for credit losses
- Fund purchase using line of credit and operating
cash flows
Sell contract to a securitization trust - Pay down line of credit with securitization proceeds
- Remove contract receivable from balance sheet
- Capitalize retained interest in securitized asset,
or RISA, which represents the present value of the
estimated future retained interest earnings net of
credit losses and adjusted for prepayments
- Record gain on sale which is equal to the RISA less
dealer participation, issuance costs and the effect of
hedging activities
- Reduce the allowance for credit losses
Collect payment for on balance sheet - Recognize net interest income
contract
- Reduce line of credit
- Collect late charges and other fees
Collect payment for off balance sheet - Amortize the RISA asset. Actual cash flows in excess
contract of the amortization of the RISA are shown in our
income statement as retained interest income
- Reduce the outstanding amount of the respective
securitization transaction by the amount of
principal received which is paid through to the
asset backed investor
- Receive contractual servicing fees, late charges and
other fees
Charge off on balance sheet contract - Reduce the allowance for credit losses
Charge off off balance sheet contract - Reduce the actual cash flows recognized from
securitization trusts thereby increasing the
amortization of the RISA
</TABLE>
15
<PAGE> 19
To improve our long-term profitability, we restructured our operations in
1998. Our restructuring had three objectives:
- to reduce operating costs;
- to increase contract production volume; and
- to strengthen credit quality.
As part of this restructuring, we merged our prime and non-prime operations and
offices, providing each dealer with a single point of contact for most of its
prime and non-prime financing needs while retaining separate prime and non-prime
underwriters. We also centralized collection efforts into our regional business
centers and standardized our operating practices. As a result of the
restructuring, we closed 96 underperforming offices and reduced our number of
employees by approximately 20%.
The total pre-tax restructuring charge in 1998 for the completed plan was
$15.0 million. Restructuring related costs included $1.8 million for employee
severance and $13.2 million of lease termination fees and the write off of
disposed assets. The restructuring charge was substantially used during 1998.
As a result of this restructuring we:
- returned to profitability, realizing net income of $49.4 million in 1999;
- increased operating cash flows from $13.6 million in 1997, to $16.4
million in 1998 and to $110 million in 1999;
- increased contract originations from $2.3 billion in 1997, to $2.7
billion in 1998 and to $3.3 billion in 1999;
- increased prime contract originations from 54% in 1997, to 68% in 1998
and 69% in 1999;
- improved the percentage of applications funded to applications received
from 13% in the first quarter of 1998 to 19% for the fourth quarter of
1999;
- lowered operating expenses as a percentage of average serviced contracts
from 5.0% in 1997, to 4.1% in 1998 and to 3.6% in 1999; and
- reduced net chargeoffs as a percentage of average serviced contracts from
3.0% in 1997 and 3.4% in 1998 to 2.1% in 1999.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the difference between the rate earned on contracts
held on balance sheet and the interest costs associated with our borrowings. Net
interest income totaled $99.4 million in 1999 compared with $65.0 million in
1998 and $52.7 million in 1997. The increase in net interest income is the
result of holding contracts on balance sheet for a longer period before
securitizing and the increase in contract originations. As we securitize our
contracts, revenue previously recognized as net interest income will, upon
securitization, be recognized as gain on sale, contractual servicing and
retained interest income.
The following table shows the average rate earned on contracts and the
average rate paid on borrowings together with the corresponding net interest
rate spread for the periods indicated. The average cost of borrowings represents
the average combined rate of the senior note, promissory note, line of credit
and conduit facility.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Yield on interest-earning assets............................ 14.37% 14.37% 13.81%
Cost of borrowings.......................................... 6.33 7.37 8.16
----- ----- -----
Net interest rate spread.................................... 8.04% 7.00% 5.65%
===== ===== =====
</TABLE>
16
<PAGE> 20
The increase in the net interest rate spread in 1999 compared with 1998 and
1997 was the result of lower overall financing costs as we expanded our
utilization of our lines of credit in order to retain contracts on our balance
sheet while obtaining higher yields on the contracts retained.
Servicing Income
The components of servicing income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retained interest income.................................... $ 47,812 $ 1,961 $ 69,844
Contractual servicing income................................ 46,847 37,180 30,803
Other fee income............................................ 46,121 36,969 37,106
-------- ------- --------
Total servicing income...................................... $140,780 $76,110 $137,753
======== ======= ========
</TABLE>
Total servicing income was $141 million in 1999, $76.1 million in 1998 and
$138 million in 1997. The increase in servicing income in 1999 compared with
1998 is primarily the result of higher retained interest income due to lower
amortization of the RISA as a result of lower credit losses. The decline in
servicing income in 1998 compared with 1997 is due primarily to lower retained
interest income. Retained interest income is dependent upon the average excess
spread on the contracts sold, credit losses and the size of the sold portfolio.
Retained interest income was lower because of higher amortization of the RISA
due to higher credit losses.
According to the terms of each securitization transaction, contractual
servicing income is earned at rates ranging from 1.0% to 1.25% per annum on the
outstanding balance of contracts securitized. Other fee income consists
primarily of documentation fees, late charges and deferment fees and has
increased as a direct result of the increase in the number of contracts
originated and outstanding. During the past three years, our average serviced
portfolio has increased to $4.8 billion for 1999 from $4.0 billion for 1998 and
$3.4 billion for 1997.
Gain on Sale of Contracts
We recorded gain on sale of contracts of $55.0 million in 1999, $25.4
million in 1998 and $39.4 million in 1997. The amount of gain on sale recorded
in each period is dependent upon the amount of contracts securitized, the
structure of the securitization as well as other factors including the gross
interest rate spread on contracts securitized, the amount of dealer
participation paid, changes in credit loss assumptions, and the effect of
hedging activities. Gross interest rate spread is affected by product mix,
general market conditions and overall market interest rates. The risks inherent
in interest rate fluctuations are reduced through hedging activities.
The following table lists each of our securitization transactions. The
first issue, in 1985, was rated AA by Standard & Poors Rating Service, a
division of McGraw-Hill, Inc. and Aa by Moody's Investor Service, Inc. and all
issues since that time were rated AAA by S&P, and Aaa by Moody's, their
respective highest long-term ratings. The money market securities for each
applicable transaction was rated A-1+ by S&P and P-1 by Moody's, their
respective highest short-term ratings. All securitization transactions prior to
1995-4 were paid in full on or before their contractual maturity date.
17
<PAGE> 21
<TABLE>
<CAPTION>
REMAINING ORIGINAL
REMAINING BALANCE AS A WEIGHTED
BALANCE AT PERCENT OF ORIGINAL AVERAGE
ISSUE ORIGINAL DECEMBER 31, ORIGINAL WEIGHTED SECURITIZATION GROSS INTEREST
NUMBER CLOSE DATE BALANCE 1999 BALANCE AVERAGE APR RATE RATE SPREAD(1)
- ------ --------------- ----------- ------------- ------------ ----------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1985-A December, 1985 $ 110,000 Paid in full 0% 18.50% 8.38% 10.12%
1986-A November, 1986 191,930 Paid in full 0 14.20 6.63 7.57
1987-A March, 1987 125,000 Paid in full 0 12.42 6.75 5.67
1987-B July, 1987 110,000 Paid in full 0 12.68 7.80 4.88
1988-A February, 1988 155,000 Paid in full 0 13.67 7.75 5.92
1988-B May, 1988 100,000 Paid in full 0 14.01 8.50 5.51
1988-C July, 1988 100,000 Paid in full 0 15.41 8.50 6.91
1988-D October, 1988 105,000 Paid in full 0 14.95 8.85 6.10
1989-A March, 1989 75,000 Paid in full 0 15.88 10.45 5.43
1989-B June, 1989 100,000 Paid in full 0 15.96 9.15 6.81
1990-A August, 1990 150,000 Paid in full 0 16.05 8.35 7.70
1990-1 November, 1990 150,000 Paid in full 0 15.56 8.50 7.06
1991-1 April, 1991 200,000 Paid in full 0 16.06 7.70 8.36
1991-2 May, 1991 200,000 Paid in full 0 15.75 7.30 8.45
1991-3 August, 1991 175,000 Paid in full 0 15.69 6.75 8.94
1991-4 December, 1991 150,000 Paid in full 0 15.53 5.63 9.90
1992-1 March, 1992 150,000 Paid in full 0 14.49 5.85 8.64
1992-2 June, 1992 165,000 Paid in full 0 14.94 5.50 9.44
1992-3 September, 1992 135,000 Paid in full 0 14.45 4.70 9.75
1993-1 March, 1993 250,000 Paid in full 0 13.90 4.45 9.45
1993-2 June, 1993 175,000 Paid in full 0 13.90 4.70 9.20
1993-3 September, 1993 187,500 Paid in full 0 13.77 4.25 9.52
1993-4 December, 1993 165,000 Paid in full 0 13.97 4.60 9.37
1994-1 March, 1994 200,000 Paid in full 0 12.90 5.10 7.80
1994-2 May, 1994 230,000 Paid in full 0 13.67 6.38 7.29
1994-3 August, 1994 200,000 Paid in full 0 14.04 6.65 7.39
1994-4 October, 1994 212,000 Paid in full 0 14.59 7.10 7.49
1995-1 January, 1995 190,000 Paid in full 0 15.58 8.05 7.53
1995-2 March, 1995 190,000 Paid in full 0 15.71 7.10 8.61
1995-3 June, 1995 300,000 Paid in full 0 16.36 6.05 10.31
1995-4 September, 1995 375,000 $ 15,682 4.18 15.05 6.20 8.85
1995-5 December, 1995 425,000 26,369 6.20 15.04 5.88 9.16
1996-A March, 1996 485,000 39,665 8.18 15.35 6.13 9.22
1996-B June, 1996 525,000 58,399 11.12 15.46 6.75 8.71
1996-C September, 1996 535,000 76,201 14.24 15.74 6.66 9.08
1996-D December, 1996 545,000 93,390 17.14 15.83 6.17 9.66
1997-A March, 1997 500,000 106,378 21.28 15.43 6.60 8.83
1997-B June, 1997 590,000 151,208 25.63 15.33 6.37 8.96
1997-C September, 1997 600,000 189,116 31.52 15.36 6.17 9.19
1997-D December, 1997 500,000 177,777 35.56 15.43 6.34 9.09
1998-A March, 1998 525,000 213,970 40.76 15.19 6.01 9.18
1998-B June, 1998 660,000 322,421 48.85 14.72 6.06 8.66
1998-C November, 1998 700,000 431,469 61.64 14.68 5.81 8.87
1999-A January, 1999 1,000,000 686,738 68.67 14.42 5.70 8.72
1999-B July, 1999 1,000,000 839,092 83.91 14.62 6.36 8.26
1999-C November, 1999 500,000 462,810 92.56 14.77 7.01 7.76
----------- ------------
Total $14,411,430 $3,890,685
=========== ============
</TABLE>
- ---------------
(1) Represents the difference between the original weighted average annual
percentage rate, or APR, and the estimated weighted average securitization
rate on the closing date of the securitization transaction.
18
<PAGE> 22
Provision for Credit Losses
We maintain an allowance for credit losses to cover anticipated losses for
contracts held on balance sheet. The allowance for credit losses is increased by
charging the provision for credit losses and decreased by actual losses on such
contracts held on balance sheet or by the reduction of the amount of contracts
held on balance sheet from securitization transactions. The level of the
allowance is based principally on the outstanding balance of contracts held on
balance sheet, pending sales of contracts and historical loss trends. When we
sell contracts in a securitization transaction, we reduce our allowance for
credit losses and factor potential losses into our calculation of gain on sale.
We believe that the allowance for credit losses is currently adequate to
absorb inherent losses in our owned portfolio. During 1999, the provision for
credit losses totaled $36.6 million compared with $15.1 million in 1998 and $8.2
million in 1997. The increase in provision for credit losses in 1999 compared
with 1998 was primarily the result of a higher level of contracts held on the
balance sheet.
Operating Expenses
Total operating expenses were $174 million for 1999, $165 million for 1998
and $167 million for 1997. Operating expenses as a percentage of average
serviced contracts declined 53 basis points to 3.6% in 1999 compared with 4.1%
in 1998 and 5.0% in 1997.
We reduced our cost of operations in 1999 as a percentage of average
serviced contracts with the completion of the restructuring programs, as well as
other operating efficiencies achieved during the past three years. These
efficiencies include increasing the conversion ratios on contracts purchased,
the automation of the loan application and underwriting system, the
centralization of data entry and verification processes, implementation of
proprietary credit scorecards and electronic funds transfers for our dealers.
Operating efficiencies also include the implementation of auto-dialers, the
centralization and upgrade of payment processing and asset recovery processes,
the upgrading of 800 lines for customer service and interactive voice response
technology, direct debit for our borrowers, imaging for record retention and
retrieval, and the implementation of a new collection system.
Currently, we pay a monthly management fee to the Bank and Westcorp, which
covers various administrative expenses. Additionally, the Bank and Westcorp pay
fees to us for information technology and other services. The management fee is
based upon the actual costs incurred and estimates of actual usage. We believe
that the management fee approximates the cost to perform these services on our
own behalf or to acquire them from third parties. We have the option, under the
management agreements, to procure these services on our own should it be more
economically beneficial to us to do so. See "Business -- Transactions with
Related Parties -- Management Agreements".
Income Taxes
We file federal and certain state tax returns as part of a consolidated
group that includes the Bank and Westcorp, the holding company parent of the
Bank. We file other state tax returns as a separate entity. Tax liabilities from
the consolidated returns are allocated in accordance with a tax sharing
agreement based on the relative income or loss of each entity on a stand-alone
basis. Our effective tax rate was 42% for 1999, 1998 and 1997. See
"Business -- Transactions with Related Parties -- Tax Sharing Agreement".
Pro-Forma Portfolio Basis Statements of Operations
Under generally accepted accounting principles, our securitization
transactions to date have been treated as sales. At the time of sale, in
accordance with SFAS 125, we record a gain equal to the present value of the
estimated future earnings from the portfolio of contracts sold. Net interest
earned on such contracts and fees earned for servicing the contract portfolios
are recognized over the life of the securitization transaction as contractual
servicing and retained interest income and other fee income. SFAS 125 changes
the timing of income recognition through the recording of a gain at the time of
sale
19
<PAGE> 23
while the ultimate realization of such income remains dependent on the actual
performance, over time, of the contracts that were securitized.
The following pro-forma statements of operations present our results under
the assumption that the securitization transactions are treated as financings
rather than as sales. We believe that such a presentation is an important
performance measure of our operations. If treated as financings, no gain on sale
or subsequent contractual servicing and retained interest income is recognized.
Instead, the earnings of the contracts in the trusts and the related financing
costs are reflected over the life of the underlying pool of loans. We refer to
these pro-forma results as "portfolio basis" statements of operations since the
contracts would have remained in our on balance sheet contract portfolio if we
accounted for the transaction as a financing. We monitor the periodic portfolio
basis earnings of our serviced contract portfolio and believe these portfolio
basis statements assist in a better understanding of our business.
The following tables presents the portfolio basis statements of operations,
both in dollars and as a percent of average serviced contracts and a
reconciliation to net income (loss) as reflected in our consolidated statements
of operations.
WFS FINANCIAL AND SUBSIDIARIES
PORTFOLIO BASIS STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1999(1) 1998 1998(1)
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.............................. $642,497 13.3% $533,222 13.3%
Interest expense............................. 300,243 6.2% 261,044 6.5%
-------- ---------- -------- ----------
Net interest income.......................... 342,254 7.1% 272,178 6.8%
Net chargeoffs(2).......................... 102,937 2.1% 137,192 3.4%
Provision for growth(3).................... 19,190 0.4% 17,253 0.4%
-------- ---------- -------- ----------
Provision for credit losses.................. 122,127 2.5% 154,445 3.8%
-------- ---------- -------- ----------
Net interest income after provision for
credit losses.............................. 220,127 4.6% 117,733 3.0%
Other income................................. 46,121 1.0% 36,969 0.9%
Operating expenses........................... 180,100 3.8% 170,733 4.2%
Restructuring charge......................... 15,000 0.4%
-------- ---------- -------- ----------
Income (loss) before income tax (benefit).... 86,148 1.8% (31,031) (0.7)%
Income tax (benefit)(4)...................... 36,080 0.8% (13,095) (0.3)%
-------- ---------- -------- ----------
Portfolio basis net income (loss)............ $ 50,068 1.0% $(17,936) (0.4)%
======== ========== ======== ==========
Portfolio basis net income (loss) per common
share -- diluted........................... $ 1.94 $ (0.70)
======== ========
Average serviced contracts................... $4,839,514 $4,006,185
========== ==========
</TABLE>
- ---------------
(1) Rates are calculated by annualizing income statement amounts and dividing by
average serviced contracts.
(2) Represents actual chargeoffs incurred during the period.
(3) Represents additional allowance for credit losses set aside due to an
increase in the serviced portfolio.
(4) Such tax effect is based upon our tax rate for the respective period.
20
<PAGE> 24
WFS FINANCIAL AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS NET INCOME TO PORTFOLIO BASIS NET INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1999 1998
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GAAP net income (loss)...................................... $ 49,375 $ (16,567)
Portfolio basis adjustments:
Gain on sales of contracts................................ (54,977) (25,438)
Retained interest income.................................. (47,812) (1,961)
Contractual servicing income.............................. (46,847) (37,180)
Net interest income....................................... 242,878 207,200
Provision for credit losses............................... (85,549) (139,299)
Operating expenses........................................ (6,500) (5,690)
-------- ---------
Total portfolio basis adjustments........................... 1,193 (2,368)
Net tax effect(1)........................................... 500 (999)
-------- ---------
Portfolio basis net income.................................. $ 50,068 $ (17,936)
======== =========
</TABLE>
- ---------------
(1) Such tax effect is based upon the Company's tax rate for the respective
period.
FINANCIAL CONDITION
Contracts Receivable and Contracts Held for Sale
We held a portfolio of contracts on balance sheet for investment that
totaled $71.8 million at December 31, 1999 and $70.8 million at December 31,
1998. The balance of contracts held for sale is largely dependent upon the
timing of the origination and securitization of contracts. By utilizing
additional liquidity sources from our parent entity, we were able to delay our
securitization transactions in both the second quarter of 1999 and the third
quarter of 1998 at times when the asset-backed securities market had been
adversely affected by wider spreads and higher pricing. Our increase in
contracts held for sale is a result of these decisions. We plan to continue to
use the liquidity of our parent or our conduit facility and securitize contracts
on an opportunistic basis.
Amounts Due From Trusts
The excess cash flow generated by contracts sold to each of the
securitization trusts is deposited into collection and spread accounts by the
trustee under the terms of the securitization transactions. In addition, at the
time a securitization transaction closes, we advance additional monies to
initially fund these spread accounts. We establish a liability associated with
the use of the spread account funds which is reduced as such funds reach
predetermined funding levels. We are released from these obligations after the
spread account reaches a predetermined funding level. The amounts due from
trusts represent amounts due to us that are still under obligation to be held in
the spread accounts. The amounts due from trusts at December 31, 1999 were $439
million compared with $333 million at December 31, 1998. The increase is due to
the timing of releases from the spread account and the amount of contracts sold.
Retained Interest in Securitized Assets
RISA is capitalized upon the sale of contracts to securitization trusts.
RISA represents the present value of the estimated future earnings to be
received by us from the excess spread created in securitization transactions.
Excess spread is calculated by taking the difference between the coupon rate of
the contracts
21
<PAGE> 25
sold less the interest rate paid to the investors less contractually specified
servicing, guarantor fees, credit losses and prepayments.
Prepayment and credit loss assumptions are also utilized to estimate future
excess spread. We currently use a prepayment rate of 1.6% ABS. Credit losses are
estimated using a cumulative loss rate estimated by management to reduce the
likelihood of impairment to the value of the RISA. We determine the cumulative
loss rate based upon our review of historical cumulative loss experience,
collection and repossession data, estimates of the value of the underlying
collateral, economic conditions and trends, the mix of prime and non-prime
contracts and other information. Cumulative net credit loss assumptions utilized
during 1999 and 1998 ranged from 6% to 7%. Future earnings are discounted at a
rate management believes to be representative of the market at the time of
securitization. Currently, we use a discount rate of 425 basis points over the
two-year Treasury rate. All assumptions used are evaluated each quarter and
adjusted, if appropriate, to reflect actual performance of the contracts.
The balance of the RISA is amortized on a monthly basis over the expected
repayment life of the underlying contracts. Actual cash flows in excess of the
amortization of the RISA are shown in our income statement as retained interest
income. RISA is classified in a manner similar to available for sale securities
and as such is marked to market each quarter. Market value changes are
calculated by discounting the excess spread using a current market discount
rate. Any changes in the market value of the RISA is reported as a separate
component of stockholders' equity on our consolidated statements of financial
condition as accumulated other comprehensive income (loss), net of applicable
taxes.
The following table presents the activity of the RISA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.......................................... $ 171,230 $ 181,177 $121,597
Additions.................................................. 111,767 91,914 112,230
Amortization............................................... (111,752) (103,610) (53,421)
Change in unrealized loss on securities available for
sale(1).................................................. (3,968) 1,749 771
--------- --------- --------
Ending balance............................................. $ 167,277 $ 171,230 $181,177
========= ========= ========
</TABLE>
- ---------------
(1) Change in unrealized loss on securities available for sale represents the
effect that current changes in interest rates have on the valuation of the
RISA. Such amount will not be realized unless the RISA is sold.
22
<PAGE> 26
The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations. Estimated future
undiscounted RISA earnings are calculated by taking the difference between the
coupon rate of the contracts sold and the interest rate paid to the investors,
less the contractually specified servicing fee and guarantor fees, after giving
effect to estimated prepayments and assuming no losses. To arrive at the RISA,
this amount is reduced by the off balance sheet allowance established for
potential future losses and by discounting to present value.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings.................... $ 410,066 $ 361,209
Off balance sheet allowance for losses...................... (220,838) (170,664)
Discount to present value................................... (21,951) (19,315)
---------- ----------
Retained interest in securitized assets..................... $ 167,277 $ 171,230
========== ==========
Outstanding balance of contracts sold through
securitizations........................................... $3,890,685 $3,491,452
Off balance sheet allowance for losses as a percent of
contracts sold through securitizations.................... 5.68% 4.89%
</TABLE>
We believe that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the sold portfolio.
Asset Quality
We provide financing in a market where there is a risk of default by
borrowers. Chargeoffs directly impact our earnings and cash flows. To minimize
the amount of losses we incur, we monitor delinquent accounts, promptly
repossess and remarket vehicles and seek to collect on deficiency balances.
At December 31, 1999 the percentage of accounts delinquent 30 days or
greater was 2.84% compared with 3.64% at December 31, 1998 and 2.20% at December
31, 1997. Delinquency is calculated by us based on the contractual due date. Net
chargeoffs on average contracts outstanding for the year ended December 31, 1999
was 2.13% compared with 3.42% and 3.02% at December 31, 1998 and 1997.
Historically, chargeoffs and delinquencies tend to be higher in the first and
fourth quarters of the year.
The improvement in credit loss experience and delinquency is the result of
improved underwriting and servicing. Stricter underwriting guidelines, the
successful implementation of our multiple credit scoring models, and a greater
concentration of prime automobile contracts in our portfolio have all
contributed to better asset quality. Collection and recovery efforts have also
improved as the effects of the disruption created by the restructuring program
completed in 1998 have dissipated.
23
<PAGE> 27
The following table reflects our delinquency on a total serviced contract
basis.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Contracts serviced(1)......... 524,709 $5,354,385 464,257 $4,367,099 408,958 $3,680,817
======= ========== ======= ========== ======= ==========
Period of delinquency(2)
31-59 days.................. 12,868 $ 107,416 13,885 $ 112,208 6,605 $ 54,450
60-89 days.................. 3,511 29,738 3,966 32,100 2,161 18,652
90 days or more............. 1,711 14,872 1,768 14,441 918 7,762
------- ---------- ------- ---------- ------- ----------
Total contracts delinquent.... 18,090 $ 152,026 19,619 $ 158,749 9,684 $ 80,864
======= ========== ======= ========== ======= ==========
Delinquencies as a percentage
of number and amount of
contracts outstanding....... 3.45% 2.84% 4.23% 3.64% 2.37% 2.20%
</TABLE>
- ---------------
(1) Includes delinquency information relating to contracts which are owned by us
and contracts which have been sold and securitized but continue to be
serviced by us.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
The following table reflects repossessed assets on a total serviced
contract basis.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Contracts serviced(1)......... 524,709 $5,354,385 464,257 $4,367,099 408,958 $3,680,817
======= ========== ======= ========== ======= ==========
Repossessed assets............ 559 $ 3,374 1,232 $ 7,790 1,554 $ 9,672
======= ========== ======= ========== ======= ==========
Repossessed assets as a
percentage of number and
amount of contracts
outstanding................. 0.11% 0.06% 0.27% 0.18% 0.38% 0.26%
</TABLE>
- ---------------
(1) Includes information relating to repossessed vehicles which are owned by us
and repossessed vehicles which have been sold and securitized but continue
to be serviced by us.
24
<PAGE> 28
The following table sets forth information with respect to actual loss
experience of our portfolio of contracts serviced:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Contracts serviced at end of period(1)................. $5,354,385 $4,367,099 $3,680,817
========== ========== ==========
Average contracts serviced during period............... $4,839,514 $4,006,185 $3,383,570
========== ========== ==========
Gross chargeoffs of contracts during period............ $ 150,518 $ 173,422 $ 136,773
Recoveries of contracts charged off in prior periods... 47,581 36,230 34,634
---------- ---------- ----------
Net chargeoffs......................................... $ 102,937 $ 137,192 $ 102,139
========== ========== ==========
Net chargeoffs as a percentage of contracts outstanding
during period........................................ 2.13% 3.42% 3.02%
</TABLE>
- ---------------
(1) Includes contract loss information relating to contracts which are owned by
us and contracts which have been sold and securitized but continue to be
serviced by us.
25
<PAGE> 29
The following table sets forth the cumulative static pool losses by month
for all outstanding securitized pools:
CUMULATIVE STATIC POOL LOSS CURVES(1)
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
MONTH(2) 1995-4 1995-5 1996-A 1996-B 1996-C 1996-D 1997-A 1997-B 1997-C 1997-D
- -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.................................... 0.00% 0.01% 0.00% 0.01% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00%
2.................................... 0.06% 0.09% 0.06% 0.09% 0.09% 0.10% 0.08% 0.06% 0.05% 0.05%
3.................................... 0.16% 0.16% 0.17% 0.20% 0.22% 0.24% 0.20% 0.15% 0.12% 0.14%
4.................................... 0.31% 0.32% 0.29% 0.35% 0.52% 0.44% 0.36% 0.33% 0.29% 0.31%
5.................................... 0.52% 0.48% 0.48% 0.61% 0.74% 0.71% 0.62% 0.56% 0.46% 0.56%
6.................................... 0.70% 0.62% 0.63% 0.88% 0.98% 0.93% 0.85% 0.77% 0.67% 0.75%
7.................................... 0.86% 0.78% 0.81% 1.14% 1.27% 1.16% 1.12% 1.10% 0.93% 0.99%
8.................................... 1.02% 0.98% 1.08% 1.42% 1.52% 1.43% 1.45% 1.40% 1.16% 1.24%
9.................................... 1.13% 1.16% 1.35% 1.67% 1.77% 1.72% 1.70% 1.70% 1.37% 1.47%
10................................... 1.26% 1.32% 1.63% 1.91% 1.98% 2.03% 2.02% 2.00% 1.66% 1.75%
11................................... 1.41% 1.54% 1.87% 2.18% 2.21% 2.34% 2.32% 2.22% 1.94% 2.06%
12................................... 1.52% 2.01% 2.06% 2.38% 2.49% 2.62% 2.61% 2.43% 2.16% 2.35%
13................................... 1.66% 2.03% 2.28% 2.58% 2.73% 2.97% 2.92% 2.66% 2.40% 2.63%
14................................... 1.86% 2.25% 2.47% 2.79% 2.99% 3.27% 3.14% 2.91% 2.65% 2.86%
15................................... 2.07% 2.41% 2.63% 2.95% 3.21% 3.53% 3.30% 3.15% 2.90% 3.05%
16................................... 2.26% 2.59% 2.79% 3.14% 3.47% 3.79% 3.55% 3.47% 3.15% 3.19%
17................................... 2.47% 2.77% 2.97% 3.38% 3.70% 4.02% 3.77% 3.77% 3.36% 3.32%
18................................... 2.59% 2.88% 3.12% 3.55% 3.94% 4.19% 3.94% 3.97% 3.55% 3.42%
19................................... 2.72% 3.00% 3.31% 3.80% 4.18% 4.43% 4.21% 4.20% 3.70% 3.50%
20................................... 2.88% 3.12% 3.49% 3.98% 4.36% 4.65% 4.40% 4.39% 3.81% 3.60%
21................................... 2.95% 3.24% 3.63% 4.14% 4.53% 4.80% 4.59% 4.53% 3.91% 3.69%
22................................... 3.04% 3.39% 3.80% 4.31% 4.67% 5.07% 4.81% 4.67% 4.00% 3.81%
23................................... 3.13% 3.53% 3.95% 4.46% 4.84% 5.27% 5.00% 4.75% 4.11% 3.96%
24................................... 3.22% 3.64% 4.10% 4.58% 5.01% 5.47% 5.14% 4.81% 4.21% 4.10%
25................................... 3.30% 3.72% 4.22% 4.74% 5.17% 5.65% 5.24% 4.88% 4.30% 4.23%
26................................... 3.37% 3.83% 4.33% 4.87% 5.34% 5.80% 5.33% 4.94% 4.44%
27................................... 3.47% 3.95% 4.41% 4.98% 5.50% 5.91% 5.39% 5.04% 4.56%
28................................... 3.50% 4.08% 4.51% 5.11% 5.67% 5.98% 5.44% 5.11% 4.66%
29................................... 3.58% 4.16% 4.60% 5.21% 5.78% 6.06% 5.50% 5.21%
30................................... 3.65% 4.25% 4.70% 5.31% 5.89% 6.12% 5.56% 5.31%
31................................... 3.75% 4.31% 4.79% 5.42% 5.98% 6.17% 5.65% 5.40%
32................................... 3.80% 4.35% 4.85% 5.50% 6.02% 6.24% 5.71%
33................................... 3.83% 4.40% 4.91% 5.55% 6.06% 6.29% 5.79%
34................................... 3.87% 4.46% 4.99% 5.58% 6.11% 6.34% 5.85%
35................................... 3.91% 4.54% 5.03% 5.60% 6.14% 6.39%
36................................... 3.94% 4.58% 5.07% 5.62% 6.16% 6.44%
37................................... 3.96% 4.61% 5.11% 5.65% 6.17% 6.47%
38................................... 3.99% 4.64% 5.11% 5.68% 6.22%
39................................... 4.01% 4.66% 5.12% 5.70% 6.27%
40................................... 4.04% 4.69% 5.12% 5.71% 6.30%
41................................... 4.06% 4.69% 5.13% 5.74%
42................................... 4.07% 4.69% 5.13% 5.76%
43................................... 4.07% 4.68% 5.13% 5.77%
44................................... 4.07% 4.68% 5.13%
45................................... 4.06% 4.68% 5.14%
46................................... 4.05% 4.68% 5.14%
47................................... 4.05% 4.66%
48................................... 4.05% 4.68%
49................................... 4.03% 4.67%
50................................... 4.03%
51................................... 4.03%
52................................... 4.04%
Prime Mix(3)......................... 65% 64% 59% 58% 55% 51% 54% 55% 53% 49%
<CAPTION>
MONTH(2) 1998-A 1998-B 1998-C 1999-A 1999-B 1999-C
- -------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
1.................................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2.................................... 0.04% 0.02% 0.04% 0.04% 0.04% 0.02%
3.................................... 0.11% 0.08% 0.11% 0.11% 0.11% 0.10%
4.................................... 0.25% 0.18% 0.23% 0.20% 0.26%
5.................................... 0.44% 0.38% 0.39% 0.33% 0.47%
6.................................... 0.66% 0.59% 0.50% 0.46% 0.66%
7.................................... 0.95% 0.83% 0.61% 0.62%
8.................................... 1.23% 1.03% 0.75% 0.76%
9.................................... 1.50% 1.21% 0.86% 0.92%
10................................... 1.79% 1.40% 1.00% 1.11%
11................................... 2.03% 1.53% 1.17% 1.30%
12................................... 2.21% 1.62% 1.32%
13................................... 2.39% 1.74% 1.48%
14................................... 2.49% 1.84% 1.66%
15................................... 2.60% 1.96%
16................................... 2.72% 2.10%
17................................... 2.85% 2.22%
18................................... 2.98% 2.40%
19................................... 3.11% 2.55%
20................................... 3.25%
21................................... 3.35%
22................................... 3.48%
23...................................
24...................................
25...................................
26...................................
27...................................
28...................................
29...................................
30...................................
31...................................
32...................................
33...................................
34...................................
35...................................
36...................................
37...................................
38...................................
39...................................
40...................................
41...................................
42...................................
43...................................
44...................................
45...................................
46...................................
47...................................
48...................................
49...................................
50...................................
51...................................
52...................................
Prime Mix(3)......................... 57% 67% 70% 70% 70% 67%
</TABLE>
- ---------------
(1) Cumulative static pool losses are equal to the cumulative amount of loss
actually recognized up to and including a given month divided by the
original principal balance of the securitization transaction.
(2) Represents the number of months since the inception of the securitization
transaction.
(3) Represents the original percentage of prime contracts sold within each pool.
26
<PAGE> 30
CAPITAL RESOURCES AND LIQUIDITY
We require substantial capital resources and cash to support our business.
Our ability to maintain positive cash flows from operations, which we believe is
unusual among independent auto finance companies, is the result of our
consistent, managed growth, favorable loss experience and efficient operation.
In addition to our indirect statement of cash flow as presented under GAAP,
we also analyze the key cash flows from our operations on a direct basis
excluding certain items such as the purchase or sale of loans. The following
table shows our operating cash flows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from trust...................................... $159,564 $ 97,730 $108,717
Contractual servicing income............................... 46,847 37,180 30,803
Net interest margin-owned loans............................ 114,092 81,798 67,021
Other fee income........................................... 46,121 36,969 37,106
Less:
Dealer participation....................................... 83,435 72,255 62,662
Operating costs............................................ 173,600 165,042 167,418
-------- -------- --------
Operating cash flows....................................... $109,589 $ 16,380 $ 13,567
======== ======== ========
</TABLE>
Operating cash flows have improved dramatically for 1999 compared with 1998
as a result of the improving credit quality of our portfolio as well as improved
operating efficiency and declining dealer participation rates.
PRINCIPAL SOURCES OF CASH
Collections of Principal and Interest from Contracts
Our primary source of funds is the collection of principal and interest
from contracts originated. These monies are deposited into collection accounts
established in connection with each securitization transaction, or into our
accounts for contracts not in a securitization. Pursuant to reinvestment
contracts entered into in connection with each securitization transaction, our
parent entity, the Bank, and our subsidiary, WFS Financial Auto Loans 2, Inc.,
or WFAL2, receive access to the amounts deposited into each collection account
and the amounts held in the spread accounts for each securitization transaction.
The Bank and WFAL2 then make those funds available to us, in the case of the
Bank pursuant to our reinvestment contract with the Bank and in the case of
WFAL2 through its purchase of contracts from us. We are then permitted to use
those amounts so received in our daily operations to fund the purchase of
contracts or to cover the day to day costs of our operations. Principal and
interest collections totaled $3.3 billion for the year ended December 31, 1999,
$2.6 billion for the year ended December 31, 1998 and $2.1 billion for the year
ended December 31, 1997.
Contract Securitizations
Since 1985, we have securitized over $14 billion of automobile receivables
in 46 public offerings making us the fourth largest issuer of such securities in
the nation. For the year ended December 31, 1999, we securitized $2.5 billion,
as compared to $1.9 billion securitized for the year ended December 31, 1998 and
$2.2 billion securitized for the year ended December 31, 1997. We expect to
continue to use securitization transactions as part of our liquidity strategy
when appropriate market conditions exist.
Borrowings from Parent
Our parent company is a federally insured savings institution. It has the
ability to raise significant amounts of liquidity by attracting both short-term
and long-term deposits from the general public,
27
<PAGE> 31
commercial enterprises and institutions by offering a variety of accounts and
rates. The Bank may also raise funds by issuing commercial paper, obtaining
advances from the Federal Home Loan Bank, selling securities under agreements to
repurchase and other borrowings.
We are able to utilize these liquidity sources through agreements entered
into by us and our parent. These include the senior note, promissory note, line
of credit and the WFS Reinvestment Contract. See "Business -- Transactions with
Related Parties".
These financing arrangements provide us with another source of liquidity
beyond the secondary markets, thereby affording us a greater ability to choose
the timing of a securitization.
Conduit Financing
On September 30, 1999, we securitized $500 million of contracts with notes
through a conduit facility in a private placement through our wholly-owned
subsidiary, WFS Funding, Inc. This structure was accounted for as a secured
financing and provided us with another source of liquidity.
PRINCIPAL USES OF CASH
Purchase of Automobile Contracts
Our most significant use of cash is the purchase of automobile contracts.
We acquire these contracts through our nationwide relationship of franchised and
select independent automobile dealers. Payments for such contracts are sent to
our dealers either via an electronic funds transfer or check. We purchased $3.3
billion of contracts during 1999 compared with $2.7 billion and $2.3 billion
during 1998 and 1997.
Payments of Principal and Interest on Securitized Borrowings
Under the terms of our reinvestment contract and the conduit financing
transactions, we are required to make quarterly payments of interest and
principal to noteholders and certificateholders. Payment of principal and
interest to noteholders and certificateholders was $2.3 billion during 1999
compared with $2.1 billion and $1.7 billion during 1998 and 1997.
Dealer Participation
Consistent with industry practice, we generally pay an up-front dealer
participation to the originating dealer for each contract purchased.
Participation paid by us to dealers during 1999 totaled $83.4 million compared
with $76.7 million and $68.0 million in 1998 and 1997. Typically, the
acquisition of prime quality contracts requires a higher amount of participation
paid to the dealer due to the increased level of competition for such contracts.
However, despite our increasing the relative percentage of prime contracts
purchased during the past two years, our yield participation with the dealer has
declined to 1.0% for the fourth quarter of 1999 compared with 1.3% during the
first quarter of 1998. The improvement is the result of our efforts to
standardize dealer programs throughout the nation and to target dealer
relationships that provide the highest level of profitability.
Advances to Spread Accounts
At the time a securitization transaction closes, we are required to advance
monies to initially fund spread accounts. Additionally, these spread accounts
are required to increase beyond the initial spread account funding to
predetermined levels. These spread accounts increase through receipt of excess
cash flow until these predetermined levels are met. The amounts due from trust
represent funds due to us that have not yet been disbursed from the spread
accounts. The amounts due from trusts at December 31, 1999, including initial
advances not yet returned, was $439 million compared with $333 million at
December 31, 1998. See "Business -- Transactions with Related Parties -- WFS
Reinvestment Contract".
28
<PAGE> 32
Operating Our Business
Our largest operating expenditure is salaries and benefits paid to our
associates. Other amounts include occupancy costs, costs associated with
collection and repossession, telephone and data processing costs. We also use
substantial amounts of cash in capital expenditures for automation and new
technologies to remain competitive and to become more efficient. See
"Business -- Our Business Strategy -- Leverage Technology to Improve Our
Business".
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuation in interest rates and early prepayment of our contracts are the
primary market risks facing our company. The credit and pricing committee is
responsible for setting credit and pricing policies and for monitoring credit
quality. See "Business -- Operations -- Underwriting and Purchasing of
Contracts". Our Asset/Liability Committee is responsible for the management of
interest rate and prepayment risks. Asset/ liability management is the process
of measuring and controlling interest rate risk through matching the maturity
and repricing characteristics of interest earning assets with those of interest
bearing liabilities. The primary measurement tool for evaluating this risk is
the use of interest rate shock analysis. It should be noted that shock analysis
is objective but not entirely realistic in that it assumes an instantaneous and
isolated set of events. This committee closely monitors interest rate and
prepayment risks and recommends policies for managing such risks.
The contracts originated and held by us are all fixed rate and accordingly
we have exposure to changes in interest rates. Our prepayment experience on
contracts has not been historically sensitive to changes in interest rates and
we, therefore, believe that we are not exposed to significant prepayment risk
relative to changes in interest rates.
To protect against changes in interest rates, we hedge contracts purchased
with two-year Treasury securities forward agreements until they are securitized.
Generally, we enter into forward agreements in amounts that correspond to the
principal amount of the contracts originated. The market value of these forward
agreements is designed to respond inversely to the market value changes of the
underlying contracts. Because of this inverse relationship, we can effectively
lock in a gross interest rate spread at the time of entering into the hedge
transaction. We enter into these forward agreements either with highly rated
counterparties or the Bank, which further reduces our risk by avoiding any
material concentration with a single counterparty. Credit exposure is limited to
those agreements with a positive fair value and only to the extent of that fair
value. We currently hedge substantially all of our contracts pending
securitization. See "Consolidated Financial Statements -- Note 15 -- Financial
Instrument Agreements".
We then sell contracts to securitization trusts that in turn sell
asset-backed securities to investors. By securitizing our contracts, we are able
to lock in the gross interest rate spread between the yield on such contracts
and the interest rate on the asset-backed securities. Gains and losses relative
to these forward agreements are deferred and recognized in full at the time of
securitization as an adjustment to the gain or loss on the sale of the
contracts.
The Asset/Liability Committee monitors our hedging activities to ensure
that the value of hedges, their correlation to the contracts being hedged and
the amounts being hedged continue to provide effective protection against
interest rate risk. The amount and timing of hedging transactions are determined
by our senior management based upon the monitoring activities of the
Asset/Liability Committee. As a result of this approach to interest rate
management, combined with our hedging strategies, we do not anticipate that
changes in interest rate will materially affect our results of operations or
liquidity, although we can provide no assurance in this regard.
The following table provides information about our derivative financial
instruments and other financial instruments used that are sensitive to changes
in interest rates. For loans and liabilities with contractual maturities, the
table presents principal cash flows and related weighted average interest rates
by
29
<PAGE> 33
contractual maturities as well as our historical experience of the impact of
interest rate fluctuations on the prepayment of contracts.
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---------- -------- -------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate contracts.... $ 403,542 $360,940 $296,041 $242,214 $161,385 $31,595 $1,495,717 $1,617,108
Average interest rate........ 14.87% 14.90% 14.95% 15.00% 14.61% 13.04% 14.85%
RATE SENSITIVE LIABILITIES:
Fixed interest rate
borrowings:.................. $ 25,000 $ 86,408 $ 67,500 $ 178,908 $ 165,190
Average interest rate........ 7.25% 8.95% 9.42% 8.89%
Variable interest rate
borrowings................... $1,012,293 $1,012,293 $1,012,293
Average interest rate........ 6.39% 6.35%
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Forward agreements in net
receivable position.......... $ 10,872
</TABLE>
YEAR 2000
The Year 2000 issue arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs may
not properly recognize a year that begins with "20" instead of the familiar
"19". This problem is pervasive and complex. If not corrected, the potential
impact is that date sensitive calculations would be based on erroneous data or
could cause a system failure. This affects all forms of financial accounting,
including interest computations, due dates, pensions, personnel benefits,
investments, and legal commitments. It can also affect record keeping, such as
inventory, maintenance, and file retention. Reliable information is necessary
for financial institutions to conduct business.
In July 1997, we initiated a five-phase program to address Year 2000
related issues. These phases were awareness, assessment, remediation, validation
and implementation.
The board of directors provides oversight and direction through the Year
2000 Committee. The Year 2000 Committee is responsible for assessing all risks,
evaluating current systems, coordinating system upgrades and replacements, and
building facility management and reporting Year 2000 status. The Year 2000
Committee reports monthly to executive management and quarterly to the board of
directors on their Year 2000 efforts.
We have completed all five phases of our Year 2000 program. Although we
have not experienced any Year 2000 problems to date, we continue to monitor our
operations for Year 2000 effects.
We have incurred direct costs of $0.4 million in 1998 and $0.9 million in
1999. The costs incurred include conducting individual and integrated systems
testing, developing contingency plans, and monitoring the Year 2000 compliance
preparations of our key service providers. The estimated costs include the cost
of consultants to supplement our staff and management assigned to the project.
Any potential additional costs to implement contingency plans that address
possible Year 2000 failures of third-party systems or our systems are not
included in the estimate. These estimated Year 2000 costs for 1999 have been
incorporated into our 1999 operating expense budget. The costs incurred in 1999
did not have a material effect on our net income for 1999.
Year 2000 planning, assessment, renovation, validation, and implementation
are iterative processes. All statements made in this document are based on our
reasonable belief, knowledge and investigation. We believe that we are taking
reasonable steps to address the Year 2000 issues within our control. However, we
make no representation that all of our systems or those of our service providers
will be Year 2000-compliant or that Year 2000 issues will not adversely affect
the company.
This document may contain forward-looking statements regarding the
expectations, intentions, and estimations of, among other things, the cost of
remediations, the timing of projects, the testing of systems
30
<PAGE> 34
and plans for projections of future events. These forward-looking statements
involve risks or uncertainties and actual results may differ from anticipated
results. These risks and uncertainties may involve, among other things,
unanticipated problems in computer systems and applications and unexpected
events or delays.
EFFECT OF INFLATION AND CHANGING PRICES
Unlike many industrial companies, substantially all of the assets and
liabilities of our company are monetary in nature. As a result, interest rates
have a more significant effect on our performance than the general level of
inflation. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Quantitative and Qualitative Disclosure about Market
Risk".
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133". This statement defers for one year the effective date of FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities". These
statements provide guidance for the way public enterprises report information
about derivatives and hedging in annual financial statements and in interim
financial reports. The derivatives and hedging disclosure is required for
financial statements of all fiscal quarters of all fiscal years beginning after
June 15, 2000. These statements will require us to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings. We are in the process of evaluating the effect that SFAS 137, if any,
will have on our earnings and financial position.
FORWARD-LOOKING STATEMENTS
Included in our Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this prospectus are several
"forward-looking statements." Forward-looking statements are those which use
words such as "believe", "expect", "anticipate", "intend", "plan", "may",
"will", "should", "estimate", "continue" or other comparable expressions. These
words indicate future events and trends. Forward-looking statements are our
current views with respect to future events and financial performance. These
forward-looking statements are subject to many risks and uncertainties that
could cause actual results to differ significantly from historical results or
from those anticipated by us. The most significant risks and uncertainties we
face are:
- the level of chargeoffs, as an increase in the level of chargeoffs will
decrease our earnings;
- the ability to originate new contracts in a sufficient amount to reach
our needs, as a decrease in the amount of contracts we originate will
decrease our earnings;
- a decrease in the difference between the average interest rate we receive
on the contracts we originate and the rate of interest we must pay to
fund our cost of originating those contracts; as a decrease will reduce
our earnings;
- the continued availability of sources of funding for our operations, as a
reduction in the availability of funding will reduce our ability to
originate contracts;
- the level of operating costs; as an increase in those costs will reduce
our net earnings;
- a change in general economic conditions; and
31
<PAGE> 35
- the Year 2000 issues; as a disruption of our collection efforts as a
result of Year 2000 problems or an increase in our costs to correct Year
2000 issues will reduce earnings.
There are other risks and uncertainties we face, including the effect of
changes in general economic conditions and the effect of new laws, regulations
and court decisions and those described under the caption "Risk Factors." You
are cautioned not to place undue reliance on our forward-looking statements. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
32
<PAGE> 36
BUSINESS
GENERAL
With 27 years of experience in the auto finance industry, we are one of the
nation's largest independent automobile finance companies. We purchase
automobile contracts from over 8,000 franchised and select independent
automobile dealers. We originate and service prime and non-prime credit quality
contracts in 43 states through 45 offices. Approximately 70% of our originations
are prime credit quality contracts. At December 31, 1999, our portfolio of
outstanding contracts totaled $5.4 billion.
We originate contracts through our nationwide network of business
development representatives who offer dealers our full range of financing
products. These representatives seek to develop and maintain close professional
relationships with automobile dealers. By financing both prime and non-prime
borrowers, we provide dealers with a single contact to whom they can sell most
of their automobile contracts. We emphasize highly personalized service,
consistent business practices, prompt credit decisions and immediate funding of
contracts in order to earn and maintain a dealer's business. Our experience and
longevity in the business combined with our local, dealer based marketing
approach have enabled us to enjoy compounded annual origination growth rates of
over 26% during the past five years.
We underwrite the purchase of contracts through a regional credit approval
process that is supported and controlled by an automated front-end system. The
front-end system includes proprietary credit scoring models and tools which
enhance our credit analysts' ability to tailor each loan's pricing and structure
to maximize risk-adjusted returns.
We fund our contract purchases by a combination of sources including
positive cash flows from operations, a $1.3 billion line of credit with our
parent company, Western Financial Bank, a conduit facility and regular
securitizations. Since 1985, we have securitized over $14 billion of automobile
receivables in 46 public offerings making us the fourth largest issuer of such
securities in the nation. We anticipate that we will continue to securitize
contracts in transactions recorded as either secured financings or as sales.
The following table presents a summary of our production volumes.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
New vehicles........................................... $ 796,339 $ 547,898 $ 417,075
Used vehicles.......................................... 2,543,807 2,122,798 1,868,204
---------- ---------- ----------
Total volume................................. $3,340,146 $2,670,696 $2,285,279
========== ========== ==========
Prime.................................................. $2,313,573 $1,808,013 $1,245,027
Non-prime.............................................. 1,026,573 862,683 1,040,252
---------- ---------- ----------
Total volume................................. $3,340,146 $2,670,696 $2,285,279
========== ========== ==========
</TABLE>
THE HISTORY OF WFS
Westcorp, the ultimate parent of WFS, was formed in 1973 as the holding
company for Western Thrift and Loan Association, a California licensed thrift
and loan association founded in 1972. Western Thrift was involved in auto
finance activities from its incorporation until its merger with Western
Financial Bank in 1982, at which time the auto finance activities of Western
Thrift were continued by the Bank. In 1988, Westcorp Financial Services, Inc.
was incorporated as a wholly-owned consumer finance subsidiary of the Bank to
provide auto finance services to a market not serviced by the Bank's auto
finance division.
In 1995, the Bank transferred its auto finance division to Westcorp
Financial Services and changed the name of Westcorp Financial Services to WFS
Financial Inc. In connection with that restructuring, the Bank transferred to
WFS all assets relating to its auto finance division including the contracts
held on
33
<PAGE> 37
balance sheet and all interests of the Bank in the excess spread payable from
outstanding securitization transactions. The Bank also transferred all of the
outstanding stock of WFS Financial Auto Loans, Inc., or WFAL as we refer to it,
and WFS Financial Auto Loans 2, Inc., or WFAL2 as we refer to it, the
securitization entities of the Bank, thereby making these companies subsidiaries
of WFS. In August 1995, WFS sold approximately 20% of its shares in a public
offering. Currently, the Bank owns 87% of WFS' stock. The Bank intends to retain
control of at least 80% of the outstanding shares of WFS' common stock to ensure
that it may consolidate WFS for federal tax purposes.
MARKET AND COMPETITION
Our dealer servicing and underwriting capabilities enable us to compete
effectively in the auto finance market. Our ability to compete successfully
depends largely upon our strong personal relationships with dealers and their
willingness to offer to us those contracts that meet our underwriting criteria.
Our relationship is fostered by the promptness with which we can process and
fund contracts as well as the flexibility and scope of the programs we offer. We
purchase the full spectrum of prime and non-prime contracts secured by both new
and used vehicles.
The competition for contracts available within the prime and non-prime
credit quality contract spectrum is more intense when the rate of sales of autos
declines. Although we have experienced consistent growth for many years, we can
give no assurance that we will be able to continue to do so. Although auto
leasing has increased significantly in recent years, we have no present
intention of offering leases. We believe that many of such leases are for
relatively short terms of two or three years; therefore, the number of used auto
contracts available will continue to increase as these leases terminate. We
believe that this will continue to provide us opportunities to purchase
contracts secured by used autos in the quantity and the quality we seek.
We believe that the automobile finance industry is the second largest
consumer finance industry in the United States with approximately $635 billion
of loan and lease originations during 1999. The industry is generally segmented
according to the type of car sold, new versus used, and the credit
characteristics of the borrower, prime, non-prime or sub-prime. Based upon
industry data we believe that during 1999, prime, non-prime and sub-prime loan
originations in the United States were $341 billion, $105 billion and $86
billion respectively. Competition in the field of automobile finance is intense.
The United States captive auto finance companies, General Motors Acceptance
Corporation, Ford Motor Credit Company and Chrysler Credit Corporation account
for up to 30% of the auto finance market. We believe that the balance of the
market is highly fragmented and that no other market participant has greater
than a 1% market share. Other market participants include the captive auto
finance companies of other manufacturers, banks, credit unions, independent auto
finance companies and other financial institutions.
Several of these competitors have greater financial resources than us and
may have a significantly lower cost of funds. Many of these competitors also
have longstanding relationships with automobile dealers and may offer dealers or
their customers other forms of financing or services not provided by us. The
finance company that provides floor planning for the dealer's inventory is also
ordinarily one of the dealer's primary sources of financings for auto sales. We
do not currently provide financing on dealers' inventories. We must also compete
with dealer interest rate subsidy programs offered by the captive auto finance
companies. However, frequently those programs are limited to certain models or
to certain loan terms which may not be attractive to many new auto purchasers.
Also, these programs are rarely offered on used vehicles.
34
<PAGE> 38
OUR BUSINESS STRATEGY
Our business objective is to maximize long term profitability by
efficiently purchasing and servicing prime and non-prime credit quality
contracts that generate strong and consistent risk-adjusted returns. We believe
we will be able to achieve this objective by employing our business strategies:
- produce measured growth in contract originations;
- leverage technology to improve our business; and
- effectively price contracts relative to risk.
Produce Measured Growth in Contract Originations
Over the past five years, we have experienced a compounded annual growth
rate in contract originations in excess of 26%.
ANNUAL GROWTH RATE CHART
We provide a high degree of personalized service to our dealership base by
marketing, underwriting and purchasing contracts on a local level. Our focus is
to provide each dealer superior service by providing a single source of contact
to meet the dealer's prime and non-prime financing needs. We believe that the
level of our service surpasses that of our competitors because our business
development representatives are available any time a dealer is open to permit us
to make prompt credit decisions, negotiate credit decisions within available
programs by providing structural alternatives and fund promptly.
Growth of originations primarily will be through increased dealer
penetration. We intend to increase contract purchases from our current dealer
base and as well as develop new dealer relationships. Prior to 1995, we
originated contracts in seven, primarily western, states. Subsequently, we
increased our penetration to 36 additional states. Although our presence is well
established throughout the country, we believe that we still have greater
opportunities to build market share especially in those states which we entered
since 1994. In addition to increased geographic penetration, we have improved
our dealer education and delivery systems to improve the efficiency of our
relationships by increasing the ratio of contracts purchased to the amount of
applications received from a dealer. We are also seeking to increase contract
purchases through new dealer programs targeting high volume, multiple location
dealers. These programs focus on creating relationships with dealers to achieve
higher contract originations and improved efficiencies. Additionally, we
continue to explore other distribution channels including the Internet and are
piloting different dealer-centric approaches with partners in order to determine
the most effective Internet strategy.
35
<PAGE> 39
Leverage Technology to Improve Our Business
We are focused on leveraging technology to improve all aspects of our
business. Over the past three years, we have implemented technology and
streamlined operations to improve credit quality, enhance and manage growth and
improve operating efficiency. We plan to realize additional benefits with
ongoing investments in the future.
Key technological initiatives implemented to date include our:
- new automated front end originating system which calculates borrower
ratios, maintains lending parameters and approval limits, accepts
electronic applications and directs applications to the appropriate
credit analyst and which has reduced the cost of receiving, underwriting
and funding contracts;
- custom designed proprietary scoring models that rank order the risk of
loss occurring on a particular contract;
- new collection system platform utilizing new hardware and software to
improve our ability to queue according to the level of risk, monitor
collector performance and track delinquent accounts;
- centralized and upgraded borrower services department which includes
remittance processing, interactive voice response technology and direct
debit services; and
- centralized imaging system that provides for the electronic retention and
retrieval of account records.
We are currently developing behavioral scoring models to enhance both the
efficiency and effectiveness of our collection processes. We are also developing
a second generation data warehouse to enhance our ability to maximize our
profitability by dealer, and we are developing an on-line, internet-based credit
application to further enhance our growth.
Effectively Price Contracts Relative to Risk
Quality underwriting and servicing are essential to effectively assess and
price for risk and to maximize risk-adjusted returns. We rely on a combination
of credit scoring models, system controlled underwriting policies and the
judgment of our trained credit analysts to make risk based credit decisions. We
use credit scoring to differentiate applicants and to rank order credit risk in
terms of expected default probability. Based upon this statistical assessment of
credit risk, the underwriter is able to appropriately tailor contract pricing
and structure.
To achieve the return anticipated at origination, we have developed a
disciplined servicing process for the early identification and cure of
delinquent contracts and for loss mitigation. In addition, we provide credit and
profitability incentives to our employees to make decisions consistent with our
underwriting policies by offering bonuses based both on individual and
office-wide performance.
OPERATIONS
Locations
We currently originate contracts in 43 states through 45 offices. These
offices are organized in three geographic divisions: Western, Northwestern and
Eastern. Each office manager is accountable for the performance of contracts
originated in that office throughout the life of the contracts, including
acquisition, underwriting, funding and collection. We have two regional
production and servicing centers with functions including data entry and
verification, records management, remittance processing, customer service call
centers and auto-dialers located in Texas and California. We maintain three
regional bankruptcy and remarketing centers and we have a centralized asset
recovery center located in California. Our corporate offices are located in
Irvine, California.
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Business Development
Our marketing research staff locate geographic areas which exhibit
demographic characteristics that we believe will provide us the level of
originations necessary to provide us the maximum return given the costs
associated with establishing an office. These characteristics include population
size, number of dealers, the regulatory environment and competition. Within the
geographic area, we locate our offices in sections of high dealer concentration
to facilitate personal service in the local markets, including consistent buying
practices, quick credit decisions, operations open seven days a week,
competitive rates, a dedicated customer service staff and prompt funding. This
personal service is provided by a team of experienced business development
representatives with an established reputation for responsiveness and integrity
that call on dealers in a consistent and professional manner. We believe that
our local presence and service provide the opportunity to build strong and
lasting relationships with dealers.
The business development representative's responsibilities include
improving our relationship with existing dealers and, enrolling and educating
new dealers to increase the number of contracts originated. The business
development representative targets selected dealers within their territory based
upon volume, potential for business, financing needs of the dealer, and
competitors that are doing business with such dealer. If we decide to do
business with a new dealer, we perform a review process. This process includes
verifying that the dealer holds a current business license and determining the
length of time the dealer has been in business. Additionally, we may review
current financial statements, inventory on hand and floor planning or other
financing arrangements that the dealer maintains.
We will then enter into a non-exclusive dealership agreement with the
dealer. This agreement contains certain representations regarding the contracts
the dealer will sell to us. Due to the non-exclusive nature of our relationship
with dealers, they retain discretion to determine whether to sell contracts to
us or some other financial institution. The business development representative
is responsible for educating the finance managers about the types of contracts
that meet our underwriting standards. This education process ensures that we
minimize the number of applications we receive that are outside of our
underwriting guidelines, thereby increasing our efficiency and lowering our
overall cost to originate contracts.
After this relationship is established, the business development
representative continues to actively monitor the relationship with the objective
of maximizing the overall profitability of each dealer relationship within his
or her territory. This includes ensuring that a significant number of
applications received from a particular dealer are actually funded by us,
ensuring that the type of contract received meets our underwriting standards,
monitoring the risk-based pricing of contracts acquired and reviewing the actual
performance of the contracts purchased. To the extent that a dealer does not
meet minimum conversion ratio or lending volume standards, the dealer may be
precluded from sending us applications in the future. During the past twelve
months, our dealer base has declined from 11,323 to 8,722, primarily as a result
of our eliminating dealers that did not meet our standards. Business development
managers, within each regional business center, provide direct management
oversight to each business development representative. In addition, the director
of sales and marketing provides oversight management to ensure that all business
development managers and representatives are following overall corporate
guidelines.
Underwriting and Purchasing of Contracts
The underwriting process begins when an application is faxed to our
centralized data entry center. Our data entry group enters the applicant
information into our front-end underwriting computer system. Once the
application has been entered, the computer system automatically obtains credit
bureau information on the applicant which is then routed through one of our
multiple proprietary credit scorecards.
We use credit scoring to differentiate credit applicants and to rank order
credit risk in terms of expected default probabilities, which enables us to
tailor contract pricing and structure according to this statistical assessment
of credit risk. For example, a consumer with a lower score would indicate a
higher probability of default; therefore, we would structure and price the
transaction to compensate for this higher default risk. Multiple scorecards are
used to accommodate the full spectrum of contracts we purchase. In
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addition to a credit score, the system will highlight certain aspects of the
credit application which have historically impacted the credit worthiness of the
borrowers.
Credit analysts are responsible for properly structuring and pricing deals
to meet our risked-based criteria. Credit analysts review the information,
structure and price of an application and make a determination whether to
approve, decline or make a counteroffer to the dealer. Each credit analyst's
lending levels and approval authorities are established based on the
individual's credit experience and portfolio performance, credit manager audit
results and quality control review results. Higher levels of approvals are
required for higher credit risk and are controlled by system driven parameters
and limits. System driven controls include limits on interest rates, contract
term, contract advances, payment to income ratios, debt to income ratios,
collateral values and low side overrides.
Once adequate approval has been received, the computer system automatically
sends a fax back to the dealer with our credit decision, specifying approval,
denial or conditional approval based upon modification to the structure such as
increase in downpayment, reduction of term, or the addition of a co-signer. As
part of the approval process, the system or the credit analyst may require that
some of the information be verified, such as income, employment, residence or
credit history of the applicant. The system increases efficiency by
automatically denying approval in certain circumstances without additional
underwriting being performed. These automated notices are controlled by
parameters set by us consistent with our credit policy.
If the dealer accepts the terms of the approval, the dealer is required to
deliver the necessary documentation for each contract to the appropriate office.
The operations group audits such documents for completeness and consistency with
the application, providing final approval and funding of the contract. A direct
deposit is made or a check is prepared and is promptly sent to the dealer for
payment. The dealer's proceeds include an up-front dealer participation paid to
the dealer for consideration of the acquisition of the contract. The completed
contract file is then forwarded to the appropriate records center for imaging.
Under the direction of the Credit Pricing Committee, the Chief Credit
Officer oversees credit risk management, sets underwriting policy, monitors
contract pricing and tracks compliance to underwriting policies and
re-underwrites select contracts. If re-underwriting statistics are unacceptable,
all monthly and quarterly incentives are forfeited by the office that originated
the contracts. Our internal quality control group reviews contracts, on a
statistical sampling basis, to ensure adherence to established lending
guidelines and proper documentation requirements. Credit managers, within each
regional business center, provide direct management oversight to each credit
analyst. In addition, the Chief Credit Officer provides oversight management to
ensure that all credit managers analysts are following overall corporate
guidelines.
Servicing of Contracts
We service all of the contracts we purchase, both those held by us and
those sold in securitization transactions. The servicing process includes the
routine collection and processing of payments, responding to borrower inquiries,
maintaining the security interest in the vehicle, maintaining physical damage
insurance coverage and repossessing and selling collateral when necessary.
During the fourth quarter of 1999 we implemented a new collection system to
further improve our collection processes and reduce operating expenses.
We use monthly billing statements to serve as a reminder to borrowers as
well as an early warning mechanism in the event a borrower has failed to notify
us of an address change. Approximately 15 days before a borrower's payment is
due, we mail the borrower a billing statement directing the borrower to mail
payments to our lockbox address. Payments received in the mail or through our
offices are processed by our remittance processing center using state of the art
lockbox equipment. To expedite the collection process, we accept payments from
borrowers through automated payment programs including PC banking, direct debits
and third party payment processing services. Our customer service center uses
interactive voice response technology to answer routine account questions and
route calls to the appropriate service counselor.
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Our fully integrated servicing and collections system automatically
forwards accounts based on estimated likelihood of default and delinquency
status to our automated dialers or to our collection centers throughout the
country. Borrowers who are past due initially receive a call from a collector
queued by our automated telephone dialing system. If the system is unable to
reach a borrower within a specified number of days or if the account is beyond
21 days delinquent, the account is forwarded to a collection specialist within
the office that originated the contract. This process balances the efficiency of
centralized collection efforts with the effectiveness of decentralized personal
collection efforts. Our systems also track delinquencies and chargeoffs, monitor
the performance of our collection associates and forecast potential future
delinquency. To assist in the collections process, we can access original
documents through our imaging system which stores all the documents related to
each contract. We limit deferments to a maximum of three deferments over the
life of the contract and rarely rewrite contracts.
If satisfactory payment arrangements are not made, the automobile is
generally repossessed within 60 to 90 days of the date of delinquency, subject
to compliance with applicable law. We use independent contractors to perform
repossessions. The automobile remains in our custody generally for 15 days, or
longer if required by local law, to provide the obligor the opportunity to
redeem the contract. If after the redemption period the delinquency is not
cured, we write down the vehicle to fair value and reclassify the contract as a
repossessed asset. After the redemption period expires, we prepare the
automobile for sale. We sell substantially all repossessed automobiles through
wholesale auto auctions, subject to applicable law. We do not provide the
financing on repossessions sold. We use regional remarketing departments to sell
our repossessed vehicles. Once the vehicle is sold, any remaining deficiency
balances are then charged off. At December 31, 1999, the total amount of
repossessed autos managed by us was $3.4 million or 0.06% of the total serviced
contracts compared with $7.8 million or 0.18% of total serviced contracts at
December 31, 1998 and $9.7 million or 0.26% of total serviced contracts at
December 31, 1997.
It is our policy to charge off an account when it becomes contractually
delinquent by 120 days, even if we have not yet repossessed the vehicle. At the
time that the contract is charged off, all accrued interest is also reversed.
After chargeoff, we collect deficiency balances through our centralized asset
recovery center. These efforts include contacting the borrower directly, seeking
a deficiency judgment through a small claims court, or instituting a formal
judicial action where necessary. In some cases, particularly where recovery is
believed to be less likely, the account may be assigned to a collection agency
for final resolution. We also monitor payment plans on those obligors who have
filed for bankruptcy.
TRANSACTIONS WITH RELATED PARTIES
Relationship with the Bank and its Controlling Parties
In our opinion, the transactions described herein under the caption
"Transactions with Related Parties" have been on terms no less favorable to us
than could be obtained from unaffiliated parties, notwithstanding that the
transactions were not negotiated at arm's length. However, the transactions were
approved by our entire board of directors and the boards of directors of the
Bank and Westcorp, including their respective independent directors.
Furthermore, any future transactions with the Bank or affiliated persons will
continue to be approved by a majority of disinterested directors of the Company.
See "Supervision and Regulation".
Advances From Parent
We have three separate borrowing arrangements with our parent, Western
Financial Bank. The senior note and the promissory note are longer term,
unsecured debt, while the line of credit is designed to provide short-term
financing for the purchases of contracts.
The principal amount outstanding under the senior note payable to the Bank
is $43.9 million at December 31, 1999. The original principal amount under the
senior note payable was $125 million. The senior note provides for principal
payments of $25.0 million per year, commencing on April 30, 1999 and continuing
through its final maturity, April 30, 2003. During 1999, we made paydowns of
$66.1 million without prepayment penalties. Interest payments on the senior note
are due quarterly, in arrears, calculated at the rate of 7.25% per annum.
Interest expense totaled $5.4 million for the year ended December 31,
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1999, $9.0 million for the year ended December 31, 1998 and $9.1 million for the
year ended December 31, 1997.
We have $135 million outstanding under the terms of the promissory note
from the Bank. The promissory note provides for principal payments of $67.5
million per year, commencing July 31, 2001 and continuing through its final
maturity, July 31, 2002. Interest payments on the senior note are due quarterly,
in arrears, calculated at the rate of 9.42% per annum. Interest expense totaled
$9.3 million for the year ended December 31, 1999 and $4.7 million and $2.0
million for the years ended December 31, 1998 and 1997, respectively.
Pursuant to the terms of the senior note and promissory note, we have
agreed that until the senior note and promissory note are paid in full, we will
not incur any other indebtedness which is senior to the obligations evidenced by
the senior note and promissory note except for indebtedness collateralized or
secured under the line of credit described below and indebtedness for similar
types of warehouse lines of credit.
The line of credit extended by the Bank permits us to draw up to $1.3
billion. We do not pay a commitment fee for the line of credit. The line of
credit terminates on December 31, 2004 although we may extend the line of credit
for additional periods up to 60 months. When secured, the line of credit carries
an interest rate equal to one-month LIBOR plus 62.5 basis points. When
unsecured, the line of credit carries an interest rate equal to one-month LIBOR
plus 112.5 basis points. Interest on the amount outstanding under the line of
credit is paid monthly, in arrears, and is calculated on the daily average
amount outstanding that month. At December 31, 1999, $551 million was
outstanding on the line of credit. Interest expense was $17.2 million for the
year ended December 31, 1999, $16.8 million for the year ended December 31, 1998
and $6.1 million for the ended December 31, 1997.
Short Term Investments -- Parent
We invest our cash at the Bank under an investment agreement. The Bank pays
us an interest rate equal to the Federal composite commercial paper rate on this
cash. At December 31, 1999 and December 31, 1998, we held no excess cash with
the Bank under the investment agreement. Interest earned totaled $0.1 million
for the year ended December 31, 1999, $0.5 million for the year ended December
31, 1998 and $1.7 million for the year ended December 31, 1997.
WFS Reinvestment Contract
Through a series of agreements which we, the Bank, WFAL2 and other parties
have entered into, we have access to the cash flows of each of the outstanding
securitization transactions, including the cash held in each spread account. We
are permitted to use that cash as we determine, including in the ordinary
business activities of originating contracts.
In each securitization transaction, the securitization agreements require,
provided certain conditions are met, that all cash flows of the relevant trust
and the associated spread accounts be invested in eligible investments. The Bank
and WFAL2 have entered into a reinvestment contract in connection with each
securitization transaction, which is deemed to be an eligible investment under
the relevant securitization agreements.
A limited portion of the invested funds may be used by WFAL2 and the
balance may be used by the Bank. The Bank makes its portion available to us
through the terms of our reinvestment contract. Under our reinvestment contract
with the Bank, we receive access to all of the cash available to the Bank under
each trust reinvestment contract. We are obligated to repay to the Bank an
amount equal to the cash we used, when needed by the Bank, to meet its
obligations under the individual trust reinvestment contracts. With the portion
of the cash available to it under the individual trust reinvestment contracts,
WFAL2 purchases contracts from us through the terms of sale and servicing
agreements.
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Tax Sharing Agreement
We and our subsidiaries, WFAL, WFAL2 and WFS Investments, Inc., are parties
to a tax sharing agreement with Westcorp, the Bank and other subsidiaries of
Westcorp, pursuant to which a consolidated federal tax return is filed for all
of the parties to the agreement. Under the agreement, the tax due by the group
is allocated to each member based upon the relative percentage of each member's
taxable income to that of all members. Each member pays Westcorp its estimated
share of that tax liability when otherwise due, but in no event may the amount
paid exceed the amount of tax which would have been due if a member were to file
a separate return. A similar process is used with respect to state income taxes,
for those states, which permit the filing of a consolidated or combined return.
Tax liabilities to states which require the filing of separate tax returns for
each company are paid by each company. The term of the tax sharing agreement
commenced on the first day of the consolidated return year beginning January 1,
1994 and continues in effect until the parties to the tax sharing agreement
agree in writing to terminate it. See "Consolidated Financial Statements -- Note
13 -- Income Taxes".
Management Agreements
We have entered into certain management agreements with the Bank and
Westcorp pursuant to which we pay our allocated portion of certain costs and
expenses incurred by the Bank and Westcorp for services or facilities of the
Bank and Westcorp used by us or our subsidiaries, including our principal office
facilities, certain field offices and overhead and employee benefits pertaining
to Bank and Westcorp employees who also provide services to us or our
subsidiaries. Additionally, as part of these management agreements, the Bank and
Westcorp have agreed to reimburse us for similar costs incurred. The management
agreements may be terminated by any party upon five days prior written notice
without cause, or immediately in the event of the other party's breach of any
covenant, obligation, or duty contained in the applicable management agreement
or for violation of law, ordinance, statue, rule or regulation governing either
party to the applicable management agreement.
We have entered into an agreement with Westran Services Corp, which is a
subsidiary of Westcorp, to receive travel related services. We believe that the
services rendered by Westran are reasonable and representative of what such
costs would have been had we used an unaffiliated entity for such services.
Total amounts paid to Westran in 1999 were $0.1 million, in 1998 were $0.2
million and in 1997 were $0.1 million.
We lease office space for one of our offices from an affiliate of Mr. Rady,
who is our Chairman of the Board of Directors as well as the Chairman of the
Boards of Directors of the Bank and Westcorp. The basic annual rent is adjusted
annually and includes a portion of direct operating expenses. The lease expires
in 2001. We paid $0.2 million in rent to affiliates in 1999.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following is a brief account of the business experience of our
directors:
ERNEST S. RADY has been our Chairman of the Board of Directors since 1995.
He has also served as Chairman of the Board of Directors and Chief Executive
Officer of Westcorp since 1982. He has been Chairman of the Board of Directors
of Western Financial Bank, our parent entity, since 1992; a director since 1982;
and President and Chief Executive Officer from June, 1994 to January, 1996, and
again, from March 23, 1998 to March 23, 1999. He also served as chairman of the
board of directors of Western Thrift and Loan Association, a predecessor of the
Bank, from 1972 until 1983. Mr. Rady is a principal shareholder, manager and
consultant to a group of companies engaged in real estate management and
development, property and casualty insurance, oil and gas exploration and
development and beverage distribution.
JOY SCHAEFER is our Chief Executive Officer and Vice Chairman of the Board
of Directors. She was elected to be our President in 1996 and Chief Executive
Officer in 1997. She was our Senior Executive Vice President from 1995 to 1996.
Ms. Schaefer joined the Bank in January, 1990 and was named Vice President and
Treasurer in May, 1990. She became the Bank's Chief Financial Officer and a
Senior Vice President in 1992. In January, 1994, she was named Executive Vice
President and later Chief Operating Officer and Senior Executive Vice President
in December, 1994.
HOWARD C. REESE, a director since 1990, joined us in 1987 as President and
Chief Executive Officer of Westcorp Financial Services, Inc., which is now WFS.
He retired as President and Chief Executive Officer in 1996, and continues to
serve in a consulting capacity. He began his career in consumer finance with
Household Finance Corporation in 1953 where he managed several branch offices in
southern California. In 1963, he joined Fireside Thrift Company as a manager. He
progressed through the ranks as Supervisor, Assistant Vice President and
Regional Director, and ultimately to Operations Vice President in charge of 73
branch offices within California.
JAMES R. DOWLAN has been a director since 1995 and was our Senior Executive
Vice President from 1995 through January, 1999. He started as Senior Vice
President of the Bank in 1984 and served as Executive Vice President of the Bank
from 1989 until the Auto Finance Division of the Bank was combined into WFS in
1995. He also served as Chairman of the Board of Directors of Western Financial
Insurance Agency, Inc., and Chairman of the Board of Directors of Westhrift Life
Insurance Company, subsidiaries of the Bank; and President and Chief Executive
Officer of WFS Financial Auto Loans, Inc., and WFS Financial Auto Loans 2, Inc.,
subsidiaries of WFS. Prior to his association with the Bank, Mr. Dowlan was Vice
President, Loan Administration of Union Bank where he held several positions
since 1973. He served for several years on the National Advisory Board, American
Bankers Association and the Consumer Lending Committee of the California Bankers
Association.
BERNARD E. FIPP has been a director since 1995. Mr. Fipp has been active in
commercial real estate development, general contracting, real estate acquisition
and marketing since 1976. Investments in automobile dealers in 1988 brought him
into the retail automobile industry where he acted as president of Ritchey-Fipp
Chevrolet for six years and served as president of the San Diego County
Chevrolet Dealer's Association and Chairman of the San Diego County New Car
Dealer's Association. Mr. Fipp is President of Fipp Investments LLC, a real
estate acquisition, management and development company.
DUANE A. NELLES has been a director since 1995. Mr. Nelles has been in the
private and personal investment business since 1987. Prior to 1987, Mr. Nelles
was a partner in the international accounting firm which is now known as
PriceWaterhouseCoopers L.L.P., which he joined in 1968. Since 1988, Mr. Nelles
has been a member of the board of directors of QUALCOMM, Inc., a world leader in
digital wireless communications.
STANLEY E. FOSTER was elected to our board of directors in 1998 and has
been a director of the Bank since 1992 and of Westcorp since 1978. Mr. Foster
has been President and Chief Executive Officer of
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Foster Investment Corporation and its predecessor Ratner Corporation, an apparel
manufacturing and investment company headquartered in San Diego, California,
since 1954. Mr. Foster also serves as the Chairman of the Board of Directors of
Hang Ten International, Inc., and is a director of Postal Annex Plus, Inc.;
Accucom, Inc.; Cartronics, Inc.; and Hot Topic, Inc.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following information is provided with respect to our executive
officers who are not directors. Some officers providing services to us are
employed by our related companies, and provide those services at fair market
value to us, while also serving as our officers.
<TABLE>
<CAPTION>
OFFICER
NAME POSITION AGE SINCE
- ---- -------- --- -------
<S> <C> <C> <C>
Thomas Wolfe......................... President, Chief Operating Officer 40 1998
Lee A. Whatcott...................... Senior Executive Vice President, Chief Financial 40 1992
Officer
Richard W. Stephan................... Executive Vice President 61 1994
Dawn M. Martin....................... Executive Vice President, Chief Information 40 1997
Officer
Donna Lesch.......................... Executive Vice President, Human Performance 40 1998
J. Keith Palmer...................... Senior Vice President, Treasurer 39 1995
Mark Olson........................... Senior Vice President, Controller 36 1995
Guy Du Bose.......................... Senior Vice President, General Counsel and 45 1995
Secretary
Dennis Morris........................ Senior Vice President, Chief Credit Officer 35 1998
</TABLE>
The following is a brief account of the business experience of each
executive officer who is not a director:
THOMAS WOLFE became our President and Chief Operating Officer in March,
1999. He joined us as an Executive Vice President and National Production
Manager in April, 1998. Prior to joining us, he held the position of National
Production Manager at Key Auto Finance, where he oversaw the production of the
indirect auto finance business which included prime, sub-prime, leasing and
commercial lending. Mr. Wolfe has been in the auto finance and consumer credit
industry since 1982. He previously held positions with Citibank, Inc., and
General Motors Acceptance Corporation.
LEE A. WHATCOTT currently serves as Senior Executive Vice President and has
served in that capacity since 1999. He has served as an Executive Vice President
since 1996 and as our Chief Financial Officer since 1995. Mr. Whatcott joined us
in 1988 and became Vice President, Controller in 1992. He also serves as Senior
Executive Vice President and Chief Financial Officer of the Bank. Prior to
joining us, he was employed by what is now known as Ernst & Young LLP. He is
licensed as a Certified Public Accountant in California and is a member of the
American Institute of Certified Public Accountants.
RICHARD W. STEPHAN has served as an Executive Vice President with us since
1996; and as our Chief Information Officer from 1996 to December, 1998. He also
became Executive Vice President of the Bank in 1996 and Chief Technology Officer
of the Bank in 1999. Mr. Stephan has over 25 years of experience in the
information technology field, with the last 20 years in the financial
institution services industry. Prior to his association with us, Mr. Stephan was
an Executive Vice President of FiServ, Inc., a major provider of information
services to the banking industry and he was a partner with the company now known
as Ernst & Young LLP, where he managed the consulting practice for the Western
Region, served as the Senior Technology Partner for the firm for the banking
industry and was a member of the planning committee for the firm-wide banking
practice. Mr. Stephan is a member of the Chief Information Officer National
Association and is a Certified Systems Professional.
DAWN M. MARTIN has been an Executive Vice President with us since 1999 and
our Chief Information Officer since 1998. Ms. Martin joined us in April, 1997 as
Senior Vice President, Manager of Network Computing. In February, 1998, she was
named Manager of Business Unit Support. She also became an Executive Vice
President and Chief Information Officer of the Bank in 1999. Prior to joining
us,
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Ms. Martin was Senior Vice President and System Integration Officer at American
Savings Bank where she was employed from 1984 to 1997. Ms. Martin has more than
19 years of experience in information technology within the financial services
industry.
DONNA J. LESCH has served as Executive Vice President, Human Performance
for us and for the Bank since 1999. Human Performance is responsible for all
administrative functions related to compensation and training of our associates.
This includes human resources, payroll, training, project management and
corporate communication. Donna has over 20 years experience in the training and
education field. Prior to joining us in 1998 as Director of Performance Support,
she managed training functions at American Savings Bank and Executrain.
J. KEITH PALMER has served as our Treasurer since 1995, and of the Bank
since 1993. He became a Senior Vice President of us and of the Bank in 1997.
Prior to joining the Bank in 1993, Mr. Palmer served as a Capital Markets
Examiner with the Office of Thrift Supervision from 1991 to 1993. From 1986 to
1991, Mr. Palmer served in various capacities with the Office of Thrift
Supervision. Mr. Palmer has worked in the banking industry for 14 years.
MARK K. OLSON has served as our Controller since 1995 and was named Senior
Vice President in 1997. He also serves as Senior Vice President, Controller of
Western Financial Bank. He joined the Bank in 1991 as Accounting Systems
Director. Prior to joining the Bank, Mr. Olson was employed by what is now known
as Ernst & Young LLP. Mr. Olson is a licensed Certified Public Accountant in
California and is a member of the American Institute of Certified Public
Accountants.
GUY DU BOSE has served as General Counsel and Secretary for us since 1999
and as Senior Vice President since 1998. He started as Vice President and Legal
Counsel of the Bank in November, 1992. He became Senior Vice President of the
Bank in 1997 and General Counsel and Secretary of the Bank in 1999. Prior to his
association with WFS, Mr. Du Bose was Chief Operating Officer and General
Counsel of Guardian Federal Savings, Senior Vice President and General Counsel
of Mercury Federal Savings and Loan Association and Corporate Counsel of
Southern California Savings. Mr. Du Bose is an active member of the California
State Bar Association and a member of various professional associations.
DENNIS MORRIS has been our Senior Vice President and Chief Credit Officer
since January, 1998. His background includes over 10 years experience in
national indirect automotive finance and leasing with American Honda Finance
Corporation and Nissan Motor Acceptance Corporation. Among the positions held
within these companies, Dennis was responsible for implementation of first
generation, custom developed credit scoring technology and risk based pricing in
both centralized and regionalized processing environments.
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SUPERVISION AND REGULATION
REGULATIONS APPLICABLE TO US
We purchase automobile loans in 43 states and are subject to both state and
federal regulations. Since we are owned by the Bank, which is a federal savings
association, we are regulated by the Office of Thrift Supervision, the primary
federal banking agency responsible for the supervision and regulation of the
Bank, as well as by the Federal Deposit Insurance Corporation, the federal
banking agency which insures deposits to the Bank. We must also comply with each
state's consumer finance, auto finance, licensing and titling laws and
regulations to the extent those laws and regulations are not pre-empted by OTS
regulations. To ensure compliance with such laws, we hire experienced legal
counsel. We believe that we are in compliance with OTS and FDIC regulations as
well as state laws applicable to the purchase and securitization of automobile
loans.
The automobile loans we originate and service are also subject to numerous
federal and state consumer protection laws. The consumer protection laws include
the Federal Truth-in-Lending Act, the Federal Trade Commission Act, the Fair
Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity
Act, the Fair Debt Collection Practices Act, the California Rees-Levering Act,
other retail installment sales laws and similar state laws. Most state consumer
protection laws also govern the process by which we may repossess and sell an
automobile pledged as security on a defaulted automobile contract. We must
follow those laws carefully in order to maximize the amount of money we can
recover on a defaulted automobile contract.
We must also comply with OTS regulations regarding ownership and
operations. The Bank is permitted by OTS regulations to have operating
subsidiaries and service corporation subsidiaries. We were created as an
operating subsidiary of the Bank in order to: (1) enable us to sell our equity
securities to third parties rather than be limited by the restrictions placed on
service corporations, whose equity securities may only be sold to other savings
associations and (2) enjoy the same pre-emption from state law that is granted
to the Bank by OTS regulations. As an operating subsidiary, we are prohibited
from engaging in any business activity that the Bank may not itself engage in.
All of our business activities are activities in which the Bank is permitted to
engage. Furthermore, prior to engaging in any new business activity, acquiring a
business from a third party or creating a new subsidiary, we must first give
notice to the OTS and the FDIC. Finally, at all times, a majority of our voting
stock must be held by the Bank.
REGULATIONS APPLICABLE TO THE BANK WHICH MAY AFFECT US
The OTS and FDIC extensively regulate the activities of the Bank, our
majority shareholder. If the Bank is unable to pay its debts and is deemed
insolvent, the FDIC is required to be appointed as the Bank's conservator to
manage its affairs or as the Bank's receiver to liquidate its business and to
preserve its assets for payment to creditors of the Bank. If the Bank is placed
in conservatorship or receivership, our assets may not be used to pay off the
Bank's creditors. However, as conservator or receiver of the Bank, the FDIC
would have control of the majority of the shares of our common stock and could
exercise control over those shares to the same extent as the Bank prior to being
placed in conservatorship or receivership. As receiver or conservator, the FDIC
also would have the right to keep the Bank from making further advances to us
under our line of credit with the Bank.
As an operating subsidiary, our investments are required to be consolidated
with those of the Bank for purposes of determining whether the Bank, on a
consolidated basis, is in full compliance with regulations limiting certain of
its activities to a percentage of its total consolidated assets. The regulations
allow the Bank to invest up to 35% of its consolidated assets in consumer loans,
commercial paper and qualifying corporate debt instruments; provided however,
that all consumer loans in excess of 30% of the Bank's consolidated assets must
be made directly to the consumer by the Bank or its subsidiaries. Thus, not more
than 30% of the Bank's consolidated assets may be invested in automobile
contracts purchased from new and used car dealers. For 1999, we were purchasing
contracts at the average rate of $278 million per month. However, the Bank was
able to remain in compliance with this regulatory limitation on its
45
<PAGE> 49
consolidated activities, as we directly, and through WFS Funding, Inc.,
securitized automobile contracts worth $2.5 billion and transferred other
contracts worth $500 million to WFS Funding, Inc. for securitization by it. We
intend to regularly securitize directly, and through WFS Funding, Inc.,
automobile contracts purchased from dealers to insure that the Bank will remain
in compliance with this regulatory limitation on its consolidated activities.
As an operating subsidiary of the Bank, we are subject to examination and
supervision by the OTS to the same extent as the Bank. Following such an
examination, the OTS may direct the Bank or us to take any action needed to
prevent violation of any law, regulation or OTS policy, including, with respect
to the Bank, disposing of all or part of its ownership of us. In addition, the
OTS may, for supervisory, legal, safety or soundness reasons, limit the Bank's
activities, limit the Bank's investment in us or limit our activities by
directive or cease-and-desist proceedings. If the OTS were to determine that any
activity of the Bank or of ours subjected either the Bank or us to sufficient
risk, the OTS has the statutory authority to issue a temporary cease-and-desist
order requiring the Bank or us, as the case may be, to immediately take
affirmative action as described in the order. If a temporary cease-and-desist
order were entered and if the OTS were not satisfied with the actions taken as
required by that order, the OTS has the authority to immediately seek an order
from the United States district court compelling compliance with that order. The
most significant action which the FDIC, as the insurer of the Bank's deposit
accounts, may take is to seek involuntary termination of the Bank's insurance of
accounts. Termination of insurance, absent consent by the insured institution,
requires a hearing before the FDIC, a finding of unsafe and unsound practices or
condition or violation of laws, regulations, orders or agreements with the FDIC
or OTS, and a judicial affirmance of the FDIC's findings. Termination of the
Bank's FDIC insurance could have a serious adverse effect on us as the Bank's
deposits provide a source of funding for our activities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Principal Sources of Cash -- Borrowings from Parent" and
"Business -- Transactions with Related Parties." We are not aware of any actions
the Bank or we have taken or are planning to take which we believe the OTS would
find to be unsafe or unsound or give rise to any action by the OTS or FDIC.
REGULATIONS APPLICABLE TO WESTCORP WHICH MAY AFFECT US
The Bank is wholly owned by Westcorp. As a result, Westcorp is a savings
and loan holding company, and therefore, Westcorp and its relationship with
subsidiaries, including us, is extensively regulated under federal laws.
The OTS has broad statutory powers to regulate savings and loan holding
companies. Pursuant to such powers, if the OTS determines that there is
reasonable cause to believe that the continuation by Westcorp of any particular
activity creates a serious risk to the financial safety, soundness or stability
of the Bank, the OTS may:
- limit the payment of dividends by the Bank;
- limit transactions between the Bank, Westcorp and other companies which
Westcorp owns or controls; and
- limit any activities of Westcorp that might create a serious risk that
the Bank or companies owned by the Bank, such as ourselves, may be
required to pay for the liabilities of Westcorp and/or any other
companies over which Westcorp exerts control.
As subsidiaries of Westcorp, the Bank and ourselves are limited in the type
of activities and investments we may participate in if the investment and/or
activity involves a company which Westcorp controls and which is not the Bank or
a subsidiary of the Bank. The transactions with these controlled companies which
are subject to limitations based on the Bank's capital are:
- loans or extensions of credit to a controlled company;
- the purchase of or investment in securities issued by a controlled
company;
- the purchase of certain assets from a controlled company;
46
<PAGE> 50
- the acceptance of securities issued by a controlled company as security
for a loan or extension of credit to any person; or
- the issuance of a guarantee, acceptance or letter of credit on behalf of
a controlled company.
In addition, while the OTS has not adopted regulations requiring
consolidated or unconsolidated capital levels for savings and loan holding
companies generally, it has exercised its power to do so by requiring increased
or specific capital levels on a case-by-case basis following examinations or in
connection with particular applications. The OTS has not required Westcorp to
increase or to maintain specific levels of capital.
Furthermore, transactions between the Bank or its subsidiaries, including
ourselves, and a company controlled by Westcorp must be on terms at least as
favorable to the Bank or its subsidiary, including ourselves, as transactions
with companies not under Westcorp's control. We and the Bank are also prohibited
from making a loan or extending credit to a company under the control of
Westcorp, which also includes, under most circumstances, a purchase of assets
from a Westcorp controlled company that is subject to the controlled company's
agreement to repurchase those assets, unless the controlled company engages only
in activities permitted to bank holding companies under Section 4(c) of the Bank
Holding Company Act. The Bank and its subsidiaries, including ourselves, are
also prohibited from purchasing or investing in the securities of a controlled
company.
The OTS regulations limiting transactions between Westcorp or a controlled
company and the Bank or its subsidiaries exclude transactions between the Bank
and its subsidiaries from those limitations. However, the OTS regulations define
certain subsidiaries of the Bank to be affiliates of the Bank and therefore
subject to the requirements of the OTS regulations. At the present time, neither
we nor any of our subsidiaries are within the definition of an affiliate of the
Bank for purposes of the OTS regulations.
RECENT LEGISLATION AND REGULATORY STATEMENTS
Congress passed and the President has signed the Gramm-Leach-Bliley Act to
substantially modernize how financial services are provided to the American
public. The Act's most significant provisions are to permit insurance, banking
and securities firms to be owned by a single owner and to prohibit savings and
loan holding companies that own a single thrift, like Westcorp, from being
acquired by commercial companies. However, the Act permits Westcorp to continue
to engage in all business opportunities to which it had the right to engage
prior to the passage of the Act. The bill does not have significant effect on
the business we do. It neither encourages nor discourages other financial
service companies from engaging in automobile finance. However, the Act does
liberalize the activities permitted to qualifying bank holding companies, called
financial holding companies, from those closely related to banking to those
which are financial activities. This means that entities which previously could
not own banks without ceasing nonconforming activities can now acquire a bank
and become a financial holding company. Thus, the Act creates the potential for
well capitalized entities to enter the banking business and to provide
automobile finance in competition with us. As any such entity could have become
a savings and loan holding company prior to enactment of the Act and thereby
entered the auto finance business in the same manner as the Bank and ourselves,
we do not anticipate that this change in the laws applicable to bank holding
companies will have a significant effect upon us.
The Act also creates additional obligations on us regarding the
safeguarding of nonpublic personal information of our borrowers and creates
affirmative duties to advise our borrowers as to what we do with their nonpublic
personal information. Also, for customers that obtain a financial product, such
as an automobile loan, for personal, family or household purposes, a financial
company like us is required to disclose its privacy policy to the customer at
the time the relationship is established and annually thereafter, including its
policies concerning the sharing of the customer's nonpublic personal information
with affiliates and third parties. If an exemption is not available, a financial
company must provide consumers with a notice of its information sharing
practices that allows the consumer to reject the disclosure of its nonpublic
personal information to third parties. Third parties that receive such
information are subject to the same restrictions as the financial company on the
reuse of the information. Finally, a
47
<PAGE> 51
financial company is prohibited from disclosing an account number or similar
item to a third party for use in telemarketing, direct mail marketing or other
marketing through electronic mail. We do not believe that these privacy
requirements will have a significant effect on us since we have historically
safeguarded the personal confidential information of our borrowers as is
required by other federal statutes. None of the provisions of the Act are
expected to have an adverse effect on our operations or financial condition.
The OTS, in conjunction with the other Federal banking regulatory agencies,
recently issued a guidance statement regarding asset securitization activities
of banks and savings associations which applies to the Bank and to us as an
operating subsidiary of the Bank. The guidance statement states that reported
values for retained interest assets should be reasonable, conservative and
supported by objective and verifiable documentation. Furthermore, institutions
engaged in asset securitization activities should ensure that sufficient capital
is held to support the risks associated with those activities and that
appropriate management oversight and reporting is accomplished with respect to
the institution's asset securitization activities. The agencies noted that on a
case-by-case basis additional capital may be required to be held by those
institutions whose asset securitization activities are not in compliance with
the guidance provisions, or the retained interests may be classified as loss and
not permitted to be included in calculating the institution's regulatory
capital. We believe that our valuation of our retained interest assets and our
securitization activities as an operating subsidiary of the Bank are in
compliance with the guidance provisions. As we are consolidated with the Bank
for regulatory purposes, our compliance with the guidance provisions should
satisfy the Bank's obligations as well. While we can give no assurance as to any
regulatory action the OTS may take, we do not believe that the OTS will require
the Bank to hold additional capital as a result of our asset securitization
activities.
In the guidance statement the OTS and the other Federal banking regulatory
agencies noted that regulations may be proposed to remedy the problems discussed
in the guidance statement. Among the items which the agencies may consider
implementing is the establishment of regulatory restrictions that would limit or
eliminate the amount of certain retained interests that may be included in
determining the bank's or savings association's regulatory capital. Until the
agencies actually propose any such regulations, we cannot determine whether
those regulations would have any adverse effect upon our business or financial
condition.
YEAR 2000 STANDARDS FOR SAFETY AND SOUNDNESS
We must comply with guidelines issued by the OTS establishing Year 2000
safety and soundness standards. The guidelines required us to: (1) develop and
implement a written plan by which we would investigate, monitor and evaluate the
adequacy of the efforts of our third-party service providers and software
vendors to meet Year 2000 compliance standards; (2) develop and adopt a written
plan describing each phase of our Year 2000 compliance process; (3) perform
adequate testing of our technology systems and operating structure; (4) design
contingency plans to mitigate risks associated with a system failure, failure to
complete renovation testing or implementation of an emission critical system;
(5) identify customers posing potential Year 2000 risk, evaluate such customers'
Year 2000 preparedness, assess the amount of risk such customers potentially
pose and implement appropriate risk controls; and (6) involve our board of
directors and management in all stages of our efforts to achieve Year 2000
readiness. As of this date, we are in full compliance with the OTS guidelines
and have not experienced any Year 2000 problems, but we continue to monitor our
operations for Year 2000 effects.
LEGAL PROCEEDINGS
We are involved as a party in certain legal proceedings incidental to our
business. We believe that the outcome of these proceedings will not have a
material effect upon our business or our financial condition on a consolidated
basis with our subsidiaries and affiliates.
48
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
without par value, and 10,000,000 shares of preferred stock, without par value.
The common stock represents non-withdrawable capital and is not insured by the
FDIC or any other governmental authority or agency.
Our board of directors has the power to issue, from time to time,
additional shares of common stock or preferred stock authorized by our articles
of incorporation without obtaining approval of our stockholders.
COMMON STOCK
As of December 31, 1999, there were 25,771,956 shares of common stock
issued and outstanding. Holders of common stock are entitled to one vote per
share of common stock held of record on all matters submitted to a vote of
holders of the stockholders. The shares are not entitled to cumulative voting
rights because our articles of incorporation eliminated such rights upon the
listing of the common stock on Nasdaq National Market. Holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared, from
time to time, by our board of directors out of funds legally available
therefore. See "Dividend Policy". In the event of our liquidation, dissolution
or winding up, holders of common stock would be entitled to receive all of our
assets, pro rata, after payment of all our debts and liabilities. Holders of
common stock do not have preemptive rights with respect to newly issued shares.
The common stock is not subject to call or redemption. The outstanding shares of
common stock are, and the shares of common stock offered hereby, when issued and
upon receipt by the company of the full purchase price therefor, will be, fully
paid and nonassessable. See "Risk Factors -- Risks Related to Us -- The
ownership of our common stock is concentrated, which may result in conflicts of
interest and actions that are not in the best interests of other stockholders".
Our articles of incorporation provide for the classification of the board
of directors into two or three classes depending upon the number of directors.
Based on the current number of seven directors, the board of directors is
divided into two classes with staggered two-year terms. If, in the future, the
board of directors is expanded to nine or more directors, the board of directors
will be split into three classes with staggered three-year terms.
PREFERRED STOCK
The board of directors is authorized to issue up to 10,000,000 shares of
preferred stock in one or more series. The board of directors may fix or alter
the rights, preferences, privileges and restrictions granted to and imposed upon
any wholly unissued class or series of preferred stock, fix the number of shares
of any series of preferred stock and change the designation of any such series
of preferred stock. The board of directors may also, within the limits and
restrictions stated in any resolution or resolutions of the board of directors
originally fixing the number of shares constituting any series, may increase or
decrease, but not below the number of shares of such series then outstanding,
the number of any series subsequent to the issues of shares of that series. At
present, no shares of preferred stock are outstanding and the directors of our
company have no plans to issue shares of preferred stock.
The transfer agent and registrar for our common stock is Chemical Mellon
Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
We currently have 25,771,956 shares of our common stock outstanding. Other
than the 22,427,303 shares owned by the Bank and other affiliates, the balance
of our outstanding shares are freely tradeable. Upon completion of the offering,
we will have outstanding 27,771,956 shares of common stock (or a maximum of
28,071,956 shares of common stock if the underwriters' over-allotment option is
exercised in full). The 2,000,000 shares sold in the offering (or a maximum of
2,300,000 shares if the underwriters' over-allotment option is exercised in
full) will be freely tradable by persons other than "affiliates" of WFS without
restriction or further registration under the Securities Act. In addition, we
49
<PAGE> 53
have reserved 1,012,212 shares of our common stock for issuance to employees and
directors to whom options have been or may be granted. These shares will be
freely tradeable when issued except to the extent issued to Ernest Rady. The
shares outstanding upon completion of the offering issued to the Bank will be
"restricted securities" within the meaning of Rule 144 under the Act.
Because we are an operating subsidiary of the Bank, the Bank is required by
the regulations of the OTS to maintain ownership of at least a majority of our
voting stock. In addition, so long as the Bank is able to elect a majority of
the board of directors, it will also be able to cause us at any time to register
under the Securities Act all or any portion of the shares of common stock it
owns, in which event the Bank would be able to sell such shares upon the
effectiveness of any such registration. Sales of the Bank's shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of the common stock.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year, including
persons who may be deemed our "affiliates", would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the number of shares of common stock then outstanding or the average weekly
trading volume of the common stock on all exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks immediately preceding the SEC filing with respect to such
sale. Such sales are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about us.
However, if a person (or persons whose shares are aggregated) is not deemed to
have been our affiliate at any time during the 90 days immediately preceding the
sale, he or she may sell his or her restricted shares under Rule 144(k) without
regard to the limitations described above if at least two years have elapsed
since the later of the date the shares were acquired from us or from our
affiliate. The foregoing is a summary of Rule 144 and is not intended to be a
complete description of it.
The Bank and our directors and officers have agreed not to directly or
indirectly offer to sell, sell, contract to sell or otherwise dispose of any
shares of common stock for a period of 120 days after the date of this
prospectus without the prior written consent of the underwriters.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters and us, each of the underwriters named below, through
their representatives Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, has severally agreed to purchase from us the aggregate
number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
-------
Total.............................................
=======
</TABLE>
50
<PAGE> 54
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriters' obligations is such
that they are committed to purchase and pay for all of the above shares of
common stock if any are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and at such price less a concession not in excess of $ per share
of common stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and such dealers may
reallow, concessions not in excess of $ per share of common stock to certain
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. The common stock is offered
subject to receipt and acceptance by the underwriters and to certain other
conditions, including the right to reject orders in whole or in part.
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 300,000 additional shares of our common stock
exercisable at the "public offering price" less the "underwriting discounts and
commissions," each as set forth on the cover page of this prospectus. If the
underwriters exercise such option in whole or in part, then each of the
underwriters will be severally committed, subject to certain conditions,
including the approval of certain matters by counsel, to purchase the additional
shares of common stock in proportion to their respective purchase commitments as
indicated in the preceding table.
The following table summarizes the compensation to be paid to the
underwriters by us in connection with this offering:
<TABLE>
<CAPTION>
TOTAL
-----------------------------------------------
WITHOUT EXERCISE OF THE WITH EXERCISE OF THE
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- ----------------------- ---------------------
<S> <C> <C> <C>
Underwriting discounts................ $
</TABLE>
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority. Western Financial
Bank has expressed a non-binding interest in purchasing shares at the public
offering price. As of the date of this prospectus, Western Financial Bank holds
22,367,036 shares of our common stock, or approximately 87% of the total
outstanding shares. As Western Financial Bank has expressed an interest in
maintaining at least an 80% ownership interest, at our request, the underwriters
will reserve at the public offering price sufficient shares for sale to the Bank
to allow it to maintain at least an 80% interest.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the Securities
Act of 1933, as amended, or will contribute to payments that the underwriters
may be required to make in respect thereof.
Our directors, officers and affiliates who hold an aggregate of 22,427,303
shares of common stock have agreed that they will not offer, sell or agree to
sell, directly or indirectly, or otherwise dispose of any shares of common stock
in the public market without the prior written consent of Bear, Stearns & Co.
Inc. for a period of 120 days from the date of this prospectus.
In addition, we have agreed that for a period of 120 days after the date of
this prospectus we will not, without the prior written consent of Bear, Stearns
& Co. Inc., offer, sell or otherwise dispose of any shares of common stock
except for the shares of common stock offered hereby and the shares of common
stock issuable upon exercise of outstanding options and warrants.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any such short position by
purchasing shares of common stock in the open
51
<PAGE> 55
market or by exercising the over-allotment option granted to the underwriters.
In addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market and
may impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in this offering are reclaimed if
shares of common stock previously distributed in this offering are repurchased
in connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the common stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the authorization and issuance of the
common stock offered hereby will be passed upon for us by Mitchell, Silberberg &
Knupp LLP, Los Angeles, California. Certain legal matters with respect to our
common stock offered hereby will be passed upon for the underwriters by Gibson,
Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The Consolidated Financial Statements of WFS Financial Inc and Subsidiaries
at December 31, 1999 and 1998 and for each of the three years in the period
ending December 31, 1999 appearing in this prospectus and registration statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and in the registration
statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-2 under the
Securities Act of 1933 with respect to the common stock offered hereby. This
prospectus, which constitutes part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits and schedules relating to the registration statement. You may read and
copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov.
INCORPORATION BY REFERENCE
The following documents, all of which were previously filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 are hereby incorporated by reference in this prospectus:
- our Annual Report on Form 10-K for the year ended December 31, 1998;
- our Current Report on Form 8-K dated April 9, 1999;
- our definitive Proxy Statement for our annual meeting held on April 27,
1999; and
- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999.
All other reports and documents filed by us after the date of this
prospectus pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange
Act of 1934 prior to the termination of the
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<PAGE> 56
offering of the common stock covered by this prospectus are also incorporated by
reference in this prospectus and are considered to be part of this prospectus
from the date those documents are filed.
If any statement contained in a document incorporated by reference herein
conflicts with or is modified by a statement contained in this prospectus or in
any other subsequently filed document that is incorporated by reference into
this prospectus, the statement made at the latest point in time should control.
Any previous statements that have been subsequently altered should therefore not
be considered to be a part of this prospectus. We will provide a copy of any or
all of the documents referred to above that have been or may be incorporated by
reference in this prospectus to any person to whom a copy of this prospectus has
been delivered free of charge upon request. Exhibits to such documents will not
be provided unless the exhibits are specifically incorporated by reference into
the information that the prospectus incorporates. Written requests for copies of
any documents incorporated by reference should be directed to Guy Du Bose, Esq.,
General Counsel, WFS Financial Inc, 23 Pasteur Road, Irvine, California 92618
(telephone 949-727-1002).
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<PAGE> 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WFS FINANCIAL INC
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS.............................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at December
31, 1999, 1998 and 1997................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT AUDITORS
Board of Directors
WFS Financial Inc
We have audited the accompanying consolidated statements of financial
condition of WFS Financial Inc and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of WFS
Financial Inc's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WFS Financial Inc and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Los Angeles, California
January 18, 2000
F-2
<PAGE> 59
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Short term investments...................................... $ 7,120 $ 15,020
Contracts receivable........................................ 71,757 70,814
Contracts held for sale..................................... 1,423,960 825,257
Allowance for credit losses................................. (36,682) (11,246)
---------- ----------
Contracts receivable, net................................... 1,459,035 884,825
Amounts due from trusts..................................... 439,022 332,732
Retained interest in securitized assets..................... 167,277 171,230
Premises and equipment, net................................. 38,038 26,482
Accrued interest receivable................................. 10,521 5,859
Other assets................................................ 9,914 8,192
---------- ----------
$2,130,927 $1,444,340
========== ==========
LIABILITIES
Notes payable -- parent..................................... $ 178,908 $ 160,000
Secured lines of credit..................................... 1,012,293 554,836
Amounts held on behalf of trustee........................... 687,274 528,092
Other liabilities........................................... 40,264 37,071
---------- ----------
1,918,739 1,279,999
STOCKHOLDERS' EQUITY
Common stock, (no par value; authorized 50,000,000 shares;
issued and outstanding 25,771,956 shares in 1999 and
25,708,611 in 1998)....................................... 74,010 73,564
Paid-in capital............................................. 4,327 4,000
Retained earnings........................................... 134,690 85,315
Accumulated other comprehensive (loss) income, net of tax... (839) 1,462
---------- ----------
212,188 164,341
---------- ----------
$2,130,927 $1,444,340
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 60
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Interest income..................................... $ 140,526 $ 89,758 $ 62,988
Interest expense.................................. 41,150 24,780 10,331
----------- ----------- -----------
Net interest income............................... 99,376 64,978 52,657
Servicing income.................................. 140,780 76,110 137,753
Gain on sale of contracts......................... 54,977 25,438 39,399
----------- ----------- -----------
TOTAL REVENUES...................................... 295,133 166,526 229,809
EXPENSES:
Provision for credit losses....................... 36,578 15,146 8,248
Operating expenses
Salaries and employee benefits................. 110,289 95,740 95,731
Credit and collections......................... 21,634 21,248 14,522
Miscellaneous.................................. 41,677 48,054 57,165
----------- ----------- -----------
TOTAL OPERATING EXPENSES............................ 173,600 165,042 167,418
Restructuring charge.............................. 15,000
----------- ----------- -----------
TOTAL EXPENSES...................................... 210,178 195,188 175,666
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)........... 84,955 (28,662) 54,143
Income tax (benefit).............................. 35,580 (12,095) 22,829
----------- ----------- -----------
NET INCOME (LOSS)................................... $ 49,375 $ (16,567) $ 31,314
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC............................................. $ 1.92 $ (0.64) $ 1.22
=========== =========== ===========
DILUTED........................................... $ 1.91 $ (0.64) $ 1.22
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC............................................. 25,732,089 25,708,611 25,691,892
=========== =========== ===========
DILUTED........................................... 25,842,648 25,708,611 25,696,513
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 61
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN INCOME RETAINED
SHARES STOCK CAPITAL NET OF TAX EARNINGS TOTAL
---------- ------- ------- ------------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997......... 25,684,168 $73,124 $4,000 $ 70,568 $147,692
Net income....................... 31,314 31,314
Unrealized gains (losses) on
retained interest in
securitized assets, net of
tax......................... $ 447 447
--------
Comprehensive income........... 31,761
10% Stock dividend............. 24,443 440 440
---------- ------- ------ ------- -------- --------
Balance, December 31, 1997....... 25,708,611 73,564 4,000 447 101,882 179,893
Net income..................... (16,567) (16,567)
Unrealized gains (losses) on
retained interest in
securitized assets, net of
tax(1)...................... 1,015 1,015
--------
Comprehensive income........... (15,552)
---------- ------- ------ ------- -------- --------
Balance, December 31, 1998....... 25,708,611 73,564 4,000 1,462 85,315 164,341
Net income..................... 49,375 49,375
Unrealized gains (losses) on
retained interest in
securitized assets, net of
tax(1)...................... (2,301) (2,301)
--------
Comprehensive income........... 47,074
Stock options exercised.......... 63,345 446 327 773
---------- ------- ------ ------- -------- --------
Balance, December 31, 1999....... 25,771,956 $74,010 $4,327 $ (839) $134,690 $212,188
========== ======= ====== ======= ======== ========
</TABLE>
- ---------------
(1) The pre-tax increase in unrealized gains on retained interest in securitized
assets at December 31, 1999, 1998 and 1997 was $4.0 million, $1.8 million
and $0.8 million, respectively.
See accompanying notes to consolidated financial statements
F-5
<PAGE> 62
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income(loss)............................................ $ 49,375 $ (16,567) $ 31,314
Adjustments to reconcile net income (loss) to net cash (used
in) provided by
Operating activities:
Provision for credit losses............................... 36,578 15,146 8,248
Depreciation.............................................. 6,901 8,066 9,731
Amortization of retained interest in securitized assets... 111,752 103,610 53,421
(Gain) loss on disposal of assets......................... (77) 7,092
(Increase) decrease in assets:
Automobile contracts:
Purchase of contracts................................ (3,340,146) (2,670,696) (2,285,279)
Proceeds from sale of contracts...................... 2,500,000 1,885,000 2,190,000
Other change in contracts............................ 229,441 115,180 89,826
Other assets............................................ (6,469) (6,855) (3,038)
Increase in liabilities:
Other liabilities.................................... 4,858 1,724 24,984
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES......... (407,787) (558,300) 119,207
INVESTING ACTIVITIES
Purchase of property, plant and equipment................... (18,376) (20,236) (14,233)
Increase in trust receivable................................ (106,290) (37,609) (103,654)
Increase in retained interest in securitized asset.......... (111,767) (91,914) (112,230)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (236,433) (149,759) (230,117)
FINANCING ACTIVITIES
Proceeds from issuance of common
stock..................................................... 773 440
Proceeds (payments) from notes payable -- parent............ 18,908 (15,000) 50,000
Proceeds from secured lines of credit....................... 457,457 554,836
Increase in trustee accounts................................ 159,182 39,438 95,205
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 636,320 579,274 145,645
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (7,900) (128,785) 34,735
Cash and equivalents at beginning of period................. 15,020 143,805 109,070
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7,120 $ 15,020 $ 143,805
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest.................................................. $ 39,067 $ 23,322 $ 10,746
Income taxes.............................................. 32,607 5,397
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 63
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
WFS Financial Inc ("WFS") and its subsidiaries, WFS Financial Auto Loans, Inc.
("WFAL"), WFS Financial Auto Loans 2, Inc. ("WFAL2"), WFS Funding, Inc. ("WFSF")
and WFS Investments, Inc. ("WFSII"). All significant intercompany transactions
and accounts have been eliminated in consolidation. Certain amounts have been
reclassified to conform to the 1999 presentation. After the initial public
offering on August 8, 1995, WFS became a majority owned subsidiary of Western
Financial Bank ("the Bank"), which is a wholly owned subsidiary of Westcorp.
WFS pays a monthly management fee to the Bank and Westcorp which covers
various expenses, including accounting, legal, tax, cash management, purchasing
and auditing services. Additionally, the Bank and Westcorp pay a fee to WFS for
information services. The management fee is based upon the actual costs incurred
and estimates of actual usage. WFS believes that the management fee approximates
the cost to perform these services on its own behalf or to acquire them from
third parties. WFS has the option, under the management agreements, to procure
these services on its own should it be more economically beneficial for WFS to
do so.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Nature of Operations
WFS is a consumer finance company that specializes in the purchase,
securitization and service of fixed rate consumer auto loans ("contracts"). WFS
purchases contracts from franchised new and independent used car dealers on a
nonrecourse basis and originates loans directly with consumers which are
collectively known as contracts. WFS purchased contracts in 43 states.
Cash and Cash Equivalents
Cash and cash equivalents includes short term investments with the Bank.
There are no material restrictions as to the withdrawal or usage of this amount.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level believed adequate
by management to absorb inherent losses in the on balance sheet contract
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past contract loss experience, current
economic conditions, volume, pending contract sales, growth and composition of
the contract portfolio, and other relevant factors. The allowance is increased
by provisions for credit losses charged against income.
F-7
<PAGE> 64
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales of Contracts
Contracts are originated and sold to investors with servicing rights
retained by WFS. WFS does not retain any recourse with respect to the contracts
securitized. As part of the sale, the trustee reimburses WFS for borrowing costs
incurred between the cut-off date of the loans and the closing date of the sale.
Gain on sale of contracts represents the present value of the estimated
future earnings to be received from the excess spread created in the
securitization transactions less prepaid dealer participations, issuance costs,
and the effect of hedging activities. These retained interest in securitized
assets ("RISA") is capitalized and amortized over the expected repayment life of
the underlying contracts.
WFS evaluates quarterly the carrying value of its RISA in light of the
actual repayment experience of the underlying contracts and makes adjustments to
reduce the carrying value, if appropriate. Servicing income and amortization of
RISA is included in servicing income in the Consolidated Statements of Income.
As servicer of these contracts, WFS holds and remits funds collected from the
borrowers on behalf of the trustee pursuant to a reinvestment contract that WFS
has entered into with the Bank. These amounts are reported as amounts held on
behalf of trustee. WFS retains servicing rights and is entitled to servicing
income. Amounts due from trusts represents servicing income earned by WFS for
which WFS has not yet received repayment from the trust.
Nonaccrual Contracts
WFS continues to accrue interest income on contracts until the contract is
charged off, which occurs automatically after the contract is past due 120 days.
At the time that the contract is charged off, all accrued interest is also
charged off.
Contracts Held for Sale
Contracts held for sale are stated at the lower of aggregate amortized cost
or market. The carrying amount of the specific contract pool sold is used to
compute gains or losses. Market value is based on discounted cash flow
calculations, which approximates the amounts realized upon securitization of the
contracts.
The contracts purchased by the Company are fixed-rate loans. The Company
bears the risk of interest-rate increases during the period between the setting
of the rate at which the contracts will be acquired and their sale in a
securitization transaction. In order to mitigate this risk, the Company uses
two-year Treasury securities forward agreements to minimize its exposure to
interest rate risk during the relevant period. The fair value of these
instruments may vary with changes in interest rates. Generally, these agreements
are entered into by WFS in amounts which correspond to the principal amount of
the securitization transactions. The market value of these forward agreements is
designed to respond inversely to the market value changes of the underlying
contracts. Because of this inverse relationship, WFS can effectively lock in its
gross interest rate spread at the time of entering into a hedge transaction.
Gain and losses relative to these agreements are deferred and recognized in full
at the time of securitization as an adjustment to the gain or loss on the sale
of the contracts. WFS enters into these forward agreements either with the Bank,
or highly rated counterparties and further reduces its risk by avoiding any
material concentration with a single counterparty. Credit exposure is limited to
those agreements with a positive fair value and only to the extent of that fair
value. WFS hedges substantially all of its contracts pending securitization.
Premises and Equipment
Premises and equipment are recorded at cost less accumulated depreciation
and amortization and are depreciated over their estimated useful lives
principally using the straight line method for financial
F-8
<PAGE> 65
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reporting and accelerated methods for tax purposes. Leasehold improvements are
amortized over the lives of the respective leases or the service lives of the
improvements, whichever is shorter.
Interest Income and Fee Income
Interest income is earned in accordance with the terms of the contracts.
For pre-computed contracts, interest is earned monthly and for simple interest
contracts, interest is earned daily. Interest income on certain contracts is
earned using the effective yield method and classified on the balance sheet as
interest receivable to the extent not collected. Other contracts use the sum of
the month's digits method, which approximates the effective yield method.
WFS defers contract origination fees and premiums paid to dealers. The net
amount is amortized as an adjustment to the related contract's yield, over the
contractual life of the related contract or until the contract is sold at which
time any remaining amounts are included as part of the gain on sale of
contracts. Fees for other services are recorded as income when earned.
Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), provides for companies to recognize
compensation expense associated with stock-based compensation plans over the
anticipated service period based on the fair value of the award on the date of
grant. However, SFAS 123 allows companies to continue to measure compensation
costs prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Companies electing to continue accounting
for stock-based compensation plans under APB 25 must make pro forma disclosures
of net income and earnings per share as if SFAS 123 has been adopted if the fair
value of the options has a material impact on earnings. WFS has continued to
account for stock-based compensation plans under APB 25. The impact of applying
SFAS 123 in 1999, 1998 and 1997 is immaterial to the financial statements of
WFS.
Income Taxes
WFS files consolidated federal and state tax returns as part of a
consolidated group that includes the Bank and Westcorp. WFS taxes are paid in
accordance with a tax sharing agreement that allocates taxes based on the
relative income or loss of each entity on a stand-alone basis.
Fair Value of Financial Instruments
Fair value information about financial instruments whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value, are reported using quoted market prices. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and in many cases, could not be realized in
immediate settlement of the instrument. Fair values for certain financial
instruments and all non-financial instruments are not required to be disclosed.
Accordingly, the aggregate fair value of amounts presented do not represent the
underlying value of WFS.
WFS' financial instruments as defined by Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments,"
including short term investments, retained interest in securitized assets and
amounts held on behalf of trustee are accounted for on a historical cost
F-9
<PAGE> 66
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis which, due to the nature of these financial instruments, approximates fair
value. The fair value for contracts receivable is based on quoted market prices
of similar contracts sold in conjunction with securitization transactions,
adjusted for differences in contract characteristics. The fair value of forward
agreements is estimated by obtaining market quotes from brokers. The fair value
of notes payable -- parent is estimated using discounted cash flow analysis,
based on current borrowing rates for similar instruments.
Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 ("SFAS 137"). This Statement defers for one year the effective
date of FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"). These statements provide guidance for the way
public enterprises report information about derivatives and hedging in annual
financial statements and in interim financial reports. The derivatives and
hedging disclosure is required for financial statements of all fiscal quarters
of all fiscal years beginning after June 15, 2000. These Statements will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives will either be offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. The Company is in the process
of evaluating the effect that SFAS 137, if any, will have on the earnings and
financial position of the Company.
NOTE 2 -- NET CONTRACTS RECEIVABLE
WFS' contract portfolio consists of contracts purchased from automobile
dealers on a non-recourse basis and contracts financed directly with the
consumer. If pre-computed finance charges are added to a contract, they are
added to the contract balance and carried as an offset against the contract
balance as unearned discounts. Amounts paid to dealers are capitalized as dealer
participation and amortized over the life of the contract.
F-10
<PAGE> 67
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Consumer:
Contracts................................................... $1,518,433 $923,953
Unearned discounts........................................ (54,248) (48,015)
---------- --------
Net contracts............................................. 1,464,185 875,938
Allowance for credit losses................................. (36,682) (11,246)
Dealer participation, net of deferred contract fees......... 31,532 20,133
---------- --------
Net contracts receivable.......................... $1,459,035 $884,825
========== ========
</TABLE>
The following table presents the changes in amounts deferred and carried as
adjustments to the contract balance including deferred contract fees and dealer
participation.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period....................... $ 20,133 $ 4,896 $ 5,642
New deferrals........................................ 73,573 71,964 62,662
Amortization......................................... (3,257) (6,128) (4,107)
Sales................................................ (58,917) (50,599) (59,301)
-------- -------- --------
Balance at end of period............................. $ 31,532 $ 20,133 $ 4,896
======== ======== ========
</TABLE>
Contracts serviced by WFS for the benefit of others totaled approximately
$3.9 billion at December 31, 1999 and $3.5 billion and $3.4 billion at December
31, 1998 and 1997.
F-11
<PAGE> 68
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 11,246 $ 6,787 $ 7,648
Provision for credit losses........................ 36,578 15,146 8,248
Charged off contracts.............................. (18,696) (14,832) (13,412)
Recoveries......................................... 7,554 4,145 4,303
-------- -------- --------
Balance at end of period........................... $ 36,682 $ 11,246 $ 6,787
======== ======== ========
</TABLE>
NOTE 4 -- RETAINED INTEREST IN SECURITIZED ASSETS
SFAS 125 requires that following a transfer of financial assets, an entity
is to recognize the assets it controls and the liabilities it has incurred, and
de-recognize assets for which control has been surrendered and liabilities that
have been extinguished. For securitization transactions, SFAS 125 defines two
separate financial assets retained at the time of securitization, a retained
interest in securitized assets, which represents the excess spread created from
securitization, and a servicing rights asset which represents the benefit
derived from retaining the rights to service the contracts securitized. Previous
accounting guidance did not separately distinguish these rights.
Retained interests in securitized assets capitalized upon securitization of
contracts represent the present value of the estimated future earnings to be
received by WFS from the excess spread created in securitization transactions.
Excess spread is calculated by taking the difference between the coupon rate of
the contracts sold and the interest rate paid to the investors less
contractually specified servicing and guarantor fees.
Prepayment and credit loss assumptions are utilized to project future
earnings and are based upon historical experience. Credit losses are estimated
using a cumulative loss rate estimated by management to reduce the likelihood of
asset impairment. All assumptions used are evaluated each quarter and adjusted,
if appropriate, to reflect actual performance of the contracts.
Future earnings are discounted at a rate management believes to be
representative of the market at the time of securitization. The balance of the
RISA is amortized against actual excess spread income earned on a monthly basis
over the expected repayment life of the underlying contracts. RISA's are
classified in a manner similar to available for sale securities and as such are
marked to market each quarter. Market value changes are calculated by
discounting the excess spread using a current market discount rate. Any changes
in the market value of the RISA is reported as a separate component of
stockholders' equity as an unrealized gain or loss, net of applicable taxes.
Two methods have arisen in practice to determine the fair value of credit
enhancement assets: the cash-in method and the cash-out method. The Securities
and Exchange Commission ("SEC") has set forth specific guidance that the
cash-out method is the only appropriate method to be used in determining the
fair value of such assets as defined by the SFAS No. 125. The cash-out method
discounts expected cash flows from the period in which the transferor expects to
receive the cash, thereby taking into consideration the period of time that the
cash is received from obligors but restricted from distribution to the
transferor. WFS has historically and will continue to use the cash-out method in
measuring such assets.
F-12
<PAGE> 69
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At the time of a securitization, the Company utilizes prepayment speed, net
credit loss and discount rate assumptions to initially compute the value of the
RISA. These assumptions may change periodically based on actual performance or
other factors. During 1999 and 1998, the Company utilized a prepayment rate of
1.6% ABS in computing RISA. Cumulative net credit loss assumptions utilized for
1999 and 1998 securitizations ranged from 6% to 7%. The Company used a discount
rate of 425 basis points over the two-year Treasury rate at the time of
securitization in discounting future earnings.
The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations. Estimated future
undiscounted RISA earnings are calculated by taking the difference between the
coupon rate of the contracts sold and the certificate rate paid to the
investors, less the contractually specified servicing fee and guarantor fees,
after giving effect to estimated prepayments and assuming no losses. To arrive
at the RISA, this amount is reduced by the off balance sheet allowance
established for potential future losses and by discounting to present value.
The following table sets forth the components of the RISA:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings.................... $ 410,066 $ 361,209
Off balance sheet allowance for losses...................... (220,838) (170,664)
Discount to present value................................... (21,951) (19,315)
---------- ----------
Retained interest in securitized assets..................... $ 167,217 $ 171,230
========== ==========
Outstanding balance of contracts sold through
securitizations........................................... $3,890,685 $3,491,452
Off balance sheet allowance for losses as a percent of
contracts sold through securitizations.................... 5.68% 4.89%
</TABLE>
WFS believes that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the sold portfolio.
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 2,017 $ 2,017
Construction in progress.................................... 3,085
Buildings................................................... 13,519 8,230
Computers and software...................................... 31,502 16,707
Furniture, fixtures and leasehold improvements.............. 3,638 3,069
Equipment................................................... 4,093 3,415
Automobiles................................................. 274 259
------- -------
55,043 36,782
Less: Accumulated depreciation.............................. 17,005 10,300
------- -------
$38,038 $26,482
======= =======
</TABLE>
The increase in 1999 was the result of the increase in computers and
software which was primarily due to computer systems upgrades.
F-13
<PAGE> 70
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INTERCOMPANY AGREEMENTS
WFS borrowed $125 million from the Bank under the terms of the senior note.
The senior note provides for principal payments of $25 million per year,
commencing on April 30, 1999 and continuing through its final maturity, April
30, 2003. During 1999, the Company made paydowns of $66.1 million without
prepayment penalties. Interest payments on senior note are due quarterly, in
arrears, calculated at the rate of 7.25% per annum. Interest expense totaled
$5.4 million, $9.0 million and $9.1 million for the years ended December 31,
1999, 1998 and 1997.
Additionally, WFS has borrowed $135 million under the terms of the
promissory note from the Bank. The promissory note provides for principal
payments of $67.5 million per year, commencing July 31, 2001 and continuing
through its final maturity, July 31, 2002. Interest payments on the senior note
are due quarterly, in arrears, calculated at the rate of 9.42% per annum.
Pursuant to the terms of the promissory note, WFS may not incur any other
indebtedness which is senior to the obligations evidenced by the promissory note
except for (i) indebtedness under the senior note (ii) indebtedness
collateralized or secured under the line of credit and (iii) indebtedness for
similar types of warehouse lines of credit. Interest expense totaled $9.3
million, $4.7 million and $2.0 million for the years ended December 31, 1999,
1998 and 1997.
WFS also has a line of credit extended by the Bank permitting the Company
to draw up to $1.3 billion as needed to be used in its operations. WFS does not
pay a commitment fee for the line of credit. The line of credit terminates on
December 31, 2004 although the term may be extended by WFS for additional
periods up to 60 months. When secured, the line of credit carries an interest
rate equal to one-month London Interbank Offer Rate ("LIBOR") plus 62.5 basis
points. When unsecured, the line of credit carries an interest rate equal to
one-month LIBOR plus 112.5 basis points. Interest on the amount outstanding
under the line of credit is paid monthly, in arrears, and is calculated on the
average amount outstanding that month. The Bank has the right under the line of
credit to refuse to permit additional amounts to be drawn on the line of credit
if, in the Bank's discretion, the amount sought to be drawn will not be used to
finance the Company's purchase of contracts or other working capital
requirements. There was $551 million and $555 million outstanding at December
31, 1999 and December 31, 1998. The average amount outstanding during 1999 was
$433 million. The average amount outstanding during 1998 and 1997 was $278
million and $107 million. Interest expense was $17.2 million, $16.8 million and
$6.1 million for the years ended December 31, 1999, 1998 and 1997.
WFS also invests its excess cash at the Bank under an Investment Agreement.
The Bank pays us an interest rate equal to the Federal composite commercial
paper rate on this excess cash. The weighted average interest rate was 5.23%,
5.45% and 5.78% for 1999, 1998 and 1997. At December 31, 1999, the Company held
no excess cash with the Bank under the Investment Agreement. The average balance
of the excess cash was $2.8 million, $9.0 million, and $30.0 million, and the
interest income earned was $0.1 million, $0.5 million and $1.7 million during
1999, 1998 and 1997.
WFS has entered into certain management agreements with the Bank and
Westcorp pursuant to which WFS pays its allocated portion of certain costs and
expenses incurred by the Bank and Westcorp with respect to services or
facilities of the Bank and Westcorp used by WFS or its subsidiaries, including
their principal office facilities, field offices of WFS and overhead and
employee benefits pertaining to Bank and Westcorp employees who also provide
services to WFS or its subsidiaries. Additionally, as part of these management
agreements, the Bank and Westcorp have agreed to reimburse WFS for similar costs
incurred. The management agreements may be terminated by any party upon 5 days
prior written notice without cause, or immediately in the event of the other
party's breach of any covenant, obligation, or duty contained in the applicable
management agreement or for violation of law, ordinance, statute, rule or
regulation governing either party to the applicable management agreement.
F-14
<PAGE> 71
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to a series of agreements to which WFS, the Bank and WFAL2, among
others, are parties, WFS is able to access the cash flows of each of the
outstanding securitization transactions and the cash held in each spread account
for each of those transactions. WFS is permitted to use that cash as it
determines, including in its ordinary business activities of originating
contracts.
In each securitization transaction, the Bank and WFAL2 have entered into a
reinvestment contract, which is deemed to be an eligible investment under the
relevant securitization agreements. The securitization agreements required,
provided certain conditions are met, that all cash flows of the relevant trust
and the associated spread accounts be invested in the applicable reinvestment
contract. A limited portion of the invested funds may be used by WFAL2 and the
balance may be used by the Bank. The Bank makes its portion available to WFS
pursuant to the term of the WFS Reinvestment Contract. Under the WFS
Reinvestment Contract, WFS receives access to all of the cash available to the
Bank under each trust reinvestment contract and is obligated to repay to the
Bank an amount equal to the cash so used when needed by the Bank to meet its
obligations under the individual trust reinvestment contracts. With the portion
of the cash available to it under the individual trust reinvestment contracts,
WFAL2 purchases contracts for WFS pursuant to the terms of Sale and Servicing
Agreements.
FSA has determined that the trust reinvestment contracts may be eligible
investments provided the Bank and WFAL2 pledge adequate collateral to secure
their respective obligations. In accordance with this agreement, the Bank and
WFAL2 pledge property owned by each for the benefit of the trustee of each trust
and FSA. WFS pays the Bank a fee equal to 12.5 basis points of the amount of
collateral pledged by the Bank as consideration for the pledge of collateral by
the Bank and for WFS' access to cash under the WFS Reinvestment Contract. During
1999, WFS paid the Bank $0.6 million for this purpose. As WFAL2 directly
utilizes the cash made available to it to purchase contracts for its own account
from WFS, no additional consideration from WFS is required to support WFAL2's
pledge of its property under the agreement with FSA. While WFS is under no
obligation to repurchase contracts from WFAL2 to the extent WFAL2 needs to sell
any such contracts to fund its repayment obligations under the trust
reinvestment contracts, it is anticipated that WFS would prefer to purchase
those contracts than for WFAL2 to sell those contracts to a third party. The WFS
Reinvestment Contract, by its terms, is to remain in effect so long as any of
the trust reinvestment contracts is an eligible investment for its related
securitization transaction. At December 31, 1999, 1998 and 1997, the amount
outstanding under the WFS Reinvestment Contract was $477 million, $364 million
and $612 million.
WFS has entered into an agreement with Westran Services Corp. ("Westran"),
which is a subsidiary of Westcorp, to receive travel related services. WFS
believes that the services rendered by Westran are reasonable and representative
of what such costs would have been had WFS used an unaffiliated entity. Total
amounts paid to Westran in 1999, 1998, and 1997 was $0.1 million $0.2 million,
and $0.1 million.
NOTE 7 -- CONDUIT FACILITY
In September 1999, WFS established a $500 million conduit facility secured
by automobile contracts in a private placement. The amount outstanding on the
credit facility at December 31, 1999 was $461 million. The Notes are rated AAA
by Standard & Poor's and Aaa by Moody's. Timely principal and interest payments
on the Notes are guaranteed by an insurance policy. Interest payments on the
Notes are due quarterly, in arrears, calculated at a commercial paper index rate
plus 30 basis points. Interest expense totaled $7.9 million for the year ended
December 31, 1999. The average amount outstanding during 1999 was $494 million.
F-15
<PAGE> 72
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under non-cancelable operating leases on premises
and equipment with terms of one year or more as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
2000.................................................... $ 4,260
2001.................................................... 3,119
2002.................................................... 1,997
2003.................................................... 1,749
2004.................................................... 1,350
Thereafter.............................................. 301
-------
$12,776
=======
</TABLE>
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense for premises and equipment amounted
to $5.1 million, $7.6 million and $9.0 million for the years ended December 31,
1999, 1998 and 1997.
WFS is involved as a party to certain legal proceedings incidental to its
business. Management of WFS believes that the outcome of such proceedings will
not have a material effect upon its business or financial condition.
NOTE 9 -- SERVICING INCOME
Servicing income consists of the following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retained interest income............................ $ 47,812 $ 1,961 $ 69,844
Contractual servicing income........................ 46,847 37,180 30,803
Other fee income.................................... 46,121 36,969 37,106
-------- ------- --------
Total servicing income.............................. $140,780 $76,110 $137,753
======== ======= ========
</TABLE>
NOTE 10 -- EMPLOYEE STOCK OWNERSHIP AND SALARY SAVINGS PLAN
WFS participates in the Westcorp Employee Stock Ownership and Salary
Savings Plan ("the Plan"), which covers essentially all full-time employees who
have completed one year of service. Contributions to the Plan are discretionary
and determined by the Board of Directors of Westcorp within limits set forth
under the Employee Retirement Income Security Act of 1974. Contributions to the
Plan are fully expensed in the year in which the contribution is made.
Westcorp contributes to the Plan annually for all Westcorp employees.
Amounts paid were $5.5 million, $0.8 million and $2.4 million in 1999, 1998 and
1997.
NOTE 11 -- STOCK OPTIONS
In 1996, WFS reserved 550,000 shares of common stock for future issuance to
certain employees under an incentive stock option plan ("the Plan"). In 1997,
WFS reserved an additional 550,000 shares of
F-16
<PAGE> 73
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock for future issuance under the Plan. There were 793,244 shares
available for future grants at December 31, 1999. The options may be exercised
within five to seven years after the date of grant. Additionally, the weighted
average life of the options at December 31, 1999 was 5.71 years and the exercise
price of the options outstanding at December 31, 1999 ranged from $6.94 to
$18.00 per share.
At December 31, 1998 all stock options were anti-dilutive under the plan.
In October 1998, the Company canceled 624,539 of existing options as part of a
voluntary stock option exchange program. All option holders taking part in this
program forfeited their existing options and were issued a proportionately
smaller number of new options based upon a reduced exercise price. Stock option
activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
-------- ----------------
<S> <C> <C>
OUTSTANDING AT JANUARY 1, 1997............................. 519,569 $18.00
Issued..................................................... 343,498 13.14
Exercised................................................ (24,443) 18.00
Cancelled................................................ (83,742) 17.58
-------- ------
OUTSTANDING AT DECEMBER 31, 1997........................... 754,882 15.83
Issued................................................... 326,052 7.32
Exercised................................................
Cancelled................................................ (762,985) 15.53
-------- ------
OUTSTANDING AT DECEMBER 31, 1998........................... 317,949 8.14
Issued...................................................
Exercised................................................ (63,345) 7.02
Cancelled................................................ (35,636) 14.18
-------- ------
OUTSTANDING AT DECEMBER 31, 1999........................... 218,968 $ 7.47
======== ======
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because WFS' employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair value of options granted in 1999, 1998 and 1997 was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................. 6.64% 4.70% 5.70%
Volatility factor....................................... 0.59 0.53 0.57
Expected option life.................................... 7 years 7 years 7 years
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and
1997 was $4.88, $4.57 and $8.26.
F-17
<PAGE> 74
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WFS elected to follow APB 25 and related Interpretations in accounting for
its employee stock options. Under APB 25, the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant and, therefore, no compensation expense is recognized. Pro-forma
information regarding net income and earnings per share is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock option under the fair value method of that statement. Pro-forma net
income/(loss) and earnings/(loss) per diluted share for the respective periods
were as follows:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- -------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro-forma net income/(loss).......................... $49,253 $(16,636) $30,983
Per diluted share.................................... $ 1.91 $ (0.65) $ 1.21
</TABLE>
The impact of applying SFAS 123 in 1999, 1998, 1997 and 1996 is immaterial
to the financial statements of WFS.
NOTE 12 -- RESTRUCTURING
In 1998, the Company completed a restructuring plan initially announced on
February 10, 1998. The goal of the plan was to consolidate offices and eliminate
redundant staff positions on a national level. The plan was achieved in two
phases. Phase I of the plan, completed in the first quarter of 1998, consisted
of the restructuring of operations in the Western United States. Phase II of the
plan, completed in the third quarter of 1998 and patterned after Phase I,
consisted of the restructuring of operations in the Central and Eastern United
States. As a result of these two restructuring, a total of 400 positions, or 20%
of the Company's workforce, were eliminated and 96 offices were closed. The
total pre-tax restructuring charge in 1998 for the completed plan was $15.0
million. Restructuring related costs included $1.8 million for employee
severance and $13.2 million of lease termination fees and the write off of
disposed assets. The restructuring charge was substantially utilized during
1998. Through the restructuring, WFS merged prime and non-prime office locations
with close geographic proximity and closed poorly performing offices.
F-18
<PAGE> 75
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $ 36,047 $ (5,427) $ 4,967
State franchise................................... 11,138 (888) 1,841
-------- -------- -------
47,185 (6,315) 6,808
Deferred:
Federal........................................... (9,604) (3,517) 11,913
State franchise................................... (2,001) (2,263) 4,108
-------- -------- -------
(11,605) (5,780) 16,021
-------- -------- -------
$ 35,580 $(12,095) $22,829
======== ======== =======
</TABLE>
The difference between total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
due to:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate.................................... $29,734 $(10,032) $18,950
State tax (net of Federal tax benefit)................... 5,938 (2,048) 3,867
Other.................................................... (92) (15) 12
------- -------- -------
$35,580 $(12,095) $22,829
======= ======== =======
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Amounts previously reported as
current and deferred income tax expense have been restated. Such changes to the
components of the expense occur because all tax alternatives available to WFS
are not known for a number of months subsequent to year end.
F-19
<PAGE> 76
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of WFS' deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan loss reserves.......................................... $ 15,987 $ 4,848
State tax deferred benefit.................................. 5,156 2,017
Other assets................................................ 1,418 2,658
-------- --------
Total deferred tax assets................................... 22,561 9,523
Deferred tax liabilities:
Accelerated depreciation for tax purposes................... (54) (669)
Asset securitization income recognized for book purposes.... (33,498) (32,154)
Other liabilities........................................... (3,292) (4,255)
-------- --------
Total deferred tax liabilities.............................. (36,844) (37,078)
-------- --------
Net deferred tax liability.................................. $(14,283) $(27,555)
======== ========
</TABLE>
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of WFS' financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE AMOUNTS VALUE
---------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Short term
investments -- parent........... $ 7,120 $ 7,120 $ 15,020 $ 15,020 $143,805 $143,805
Contracts receivable............ 1,495,717 1,617,108 896,071 943,393 236,125 251,131
Retained interest in securitized
assets........................ 167,277 167,277 171,230 171,230 181,177 181,177
FINANCIAL INSTRUMENT AGREEMENTS
HELD FOR PURPOSES OTHER THAN
TRADING:
Forward agreements:............. 10,872 4,389 (55)
FINANCIAL LIABILITIES:
Note payable -- parent.......... 178,908 165,190 160,000 128,450 175,000 179,238
Secured lines................... 1,012,293 1,012,293 554,836 554,836
Amounts held on behalf of
trustee....................... 687,274 687,274 528,092 528,092 488,654 488,654
</TABLE>
NOTE 15 -- FINANCIAL INSTRUMENT AGREEMENTS
WFS Financial uses Forward Agreements to minimize its exposure to interest
rate risk. The fair value of these instruments may vary with changes in interest
rates. At December 31, 1999, 1998 and 1997, WFS' portfolio consisted of Forward
Agreements with a notional amount of $1.6 billion, $775 million and $70.0
million.
Notional amounts do not represent amounts exchanged with other parties and,
thus are not a measure of WFS' exposure to loss through its use of these
agreements. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the agreements.
F-20
<PAGE> 77
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
and does not include the impact of any potentially dilutive common stock
equivalents. Diluted earnings per share is arrived at by dividing net income by
the weighted average number of shares outstanding, adjusted for the dilutive
effect of outstanding stock options.
The calculation of net income per common share follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
BASIC
Net income (loss)................................... $ 49,375 $ (16,567) $ 31,314
Average common shares outstanding................... 25,732,089 25,708,611 25,691,892
Net income (loss) per common share -- basic......... $ 1.92 $ (0.64) $ 1.22
DILUTED
Net income (loss)................................... $ 49,375 $ (16,567) $ 31,314
Average common share outstanding.................... 25,732,089 25,708,611 25,691,892
Stock option adjustment............................. 110,559 4,621
Average common shares outstanding................... 25,842,648 25,708,611 25,696,513
Net income (loss) per common share -- diluted....... $ 1.91 $ (0.64) $ 1.22
</TABLE>
Options to purchase 317,949 shares of common stock at a range of $6.94 to
$18.00 per share, were outstanding during 1998 but were not included in the
computation of diluted earnings per share because the Company experienced a loss
and the options' exercise price was greater than the average market price of the
common shares, and therefore, the effect would be antidilutive.
NOTE 17 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the periods ended December 31, 1999, 1998 and 1997. Certain quarterly amounts
have been adjusted to conform with the year-end presentation.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Interest income................................. $ 23,744 $38,507 $34,324 $43,951
Interest expense.............................. 6,087 11,073 8,873 15,117
Net interest income........................... 17,657 27,434 25,451 28,834
Provision for credit losses................... 11,198 4,758 15,347 5,275
Income before income tax...................... 20,001 21,009 21,990 21,955
Income tax.................................... 8,416 8,858 9,278 9,028
Net income.................................... 11,585 12,151 12,712 12,927
Net income per common share -- basic.......... 0.45 0.47 0.49 0.50
Net income per common share -- diluted........ 0.45 0.47 0.49 0.50
</TABLE>
F-21
<PAGE> 78
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Interest income............................... $ 15,290 $17,902 $25,809 $30,757
Interest expense.............................. 3,270 3,991 7,666 9,853
Net interest income........................... 12,020 13,911 18,143 20,904
Provision for credit losses................... 5,741 1,356 2,291 5,758
Income (loss) before income tax (benefit)..... (23,068) 526 (6,835) 715
Income tax (benefit).......................... (9,727) 234 (2,887) 285
Net income.................................... (13,341) 292 (3,948) 430
Net income (loss) per common share -- basic... (0.52) 0.01 (0.15) 0.02
Net income (loss) per common
share -- diluted........................... (0.52) 0.01 (0.15) 0.02
1997
Interest income............................... $ 14,292 $16,299 $17,044 $15,353
Interest expense.............................. 1,608 2,602 2,678 3,443
Net interest income........................... 12,684 13,697 14,366 11,910
Provision for credit losses................... 3,304 1,233 1,211 2,500
Income before income tax...................... 15,010 17,314 10,741 11,078
Income tax.................................... 6,378 7,364 4,370 4,717
Net income.................................... 8,632 9,950 6,371 6,361
Net income per common share -- basic.......... 0.34 0.39 0.25 0.25
Net income per common share -- diluted........ 0.34 0.39 0.25 0.25
</TABLE>
F-22
<PAGE> 79
- ------------------------------------------------------
- ------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER WFS
FINANCIAL INC NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE
INVESTORS WITH DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN
OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS
OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
------------------------------------
TABLE OF CONTENTS
------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Use of Proceeds....................... 11
Price Range of Common Stock........... 11
Dividend Policy....................... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Forward-looking Statements............ 31
Business.............................. 33
Management............................ 42
Supervision and Regulation............ 45
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 49
Underwriting.......................... 50
Legal Matters......................... 52
Experts............................... 52
Where You Can Find Additional
Information......................... 52
Incorporation by Reference............ 52
Index to Combined Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
WFS LOGO
2,000,000 SHARES
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fee............................................ $ 12,788
Printing and Engraving...................................... 75,000
Accounting Fees............................................. 100,000
Legal Fees and Expenses..................................... 150,000
Blue Sky Fees and Expenses.................................. 5,000
Nasdaq National Market Listing Fees......................... 50,000
Fees of Registrar and Transfer Agent........................ 5,000
Miscellaneous Fees.......................................... 102,212
--------
Total............................................. $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 204 of the California General Corporation Law permits a corporation
to eliminate or limit a director's personal liability to the corporation for
breach of the director's duties to the corporation or its stockholders with
certain exceptions.
The exceptions include intentional misconduct or knowing misconduct, acts
or omissions not done in good faith, transactions from which a director derived
an improper personal benefit, reckless acts, acts or omissions showing an
unexcused pattern of inattention, transactions between the corporation and a
director or between corporations having interrelated directors and improper
distributions, loans and guarantees. Section 204 does not apply to officers in
their capacities as such, even if they are also directors.
Section 317 of the California General Corporation Law authorizes a
corporation, in its discretion, to indemnify its directors, officers, employees
and other agents in terms broad enough to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses)
imposed. The Articles of Incorporation and Bylaws of WFS provide for
indemnification of agents to the fullest extent permitted by law.
Section 317 further permits a corporation to purchase and maintain
insurance on behalf of its agents. Westcorp currently maintains officers' and
directors' liability insurance for its officers and directors and for the
officers and directors of its subsidiaries, including WFS with policy limits of
$20,000,000. The coverage is composed of a primary insurance policy with limits
of $10 million and an excess insurance policy with limits of $10 million. The
aggregate deductible is $500,000.
II-1
<PAGE> 81
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement
4 Specimen WFS Financial Inc Common Stock Certificate(5)
5 Opinion of Mitchell, Silberberg & Knupp LLP with respect to
legality(12)
10.1 Westcorp Incentive Stock Option Plan(2)
10.2 Westcorp, Inc. Employee Stock Ownership and Salary Savings
Plan(3)
10.3 Westcorp 1991 Stock Option Plan(4)
10.4 1985 Executive Deferral Plan(1)
10.5 1988 Executive Deferral Plan II(1)
10.6 1992 Executive Deferral Plan III(1)
10.7 Transfer Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.8 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.9 Revolving Line of Credit Agreement between WFS Financial Inc
and Western Financial Bank, dated June 15, 1999(12)
10.9.1 Amendment No. 1, dated as of August 1, 1999, to the
Revolving Line of Credit Agreement between WFS Financial Inc
and Western Financial Bank(12)
10.10 Tax Sharing Agreement between WFS Financial Inc. and Western
Financial Banks, F.S.B., dated January 1, 1994(1)
10.11 Master Reinvestment Contract between WFS Financial Inc and
Western Financial Bank, F.S.B., dated May 1, 1995(1)
10.12 Amendment No. 1, dated as of June 1, 1995, to the Restated
Master Reinvestment Reimbursement Agreement(11)
10.13 Amended and Restated Master Collateral Assignment Agreement,
dated as of November 1, 1998(11)
10.14 Form of WFS Financial Inc Dealer Agreement(5)
10.15 Form of WFS Financial Inc Loan Application(5)
10.16 Westcorp Employee Stock Ownership and Salary Savings Plan(7)
10.16.1 Amendment No. 1, dated as of December 1998, to Westcorp
Employee Stock Ownership and Salary Savings Plan
10.16.2 Amendment No. 2, dated as of January 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan
10.16.3 Amendment No. 3, dated as of June 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan
10.17 Amended and Restated WFS 1996 Incentive Stock Option Plan,
dated January 1, 1997(6)
10.18 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated August 1, 1997(11)
10.18.1 Amendment No. 1, dated February 23, 1999, to the Promissory
Note of WFS Financial Inc in favor of Western Financial
Bank(11)
10.18.2 Amendment No. 2, dated July 30, 1999, to the Promissory Note
of WFS Financial Inc in favor of Western Financial Bank(12)
</TABLE>
II-2
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------
<C> <S>
10.19 Investment Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1996(11)
10.20 Management Services Agreement between WFS Financial Inc and
Western Financial Bank, F.S.B., dated January 1, 1997(11)
10.21 Employment Agreement(8)(9)(10)
21.1 Subsidiaries of WFS Financial Inc
23.1 Consent of Ernst & Young LLP
23.2 Consent of Mitchell, Silberberg & Knupp LLP (included in
Exhibit 5)
24 Power of Attorney(12)
</TABLE>
- ---------------
(1) Exhibits previously filed with WFS Financial Inc Registration Statement on
Form S-1 (File No. 33-93068), filed August 8, 1995 incorporated herein by
reference under Exhibit Number indicated.
(2) Exhibits previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated herein by reference
under Exhibit Number indicated.
(3) Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
(4) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991 incorporated herein by
reference under Exhibit Number indicated.
(5) Amendment No. 1, dated as of July 14, 1995 to the WFS Financial Inc
Registration Statement on Form S-1 (File No. 33-93068) incorporated herein
by reference under Exhibit Number indicated.
(6) Exhibit previously filed with WFS Registration Statement on Form S-8 (File
No. 33-7485), filed July 3, 1996 incorporated by reference under the
Exhibit Number indicated. Amendment No. 1 dated as of November 13, 1997
filed with the WFS Registration Statement on Form S-8 (File no. 333-40121)
incorporated herein by reference under Exhibit Number indicated.
(7) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039), filed August 29, 1996 incorporated herein by
reference under Exhibit Number indicated.
(8) Employment Agreement dated February 27, 1998 between the registrant and Joy
Schaefer (will be provided to the SEC upon request).
(9) Employment Agreement dated February 27, 1998 between the registrant,
Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).
(10) Employment Agreement, dated November, 1998 between the registrant and Mark
Olson (will be provided to the SEC upon request).
(11) Exhibits previously filed with Annual Report on Form 10-K of WFS Financial
Inc for the year ended December 31, 1998 (file # 33-93068) as filed on or
about March 31, 1999.
(12) Exhibits previously filed with WFS Registration Statement on Form S-2 (File
No. 333-91277) filed November 19, 2000 incorporated by reference under
Exhibit Number indicated.
II-3
<PAGE> 83
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes as follows:
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 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
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the 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.
(ii) For purposes of determining any liability under the Securities
Act of 1933, 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 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(iii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(iv) For purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that is has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California, on January 20, 2000.
WFS FINANCIAL INC
By: /s/ JOY SCHAEFER
------------------------------------
Joy Schaefer
Vice Chairman, Director,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
* Chairman of the Board January 20, 2000
- ---------------------------------------------------
Ernest S. Rady
/s/ JOY SCHAEFER Vice Chairman, Director, and January 20, 2000
- --------------------------------------------------- Chief Executive Officer
Joy Schaefer
* Director January 20, 2000
- ---------------------------------------------------
James R. Dowlan
* Director January 20, 2000
- ---------------------------------------------------
Howard C. Reese
* Director January 20, 2000
- ---------------------------------------------------
Stanley E. Foster
Director January 20, 2000
- ---------------------------------------------------
Bernard E. Fipp
* Director January 20, 2000
- ---------------------------------------------------
Duane A. Nelles
* Senior Executive Vice January 20, 2000
- --------------------------------------------------- President (Principal
Lee A. Whatcott Financial and Accounting
Officer) and Chief Financial
Officer
</TABLE>
*By: /s/ JOY SCHAEFER
------------------------------
Joy Schaefer
(Attorney-in-fact)
II-5
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
1 Form of Underwriting Agreement
4 Specimen WFS Financial Inc Common Stock Certificate(5)
5 Opinion of Mitchell, Silberberg & Knupp LLP with respect to
legality(12)
10.1 Westcorp Incentive Stock Option Plan(2)
10.2 Westcorp, Inc. Employee Stock Ownership and Salary Savings
Plan(3)
10.3 Westcorp 1991 Stock Option Plan(4)
10.4 1985 Executive Deferral Plan(1)
10.5 1988 Executive Deferral Plan II(1)
10.6 1992 Executive Deferral Plan III(1)
10.7 Transfer Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.8 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.9 Line of Credit Agreement between WFS Financial Inc and
Western Financial Bank, dated June 15, 1999(12)
10.9.1 Amendment No. 1, dated as of August 1, 1999, to the Line of
Credit Agreement between WFS Financial Inc and Western
Financial Bank(12)
10.10 Tax Sharing Agreement between WFS Financial Inc. and Western
Financial Banks, F.S.B., dated January 1, 1994(1)
10.11 Master Reinvestment Contract between WFS Financial Inc and
Western Financial Bank, F.S.B., dated May 1, 1995(1)
10.12 Amendment No. 1, dated as of June 1, 1995, to the Restated
Master Reinvestment Reimbursement Agreement(11)
10.13 Amended and Restated Master Collateral Assignment Agreement,
dated as of November 1, 1998(11)
10.14 Form of WFS Financial Inc Dealer Agreement(5)
10.15 Form of WFS Financial Inc Loan Application(5)
10.16 Westcorp Employee Stock Ownership and Salary Savings Plan(7)
10.16.1 Amendment No. 1, dated as of December 1998, to Westcorp
Employee Stock Ownership and Salary Savings Plan
10.16.2 Amendment No. 2, dated as of January 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan
10.16.3 Amendment No. 3, dated as of June 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan
10.17 Amended and Restated WFS 1996 Incentive Stock Option Plan,
dated January 1, 1997(6)
10.18 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated August 1, 1997(11)
10.18.1 Amendment No. 1, dated February 23, 1999, to the Promissory
Note of WFS Financial Inc in favor of Western Financial
Bank(11)
10.18.2 Amendment No. 2, dated July 30, 1999, to the Promissory Note
of WFS Financial Inc in favor of Western Financial Bank(12)
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
10.19 Investment Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1996(11)
10.20 Management Services Agreement between WFS Financial Inc and
Western Financial Bank, F.S.B., dated January 1, 1997(11)
10.21 Employment Agreement(8)(9)(10)
21.1 Subsidiaries of WFS Financial Inc
23.1 Consent of Ernst & Young LLP
24 Power of Attorney(12)
</TABLE>
- ---------------
(1) Exhibits previously filed with WFS Financial Inc Registration Statement on
Form S-1 (File No. 33-93068), filed August 8, 1995 incorporated herein by
reference under Exhibit Number indicated.
(2) Exhibits previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated herein by reference
under Exhibit Number indicated.
(3) Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
(4) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991 incorporated herein by
reference under Exhibit Number indicated.
(5) Amendment No. 1, dated as of July 14, 1995 to the WFS Financial Inc
Registration Statement on Form S-1 (File No. 33-93068) incorporated herein
by reference under Exhibit Number indicated.
(6) Exhibit previously filed with WFS Registration Statement on Form S-8 (File
No. 33-7485), filed July 3, 1996 incorporated by reference under the
Exhibit Number indicated. Amendment No. 1 dated as of November 13, 1997
filed with the WFS Registration Statement on Form S-8 (File no. 333-40121)
incorporated herein by reference under Exhibit Number indicated.
(7) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039), filed August 29, 1996 incorporated herein by
reference under Exhibit Number indicated.
(8) Employment Agreement dated February 27, 1998 between the registrant and Joy
Schaefer (will be provided to the SEC upon request).
(9) Employment Agreement dated February 27, 1998 between the registrant,
Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).
(10) Employment Agreement, dated November, 1998 between the registrant and Mark
Olson (will be provided to the SEC upon request).
(11) Exhibits previously filed with Annual Report on Form 10-K of WFS Financial
Inc for the year ended December 31, 1998 (file # 33-93068) as filed on or
about March 31, 1999.
(12) Exhibits previously filed with WFS Registration Statement on Form S-2 (File
No. 333-91277) filed November 19, 2000 incorporated by reference under
Exhibit Number indicated.
<PAGE> 1
EXHIBIT 1
2,000,000 Shares of Common Stock
WFS FINANCIAL INC
UNDERWRITING AGREEMENT
February __, 2000
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
WFS Financial Inc, a corporation organized and existing under the laws
of California (the "COMPANY"), proposes, subject to the terms and conditions
stated herein, to issue and sell to the several underwriters named in SCHEDULE I
hereto (the "UNDERWRITERS") an aggregate of 2,000,000 shares (the "FIRM SHARES")
of its common stock, no par value per share (the "COMMON STOCK"), and, for the
sole purpose of covering over-allotments in connection with the sale of the Firm
Shares, at the option of the Underwriters, up to an additional 300,000 shares
(the "ADDITIONAL SHARES") of Common Stock. The Firm Shares and any Additional
Shares purchased by the Underwriters are referred to herein as the "SHARES". The
Shares are more fully described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement, and has filed an
amendment or amendments thereto, on Form S-2 (No. 333-91277), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"ACT"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules
and Regulations of the Commission under the Act (the "REGULATIONS"), is herein
called the "REGISTRATION STATEMENT" and the prospectus, in the form first filed
with the
<PAGE> 2
Commission pursuant to Rule 424(b) of the Regulations or filed as part of the
Registration Statement at the time of effectiveness if no Rule 424(b) or Rule
434 filing is required, is herein called the "PROSPECTUS". The term "PRELIMINARY
PROSPECTUS" as used herein means a preliminary prospectus as described in Rule
430 of the Regulations. Any reference herein to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of Form S-2
which were filed under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT") on or before the effective date of the Registration Statement,
the date of such preliminary prospectus or the date of the Prospectus, as the
case may be, and any reference herein to the terms "amend", "amendment" or
"supplement" with respect to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to refer to and include (i) the
filing of any document under the Exchange Act after the effective date of the
Registration Statement, the date of such preliminary prospectus or the date of
the Prospectus, as the case may be, which is incorporated therein by reference
and (ii) any such document so filed.
(b) At the time of the effectiveness of the Registration Statement
or any 462(b) Registration Statement or the effectiveness of any post-effective
amendment to the Registration Statement, when the Prospectus is first filed with
the Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any
supplement to or amendment of the Prospectus is filed with the Commission, when
any document filed under the Exchange Act is filed and at the Closing Date and
the Additional Closing Date, if any (as hereinafter respectively defined), the
Registration Statement, any 462(b) Registration Statement and the Prospectus and
any amendments thereof and supplements thereto complied or will comply in all
material respects with the applicable provisions of the Act and the Regulations
and the Exchange Act and the respective rules and regulations thereunder and
does not or will not contain an untrue statement of a material fact and does not
or will not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein (i) in the case of the
Registration Statement, not misleading and (ii) in the case of the Prospectus,
in light of the circumstances under which they were made, not misleading. When
any related preliminary prospectus was first filed with the Commission (whether
filed as part of the registration statement for the registration of the Shares
or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when
any amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and the Exchange Act and the respective rules and regulations
thereunder and did not contain an untrue statement of a material fact and did
not omit to state any material fact required to be stated therein or necessary
in order to make the statements therein in light of the circumstances under
which they were made not misleading. No representation and warranty is made in
this subsection (b), however, with respect to any information contained in or
omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter
2
<PAGE> 3
through you as herein stated expressly for use in connection with the
preparation thereof. If Rule 434 is used, the Company will comply with the
requirements of Rule 434.
(c) Ernst & Young LLP, who have certified the financial statements
and supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiaries taken as
a whole, whether or not arising from transactions in the ordinary course of
business (a "MATERIAL ADVERSE EFFECT"), and since the date of the latest balance
sheet presented in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has incurred or undertaken any liabilities
or obligations, direct or contingent, which are material to the Company and its
subsidiaries taken as a whole, except for liabilities or obligations which are
reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated herein have
been duly and validly authorized by the Company and this Agreement has been duly
and validly executed and delivered by the Company and constitutes the valid and
binding agreement of the Company, enforceable against it in accordance with its
terms.
(f) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust,
agreement, instrument, franchise, license or permit to which the Company or any
of its subsidiaries is a party or by which any of such corporations or their
respective properties or assets may be bound or (ii) violate or conflict with
any provision of the articles of incorporation or by-laws of the Company or any
of its subsidiaries or any judgment, decree, order, statute, Rule or regulation
of any court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties, assets or businesses. No consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties, assets or businesses is required for the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, including the issuance, sale and delivery of
the Shares to be issued, sold and delivered by the Company hereunder, except (A)
the registration under the Act of the Shares, (B) such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits as may be required under state securities or Blue Sky
3
<PAGE> 4
laws in connection with the purchase and distribution of the Shares by the
Underwriters and (C) those which have been duly obtained at or prior to the
Closing Date.
(g) All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and were not issued
and are not now in violation of or subject to any preemptive rights. The Shares,
when issued, delivered and sold in accordance with this Agreement, will be duly
and validly issued and outstanding, fully paid and nonassessable, were issued in
compliance with all applicable laws (including, without limitation, federal and
state securities laws) and will not have been issued in violation of or be
subject to any preemptive rights. The Company had, at December 31, 1999, an
authorized and outstanding capitalization as set forth in the Registration
Statement and the Prospectus. The Common Stock, the Firm Shares and the
Additional Shares conform to the descriptions thereof contained in the
Registration Statement and the Prospectus. Except as disclosed in or
specifically contemplated by the Prospectus, the Company has no outstanding
options to purchase, or any preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or any contracts
or commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The description of the
Company's stock option and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents in all material respects the information required
to be shown with respect to such plans, arrangements, options and rights. No
further approval or authority of the stockholders or the Board of Directors of
the Company will be required for the issuance and sale of the Shares to be sold
by the Company to the Underwriters as contemplated herein.
(h) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and its subsidiaries is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which will not in the
aggregate have a Material Adverse Effect. Each of the Company and its
subsidiaries has all requisite power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public, regulatory or governmental agencies and bodies,
to own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the Prospectus, and
no such consent, approval, authorization, order, registration, qualification,
license or permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus; and, to the
knowledge of the Company, no proceeding has been instituted in any jurisdiction
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification. Other than its ownership of all of the
outstanding capital stock of each of WFS Financial Auto Loans, Inc., a
California corporation, WFS Financial Auto Loans 2, Inc., a California
corporation, WFS Investments, Inc., a California
4
<PAGE> 5
corporation, and WFS Funding, Inc., a California corporation, the Company does
not own or control, either directly or indirectly, any corporation, partnership,
limited liability company, association or other entity.
(i) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company or any of its subsidiaries is a
party or to which any property of the Company or any of its subsidiaries is
subject or which is pending or, to the knowledge of the Company, contemplated
against the Company or any of its subsidiaries which might result in any
Material Adverse Effect or which is required to be disclosed in the Registration
Statement and the Prospectus. There are no statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration Statement that are
not described or filed as required.
(j) Except as set forth in the Prospectus, the operations of the
Company, Western Financial Bank and Westcorp are in compliance with all
statutes, codes, rules, regulations, ordinances, requirements, orders, writs,
directives, judgments and decrees (collectively "Laws") of any court,
commission, tribunal or any federal, state or local governmental agency or
authority applicable to such entities, including without limitation the Laws
relating to the federal and state supervision of banks and related entities and
the Company has not received any notice of non-compliance with any such Laws.
None of Westcorp, Western Financial Bank or the Company is subject to any
supervisory agreements or letters of understanding (or similar agreements) with
federal or state banking authorities with respect to the operations of Westcorp,
Western Financial Bank or the Company.
(k) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(l) The consolidated financial statements, including the notes
thereto, and supporting schedules included in the Registration Statement and the
Prospectus present fairly the financial position of the Company and its
subsidiaries as of the dates indicated and the results of its operations for the
periods specified; except as otherwise stated in the Registration Statement,
said consolidated financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis; and the
supporting schedules included or incorporated by reference in the Registration
Statement, if any, present fairly the information required to be stated therein.
Except as included in the Registration Statement, no other financial statements
or schedules are required by Form S-2 to be included or incorporated by
reference in the Registration Statement.
(m) The description of past securitization transactions effected by
the Company, as contained in the Registration Statement and the Prospectus, is
true and complete in all material respects and to the Company's best knowledge,
no event or series of events has occurred which would be likely to result in any
of the securities issued in connection with any of such transactions being
downgraded or placed on a
5
<PAGE> 6
watch list with negative implications by any rating agency or similar
organization, or which would be likely to impair the Company's or its
subsidiaries ability to consummate future securitization transactions upon
economic terms consistent with past securitization transactions or otherwise
cause the Company and its subsidiaries to suffer any material adverse effect
with respect to any past or future securitization transaction (other than any
such event or series of events described in the Prospectus).
(n) Except as described in the Prospectus, no holder of securities
of the Company has any rights to the registration of securities of the Company
because of the filing of the Registration Statement or otherwise in connection
with the sale of the Shares contemplated hereby. All holders of any such rights
to the registration of securities of the Company have duly and validly waived
all such rights in writing prior to the date hereof.
(o) None of the Company or any of its subsidiaries is, and upon
consummation of the transactions contemplated hereby none of such entities will
be, subject to registration as an "investment company" under the Investment
Company Act of 1940.
(p) The conditions for use of Form S-2, as set forth in the General
Instructions thereto, have been satisfied.
(q) The documents incorporated or deemed to be incorporated by
reference in the Prospectus, at the time they were or hereafter are filed with
the Commission, complied and will comply in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
under the Exchange Act, and, when read together with the other information in
the Prospectus, at the time the Registration Statement and any amendments
thereto become effective and at the Closing Date, will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(r) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(s) None of the Company or its subsidiaries is in violation or
default of any provision of its articles of incorporation or bylaws, or other
organizational documents, and is not in breach of or in default with respect to
any provision of any agreement, judgment, decree, order, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument to which
it is a party or by which it or any of its
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<PAGE> 7
properties are bound except as would not reasonably be expected to result in a
Material Adverse Effect; and there does not exist any state of facts which
constitutes an event of default on the part of the Company or its subsidiaries
as defined in such documents or which, with notice or lapse of time or both,
would constitute such an event of default except as would not reasonably be
expected to be result in a Material Adverse Effect.
(t) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement which have not been described or filed as required. The
contracts so described in the Prospectus are in full force and effect on the
date hereof and neither the Company nor its subsidiaries nor, to the Company's
knowledge, any other party is in breach of or default under any of such
contracts except as would not be reasonably expected to result in a Material
Adverse Effect.
(u) Each of the Company and its subsidiaries has good and marketable
title to all the properties and assets reflected as owned by them in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements, or (ii) those which
are not material in amount and do not adversely affect in any material respect
the use made and proposed to be made of such property by the Company and its
subsidiaries. Each of the Company and its subsidiaries holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company. Except as
disclosed in the Prospectus, the Company and its subsidiaries own or lease all
such properties as are necessary to its operations as now conducted or as
currently proposed to be conducted.
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, except as disclosed therein: (i)
neither the Company nor its subsidiaries has incurred any material liabilities
or obligations, indirect, direct or contingent, or entered into any material
agreement or other transaction which is not in the ordinary course of business;
(ii) the Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind on its
capital stock; (iii) neither the Company nor its subsidiaries has sustained any
material loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance; (iv)
neither the Company nor its subsidiaries has paid or declared any dividends or
other distributions with respect to its capital stock and neither the Company
nor its subsidiaries is in default in the payment of principal or interest on
any outstanding debt obligations; and (v) there has not been any change in the
capital stock (other than upon the sale of the Common Stock hereunder and upon
the exercise of options or warrants described in the Registration Statement).
(w) Except as disclosed in the Prospectus, the Company has or can
acquire on commercially reasonable terms sufficient trademarks, trade names,
patent rights, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), licenses,
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<PAGE> 8
approvals and governmental authorizations to conduct its business as now
conducted and as presently proposed to be conducted; and the Company has no
knowledge of any material infringement by it of trademark, trade name rights,
patent rights, copyrights, licenses, trade secret or other similar rights of
others and, to the Company's knowledge, there is no claim being made against the
Company regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which would reasonably be expected to have a
Material Adverse Effect, nor is the Company aware of any reasonable grounds for
the same.
(x) Each of the Company and its subsidiaries has filed all federal,
state, and local income tax returns or extensions therefor which have been
required to be filed and has paid or accrued all taxes required to be paid and
any other assessment, fine or penalty levied against it, to the extent that any
of the foregoing is due and payable, except, in all cases, for any such tax,
assessment, fine or penalty that is being contested in good faith (and except in
any case in which the failure to so file or pay would not have a Material
Adverse Effect). The Company has no knowledge of any tax deficiency which has
been or might be asserted or threatened against the Company which would
reasonably be expected to result in a Material Adverse Effect.
(y) The Company has not distributed and will not distribute prior to
the Closing Date any offering material in connection with the offering and sale
of the Shares other than the Prospectus, the Registration Statement and the
other materials permitted by the Act.
(z) The Company and its subsidiaries maintain insurance of the types
and in the amounts generally deemed adequate for their respective businesses and
all other risks customarily insured against, all of which insurance is in full
force and effect. None of the Company nor its subsidiaries has been refused any
insurance coverage sought or applied for; and the Company has no reason to
believe that it and its subsidiaries will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not result in a Material Adverse Effect.
(aa) Neither the Company, any of its subsidiaries nor, to the
Company's knowledge, any of its employees or agents has at any time during the
last five years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law or (ii)
made any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States of any
jurisdiction thereof.
(bb) No labor disturbance by the employees of the Company or any of
its subsidiaries exists or, to the knowledge of the Company, is imminent; and
the Company is not aware of any existing or threatened labor disturbance by the
employees of any of its principal suppliers, vendors or original equipment
manufacturers, that would reasonably be expected to result in a Material Adverse
Effect. No collective bargaining
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<PAGE> 9
agreement exists with any of the Company's or its subsidiaries' employees and,
to the Company's knowledge, no such agreement is imminent.
(cc) The Common Stock has been approved for quotation on Nasdaq/NMS,
subject to official notice of issuance.
(dd) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("ENVIRONMENTAL LAWS")
which are applicable to its business, except as would not reasonably be expected
to have a Material Adverse Effect, (ii) the Company has received no notice from
any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws, (iv) no
property which is owned, leased or occupied by the Company has been designated
as a Superfund site pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
seq.) ("CERCLA"), or otherwise designated as a contaminated site under
applicable state or local law except in each case as would not reasonably be
expected to have a Material Adverse Effect, (v) the Company has not disposed of
any "hazardous substances" as defined by CERCLA on any property which is or was
owned, leased or occupied by the Company, except as would not reasonably be
expected to have a Material Adverse Effect; (vi) the Company has not disposed or
arranged for disposal of any "hazardous substances" as defined by CERCLA on any
third party property except as would not reasonably be expected to have a
Material Adverse Effect; and (viii) the Company has not agreed to assume,
undertake or provide indemnification for any liability of any other person under
any Environmental Law, including any obligation for cleanup or remedial action,
except as would not reasonably be expected to have a Material Adverse Effect.
(ee) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the executive
officers or directors of the Company or any of the members of the families of
any of them of the sort required to be disclosed in the Registration Statement
and Prospectus, except as disclosed therein. No relationship, direct or
indirect, exists between or among the Company or any of its subsidiaries on the
one hand, and the directors, officers, stockholders of the Company or its
subsidiaries, customers or suppliers of the Company or its subsidiaries, on the
other hand, which is required to be described in the Prospectus which is not so
described.
(ff) Each of the Company and its subsidiaries is in compliance in
all material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company or any of its subsidiaries would have any
liability; none the Company or its
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<PAGE> 10
subsidiaries has incurred and does not expect to incur liability under (i) Title
IV of ERISA with respect to termination of, or withdrawal from, any "pension
plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended (the "CODE"), including the regulations and published interpretations
thereunder; each "pension plan" for which the Company or any of its subsidiaries
would have any liability that is intended to be qualified under Section 401(a)
of the Code is so qualified in all material respects and nothing has occurred,
whether by action or by failure to act, which would cause the loss of such
qualification; and each "pension plan" for which the Company, any of its
subsidiaries or any of their affiliates has any liability or with respect to
which the Company, any of its subsidiaries or any of their affiliates is a
disqualified person (as defined in the Code) or party-in-interest (as defined in
ERISA) has not been a party to any "prohibited transaction" (as defined in ERISA
and the Code), except for such noncompliance, reportable events, liabilities, or
failures to qualify that would not have a Material Adverse Effect.
(gg) Except as otherwise disclosed in the Prospectus, the
information technology of the Company and its subsidiaries, is, and at the
Closing Date, will be Year 2000 Compliant. "YEAR 2000 COMPLIANT" means, with
respect to the information technology (as defined below) of the Company and its
subsidiaries, the information technology is designed to be used prior to,
during, and after the calendar Year 2000 A.D., and the information technology
used during each such time period will accurately receive, provide and process
date/time data (including, but not limited to, calculating, comparing and
sequencing) from, into and between the twentieth and twenty-first centuries,
including the years 1999 and 2000, and leap year calculations and will not
malfunction, cease to function, or provide invalid or incorrect results as a
result of date/time data, to the extent that other information technology, used
in combination with the information technology being acquired, properly
exchanges date/time data with it. For purposes of this agreement, "INFORMATION
TECHNOLOGY" refers to all computer software, computer firmware, computer
hardware (whether general or specific purpose), and other similar or related
items of automated, computerized, and/or software system(s) that are used or
relied on by the Company and its subsidiaries in the conduct of their respective
businesses.
(hh) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
none of the Company, or any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Effect, except as described in the Prospectus.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to the Underwriters and the
Underwriters, severally and not jointly, agree to purchase from the Company, at
a purchase price per share of
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<PAGE> 11
$_______, the number of Firm Shares set forth opposite the respective names of
the Underwriters in SCHEDULE I hereto plus any additional number of Shares which
such Underwriter may become obligated to purchase pursuant to the provisions of
Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the office of Gibson, Dunn & Crutcher LLP, 4
Park Plaza, Irvine, California 92614-8557, or at such other place as shall be
agreed upon by Bear, Stearns & Co. Inc. ("Bear Stearns") and the Company, at
10:00 A.M. on the third or fourth business day (as permitted under Rule 15c6-1
under the Exchange Act) (unless postponed in accordance with the provisions of
Section 9 hereof) following the date of the effectiveness of the Registration
Statement (or, if the Company has elected to rely upon Rule 430A of the
Regulations, the third or fourth business day (as permitted under Rule 15c6-1
under the Exchange Act) after the determination of the initial public offering
price of the Shares), or such other time not later than ten business days after
such date as shall be agreed upon by Bear Stearns and the Company (such time and
date of payment and delivery being herein called the "CLOSING DATE"). Payment
shall be made to the Company by wire transfer in same day funds, against
delivery to you for the respective accounts of the Underwriters of certificates
for the Firm Shares to be purchased by them. Certificates for the Firm Shares
shall be registered in such name or names and in such authorized denominations
as you may request in writing at least two full business days prior to the
Closing Date. The Company will permit you to examine and package such
certificates for delivery at least one full business day prior to the Closing
Date. If you so elect, delivery of the Firm Shares purchased from the Company
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by you.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to 300,000 Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised from
time to time and at any time, in whole or in part, on or before the thirtieth
day following the date of the Prospectus, by written notice by you to the
Company. Such notice shall set forth the aggregate number of Additional Shares
as to which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "ADDITIONAL CLOSING DATE");
provided, however, that, unless otherwise agreed to by Bear Stearns and the
Company, the Additional Closing Date shall not be earlier than the Closing Date
or earlier than the second full business day after the date on which the option
shall have been exercised nor later than the eighth full business day after the
date on which the option shall have been exercised (unless such time and date
are postponed in accordance with the provisions of Section 9 hereof).
Certificates for the Additional Shares shall be registered in such name or names
and in such authorized denominations as you may request in writing at least two
full business days prior to the Additional Closing Date. The Company will permit
you to examine and package such certificates for delivery at least one full
business day prior to the Additional Closing Date. If you so elect, delivery of
any Additional Shares purchased
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<PAGE> 12
from the Company may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by you.
The number of Additional Shares to be sold to each Underwriter shall be
the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to 2,000,000, subject, however, to such adjustments
to eliminate any fractional shares as you in your sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer in
same day funds at the offices of Gibson, Dunn & Crutcher LLP, 4 Park Plaza,
Irvine, California 92614-8557, or such other location as may be mutually
acceptable, upon delivery of the certificates for the Additional Shares to you
for the respective accounts of the Underwriters.
3. Offering.
(a) Upon your authorization of the release of the Firm Shares, the
Underwriters propose to offer the Shares for sale to the public upon the terms
set forth in the Prospectus.
(b) At the request of the Company, the Underwriters will reserve up
to an aggregate of _______ Shares for sale to Western Financial Bank at the
initial offering price for such Shares. The number of Shares available to the
general public shall be reduced to the extent that Western Financial Bank elects
to purchase the Shares. Any reserved Shares not purchased by Western Financial
Bank at the Closing shall be offered by the Underwriters to the general public
in accordance with the terms of purchase, sale and delivery set out in the
Prospectus.
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) If the Registration Statement has not yet been declared
effective the Company will use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is otherwise
required under Rule 424(b) or Rule 434, the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule
434 within the prescribed time period and will provide evidence satisfactory to
you of such timely filing. If the Company elects to rely on Rule 434, the
Company will prepare and file a term sheet that complies with the requirements
of Rule 434.
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto become effective, (ii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the
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<PAGE> 13
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of the initiation, or the threatening, of
any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement
or any amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement or
file any document under the Exchange Act if such document would be deemed to be
incorporated by reference into the Prospectus to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, or to file under the Exchange Act so as to
comply therewith any document incorporated by reference in the Registration
Statement or the Prospectus or in any amendment thereof or supplement thereto,
the Company will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory to you)
which will correct such statement or omission or which will effect such
compliance and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you three signed copies of
the Registration Statement, including exhibits and all documents incorporated by
reference therein and all amendments thereto, and the Company will promptly
deliver to each of the Underwriters such number of copies of any preliminary
prospectus, the Prospectus, the Registration Statement, all amendments of and
supplements to such documents, if any, and all documents incorporated by
reference in the Registration Statement and Prospectus or any amendment thereof
or supplement thereto, without exhibits, as you may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with
you, at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification
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<PAGE> 14
in effect for so long as required for the distribution thereof; except that in
no event shall the Company be obligated in connection therewith to qualify as a
foreign corporation or to execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 120 days from the date of the Prospectus,
the Company will not, without your prior written consent, issue, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock), and the Company will obtain
the written undertaking, the form of which shall be subject to the approval of
Bear Stearns, of each of its officers and directors and such of its shareholders
as have been heretofore designated by you and listed on SCHEDULE II attached
hereto not to engage in any similar transactions on their own behalf. The
foregoing sentence shall not apply to (A) the Shares to be sold hereunder, (B)
the issuance by the Company of shares of Common Stock upon the exercise of
options or warrants or the conversion of a security outstanding on the date
hereof which is described in the Prospectus or (C) the grant of options or share
purchase rights by the Company pursuant to the option and employee stock
purchase plans described in the Registration Statement and Prospectus, provided
such options are not exercisable for 120 days after the date of the Prospectus,
or if such options are exercisable within such period, such options are subject
to lockup provisions substantially the same as those set forth in this Section
4(f).
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish or make available to you copies
of (i) all reports to its shareholders; and (ii) all reports, financial
statements and proxy or information statements filed by the Company with the
Commission or any national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to be
listed for inclusion in the National Association of Securities Dealers Automated
Quotation National Market System ("Nasdaq/NMS").
(j) The Company, during the period when the Prospectus is required
to be delivered under the Act or the Exchange Act, will file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15 of the
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<PAGE> 15
Exchange Act within the time periods required by the Exchange Act and the rules
and regulations thereunder.
5. Payment of Expenses. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement, the Agreement Among Underwriters and the Master Selling Agreement)
and all other documents related to the public offering of the Shares (including
those supplied to the Underwriters in quantities as hereinabove stated), (ii)
the issuance, transfer and delivery of the Shares to the Underwriters, including
any transfer or other taxes payable thereon, (iii) the qualification of the
Shares under state or foreign securities or Blue Sky laws, including the costs
of printing and mailing a preliminary and final "Blue Sky Survey" and the fees
of counsel for the Underwriters and such counsel's disbursements in relation
thereto, (iv) listing the Shares for quotation on Nasdaq/NMS, (v) filing fees of
the Commission and the National Association of Securities Dealers, Inc.; (vi)
the cost of printing certificates representing the Shares and (vii) the cost and
charges of any transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Gibson, Dunn & Crutcher LLP
("UNDERWRITERS' COUNSEL") pursuant to this Section 6 of any misstatement or
omission, to the performance by the Company of its obligations hereunder, and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., New York City time, on the date of this Agreement, or at such
later time and date as shall have been consented to in writing by you; if the
Company shall have elected to rely upon Rule 430A or Rule 434 of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof; and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of
Mitchell, Silberberg & Knupp LLP, counsel for the Company, dated the Closing
Date
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addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of the
Company and its subsidiaries is duly qualified and in good standing as
a foreign corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the nature or
conduct of its business makes such qualification necessary, except for
those failures to be so qualified or in good standing which will not in
the aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole. Each of the Company and its subsidiaries
has all requisite corporate authority to own, lease and license its
respective properties and conduct its business as now being conducted
and as described in the Registration Statement and the Prospectus. All
of the issued and outstanding capital stock of each subsidiary of the
Company (A) has been duly and validly issued and is fully paid and
nonassessable, (B) were not issued in violation of preemptive rights
and (C) is owned directly or indirectly by the Company, free and clear
of any lien, encumbrance, claim, security interest, restriction on
transfer, shareholders' agreement, voting trust or other defect of
title whatsoever. Except as disclosed in or specifically contemplated
by the Prospectus, to the knowledge of such counsel, the Company has no
outstanding options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock
option, employee stock purchase and other stock plans or arrangements,
and the options or other rights granted and exercised thereunder, set
forth in the Prospectus fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights and
is accurate in all material respects.
(ii) The authorized capital stock of the Company (including the
Common Stock) conforms to the description thereof as set forth in the
Registration Statement and the Prospectus. All of the outstanding
shares of Common Stock are duly and validly authorized and issued, are
fully paid and nonassessable and were not issued in violation of or
subject to any preemptive rights. The Shares to be delivered on the
Closing Date have been duly and validly authorized and, when delivered
by the Company in accordance with this Agreement, will be duly and
validly issued, fully paid and nonassessable and will not have been
issued in violation of or subject to any preemptive rights. The Common
Stock, the Firm Shares and the Additional Shares conform to the
descriptions thereof contained in the Registration Statement and the
Prospectus. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and
the sale of the Shares to be sold by the Company as contemplated
herein.
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(iii) The Common Stock currently outstanding is listed, and the
Shares to be sold under this Agreement to the Underwriters are duly
authorized for quotation, on Nasdaq/NMS.
(iv) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(v) There is no litigation or governmental or other action,
suit, proceeding or investigation before any court or before or by any
public, regulatory or governmental agency or body pending or to the
best of such counsel's knowledge, threatened against, or involving the
properties or business of, the Company or any of its subsidiaries,
which is of a character required to be disclosed in the Registration
Statement and the Prospectus which has not been properly disclosed
therein.
(vi) The execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated hereby by the
Company do not and will not (A) conflict with or result in a breach of
any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a
default) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
of its subsidiaries pursuant to, any agreement, instrument, franchise,
license or permit known to such counsel to which the Company or any of
its subsidiaries is a party or by which any of such corporations or
their respective properties or assets may be bound or (B) violate or
conflict with any provision of the certificate of incorporation or
by-laws of the Company or any of its subsidiaries, or, to the best
knowledge of such counsel, any judgment, decree, order, statute, Rule
or regulation of any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets. No
consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective
properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such
counsel need express no opinion), (2) such as have been made or
obtained under the Act and (3) the clearance of the offering by the
NASD.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included or
incorporated by reference therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations. The documents filed under
the Exchange Act and incorporated by reference in the Registration
Statement and the Prospectus or any amendment thereof or
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<PAGE> 18
supplement thereto (other than the financial statements and schedules
and other financial data included or incorporated by reference therein,
as to which no opinion need be rendered) when they became effective or
were filed with the Commission, as the case may be, complied as to form
in all material respects with the Act or the Exchange Act, as
applicable, and the rules and regulations of the Commission thereunder;
and they have no reason to believe that any of such documents, when
such documents became effective or were so filed, as they case may be,
contained, in the case of a registration statement which became
effective under the Act, an untrue statement of a material fact, or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or, in the
case of other documents which were filed under the Exchange Act with
the Commission, an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made
when such documents were so filed, not misleading.
(viii) The Registration Statement is effective under the Act,
and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any post-effective
amendment thereof has been issued and no proceedings therefor have been
initiated or threatened by the Commission and all filings required by
Rule 424(b) of the Regulations have been made.
(ix) To the knowledge of such counsel, the Company is not in
violation or default of any provision of its articles of incorporation
or bylaws, or other organizational documents, and is not in breach of
or default with respect to any provision of any agreement, judgment,
decree, order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound except as would not be
material to the Company's and its subsidiaries business, results of
operations or financial condition taken as a whole; and to the best of
such counsel's knowledge, there does not exist any state of facts which
constitutes an event of default on the part of the Company as defined
in such documents or which, with notice or lapse of time or both, would
constitute such an event of default except as would not be material to
the Company and its subsidiaries' business, results of operations or
financial condition, taken as a whole.
(x) To the knowledge of such counsel, there are no contracts or
other documents required to be described in the Registration Statement
or to be filed as exhibits to the Registration Statement or by the
Regulations which have not been accurately described in all material
respects or filed as required. Except as otherwise disclosed in the
Prospectus, the contracts so described therein are in full force and
effect on the date hereof; and, to the best of such counsel's
knowledge, neither the Company nor any other party is in breach of or
default under any of such contracts except as would not be material to
the Company and its subsidiaries' business, results of operations or
financial condition, taken as a whole.
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<PAGE> 19
(xi) Such counsel has no knowledge of any material infringement
by it of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others, and to such
counsel's knowledge, there is no claim pending or threatened against
the Company regarding trademark, trade name, patent, copyright,
license, trade secret or other infringement which could have a material
adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and its subsidiaries,
taken as a whole, nor is such counsel aware of any reasonable grounds
for any such claim.
(xii) To such counsel's knowledge, there are no outstanding
loans, advances (except normal advances for business expenses in the
ordinary course of business) or guarantees of indebtedness by the
Company to or for the benefit of any of the officers or directors of
the Company or any of the members of the families of any of them, which
is required to be disclosed in the Registration Statement or the
Prospectus, except as disclosed therein.
(xiii) The statements (i) under the captions "Risk Factors,"
"Business," "Management," "Supervision and Regulation," "Description of
Capital Stock" and "Plan of Distribution" and (ii) in Item 15 of Part
II of the Registration Statement, insofar as such statements constitute
a summary of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such
legal matters, documents and proceedings.
(xiv) The description of past securitization transactions
effected by the Company (other than the financial data as to which such
counsel need express no opinion), as contained in the Registration
Statement and the Prospectus, is true and complete in all material
respects.
(xv) The form of certificate used to evidence the Shares is in
due and proper form and complies in all material respects with all
applicable statutory requirements under the laws of the State of
Delaware.
(xvi) the Company has duly authorized and reserved a number of
shares of Common Stock for issuance upon the exercise of options under
the Company's incentive option plan which is not less than the number
of options issuable under such plan, as of the Closing Date.
(xvii) No stockholder of the Company or any other person has any
preemptive right of first refusal or other similar right to subscribe
for or purchase securities of the Company which would apply to the
Shares or continue in effect following the Closing (i) arising by
operation of the certificate of incorporation or bylaws of the Company
or the general corporation law of the State of Delaware or (ii) arising
from any contract or agreement filed as an exhibit to the Registration
Statement (including without limitation any transaction document
entered into in connection with any of the Company's Preferred Stock
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<PAGE> 20
financings) or otherwise known to such counsel, except for such rights
as have been validly and duly waived prior to the date hereof.
(xviii) In addition, such opinion shall also contain a statement
that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent
public accountants for the Company and the Underwriters at which the
contents and the Prospectus and related matters were discussed and, no
facts have come to the attention of such counsel which would lead such
counsel to believe that either the Registration Statement at the time
it became effective (including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule
430A(b) or Rule 434, if applicable), or any amendment thereof made
prior to the Closing Date as of the date of such amendment, contained
an untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date
as of the date of such amendment or supplement) and as of the Closing
Date contained or contains an untrue statement of a material fact or
omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being
understood that such counsel need express no belief or opinion with
respect to the financial statements and schedules and other financial
data included or incorporated by reference therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
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<PAGE> 21
(d) At the Closing Date you shall have received a certificate of the
Company executed on its behalf by the Chief Executive Officer and Chief
Financial Officer of the Company, dated the Closing Date to the effect that (i)
the condition set forth in subsection (a) of this Section 6 has been satisfied,
(ii) as of the date hereof and as of the Closing Date the representations and
warranties of the Company set forth in Section 1 hereof are accurate, (iii) as
of the Closing Date the obligations of the Company to be performed hereunder on
or prior thereto have been duly performed and (iv) subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, the Company and its subsidiaries have not sustained any material
loss or interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding,
and there has not been any prospective material adverse change, or any
development involving a material adverse change, in the business prospects,
properties, operations, condition (financial or otherwise), or results of
operations of the Company as presently conducted or as proposed to be conducted
and its subsidiaries taken as a whole, except in each case as described in or
contemplated by the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Ernst & Young LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements and schedules of the Company
included or incorporated by reference in the Registration Statement and the
Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Exchange Act and the applicable published rules and regulations of the
Commission thereunder; (iii) on the basis of procedures consisting of a reading
of the latest available unaudited interim consolidated financial statements of
the Company, and its subsidiaries, a reading of the minutes of meetings and
consents of the shareholders and boards of directors of the Company and its
subsidiaries and the committees of such boards subsequent to December 31, 1999,
inquiries of officers and other employees of the Company and its subsidiaries
who have responsibility for financial and accounting matters of the Company and
its subsidiaries with respect to transactions and events subsequent to December
31, 1999 and other specified procedures and inquiries to a date not more than
five days prior to the date of such letter, nothing has come to their attention
that would cause them to believe that: (A) with respect to the period subsequent
to December 31, 1999 there were, as of the date of the most recent available
monthly consolidated financial statements of the Company and its subsidiaries,
if any, and as of a specified date not more than five days prior to the date of
such letter, any changes in the capital stock or long-term indebtedness of the
Company or any decrease in the net current assets or stockholders' equity of the
Company, in each case as compared with the amounts shown in the most recent
balance sheet presented in the Registration Statement and the Prospectus, except
for changes or decreases which the Registration Statement and the Prospectus
disclose
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have occurred or may occur or which are set forth in such letter or (B) that
during the period from December 31, 1999 to the date of the most recent
available monthly consolidated financial statements of the Company and its
subsidiaries, if any, and to a specified date not more than five days prior to
the date of such letter, there was any decrease, as compared with the
corresponding period in the prior fiscal year, in total revenues, or total or
per share net income, except for decreases which the Registration Statement and
the Prospectus disclose have occurred or may occur or which are set forth in
such letter; and (iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, and other financial
information pertaining to the Company and its subsidiaries set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company and its subsidiaries or from schedules
furnished by the Company, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries, and other appropriate procedures specified by
you set forth in such letter, and found them to be in agreement.
(f) Prior to the Closing Date the Company shall have furnished to
you such further information, certificates and documents as you may reasonably
request.
(g) You shall have received from each person who is a director or
officer of the Company or such shareholder as have been heretofore designated by
you and listed on SCHEDULE II hereto an agreement to the effect that such person
will not, directly or indirectly, without your prior written consent, offer,
sell, offer or agree to sell, grant any option for the sale of, pledge, make any
short sale or maintain any short position, establish or maintain a "put
equivalent position" (within the meaning of Rule 16a-1(h) under the Securities
Exchange Act of 1934, as amended), enter into any swap, derivative transaction
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock (whether any such
transaction is to be settled by delivery of Common Stock, other securities, cash
or other consideration) to purchase or otherwise dispose of any shares of Common
Stock (or any securities convertible into, exercisable for shares of Common
Stock) or interest therein of the Company or any of its subsidiaries for a
period of 120 days after the date of the Prospectus, except as may otherwise be
explicitly permitted by the terms of such agreement.
(h) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq/NMS.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
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<PAGE> 23
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), jointly or several, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but
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<PAGE> 24
only to the extent, that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through you expressly for use therein; provided, however, that
in no case shall any Underwriter be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder. This indemnity will be in addition to any liability which
any Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page and in the third paragraph under the caption "Underwriting" in the
Prospectus constitute the only information furnished in writing by or on behalf
of any Underwriter expressly for use in the registration statement relating to
the Shares as originally filed or in any amendment thereof, any related
preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the
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<PAGE> 25
aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company any contribution received by the Company from persons,
other than the Underwriters, who may also be liable for contribution, including
persons who control the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, officers of the Company who signed the
Registration Statement and directors of the Company) as incurred to which the
Company and one or more of the Underwriters may be subject, in such proportions
as is appropriate to reflect the relative benefits received by the Company and
the Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and of the Underwriters shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8 and the preceding sentence, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each
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<PAGE> 26
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within five (5) calendar days
after such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment
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or supplement to the Registration Statement or the Prospectus which, in the
opinion of Underwriters' Counsel, may thereby be made necessary or advisable.
The term "Underwriter" as used in this Agreement shall include any party
substituted under this Section 9 with like effect as if it had originally been a
party to this Agreement with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations and
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective, upon the later of when
(i) you and the Company shall have received notification of the effectiveness of
the Registration Statement or (ii) the execution of this Agreement. If either
the initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York City time, on the fifth full business
day after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full
force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York or American Stock Exchanges or NASDAQ/NMS shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required, by
the New York or American Stock Exchanges or by order of the Commission or any
other governmental authority having jurisdiction; or (C) if a banking moratorium
has been declared by a state or federal authority or if any new restriction
materially adversely affecting the distribution of the Firm Shares or the
Additional Shares, as the case may be, shall have become effective; (D) if any
downgrading in the rating of the Company's (or any affiliate's) debt securities
by any "nationally recognized statistical rating-organization" (as defined for
purposes of
27
<PAGE> 28
Rule 436(g) under the Act, or (E) (i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(ii) if there shall have been such change in political, financial or economic
conditions if the effect of any such event in (i) or (ii) as in your judgment
makes it impracticable or inadvisable to proceed with the offering, sale and
delivery of the Firm Shares or the Additional Shares, as the case may be, on the
terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be
by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all
out-of-pocket expenses (including the fees and expenses of their counsel),
incurred by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Syndicate Department, with a copy to Gibson,
Dunn & Crutcher LLP, Attention: Peter F. Ziegler, Esq., 333 South Grand Avenue,
Los Angeles, California 90071-3197; if sent to the Company, shall be mailed,
delivered, or telegraphed and confirmed in writing to the Company, WFS Financial
Inc, 23 Pasteur Road, Irvine, CA 92618-3816, Attention: Lee A. Whatcott, with a
copy to Mitchell, Silberberg & Knupp LLP, Attention: Andrew E. Katz, Esq., 11377
West Olympic Boulevard, Los Angeles, California 90064-1683.
13. Parties. This Agreement shall insure solely to the benefit of, and
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
28
<PAGE> 29
15. Counterparts. This Agreement may be executed in counterparts, each
of which shall be an original and all of which together shall constitute one and
the same instrument.
16. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
29
<PAGE> 30
If the foregoing correctly sets forth the understanding
between you and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
WFS Financial Inc
By
-------------------------------
Name:
Title:
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
By
------------------------------------
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
S-1
<PAGE> 31
SCHEDULE I
NUMBER OF FIRM
NAME OF UNDERWRITER SHARES TO BE PURCHASED
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
----------------------
Total...................................... 2,000,000
======================
Schedule I
Page 1
<PAGE> 32
SCHEDULE II
Ernest S. Rady
Joy Schaefer
Howard C. Reese
James R. Dowlan
Bernard E. Fipp
Duane A. Nelles
Stanley E. Foster
Thomas Wolfe
Lee A. Whatcott
Richard W. Stephan
Dawn M. Martin
Donna Lesch
J. Keith Palmer
Mark Olson
Guy Du Bose
Dennis Morris
Western Financial Bank
Schedule II
Page 1
<PAGE> 1
EXHIBIT 10.16.1
WESTCORP
EMPLOYEE STOCK OWNERSHIP PLAN
AND SALARY SAVINGS PLAN
PLAN AMENDMENT
The Westcorp Employee Stock Ownership Plan and Salary Savings Plan (restated
1997) is hereby amended effective December, 1998 as follows:
SECTION 6.7. FORFEITURE FROM EMPLOYER MATCHING CONTRIBUTION ACCOUNT.
Any amount of a Participant's Employer Matching Contribution Account that is
forfeited shall be used in the following manner:
a. First, to restore the Employer Matching Contribution Accounts
or ESOP Contribution Accounts of former Participants under
Section 8.7 below;
b. Second, to reduce the Employer Matching Contributions to the
Plan; and
c. Third, to be allocated to the accounts of Participants in a
non-discriminatory manner, to reduce Employer contributions
not provided in Sections 6.7 or 6.8, or to be allocated to the
ESOP Contribution Accounts pursuant to Section 6.3.
SECTION 6.8 FORFEITURES FROM ESOP CONTRIBUTION ACCOUNT.
Any amount of a Participant's ESOP Contribution Account that is forfeited shall
be used in the following manner:
a. First, to restore the Employer Matching Contribution Accounts
or ESOP Contribution Accounts of former Participants under
Section 8.7 below; and/or
b. Second, to be allocated to the account of Participants in a
non-discriminatory manner, to Reduce Employer contributions
not provided in Sections 6.7 or 6.8, or to be allocated to the
ESOP Contribution Accounts pursuant to Section 6.3.
IN WITNESS WHEREOF, the Employer has signed this Plan Amendment this 20th day of
January, 1999.
WESTCORP
By: /s/ AMY FITZGERALD
-------------------------------
Title: Chairman, ESOP Committee
<PAGE> 1
EXHIBIT 10.16.2
WESTCORP EMPLOYEE STOCK OWNERSHIP PLAN
AND SALARY SAVINGS PLAN
2ND PLAN AMENDMENT
This Westcorp Employee Stock Ownership Plan and Salary Savings Plan is
hereby amended effective January 1, 1999 unless otherwise provided:
Section 3.1
Section 3.1 shall be amended effective July 1, 1999 to read as follows:
(a) Every Employee of the Company shall become eligible to participate in
the Plan as of the Entry Date following the later of
(i) the attainment of age twenty-one (21) and
(ii) the completion of 6 consecutive months of employment during which
the Employee completes at least five hundred (500) Hours of Service.
Notwithstanding the requirement of five hundred Hours of Service, any
Employee who completes a Year of Service shall be eligible to
participate in the Plan.
Section 6.2
Section 6.2(b) shall be amended to read as follows:
The amount of Employer matching contribution to be allocated to an
eligible Participant's Employer Matching Contribution Account for a Plan
Year shall be
(i) 100% of up to the first $500 of Participant Salary Savings
contributions for a Plan Year and
(ii) 50% of Participant Salary Savings Contributions for a Plan Year
in excess of the first $500 and up to a maximum 6% of Compensation.
Section 6.3
Section 6.3 shall be amended by addition of subsection (d) to read as
follows:
(d) Notwithstanding the provisions of Section 6.3(b) above, should the
Company elect to make ESOP Contributions other
<PAGE> 2
than at the end of the Plan Year, such ESOP Contribution(s) shall be allocated
to the ESOP Contribution Account of Participants (as defined in Section 2.47)
and who are Employees (as defined in Section 2.22) as of the date of such
Contribution.
Section 8.4
Section 8.4 is hereby amended by changing the reference to
"thirty-five hundred dollars ($3,500)" to "five thousand dollars ($5,000) ..."
Section 9.4
Section 9.4 is hereby amended by changing the reference to
"thirty-five hundred dollars ($3,500)" to "five thousand dollars ($5,000) ..."
Section 18.4
Section 18.4 shall be added as follows effective December 12, 1994:
18.4 USERRA
Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with Code Section
414(u). Loan repayments will be suspended under this Plan as permitted
under Code Section 414(u)(4).
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year above.
Dated: __________ WESTCORP
By:__________________________
-2-
<PAGE> 1
Exhibit 10.16.3
WESTCORP EMPLOYEE STOCK OWNERSHIP PLAN
AND SALARY SAVINGS PLAN
3RD PLAN AMENDMENT
The Westcorp Employer Stock Ownership Plan and Salary Savings Plan is
hereby amended effective June 1, 1999 unless otherwise provided:
Section 5.7
Section 5.7(e) is hereby deleted and amended to read as follows effective
January 1, 1999:
In the event that the Plan fails to satisfy the above tests of this
Section 5.7, the non-vested Employer Matching Contributions in excess of those
test limits ("Excess Aggregate Contributions") (and the income allocable
thereto), shall be forfeited. The vested Excess Aggregate Contributions (and
the income allocable thereto), shall be distributed to the appropriate Highly
Compensated Employees after the close of the Plan Year in which such vested
Excess Aggregate Contributions arose and within 12 months of the close of that
Plan Year. The Excess Aggregate Contributions shall be determined by reducing
the contributions made on behalf of Highly Compensated Employees, beginning
with the individual with the highest amount of contributions.
Section 16.7
Section 16.7(g) is hereby amended effective January 1, 1996 to correct
inadvertant errata in the Plan caused by assumption of certain participant
loans as part of an acquisition:
(g) Donation: All loan agreements shall provide for repayment
within five (5) years from the date of loan. Notwithstanding the
foregoing, if the loan is for the purchase of the Participant's
primary residence, the loan agreement may provide for repayment
within a period not to exceed thirty (30) years from the date of
loan.
Section 16.8
A new Section 16.8 is hereby added to read as follow:
16.8 ESOP Loans
The Administrative Committee may direct the Trustee to borrow funds for the
benefit of the Plan and Trust; provided, any loan must be primarily for the
benefit of the participants and their beneficiaries and, notwithstanding
<PAGE> 2
any other provision of this Plan or the Trust, all Exempt Loans (as that term
is defined in Section 7.4 of the Plan), to the Trust must meet the requirements
of and be in compliance with Section 7.4 of the Trust Agreement.
IN WITNESS WHEREOF, the Company has executed this Amendment as of this day
of ______________, 1999.
WESTCORP
By:
-----------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of WFS Financial Inc
WFS Financial Auto Loans, Inc.
WFS Financial Auto Loans 2, Inc.
WFS Investments, Inc.
WFS Funding, Inc.
WFS Receivables Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 18, 2000, in the Registration Statement
(Form S-2 No. 333-91277) and related Prospectus of WFS Financial Inc for the
registration of 5,520,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Los Angeles, California
January 18, 2000
