<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1998
REGISTRATION NOS. 333-59837 AND 333-59837-01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
<TABLE>
<CAPTION>
I.R.S. EMPLOYER
REGISTRANT STATE OF ORGANIZATION IDENTIFICATION NO.
- ---------------------------------------------------- ------------------------ ----------------------------------------------------
<S> <C> <C>
HOUSEHOLD AUTOMOBILE DELAWARE NOT APPLICABLE
REVOLVING TRUST I
(Registrant Issuer of Notes)
HOUSEHOLD AUTO NEVADA 36-4220459
RECEIVABLES CORPORATION
(Registrant Sponsor of the Issuer)
</TABLE>
--------------------------
1111 Town Center Drive
Las Vegas, Nevada 89134
(Address of principal executive offices of Household Auto Receivables
Corporation)
------------------------------
PATRICK D. SCHWARTZ, ESQ.
Associate General Counsel and Assistant Secretary
HOUSEHOLD INTERNATIONAL, INC.
2700 Sanders Road
Prospect Heights, Illinois 60070
(847) 564-6301
(Name, Address, telephone number, including area code, of agent for service)
------------------------------
CHRISTOPHER J. DI ANGELO, ESQ.
DEWEY BALLANTINE LLP
1301 Avenue of the Americas
New York, New York 10019
(212) 259-8000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(1)(2)
<S> <C> <C> <C> <C>
Household Automobile Revolving Trust I, Series
1998-1, Class A-1 Notes......................... $139,370,000 100% $139,370,000 $41,114.15
Household Automobile Revolving Trust I, Series
1998-1, Class A-2 Notes......................... $54,000,000 100% $54,000,000 $15,930.00
Household Automobile Revolving Trust I, Series
1998-1, Class A-3 Notes......................... $143,000,000 100% $143,000,000 $42,185.00
Household Automobile Revolving Trust I, Series
1998-1, Class A-4 Notes......................... $80,832,000 100% $80,832,000 $23,845.45
Household Automobile Revolving Trust I, Series
1998-1, Class A-5 Notes......................... $100,000,000 100% $100,000,000 $29,500.00
Household Automobile Revolving Trust I, Series
1998-1, Class B-1 Notes......................... $99,303,000 100% $99,303,000 $29,294.40
Total............................................. $616,505,000 100% $616,505,000 $181,869.00
</TABLE>
(1) Pursuant to Rule 457(a) the filing fee has been calculated based upon a bona
fide estimate of the maximum offering price for the securities.
(2) On November 13, September 24 and July 23, 1998, wires were sent to the
Commission in the amounts of $180,099, $295 and $1,475, respectively.
------------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1998
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
Issuer
SERIES 1998-1
<TABLE>
<S> <C>
$139,370,000 % Class A-1 Notes $80,832,000 Floating Rate Class A-4 Notes
$54,000,000 % Class A-2 Notes $100,000,000 % Class A-5 Notes
$143,000,000 Floating Rate Class A-3 Notes $99,303,000 % Class B-1 Notes
</TABLE>
HOUSEHOLD AUTO RECEIVABLES CORPORATION
Seller
HOUSEHOLD FINANCE CORPORATION
Servicer
The Household Automobile Revolving Trust I (the "Issuer") was formed pursuant to
a Trust Agreement, dated as of March 1, 1998, as supplemented by a Series
1998-1 Supplement (the "Trust Agreement"), between Household Auto Receivables
Corporation (the "Seller") and Wilmington Trust Company, as owner trustee
(the "Owner Trustee") and will issue eight classes of Series 1998-1 Notes
(collectively, the "Notes") in the respective aggregate principal amounts
set forth herein. The Notes will be issued pursuant to an Indenture,
dated as of November 1, 1998, as supplemented by a Series 1998-1
Supplement (the "Indenture"), between the Issuer, Household Finance
Corporation, as master servicer (the "Servicer") and The Chase
Manhattan Bank, as indenture trustee (the "Indenture Trustee"). The
Issuer will also issue $55,858,763 aggregate principal amount of
Series 1998-1 Certificates (the "Certificates"). The Notes and the
Certificates are collectively referred to herein as the "Series
1998-1 Securities". Only the Class A and Class B-1 Notes (the
"Offered Notes") are offered by this Prospectus. The Class B-2
and Class C Notes and the Certificates will be sold privately to
qualified institutional buyers or accredited investors (which
may include an affiliate of the Seller), and unless otherwise
registered with the Commission (as defined herein), any resale
of such securities will be made to
qualified institutional buyers or to accredited investors.
The Notes will be secured by a segregated pool of assets held by the Issuer (the
"Trust Assets"). The Trust Assets include non-prime retail installment sales
contracts secured by new and used automobiles, light trucks and vans
(the "Receivables"), including the collections thereon. For a
complete list of the Trust Assets, see "The Trust Assets--General"
on page 22. "Non-prime" means that due to past delinquencies or
defaults on credit obligations, a borrower is considered to
be a higher risk and may not be able to obtain credit
from traditional lenders such as banks, thrifts,
credit unions and captive finance companies. None
of the Receivables is more than 30 days
delinquent as of the Cut-Off Date. The
Receivables were purchased by Household
Automotive Finance Corporation
("HAFC") or by its predecessors or
affiliates, from motor vehicle
dealers.
Capitalized terms used herein are defined terms having specific meanings. An
"Index of Defined Terms" is set forth on
page 71 hereto and indicates the page on which such term is defined.
(COVER CONTINUED ON NEXT PAGE)
For a discussion of certain risks associated with an investment in the Notes,
see "Risk Factors" on page 15 herein.
THE NOTES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF HOUSEHOLD AUTO RECEIVABLES CORPORATION,
HOUSEHOLD FINANCE CORPORATION, HOUSEHOLD AUTOMOTIVE FINANCE CORPORATION,
THE OWNER TRUSTEE, THE INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF,
EXCEPT TO THE EXTENT DESCRIBED HEREIN. NONE OF THE NOTES OR THE
RECEIVABLES ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC(1) DISCOUNT SELLER(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Class A-1 Note.......................... % % %
Per Class A-2 Note.......................... % % %
Per Class A-3 Note.......................... % % %
Per Class A-4 Note.......................... % % %
Per Class A-5 Note.......................... % % %
Per Class B-1 Note.......................... % % %
Total....................................... $ $ $
</TABLE>
- ------------------------------
(1) Plus accrued interest, if any, from , 1998.
(2) Before deducting expenses, estimated to be $730,000.
The Offered Notes are offered by the Underwriters when, as and if issued by
the Issuer, delivered to and accepted by, the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that delivery of such
Notes will be made in book-entry form only through the facilities of The
Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear System
on or about , 1998.
CREDIT SUISSE FIRST BOSTON
<PAGE>
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
The date of this Prospectus is , 1998.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Prior to the issuance of the Notes, the Receivables will have been sold by
HAFC to the Seller and the Seller will have sold the Receivables to the Issuer.
The aggregate principal balance of the pool of Receivables as of the Cut-Off
Date was $827,524,762.71.
Interest will accrue on each of the Class A-1, Class A-2, Class A-5 and
Class B-1 Notes at the respective fixed per annum rates specified above.
Interest will accrue on the Class A-3 and Class A-4 Notes at floating rates
equal to LIBOR (as defined herein) plus % per annum and % per annum,
respectively. The Issuer will have the benefit of an interest rate cap agreement
(the "Interest Rate Cap"), pursuant to which funds will be deposited in the
Collection Account by Westdeutsche Landesbank Girozentrale, New York Branch (the
"Interest Rate Cap Provider") in the event LIBOR exceeds 5.75%. Payments
received pursuant to the Interest Rate Cap will be available to make payments on
the Notes. See "Description of the Notes--Payments of Interest", "--Payments of
Principal", "--The Interest Rate Cap" and "--Payment Priorities." Payments of
interest and principal on the Notes will be made on the seventeenth day of each
month, or if any such day is not a Business Day, on the next succeeding Business
Day, commencing December 17, 1998 (each, a "Payment Date").
There is currently no secondary market for the Notes. There can be no
assurance that a secondary market for the Notes will develop or, if it does
develop, that it will continue. The Notes will not be listed on any securities
exchange. See "Risk Factors--An investment in the Notes may be an illiquid
investment which may result in such Note Owner holding such investment to
maturity".
Credit Suisse First Boston, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions, and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Offered Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit Credit Suisse First Boston to reclaim a selling concession
from a syndicate member when the Offered Notes originally sold by such syndicate
member are purchased in a syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the Offered Notes to be higher than it
would otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
Until , 1999, all dealers effecting transactions in the Offered
Notes, whether or not participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
The address and telephone number of the Seller, the sponsor of the Issuer,
is 1111 Town Center Drive, Las Vegas, Nevada 89134, (702) 243-1241. The address
and telephone number of the Owner Trustee of the Issuer is Wilmington Trust
Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890, (302) 651-1000.
AVAILABLE INFORMATION
The Seller, has filed a Registration Statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission (the "Commission")
with respect to the Notes offered pursuant to this Prospectus. This Prospectus,
which forms a part of the Registration Statement, does not contain all of the
information included in the Registration Statement and the exhibits thereto. For
further information, reference is made to the Registration Statement and
amendments thereof and to exhibits thereto, which are available for inspection
without charge at the office of the Commission at 450 Fifth Street, N.W.,
2
<PAGE>
Washington, D.C. 20549, and at the regional offices of the Commission at Seven
World Trade Center, New York, New York 10048 and at 500 W. Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of the Registration Statement, the
amendments thereof and the exhibits thereto, may be obtained from the Public
Reference Section of the Commission's Washington Offices, at prescribed rates.
The Commission also maintains an internet Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers who file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with the Commission on behalf of the Issuer pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, on or subsequent to the
date of this Prospectus and prior to the termination of the offering of the
Notes made hereby shall be deemed to be incorporated by reference herein and to
be a part of this Prospectus from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for all purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or replaces such statement. Any such statement so
modified or superseded shall not be deemed, except as modified or superseded, to
constitute a part of this Prospectus. The Seller will provide without charge to
each person to whom this Prospectus is delivered, on the request of such person,
a copy of any or all of the documents incorporated herein by reference (other
than exhibits to such documents unless the exhibits are specifically
incorporated by reference in such documents). Requests should be directed in
writing to Household Auto Receivables Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Secretary.
FINANCIAL INFORMATION
The Seller has determined that its financial statements are not material to
the offering made hereby.
The Issuer was formed to issue the Notes. Prior to the issuance of the Notes
the Issuer sold a series of notes backed by a portion of the Receivables in a
private placement. The outstanding notes of the Issuer will be retired and the
lien of the indenture for such series of notes will be released simultaneous
with the closing of the sale of the Notes. The proceeds from the sale of the
Notes will be used to obtain the release of such lien and to make the initial
deposit of funds into the Reserve Account. Commencing on , 1998 (the
"Closing Date"), the Issuer will engage in no activities other than those
described herein. Financial statements of the Issuer are contained in Appendix B
hereto.
REPORTS TO THE NOTEHOLDERS
Unless and until Replacement Notes (as defined herein) are issued, the
Issuer will provide to CEDE & Co., as nominee of The Depository Trust Company
("DTC") and registered holder of the Notes and, upon request, to Participants
(as defined herein), monthly and annual reports concerning the Noteholders
pursuant to the Indenture. See "Description of the Notes--Reports to
Noteholders" and "Description of the Trust Documents--Evidence as to Compliance"
herein. Such reports may be made available to the beneficial owners of the Notes
(the "Note Owners") upon request to their Participants. Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. The Issuer does not intend to provide any financial
information to any holder of the Notes which has been examined and reported
upon, with an opinion expressed, by an independent public accountant. The
Servicer will file with the Commission such periodic reports with respect to the
Issuer as are required by the Exchange Act, and the rules, regulations or orders
of the Commission thereunder.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------------------------------------------------------ ---------
<S> <C>
Available Information................................. 2
Incorporation of Certain Documents by Reference....... 3
Financial Information................................. 3
Reports to the Noteholders............................ 3
Prospectus Summary.................................... 5
Risk Factors.......................................... 15
Non-prime contracts are likely to incur higher loss
rates than contracts with borrowers with better
credit or collateral.............................. 15
Non-prime borrowers are consumers with relatively
weak credit who may be unable to (or unwilling to)
repay their loans................................. 15
Non-prime loans may also have less valuable
collateral........................................ 15
An investment in the Notes may be an illiquid
investment which may result in a Note Owner
holding such investment to maturity............... 15
Book-entry registration may reduce the liquidity of
the Notes......................................... 15
Book-entry registration may result in delays in
receipt of payments............................... 15
Subordination provisions applicable to a class could
have adverse consequences for the subordinate
classes........................................... 16
Geographic concentration of Receivables may result
in higher losses if particular regions experience
downturns......................................... 16
Prepayments of the Receivables may adversely affect
the yield to maturity of the Notes................ 16
Ratings are not recommendations to purchase, hold or
sell the Notes.................................... 16
Security interests in both the Receivables and the
underlying vehicles may not be valid under certain
circumstances..................................... 17
Although the transaction has been structured so as
to minimize the risks associated with the
bankruptcy of HAFC or the Seller, such safeguards
may not eliminate all such risks.................. 17
Financial conditions of the Seller or Servicer may
affect an investor's return, even if the intended
bankruptcy characterization is sustained.......... 18
Insurance on vehicles will generally be required at
the time of origination, although no assurance can
be given that such insurance will be maintained... 18
Delinquencies may vary over time, and any increase
in delinquencies may result in unanticipated
losses............................................ 18
State and federal credit protection laws may limit
collection of principal and interest on the
Receivables....................................... 18
Social, legal, economic and other factors may affect
investment........................................ 19
HAFC's underwriting process and subjective credit
standards......................................... 20
Restrictions on recoveries may result in the Issuer
receiving substantially less than the face amount
of the related contract........................... 20
HAFC, the Servicer and Seller are not corporately
liable on the Notes, and the only source of
repayment will be the Trust Assets................ 20
The Seller............................................ 20
The Servicer.......................................... 21
The Subservicer....................................... 21
Use of Proceeds....................................... 21
The Issuer............................................ 22
General............................................. 22
The Owner Trustee................................... 22
The Indenture Trustee............................... 22
The Trust Assets...................................... 22
General............................................. 22
Eligibility Criteria................................ 23
Terms of the Receivables............................ 23
Composition of the Receivables...................... 24
The Reserve Account................................. 27
The Preferred Stock................................. 27
Yield and Prepayment Considerations................... 28
The Automobile Financing Business of HAFC............. 32
<CAPTION>
CAPTION PAGE
- ------------------------------------------------------ ---------
<S> <C>
General............................................. 32
Application Processing and Purchasing Criteria...... 32
Funding Package Completion, Verification and
Funding........................................... 33
Post-Funding Quality Reviews........................ 33
Servicing of Contracts.............................. 33
Billing and Collection Process...................... 34
Repossession........................................ 34
Insurance........................................... 35
Delinquency and Loan Loss Information............... 35
Description of the Notes.............................. 38
General............................................. 38
Payments of Interest................................ 38
Payments of Principal............................... 39
The Interest Rate Cap............................... 40
Payment Priorities.................................. 41
Maturity Dates; Optional Redemption................. 47
Reports to Noteholders.............................. 47
Events of Default; Rights Upon Event of Default;
Distributions following Acceleration.............. 48
Certain Covenants................................... 49
Annual Compliance Statement......................... 50
Satisfaction and Discharge of Indenture............. 50
Modification of Indenture........................... 50
Certain Matters Regarding the Indenture Trustee and
the Issuer........................................ 51
Limitation on Liability of the Indenture Trustee.... 51
Resignation of Indenture Trustee.................... 51
Registration of the Notes........................... 52
Description of the Trust Documents.................... 55
Sale and Assignment of Receivables.................. 55
Representation and Warranties; Repurchase
Obligation........................................ 55
Payments on Receivables; Deposits to Collection
Account........................................... 57
Collection and Other Servicing Procedures........... 58
Servicing Compensation and Payment of Expenses...... 58
Evidence as to Compliance........................... 59
Certain Matters Regarding the Servicer and the
Seller............................................ 59
Servicer Termination Event.......................... 60
Rights Upon Servicer Termination Event.............. 60
Amendment........................................... 60
Description of the Receivables Purchase Agreement..... 61
Sale of Receivables................................. 61
Representations and Warranties...................... 61
Amendments.......................................... 62
Certain Legal Aspects of the Receivables.............. 62
Security Interests in Vehicles...................... 62
Repossession........................................ 63
Notice of Sale; Redemption Rights................... 63
Deficiency Judgments and Excess Proceeds............ 64
Consumer Protection Laws............................ 64
Soldiers' and Sailors' Civil Relief Act of 1940..... 65
Other Limitations................................... 66
Material Federal Income Tax Consequences.............. 66
Tax Characterization of the Issuer.................. 66
Tax Consequences to Holders of the Notes............ 66
State and Local Tax Considerations.................... 69
ERISA Considerations.................................. 69
Underwriting.......................................... 70
Legal Matters......................................... 70
Index of Defined Terms................................ 71
Global Clearance, Settlement and Tax Documentation
Procedures.......................................... A-1
Initial Settlement.................................. A-1
Secondary Market Trading............................ A-1
Certain U.S. Federal Income Tax Documentation
Requirements...................................... A-3
Financial Statements of Household Automobile
Revolving Trust I................................. B-1
Report of Independent Public Accountants............ B-2
Statement of Operations and Retained Earnings....... B-3
Balance Sheet....................................... B-4
Statement of Cash Flows............................. B-5
Notes to Financial Statements....................... B-6
</TABLE>
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY OF CERTAIN PERTINENT INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS. REFERENCE IS MADE TO THE INDEX OF DEFINED TERMS FOR THE LOCATION
HEREIN OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS.
<TABLE>
<S> <C>
ISSUER.......................... The Household Automobile Revolving Trust I (the "Issuer"),
a Delaware business trust formed by the Seller and the
Owner Trustee pursuant to the Trust Agreement. Wilmington
Trust Company acts as owner trustee for the Issuer.
SECURITIES ISSUED BY THE
ISSUER........................ The Class A-1 Notes, Class A-2 Notes, Class A-3 Notes,
Class A-4 Notes, Class A-5 Notes (collectively the "Class
A Notes"), Class B-1 Notes, Class B-2 Notes (collectively,
the "Class B Notes"), Class C Notes and the Certificates.
Only the Class A and Class B-1 Notes (collectively, the
"Offered Notes") are offered hereby. The Notes will be
issued pursuant to the Indenture and will be secured by
the Trust Assets (as defined below). Pursuant to the terms
of the Indenture, payments of principal on the Class C
Notes will be subordinate to payments of principal on the
Class A and B Notes to the extent provided herein.
Payments of principal on the Class B-2 Notes will be
subordinate to the Class B-1 Notes and payments of
principal on the Class B-1 Notes will be subordinate to
the Class A Notes to the extent provided herein. Payments
of principal on the Class A-4 Notes will be subordinate to
the Class A-5, A-3, Class A-2 and Class A-1 Notes to the
extent provided herein. Payments of principal on the Class
A-3 Notes will be subordinate to the Class A-5, A-2 and
Class A-1 Notes to the extent provided herein. Payments of
principal on the A-2 Notes will be subordinate to the
Class A-5 and Class A-1 Notes to the extent provided
herein. In addition, the Certificates will be issued by
the Issuer pursuant to the Trust Agreement, and will be
subordinate to the Notes pursuant to the terms of the
Indenture.
The Notes represent obligations solely of the Issuer and
do not represent interests in or obligations of the
Seller, the Servicer, HAFC, the Owner Trustee, the
Indenture Trustee or any affiliate thereof, except to the
extent described herein. None of the Notes, the
Receivables or other Trust Assets are insured or
guaranteed by any governmental agency or instrumentality.
Only the Offered Notes are offered hereby.
THE CLASS A-1 NOTES............. $139,370,000 % Class A-1 Notes (the "Class A-1
Notes").
THE CLASS A-2 NOTES............. $54,000,000 % Class A-2 Notes (the "Class A-2
Notes").
THE CLASS A-3 NOTES............. $143,000,000 Floating Rate Class A-3 Notes (the "Class A-3
Notes").
THE CLASS A-4 NOTES............. $80,832,000 Floating Rate Class A-4 Notes (the "Class A-4
Notes").
THE CLASS A-5 NOTES............. $100,000,000 % Class A-5 Notes (the "Class A-5
Notes").
THE CLASS B-1 NOTES............. $99,303,000 % Class B-1 Notes (the "Class B-1
Notes").
THE CLASS B-2 NOTES............. $94,338,000 % Class B-2 Notes (the "Class B-2
Notes").
THE CLASS C NOTES............... $60,823,000 % Class C Notes (the "Class C Notes").
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
THE CERTIFICATES................ Series 1998-1 Certificates (the "Certificates"). The
Certificates will be issued pursuant to the Trust
Agreement and will evidence beneficial ownership interests
in the Issuer.
TRUST ASSETS.................... The "Trust Assets" consist of, as more fully described
herein, (i) the Receivables, (ii) all amounts paid or
payable under the Receivables after the Cut-Off Date,
(iii) security interests in the financed vehicles securing
the Receivables, (iv) the Note Account, the Collection
Account and the Reserve Account, and the proceeds thereof,
(v) the right to receive payments under insurance policies
benefitting the holder of the Receivable, which policies
provide coverage for loss, physical damage, credit life,
credit disability, theft, mechanical breakdown or similar
coverages with respect to a financed vehicle or the
borrower, (vi) as provided in the Sale and Servicing
Agreement, rights to enforce the Dealer Agreements, the
Receivables Purchase Agreement and all supplements
thereto, (vii) all documents related to the Receivables,
(viii) a share of preferred stock of the Seller (the
"Preferred Stock"), (ix) the Interest Rate Cap and all
payments made pursuant thereto and (x) all proceeds of the
foregoing. See "The Trust Assets--General" herein.
SELLER.......................... Household Auto Receivables Corporation is a corporation
organized under the laws of the State of Nevada and is a
wholly-owned special purpose subsidiary of HFC. On or
prior to the Closing Date, the Seller will have purchased
the Receivables from HAFC pursuant to the Master
Receivables Purchase Agreement dated as of March 1, 1998,
between the Seller and HAFC (the "Receivables Purchase
Agreement"). Pursuant to the Master Sale and Servicing
Agreement, dated as of March 1, 1998 (the "Sale and
Servicing Agreement"), among the Issuer, the Seller, the
Servicer and the Indenture Trustee, on or prior to the
Closing Date, the Seller will have sold the Receivables
and all rights with respect thereto to the Issuer. See
"Description of Trust Documents--Sale and Assignment of
Receivables" herein.
SERVICER........................ Household Finance Corporation ("HFC", in its individual
capacity, or the "Servicer" in its capacity as the master
servicer under the Sale and Servicing Agreement), a
subsidiary of Household International, Inc., is the master
servicer of the Receivables pursuant to the Sale and
Servicing Agreement.
SUBSERVICER..................... HAFC, a wholly-owned subsidiary of HFC, will service the
Receivables in accordance with standards and guidelines
established in consultation with the Servicer from time to
time (in such capacity, the "Subservicer"). HAFC is
licensed to purchase and service retail installment sales
contracts secured by vehicles in the states in which the
Receivables were originated. The Receivables were
purchased by HAFC, its predecessors, or affiliates in its
ordinary course of business as described herein. See "The
Automobile Financing Business of HAFC".
THE RECEIVABLES................. The Receivables consist of non-prime retail installment
sales contracts secured by new and used automobiles, light
trucks and vans which were purchased under HAFC's finance
programs.
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HAFC's finance programs target automobile purchasers with
below average credit profiles who are generally unable to
obtain credit from traditional lending sources. The
Receivables had, as of the Cut-Off Date, a weighted
average annual percentage rate ("APR") of approximately
19.77%, a weighted average original term of 61.85 months
and a weighted average remaining term of 56.37 months. The
Receivables had an aggregate Principal Balance of
$827,524,762.71 (the "Original Pool Balance") as of
October 31, 1998 (the "Cut-Off Date"). See "The Trust
Assets."
Certain Receivables included in the pool as of the Cut-Off
Date may prepay in full, or may be determined not to meet
the eligibility requirements for the final pool, and may
not be included in the final pool. If Receivables are
excluded from the final pool consistent with the
foregoing, the statistical distribution of characteristics
as of the Closing Date for the final Receivables pool may
vary somewhat from the statistical distribution of such
characteristics as of the Cut-Off Date as presented in
this Prospectus, although such variance will not be
material. In no event will the pool of Receivables as of
the Closing Date vary by in excess of 5% of the principal
balance of the Receivables as of the Cut-Off Date.
The Seller has represented and warranted that no
Receivable is more than 30 days delinquent as of the
Cut-Off Date, and that no more than 0.99% (by aggregate
Principal Balance) of the Receivables have been extended.
See "The Automobile Financing Business of HAFC--Servicing
of Contracts" for a description of the delinquency and
extension policies applicable to the Receivables.
With respect to any date, the "Pool Balance" will be equal
to the aggregate of the Principal Balances of all
Receivables as of the end of the preceding Business Day.
The "Principal Balance" of a Receivable on any day is
equal to its principal balance on the Cut-Off Date, minus
(i) all collections credited against the Principal Balance
prior to such day, (ii) any Cram Down Loss in respect of
such Receivable, and plus or minus (iii) any correcting
adjustments. Notwithstanding the above, the Principal
Balance of Liquidated Receivables and Purchased
Receivables shall be zero. With respect to any Payment
Date, a "Liquidated Receivable" is a Receivable as to
which (i) 90 days have elapsed since the financed vehicle
was repossessed, (ii) the Servicer has determined in good
faith that all amounts it expects to recover have been
received, (iii) ten percent or more of a scheduled payment
shall have become 150 or more days delinquent, or in the
case of a borrower who is subject to bankruptcy
proceedings, 210 or more days delinquent or (iv) the
financed vehicle has been sold and the proceeds received.
Any Receivable that is repurchased by HAFC, the Seller or
the Servicer as a result of a breach of a representation
or warranty with respect to such Receivable (a "Purchased
Receivable") on or before the Business Day immediately
preceding the related Determination Date shall not be a
Liquidated Receivable.
COLLECTIONS..................... As to any Payment Date other than the first Payment Date,
the "Collection Period" is the calendar month preceding
the month of
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such Payment Date and in the case of the first Payment
Date, the period from the Cut-Off Date through November
30, 1998.
On the Business Day prior to each Payment Date, the
Servicer will deposit funds collected with respect to the
Receivables during the related Collection Period into an
account (the "Collection Account") established and
maintained by the Issuer under the Sale and Servicing
Agreement. A "Business Day" is a day other than a
Saturday, Sunday or other day on which commercial banks
located in the States of Illinois, California or New York
are authorized or obligated to be closed.
INTEREST........................ Interest on each class of Notes will be payable monthly on
the seventeenth day of each month or, if such day is not a
Business Day (as defined herein), on the next succeeding
Business Day (each, a "Payment Date"), commencing on
December 17, 1998, in an amount equal to interest accrued
during the related Interest Period (as defined below) at
the applicable Note Rate on the outstanding principal
balance for the related class of Notes. The per annum rate
of interest accruing on each class of Notes is referred to
as the "Note Rate" for the respective classes of Notes.
The Note Rates for the Class A-1, Class A-2, Class A-5,
Class B-1, Class B-2 and Class C Notes will be %,
%, %, %, %, and %, respectively. The
Note Rates for the Class A-3 and Class A-4 Notes will be
floating rates equal to the sum of (a) the London
interbank offered rate for one-month United States dollar
deposits ("LIBOR"), determined as specified herein, as of
the second LIBOR Business Day (as defined herein) prior to
the first day of the Interest Period and (b) % per
annum and % per annum, respectively.
Interest on the Notes in respect of any Payment Date will
accrue from (and including) the preceding Payment Date (or
in the case of the first Payment Date, from the Closing
Date) through (and including) the day preceding such
Payment Date (each such period, an "Interest Period").
Interest on the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes will be calculated on the basis of a 360-day
year and the actual number of days elapsed in an
applicable Interest Period. Interest on the Class A-5,
Class B and Class C Notes will be calculated on the basis
of a 360-day year consisting of twelve 30-day months. See
"Description of the Notes--Payments of Interest". Interest
for any Payment Date due but not paid on such Payment Date
shall bear interest, to the extent permitted by applicable
law, at the related Note Rate until paid. Failure to pay
interest in full on any Payment Date after expiration of
the applicable grace period is an Event of Default under
the Indenture.
On each Payment Date, Available Funds remaining after
making the distributions referred to in items (i) and (ii)
under "Description of the Notes--Payment Priorities" will
be allocated pro rata to the Class A Interest
Distributable Amount of each of the Class A-1, Class A-2,
Class A-3, Class A-4 and Class A-5 Notes. Interest on the
Class B-1 Notes will not be paid on any Payment Date until
all accrued interest due and payable on the Class A Notes
on such
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Payment Date has been paid in full. Interest on the Class
B-2 Notes will not be paid on any Payment Date until all
accrued interest due and payable on the Class A and Class
B-1 Notes on such Payment Date has been paid in full.
Interest on the Class C Notes will not be paid on any
Payment Date until all accrued interest due and payable on
the Class A Notes and the Class B Notes on such Payment
Date has been paid in full. See "Description of the
Notes--Payments of Interest."
If the Notes are accelerated following the occurrence of
an Event of Default, interest payments will be allocated
to the Notes in the priority described in "Description of
the Notes--Events of Default; Rights Upon Event of
Default; Distributions following Acceleration."
PRINCIPAL....................... On each Payment Date and, in the case of the Class A-1
Notes on the Class A-1 Scheduled Maturity Date, principal
payments will be due and payable on the Notes, in the
aggregate, in an amount equal to the Principal
Distributable Amount for such Payment Date to the extent
of funds available therefor; provided, that (i) no
principal payments will be made with respect to the Class
B-1 Notes on any Payment Date until all amounts payable
with respect to the Class A Notes on such Payment Date
have been paid in full, (ii) no principal payments will be
made with respect to the Class B-2 Notes on any Payment
Date until all amounts payable with respect to the Class A
and Class B-1 Notes on such Payment Date have been paid in
full, and (iii) no principal payments will be made with
respect to the Class C Notes on any Payment Date until all
amounts payable with respect to the Class A Notes and the
Class B Notes on such Payment Date have been paid in full.
On each Payment Date, the Class A Principal Distributable
Amount will be allocated to the payment of the Class A-5
Principal Distributable Amount and payment of principal to
the other class or classes of Class A Notes then entitled
to distributions in respect of principal. On each Payment
Date on or prior to the Payment Date on which the Class
A-1 Notes have been paid in full, the Class A Principal
Distributable Amount will be allocated to payment of the
Class A-5 Principal Distributable Amount and the remaining
portion thereof will be applied in reduction of the
principal balance of the Class A-1 Notes. On each Payment
Date after the Payment Date on which the Class A-1 Notes
have been paid in full, the Class A Principal
Distributable Amount will be allocated to payment of the
Class A-5 Principal Distributable Amount and payment of
the principal of the Class A-2 Notes until the Class A-2
Notes are paid in full. On each Payment Date after the
Payment Date on which the Class A-2 Notes have been paid
in full, the Class A Principal Distributable Amount will
be allocated to payment of the Class A-5 Principal
Distributable Amount and payment of the principal of the
Class A-3 Notes until the Class A-3 Notes are paid in
full. On each Payment Date after the Payment Date on which
the Class A-3 Notes have been paid in full, the Class A
Principal Distributable Amount will be allocated to
payment of the Class A-5 Principal Distributable Amount
and
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payment of principal of the Class A-4 Notes until the
Class A-4 Notes are paid in full. On a Payment Date on
which the Class A-1, Class A-2, Class A-3 or Class A-4
Notes are paid in full, the Class A Principal
Distributable Amount may also be allocable to payments of
the class of Class A Notes next entitled to distributions
in respect of principal.
The principal of the Class B-1, Class B-2 and Class C
Notes will be payable on each Payment Date on and after
the Payment Date on which the outstanding principal amount
of the Class A-1 Notes has been reduced to zero, until the
Class B-1, Class B-2 and Class C Notes have been paid in
full, in an amount equal to the Class B-1 Principal
Distributable Amount, the Class B-2 Principal
Distributable Amount and the Class C Principal
Distributable Amount, respectively.
If the Notes are accelerated following the occurrence of
an Event of Default, principal payments will be allocated
to the Notes in the priority described in "Description of
the Notes--Events of Default; Rights Upon Event of
Default; Distributions following Acceleration."
PAYMENT PRIORITY................ On each Payment Date, the Servicer will transfer the
Available Funds to an account maintained by the Indenture
Trustee in accordance with the Indenture (the "Note
Account") and the payments will be made in the following
order of priority:
first, to the Servicer, any Supplemental Servicing Fees
for the related Collection Period and if HFC is no longer
acting as the master servicer, the Servicing Fee then due;
second, to the Interest Rate Cap Provider, the fee for
maintaining the Interest Rate Cap and to the Indenture
Trustee, and the Owner Trustee, their fees then due (in
each case, to the extent such fees have not been
previously paid by the Servicer);
third, to the holders of record of the Class A Notes (the
"Class A Noteholders"), the interest then due with respect
to each class of Notes;
fourth, to the holders of record of the Class B-1 Notes
(the "Class B-1 Noteholders"), the interest then due with
respect to the Class B-1 Notes;
fifth, to the holders of record of the Class B-2 Notes
(the "Class B-2 Noteholders"), the interest then due with
respect to the Class B-2 Notes;
sixth, to the holders of record of the Class C Notes (the
"Class C Noteholders"), the interest then due with respect
to the Class C Notes;
seventh, (i) to the holders of record of the Class A-5
Notes (the "Class A-5 Noteholders"), the Class A-5
Principal Distributable Amount and to the holders of
record of the Class A-1 Notes (the "Class A-1
Noteholders"), the Class A Principal Distributable Amount
remaining after distribution of the Class A-5 Principal
Distributable Amount, until the outstanding principal
amount of
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the Class A-1 Notes has been reduced to zero; and (ii) on
and after the Payment Date on which the outstanding
principal amount of the Class A-1 Notes has been reduced
to zero, the Class A Principal Distributable Amount will
be allocated to payment of the Class A-5 Principal
Distributable Amount to the Class A-5 Noteholders and to
the Class A-2, Class A-3 and Class A-4 Notes, in
"sequential pay" fashion, beginning with the Class A-2
Notes, in each case until the respective outstanding
principal amount of the Class A-2, Class A-3 and Class A-4
Notes are paid in full;
eighth, to the Class B-1 Noteholders, the Class B-1
Principal Distributable Amount;
ninth, to the Class B-2 Noteholders, the Class B-2
Principal Distributable Amount;
tenth, to the Class C Noteholders, the Class C Principal
Distributable Amount;
eleventh, to the Reserve Account, until the Reserve
Account is fully funded;
twelfth, if HFC is acting as the master servicer, the
Servicing Fee then due; and
thirteenth, any remainder to the holders of the
Certificates.
RESERVE ACCOUNT................. An account will be created (the "Reserve Account") with an
initial deposit of $8,275,247.63 (1% of the Original Pool
Balance). The Reserve Account will be increased on each
Payment Date by the deposit in the Reserve Account of
certain amounts remaining after payments to Noteholders
and any fees then payable, pursuant to the priorities set
forth in "Payment Priority" above until the amount on
deposit therein equals the Targeted Reserve Account
Balance.
Amounts in the Reserve Account on any Payment Date (after
giving effect to all payments to be made to the Servicer
and the Noteholders on such Payment Date) in excess of the
Targeted Reserve Account Balance for such Payment Date
will be paid to the holders of the Certificates.
Funds will be withdrawn from the Reserve Account on each
Payment Date to pay any Servicing Fee then payable to a
master servicer other than HFC and to make required
distributions on the Notes to the extent funds are not
otherwise available, as described herein. See "Description
of the Notes--Payment Priorities" and "The Trust
Assets--The Reserve Account."
DENOMINATIONS................... Each class of the Notes will be issued in the aggregate
principal amounts set forth on the cover page hereof, in
fully registered denominations of $100,000 and integral
multiples of $1,000 in excess thereof.
REGISTRATION OF NOTES........... Each class of the Offered Notes will initially be issued
in book-entry form. Persons acquiring beneficial ownership
interests in the Offered Notes ("Note Owners") may elect
to hold their Notes through DTC, in the United States, or
Cedel Bank, societe anonyme ("Cedel") or the Euroclear
System ("Euroclear"), in
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Europe. Transfers within DTC, Cedel or Euroclear, as the
case may be, will be in accordance with the usual rules
and operating procedures of the relevant system. No person
acquiring a beneficial ownership interest in any Note will
be entitled to receive such Note in fully registered
certificated form (a "Replacement Note") except in the
limited circumstances described herein.
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through
Cedel or Euroclear, on the other, will be effected in DTC
through Citibank, N.A. or Morgan Guaranty Trust Company of
New York, the relevant depositaries (collectively, the
"Depositaries") of Cedel or Euroclear, respectively, and
each a participating member of DTC. So long as the Notes
are in book-entry form, such Notes will be evidenced by
one or more Notes registered in the name of CEDE & Co.,
the nominee of DTC. The interests of the Note Owners will
be represented by book-entries on the records of DTC and
participating members thereof. Unless and until
Replacement Notes are issued, it is anticipated that the
only "Noteholder" will be Cede & Co., as nominee of DTC.
All references in this Prospectus to "Holders" or
"Noteholders" shall be deemed, unless the context clearly
requires otherwise, to refer to CEDE & Co. See "Risk
Factors" and "Description of the Notes--Registration of
the Notes" herein.
RECORD DATE..................... So long as the Notes are in book-entry form, the last day
preceding a Payment Date; if the Notes are no longer in
book-entry form, the last day of a month preceding a
Payment Date.
SERVICING....................... The Servicer will be responsible for servicing and making
collections on the Receivables. Each Receivable will be
subserviced by HAFC on behalf of the Servicer. The
Servicer will cause funds collected with respect to the
Receivables to be deposited into the Collection Account,
except as described herein. On the earlier of the fifth
calendar day or third Business Day prior to any Payment
Date (the "Determination Date"), the Servicer will
calculate, and instruct the Issuer and the Indenture
Trustee regarding the amounts to be paid with respect to
the related Collection Period to the Noteholders. See
"Description of the Trust Documents-- Payments on
Receivables; Deposits to Collection Account."
As long as HFC is the Servicer, on each Payment Date it
will receive, or be entitled to retain on behalf of itself
and HAFC, and after payment of the amounts due on the
Notes, a monthly servicing fee (the "Servicing Fee") in
the amount of 3.00% per annum of the Pool Balance as of
the beginning of the related Collection Period. See
"Description of the Trust Documents-- Servicing
Compensation and Payment of Expenses." In addition, the
Servicer is entitled to retain all administrative fees,
expenses and charges paid by or on behalf of borrowers,
including late fees, prepayment fees and liquidation fees
(the "Supplemental Servicing Fees"). The Servicer will pay
ongoing expenses associated with the Issuer and the Notes,
and incurred by it in connection with its
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responsibilities under the Sale and Servicing Agreement,
including, without limitation, fees of the Indenture
Trustee and the Owner Trustee.
In certain limited circumstances, the Servicer may resign
or be removed under the Sale and Servicing Agreement, in
which event either the Indenture Trustee or, so long as it
meets certain eligibility standards as set forth in the
Sale and Servicing Agreement, a third-party servicer
selected by the Indenture Trustee will be appointed as a
successor master servicer. In such event, the Servicing
Fee will be paid to the successor master servicer prior to
any distributions on the Notes. See "Description of the
Trust Documents--Certain Matters Regarding the Servicer
and the Seller."
If the Servicer fails to comply in all material respects
with certain representations, warranties or covenants with
respect to any Receivable and such noncompliance is not
cured within a specified period after the Servicer becomes
aware or receives notice thereof and such noncompliance
has a material adverse effect on the Noteholders, or
certain events of insolvency occur with respect to the
Servicer, the Indenture Trustee may appoint a successor.
See "Description of the Trust Documents--Servicer
Termination Event"; "--Rights upon Servicer Termination
Event."
FINAL PAYMENT OF PRINCIPAL;
OPTIONAL REDEMPTION........... Each class of Notes will mature on the earlier of the date
such class of Notes is paid in full or May 17, 2005 (the
"Final Scheduled Payment Date"); provided the Class A-1
Notes will be due and payable on December 17, 1999 (the
"Class A-1 Scheduled Maturity Date"). The Notes then
outstanding will be redeemed in whole, but not in part, on
any Payment Date on which the Seller or Servicer exercises
the option to purchase the Receivables from the Issuer.
Such option may be exercised after the aggregate principal
balance of the Offered Notes is less than or equal to
$61,650,500 (10% of the original aggregate principal
balance of the Offered Notes) at a redemption price which
is not less than the Aggregate Note Principal Balance plus
accrued and unpaid interest thereon. See "Description of
the Notes--Maturity Dates; Optional Redemption" herein.
MANDATORY REPURCHASE OF CERTAIN
RECEIVABLES................... The Seller will make certain representations and
warranties with respect to the Trust Assets and the
Receivables. If the Seller breaches certain of its
representations and warranties with respect to any
Receivable, then depending upon the representation or
warranty breached, if such breach has a material adverse
effect on the interest of the Noteholders and is not cured
within the specified period, such Receivable will be
assigned to the Seller. Such representations include that
each Receivable was originated by a properly licensed
Dealer in its normal course of business, contains
customary and enforceable provisions, was originated and
sold to HAFC without fraud or misrepresentation by the
Dealer or the borrower, was originated in material
compliance with all applicable laws and regulations
relating to the Receivable, and creates a valid,
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binding and enforceable first priority security interest
in the financed vehicle in favor of HAFC. For a complete
description of representations and warranties of the
Seller, see "Description of the Trust
Documents--Representations and Warranties; Repurchase
Obligation."
The Servicer (pursuant to the Sale and Servicing
Agreement) will be obligated to repurchase a Receivable if
such Receivable is materially adversely affected by a
breach of certain of its servicing obligations under the
Sale and Servicing Agreement (including, but not limited
to, its obligation to ensure that the perfected security
interest of HAFC in the related financed vehicles is
maintained), if the breach has not been cured within the
specified period. See "Description of the Trust
Documents--Representation and Warranties; Repurchase
Obligation."
TAX STATUS...................... Dewey Ballantine LLP, special tax counsel to the Seller is
of the opinion that under existing law, the Offered Notes
will be characterized as indebtedness, and the Issuer will
not be characterized as an association (or publicly traded
partnership) taxable as a corporation. The Seller, the
Indenture Trustee and the Owner Trustee will agree to
treat the Offered Notes as indebtedness for all federal,
state and local income and franchise tax purposes. By
acceptance of a Class A or a Class B-1 Note, each
Noteholder will agree to treat the Notes as debt. See
"Material Federal Income Tax Consequences" for additional
information concerning the application of federal income
tax laws.
ERISA CONSIDERATIONS............ As described herein, the Class A and Class B-1 Notes may
be purchased by Benefit Plans (as hereinafter defined)
that are subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") or entities using assets of
such Benefit Plans. Any Benefit Plan should consult its
tax and/or legal advisors in determining whether all
required conditions have been satisfied.
RATING.......................... As a condition to the issuance of the Notes, (i) the Class
A-1 Notes will be rated in the highest short-term debt
rating category ("A-1," or its equivalent), (ii) the Class
A-2, Class A-3, Class A-4 and Class A-5 Notes will be
rated in the highest long-term debt rating category ("AAA"
or its equivalent), (iii) the Class B-1 Notes will be
rated in the second highest long-term debt rating category
("AA," or its equivalent), (iv) the Class B-2 Notes will
be rated in the third highest long-term debt rating
category ("A," or its equivalent), and the Class C Notes
will be rated in the fourth highest long-term debt rating
category ("BBB," or its equivalent), in each case, by at
least two Nationally Recognized Statistical Rating
Organizations ("NRSROs" or "Rating Agencies"). A rating is
not a recommendation to purchase, hold or sell the Notes,
in as much as such rating does not comment as to market
price or suitability for a particular investor.
The ratings of the Notes are based primarily on the value
of the Receivables, the credit quality of HFC and the
terms of the Notes. There is no assurance that the ratings
will remain in place for any given period of time or that
the ratings will not be lowered or withdrawn by the Rating
Agencies. See "Risk Factors" herein.
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RISK FACTORS
For a discussion of all material risk factors in connection with the
purchase of the Notes, prospective investors should consider among other things,
the following risk factors.
NON-PRIME CONTRACTS ARE LIKELY TO INCUR HIGHER LOSS RATES THAN CONTRACTS
WITH BORROWERS WITH BETTER CREDIT OR COLLATERAL. HAFC specializes in the
indirect financing of contracts for non-prime borrowers. The non-prime credit
market consists of extending credit to persons who may not be able to obtain
financing from traditional sources of credit, which in the automobile finance
business is comprised of insured-deposit taking institutions such as banks,
thrifts and credit unions, and finance companies which are "captives" (i.e.,
finance subsidiaries) of automobile manufacturers.
A loan may be considered "non-prime" primarily for one, or both, of two
reasons: borrower credit considerations and collateral considerations. Non-prime
loans are likely to experience a higher rate of delinquency and losses than
"prime" loans. It is also possible that the non-prime automobile finance
business is more susceptible to loss than other segments of the non-prime
lending business generally, such as non-prime mortgage lending, due to the
mobility and depreciation of the collateral. The added risk posed by non-prime
contracts has been considered in establishing the subordination supporting each
class of Notes. However, there can be no assurance that such subordination will
be adequate to prevent losses to some or all of the Noteholders.
NON-PRIME BORROWERS ARE CONSUMERS WITH RELATIVELY WEAK CREDIT WHO MAY BE
UNABLE TO (OR UNWILLING TO) REPAY THEIR LOANS. A borrower may be considered a
"non-prime" credit due to limited income, past credit problems (e.g., prior
bankruptcy, history of delinquent payments on other types of installment credit)
or limited or no credit histories.
NON-PRIME LOANS MAY ALSO HAVE LESS VALUABLE COLLATERAL. Collateral
considerations in the non-prime market primarily result from the financing, in
many cases, of used vehicles. Although depreciation also affects new
automobiles, the market value of an automobile which is several years old may be
more difficult to ascertain than for a new vehicle since such value will depend
on mileage and general condition, which may vary substantially for different
vehicles of a similar model year. As a result, upon sale of repossessed
vehicles, proceeds may be less than anticipated, resulting in greater losses.
This factor has been considered in establishing the subordination supporting
each class of Notes. However, there can be no assurance that such subordination
will be adequate to prevent losses to some or all of the Noteholders.
AN INVESTMENT IN THE NOTES MAY BE AN ILLIQUID INVESTMENT WHICH MAY RESULT IN
A NOTE OWNER HOLDING SUCH INVESTMENT TO MATURITY. The Notes will not be listed
on any securities exchange. There is currently no market for the Notes. While
the Underwriters currently intend to make a market in the Notes, they are under
no obligation to do so. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will provide Notes
Owners with liquidity of investment or that it will continue while the Notes
remain outstanding.
Issuance of the Notes in book-entry form may reduce the liquidity of such
Notes in the secondary trading market since investors may be unwilling to
purchase Notes for which they cannot obtain physical certificates. See
"Description of the Notes--Registration of the Notes" herein.
BOOK-ENTRY REGISTRATION MAY REDUCE THE LIQUIDITY OF THE NOTES. Since
transactions in the Notes can be effected only through DTC, Cedel, Euroclear,
participating organizations, indirect participants and certain banks, the
ability of a Note Owner to pledge a Note to persons or entities that do not
participate in the DTC, Cedel or Euroclear system, or otherwise to take actions
in respect of such Notes, may be limited due to lack of a physical certificate
representing the Notes. See "Description of the Notes--Registration of the
Notes" herein.
BOOK-ENTRY REGISTRATION MAY RESULT IN DELAYS IN RECEIPT OF PAYMENTS. Note
Owners may experience some delay in their receipt of distributions of interest
and principal on the Notes since such distributions
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will be forwarded by the Indenture Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Note Owners either directly or
indirectly through indirect participants. Such delays will decrease the yield to
the Note Owners from the Notes. See "Description of the Notes-- Registration of
the Notes" herein.
SUBORDINATION PROVISIONS APPLICABLE TO A CLASS COULD HAVE ADVERSE
CONSEQUENCES FOR THE SUBORDINATE CLASSES. Distributions of interest on each of
the Class B and Class C Notes will be subordinated in priority of payment to
payment of interest due on the Class A Notes as described herein. Distributions
of interest on the Class B-2 and Class C Notes will be subordinated in priority
of payment to payment of interest due on the Class B-1 Notes and distributions
of interest on the Class C Notes will be subordinated in priority of payment to
payment of interest due on the Class B-2 Notes. Consequently, the Class B and
Class C Noteholders will not receive any interest payments with respect to a
Collection Period until the full amount of interest payable on such Payment Date
with respect to each class of Notes with a higher priority has been paid. See
"Description of the Notes--Payment Priorities" and "Events of Default; Rights
upon Event of Default; Distributions following Acceleration" herein.
The Issuer will not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Receivables. Noteholders
must rely upon payments on the Receivables for repayment.
GEOGRAPHIC CONCENTRATION OF RECEIVABLES MAY RESULT IN HIGHER LOSSES IF
PARTICULAR REGIONS EXPERIENCE DOWNTURNS. As of the Cut-Off Date (based on
principal balance and mailing address of the borrowers), borrowers with respect
to approximately 12.73% and 16.28% of the Receivables were located in California
and Texas, respectively. Accordingly, adverse economic conditions or other
factors particularly affecting either of these states could adversely affect the
delinquency or loan loss experience of the Issuer with respect to the
Receivables. Such economic conditions or other factors could include wide-scale
property losses, business failures or unemployment resulting from natural
disasters such as hurricanes or earthquakes. The location of the Receivables by
state is identified in the table beginning on page 25 based upon borrower
mailing address. See "The Trust Assets."
PREPAYMENTS OF THE RECEIVABLES MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF
THE NOTES. All of the Receivables may be prepaid in whole or in part at any
time without penalty. However, borrowers must obtain HAFC's consent prior to
transferring their interest in a financed vehicle. Neither the Seller nor HFC is
aware of any publicly generated studies or statistics available on the rate of
prepayment of automobile retail installment contracts. It can be expected that a
number of the Receivables will prepay prior to the maturity of such Receivables.
Actual prepayment experience may be affected by a wide variety of factors,
including general economic conditions, interest rates, the fact that a borrower
generally may not sell or transfer the vehicle securing a Receivable without the
consent of HAFC, and the availability of alternative financing (including from
HFC or any of its affiliates). If the rate of prepayments on the Receivables
varies from that anticipated at the time a Note is purchased, it will impact the
time the Notes remain outstanding and consequently, may impact the anticipated
yield on the Notes. If a Note is purchased at a premium, and the rate of
prepayments exceeds the rate of prepayments anticipated at the time the Note was
purchased, the actual yield to maturity of the Note will be less than the
anticipated yield. If a Note is purchased at a discount, and the rate of
prepayments is less than the rate of prepayments anticipated at the time the
Note was purchased, the actual yield to maturity will be less than the
anticipated yield.
RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, HOLD OR SELL THE NOTES. The
ratings of the Notes will depend primarily on an assessment by the Rating
Agencies of the underlying Receivables, and the subordination of the Class B and
Class C Notes and the Certificates. The ratings assigned by the Rating Agencies
to the Notes are not recommendations to purchase, hold or sell the Notes,
inasmuch as such ratings do not consider the market price or suitability for a
particular investor. There is no assurance that the ratings will remain in place
for any given period of time or that the ratings will not be lowered or
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withdrawn by the Rating Agencies if in their judgment future circumstances so
warrant, including a change in the credit ratings of HFC.
SECURITY INTERESTS IN BOTH THE RECEIVABLES AND THE UNDERLYING VEHICLES MAY
NOT BE VALID UNDER CERTAIN CIRCUMSTANCES. In connection with the sale and
assignment of the Receivables to the Issuer, security interests in the financed
vehicles which have been assigned first, by HAFC to the Seller, and then by the
Seller to the Issuer, will be assigned by the Issuer to the Indenture Trustee.
In most states, such an assignment is an effective conveyance of a security
interest without amendment of any security interest noted on a vehicle's
certificate of title, and the assignee succeeds thereby to the assignor's rights
as secured party. However, a security interest in a motor vehicle registered in
the states in which a majority of financed vehicles underlying the Receivables
are currently registered, may be perfected only by causing such vehicle's
certificate of title to be amended to note the security interest of the secured
party. Such notation of a secured party's security interest is generally
effected in such states by depositing with the applicable state highway
department, motor vehicle registrar or similar state authority, the vehicle's
certificate of title, an application containing the name and address of the
secured party, and the necessary registration fees.
Because of the administrative burden and expense that would be entailed in
doing so, the certificates of title for the financed vehicles will not identify
the Seller, Issuer, Indenture Trustee or Owner Trustee as the secured party, and
will not be deposited with the state highway department, motor vehicle registrar
or other state authorities in any state. In the absence of such action, the
Indenture Trustee may not have a perfected security interest in the financed
vehicles and, in the event that another person obtains a perfected security
interest in a financed vehicle subsequent to the transfer of the Receivables to
the Issuer, such person might acquire rights in such financed vehicle prior to
the rights of the Indenture Trustee. The Seller agreed in the Sale and Servicing
Agreement to repurchase any Receivable if, on the Closing Date a valid,
subsisting and enforceable first priority security interest has not been
perfected (or is not in the process of perfection) in favor of HAFC (or any
predecessor to HAFC or any subsidiary thereof), which will have been validly
assigned to the Issuer and the Indenture Trustee, in the related financed
vehicle. The Servicer covenanted in the Sale and Servicing Agreement to
repurchase any Receivable if, after the Closing Date, a valid, subsisting and
enforceable first priority security interest in the name of HAFC (or any
predecessor to HAFC or any subsidiary thereof) is not maintained on behalf of
the Indenture Trustee in the related financed vehicle.
ALTHOUGH THE TRANSACTION HAS BEEN STRUCTURED SO AS TO MINIMIZE THE RISKS
ASSOCIATED WITH THE BANKRUPTCY OF HAFC OR THE SELLER, SUCH SAFEGUARDS MAY NOT
ELIMINATE ALL SUCH RISKS. HAFC intends that its transfer of Receivables to the
Seller will constitute a sale rather than a pledge of the Receivables to secure
indebtedness of HAFC. The Seller intends that the transfer of Receivables to the
Issuer will also constitute a sale rather than a pledge of the Receivables to
secure indebtedness for the Seller. However, if HAFC or the Seller were to
become a debtor under the United States Bankruptcy Code or similar applicable
state laws ("Insolvency Laws"), a creditor or trustee in bankruptcy of HAFC or
the Seller, as debtor-in-possession, might argue that such sale of Receivables
by HAFC to the Seller, or by the Seller to the Issuer, was a pledge of
Receivables rather than a sale, and if such position--that the transfer of
Receivables was a pledge rather than a sale or otherwise should be treated as
part of the bankruptcy estate of HAFC or the Seller--were presented to or
accepted by a court, then delays in payments to Noteholders could occur and/ or
reductions in the amounts of such payments could result. It is also possible
that such a recharacterization could result in no additional payments to
Noteholders. In addition if the transfer of any Receivable is recharacterized as
a pledge, then a tax lien, other governmental lien, or other lien created by
operation of law on the property of HAFC or the Seller, as applicable, may have
priority over the Issuer's interest in such Receivable.
HAFC and the Seller have taken steps in structuring the transactions
contemplated hereby that are intended to make it unlikely that the voluntary or
involuntary application for relief by HAFC or the Seller under any Insolvency
Laws will result in the consolidation of the assets and liabilities of the
Issuer with
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those of HAFC or the Seller. These steps include the creation of the Issuer as a
separate, limited-purpose entity pursuant to its certificate of trust, the
formation of the Seller as a limited purpose entity to hold the ownership
interest in the Issuer and incorporating into the Articles of Incorporation of
the Seller certain limitations (including restrictions on the nature of the
business of the Seller) and a restriction on its ability to commence a voluntary
case or proceeding under any Insolvency Law without the unanimous affirmative
vote of the holders of its Preferred Stock, which is the Indenture Trustee. See
"The Trust Assets--The Preferred Stock" herein.
HAFC and the Seller have received the advice of counsel, concluding on the
basis of a reasoned analysis of analogous case law (although acknowledging that
there is no precedent based on directly similar facts) to the effect that,
subject to certain facts, assumptions and qualifications specified therein, a
court would conclude that neither the assets and liabilities of HAFC nor the
Seller would be consolidated with the assets and liabilities of the Issuer, in
the event of the application of the federal bankruptcy laws to HAFC or the
Seller. If a court concluded otherwise, or a filing were to be made under any
Insolvency Law by or against HAFC or the Seller, or if an attempt were to be
made to litigate any of the foregoing issues, delays in the distributions on the
Notes (and possible reductions in the amount of such distributions) could occur.
The Issuer is not expected to have any significant assets or sources of funds
other than the Receivables and the proceeds thereof.
FINANCIAL CONDITIONS OF THE SELLER OR SERVICER MAY AFFECT AN INVESTOR'S
RETURN, EVEN IF THE INTENDED BANKRUPTCY CHARACTERIZATION IS SUSTAINED. Neither
HAFC, the Servicer, nor the Seller is generally obligated to make any payments
in respect of any class of Notes or the Receivables. If either of HFC or HAFC
were to cease acting as Servicer or Subservicer respectively, delays in
processing payments on the Receivables and information in respect thereof could
occur and result in delays in payments to the Noteholders.
In certain circumstances, the Seller or the Servicer will be required to
acquire Receivables from the Issuer with respect to which certain
representations and warranties have been breached. In the event that either of
the Seller or the Servicer is incapable of complying with its reacquisition
obligations and no other party is obligated to perform or satisfy such
obligations, Noteholders may be subject to delays in receiving payments and
suffer loss of their investment in the Notes.
INSURANCE ON VEHICLES WILL GENERALLY BE REQUIRED AT THE TIME OF ORIGINATION,
ALTHOUGH NO ASSURANCE CAN BE GIVEN THAT SUCH INSURANCE WILL BE MAINTAINED. HAFC
generally requires that the borrower under a contract insure the related vehicle
with a physical damage policy naming HAFC as loss payee. Although such insurance
on the vehicle is generally required at the time the contract is originated,
there can be no assurance that the borrower will maintain the appropriate
coverage on the vehicle. HAFC does not anticipate force placing insurance (i.e.,
obtaining such insurance coverage without the consent of the related borrower)
on the related vehicles. HAFC has not represented and warranted to the Seller
that each vehicle is in fact covered by a physical damage policy, although HAFC
has represented and warranted that the procedures described above have been
followed with respect to each vehicle. As a consequence of the foregoing, the
vehicles may not be covered by physical damage insurance and losses to
Noteholders may result from such lack of coverage.
DELINQUENCIES MAY VARY OVER TIME, AND ANY INCREASE IN DELINQUENCIES MAY
RESULT IN UNANTICIPATED LOSSES. There can be no assurance that the historical
levels of delinquencies and losses experienced by HAFC on its respective
contract and vehicle portfolio as set forth on pages 36 and 37 will be
indicative of the performance of the contracts comprising the Trust Assets or
that such levels will continue in the future. Delinquencies and losses could
increase significantly for various reasons, including changes in the local,
regional or national economies, the failure to adequately service the
Receivables comprising the Trust Assets, or the transfer or relocation of the
servicing from HFC or HAFC.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL
AND INTEREST ON THE RECEIVABLES. The Receivables are subject to numerous
federal and state consumer protection laws which impose
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requirements on the solicitation, making, enforcement and collection of motor
vehicle sales finance contracts. Such laws, as well as any new laws which may be
adopted and court rulings (including, but not limited to, federal or state
interest rate caps on consumer loans), may adversely affect the Servicer's
ability to collect on the Receivables. If this would occur in states in which a
higher concentration of Receivables are located, such as California and Texas, a
shortfall in funds available to make payments on the Notes could occur. In
addition, failure of the Servicer to comply with such requirements could
adversely affect the Servicer's ability to enforce the Receivables.
Pursuant to the Sale and Servicing Agreement, if the interest of the Issuer,
and consequently the Noteholders, in a Receivable is materially adversely
affected by the failure of the related installment sales contract to comply in
all material respects with applicable requirements of law, the affected
Receivable will be reassigned to the Seller. Pursuant to the Sale and Servicing
Agreement, the Seller will make certain other representations and warranties
relating to the validity and enforceability of the installment sales contracts
and the Receivables. However, it is not anticipated that the Issuer or Indenture
Trustee will make any examination of the installment sales contracts or the
records relating thereto for the purpose of establishing the presence or absence
of defects, compliance with such representations and warranties, or for any
other purpose. The sole remedy, if any such representation or warranty is
breached and such breach has a material adverse effect on the interest of
Noteholders in any Receivable and continues beyond the applicable cure period,
is that the Receivables affected thereby will be reassigned to the Seller. In
addition, in the event of the breach of certain representations and warranties,
the Seller may be obligated to accept the reassignment of the Receivables. See
"Description of the Trust Documents-- Representations and Warranties; Repurchase
Obligation".
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and may require licensing of HAFC. In addition,
many states have other laws, such as consumer protection laws, unfair and
deceptive practices acts and debt collection practices acts which may apply to
the origination or collection of the Receivables. Depending on the provisions of
the applicable law, violations of these laws may limit the ability of HAFC to
collect all or part of the principal of or interest on the Receivables, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject HAFC, the Servicer, the Seller and possibly the Issuer to damages
and administrative enforcement.
The Receivables will also be subject to certain federal laws, which may
include:
(i) the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Receivables;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in
the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) the Fair Debt Collection Practices Act, which regulates collection
practices of debt collectors.
Violations of certain provisions of these federal laws may limit the ability
of HAFC, the Servicer and the Issuer to collect all or part of the principal of
or interest on the Receivables and in addition could subject HAFC or the
Servicer (and possibly the Seller or the Issuer) to damages and administrative
enforcement.
SOCIAL, LEGAL, ECONOMIC AND OTHER FACTORS MAY AFFECT INVESTMENT. Changes in
borrowing and payment patterns by borrowers result from a variety of social,
legal and economic factors. Economic factors include the rate of inflation,
unemployment levels, tax law changes and relative interest rates. The Seller,
Servicer
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and HAFC are unable to determine and have no basis to predict whether or to what
extent tax law changes or other economic or social factors will affect repayment
patterns. See "The Trust Assets."
HAFC'S UNDERWRITING PROCESS AND SUBJECTIVE CREDIT STANDARDS. The
underwriting standards applied by HAFC may not be as stringent as those of the
finance companies of motor vehicle manufacturers or other financial institutions
since HAFC purchases retail automobile installment contracts which may not meet
the credit standards of traditional primary lenders. The HAFC finance program
focuses on the non-prime market including borrowers with below average credit
profiles who may not be able to receive financing from more traditional sources.
The HAFC finance program does set specific limits for the credit amount extended
based upon its evaluation of each borrower's credit profile. See "The Automobile
Financing Business of HAFC--Application Processing and Purchasing Criteria."
RESTRICTIONS ON RECOVERIES MAY RESULT IN THE ISSUER RECEIVING SUBSTANTIALLY
LESS THAN THE FACE AMOUNT OF THE RELATED CONTRACT. The FTC Rule, as described
under "Certain Legal Aspects of the Receivables-- Consumer Protection Laws"
herein, provides borrowers with the right to set-off and defend against
collections. HAFC will warrant that no claims or defenses have been asserted or
threatened with respect to the contracts and that all requirements of applicable
law with respect to the contracts have been satisfied.
In the event that HAFC, the Servicer or the Indenture Trustee must rely on
repossession and disposition of vehicles to recover scheduled payments due on
defaulted contracts, i.e., contracts which are seriously delinquent, or as to
which the related borrower has affirmatively indicated an inability or
unwillingness to make payment, the Issuer may not realize the full amount due on
a contract (or may not realize the full amount on a timely basis). Other factors
that may affect the ability of the Issuer to realize the full amount due on a
contract include whether amendments to certificates of title relating to the
vehicles had been filed, whether financing statements to perfect the security
interest in the vehicles had been filed, depreciation, obsolescence, damage or
loss of any vehicle, and the application of Insolvency Laws. As a result, the
Noteholders may be subject to delays in receiving payments and suffer loss of
their investment in the Notes.
HAFC, THE SERVICER AND SELLER ARE NOT CORPORATELY LIABLE ON THE NOTES, AND
THE ONLY SOURCE OF REPAYMENT WILL BE THE TRUST ASSETS. The Issuer will not
have, nor is it permitted or expected to have, any significant assets or sources
of funds other than the Receivables and the related assets as described herein.
The Notes represent obligations solely of the Issuer or debt secured by the
Trust Assets, and will not represent a recourse obligation to other assets of
the Servicer, Seller or HAFC. No Note will be insured or guaranteed by HAFC, the
Servicer, the Seller, or any other entity. Consequently, holders of the Notes
must rely for repayment primarily upon payments on the Receivables and the
related assets as specified herein.
THE SELLER
The Seller was incorporated under the laws of the State of Nevada on March
25, 1998 and is a wholly-owned special purpose subsidiary of HFC. The Seller was
organized for the limited purposes of engaging in the type of transactions
described herein and other similar transactions and any activities incidental to
and necessary or convenient for the accomplishment of such purposes. Neither
HFC's nor the Seller's board of directors intends to change the business purpose
of the Seller. The Seller's principal executive office is located at 1111 Town
Center Drive, Las Vegas, Nevada 89134. The Seller is not subject to any legal
proceedings.
Each Receivable will be purchased by the Seller at a price equal to its
principal balance as of the date it is acquired, plus the present value of the
anticipated excess spread discounted to account for uncertainty in future
performance of such Receivable. The Seller will immediately sell each Receivable
to the Issuer at a price equal to its principal balance. The Receivables will be
subserviced by HAFC on behalf of HFC as Servicer. The Servicer will be entitled
to the Servicing Fee and any Supplemental Servicing Fees, on behalf of itself
and HAFC.
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THE SERVICER
HFC was incorporated in Delaware in 1925, as successor to an enterprise
which traces its origin through the same ownership to an office established in
1878. HFC will be responsible for acting as the Servicer for the Receivables.
The address of its principal executive office is 2700 Sanders Road, Prospect
Heights, Illinois 60070. HFC is a subsidiary of Household International, Inc.
HFC and its subsidiaries offer a diversified range of financial services.
The principal product of HFC's consumer financial services business is the
making or purchasing of cash loans and sales finance contracts, including home
equity loans secured by first and second mortgages, automotive sales finance
contracts and unsecured credit advances (including revolving and closed-end
personal loans) to middle-income consumers in the United States. Loans are made
through branch lending offices and through direct marketing efforts. HFC,
through banking subsidiaries, also offers both MasterCard* and VISA* credit
cards to residents throughout the United States.
Through its subsidiaries, HFC also purchases and services revolving charge
card accounts originated by merchants. The accounts result from consumer
purchases of goods and services from the originating merchant. Closed-end sales
contracts are also directly originated by an HFC subsidiary.
Where applicable laws permit, HFC offers customers credit life and credit
accident, health and disability insurance. Such insurance is generally written
directly by, or reinsured with, one of HFC's insurance affiliates.
As of September 30, 1998, HFC had approximately $43.6 billion in total
assets, approximately $37.8 billion in total liabilities and approximately $5.8
billion in shareholder's equity. The Servicer is not subject to any legal
proceedings which are expected to have a material impact on its business or
financial condition, taken as a whole.
THE SUBSERVICER
HAFC is a Delaware corporation and the surviving entity in a merger between
a subsidiary of Household International, Inc. ("Household") and ACC Consumer
Finance Corporation ("ACC"). The merger closed on October 21, 1997 and ACC
changed its name to Household Automotive Finance Corporation shortly thereafter.
ACC was the successor to a California corporation also named ACC Consumer
Finance Corporation which was formerly named American Credit Corporation. The
principal executive offices of HAFC are located at 11452 El Camino Real, Suite
400, San Diego, CA 92130.
HAFC is an automobile finance company specializing in the indirect financing
of automobile sales finance contracts to consumers with non-prime credit.
Through a subsidiary, HAFC also offers loans directly to consumers. The indirect
lending program provides automobile dealers with an alternative source of
financing for those consumers who typically do not qualify for financing under
the dealer's traditional financing sources. Under this program, retail
installment sales contracts are purchased by HAFC from originating automobile
dealers.
HAFC is licensed, where required, to purchase and service retail installment
contracts. HAFC is not subject to any legal proceedings which are expected to
have a material impact on its business or financial condition.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes and the
Certificates will be used to fund the initial deposit in the Reserve Account and
to obtain a release of a lien maintained against assets of the Issuer prior to
the Closing Date. Such lien exists as security for issuance of a series of
privately placed notes that will be retired simultaneously with the closing of
the sale of the Notes.
- ------------------------
* Master Card and VISA are registered trademarks of MasterCard International
Incorporated and VISA USA, Inc., respectively.
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THE ISSUER
GENERAL
The Issuer, Household Automobile Revolving Trust I, is a Delaware business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the purpose of engaging in the transactions described in this
Prospectus. The Issuer will not engage in any activity other than (i) acquiring,
holding and managing the Receivables and the other assets of the Issuer and
proceeds therefrom, (ii) issuing notes in private and public offerings,
including the issuance of the Notes, (iii) making payments on the Notes and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith.
Financial statements of the Issuer are contained in Appendix B hereto.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company as Owner Trustee, at the address listed below under
"--The Owner Trustee."
THE OWNER TRUSTEE
Wilmington Trust Company, the Owner Trustee under the Trust Agreement, is a
Delaware banking corporation and its principal offices are located at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. The
Owner Trustee will perform limited administrative functions under the Trust
Agreement. The Owner Trustee's liability in connection with the issuance and
sale of the Notes is limited solely to the express obligations of the Owner
Trustee set forth in the Trust Agreement and the Sale and Servicing Agreement.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank is the Indenture Trustee under the Indenture. The
Chase Manhattan Bank is a New York banking corporation, the principal offices of
which are located at 450 West 33rd Street, 8th Floor, New York, New York 10001.
THE TRUST ASSETS
GENERAL
The Trust Assets consist of the following: (a) the Receivables; (b) all
amounts paid or payable under the Receivables after the Cut-Off Date; (c)
security interests in the financed vehicles granted by the borrowers; (d) an
assignment of HAFC's rights against automobile dealers ("Dealers") under
agreements between HAFC and the Dealers (the "Dealer Agreements"); (e) an
assignment of the right to receive proceeds from claims on loss, physical
damage, credit life, disability, theft, mechanical breakdown, or similar
insurance policies covering the financed vehicles or the borrowers; (f) all
funds on deposit from time to time in the Collection Account, the Note Account
and the Reserve Account; (g) an assignment of all rights and benefits under the
Receivables Purchase Agreement and all supplements thereto; (h) all documents
related to the Receivables, including the original contracts, documents
evidencing insurance, original credit applications and original certificates of
title or copies of applications therefor, (i) a share of the preferred stock of
the Seller (the "Preferred Stock"); (j) the Interest Rate Cap and all payments
made pursuant thereto; and (k) all proceeds of the foregoing.
The Receivables were originated by Dealers in accordance with HAFC's
requirements under agreements with Dealers, have been assigned by the Dealers to
HAFC, and evidence the indirect financing made available to the borrowers by
HAFC. Dealer Agreements may provide for repurchase or recourse against the
Dealer in the event of a breach of a representation or warranty by the Dealer
under a Dealer Agreement.
All of the Receivables were sold by HAFC to the Seller pursuant to the
Receivables Purchase Agreement and by the Seller to the Issuer pursuant to the
Sale and Servicing Agreement. The Receivables
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were originated by Dealers and purchased by HAFC in the ordinary course of
HAFC's business pursuant to its finance programs and underwriting standards. The
files relating to the Receivables will be held by HAFC as custodian for the
Indenture Trustee.
ELIGIBILITY CRITERIA
The Receivables were selected according to several criteria, including the
following: each Receivable (i) was originated by a Dealer located in the United
States to a borrower who was a resident of the United States with a mailing
address in the United States, (ii) has a contractual APR of not less than 10.5%
or more than 27%, (iii) provides for level monthly payments which provide
interest at the APR and fully amortize the amount financed over an original term
no greater than 72 months, (iv) is not more than 30 days past due as of the
Cut-Off Date, (v) is attributable to the purchase of a new or used automobile,
light duty truck or van, (vi) as of the Cut-Off Date has a remaining term of not
more than 72 months and (vii) had an original principal balance of at least
$3,000 and not more than $27,000. No selection procedures adverse to the
Noteholders were utilized in selecting the Receivables to be conveyed to the
Issuer.
TERMS OF THE RECEIVABLES
Each Receivable provides for the allocation of payments according to (i) the
simple interest method ("Simple Interest Receivables") or (ii) the "sum of
periodic balances" or "sum of monthly payments" method ("Actuarial
Receivables"). Except as otherwise described, the scheduled payment on each
Receivable is a fixed level monthly payment which will amortize the full amount
of the Receivable over its term assuming, in the case of each Simple Interest
Receivable, that the borrower does not pay any installment before or after its
scheduled due date.
Payments on Simple Interest Receivables will be applied first to interest
accrued through the date immediately preceding the date of payment and then to
unpaid principal. Accordingly, if a borrower pays an installment before its due
date, the portion of the payment allocable to interest for the payment period
will be less than if the payment had been made on the due date, the portion of
the payment applied to reduce the principal balance will be correspondingly
greater, and the principal balance will be amortized more rapidly than
scheduled. Conversely, if a borrower pays an installment after its due date, the
portion of the payment allocable to interest for the payment period will be
greater than if the payment had been made on the due date, the portion of the
payment applied to reduce the principal balance will be correspondingly less,
and the principal balance will be amortized more slowly than scheduled, in which
case a larger portion of the principal balance may be due on the final scheduled
payment date.
An Actuarial Receivable provides for the payment by the borrower of a
specified total amount of payments, payable in monthly installments on the
related due date, which total represents the principal amount financed and
finance charges in an amount calculated on the basis of a stated APR for the
term of such Receivable. Notwithstanding the foregoing, the rate at which such
finance charge accrues and, correspondingly, the amount of each scheduled
payment allocated to reduction of the outstanding principal balance of an
Actuarial Receivable is calculated in accordance with the actuarial method and
all payments (other than partial prepayments) received by the Servicer on or in
respect of the Actuarial Receivables will be allocated pursuant to the Sale and
Servicing Agreement on an actuarial basis. Collections on an Actuarial
Receivable made during a Collection Period will be applied first, to the
scheduled payment on such Actuarial Receivable, and second, to any late fees
accrued with respect to such Actuarial Receivable.
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COMPOSITION OF THE RECEIVABLES
Set forth below is a description of the material characteristics of the
Receivables as of the Cut-Off Date:
<TABLE>
<CAPTION>
TOTAL POOL OF RECEIVABLES
------------------------------
<S> <C>
Original Pool Balance............................................................. $827,524,762.71
Number of Receivables............................................................. 63,356
Average Principal Balance(1)...................................................... $13,061.51
Range of Principal Balances..................................................... $3,042.00 to $26,497.15
Average Original Amount Financed(2)............................................... $13,760.06
Range of Original Amounts Financed.............................................. $3,272.62 to $26,999.99
Weighted Average APR(3)........................................................... 19.77%
Range of Original APRs.......................................................... 11% to 27%
Weighted Average Original Term(3)................................................. 61.85 months
Range of Original Terms......................................................... 24 months to 72 months
Weighted Average Remaining Term(3)................................................ 56.37 months
Range of Remaining Terms........................................................ 18 months to 72 months
Weighted Average Months of Seasoning(3)........................................... 5.48 months
Range of Months of Seasoning.................................................... 0 months to 37 months
Number of Receivables more than 30 days delinquent................................ None
</TABLE>
- ------------------------
(1) Original Pool Balance divided by total number of loans.
(2) Aggregate amount financed divided by total number of loans.
(3) Weighted by Principal Balance as of the Cut-Off Date.
COMPOSITION OF RECEIVABLES BY PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PRINCIPAL NUMBER OF % OF PRINCIPAL % OF POOL BY
BALANCE RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- ----------------------------------------------- ----------- ----------- ----------------- -------------------
<S> <C> <C> <C> <C>
$3,000 to 4,000............................... 74 0.12% $ 263,318.11 0.03%
4,001 to 5,000............................... 269 0.42 1,238,126.48 0.15
5,001 to 6,000............................... 616 0.97 3,424,277.71 0.41
6,001 to 7,000............................... 1,127 1.78 7,379,384.50 0.89
7,001 to 8,000............................... 2,095 3.31 15,794,574.54 1.91
8,001 to 9,000............................... 3,292 5.20 28,109,549.17 3.40
9,001 to 10,000............................... 4,768 7.53 45,392,220.43 5.49
10,001 to 11,000............................... 6,165 9.73 64,850,150.32 7.84
11,001 to 12,000............................... 7,780 12.28 89,578,741.58 10.82
12,001 to 13,000............................... 8,301 13.10 103,718,814.59 12.53
13,001 to 14,000............................... 6,623 10.45 89,248,171.90 10.78
14,001 to 15,000............................... 5,068 8.00 73,387,816.21 8.87
15,001 to 16,000............................... 4,009 6.33 62,069,137.99 7.50
16,001 to 17,000............................... 3,465 5.47 57,100,597.68 6.90
17,001 to 18,000............................... 2,910 4.59 50,873,582.97 6.15
18,001 to 19,000............................... 2,391 3.77 44,180,603.19 5.34
19,001 to 20,000............................... 1,655 2.61 32,215,648.79 3.89
20,001 to 21,000............................... 1,253 1.98 25,647,165.09 3.10
21,001 to 22,000............................... 830 1.31 17,782,031.78 2.15
22,001 to 23,000............................... 391 0.62 8,766,088.19 1.06
23,001 to 24,000............................... 201 0.32 4,706,544.96 0.57
24,001 to 25,000............................... 57 0.09 1,389,765.58 0.17
25,001 to 26,000............................... 13 0.02 329,664.99 0.04
26,001 to 27,000............................... 3 0.00 78,785.96 0.01
----------- ----------- ----------------- ------
Total...................................... 63,356 100.00% $ 827,524,762.71 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
24
<PAGE>
COMPOSITION BY APR OF THE RECEIVABLES
(AS OF CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
APR RANGE RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- -------------------------------------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
11.00 to 11.99%................................... 1 0.00% $ 13,268.27 0.00%
12.00 to 12.99.................................... 179 0.28 2,984,872.43 0.36
13.00 to 13.99.................................... 59 0.09 990,779.10 0.12
14.00 to 14.99.................................... 142 0.22 2,341,716.73 0.28
15.00 to 15.99.................................... 1,190 1.88 18,835,210.53 2.28
16.00 to 16.99.................................... 1,303 2.06 22,136,681.45 2.68
17.00 to 17.99.................................... 13,491 21.29 194,501,786.48 23.50
18.00 to 18.99.................................... 8,863 13.99 124,526,601.55 15.05
19.00 to 19.99.................................... 6,302 9.95 83,038,217.73 10.03
20.00 to 20.99.................................... 16,840 26.58 209,408,753.58 25.31
21.00 to 21.99.................................... 6,625 10.46 78,076,434.79 9.43
22.00 to 22.99.................................... 5,196 8.20 59,205,963.09 7.15
23.00 to 23.99.................................... 1,222 1.93 12,903,234.83 1.56
24.00 to 24.99.................................... 1,756 2.77 16,984,786.96 2.05
25.00 to 25.99.................................... 177 0.28 1,493,777.71 0.18
26.00 to 27.00.................................... 10 0.02 82,677.48 0.01
----------- ----------- ----------------- ------
Total......................................... 63,356 100.00% $ 827,524,762.71 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
COMPOSITION BY INTEREST ACCRUAL METHOD
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
INTEREST ACCRUAL METHOD RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL OUTSTANDING
- ---------------------------------------------- ----------- ----------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Actuarial..................................... 6,343 10.01% $ 76,676,853.82 9.27%
Simple Interest............................... 57,013 89.99 750,847,908.89 90.73
----------- ----------- ----------------- ------
Total..................................... 63,356 100.00% $ 827,524,762.71 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
COMPOSITION BY STATE OF RESIDENCE
(AS OF CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
LOCATION OF MAILING ADDRESS OF BORROWER RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- -------------------------------------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Alabama........................................... 106 0.17% $ 1,466,587.45 0.18%
Alaska............................................ 11 0.02 130,210.87 0.02
Arizona........................................... 1,024 1.62 13,056,693.32 1.58
Arkansas.......................................... 191 0.30 2,635,608.95 0.32
California........................................ 8,158 12.88 105,357,664.56 12.73
Colorado.......................................... 610 0.96 7,109,390.13 0.86
Connecticut....................................... 12 0.02 178,109.35 0.02
Delaware.......................................... 469 0.74 5,763,575.64 0.70
District of Columbia.............................. 294 0.46 3,825,705.20 0.46
Florida........................................... 5,973 9.43 78,549,753.43 9.49
Georgia........................................... 5,044 7.96 65,142,856.73 7.87
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
LOCATION OF MAILING ADDRESS OF BORROWER RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- -------------------------------------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Hawaii............................................ 4 0.01 49,688.47 0.01
Idaho............................................. 41 0.06 432,955.05 0.05
Illinois.......................................... 2,674 4.22 35,385,350.88 4.28
Indiana........................................... 573 0.90 7,395,687.99 0.89
Iowa.............................................. 255 0.40 3,098,372.96 0.37
Kansas............................................ 364 0.57 4,571,518.84 0.55
Kentucky.......................................... 875 1.38 11,140,081.50 1.35
Louisiana......................................... 1,154 1.82 14,434,009.13 1.74
Maine............................................. 26 0.04 354,124.19 0.04
Maryland.......................................... 2,337 3.69 31,124,340.81 3.76
Massachusetts..................................... 80 0.13 926,234.86 0.11
Michigan.......................................... 1,419 2.24 18,058,740.21 2.18
Minnesota......................................... 147 0.23 1,992,840.55 0.24
Mississippi....................................... 869 1.37 11,123,824.88 1.34
Missouri.......................................... 1,096 1.73 13,528,373.00 1.63
Montana........................................... 83 0.13 935,425.59 0.11
Nebraska.......................................... 321 0.51 3,833,994.81 0.46
Nevada............................................ 1,274 2.01 15,896,321.30 1.92
New Hampshire..................................... 25 0.04 261,318.61 0.03
New Jersey........................................ 1,422 2.24 17,486,497.52 2.11
New Mexico........................................ 175 0.28 2,198,568.44 0.27
New York.......................................... 574 0.91 7,197,343.08 0.87
North Carolina.................................... 3,293 5.20 46,224,541.74 5.59
North Dakota...................................... 10 0.02 140,735.88 0.02
Ohio.............................................. 1,386 2.19 17,831,011.67 2.15
Oklahoma.......................................... 862 1.36 10,545,323.47 1.27
Oregon............................................ 395 0.62 4,700,556.39 0.57
Pennsylvania...................................... 2,461 3.88 31,906,899.97 3.86
Rhode Island...................................... 8 0.01 98,354.43 0.01
South Carolina.................................... 958 1.51 12,494,907.12 1.51
South Dakota...................................... 20 0.03 236,422.75 0.03
Tennessee......................................... 3,061 4.83 40,069,949.67 4.84
Texas............................................. 9,789 15.45 134,703,278.13 16.28
Utah.............................................. 88 0.14 1,179,015.20 0.14
Vermont........................................... 1 0.00 9,629.96 0.00
Virginia.......................................... 1,738 2.74 22,127,121.35 2.67
Washington........................................ 648 1.02 8,150,665.49 0.98
West Virginia..................................... 842 1.33 11,036,068.42 1.33
Wisconsin......................................... 103 0.16 1,249,890.25 0.15
Wyoming........................................... 13 0.02 178,622.52 0.02
----------- ----------- ----------------- ------
Total......................................... 63,356 100.00% $ 827,524,762.71 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
26
<PAGE>
COMPOSITION BY REMAINING TERM OF THE RECEIVABLES (AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
REMAINING TERM RANGE (IN MONTHS) RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- -------------------------------------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
18 to 23.......................................... 200 0.32% $ 1,093,477.95 0.13%
24 to 29.......................................... 621 0.98 4,081,008.21 0.49
30 to 35.......................................... 1,262 1.99 9,953,650.52 1.20
36 to 41.......................................... 2,030 3.20 18,351,106.74 2.22
42 to 47.......................................... 5,605 8.85 59,842,032.57 7.23
48 to 53.......................................... 14,507 22.90 174,807,361.45 21.12
54 to 59.......................................... 26,407 41.68 347,233,263.85 41.96
60 to 65.......................................... 3,023 4.77 48,640,784.14 5.88
66 to 71.......................................... 9,647 15.23 162,558,785.32 19.64
72................................................ 54 0.09 963,291.96 0.12
----------- ----------- ----------------- ------
Total......................................... 63,356 100.00% $ 827,524,762.71 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
COMPOSITION OF RECEIVABLES BY TYPE OF FINANCED VEHICLE
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
TYPE OF FINANCING RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL OUTSTANDING
- ---------------------------------------------- ----------- ----------- ----------------- ---------------------
<S> <C> <C> <C> <C>
New........................................... 10,576 16.69% $ 168,752,614.70 20.39%
Used.......................................... 52,780 83.31 658,772,148.01 79.61
----------- ----------- ----------------- ------
Total..................................... 63,356 100.00% $ 827,524,762.71 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
THE RESERVE ACCOUNT
An initial deposit of $8,275,247.63 (1% of the Original Pool Balance) will
be placed in an account (the "Reserve Account"). The Reserve Account will be
increased on each Payment Date by the deposit in the Reserve Account of amounts
remaining after payments to Noteholders and any fees then payable pursuant to
the priorities set forth in "Description of the Notes--Payment Priorities,"
until the amount on deposit therein equals the Targeted Reserve Account Balance.
Amounts in the Reserve Account on any Payment Date (after giving effect to all
payments to be made to the Servicer and the Noteholders on such Payment Date) in
excess of the Targeted Reserve Account Balance for such Payment Date will be
paid to the holders of the Certificates.
Funds will be withdrawn from the Reserve Account each Payment Date to pay
any Servicing Fee then payable to a master servicer other than HFC, and to make
required distributions on the Notes to the extent funds are not otherwise
available, as described herein. See "Description of the Notes--Payment
Priorities".
THE PREFERRED STOCK
The Trust Assets include one share of preferred stock of the Seller (the
"Preferred Stock"). The Preferred Stock has a par value of $1.00 and is
designated the "Class SV Preferred Stock". Issuance of the Preferred Stock to
the Issuer is intended to prevent the Seller from instituting any of the
Seller's Bankruptcy Initiatives described below and will have no impact on the
bankruptcy remoteness of the Issuer. As discussed in "Risk Factors--Although the
transaction has been structured so as to minimize the risks associated with the
bankruptcy of HAFC or the Seller, such safeguards may not eliminate all such
risks", a bankruptcy of the Seller may reduce, delay or prevent payments to
Noteholders. In March 1998, the Preferred Stock was issued directly to the
Issuer. The share of Preferred Stock held by the Issuer is
27
<PAGE>
currently the only issued and outstanding share of the Seller's Preferred Stock.
As the Seller sponsors other trusts to issue notes backed by other pools of
automobile installment contracts, an additional share of Preferred Stock will be
issued to each such trust. Pursuant to the Articles of Incorporation of the
Seller (included as an exhibit to the Registration Statement of which this
Prospectus forms a part), the sole rights of the holders of the Preferred Stock
are to (a) vote in the event the Seller desires to: institute proceedings to be
adjudicated insolvent, consent to the institution of any bankruptcy or
insolvency case or petition, make an assignment for the benefit of creditors, or
admit in writing its inability to pay its debts as they become due
(collectively, the "Seller's Bankruptcy Initiatives"), and (b) receive $1.00
upon liquidation of the Seller. The unanimous affirmative vote of the holders of
the Preferred Stock is required to approve any of the Seller's Bankruptcy
Initiatives. Holders of the Preferred Stock of the Seller have no other rights,
including the right to receive dividends or to vote on any other matter.
Pursuant to the Issuer's pledge of its interest in the Trust Assets, the
Indenture Trustee has the exclusive authority to vote the interest of the Issuer
in the Preferred Stock. In the Indenture, the Indenture Trustee covenants that
it will not consent to any of the Seller's Bankruptcy Initiatives. It is
expected that each trust sponsored by the Seller and series of notes issued by
such trusts will be structured identically with respect to the Preferred Stock,
the voting rights related thereto and the covenants with respect to voting of
such shares. As a result, it is expected that all shares of Preferred Stock will
be voted to prevent the Seller's Bankruptcy Initiatives. However, because
unanimous consent of the holders of the Preferred Stock is required to approve
any of the Seller's Bankruptcy Initiatives, the holders of the Notes will be
able to unilaterally prevent the implementation of the Seller's Bankruptcy
Initiatives.
YIELD AND PREPAYMENT CONSIDERATIONS
All the Receivables are prepayable at any time. If prepayments are received
on the Receivables, the actual weighted average life of the Receivables may be
shorter than the scheduled weighted average life (i.e., the scheduled weighted
average life assumes that payments will be made as scheduled, and that no
prepayments will be made). (For this purpose, the term "prepayments" also
includes liquidations due to default, as well as receipt of proceeds from credit
life, credit disability, and casualty insurance policies.) Weighted average life
means the average amount of time during which each dollar of principal of a
Receivable is outstanding.
The rate of prepayments on the Receivables may be influenced by a variety of
economic, social, and other factors, including the fact that a borrower may not
sell or transfer a financed vehicle without the consent of HAFC. HAFC believes
that the actual rate of prepayments will result in a substantially shorter
weighted average life than the scheduled weighted average life of the
Receivables. If a Note is purchased at a premium, and the actual rate of
prepayments exceed the rate of prepayments anticipated at the time the Note was
purchased, the actual yield to maturity of the Note will be less than the yield
anticipated at the time of purchase. If a Note is purchased at a discount, and
the rate of prepayments is less than the rate of prepayments anticipated at the
time the Note was purchased, the actual yield to maturity will be less than the
yield anticipated at the time of purchase. Any reinvestment risks (i.e., that a
Noteholder will not be able to reinvest amounts received in payment on the Notes
at interest rates that are greater than or equal to the applicable Note Rate)
resulting from a faster or slower incidence of prepayment of Receivables will be
borne by the Note Owners.
The rate of payment of principal of each class of Notes will depend on the
rate of payment (including prepayments) of the Principal Balance of the
Receivables. As a result, final payment of any class of Notes could occur
significantly earlier than the Final Scheduled Payment Date or the Class A-1
Scheduled Maturity Date, in the case of the Class A-1 Notes. Reinvestment risk
associated with early payment of the Notes will be borne exclusively by the
Noteholders.
Prepayments on automobile receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus, the Absolute
Prepayment Model ("ABS"), represents an assumed rate
28
<PAGE>
of prepayment each month relative to the original number of receivables in a
pool of receivables. ABS further assumes that all the receivables are the same
size and amortize at the same rate and that each receivable in each month of its
life will either be paid as scheduled or be prepaid in full. For example, in a
pool of receivables originally containing 10,000 receivables, a 1% ABS rate
means that 100 receivables prepay each month. ABS does not purport to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of receivables, including the
Receivables.
The table captioned "Percent of Initial Note Principal Balance at Various
ABS Percentages" (the "ABS Table") has been prepared on the basis of the
following assumptions: (i) the Receivables prepay in full at the specified
constant percentage of ABS monthly, with no defaults, losses or repurchases;
(ii) each scheduled monthly payment on the Receivables is made on the last day
of each month and each month has 30 days; (iii) the initial principal amount of
each class of Offered Notes are as set forth on the cover page hereof; (iv)
interest accrues during each Interest Period at the following assumed coupon
rates: Class A-1 Notes, 5.482%; Class A-2 Notes, 5.593%; Class A-3 Notes,
5.7278%; Class A-4 Notes, 5.8778%; Class A-5 Notes, 5.610%; Class B-1 Notes,
6.260%; Class B-2 Notes, 6.500%; and Class C Notes, 6.740%; (v) payments on the
Notes are made on the 17th day of each month whether or not a Business Day; (vi)
the Notes are purchased on the Closing Date; (vii) the scheduled monthly payment
for each Receivable has been calculated on the basis of the assumed
characteristics set forth in the table below, such that each Receivable will
amortize in amounts sufficient to repay the Principal Balance of such Receivable
by its indicated remaining term to maturity; (viii) the Seller or the Servicer
exercise the option to purchase the Receivables; (ix) the Interest Rate Cap
Provider is paid the fee for maintaining the Interest Rate Cap; and (x) LIBOR
remains constant at 5.2778%.
The ABS Table also assumes that the Receivables have been aggregated into
hypothetical pools with all of the Receivables within each such pool having the
following characteristics and that the level of scheduled monthly payment for
each of the pools (which is based on its aggregate principal balance, gross APR,
original number of scheduled payments and remaining number of scheduled payments
as of the Cut-Off Date) will be such that each pool will be fully amortized by
the end of its remaining term to maturity.
<TABLE>
<CAPTION>
REMAINING
TERM
AGGREGATE TO MATURITY SEASONING
POOL PRINCIPAL BALANCE APR (IN MONTHS) (IN MONTHS)
- ----------- ----------------- --------- ----------------- -------------------
<S> <C> <C> <C> <C>
1 $ 1,093,477.95 21.35% 21 7
2 14,034,658.73 21.17 31 7
3 78,193,139.31 20.45 44 8
4 522,040,625.30 19.96 55 6
5 211,199,569.46 18.95 67 4
6 963,291.96 19.03 72 0
</TABLE>
The ABS Table indicates, based on the assumptions set forth above, the
percentages of the initial principal amount of each class of Notes that would be
outstanding after each of the Payment Dates shown at various percentages of ABS
and the corresponding weighted average lives of such Notes. The actual
characteristics and performance of the Receivables will differ from the
assumptions used in constructing the ABS Table. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity or that all of the Receivables will prepay at the
same level of ABS. Moreover, the diverse terms of Receivables could produce
slower or faster principal distributions than indicated in the ABS Table at the
various constant percentages of ABS specified, even if the original and
remaining terms to maturity of the Receivables are as assumed. Any difference
between such assumptions and the actual characteristics and performance of the
Receivables, including actual prepayment experience or losses, will affect the
percentages of initial balances outstanding over time and the weighted average
lives of each class of Offered Notes.
29
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
------------------------- -------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- --------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100
12/17/98 91 89 84 79 100 100 100 100
1/17/99 79 73 65 54 100 100 100 100
2/17/99 64 55 43 27 100 100 100 100
3/17/99 48 37 22 4 100 100 100 100
4/17/99 39 27 9 0 100 100 100 100
5/17/99 31 17 0 0 100 100 100 100
6/17/99 23 7 0 0 100 100 100 100
7/17/99 16 0 0 0 100 100 100 79
8/17/99 8 0 0 0 100 100 100 54
9/17/99 0 0 0 0 100 100 93 31
10/17/99 0 0 0 0 100 100 74 8
11/17/99 0 0 0 0 100 100 55 0
12/17/99 0 0 0 0 100 100 38 0
1/17/00 0 0 0 0 100 85 20 0
2/17/00 0 0 0 0 100 71 3 0
3/17/00 0 0 0 0 100 56 0 0
4/17/00 0 0 0 0 93 43 0 0
5/17/00 0 0 0 0 81 29 0 0
6/17/00 0 0 0 0 68 16 0 0
7/17/00 0 0 0 0 56 2 0 0
8/17/00 0 0 0 0 44 0 0 0
9/17/00 0 0 0 0 32 0 0 0
10/17/00 0 0 0 0 21 0 0 0
11/17/00 0 0 0 0 9 0 0 0
12/17/00 0 0 0 0 0 0 0 0
1/17/01 0 0 0 0 0 0 0 0
2/17/01 0 0 0 0 0 0 0 0
3/17/01 0 0 0 0 0 0 0 0
4/17/01 0 0 0 0 0 0 0 0
5/17/01 0 0 0 0 0 0 0 0
6/17/01 0 0 0 0 0 0 0 0
7/17/01 0 0 0 0 0 0 0 0
8/17/01 0 0 0 0 0 0 0 0
9/17/01 0 0 0 0 0 0 0 0
10/17/01 0 0 0 0 0 0 0 0
11/17/01 0 0 0 0 0 0 0 0
12/17/01 0 0 0 0 0 0 0 0
1/17/02 0 0 0 0 0 0 0 0
2/17/02 0 0 0 0 0 0 0 0
3/17/02 0 0 0 0 0 0 0 0
<CAPTION>
CLASS A-3 NOTES CLASS A-4 NOTES
------------------------- -------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- --------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100
12/17/98 100 100 100 100 100 100 100 100
1/17/99 100 100 100 100 100 100 100 100
2/17/99 100 100 100 100 100 100 100 100
3/17/99 100 100 100 100 100 100 100 100
4/17/99 100 100 100 100 100 100 100 100
5/17/99 100 100 100 100 100 100 100 100
6/17/99 100 100 100 100 100 100 100 100
7/17/99 100 100 100 100 100 100 100 100
8/17/99 100 100 100 100 100 100 100 100
9/17/99 100 100 100 100 100 100 100 100
10/17/99 100 100 100 100 100 100 100 100
11/17/99 100 100 100 94 100 100 100 100
12/17/99 100 100 100 86 100 100 100 100
1/17/00 100 100 100 78 100 100 100 100
2/17/00 100 100 100 70 100 100 100 100
3/17/00 100 100 95 62 100 100 100 100
4/17/00 100 100 89 54 100 100 100 100
5/17/00 100 100 83 47 100 100 100 100
6/17/00 100 100 77 39 100 100 100 100
7/17/00 100 100 71 32 100 100 100 100
8/17/00 100 96 65 25 100 100 100 100
9/17/00 100 91 59 19 100 100 100 100
10/17/00 100 86 53 12 100 100 100 100
11/17/00 100 81 48 6 100 100 100 100
12/17/00 99 76 43 0 100 100 100 100
1/17/01 94 72 37 0 100 100 100 90
2/17/01 90 67 32 0 100 100 100 78
3/17/01 85 62 27 0 100 100 100 66
4/17/01 81 57 22 0 100 100 100 54
5/17/01 76 53 18 0 100 100 100 0
6/17/01 72 48 13 0 100 100 100 0
7/17/01 67 44 9 0 100 100 100 0
8/17/01 63 39 4 0 100 100 100 0
9/17/01 58 35 0 0 100 100 100 0
10/17/01 54 31 0 0 100 100 94 0
11/17/01 49 26 0 0 100 100 87 0
12/17/01 45 22 0 0 100 100 79 0
1/17/02 40 18 0 0 100 100 71 0
2/17/02 35 14 0 0 100 100 63 0
3/17/02 31 10 0 0 100 100 56 0
<CAPTION>
CLASS A-5 NOTES CLASS B-1 NOTES
------------------------- -------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- --------------------- ----- ----- ----- ----- ----- ----- ----- -----
Initial 100 100 100 100 100 100 100 100
12/17/98 98 98 97 96 100 100 100 100
1/17/99 97 96 94 92 100 100 100 100
2/17/99 95 94 91 88 100 100 100 100
3/17/99 93 91 88 84 100 100 100 100
4/17/99 92 89 85 80 100 100 100 100
5/17/99 90 87 82 77 100 100 100 94
6/17/99 88 85 80 73 100 100 100 76
7/17/99 87 83 77 69 100 100 94 69
8/17/99 85 81 74 66 100 100 81 66
9/17/99 83 79 71 62 100 100 71 62
10/17/99 82 76 69 59 100 93 69 59
11/17/99 80 74 66 55 100 82 66 55
12/17/99 78 72 63 52 100 72 63 52
1/17/00 77 70 61 49 93 70 61 49
2/17/00 75 68 58 46 85 68 58 46
3/17/00 73 66 56 43 76 66 56 43
4/17/00 71 64 53 39 71 64 53 39
5/17/00 70 62 51 37 70 62 51 37
6/17/00 68 60 48 34 68 60 48 34
7/17/00 66 58 46 31 66 58 46 31
8/17/00 64 56 44 28 64 56 44 28
9/17/00 63 54 41 25 63 54 41 25
10/17/00 61 52 39 23 61 52 39 23
11/17/00 59 50 37 20 59 50 37 20
12/17/00 57 48 35 18 57 48 35 18
1/17/01 55 46 33 16 55 46 33 16
2/17/01 54 44 31 13 54 44 31 13
3/17/01 52 43 29 11 52 43 29 11
4/17/01 50 41 27 9 50 41 27 9
5/17/01 48 39 25 0 48 39 25 0
6/17/01 46 37 23 0 46 37 23 0
7/17/01 45 35 21 0 45 35 21 0
8/17/01 43 34 20 0 43 34 20 0
9/17/01 41 32 18 0 41 32 18 0
10/17/01 39 30 16 0 39 30 16 0
11/17/01 37 28 15 0 37 28 15 0
12/17/01 36 27 14 0 36 27 14 0
1/17/02 34 25 12 0 34 25 12 0
2/17/02 32 24 11 0 32 24 11 0
3/17/02 30 22 10 0 30 22 10 0
</TABLE>
(CONTINUED ON NEXT PAGE)
30
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
------------------------- -------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- --------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4/17/02 0 0 0 0 0 0 0 0
5/17/02 0 0 0 0 0 0 0 0
6/17/02 0 0 0 0 0 0 0 0
7/17/02 0 0 0 0 0 0 0 0
8/17/02 0 0 0 0 0 0 0 0
9/17/02 0 0 0 0 0 0 0 0
10/17/02 0 0 0 0 0 0 0 0
11/17/02 0 0 0 0 0 0 0 0
12/17/02 0 0 0 0 0 0 0 0
1/17/03 0 0 0 0 0 0 0 0
2/17/03 0 0 0 0 0 0 0 0
3/17/03 0 0 0 0 0 0 0 0
4/17/03 0 0 0 0 0 0 0 0
5/17/03 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(2) 0.4 0.3 0.2 0.2 1.7 1.4 1.0 0.8
<CAPTION>
CLASS A-3 NOTES CLASS A-4 NOTES
------------------------- -------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- --------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4/17/02 26 6 0 0 100 100 0 0
5/17/02 22 2 0 0 100 100 0 0
6/17/02 17 0 0 0 100 97 0 0
7/17/02 12 0 0 0 100 91 0 0
8/17/02 8 0 0 0 100 85 0 0
9/17/02 4 0 0 0 100 77 0 0
10/17/02 0 0 0 0 100 70 0 0
11/17/02 0 0 0 0 93 63 0 0
12/17/02 0 0 0 0 86 56 0 0
1/17/03 0 0 0 0 77 0 0 0
2/17/03 0 0 0 0 67 0 0 0
3/17/03 0 0 0 0 57 0 0 0
4/17/03 0 0 0 0 0 0 0 0
5/17/03 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(2) 3.0 2.6 2.0 1.5 4.3 4.0 3.3 2.4
<CAPTION>
CLASS A-5 NOTES CLASS B-1 NOTES
------------------------- -------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- --------------------- ----- ----- ----- ----- ----- ----- ----- -----
4/17/02 28 20 0 0 28 20 0 0
5/17/02 27 19 0 0 27 19 0 0
6/17/02 25 17 0 0 25 17 0 0
7/17/02 23 16 0 0 23 16 0 0
8/17/02 21 15 0 0 21 15 0 0
9/17/02 20 13 0 0 20 13 0 0
10/17/02 18 12 0 0 18 12 0 0
11/17/02 16 11 0 0 16 11 0 0
12/17/02 15 10 0 0 15 10 0 0
1/17/03 13 0 0 0 13 0 0 0
2/17/03 11 0 0 0 11 0 0 0
3/17/03 10 0 0 0 10 0 0 0
4/17/03 0 0 0 0 0 0 0 0
5/17/03 0 0 0 0 0 0 0 0
Weighted Average Life
in Years(2) 2.4 2.1 1.6 1.2 2.5 2.2 1.7 1.3
</TABLE>
- ----------------------------------
(1) The percentages in this table have been rounded to nearest whole number.
(2) The weighted average life of a Note is determined by (i) multiplying the
amount of each principal payment on a Note by the number of years from the
date of the issuance of the Note to the related Payment Date, (ii) adding
the results and (iii) dividing the sum by the related initial principal
amount of the Notes.
31
<PAGE>
THE AUTOMOBILE FINANCING BUSINESS OF HAFC
GENERAL
HAFC purchases retail installment contracts of non-prime borrowers from a
network of automobile Dealers. Through a subsidiary, it also originates
contracts directly with borrowers. No direct originations are included in the
Receivables. Approximately 97% of the Dealers are franchisees of major
automobile manufacturers. The retail sales contracts are secured by new or used
automobiles, light duty trucks and vans. HAFC's customers typically have limited
credit history or past credit problems including bankruptcy, chargeoffs or other
derogatory credit events, and are unable to obtain automobile financing from
more traditional sources. The retail installment contracts typically bear a
higher annual percentage rate than charged by a traditional source.
APPLICATION PROCESSING AND PURCHASING CRITERIA
HAFC markets it services to Dealers under seven different programs and uses
a tiered pricing structure designed to price loans according to the borrower's
credit characteristics. Programs exist for borrowers with limited credit
histories, such as first time buyers, and for borrowers who have been the
subject of a bankruptcy that was discharged within the last five years. In
addition, multiple programs are offered that provide more favorable rates and
terms to borrowers meeting progressively more stringent credit criteria. The
criteria examined include length of employment, length at current residence,
income, length of credit history, credit bureau score, the ratio of required
monthly debt payments to monthly gross income and the ratio of proposed monthly
payment on the auto contract to monthly gross income.
For new vehicles, HAFC will finance up to 110% of the Dealer's invoice
price, plus taxes, license fees, insurance, any dealer handling or documentation
charges, and the cost of any service contract. For used vehicles, HAFC will
finance up to 115% of the value quoted in industry-accepted used car guides
(such as the Kelly Wholesale Blue Book), plus the same additions as for new
vehicles. In each case, the total amount financed may not exceed 150% of the
invoice or wholesale value as quoted in the used car guide. The maximum amount
financed will not exceed $27,000. Financing is not offered for vehicles that are
more than eight years old or that have been driven more than 90,000 miles.
The amount of the required downpayment varies by program. For qualifying
borrowers with higher credit profiles, no downpayment is required while other
programs require a minimum downpayment of $1,000. The value of a trade-in
vehicle (as determined by reference to industry accepted used car guides) may be
applied to the downpayment; however manufacturer rebates may not be applied
toward the required downpayment.
HAFC's application processing is conducted in six regional credit centers
which focus solely on underwriting customer applications forwarded by Dealers,
typically by facsimile. Upon receipt of an application a credit officer reviews
the application and obtains a credit history from a credit reporting bureau. A
conditional underwriting decision is made by the credit officer after evaluating
the application, credit bureau data, and whether the application meets the
criteria under HAFC's policy guidelines and its proprietary credit scoring
model. Despite certain deficiencies that may exist in a borrower's credit
history, the credit scoring model is predictive of future delinquency and credit
loss based on statistical modelling of HAFC's historical portfolio. Additional
factors considered that may offset past credit deficiencies include the
borrower's residence stability, employment stability, income level relative to
expenses and past performance on automobile-related debt. Upon conditional
approval, the Dealer forwards a funding package to a centralized funding
facility. The funding package includes the application, contract, title
transfer, customer agreement to provide insurance, and other information
necessary to fund the contract.
Among other things, the contract must be fully amortizing, provide for level
payments over the term of the contract, grant a first priority security interest
in the financed vehicle to HAFC, prohibit the sale or transfer of the financed
vehicle without HAFC's consent, and allow for acceleration of maturity of the
32
<PAGE>
contract if the vehicle is sold or transferred without this consent. The
portions of payments on contracts allocable to principal and interest are, for
payoff and deficiency purposes, determined in accordance with the law of the
state in which the contract was originated.
FUNDING PACKAGE COMPLETION, VERIFICATION AND FUNDING
After receiving an approval from one of HAFC's regional credit centers and
compiling a set of documents the Dealers believe to be consistent with HAFC's
documentation requirements, the Dealers send funding packages to HAFC's central
funding group in San Diego, California. HAFC generally requires that funding
packages include verification of the borrower's income, an agreement of the
borrower to obtain insurance and evidence that application has been made to
transfer title.
HAFC's funding department reviews each contract and verifies the application
data and contract documentation. The funding department also confirms or
reconfirms the borrower's employment and the borrower's agreement to obtain
insurance on the vehicle. HAFC believes one of the most important verifications
is a direct telephone interview of the borrower to confirm the terms of the
contract, the source of the down payment and the equipment on the vehicle. HAFC
requires a telephone interview of the borrower prior to funding a contract with
a borrower that is deemed by HAFC to be a higher credit risk. HAFC believes this
process reduces the risk of misrepresentation by Dealers and/or borrowers and
provides a basis for future borrower contact.
A funding package may be returned if it does not comply with the terms of
the initial approval or if HAFC discovers facts that were not disclosed during
the approval process. As an additional quality control check, HAFC's data
processing systems perform an automated review of the contracts and identify any
characteristics not in compliance with HAFC's minimum underwriting standards.
POST-FUNDING QUALITY REVIEWS
HAFC uses its automated systems to continue to monitor contracts after
funding. In addition, on-going quality control reviews of the newly-purchased
contracts are performed at each of HAFC's credit underwriting centers. These
reviews focus on compliance with underwriting standards, the quality of the
credit decision and the completeness of contract documentation. On a quarterly
basis, a report is prepared which summarizes (by credit processor and credit
officer) policy exceptions, processing errors, documentation deficiencies and
credit decisions which HAFC's quality control manager considers overly
aggressive.
SERVICING OF CONTRACTS
HAFC services all of the contracts it purchases or originates. HAFC's
servicing generally consists of payment and pay-off processing, collecting,
insurance tracking, title tracking, responding to borrower inquiries,
investigating delinquencies, repossessing and reselling collateral, collection
reporting and credit performance monitoring. Servicing for all contracts,
whether owned or sold in an asset-backed security, is performed in accordance
with policies and procedures established by HAFC in consultation with HFC, the
Servicer, from time to time. In accordance with these policies and procedures
and reasonable commercial practice, appropriate action may be taken in the
discretion of HAFC, including, but not limited to, extending payment
arrangements, deferment pending a change in circumstances, referral for
repossession and/or legal action and contract restructuring. HAFC's current
policies require that the aggregate of all extensions on a contract may not
exceed six months over the life of the contract and no more than two months in
any contract in a consecutive twelve month period.
A Receivable is considered contractually delinquent if less than 90% of the
required payment due from the borrower has been received by HAFC. Generally,
contracts that are in excess of 31 days delinquent may be extended once during a
six month period after the borrower makes, in one or more payments, at least 90%
of one required payment in either the current or prior month. If partial
payments are aggregated, all such payments must be made within a 30 day period.
When a contract is extended, it is
33
<PAGE>
no longer considered delinquent. Under the HAFC's current policies, a contract
will generally be charged-off upon the earlier of: (i) the elapse of 90 days
since the financed vehicle was repossessed, (ii) a good faith determination that
all amounts expected to be recovered have been received, (iii) if the financed
vehicle has not been repossessed, the date on which at least 10% of a scheduled
payment becomes 150 or more days delinquent, or in the case of a borrower who is
subject to bankruptcy proceedings, 210 or more days delinquent or (iv) the date
on which the financed vehicle has been sold and the proceeds received. See "--
Repossession" below for discussion of how the amount to be charged-off upon
repossession of a financed vehicle is determined.
The delinquency and charge-off policies and collection practices discussed
herein may change over time in accordance with the business judgment of HAFC and
HFC, changes in applicable laws and regulations, and other considerations.
BILLING AND COLLECTION PROCESS
HAFC sends each borrower a monthly bill, rather than using payment coupon
books. All payments are directed to a lock-box account at a bank affiliated with
HAFC. On a daily basis, the lock-box bank retrieves and processes payments
received and then deposits the entire amount into the lock-box account. A
simultaneous electronic data transfer of borrower payment data is made to HAFC
for posting to computerized records.
HAFC's collection process is based on a strategy of closely monitoring
contracts and maintaining frequent contact with borrowers. As part of this
process, HAFC makes early, frequent contact with delinquent borrowers in an
attempt to identify the underlying causes of a borrower's delinquency and to
make an early collection risk assessment. HAFC believes that its proactive
collection process, including the early identification of payment problems,
reduces its repossession rates and loss levels.
In support of its collection efforts, HAFC maintains a collection software
package with customized features designed for high-intensity collection
operations, which includes a high-penetration autodialer. With the aid of the
autodialer, HAFC initially attempts to contact any borrower whose account
becomes ten days past due.
Although HAFC emphasizes telephonic contact, HAFC also typically sends past
due notices to borrowers when an account becomes ten days past due. In some
cases, HAFC uses the Western Union Quick Collection Service to collect
borrowers' payments and to reduce the incidence of bad checks.
REPOSSESSION
HAFC repossesses a vehicle when resolution of a delinquency is not likely or
when it believes that the collateral is at risk. HAFC makes these judgments
based upon discussions with borrowers, the ability or inability to locate the
borrowers and/or the vehicles, the receipt of notices of liens and other
information. HAFC uses independent, licensed and bonded repossession agencies to
repossess vehicles as well as the services of an agency that traces skips (where
neither the borrower nor the vehicle can be located) to supplement its own
efforts in locating vehicles. When a vehicle is repossessed, it generally is
sold through a public auction within 60 days of repossession. HAFC generally
uses its own staff to pursue recoveries of deficiency balances, but HAFC may
also use outside collection agencies which share in any recoveries. If HAFC has
reason to believe that a Dealer violated any representations or warranties made
to HAFC on a defaulted contract, HAFC may pursue its remedies against the Dealer
under the Dealer Agreement.
HAFC expects that a charge-off will be incurred whenever a vehicle is
repossessed. Unless a determination is made to charge-off a contract earlier,
upon sale of a repossessed vehicle, HAFC records a net loss equal to the
outstanding principal balance of the contract, less the proceeds from the sale
of the vehicle.
34
<PAGE>
If a contract becomes 150 days delinquent (other than accounts in
bankruptcy) and HAFC has repossessed the vehicle, but not yet received the sale
proceeds, then HAFC reports a loss equal to the outstanding principal balance of
the contract, less the estimated auction value of the vehicle (which is based
upon wholesale used car values published by nationally recognized firms) and any
expected recoveries under any insurance. If a contract becomes 150 days
delinquent (or 210 days delinquent in the case of a bankrupt borrower) and HAFC
has not repossessed the vehicle, then HAFC records a loss equal to the
outstanding principal balance of the contract. Any recoveries received
subsequent to the contract being charged-off, including amounts (i) from the
borrower's insurance policies or service contracts, (ii) from Dealers under a
breach of the Dealer Agreements or (iii) from deficiency balances recovered from
borrowers, are treated as loss adjustments in the period when these recoveries
are received.
INSURANCE
HAFC requires that physical damage insurance policies be maintained by the
borrowers naming HAFC (or any predecessor to HAFC or any subsidiary thereof), as
the loss payee.
HAFC maintains fidelity bond coverage insuring against losses through
wrongdoing of its officers, employees and agents.
DELINQUENCY AND LOAN LOSS INFORMATION
Set forth below is certain information concerning HAFC's delinquency and
loss experience with respect to its servicing portfolio of retail installment
sale contracts for new and used automobiles, light duty trucks and vans acquired
pursuant to its finance programs. Delinquency is recognized on a contractual
basis only. Installment payments must equal or exceed 90% of the scheduled
payment due for a contract to be considered current. The information has not
been adjusted to eliminate the effect of the significant growth in the size of
HAFC's portfolio or changes to its underwriting or charge-off policies during
the periods shown. In response to competitive and market conditions, HAFC's
underwriting policies have changed in various respects over the periods
presented. HAFC does not believe these changes had a material impact on the
historical delinquency and loss experience presented below. With respect to
changes to HAFC's charge-off policies, in the fourth quarter of 1997 HAFC began
charging off non-securitized contracts at the earlier of: (a) the date a
contract becomes 150 days delinquent and (b) 90 days after a vehicle has been
repossessed if it remains unsold. Prior to that change (and continuing for all
contracts securitized prior to 1998), contracts were charged off (a) at 120 days
delinquent and (b) 60 days after a vehicle was repossessed if it remained
unsold. The impact of these changes did not have a material impact on the
delinquency and loss experience as reported for year-end 1997 and for the nine
months ended September 30, 1998. In footnote 4 below, the amount of the impact
on the delinquency ratios for such periods is reported. It is also not expected
that the change in the charge-off policy will have a material impact on the
delinquency or loss rates in the future.
If adjustments were made for the growth of the portfolio, loss and
delinquency as percentages of Receivables serviced for each period would be
higher than those shown. The tables below present all retail installment sales
contract data for contracts purchased by HAFC, including contracts managed in
states which are not represented in the pool consisting of the Receivables. The
majority of the HAFC portfolio was previously sold in privately placed
asset-backed securities for which servicing is performed by HAFC. Following the
merger in which Household acquired ACC (see "The Subservicer"), HAFC assumed
management and servicing responsibilities for a portfolio of automotive retail
installment sales contracts purchased or acquired by another Household
subsidiary. None of the contracts held by such entity are included in the
Receivables or the performance results presented in the following tables.
35
<PAGE>
HISTORICAL DELINQUENCY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1993 1994 1995 1996
------------------------ ------------------------ ---------------------- ----------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
----------- ----------- ----------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal
Outstanding........... 780 100% 42,837 100% 117,539 100% 251,751 100%
Delinquencies (1)(2)....
31-60 Days............ 0 0.00% 1,014 2.37% 3,218 2.74% 8,297 3.30%
61-90 Days............ 14 1.79% 247 0.58% 1,171 1.00% 2,847 1.13%
Over 90 Days.......... 0 0.00% 133 0.31% 607 0.52% 1,515 0.60%
Subtotal............ 14 1.79% 1,394 3.25% 4,996 4.25% 12,659 5.03%
Repossession on
hand (3).............. 0 0.00% 261 0.61% 861 0.73% 2,241 0.89%
Total Delinquencies and
Repossession on
hand.................. 14 1.79% 1,655 3.86% 5,857 4.98% 14,900 5.92%
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1997(4) 1998(4)
---------------------- ----------------------
DOLLARS PERCENT DOLLARS PERCENT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Principal
Outstanding........... 607,802 100% 1,302,070 100%
Delinquencies (1)(2)....
31-60 Days............ 23,784 3.91% 44,264 3.40%
61-90 Days............ 8,498 1.40% 16,101 1.24%
Over 90 Days.......... 3,939 0.65% 8,673 0.67%
Subtotal............ 36,221 5.96% 69,038 5.30%
Repossession on
hand (3).............. 6,495 1.07% 12,954 0.99%
Total Delinquencies and
Repossession on
hand.................. 42,716 7.03% 81,992 6.30%
</TABLE>
- ------------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) Delinquencies include bankruptcies. Bankruptcies represent approximately
0.5% of outstanding principal for each period presented.
(3) Amounts shown represent the expected net realizable value for repossessed
vehicles that have not been sold.
(4) In October 1997, HAFC implemented changes to its charge-off policy for owned
receivables. The former policy for owned receivables was to charge-off at
120 days past due. For repossessed vehicles for which the account was not
yet 120 days past due, charge-off occurred at 60 days after the repossession
date. The revised policy for owned receivables is to charge-off at 150 days
past due, or for repossessed vehicles for which the account is not yet 150
days past due, the charge-off occurs at 90 days after the repossession date.
The impact of this change increased the December 31, 1997 and September 30,
1998 delinquency ratios by approximately .01% and .17%, respectively.
36
<PAGE>
HISTORICAL NET LOSS EXPERIENCE
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997(3) 1998(3)
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Principal outstanding......................... $ 780 $ 42,837 $ 117,539 $ 251,751 $ 607,802 $ 1,302,070
Average principal amount outstanding.......... $ 390 $ 19,099 $ 79,304 $ 178,316 $ 411,194 $ 915,401
Number of contracts outstanding............... 71 3,951 10,935 23,145 53,856 108,145
Average number of contracts outstanding....... 36 1,750 7,340 16,515 36,964 78,175
Number of repossessions....................... 0 61 520 1,530 3,686 5,479
Number of repossessions as a percent of
average number of contracts outstanding
(1)......................................... 0.00% 3.48% 7.08% 9.26% 9.97% 9.34%
Net losses (2)................................ $ 0.00 $ 262 $ 3,042 $ 7,918 $ 23,700 $ 33,947
Net losses as a percent of average principal
amount outstanding (1)(2)................... 0.00% 1.37% 3.84% 4.44% 5.76% 4.94%
</TABLE>
- ------------------------
(1) Annualized.
(2) Net Losses are net of recoveries and include principal balance at time of
charge-off. In the case of repossession, net losses include the remaining
balance at the time of repossession less liquidation proceeds (for disposed
vehicles) or the NADA wholesale value (for vehicles repossessed but not
sold). Net losses do not include repossessions that are less than 150 days
delinquent and are not charged off.
(3) In October 1997, HAFC implemented changes to its charge-off policy for owned
receivables. The former policy for owned receivables was to charge-off at
120 days past due. For repossessed vehicles for which the account was not
yet 120 days past due, charge-off occurred at 60 days after the repossession
date. The revised policy for owned receivables is to charge-off at 150 days
past due, or for repossessed vehicles for which the account is not yet 150
days past due, the charge-off occurs at 90 days after the repossession date.
The impact of this change decreased the December 31, 1997 and September 30,
1998 charge-off ratios by approximately .01% and .32%, respectively.
The Seller expects that the delinquency, loss and repossession experience
for the Receivables will be generally consistent with the information provided
in the above tables. However, as the HAFC portfolio matures and the rate of
growth slows (which is likely), it can be expected that the delinquency, loss
and repossession percentages for the portfolio will increase, and may increase
significantly. This is because a higher portion of the portfolio will consist of
contracts proceeding through a typical delinquency and loss pattern. The amount
of such increases cannot be estimated. There is no assurance that delinquency,
credit loss and repossession experience with respect to automobile, light duty
truck, and van installment sale contracts in the future, or the experience of
the Issuer with respect to the Receivables, will be similar to that set forth
above. Losses and delinquencies are affected by, among other things, general and
regional economic conditions and the supply of and demand for automobiles, light
duty trucks and vans.
37
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Offered Notes will be issued pursuant to the terms of the Indenture. The
base indenture and a form of the Series 1998-1 Supplement to such indenture have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part. Such base indenture as supplemented by the Series 1998-1 Supplement is
referred to as the "Indenture". The following summary describes certain terms of
the Notes and the Indenture.
The Notes will be issued only in fully registered form, in denominations of
$100,000 and integral multiples of $1,000 in excess thereof. The Notes will be
secured by the Trust Assets pledged by the Issuer to the Indenture Trustee
pursuant to the Indenture. Replacement Notes, if issued, will be transferable
and exchangeable at the corporate trust office of the Indenture Trustee. See
"--Registration of the Notes" below. No service charge will be made for any
registration, exchange or transfer of Notes, but the Indenture Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
PAYMENTS OF INTEREST
Interest on each class of Notes will be payable monthly on the seventeenth
day of each month or, if such day is not a Business Day, on the next succeeding
Business Day (each, a "Payment Date"), commencing on December 17, 1998, in an
amount equal to interest accrued during the related Interest Period (as defined
below) at the applicable Note Rate on the outstanding principal balance for the
related class of Notes. The per annum rate of interest accruing on each class of
Notes is referred to as the "Note Rate" for the respective classes of Notes. The
Note Rates for the Class A-1, Class A-2, Class A-5, Class B-1, Class B-2 and
Class C Notes will be %, %, %, %, %, and %, respectively. The
Note Rates for the Class A-3 and Class A-4 Notes will be floating rates equal to
the sum of (a) the London interbank offered rate for one-month United States
dollar deposit ("LIBOR"), determined as specified herein, as of the second LIBOR
Business Day (as defined herein) prior to the first day of the Interest Period
and (b) % per annum and % per annum, respectively.
Interest on the outstanding principal balance of the Notes of each class in
respect of any Payment Date will accrue from (and including) the preceding
Payment Date (or in the case of the first Payment Date, from the Closing Date)
through (and including) the day preceding such Payment Date (each such period,
an "Interest Period"). Interest on the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes will be calculated on the basis of a 360-day year and the actual
number of days elapsed in an applicable Interest Period. Interest on the Class
A-5, Class B-1, Class B-2 and Class C Notes will be calculated on the basis of a
360-day year consisting of twelve 30-day months. Interest for any Payment Date
due but not paid on such Payment Date shall bear interest, to the extent
permitted by applicable law, at the related Note Rate until paid. Failure to pay
interest in full on any Payment Date after expiration of the applicable grace
period is an Event of Default under the Indenture.
LIBOR shall be established by the Indenture Trustee and as to any Interest
Period, "LIBOR" will equal the rate for United States dollar deposits for one
month which appears on the Telerate Screen Page 3750 as of 11:00 A.M., London
time, on the related LIBOR Determination Date. The "LIBOR Determination Date"
for each Interest Period will be the second LIBOR Business Day prior to the
first day of such Interest Period. "Telerate Screen Page 3750" means the display
designated as page 3750 on the Telerate Service (or such other page as may
replace page 3750 on that service for the purpose of displaying London interbank
offered rates of major banks). If such rate does not appear on such page (or
such other page as may replace that page on that service, or if such service is
no longer offered, such other service for displaying LIBOR or comparable rates
as may be selected by the Indenture Trustee after consultation with the
Servicer), the rate will be the Reference Bank Rate. The "Reference Bank Rate"
will be determined on the basis of the rates at which deposits in U.S. Dollars
are offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the
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Indenture Trustee after consultation with the Servicer) as of 11:00 A.M., London
time, on the day that is two LIBOR Business Days prior to the immediately
preceding Payment Date to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the principal balance of
the Class A-3 and Class A-4 Notes then outstanding. The Indenture Trustee will
request the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
will be the arithmetic mean of the quotations. If on such date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
Indenture Trustee after consultation with the Servicer, as of 11:00 A.M., New
York City time, on such date for loans in U.S. Dollars to leading European banks
for a period of one month in amounts approximately equal to the principal
balance of the Class A-3 and Class A-4 Notes then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Payment Date.
"LIBOR Business Day" means any day other than (i) a Saturday or a Sunday or (ii)
a day on which banking institutions in the States of New York or Illinois or in
the City of London, England are required or authorized by law to be closed.
On each Payment Date, Available Funds remaining after making the
distributions referred to in items (i) and (ii) under "Description of the Notes
- -- Payment Priorities" will be allocated pro rata to the Class A Interest
Distributable Amount of each of the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Notes. Interest on the Class B-1 Notes will not be paid on any
Payment Date until all accrued interest due and payable on the Class A Notes on
such Payment Date has been paid in full. Interest on the Class B-2 Notes will
not be paid on any Payment Date until all accrued interest due and payable on
the Class A and Class B-1 Notes on such Payment Date has been paid in full.
Interest on the Class C Notes will not be paid on any Payment Date until all
accrued interest due and payable on the Class A Notes and the Class B Notes has
been paid in full.
If the Notes are accelerated following the occurrence of an Event of
Default, interest payments will be allocated to the Notes in the priority
described in "-- Events of Default; Rights Upon Event of Default; Distributions
following Acceleration."
PAYMENTS OF PRINCIPAL
On each Payment Date and, in the case of the Class A-1 Notes, on the Class
A-1 Scheduled Maturity Date, principal payments will be due and payable on the
Notes in an amount generally equal to the Principal Distributable Amount for
such Payment Date to the extent of funds available therefor; PROVIDED, that (i)
no principal payments will be made with respect to the Class B-1 Notes on any
Payment Date until all amounts payable with respect to the Class A Notes on such
Payment Date have been paid in full, (ii) no principal payments will be made
with respect to the Class B-2 Notes on any Payment Date until all amounts
payable with respect to the Class A and Class B-1 Notes on such Payment Date
have been paid in full, and (iii) no principal payments will be made with
respect to the Class C Notes on any Payment Date until all amounts payable with
respect to the Class A Notes and the Class B Notes on such Payment Date have
been paid in full.
On each Payment Date, the Class A Principal Distributable Amount will be
allocated to the payment of the Class A-5 Principal Distributable Amount and
payment of principal to the other class or classes of Class A Notes then
entitled to distributions in respect of principal. On each Payment Date on or
prior to the Payment Date on which the Class A-1 Notes have been paid in full,
the Class A Principal Distributable Amount will be allocated to payment of the
Class A-5 Principal Distributable Amount and the remaining portion thereof will
be applied in reduction of the principal balance of the Class A-1 Notes. On each
Payment Date after the Payment Date on which the Class A-1 Notes have been paid
in full, the Class A Principal Distributable Amount will be allocated to payment
of the Class A-5 Principal Distributable Amount and payment of the principal of
the Class A-2 Notes until the Class A-2 Notes have been paid in full. On each
Payment Date after the Payment Date on which the Class A-2 Notes have been paid
in full, the Class A Principal Distributable Amount will be allocated to payment
of the Class A-5 Principal
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Distributable Amount and payment of the principal of the Class A-3 Notes until
the Class A-3 Notes have been paid in full. On each Payment Date after the
Payment Date on which the Class A-3 Notes have been paid in full, the Class A
Principal Distributable Amount will be allocated to payment of the Class A-5
Principal Distributable Amount and payment of principal of the Class A-4 Notes
until the Class A-4 have been paid in full. On a Payment Date on which the Class
A-1, Class A-2, Class A-3 or Class A-4 Notes are paid in full, the Class A
Principal Distributable Amount may also be allocable to payments of the class of
Class A Notes next entitled to distributions in respect of principal.
The principal of the Class B-1, Class B-2 and Class C Notes will be payable
on each Payment Date on and after the Payment Date on which the outstanding
principal amount of the Class A-1 Notes has been reduced to zero, until the
Class B-1, Class B-2 and Class C Notes have been paid in full, in an amount
equal to the Class B-1 Principal Distributable Amount, Class B-2 Principal
Distributable Amount and the Class C Principal Distributable Amount,
respectively.
If the Notes are accelerated following the occurrence of an Event of
Default, principal payments will be allocated to the Notes in the priority
described in "-- Events of Default; Rights Upon Event of Default; Distributions
following Acceleration."
THE INTEREST RATE CAP
On the Closing Date, the Issuer will enter into the Interest Rate Cap with
Westdeutsche Landesbank Girozentrale, New York Branch (the "Interest Rate Cap
Provider"). The Interest Rate Cap will be for the benefit of the Noteholders and
payments thereunder will be deposited in the Collection Account for
distribution. The notional amount of the Interest Rate Cap (the "Notional
Amount") will initially be equal to $223,832,000 (the initial aggregate
principal amount of the Class A-3 and Class A-4 Notes), and will be reduced as
required on each Payment Date so that the Notional Amount is equal to the then
current aggregate principal balance of the Class A-3 and Class A-4 Notes.
Pursuant to the Interest Rate Cap, on each Payment Date on which LIBOR (as
determined on the related LIBOR Determination Date) exceeds 5.75% (the "Rate
Cap"), the Interest Rate Cap Provider will make a deposit into the Collection
Account, in an amount equal to the product of (a) the amount by which LIBOR
exceeds the Rate Cap, (b) the Notional Amount as of the preceding Payment Date
and (c) the actual number of days in the related Interest Period divided by 360.
The Interest Rate Cap will terminate on the earlier of (a) the Final
Scheduled Payment Date, (b) the Payment Date on which the principal balance of
the Class A-4 Notes is reduced to zero, (c) the date on which the Interest Rate
Cap is terminated in accordance with the Indenture for the reasons described in
the following paragraph or in connection with the establishment of a substitute
interest rate risk management arrangement (any such substitute arrangement being
conditioned upon confirmation that such substitution will not result in a
reduction or withdrawal of the ratings on the Notes) and (d) the date designated
by the Indenture Trustee or the Interest Rate Cap Provider, as the case may be,
upon an event of default by the other party.
In the event the short-term debt rating of the Interest Rate Cap Provider is
withdrawn or reduced below A-1+ by Standard & Poors's (A Division of The
McGraw-Hill Companies) ("Standard & Poor's") or the long-term debt rating of the
Interest Rate Cap Provider is withdrawn or reduced below Aa3 by Moody's
Investors Service, Inc. ("Moody's"), the Interest Rate Cap Provider and the
Issuer will, within 30 calendar days after such rating action, use reasonable
efforts (at the expense of the Interest Rate Cap Provider) to (i) obtain a
replacement interest cap agreement upon terms substantially the same as the
Interest Rate Cap or (ii) establish any other arrangement satisfactory to such
Rating Agencies, such that the ratings of the Notes will not be withdrawn or
reduced.
Westdeutsche Landesbank Girozentrale ("WestLB"), which traces its history to
1832, was created by the merger of two central banks, or Landesbanks (German
State Banks), in the State of North Rhine-Westphalia, Germany on January 1,
1969. As a German universal bank, WestLB provides commercial and
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investment banking services regionally, nationally and internationally to
public, corporate and bank customers.
The Interest Rate Cap Provider is licensed and subject to supervision and
regulation by the Superintendent of Banks of the State of New York. The Interest
Rate Cap Provider is examined by the New York State Banking Department and is
subject to banking laws and regulations applicable to a foreign bank that
operates a New York branch.
Upon written request, WestLB will provide without charge to each person to
whom this Prospectus is delivered a copy of its most recent annual report.
Written requests for such annual reports or any additional information
concerning WestLB should be directed to Westdeutsche Landesbank Girozentrale,
New York Branch, 1211 Avenue of the Americas, New York, New York 10036,
Attention: Branch Management.
PAYMENT PRIORITIES
On or prior to each Payment Date, the Servicer will transfer the Available
Funds to the Note Account and will instruct the Indenture Trustee to make the
following distributions in the following order of priority:
(i) from the Available Funds, to the Servicer, any Supplemental
Servicing Fees for the related Collection Period and if HFC is no longer
acting as master servicer, the Servicing Fee for the related Collection
Period;
(ii) from the Available Funds, to the Interest Rate Cap Provider, the
fee for maintaining the Interest Rate Cap and to the Indenture Trustee and
the Owner Trustee, any accrued and unpaid trustees' fees (in each case, to
the extent such fees have not been previously paid by the Servicer);
(iii) from the Available Funds, to the Class A Noteholders, the Class A
Interest Distributable Amount;
(iv) from the Available Funds, to the Class B-1 Noteholders, the Class
B-1 Interest Distributable Amount;
(v) from the Available Funds, to the Class B-2 Noteholders, the Class
B-2 Interest Distributable Amount;
(vi) from the Available Funds, to the Class C Noteholders, the Class C
Interest Distributable Amount;
(vii) from the Available Funds, (i) to the Class A-5 Noteholders, the
Class A-5 Principal Distributable Amount and to the Class A-1 Noteholders,
100% of the Class A Principal Distributable Amount remaining after
distribution of the Class A-5 Principal Distributable Amount, until the
outstanding principal amount of the Class A-1 Notes has been reduced to
zero; and (ii) on and after the Payment Date on which the outstanding
principal amount of the Class A-1 Notes has been reduced to zero, the Class
A Principal Distributable Amount will be allocated to payment of the Class
A-5 Principal Distributable Amount to the Class A-5 Noteholders and to the
Class A-2, Class A-3 and Class A-4 Notes in "sequential pay" fashion,
beginning with the Class A-2 Notes, in each case until the respective
outstanding principal amount of the Class A-2, Class A-3 and Class A-4 Notes
are paid in full;
(viii) from the Available Funds, to the Class B-1 Noteholders, the Class
B-1 Principal Distributable Amount;
(ix) from the Available Funds, to the Class B-2 Noteholders, the Class
B-2 Principal Distributable Amount;
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(x) from the Available Funds, to the Class C Noteholders, the Class C
Principal Distributable Amount;
(xi) from the Available Funds, to the Reserve Account, the Reserve
Account Deposit Amount, if necessary, required to increase the amount
therein to its then required level;
(xii) from the Available Funds, if HFC is acting as the master servicer,
the Servicing Fee for the related Collection Period; and
(xiii) from the Available Funds, to the holders of the Certificates, any
remainder.
In the event that on any Payment Date after the Payment Date on which the
principal balance of the Class A-1 Notes is reduced to zero, Available Funds,
available to be distributed in accordance with clause (vii) of Payment
Priorities, are less than the Class A Monthly Principal Distributable Amount for
such Payment Date, such Available Funds shall be allocated pro rata (based on
the ratio between the respective amounts of the Class A-5 Principal
Distributable Amount for such Payment Date and the amount specified in clause
(iii)(2) of the definition of Class A Monthly Principal Distributable Amount for
such Payment Date).
Amounts on deposit in the Reserve Account on any Payment Date (after giving
effect to all distributions made on such Payment Date and the related Payment
Date) in excess of the Targeted Reserve Account Balance for such Payment Date
may be released to the holders of the Certificates without the consent of the
Noteholders.
The terms used in this description of Payment Priorities on the Series
1998-1 Securities are defined as follows:
"AGGREGATE NOTE PRINCIPAL BALANCE" means, as of any date, the aggregate
outstanding principal amount of all the Notes on such date.
"AGGREGATE OPTIMAL NOTE PRINCIPAL BALANCE" means, with respect to any
Payment Date, the excess, if any, of (x) the Pool Balance as of the end of the
prior Collection Period over (y) the Targeted Overcollateralization Amount for
such Payment Date.
"AMOUNT FINANCED" means, with respect to a Receivable, the aggregate amount
advanced under such Receivable toward the purchase price of the financed vehicle
and related costs, including amounts advanced in respect of accessories,
insurance premiums, service, car club and warranty contracts, other items
customarily financed as part of retail automobile installment sale contracts or
promissory notes and related costs.
"AVAILABLE FUNDS" means, with respect to any Collection Period, the sum of
(i) the Collected Funds for such Collection Period, (ii) all Purchase Amounts
deposited in the Collection Account during such Collection Period, (iii) income
on investments held in the Collection Account, (iv) the proceeds of any
liquidation of the assets of the Trust, (v) the lesser of (a) the excess of the
aggregate amount determined under items (i)-(x) of the Payment Priorities set
forth beginning on page 41, over the amount on deposit in the Collection Account
and (b) the Reserve Account Balance.
"CLASS A DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date and
each class of Class A Notes, the sum of (i) the related Class A Interest
Distributable Amount and (ii) the Class A Principal Distributable Amount.
"CLASS A INTEREST CARRYOVER SHORTFALL" means, with respect to any Payment
Date and each class of Class A Notes, the sum of: (i) excess of (a) the related
Class A Interest Distributable Amount for the preceding Payment Date, over (b)
the amount actually paid as interest to the Class A Noteholders on such
preceding Payment Date, PLUS (ii) interest on such excess, to the extent
permitted by law, at a rate per annum equal to the related Class A Note Rate
from such preceding Payment Date to but excluding the current Payment Date.
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"CLASS A INTEREST DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date and each class of Class A Notes, an amount equal to the sum of: (i) the
aggregate amount of interest accrued on the Class A Notes at the related Class A
Note Rate from and including the preceding Payment Date (or, in the case of the
initial Payment Date, from and including the Closing Date) to but excluding the
current Payment Date PLUS (ii) the related Class A Interest Carryover Shortfall
for the current Payment Date.
"CLASS A MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT" means, (i) with respect to
any Payment Date prior to the Payment Date on which the principal balance of the
Class A-1 Notes is reduced to zero, 100% of the Principal Distributable Amount,
(ii) with respect to the Payment Date on which the principal balance of the
Class A-1 Notes is reduced to zero, the sum of (x) the Class A-5 Monthly
Principal Distributable Amount, plus (y) 100% of the Principal Distributable
Amount with respect to that portion of the Principal Distributable Amount
required to reduce the principal balance of the Class A-1 Notes to zero, plus
(z) the excess of the amount described in clause (iii) of this definition for
such Payment Date over the sum of the amounts described in clauses (ii)(x)
(taking into account payment of the principal balance of the Class A-1 Notes on
such Payment Date) and (ii)(y) for such Payment Date, (iii) with respect to any
Payment Date after the Payment Date on which the Principal Balance of the Class
A-1 Notes is reduced to zero until the Payment Date on which the Principal
Balance of the Class A Notes is reduced to zero, the greater of (1) the Class
A-5 Monthly Principal Distributable Amount and (2) the excess of (x) aggregate
outstanding principal balance of the Class A Notes over (y)(A) the product of
69.25% and the outstanding Pool Balance as of the end of the related Collection
Period minus (B) the Targeted Overcollateralization Amount for such Payment
Date.
"CLASS A PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date after the Payment Date on which the principal balance of the Class A-1
Notes is reduced to zero, the excess of the Class A Principal Distributable
Amount for the preceding Payment Date over the amount that was actually
distributed in respect of principal of the Class A Notes on such preceding
Payment Date.
"CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date, the sum of: (i) the Class A Monthly Principal Distributable Amount for
such Payment Date and (ii) the Class A Principal Carryover Shortfall for such
Payment Date; PROVIDED HOWEVER, that (x) the sum of clauses (i) and (ii) shall
not exceed the outstanding principal amount of the Class A Notes, and (y) on the
Final Scheduled Payment Date, the Class A Principal Distributable Amount will
include the amount, to the extent of the remaining Available Funds, necessary
(after giving effect to other amounts having a higher payment priority on such
Payment Date) to reduce the outstanding principal amount of the Class A Notes to
zero.
"CLASS A-5 MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to
any Payment Date, the product of (i) a fraction, the numerator of which is the
original principal balance of the Class A-5 Notes and the denominator of which
is the Original Pool Balance, and (ii) the excess of the outstanding Pool
Balance as of the close of business on the last day of the second preceding
Collection Period over the outstanding Pool Balance as of the close of business
on the last day of the related Collection Period.
"CLASS A-5 PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the excess of the Class A-5 Principal Distributable Amount for the
preceding Payment Date over the amount that was actually distributed in respect
of principal of the Class A-5 Notes on such preceding Payment Date.
"CLASS A-5 PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any
Payment Date, the sum of: (i) the Class A-5 Monthly Principal Distributable
Amount for such Payment Date and (ii) the Class A-5 Principal Carryover
Shortfall for such Payment Date; PROVIDED HOWEVER, that the sum of clauses (i)
and (ii) shall not exceed the outstanding principal amount of the Class A-5
Notes, and on the Final Scheduled Payment Date, the Class A-5 Principal
Distributable Amount will include the amount, to the extent of the remaining
Available Funds, necessary (after giving effect to other amounts having a higher
payment priority on such Payment Date) to reduce the outstanding principal
amount of the Class A-5 Notes to zero.
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"CLASS B-1 DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date,
the sum of: (i) the Class B-1 Interest Distributable Amount and (ii) the Class
B-1 Principal Distributable Amount.
"CLASS B-1 INTEREST CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the sum of: (i) the excess of (a) the Class B-1 Interest Distributable
Amount for the preceding Payment Date, over (b) the amount actually paid as
interest to the Class B-1 Noteholders on such preceding Payment Date, PLUS (ii)
interest on such excess, to the extent permitted by law, at the Class B-1 Note
Rate from such preceding Payment Date to but excluding the current Payment Date.
"CLASS B-1 INTEREST DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date, an amount equal to the sum of: (i) the aggregate amount of interest
accrued on the Class B-1 Notes at the Class B-1 Note Rate from and including the
preceding Payment Date (or, in the case of the initial Payment Date, from and
including the Closing Date) to but excluding the current Payment Date PLUS (ii)
the Class B-1 Interest Carryover Shortfall for the current Payment Date.
"CLASS B-1 MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to
any Payment Date on and after the Payment Date on which the principal balance of
the Class A-1 Notes is reduced to zero, until the Payment Date on which the
outstanding principal amount of the Class B-1 Notes has been reduced to zero, an
amount equal to the excess of: (i) the sum of (x) the outstanding principal
balance of the Class A Notes on such Payment Date (after giving effect to
distribution of the Class A Principal Distributable Amount for such Payment
Date) plus (y) the outstanding principal balance of the Class B-1 Notes prior to
such Payment Date over (ii) (A) the product of 81.25% and the outstanding Pool
Balance as of the end of the related Collection Period minus (B) the Targeted
Overcollateralization Amount.
"CLASS B-1 PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the excess of the Class B-1 Principal Distributable Amount for the
preceding Payment Date over the amount that was actually distributed in respect
of principal of the Class B-1 Notes on such preceding Payment Date.
"CLASS B-1 PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any
Payment Date, the sum of: (i) the Class B-1 Monthly Principal Distributable
Amount for such Payment Date and (ii) the Class B-1 Principal Carryover
Shortfall for such Payment Date; PROVIDED, HOWEVER, that the sum of clauses (i)
and (ii) shall not exceed the outstanding principal amount of the Class B-1
Notes, and on the Final Scheduled Payment Date, the Class B-1 Principal
Distributable Amount will include the amount, to the extent of the remaining
Available Funds, necessary (after giving effect to other amounts having a higher
payment priority on such Payment Date) to reduce the outstanding principal
amount of the Class B-1 Notes to zero.
"CLASS B-2 DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date,
the sum of: (i) the Class B-2 Interest Distributable Amount and (ii) the Class
B-2 Principal Distributable Amount.
"CLASS B-2 INTEREST CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the sum of: (i) the excess of (a) the Class B-2 Interest Distributable
Amount for the preceding Payment Date, over (b) the amount actually paid as
interest to the Class B-2 Noteholders on such preceding Payment Date, PLUS (ii)
interest on such excess, to the extent permitted by law, at the Class B-2 Note
Rate from such preceding Payment Date to but excluding the current Payment Date.
"CLASS B-2 INTEREST DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date, an amount equal to the sum of: (i) the aggregate amount of interest
accrued on the Class B-2 Notes at the Class B-2 Note Rate from and including the
preceding Payment Date (or, in the case of the initial Payment Date, from and
including the Closing Date) to but excluding the current Payment Date PLUS (ii)
the Class B-2 Interest Carryover Shortfall for the current Payment Date.
"CLASS B-2 MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to
any Payment Date on and after the Payment Date on which the principal balance of
the Class A-1 Notes is reduced to zero, until the Payment Date on which the
outstanding principal amount of the Class B-2 Notes has been reduced to zero, an
amount equal to the excess of: (i) the sum of (x) the outstanding principal
balance of the Class A Notes
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on such Payment Date (after giving effect to distribution of the Class A
Principal Distributable Amount for such Payment Date) plus (y) the outstanding
principal balance of the Class B-1 Notes (after giving effect to distribution of
the Class B-1 Principal Distributable Amount for such Payment Date) and (z) the
outstanding principal balance of the Class B-2 Notes immediately prior to such
Payment Date over (ii) (A) the product of 92.65% and the outstanding Pool
Balance as of the end of the related Collection Period minus (B) the Targeted
Overcollateralization Amount.
"CLASS B-2 PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the excess of the Class B-2 Principal Distributable Amount for the
preceding Payment Date over the amount that was actually distributed in respect
of principal of the Class B-2 Notes on such preceding Payment Date.
"CLASS B-2 PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any
Payment Date, the sum of: (i) the Class B-2 Monthly Principal Distributable
Amount for such Payment Date and (ii) the Class B-2 Principal Carryover
Shortfall for such Payment Date; PROVIDED, HOWEVER, that the sum of clauses (i)
and (ii) shall not exceed the outstanding principal amount of the Class B-2
Notes, and on the Final Scheduled Payment Date, the Class B-2 Principal
Distributable Amount will include the amount, to the extent of the remaining
Available Funds, necessary (after giving effect to other amounts having a higher
payment priority on such Payment Date) to reduce the outstanding principal
amount of the Class B-2 Notes to zero.
"CLASS C DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date, the
sum of: (i) the Class C Interest Distributable Amount and (ii) the Class C
Principal Distributable Amount.
"CLASS C INTEREST CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the sum of: (i) the excess of (a) the Class C Interest Distributable
Amount for the preceding Payment Date over (b) the amount actually paid as
interest to the Class C Noteholders on such preceding Payment Date, PLUS (ii)
interest on such excess, to the extent permitted by law, at % per annum from
such preceding Payment Date to but excluding the current Payment Date.
"CLASS C INTEREST DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date, an amount equal to the sum of: (i) the aggregate amount of interest
accrued on the Class C Notes at % per annum from and including the preceding
Payment Date (or, in the case of the initial Payment Date, from and including
the Closing Date) to but excluding the current Payment Date (based upon a
360-day year of twelve 30-day months) PLUS (ii) the Class C Interest Carryover
Shortfall for the current Payment Date.
"CLASS C MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to each
Payment Date on and after the Payment Date on which the outstanding principal
amount of the Class A-1 Notes is reduced to zero, until the Payment Date on
which the outstanding principal amount of the Class C Notes has been reduced to
zero, an amount equal to the excess, if any of: (i) the sum of (x) the
outstanding principal balance of the Class A Notes on such Payment Date (after
giving effect to distribution of the Class A Principal Distribution Amount for
such Payment Date), plus (y) the outstanding principal balance of the Class B
Notes on such Payment Date (after giving effect to distribution of the Class B-1
Principal Distributable Amount and the Class B-2 Principal Distributable Amount
for such Distribution Date), plus (z) the outstanding principal balance of the
Class C Notes immediately prior to such Payment Date and (ii) (A) the product of
100% and the outstanding Pool Balance as of the end of the related Collection
Period minus (B) the Targeted Overcollateralization Amount for such Payment
Date.
"CLASS C PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the excess of the Class C Principal Distributable Amount for the preceding
Payment Date over the amount that was actually distributed in respect of
principal of the Class C Notes on such preceding Payment Date.
"CLASS C PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date, the sum of: (i) the Class C Monthly Principal Distributable Amount for
such Payment Date and (ii) the Class C Principal Carryover Shortfall for such
Payment Date; PROVIDED, HOWEVER, that the sum of clauses (i) and (ii) shall not
exceed the outstanding principal amount of the Class C Notes, and on the Final
Scheduled Payment Date, the Class C Principal Distributable Amount will include
the amount, to the extent of the remaining
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Available Funds, necessary (after giving effect to other amounts having a higher
payment priority on such Payment Date) to reduce the outstanding principal
amount of the Class C Notes to zero.
"COLLECTED FUNDS" means, with respect to any Collection Period, the amount
of funds in the Collection Account representing collections on the Receivables
during such Collection Period, including all Net Liquidation Proceeds collected
during such Collection Period (but excluding any Purchase Amounts) and any funds
deposited therein by the Interest Rate Cap Provider pursuant to the Interest
Rate Cap.
"CRAM DOWN LOSS" means, with respect to a Receivable if a court of
appropriate jurisdiction in an insolvency proceeding shall have issued an order
reducing the amount owed on such Receivable or otherwise modifying or
restructuring the scheduled payments to be made on such Receivable, an amount
equal to (i) the excess of the Principal Balance of such Receivable immediately
prior to such order over the Principal Balance of such Receivable as so reduced
and/or (ii) if such court shall have issued an order reducing the effective rate
of interest on such Receivable, the excess of the Principal Balance of such
Receivable immediately prior to such order over the net present value (using as
the discount rate the higher of the APR on such Receivable or the rate of
interest, if any, specified by the court in such order) of the scheduled
payments as so modified or restructured. A "Cram Down Loss" shall be deemed to
have occurred on the date of issuance of such order.
"DETERMINATION DATE" means, with respect to any Payment Date, the earlier of
the fifth calendar day or the third Business Day prior to such Payment Date.
"MAXIMUM RESERVE ACCOUNT DEPOSIT AMOUNT" for any Payment Date is equal to
that portion of Collected Funds representing interest collections on the
Receivables and Net Liquidation Proceeds for the related Collection Period less
the sum of: the Servicing Fee paid to any master servicer other than HFC, the
fees due to the Interest Rate Cap Provider, Indenture Trustee, Trust Collateral
Agent and Owner Trustee, to the extent not paid by the Servicer, the aggregate
of the Class A, Class B-1, Class B-2 and Class C Interest Distributable Amounts,
the aggregate Principal Balances of all Receivables which became Liquidated
Receivables during such Collection Period, plus the aggregate amount of Cram
Down Losses during such Collection Period.
"NET LIQUIDATION PROCEEDS" means, with respect to Liquidated Receivables,
(i) proceeds from the disposition of the underlying financed vehicle securing
the Liquidated Receivables, less the Servicer's reasonable out-of-pocket costs,
including repossession and resale expenses not already deducted from such
proceeds, and any amounts required by law to be remitted to the borrower, (ii)
any insurance proceeds, or (iii) other monies received from the borrower or
otherwise.
"NOTEHOLDERS' DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date,
the sum of the Class A Distributable Amount, the Class B-1 Distributable Amount,
the Class B-2 Distributable Amount and the Class C Distributable Amount.
"POOL BALANCE" means, as of any date of determination, the aggregate
Principal Balances of the Receivables, unless otherwise specified, as of the
close of business on the preceding Business Day.
"PRINCIPAL AMOUNT AVAILABLE" means, with respect to any Payment Date, the
amount remaining in the Note Account after the payment of the amounts listed in
(i) through (vi) of "Payment Priorities", MINUS the Reserve Account Deposit
Amount for such Payment Date.
"PRINCIPAL BALANCE" means, with respect to any Receivable, as of any date,
the Amount Financed minus (a) that portion of all amounts received on or prior
to such date and allocable to principal in accordance with the terms of the
Receivable, and (b) any Cram Down Loss in respect of such Receivable.
"PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date the
lesser of (A) the Principal Amount Available and (B) the greater of (x) the
excess, if any, of (i) the Aggregate Note Principal Balance immediately prior to
such Payment Date over (ii) the Aggregate Optimal Note Balance for such Payment
Date and (y) the Class A-5 Principal Distributable Amount.
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"PURCHASE AMOUNT" means, with respect to a Receivable, the Principal Balance
as of the date such Receivable is purchased from the Issuer by the Seller or the
Servicer.
"RESERVE ACCOUNT DEPOSIT AMOUNT" means, with respect to any Payment Date,
the lesser of: (x) the Maximum Reserve Account Deposit Amount for such Payment
Date and (y) the Reserve Account Shortfall Amount for such Payment Date.
"RESERVE ACCOUNT SHORTFALL AMOUNT" means, with respect to any Payment Date,
the excess of: (x) the Targeted Reserve Account Balance for such Payment Date
over (y) the amount on deposit in the Reserve Account as of the beginning of
such Payment Date.
"TARGETED CREDIT ENHANCEMENT AMOUNT" means, with respect to any Payment
Date, 13.75% of the outstanding Pool Balance as of the end of the related
Collection Period.
"TARGETED OVERCOLLATERALIZATION AMOUNT" means, with respect to any Payment
Date, the excess (but not less than zero), if any, of: (i) the Targeted Credit
Enhancement Amount over (ii) the Targeted Reserve Account Balance.
"TARGETED RESERVE ACCOUNT BALANCE" means, with respect to any Payment Date,
the lesser of: (i) the greater of (a) 3.0% of the outstanding Pool Balance as of
the end of the related Collection Period, and (b) 2.0% of the Original Pool
Balance, and (ii) the Aggregate Note Principal Balance.
MATURITY DATES; OPTIONAL REDEMPTION
Each class of Notes will mature on the earlier of the date such class of
Notes is paid in full or May 17, 2005 (the "Final Scheduled Payment Date") or,
in the case of the Class A-1 Notes, the Class A-1 Scheduled Maturity Date. In
the event there are insufficient funds to retire the Class A-1 Notes on December
17, 1999, or, all outstanding classes of Notes on May 17, 2005, subject to a
five day grace period, an Event of Default will occur. See "--Events of Default;
Rights Upon Event of Default; Distributions following Acceleration" herein. In
addition, the Issuer will pay the Notes in full on the Payment Date following
exercise by the Seller or the Servicer of the option to purchase the Receivables
from the Issuer. Such option may be exercised after the aggregate principal
balance of the Offered Notes is reduced to an amount less than or equal to
$61,650,500 (10% of the original aggregate principal balance of the Offered
Notes). The purchase price will be equal to the sum of the Aggregate Note
Principal Balance and accrued and unpaid interest thereon through the day
preceding the call date.
REPORTS TO NOTEHOLDERS
Concurrently with each distribution to the Noteholders, the Indenture
Trustee will prepare and forward to each Noteholder a statement setting forth
certain information with respect to the related Payment Date, including the
following:
(i) the amount of the distribution allocable to interest on or with
respect to each class of the Notes;
(ii) the amount of the distribution allocable to principal with respect
to each class of the Notes;
(iii) the aggregate outstanding principal amount for each class of Notes,
in each case, after giving effect to all payments reported under (ii) above
on such date;
(iv) the Class A Interest Carryover Shortfall, the Class B-1 Interest
Carryover Shortfall, the Class B-2 Interest Carryover Shortfall, the Class C
Interest Carryover Shortfall, the Class A Principal Carryover Shortfall, the
Class A-5 Principal Carryover Shortfall, the Class B-1 Principal Carryover
Shortfall, the Class B-2 Principal Carryover Shortfall, the Class C
Principal Carryover Shortfall, if any, and the change in such amounts from
the preceding statement;
(v) the amount of the Servicing Fee paid to the Servicer with respect to
the related Collection Period;
(vi) the notional amount of the Interest Rate Cap, the amount of the
distribution attributable to a payment under the Interest Rate Cap and the
current LIBOR; and
(vii) the Targeted Reserve Account Balance and the amount on deposit in
the Reserve Account at the end of such Payment Date.
The information furnished pursuant to (i) through (iv) above shall be
expressed as a dollar amount per $1,000 in face amount of Notes.
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EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT; DISTRIBUTIONS FOLLOWING
ACCELERATION
With respect to the Notes, an "Event of Default" under the Indenture will
have occurred at any time when any one of the following events occurs: (i) a
default in the payment of any interest on any Note when the same becomes due and
payable, and such default continues for a period of five days; (ii) a default in
the payment of the principal of or any installment of the principal of any Note
when the same becomes due and payable, and such default continues for a period
of five days; (iii) default in the observance or performance of any covenant or
agreement of the Issuer made in the Indenture, or any representation or warranty
of the Issuer made in the Indenture or in any certificate or other writing
delivered pursuant to the Indenture proving to have been incorrect in any
material respect as of the time when made which has a material adverse effect on
Note Owners, and such default shall continue or not be cured, or the
circumstance or condition in respect of which such representation or warranty
was incorrect is not eliminated or otherwise cured, for a period of 60 days
after notice is given to the Issuer by the Indenture Trustee or to the Issuer
and the Indenture Trustee by the Holders of at least 25% in principal amount of
the Notes then outstanding, specifying such default or incorrect representation
or warranty; (iv) the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Issuer or any substantial part of
the Trust Assets in an involuntary case under any applicable federal or state
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Issuer or for any substantial part of the Trust Assets,
or ordering the winding-up or liquidation of the Issuer's affairs, and such
decree or order shall remain unstayed and in effect for a period of 60
consecutive days; or (v) the commencement by the Issuer of a voluntary case
under any applicable federal or state bankruptcy, insolvency or other similar
law now or hereafter in effect, or the consent by the Issuer to the entry of an
order for relief in an involuntary case under any such law, or the consent by
the Issuer to the appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Issuer or
for any substantial part of the Trust Assets, or the making by the Issuer of any
general assignment for the benefit of creditors, or the failure by the Issuer
generally to pay its debts as such debts become due, or the taking of any action
by the Issuer in furtherance of any of the foregoing. The amount of principal
required to be paid to Noteholders on any Payment Date will generally be limited
to amounts available to be deposited in the Collection Account. Therefore, the
failure to pay principal on a class of Notes generally will not result in the
occurrence of an Event of Default until the Final Scheduled Payment Date for
such class of Notes.
If there is an Event of Default due to late payment or nonpayment of
interest or principal on a Note, interest will continue to accrue on such
principal and the overdue interest at the applicable interest rate on such Note
until such overdue principal and interest is paid. If an Event of Default should
occur and be continuing with respect to the Notes, the Indenture Trustee may,
and at the direction of Noteholders representing at least 66 2/3% of the
aggregate outstanding principal amount of the Notes shall, declare the principal
of such Notes to be immediately due and payable. Such declaration may, under
certain circumstances, be rescinded by the holders of a majority in principal
amount of the Notes then outstanding.
If the Notes are due and payable following an Event of Default with respect
thereto, the Indenture Trustee may institute proceedings to collect amounts due
or foreclose on property comprising Trust Assets or exercise remedies as a
secured party. Unless the Indenture Trustee determines that the Receivables will
not provide sufficient funds for the payment of principal and interest on the
Notes as such payments would become due, any sale, liquidation or other
disposition of the Trust Assets for an amount less than the amounts due on the
Notes will not occur without the consent of all of the Noteholders. If the
Indenture Trustee makes such a determination, it may sell, liquidate or
otherwise dispose of the Trust Assets for less than the amount due on the Notes
provided that the consent of Noteholders of not less than 66 2/3% of the
outstanding principal balance of the Notes is obtained.
If the Notes are accelerated following the occurrence of an Event of
Default, after payment of the amounts specified in items (i) and (ii) under
"Description of the Notes--Payment Priorities," all Available
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Funds, all amounts on deposit in the Reserve Account and the proceeds of any
sale, liquidation or other disposition of the Trust Assets will be applied as
follows: first, to pay all amounts due and unpaid on the Class A Notes for
interest, ratably without preference or priority; second, to pay all amounts due
and unpaid on the Class A Notes for principal, ratably without preference or
priority; third, to pay all amounts due and unpaid on the Class B-1 Notes for
interest; fourth, to pay all amounts due and unpaid on the Class B-1 Notes for
principal; fifth, to pay all amounts due on the Class B-2 Notes for interest;
sixth, to pay all amounts due and unpaid on the Class B-2 Notes for principal;
seventh, to pay all amounts due and unpaid on the Class C Notes for interest;
eighth, to pay all amounts due and unpaid on the Class C Notes for principal;
and ninth, remaining amounts to the Certificateholders.
If an Event of Default occurs and is continuing with respect to the Notes,
the Indenture Trustee will be under no obligation to exercise any of the rights
or powers under the Indenture at the request or direction of any of the Holders
of the Notes, if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority in principal amount of the outstanding Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the Holders of a majority in principal
amount of the Notes then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of all the Holders of the outstanding
Notes. No Holder of a Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
Holders of not less than 25% of the aggregate principal balance of all
outstanding Notes have made written request to the Indenture Trustee to
institute such proceeding in its own name as Indenture Trustee, (iii) such
Holder or Holders have offered the Indenture Trustee reasonable indemnity
against costs, expenses and liabilities to be incurred in complying with the
request, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to the Indenture Trustee during the 60-day period by the Holders of a
majority of the aggregate principal balance of all outstanding Notes. In
addition, the Indenture Trustee and the Note Owners, by accepting a beneficial
interest in the Notes, will covenant that they will not at any time institute
against the Issuer or the Seller, or join in any institution against the Issuer
or the Seller of, any bankruptcy, reorganization or other proceeding under any
federal or state bankruptcy or similar law. With respect to the Issuer, neither
the Indenture Trustee nor the Owner Trustee in its individual capacity, nor any
Holder representing an ownership interest in the Issuer nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the Issuer contained in the
Indenture.
CERTAIN COVENANTS
The Indenture provides that the Issuer may not consolidate with or merge
into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Issuer's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Issuer under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Issuer has been advised
that the ratings of the Notes then in effect would not be reduced or withdrawn
by any Rating Agency as a result of such merger or consolidation, (v) any action
that is necessary to maintain the lien and security interest created by the
Indenture is taken and (vi) the Issuer has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any Noteholder or holders of the Certificates.
The Issuer will not, among other things, (i) except as expressly
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permitted by the Indenture, sell, transfer, exchange or otherwise dispose of any
of the assets of the Issuer, (ii) claim any credit on or make any deduction from
the principal and interest payable in respect of the Notes (other than amounts
withheld under the Internal Revenue Code of 1986, as amended (the "Code") or
applicable state law) or assert any claim against any present or former holder
of Notes because of the payment of taxes levied or assessed upon the Issuer,
(iii) permit the validity or effectiveness of the Indenture to be impaired or
permit any person to be released from any covenants or obligations with respect
to the Notes under the Indenture except as may be expressly permitted thereby or
(iv) permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance to be created on or extend to or otherwise arise upon or
burden the assets of the Issuer or any part thereof, or any interest therein or
the proceeds thereof. The Issuer may not engage in any activity other than as
specified under the Trust Agreement.
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing the
Notes upon the delivery to the Indenture Trustee for cancellation of all the
Notes or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of outstanding principal
balance of each class of Notes affected thereby and upon confirmation that the
ratings of the Notes then in effect would not be reduced or withdrawn by any
Rating Agency, the Issuer and the Indenture Trustee may amend the Indenture to
add provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders. However, without the consent of the Holder of each outstanding Note
affected thereby, no amendment will: (i) change the due date of any installment
of principal of or interest on any Note or reduce the principal amount thereof,
the interest rate specified thereon or the redemption price with respect thereto
or change any place of payment where or the coin or currency in which any Note
or any interest thereon is payable; (ii) impair the right to institute suit for
the enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate principal balance of the outstanding
Notes, which is required to approve any supplemental indenture, waive compliance
with certain provisions of the Indenture or waive certain defaults thereunder
and their consequences as provided for in the Indenture; (iv) modify or alter
the provisions of the Indenture regarding the voting of Notes held by the
Issuer, the Seller or an affiliate of any of them; (v) decrease the percentage
of the aggregate outstanding principal balance of Notes required to amend the
sections of the Indenture which specify the applicable percentage of aggregate
outstanding principal balance of the Notes necessary to amend the Indenture or
certain other related agreements; (vi) modify any of the provisions of the
Indenture in such manner as to affect the calculation of the amount of any
payment of interest or principal due on any Note (including the calculation of
any of the individual components of such calculation); or (vii) permit the
creation of any lien ranking prior to or, except as otherwise contemplated by
the Indenture, on a parity with the lien of the Indenture with respect to any of
the collateral for the Notes or, except when the full amount required to pay the
Notes in full has been deposited or is held in trust, terminate the lien of the
Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
The Issuer and the Indenture Trustee may also amend the Indenture without
obtaining the consent of the Noteholders, for the purpose of, among other
things, to cure any ambiguity or to correct or supplement any provision in the
Indenture that may be inconsistent with any other provision therein.
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CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Issuer, the Indenture Trustee nor any director, officer or
employee of the Issuer or the Indenture Trustee will be under any liability to
the Issuer or the related Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Issuer and any director, officer or employee thereof will be protected against
any liability which would otherwise be imposed by reason of willful malfeasance,
bad faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Indenture. Subject to certain
limitations set forth in the Indenture, the Indenture Trustee and any director,
officer, employee or agent of the Indenture Trustee shall be indemnified by the
Servicer and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any loss,
liability or expense incurred by reason of willful malfeasance, bad faith or
negligence in the performance of its duties under such Indenture or by reason of
reckless disregard of its obligations and duties under the Indenture. All
persons into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
LIMITATION ON LIABILITY OF THE INDENTURE TRUSTEE
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Indenture, the Notes or of the Trust Assets or related
documents. If no Event of Default has occurred, the Indenture Trustee is
required to perform only those duties specifically required of it under the
Indenture. Upon receipt of the various certificates, statements, reports or
other instruments required to be furnished to it, the Indenture Trustee is
required to examine them to determine whether they are in the form required by
the Indenture; however, the Indenture Trustee will not be responsible for the
accuracy or content of any such documents furnished by it.
The Indenture Trustee may be held liable for its own negligent action or
failure to act, or for its own misconduct; provided, however, the Indenture
Trustee will not be personally liable with respect to any action taken, suffered
or omitted to be taken by it in good faith in accordance with the direction of
the required percentage of the Noteholders in an Event of Default. The Indenture
Trustee is not required to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties under the Indenture,
or in the exercise of any of its rights or powers, if it has reasonable grounds
for believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
RESIGNATION OF INDENTURE TRUSTEE
The Indenture Trustee may, upon written notice to the Seller and the Issuer,
resign at any time, in which event the Servicer will be obligated to use its
best efforts to appoint a successor Indenture Trustee. If no successor Indenture
Trustee has been appointed and has accepted the appointment within 60 days after
giving such notice of resignation, the resigning Indenture Trustee or the Issuer
may petition any court of competent jurisdiction for appointment of a successor
Indenture Trustee. The Indenture Trustee may also be removed at any time by the
Servicer. In addition, the Issuer may, and at the request of a majority of the
Noteholders shall remove the Indenture Trustee (i) if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture, (ii) if the
Indenture Trustee becomes insolvent or (iii) the Indenture Trustee's long-term
debt ratings are lower than "BBB" or its equivalent by either Rating Agency. Any
resignation or removal of the Indenture Trustee and appointment of a successor
Indenture Trustee will not become effective until acceptance of the appointment
by the successor Indenture Trustee.
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REGISTRATION OF THE NOTES
Notes Owners may hold their Notes through DTC (in the United States) or
Cedel or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
The Notes will initially be registered in the name of CEDE & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Cedel and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Depositary" and collectively the "Depositaries").
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures. No person
acquiring a beneficial ownership interest in any Note will be entitled to
receive such Note in fully registered certificated form (a "Replacement Note")
except in the limited circumstances described herein.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in Cedel or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedel or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures relating to the Notes, see "Material Federal
Income Tax Consequences" and "Global Clearance, Settlement and Tax Documentation
Procedures" in Appendix A hereto.
Note Owners who are not Participants but desire to purchase, sell or
otherwise transfer ownership of Notes may do so only through Participants or
indirect participants (unless and until Replacement Notes, as defined below, are
issued). In addition, Note Owners will receive all distributions of principal
of, and interest on, the Notes from the Indenture Trustee through DTC and
Participants. Note Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below.
Unless and until Replacement Notes are issued, it is anticipated that the
only Noteholder of the Notes will be CEDE & Co., as nominee of DTC. Note Owners
will not be Noteholders as that term is used in the Indenture. Note Owners are
only permitted to exercise the rights of Noteholders indirectly through
Participants and DTC.
While the Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required
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to make book-entry transfers among Participants on whose behalf it acts with
respect to the Notes and is required to receive and transmit distributions of
principal of, and interest on, the Notes. Participants and indirect participants
with whom Note Owners have accounts with respect to Notes are similarly required
to make book-entry transfers and receive and transmit such distributions on
behalf of their respective Note Owners. Accordingly, although Note Owners will
not possess certificates, the Rules provide a mechanism by which Note Owners
will receive distributions and will be able to transfer their interests.
Unless and until Replacement Notes are issued, Note Owners who are not
Participants may transfer ownership of Notes only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Notes, by book-entry transfer, through DTC for the account of the
purchasers of such Notes, which account is maintained with their respective
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Notes will be executed through DTC and the accounts of
the respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Note Owners.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through electronic
book-entry changes in accounts of Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear
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Operator, not the Cooperative. The Cooperative establishes policy for Euroclear
on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Material Federal Income Tax Consequences". Cedel or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Noteholder under the Indenture on behalf of a Cedel Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf through
DTC.
Replacement Notes will be issued in registered form to Note Owners, or their
nominees, rather than to DTC, only if (i) DTC or HFC advises the Indenture
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Notes and HFC
or the Indenture Trustee is unable to locate a qualified successor, (ii) HFC, at
its sole option and with the consent of the Trustee, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Servicer
Termination Event, DTC, at the direction of Class A and Class B Noteholders
evidencing not less than 51% of the then outstanding principal balance of each
such Class, advises the Trustee in writing that the continuation of a book-entry
system through DTC (or a successor thereto) to the exclusion of any physical
certificates being issued to Note Owners is no longer in the best interests of
Note Owners. Upon issuance of Replacement Notes to Note Owners, such Notes will
be transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Indenture Trustee with respect to
transfers, notices and distributions.
DTC has advised HFC and the Indenture Trustee that, unless and until
Replacement Notes are issued, DTC will take any action permitted to be taken by
a Noteholder under the Indenture only at the direction of one or more
Participants to whose DTC accounts the Notes are credited. DTC may take actions,
at the direction of the related Participants, with respect to some Notes which
conflict with actions taken with respect to other Notes.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of indirect participants and certain banks, the ability of holders of
beneficial interests in the Notes to pledge such Notes to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of such Notes, may be limited due to the lack of a definitive certificate for
such Notes.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
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DESCRIPTION OF THE TRUST DOCUMENTS
The following summary describes certain terms of the Sale and Servicing
Agreement, the Indenture and the Trust Agreement (collectively, the "Trust
Documents"). Copies of the Trust Documents are filed as exhibits to the
Registration Statement of which this Prospectus is a part. Copies may be
obtained by the Note Owners upon request in writing to the Servicer, at its
address set forth under "The Servicer".
SALE AND ASSIGNMENT OF RECEIVABLES.
The Seller has entered into a Sale and Servicing Agreement with the Issuer,
the Servicer and the Indenture Trustee pursuant to which the Seller, on or prior
to the Closing Date, will have sold and assigned to the Issuer, without
recourse, its entire interest in and to the Receivables, including its security
interest in the financed vehicles securing the Receivables and its right to
receive all payments on, or proceeds with respect to the Receivables to the
extent paid or payable after the Cut-Off Date. Pursuant to the Sale and
Servicing Agreement, the Seller agreed that, upon the occurrence of a breach of
a representation or warranty under the Trust Documents with respect to any of
the Receivables, the Issuer will be entitled to require the Seller to repurchase
such Receivables from the Issuer. Such rights of the Issuer under the Sale and
Servicing Agreement will constitute part of the property of the Issuer and may
be enforced directly by the Owner Trustee. In addition, the Issuer will pledge
such rights to the Indenture Trustee as collateral for the Notes, and such
rights may be enforced directly by the Indenture Trustee.
Each Receivable transferred by the Seller to the Issuer will be identified
in a schedule appearing as an exhibit to the Sale and Servicing Agreement (the
"Schedule of Receivables").
REPRESENTATION AND WARRANTIES; REPURCHASE OBLIGATION
In connection with the sale of the Receivables, the security interests in
the financed vehicles securing the Receivables have been assigned by HAFC to the
Seller, by the Seller to the Issuer and by the Issuer to the Indenture Trustee.
The Sale and Servicing Agreement provides that if the Seller breaches certain
representations and warranties relating to the Receivables and the financed
vehicles in a manner that materially and adversely affects any Receivable or the
interests of the Noteholders or the interests of the Issuer, the Seller shall,
unless such breach shall have been cured in all material respects, repurchase
such Receivable from the Issuer. The Seller shall be obligated to repurchase
such Receivable if its breach under the Sale and Servicing Agreement is not
cured by the last day of the second calendar month following the discovery by or
notice to the Seller of the breach.
The representations and warranties made by the Seller under the Sale and
Servicing Agreement state that each Receivable: (a) was originated by a properly
licensed Dealer in the ordinary course of business, purchased by HAFC pursuant
to a Dealer Agreement, sold to the Seller pursuant to the Receivables Purchase
Agreement, assigned to the Issuer pursuant to the Sale and Servicing Agreement
and assigned by the Issuer to the Indenture Trustee pursuant to the Indenture,
(b) assignment was valid and made pursuant to the respective agreements upon
customary and enforceable terms, (c) is fully amortizing with level monthly
payments, (d) was originated and sold to the Seller without fraud or material
misrepresentation on the part of the Dealer or the borrower, (e) was originated
in material compliance with all applicable laws and regulations relating to the
Receivable and all applicable laws and regulations were complied with in writing
any insurance policies with respect thereto, and such Receivable and any such
insurance policies continue to be in compliance with applicable laws and
regulations, (f) was originated in the United States and complied at the time of
purchase with HAFC's then current underwriting and funding policies, (g) is a
valid, legal and binding obligation of the borrower, enforceable in accordance
with its terms subject to certain exceptions related to bankruptcy, insolvency
or the Relief Act, (h) is not due from any governmental body, (i) had an
original maturity of at least 18 months and not more than 72 months, an original
balance between $3,000 and $27,000, an original APR between 10.5% and 27%, was
not more than 30 days past due, as to which no funds have been advanced by any
party to maintain the contract as current and no
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provision of which has been waived, altered or modified since origination, (j)
as to which the information on the Schedule of Receivables is true and correct
in all material respects, (k) with respect to which HAFC's and the Servicer's
records reflect to successive assignments or pledge from HAFC to the Seller,
from the Seller to the Issuer and by the Issuer to the Indenture Trustee, (l)
will be accurately reflected in any list of Receivables provided by HAFC, (m)
constitutes chattel paper under the UCC, (n) is documented by only one original
executed contract, (o) with respect to which the related file contains the
executed original contract, evidence of physical damage insurance coverage, the
original lien certificate naming HAFC or any predecessor or affiliate as first
lienholder and an original credit application, (p) has not been satisfied,
subordinated or rescinded and the related financed vehicle has not been released
from the lien, (q) was not originated in, or subject to laws of a jurisdiction,
the laws of which make it unlawful, void or voidable to sell, transfer or assign
the Receivable and the Receivable is not subject to any agreement restricting or
conditioning the assignment thereof, (r) has not been sold, transferred,
assigned or pledged other than as described in this Prospectus and no other
person holds any right to receive any proceeds with respect to such Receivable,
any related insurance policy or related Dealer Agreement, (s) which creates a
valid, binding and enforceable first priority security interest in favor of HAFC
in the financed vehicle, which security interest is prior to all other liens and
security interests (other than those for taxes, labor or material for a vehicle)
and as to which no such prior liens exist, (t) as to which all filings required
to give the Indenture Trustee a first priority perfected lien on, or ownership
interest in, the Receivable and the proceeds thereof have been made, (u) as to
which, HAFC, or any predecessor or affiliate thereof, has not conveyed any
interest thereto to any person that would impair the rights of the Indenture
Trustee thereto, (v) is not assumable, (w) is not subject to recision, set off,
counterclaim or defense and as to which no such right has been asserted or
threatened with respect thereto, (x) as to which no event has occurred
permitting acceleration and no condition exists or event has occurred and is
continuing that would with notice, lapse of time or both would constitute a
default, breach, violation or event permitting acceleration, nor any waiver of a
default, breach, violation or other event permitting acceleration, and with
respect to which the financed vehicle has not been repossessed, (y) at the time
of origination was covered by comprehensive, collision, loss and damage
insurance naming HAFC, its successors and assigns as loss payee, (z) with
respect to which the lien certificate names, or will name, HAFC (or any
predecessor or affiliate thereof) as the original secured party and all required
filings and recordings required to name such entity as the original secured
party have been made, (aa) as to which no selection procedures adverse to the
Noteholder were utilized and (bb) as to which 10% or more of a scheduled payment
is not 30 or more days delinquent, no determination has been made that no
further payments are likely to be made with respect thereto, and the borrower is
not subject to a bankruptcy proceeding.
The Sale and Servicing Agreement also provides that if the Servicer breaches
certain of its servicing obligations under the Sale and Servicing Agreement
(including, but not limited to its obligation to ensure that a perfected
security interest is maintained in favor of HAFC (or any predecessor of HAFC or
any subsidiary thereof) in the related financed vehicles) or certain other
covenants with regard to the Servicer, the Servicer shall, unless such breach
shall have been cured in all material respects, purchase such Receivable from
the Issuer. The obligation to purchase the affected Receivables arises only if a
breach materially and adversely affects any Receivable or the interests of the
Noteholders or the interests of the Issuer. The Servicer shall be obligated to
repurchase such Receivable if a breach under the Sale and Servicing Agreement is
not cured by the last day of the second calendar month following the discovery
by or notice to the Servicer of the breach.
In addition to the warranty that it will maintain HAFC's perfected security
interest in the financed vehicles, the Servicer represented and warranted in the
Sale and Servicing Agreement that it (a) will do nothing to impair the rights of
the Issuer or Noteholders in the Receivables, Dealer Agreements, the Receivables
Purchase Agreement, any insurance policies related to a Receivable or any other
Trust Asset, (b) will not create or allow to exist any lien or restriction on
transfer of the Receivables except for the lien in favor of the Indenture
Trustee, or sign or file under the UCC of any jurisdiction any financing
statement
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or security agreement naming HAFC, the Servicer or any affiliate thereof as
debtor or authorizing any such filing, (c) will not extend or amend any
Receivable other than as specified in the Sale and Servicing Agreement, (d) will
service the Receivables in compliance with the Sale and Servicing Agreement and
in material compliance with its standard and customary procedures for servicing
and (e) will notify the Indenture Trustee of any change in its principal offices
and will maintain the files relating to the Receivables in the United States.
PAYMENTS ON RECEIVABLES; DEPOSITS TO COLLECTION ACCOUNT
The Indenture Trustee will establish and maintain a separate trust account
(the "Collection Account") for the benefit of the Noteholders and the Issuer.
The Collection Account will be an Eligible Account (as defined herein). Except
as otherwise described herein and subject to the investment provision described
in the following paragraphs, within two Business Days following receipt by the
Servicer or HAFC of amounts in respect of the Receivables excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, or similar items, the Servicer will cause such amounts to be
deposited in the Collection Account. Amounts deposited in the Collection Account
may be invested in Eligible Investments maturing so that funds will be available
for distribution no later than the close of business on the day prior to the
related Payment Date. On the fifth calendar day prior to each Payment Date, the
Servicer will notify the Indenture Trustee and the Issuer of the amount of such
deposit to be included in the Available Funds for the related Payment Date. On
or prior to each Payment Date, the Servicer will deposit to the Collection
Account amounts which are to be included in the Available Funds for the related
Payment Date. Notwithstanding the foregoing, for as long as HFC remains the
Servicer under the Sale and Servicing Agreement and maintains a commercial paper
rating of at least P-1 from Moody's and A-1 from Standard & Poor's, which is
currently the case, the Servicer is not required to deposit collections into the
Collection Account on the day indicated in the preceding sentence, but may use
for its own benefit all such collections until the related Payment Date. So long
as such ratings are maintained, the Servicer will make such deposits in an
amount equal to the net amount of such deposits and withdrawals which would have
been made had the ratings conditions described in this paragraph not applied.
"Eligible Investments" shall mean negotiable instruments or securities which
evidence: (a) direct obligations of, or obligations fully guaranteed as to
timely payment by, the United States of America, (b) demand deposits, time
deposits or certificates of deposit of depository institutions or trust
companies incorporated under the laws of the United States of America or any
state thereof and subject to supervision and examination by federal or state
banking or depository institution authorities; provided the short-term debt
rating of such depository institution or trust company shall be in the highest
rating category of the Rating Agencies, (c) commercial paper having, at the time
of the Trust's investment or a contractual commitment to invest, a rating in the
highest rating category of the Rating Agencies, (d) demand deposits, time
deposits and certificates of deposit which are fully insured by the FDIC having,
at the time of the Issuer's investment therein, a rating in the highest rating
category of the Rating Agencies, (e) bankers' acceptances issued by any
depository institution or trust company described in (b) above, (f) money market
funds having, at the time of the Issuer's investment therein, a rating in the
highest rating category of the Rating Agencies, (g) time deposits, other than as
referred to in (d) above (having maturities not later than the succeeding
Payment Date), with an entity, the commercial paper of such entity having a
credit rating in the highest rating category of the Rating Agencies, (h) demand
notes of HFC for so long as HFC commercial paper has, at the time of the
Issuer's investment thereof, a rating in the highest rating category of the
Rating Agencies and (i) any other investment acceptable to the Rating Agencies.
At any time that the commercial paper issued by HFC does not satisfy the
rating requirements specified above, HFC may continue to hold collections prior
to distribution as described above so long as HFC causes to be maintained an
irrevocable letter of credit or surety bond or other credit enhancement
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instrument in form and substance satisfactory to each Rating Agency (a "Servicer
Credit Facility"), issued by a depository institution or insurance company
having a rating on its (i) short-term obligations of at least P-1 and long-term
obligations of at least A2 by Moody's and (ii) short-term obligations of A-1 and
long-term obligations of A by Standard & Poor's or other ratings if approved by
the Rating Agencies and providing that the Indenture Trustee may draw thereon in
the event that HFC, as Servicer, fails to make any deposit or payment required
under the Sale and Servicing Agreement.
An "Eligible Account" is an account that is either (i) a segregated account
with a depository institution organized under the laws of the United States or
any of the states thereof, which depository at the time of any deposit therein
has a net worth in excess of $50,000,000 and long-term debt rating acceptable to
the Rating Agencies or a short-term deposit obligation rating acceptable to the
Rating Agencies, or (ii) a segregated trust account with the corporate trust
department of a depository organized under the laws of the United States or any
one of the states thereof, and acting as a trustee for funds deposited in such
account, so long as any of the unsecured, unguaranteed senior debt securities of
such depository shall have a long-term debt rating acceptable to the Rating
Agencies.
The Servicer will have the revocable power to withdraw funds from the
Collection Account and to instruct the Indenture Trustee to make withdrawals and
payments from the Collection Account for the purpose of carrying out its duties
under the Sale and Servicing Agreement and the Indenture.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments called for
under the Receivables and will, consistent with the Sale and Servicing
Agreement, follow such collection procedures as it follows from time to time
with respect to motor vehicle retail installment sales contracts in its
servicing portfolio which are comparable to the Receivables. HAFC, as
Subservicer, will follow the Servicer's collection procedures as they may be
revised from time to time. Consistent with the above, HAFC or the Servicer may
in their discretion waive any late payment charge or any assumption or other fee
or charge that may be collected in the ordinary course of servicing the
Receivables.
HAFC or the Servicer may arrange with a borrower a schedule for the payment
of interest due and unpaid for a period, provided that any such arrangement is
consistent with the Servicer's policies with respect to comparable retail
installment sales contracts held in its portfolio.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As long as HFC is the master servicer it will receive, or be entitled to
retain a servicing fee on behalf of itself and HAFC, as the Subservicer, after
making payments on the Notes and making required deposits in the Reserve
Account. Such fee will be paid monthly in arrears in the amount of 3.00% per
annum of the Pool Balance as of the beginning of the related Collection Period
(the "Servicing Fee"). If HFC is no longer the master servicer, the Servicing
Fee will be paid the successor master servicer prior to any distributions on the
Notes and making required deposits in the Reserve Account. The Servicer is also
entitled to retain all administrative fees, expenses and charges paid on behalf
of borrowers, including late fees, prepayment fees and liquidation fees (the
"Supplemental Servicing Fees").
The Servicer will pay certain ongoing expenses associated with the Issuer
and the Notes, and incurred by it in connection with its responsibilities under
the Sale and Servicing Agreement, including, without limitation, payment of the
fees and disbursements of the Indenture Trustee and the Owner Trustee. In
addition, the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with its servicing duties, such right of
reimbursement being prior to the rights of Noteholders to payments of principal
and interest.
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EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides for delivery on or before April 30
in each year, to the Owner Trustee, the Indenture Trustee and the Rating
Agencies of an annual statement signed by an officer of the Servicer or of HAFC
to the effect that the Servicer or HAFC has fulfilled the material obligations
of the Servicer under the Sale and Servicing Agreement throughout the preceding
calendar year, except as specified in such statement.
On or before April 30 of each year, the Servicer will furnish a report
prepared by a firm of independent certified public accountants to the Owner
Trustee, the Indenture Trustee and the Rating Agencies to the effect that such
accountants have examined certain documents and the records relating to
servicing of the Receivables (including the Sale and Servicing Agreement) and
compared mathematical calculations for monthly servicing reports selected by
such accountants with the Servicer's computer reports, and such examination, has
disclosed no items of noncompliance with the provision of the Sale and Servicing
Agreement or variations in the results of such calculations which, in the
opinion of the firm, are material, except for such items of non-compliance as
shall be referred to in the report.
CERTAIN MATTERS REGARDING THE SERVICER AND THE SELLER
The Sale and Servicing Agreement provides that the Servicer may not resign
from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or (ii) upon the satisfaction of the following conditions: (a) the
Servicer has delivered an executed assumption agreement in form satisfactory to
the Indenture Trustee, assigning its obligations and duties to an entity as to
which the Rating Agencies have confirmed that such assumption will not result in
a lowering of the then current ratings of the Notes, and (b) the successor meets
the eligibility requirements specified in the Sale and Servicing Agreement. No
such resignation will become effective until the Indenture Trustee or a
successor servicer has assumed the Servicer's obligations and duties under the
Sale and Servicing Agreement.
The Servicer may perform any of its duties and obligations under the Sale
and Servicing Agreement through one or more subservicers or delegates, which may
be affiliates of the Servicer. Notwithstanding any such arrangement, the
Servicer will remain liable and obligated to the Issuer, the Indenture Trustee,
and the Noteholders for the Servicer's duties and obligations under the Sale and
Servicing Agreement, as if the Servicer itself were performing such duties and
obligations. It is expected that so long as HFC is the master servicer, HAFC
will subservice the Receivables on behalf of HFC.
The Sale and Servicing Agreement will also provide that neither the
Servicer, the Seller, nor any director, officer, employee or agent of the
Servicer or the Seller will be under any liability to the Issuer, the Indenture
Trustee or any Noteholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Sale and Servicing Agreement,
or for errors in judgment; provided, however, that neither the Servicer, the
Seller nor any such person will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in the performance of duties or by reason of reckless disregard of obligations
and duties thereunder. In addition, the Sale and Servicing Agreement provides
that neither the Servicer nor the Seller will be under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
respective duties under the Sale and Servicing Agreement and which in its
opinion may involve it in any expense or liability.
Any corporation into which the Servicer or the Seller may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer or the Seller shall be a party, or any
corporation succeeding to the business of the Servicer or the Seller shall be
the successor of the Servicer or the Seller under the Sale and Servicing
Agreement.
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SERVICER TERMINATION EVENT
"Servicer Termination Event" under the Sale and Servicing Agreement will
consist of the occurrence and continuance of any of the following: (i) any
failure by the Servicer to deliver to the Trustee for distribution to the
Noteholders any required payment, which failure continues unremedied for five
days after written notice is received by the Servicer from the Indenture Trustee
or after discovery of such failure by a responsible officer of the Servicer;
(ii) any failure by the Servicer duly to observe or perform in any material
respect certain material covenants and agreements set forth in the Sale and
Servicing Agreement which failure continues unremedied for 60 days after written
notice of such failure is given; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings with respect to the Servicer or certain actions by the Servicer
indicating its insolvency, inability to pay its obligations or initiating a
reorganization under bankruptcy laws; and (iv) the material breach of certain of
the Servicer's representations or warranties and the Servicer's failure to cure
such breach within 60 days after notice thereof.
Notwithstanding the foregoing, a delay in or failure of performance referred
to under clause (i) above, for five Business Days and (ii) above, for a period
of 60 days, shall not constitute a Servicer Termination Event if such delay or
failure could not be prevented by the exercise of reasonable diligence by the
Servicer and such delay or failure was caused by an act of God or other similar
occurrence. Upon the occurrence of any such event the Servicer shall not be
relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of the Sale and Servicing Agreement and the
Servicer shall provide the Seller prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations.
RIGHTS UPON SERVICER TERMINATION EVENT
If a Servicer Termination Event under the Sale and Servicing Agreement
remains unremedied, the Indenture Trustee may terminate all the rights and
obligations of the Servicer under such Agreement, whereupon the Indenture
Trustee or such other successor servicer as shall have been appointed by the
Indenture Trustee will succeed to all the responsibilities, duties, and
liabilities of the Servicer under such Agreement. Any such successor master
servicer will succeed to all the responsibilities, duties, and liabilities of
the Servicer under the Sale and Servicing Agreement and will be entitled to
similar compensation arrangements. There is no assurance that the succession of
a successor servicer will not result in a material disruption in the performance
of the duties of the master servicer.
AMENDMENT
The Sale and Servicing Agreement may be amended by the Seller, the Servicer,
the Owner Trustee and the Indenture Trustee, but without the consent of the
Noteholders, provided that such action shall not adversely affect in any
material respect the interests of any Noteholder. The Seller, the Servicer and
the Indenture Trustee may also amend the Sale and Servicing Agreement with the
consent of Noteholders holding a majority of the principal amount of the Notes
outstanding to add, change or eliminate any provisions of such Agreement;
provided that such action will not (i) reduce in any manner the amount of, or
delay the timing of, collections on Receivables or payments that are required to
be made for the benefit of the Noteholders without the consent of holders of all
the outstanding Notes; (ii) change the manner of calculating the interest of any
Noteholder without the consent of holders of all the outstanding Notes; (iii)
adversely affect any rating of the Notes by the Rating Agencies without the
consent of not less than a majority of the outstanding principal balance of the
Notes; or (iv) reduce the aforesaid percentage of the Noteholders required to
consent to any such amendment without the consent of the holders of all Notes
outstanding.
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DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENT
The Receivables transferred to the Issuer by the Seller were acquired by the
Seller from HAFC pursuant to the Master Receivables Purchase Agreement, dated as
of March 1, 1998 entered into by and between the Seller, as purchaser of the
Receivables, and HAFC, as seller of the Receivables (the "Receivables Purchase
Agreement"). The Receivables Purchase Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Pursuant to the Sale
and Servicing Agreement, the Receivables were transferred by the Seller to the
Issuer, and the Seller assigned its rights in, to and under the Receivables
Purchase Agreement with respect to such balances to the Issuer. The following
summary describes the material terms of the Receivables Purchase Agreement.
SALE OF RECEIVABLES
Pursuant to the Receivables Purchase Agreement, HAFC sold to the Seller all
its right, title and interest in and to all of the Receivables. The purchase
price of the Receivables was not less than the principal amount thereof as of
the time of sale, plus the present value of the anticipated excess spread
discounted to account for uncertainty in future performance of the Receivables.
In connection with such sale of the Receivables to the Seller, HAFC has
indicated in its computer files that the Receivables have been sold to the
Seller and that such Receivables have been further sold or transferred by the
Seller to the Issuer. In addition, HAFC has provided to the Seller a computer
file or a microfiche list containing a true and complete list showing each
Receivable, identified by account number and by total outstanding balance on the
date the Receivable was sold to the Seller. In its capacity as Subservicer, HAFC
has retained possession of the records and agreements relating to the
Receivables. Such records and agreements are not segregated by HAFC from other
documents and agreements relating to other receivables and are not stamped or
marked to reflect the sale or transfer of the Receivables to the Seller.
However, the computer records of HAFC are or will be marked to evidence such
sale or transfer. HAFC has filed a UCC financing statement meeting the
requirements of applicable state law and in each of the jurisdictions in which
such filings are required in order to maintain the lien priority with respect to
the Receivables. See "Risk Factors--Security interests in both the Receivables
and the underlying vehicles may not be valid under certain circumstances" and
"Certain Legal Aspects of the Receivables".
REPRESENTATIONS AND WARRANTIES
In the Receivables Purchase Agreement, HAFC represented and warranted to the
Seller to the effect, among other things, that (a) the Receivables Purchase
Agreement constitutes a legal, valid and binding obligation of HAFC, (b) each
Receivable satisfied certain eligibility criteria, (c) the assignment pursuant
to the Receivables Purchase Agreement constitutes a valid sale to the Seller of
all right, title and interest of HAFC in and to the Receivables, the security
interests in the financed vehicles, and in the proceeds thereof or, if held not
to constitute a sale, constitutes a grant of a security interest in the
Receivables, (d) the assignment pursuant to the Receivables Purchase Agreement
constitutes a valid sale to the Seller of all right, title and interest in and
to any related service contracts on financed vehicles and rights against Dealers
pursuant to Dealer Agreements, and (e) the assignment pursuant to the
Receivables Purchase Agreement constitutes a valid sale to the Seller of all
right, title and interest in and to any physical damage, credit life or
disability insurance policies covering financed vehicles or borrowers. If the
breach of any of the representations and warranties described in this paragraph
results in the obligation of the Seller under the Sale and Servicing Agreement
to accept retransfer of the Receivables, either the Seller, or at the Seller's
election, HAFC, will repurchase the affected Receivables for an amount equal to
the unpaid principal balance thereof, plus accrued and unpaid finance charges
from the last date billed through the end of the current Collection Period.
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AMENDMENTS
The Receivables Purchase Agreement may be amended by the Seller and HAFC
without the consent of the Noteholders. However, as certified by the Seller, no
such amendment may adversely affect in any material respect the interests of any
Noteholder.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTERESTS IN VEHICLES
In all the states in which the Receivables have been originated, retail
installment sale contracts such as the Receivables evidence the credit sale of
automobiles, light duty trucks and vans by Dealers to borrowers. The Receivables
also constitute personal property security agreements and include grants of
security interests in the financed vehicles under the Uniform Commercial Code
(the "UCC").
Perfection of security interests in the financed vehicles is generally
governed by the motor vehicle registration laws of the state in which the
vehicle is located. In the states in which a majority of the Receivables have
been originated, a security interest in a vehicle generally may be perfected
only by causing such vehicle's certificate of title to be amended to note the
security interest of the secured party. Such notation of a secured party's
security interest is generally effected in such states by depositing with the
applicable state highway department, motor vehicles registrar, or similar
authority along with any necessary registration fees, the vehicle's certificate
of title and an application containing the name and address of the secured
party.
Pursuant to the Receivables Purchase Agreement, HAFC will assign its
security interest in the financed vehicles securing the receivables to the
Seller. Pursuant to the Sale and Servicing Agreement, the Seller will then
assign such security interests to the Issuer. However, because of the
administrative burden and expense, HAFC, the Servicer, the Seller, the Indenture
Trustee and the Owner Trustee will not amend any certificate of title to
identify the Issuer as the new secured party on the certificates of title
relating to the financed vehicles. Also, HAFC, as agent for the Servicer, may
continue to hold any certificates of title relating to the financed vehicles in
its possession. See "Description of the Trust Documents--Sale and Assignment of
Receivables."
In most states, assignments such as those under the Receivables Purchase
Agreement and the Sale and Servicing Agreement are an effective conveyance of a
security interest without amendment of any lien noted on a vehicle's certificate
of title, and the assignee succeeds thereby to the assignor's rights as secured
party. In the absence of fraud or forgery by the vehicle owner, HAFC, or the
Servicer, or administrative error by state or local agencies, the notation of
HAFC's (or any predecessor of HAFC's or any subsidiary's) lien on the
certificates of title and, if applicable, HAFC's or the Servicer's possession of
the certificate of title will be sufficient to protect the Issuer against the
rights of subsequent purchasers of a financed vehicle or subsequent lenders who
take a security interest in a financed vehicle. If there are any financed
vehicles as to which a perfected security interest is not obtained, the Issuer's
security interest will be subordinate to, among others, subsequent purchasers of
the financed vehicles and holders of perfected security interests. Such a
failure, however, would constitute a breach of the Seller's warranties under the
Sale and Servicing Agreement and would create an obligation of the Seller to
purchase the related Receivable unless the breach is cured. See "Description of
the Trust Documents--Sale and Assignment of Receivables." By not identifying the
Issuer as the secured party on the certificate of title, the security interest
of the Issuer in the financed vehicle could be defeated through fraud or
negligence.
Under Texas law, unless the borrower has notice of the assignment of its
retail installment sales contract, or any outstanding balance thereunder,
payment by the borrower to the holder last known to such borrower will be
binding upon all subsequent holders or assignees of the retail installment sales
contract. By not notifying the borrower of the assignment of the retail
installment sales contract to the Issuer, the
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Issuer would not have a cause of action against the borrower for any payments
made by the borrower to the holder or assignee last known to such borrower.
Under the laws of most states, the perfected security interest in a vehicle
continues for four months after a vehicle is moved to a state other than the
state in which it is initially registered and thereafter until the vehicle owner
re-registers the vehicle in the new state. A majority of states generally
require a surrender of a certificate of title to re-register a vehicle;
accordingly, a secured party must surrender possession if it holds the
certificate of title to the vehicle, or, in the case of vehicles registered in
states providing for the notation of a security interest on the certificate of
title but not possession by the secured party, the secured party would receive
notice of surrender if the security interest is noted on the certificate of
title. Thus, the secured party would have the opportunity to re-perfect its
security interest in the vehicle in the state of relocation. In other states
that do not require a certificate of title for registration of a motor vehicle
or in cases of fraud on the part of the borrower, re-registration could defeat
perfection. In the ordinary course of servicing receivables, HAFC takes steps to
effect re-perfection upon receipt of notice of re-registration or information
from the borrower as to relocation. Similarly, when a borrower sells a vehicle,
HAFC must surrender possession of the certificate of title or will receive
notice as a result of its security interest noted thereon and accordingly will
have an opportunity to require satisfaction of the related Receivable before
release of the security interest. Under the Sale and Servicing Agreement, the
Servicer is obligated to take appropriate steps, at the Servicer's expense, to
maintain perfection of security interests in the financed vehicles.
Under the laws of most states, liens for repairs performed on, and for
storage of, a motor vehicle and liens for certain unpaid taxes take priority
over even a perfected security interest in a financed vehicle. The Code also
grants priority to certain federal tax liens over the lien of a secured party.
The laws of certain states, and federal law permit the confiscation of motor
vehicles under certain circumstances if used in unlawful activities, which may
result in the loss of a secured party's perfected security interest in the
confiscated motor vehicle. The Seller will represent to the Issuer in the Sale
and Servicing Agreement that each security interest in a financed vehicle is or
will be prior to all other present liens (other than tax liens and liens that
arise by operation of law) upon, and security interests in, such financed
vehicle. However, liens for repairs or taxes, or the confiscation of a financed
vehicle, could arise or occur at any time during the term of a Receivable. No
notice will be given to the Indenture Trustee in the event such a lien arises or
confiscation occurs.
REPOSSESSION
In the event of a default by vehicle purchasers, the holder of the retail
installment sale contract has all the remedies of a secured party under the UCC
of the state in which enforcement is to take place, except where specifically
limited by other laws. In states other than Louisiana and Wisconsin, (i) the UCC
remedies of a secured party include the right to repossession by self-help
means, unless such means would constitute a breach of the peace; (ii) unless a
vehicle is voluntarily surrendered, self-help repossession is the method that
will be employed by HAFC in the majority of instances in which a default occurs
and is accomplished by retaking possession of the financed vehicle; and (iii) in
cases where the borrower objects or raises a defense to repossession, or if
otherwise required by applicable state law, a court order must be obtained from
the appropriate state court, and the vehicle must then be repossessed in
accordance with that order. In Louisiana and Wisconsin, unless the vehicle is
voluntarily surrendered or abandoned, judicial means must be employed in order
to seize the vehicle. In certain states under certain circumstances after the
vehicle has been repossessed, the borrower may reinstate the contract by paying
the delinquent installments on the contract and other amounts due.
NOTICE OF SALE; REDEMPTION RIGHTS
In the event of default by the borrower, some jurisdictions require that the
borrower be notified of the default and be given a time period within which the
borrower may cure the default prior to repossession.
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Generally, this right of reinstatement may be exercised on a limited number of
occasions in any one-year period.
The UCC and other state laws require the secured party to provide the
borrower with reasonable notice of the date, time, and place of any public sale
and/or the date after which any private sale of the collateral may be held. In
some states the borrower has the right to redeem the collateral prior to actual
sale by paying the secured party the unpaid principal balance of the obligation
plus reasonable expenses for repossessing, holding, and preparing the collateral
for disposition and arranging for sale, plus, in some jurisdictions, reasonable
attorneys' fees, or, in some other states, by payment of delinquent installments
or the unpaid balance. Repossessed vehicles are generally resold by HAFC through
automobile auctions which are attended principally by automotive dealers.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of resale of the repossessed vehicles generally will be applied
to the expenses of resale and repossession and then to the satisfaction of the
indebtedness of the borrower on the Receivable. While some states impose
prohibitions or limitations on deficiency judgments, if the net proceeds from
resale do not cover the full amount of the indebtedness a deficiency judgment
can be sought in those states that do not prohibit or limit such judgments.
Additionally, under Texas law, in order for a creditor in a secured transaction
to sue for a deficiency, the lender must first comply with those provisions of
the UCC which govern disposition of collateral and then dispose of the
collateral in a commercially reasonable manner. Any deficiency judgment would be
a personal judgment against the borrower for the shortfall, and a defaulting
borrower can be expected to have very little capital or sources of income
available following repossession. Therefore, in many cases, it may not be useful
to seek a deficiency judgment or, if one is obtained, it may be settled at a
significant discount.
Occasionally, after resale of a vehicle and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC requires the
lender to remit the surplus to any other holder of any subordinate lien with
respect to the vehicle who has notified the lender within the specified time
period or, if no such lienholder exists or there are remaining funds, the UCC
requires the lender to remit the surplus to the borrower.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. These laws include the Truth-in Lending Act, the Equal Credit
Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting
Act, the Fair Debt Collection Practices Act, the Magnuson-Moss Warranty Act, the
Federal Reserve Board's Regulations B and Z, state adaptations of the National
Consumer Act and of the Uniform Consumer Credit Code, and state motor vehicle
retail installment sales acts, retail installment sales acts and other similar
laws. Also, state laws may impose finance charge ceilings and other restrictions
on consumer transactions and require contract disclosures in addition to those
required under federal law. These requirements may impose specific statutory
liabilities upon creditors who fail to comply with their provisions. In some
cases, this liability could affect an assignee's (such as the Issuer's) ability
to enforce retail installment sales contracts such as the Receivables.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, state statutes or the common law in certain
states, has the effect of subjecting a seller (and certain related lenders and
their assignees, such as the Issuer) in a consumer credit transaction and any
assignee of the seller to all claims and defenses which the borrower in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by the borrower under the contract, and
the holder of the contract may also be unable to collect any balance remaining
due thereunder from the borrower. The
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Receivables will be subject to the requirements of the FTC Rule. Accordingly,
the Indenture Trustee, as holder of the Receivables, will be subject to any
claims or defense that the purchaser of the financed vehicle may assert against
the seller of the financed vehicle. Such claims are limited to a maximum
liability equal to the amounts theretofore paid by the borrower on the
Receivable.
Under most state motor vehicle dealer licensing laws, sellers of motor
vehicles are required to be licensed to sell motor vehicles at retail sale.
Furthermore, the Federal Odometer Regulations promulgated under the Motor
Vehicle Information and Cost Savings Act require that all sellers of new and
used vehicles furnish a written statement signed by the seller certifying the
accuracy of the odometer reading. If a seller is not properly licensed or if an
odometer disclosure statement was not provided to the purchaser of the related
financed vehicle, the borrower may be able to assert a defense against the
seller of the vehicle.
Courts have imposed general equitable principles on secured parties pursuing
repossession of collateral or litigation involving deficiency balances. These
equitable principles may have the effect of relieving a borrower from some or
all of the legal consequences of a default.
In several cases, borrowers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. Courts have generally upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by the
creditor do not involve sufficient state action to afford constitutional
protection to consumers.
The Seller will warrant under the Sale and Servicing Agreement, that each
Receivable complies with all requirements of law in all material respects.
Accordingly, if a borrower has a claim against the Issuer for violation of any
law and such claim materially and adversely affects the Issuer's interest in a
Receivable, such violation would constitute a breach of warranty under the Sale
and Servicing Agreement and would create an obligation of the Seller to
repurchase the Receivable unless the breach is cured. See "Description of the
Trust Documents--Sale and Assignment of the Receivables."
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940. Under the terms of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"),
a borrower who enters military service after the origination of such borrower's
Receivable (including a borrower who was in reserve status and is called to
active duty after origination of the Receivable), may not be charged interest
(including fees and charges) above an annual rate of 6% during the period of
such borrower's active duty status, unless a court orders otherwise upon
application of the lender. The Relief Act applies to borrowers who are members
of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast Guard,
and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military service
(including reservists who are called to active duty) after origination of the
related Receivable, no information can be provided as to the number of
Receivables that may be effected by the Relief Act. Application of the Relief
Act would adversely affect, for an indeterminate period of time, the ability of
the Servicer to collect full amounts of interest on certain of the Receivables.
Any shortfall in interest collections resulting from the application of the
Relief Act or similar legislation or regulations, which would not be recoverable
from the related Receivables, would result in a reduction of the amounts
distributable to the holders of the Notes. In addition, the Relief Act imposes
limitations that would impair the ability of the Servicer to foreclose on an
affected Receivable during the borrower's period of active duty status, and,
under certain circumstances, during an additional three month period thereafter.
Thus, in the event that the Relief Act or similar legislation or regulations
applies to any Receivable which goes into default, there may be delays in
payment and losses on the Notes in connection therewith. Any other interest
shortfalls, deferrals or forgiveness of payments on the Receivables resulting
from similar legislation or regulations may result in delays in payments or
losses to Noteholders.
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OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including Insolvency Laws, may interfere
with or affect the ability of a lender to realize upon collateral or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding under the federal
bankruptcy law, a court may prevent a lender from repossessing a motor vehicle,
and, as part of the rehabilitation plan, reduce the amount of the secured
indebtedness to the market value of the motor vehicle at the time of bankruptcy
(as determined by the court), leaving the party providing financing as a general
unsecured creditor for the remainder of the indebtedness. A bankruptcy court may
also reduce the monthly payments due under a contract or change the rate of
interest and time of repayment of the indebtedness.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
considerations to investors of the purchase, ownership and disposition of the
securities offered hereby. The discussion is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below does not purport to deal with all federal tax considerations
applicable to all categories of investors. Certain holders, including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
taxpayers subject to the alternative minimum tax, and holders that will hold the
Securities as other than capital assets, may be subject to special rules that
are not discussed below. It is recommended that investors consult their own tax
advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the securities.
TAX CHARACTERIZATION OF THE ISSUER
Dewey Ballantine LLP ("Tax Counsel") is of the opinion that, assuming the
parties will comply with the terms of the Trust Agreement and related documents,
the Issuer will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes.
If the Issuer were taxable as a corporation for federal income tax purposes,
the Issuer would be subject to corporate income tax on its taxable income. The
Issuer's taxable income would include all its income on the Receivables,
possibly reduced by its interest expense on the Notes. Any such corporate income
tax could materially reduce cash available to make payments on the Notes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE OFFERED NOTES AS INDEBTEDNESS. The Seller agrees, and the
Noteholders will agree by their purchase of Offered Notes, to treat the Offered
Notes as debt for all federal, state and local income tax purposes. There are no
regulations, published rulings or judicial decisions involving the
characterization for federal income tax purposes of securities with terms
substantially the same as the Offered Notes. In general, whether instruments
such as the Offered Notes constitute indebtedness for federal income tax
purposes is a question of fact, the resolution of which is based primarily upon
the economic substance of the instruments and the transaction pursuant to which
they are issued rather than merely upon the form of the transaction or the
manner in which the instruments are labeled. The Internal Revenue Service
("IRS") and the courts have set forth various factors to be taken into account
in determining, for federal income tax purposes, whether or not an instrument
constitutes indebtedness and whether a transfer of property is a sale because
the transferor has relinquished substantial incidents of ownership in the
property or whether such transfer is a borrowing secured by the property. On the
basis of its analysis of such factors as applied to the facts and its analysis
of the economic substance of the contemplated transaction, Tax Counsel is of the
opinion that, for federal income tax purposes, the Offered Notes will be treated
as indebtedness of the Issuer, and not as an ownership interest in the
Receivables, or an equity interest in the Issuer or in a separate association
taxable as a corporation or other taxable entity.
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If the Offered Notes are characterized as indebtedness, interest paid or
accrued on an Offered Note will be treated as ordinary income to the Noteholders
and principal payments on an Offered Note will be treated as a return of capital
to the extent of the Noteholder's basis in the Offered Note allocable thereto.
An accrual method taxpayer will be required to include in income interest on the
Offered Notes when earned, even if not paid, unless it is determined to be
uncollectible. The Issuer will report to Noteholders of record and the IRS in
respect of the interest paid and original issue discount, if any, accrued on the
Offered Notes to the extent required by law.
Although, as described above, it is the opinion of Dewey Ballantine LLP
that, for federal income tax purposes, the Offered Notes will be characterized
as debt, such opinion is not binding on the IRS and thus no assurance can be
given that such a characterization will prevail. If the IRS successfully
asserted that one or more of the Offered Notes did not represent debt for
federal income tax purposes, the Noteholders would likely be treated as owning
an interest in a partnership and not an interest in an association (or publicly
traded partnership) taxable as a corporation. If the Noteholders were treated as
owning an equitable interest in a partnership, the partnership itself would not
be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's income,
gain, loss, deductions and credits. The amount, timing and characterization of
types of income and deductions for a Noteholder would differ if the Offered
Notes were held to constitute partnership interests, rather than indebtedness.
Since the Issuer will treat the Offered Notes as indebtedness for federal income
tax purposes, the Servicer will not attempt to satisfy the tax reporting
requirements that would apply under this alternative characterization of the
Offered Notes. Investors that are foreign persons should consult their own tax
advisors in determining the federal, state, local and other tax consequences to
them of the purchase, ownership and disposition of the Offered Notes. See
"TAXATION OF CERTAIN FOREIGN INVESTORS" below.
ORIGINAL ISSUE DISCOUNT. It is anticipated that the Offered Notes will not
have any original issue discount ("OID") other than possibly OID within a DE
MINIMIS exception and that accordingly the provisions of sections 1271 through
1273 and 1275 of the Internal Revenue Code of 1986, as amended (the "Code"),
generally will not apply to the Notes. OID will be considered DE MINIMIS if it
is less than 0.25% of the principal amount of an Offered Note multiplied by its
expected weighted average life.
MARKET DISCOUNT. A subsequent purchaser who buys an Offered Note for less
than its principal amount may be subject to the "market discount" rules of
section 1276 through 1278 of the Code. If a subsequent purchaser of an Offered
Note disposes of such Offered Note (including certain nontaxable dispositions
such as a gift), or receives a principal payment, any gain upon such sale or
other disposition will be recognized, or the amount of such principal payment
will be treated, as ordinary income to the extent of any "market discount"
accrued for the period that such purchaser holds the Offered Note. Such holder
may instead elect to include market discount in income as it accrues with
respect to all debt instruments acquired in the year of acquisition of the
Offered Notes and thereafter. Market discount generally will equal the excess,
if any, of the then current unpaid principal balance of the Offered Note over
the purchaser's basis in the Note offered immediately after such purchaser
acquired the Offered Note. In general, market discount on an Offered Note will
be treated as accruing over the term of such Offered Note in the ratio of
interest for the current period over the sum of such current interest and the
expected amount of all remaining interest payments, or at the election of the
holder, under a constant yield method. At the request of a holder of an Offered
Note, information will be made available that will allow the holder to compute
the accrual of market discount under the first method described in the preceding
sentence.
The market discount rules also provide that a holder who incurs or continues
indebtedness to acquire an Offered Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
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Notwithstanding the above rules, market discount on an Offered Note will be
considered to be zero if it is less than a DE MINIMIS amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is DE MINIMIS, the actual
amount of discount must be allocated to the remaining principal distributions on
the Offered Notes and, when each such distribution is received, capital gain
equal to the discount allocated to such distribution will be recognized.
MARKET PREMIUM. A subsequent purchaser who buys an Offered Note for more
than its principal amount generally will be considered to have purchased the
Note at a premium. Such holder may amortize such premium, using a constant yield
method, over the remaining term of the Offered Note and, except as future
regulations may otherwise provide, may apply such amortized amounts to reduce
the amount of interest reportable with respect to such Note over the period from
the purchase date to the date of maturity of the Offered Note. The amortization
of such premium on an obligation that provides for partial principal payments
prior to maturity should be governed by the methods for accrual of market
discount on such an obligation (described above). A holder that elects to
amortize premium must reduce his tax basis in the related obligation by the
amount of the aggregate deductions (or interest offsets) allowable for
amortization of premium. If a debt instrument purchased at a premium is redeemed
in full prior to its maturity, a purchaser who has elected to amortize premium
should be entitled to a deduction for any remaining unamortized premium in the
taxable year of redemption.
SALE OR REDEMPTION OF OFFERED NOTES. If an Offered Note is sold or retired,
the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and such Holder's adjusted basis in the Note. Such
adjusted basis generally will equal the cost of the Note to the seller,
increased by any original issue discount included in the seller's gross income
in respect of the Note (and by any market discount which the taxpayer elected to
include in income or was required to include in income), and reduced by payments
other than payments of qualified stated interest in respect of the Note received
by the seller and by any amortized premium. Similarly, a holder who receives a
payment other than a payment of qualified stated interest in respect of an
Offered Note, either on the date on which such payment is scheduled to be made
or as a prepayment, will recognize gain equal to the excess, if any, of the
amount of the payment over his adjusted basis in the Note allocable thereto. A
Noteholder who receives a final payment which is less than his adjusted basis in
the Offered Note will generally recognize a loss in the amount of the shortfall
on the last day of his taxable year. Generally, any such gain or loss realized
by an investor who holds a Note as a "capital asset" within the meaning of Code
Section 1221 should be capital gain or loss, except as described above in
respect of market discount and except that a loss attributable to accrued but
unpaid interest may be an ordinary loss.
TAXATION OF CERTAIN FOREIGN INVESTORS. Interest payments (including OID, if
any) on the Offered Notes made to a Noteholder who is a nonresident alien
individual, foreign corporation or other non-United States person (a "foreign
person") generally will be "portfolio interest" which is not subject to United
States tax if such payments are not effectively connected with the conduct of a
trade or business in the United States by such foreign person and if the Trust
(or other person who would otherwise be required to withhold tax from such
payments) is provided with an appropriate statement that the beneficial owner of
the Offered Note identified on the statement is a foreign person.
BACKUP WITHHOLDING. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Offered Notes, may be subject to
the "backup withholding tax" under Section 3406 of the Code at a rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but that does not do so in the proper manner.
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STATE AND LOCAL TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Offered Notes.
State and local income tax laws may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any aspect of the
income tax laws of any state or locality. Therefore, potential Noteholders
should consult their own tax advisors with respect to the various state and
local tax consequences of an investment in the Offered Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension, profit
sharing, or other employee benefit plan from engaging in certain transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to the plan. ERISA also
imposes certain duties on persons who are fiduciaries of plans subject to ERISA
and prohibits certain transactions between a plan and parties in interest with
respect to such plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a plan is
considered to be a fiduciary of such plan (subject to certain exceptions not
here relevant). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code for such persons.
In addition to the matters described below, purchasers of Notes that are
insurance companies should consult with their counsel with respect to the United
States Supreme Court case interpreting the fiduciary responsibility rules of
ERISA, JOHN HANCOCK MUTUAL LIFE INSURANCE CO. V. HARRIS TRUST AND SAVINGS BANK,
114 S. Ct. 517 (1993). In JOHN HANCOCK, the Supreme Court ruled that assets held
in an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to make purchases of the
Notes.
Certain transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the Issuer were
deemed to be "plan assets" of an employee benefit plan subject to ERISA or the
Code, or an individual retirement account (an "IRA"), or any entity whose
underlying assets are deemed to be assets of an employee benefit plan or an IRA
by reason of such employee benefit plan's or such IRA's investment in such
entity (each a "Benefit Plan"). Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of the Issuer
would be treated as plan assets of a Benefit Plan for the purposes of ERISA and
the Code only if the Benefit Plan acquires an "equity interest" in the Issuer
and none of the exceptions contained in the Plan Assets Regulation is
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The Seller
believes that the Class A and Class B Notes should be treated as indebtedness
without substantial equity features for purposes of the Plan Assets Regulation.
This determination is based in part upon the traditional debt features of the
Class A and Class B Notes, including the reasonable expectation of purchasers of
such Notes that the Notes will be repaid when due, as well as the absence of
conversion rights, warrants and other typical equity features. The debt
treatment of the Class A or Class B Notes for ERISA purposes could change if the
Issuer incurred losses. However, without regard to whether the Class A or Class
B Notes are treated as an equity interest for such purposes, the acquisition or
holding of Class A or Class B Notes by or on behalf of a Benefit Plan could be
considered to give rise to a prohibited transaction if certain parties to the
transaction are or become, or any of their respective affiliates is or becomes a
party in interest or a disqualified person with respect to such Benefit Plan. In
such case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Class A or Class B Note. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 95-60, regarding
69
<PAGE>
investments by insurance company general accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 96-23, regarding
transactions by in-house asset managers; and PTCE 84-14, regarding transactions
by "qualified professional asset managers." Each investor using the assets of a
Benefit Plan which acquires the Class A or Class B Notes, or to whom the Class A
or Class B Notes are transferred, will be deemed to have represented that the
acquisition and continued holding of the Class A or Class B Notes, whichever
applies, will be covered by a Department of Labor class exemption.
Employee plans that are government plans (as defined in Section 3(32) or
ERISA) and certain church plans (as defined in Section 3(53) of ERISA) are not
subject to ERISA; however, such plans may be subject to comparable state law
restrictions.
Any Benefit Plan fiduciary considering the purchase of a Class A or Class B
Note should consult with its counsel with respect to the potential applicability
of ERISA and the Code to such investment. Moreover, each Benefit Plan fiduciary
should determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Class A or Class B Notes is
appropriate for the Benefit Plan, taking into account the overall investment
policy of the Benefit Plan and the composition of the Benefit Plan's investment
portfolio.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated , 1998 (the "Underwriting Agreement") among the Seller, HFC and the
Underwriters named below (the "Underwriters"), the Seller has agreed to sell to
the Underwriters and each of the Underwriters has agreed to purchase, the
principal amount of the Offered Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITERS NOTES NOTES NOTES NOTES
- -------------------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Credit Suisse First Boston........................
J.P. Morgan Securities Inc........................
Morgan Stanley & Co. Incorporated.................
Salomon Smith Barney Inc..........................
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
CLASS A-5 CLASS B-1
UNDERWRITERS NOTES NOTES
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Credit Suisse First Boston........................
J.P. Morgan Securities Inc........................
Morgan Stanley & Co. Incorporated.................
Salomon Smith Barney Inc..........................
</TABLE>
The Underwriters propose to offer the Class A and Class B Notes in part
directly to purchasers at the initial public offering prices set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
prices less concessions not to exceed %, %, %, %, % and % of
the respective Security Balance of the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5 and Class B-1 Notes. The Underwriters may allow, and such dealers
may reallow, concessions not to exceed %, %, %, %, %, and % of
the respective Security Balance of the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, and Class B-1 Notes to certain brokers and dealers.
The Seller and HFC have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters relating to the Notes will be passed upon for the
Seller by John W. Blenke, Vice President-Corporate Law and Assistant Secretary
of Household International, Inc., the parent company of HFC, HAFC and the
Seller, and by Dewey Ballantine LLP, New York, New York, special counsel to the
Seller. Certain legal matters will also be passed upon for the Underwriters by
Dewey Ballantine LLP. As of the date of this Prospectus, Mr. Blenke is a
full-time employee and an officer of Household International, Inc. and
beneficially owns, and holds options to purchase, shares of Common Stock of
Household International, Inc.
70
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
ACC............................................................................... 21
Actuarial Receivables............................................................. 23
ABS............................................................................... 28
ABS Table......................................................................... 29
Aggregate Note Principal Balance.................................................. 42
Aggregate Optimal Note Principal Balance.......................................... 42
Amount Financed................................................................... 42
APR............................................................................... 7
Available Funds................................................................... 42
Benefit Plan...................................................................... 69
Business Day...................................................................... 8
Cedel............................................................................. 11
Cedel Participants................................................................ 53
Certificates...................................................................... 1, 6
Class A Noteholders............................................................... 10
Class A Notes..................................................................... 5
Class A Distributable Amount...................................................... 42
Class A Interest Carryover Shortfall.............................................. 42
Class A Interest Distributable Amount............................................. 43
Class A Monthly Principal Distributable Amount.................................... 43
Class A Principal Carryover Shortfall............................................. 43
Class A Principal Distributable Amount............................................ 43
Class A-1 Noteholders............................................................. 10
Class A-1 Notes................................................................... 5
Class A-1 Scheduled Maturity Date................................................. 13
Class A-2 Notes................................................................... 5
Class A-3 Notes................................................................... 5
Class A-4 Notes................................................................... 5
Class A-5 Monthly Principal Distributable Amount.................................. 43
Class A-5 Noteholders............................................................. 10
Class A-5 Notes................................................................... 5
Class A-5 Principal Carryover Shortfall........................................... 43
Class A-5 Principal Distributable Amount.......................................... 43
Class B-1 Noteholders............................................................. 10
Class B-2 Noteholders............................................................. 10
Class B Notes..................................................................... 5
Class B-1 Notes................................................................... 5
Class B-2 Notes................................................................... 5
Class B-1 Distributable Amount.................................................... 44
Class B-1 Interest Carryover Shortfall............................................ 44
Class B-1 Interest Distributable Amount........................................... 44
Class B-1 Monthly Principal Distributable Amount.................................. 44
Class B-1 Principal Carryover Shortfall........................................... 44
Class B-1 Principal Distributable Amount.......................................... 44
Class B-2 Distributable Amount.................................................... 44
Class B-2 Interest Carryover Shortfall............................................ 44
Class B-2 Interest Distributable Amount........................................... 44
Class B-2 Monthly Principal Distributable Amount.................................. 44
Class B-2 Principal Carryover Shortfall........................................... 45
Class B-2 Principal Distributable Amount.......................................... 45
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
Class C Noteholders............................................................... 10
Class C Notes..................................................................... 5
Class C Distributable Amount...................................................... 45
Class C Interest Carryover Shortfall.............................................. 45
Class C Interest Distributable Amount............................................. 45
Class C Monthly Principal Distributable Amount.................................... 45
Class C Principal Carryover Shortfall............................................. 45
Class C Principal Distributable Amount............................................ 45
Closing Date...................................................................... 3
Code.............................................................................. 50, 67
Collected Funds................................................................... 46
Collection Account................................................................ 8, 57
Collection Period................................................................. 7
Commission........................................................................ 2
Cooperative....................................................................... 53
Cram Down Loss.................................................................... 46
Cut-Off Date...................................................................... 7
Dealer Agreements................................................................. 22
Dealers........................................................................... 22
Depositaries...................................................................... 12, 52
Depositary........................................................................ 52
Determination Date................................................................ 12, 46
DTC............................................................................... 3, A-1
Eligible Account.................................................................. 58
Eligible Investments.............................................................. 57
ERISA............................................................................. 14
Euroclear......................................................................... 11
Euroclear Operator................................................................ 53
Euroclear Participants............................................................ 53
Event of Default.................................................................. 48
Exchange Act...................................................................... 2
Final Scheduled Payment Date...................................................... 13, 47
FTC Rule.......................................................................... 64
Global Securities................................................................. A-1
HAFC.............................................................................. 1
HFC............................................................................... 6
Holders........................................................................... 12
Household......................................................................... 21
Indenture......................................................................... 1, 38
Indenture Trustee................................................................. 1
Indirect Participants............................................................. 53
Insolvency Laws................................................................... 17
Interest Period................................................................... 8, 38
Interest Rate Cap................................................................. 2, 40
Interest Rate Cap Provider........................................................ 2, 40
IRA............................................................................... 69
IRS............................................................................... 66
Issuer............................................................................ 1, 5
LIBOR............................................................................. 8, 38
LIBOR Business Day................................................................ 39
LIBOR Determination Date.......................................................... 38
Liquidated Receivable............................................................. 7
Maximum Reserve Account Deposit Amount............................................ 46
</TABLE>
72
<PAGE>
<TABLE>
<S> <C>
Moody's........................................................................... 40
Net Liquidation Proceeds.......................................................... 46
Note Account...................................................................... 10
Noteholders....................................................................... 12
Noteholders' Distributable Amount................................................. 46
Note Owners....................................................................... 3, 11
Note Rate......................................................................... 8, 38
Notes............................................................................. 1
Notional Amount................................................................... 40
NRSRO............................................................................. 14
Offered Notes..................................................................... 1, 5
OID............................................................................... 67
Original Pool Balance............................................................. 7
Owner Trustee..................................................................... 1
Participants...................................................................... 53
Payment Date...................................................................... 2, 8, 38
Plan Asset Regulation............................................................. 69
Pool Balance...................................................................... 7, 46
Preferred Stock................................................................... 6, 22, 27
Principal Amount Available........................................................ 46
Principal Balance................................................................. 7, 46
Principal Distributable Amount.................................................... 46
Purchase Amount................................................................... 47
Purchased Receivable.............................................................. 7
PTCE.............................................................................. 69
Rate Cap.......................................................................... 40
Rating Agencies................................................................... 14
Receivables....................................................................... 1
Receivables Purchase Agreement.................................................... 6, 61
Record Date....................................................................... 12
Reference Bank Rate............................................................... 38
Relief Act........................................................................ 65
Replacement Note.................................................................. 12, 52
Reserve Account................................................................... 11, 27
Reserve Account Deposit Amount.................................................... 47
Reserve Account Shortfall Amount.................................................. 47
Rules............................................................................. 52
Sale and Servicing Agreement...................................................... 6
Schedule of Receivables........................................................... 55
Seller............................................................................ 1
Seller's Bankruptcy Initiatives................................................... 28
Series 1998-1 Securities.......................................................... 1
Servicer.......................................................................... 1, 6
Servicer Credit Facility.......................................................... 58
Servicer Termination Event........................................................ 60
Servicing Fee..................................................................... 12, 58
Simple Interest Receivables....................................................... 23
Standard & Poor's................................................................. 40
Subservicer....................................................................... 6
Supplemental Servicing Fees....................................................... 12, 58
Targeted Credit Enhancement Amount................................................ 47
Targeted Overcollateralization Amount............................................. 47
Targeted Reserve Account Balance.................................................. 47
</TABLE>
73
<PAGE>
<TABLE>
<S> <C>
Tax Counsel....................................................................... 66
Terms and Conditions.............................................................. 54
Trust Agreement................................................................... 1
Trust Assets...................................................................... 1, 6, 22
Trust Documents................................................................... 55
UCC............................................................................... 62
Underwriters...................................................................... 70
Underwriting Agreement............................................................ 70
West LB........................................................................... 40
</TABLE>
74
<PAGE>
APPENDIX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Series 1998-1 Notes will be
available only in book-entry form (the "Global Securities"). Investors in the
Global Securities may hold such Global Securities through any of The Depository
Trust Company ("DTC"), Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities through
Cedel and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior asset backed issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior asset backed issues. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed securities issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last Payment Date to and excluding the
settlement date, on the basis of (i) the actual number of days in such accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
Payment Date to and excluding the settlement date on the basis of (i) the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be backed-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a
A-2
<PAGE>
line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Note Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Note Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
A-3
<PAGE>
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Note Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate the income of
which is includible in gross income for United States tax purposes, regardless
of its source or (iv) a trust other than a "foreign trust" as defined in Section
7701(a)(31) of the Internal Revenue Code of 1986 as amended. The term "Non-U.S.
Person" means any person who is not a U.S. Person. The Prospectus does not deal
with all aspects of U.S. federal income tax withholding that may be relevant to
foreign holders of the Securities or with the application of recently issued
Treasury Regulations relating to tax documentation requirements that are
generally effective with respect to payments made after December 31, 1999. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
A-4
<PAGE>
APPENDIX B
FINANCIAL STATEMENTS OF
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
B-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Household Automobile Revolving Trust I
We have audited the accompanying balance sheet of Household Automobile
Revolving Trust I as of September 30, 1998, and the related statements of
operations and retained earnings and cash flows for the period from March 30,
1998 (inception) to September 30, 1998. These financial statements are the
responsibility of the Issuer's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Household Automobile
Revolving Trust I as of September 30, 1998, and the results of its operations
and its cash flows for the period from March 30, 1998 (inception) to September
30, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
October 29, 1998
B-2
<PAGE>
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM MARCH 30, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Finance income..................................................... $ 47,372
<S> <C>
Other interest income.............................................. 229
Interest expense................................................... 5,976
---------
Net interest margin................................................ 41,625
Provision for credit losses........................................ 24,618
---------
Net interest margin after provision for credit losses.............. 17,007
Fee income......................................................... 447
Servicing fee expense.............................................. 6,106
---------
Income before income taxes and yield to certificateholder.......... 11,348
Income taxes....................................................... --
Yield to certificateholder......................................... 21,301
---------
Net loss before allocation to certificateholder.................... (9,953)
Net loss allocable to certificateholder............................ 9,953
---------
Net loss........................................................... --
---------
---------
Retained earnings at March 30, 1998................................ --
---------
Retained earnings at September 30, 1998............................ $ --
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-3
<PAGE>
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
BALANCE SHEET
AT SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Receivables, net.................................................. $ 800,007
Receivable from servicer.......................................... 25,645
Series 1998-A reserve account..................................... 11,281
---------
TOTAL ASSETS.................................................... $ 836,933
---------
---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Series 1998-A notes............................................... $ 649,272
Series 1998-A certificate................................. 178,935
Net loss allocable to Series 1998-A certificate........... (9,953)
Series 1998-A certificate, net.................................. 168,982
Interest payable.................................................. 1,693
Servicing fee payable............................................. 2,164
Reserve deposit................................................... 14,822
---------
TOTAL LIABILITIES............................................... 836,933
SHAREHOLDER'S EQUITY
Retained earnings................................................. --
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY...................... $ 836,933
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-4
<PAGE>
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 30, 1998 (INCEPTION) TO SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH USED BY OPERATIONS
<S> <C>
Net loss......................................................... --
Adjustments to reconcile net loss to cash used by operations:
Provision for credit losses.................................... $ 24,618
Collections by servicer not yet remitted to Trust.............. (25,645)
Interest payable and undistributed yield on certificates....... 2,075
Loss allocable to certificateholder............................ (9,953)
Servicing fee payable.......................................... 2,164
---------
Cash used by operations.......................................... (6,741)
---------
INVESTMENTS IN OPERATIONS
Receivables:
Purchased...................................................... (849,812)
Collected...................................................... 25,187
Funding of Series 1998-A reserve account......................... (11,281)
---------
Cash increase from investments in operations..................... (835,906)
FINANCING AND CAPITAL TRANSACTIONS
Issuance of Series 1998-A notes.................................. 687,000
Payment of Series 1998-A notes................................... (37,728)
Issuance of Series 1998-A certificate............................ 162,769
Additional contributions to Series 1998-A certificate............ 15,784
Establishment of reserve account................................. 14,822
---------
Cash increase from financing and capital transactions............ 842,647
---------
Increase in cash................................................. --
Cash at March 30, 1998 (trust formation)......................... --
Cash at September 30, 1998....................................... $ --
---------
---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest and yield paid.......................................... $ 22,107
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-5
<PAGE>
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
NOTES TO FINANCIAL STATEMENTS
Household Automobile Revolving Trust I (the "Issuer" or the "Trust") is a
Delaware business trust formed under the laws of the State of Delaware on March
30, 1998 for the sole purpose of engaging in the transactions of (i) acquiring,
holding and managing the receivables and the other assets, (ii) issuing notes in
private and public offerings, (iii) making payments on the notes and the
certificate and (iv) engaging in other limited activities. The Trust was
initially capitalized by a nominal capital contribution by the Seller. The
Issuer's operations are governed by a trust agreement, dated as of March 1,
1998, as supplemented by a Series 1998-A Supplement (the "Trust Agreement"),
between Household Auto Receivables Corporation (the "Seller") and Wilmington
Trust Company, as owner trustee. The Seller is a wholly-owned special purpose
subsidiary of Household Automotive Finance Corporation ("HAFC"), which is a
wholly-owned subsidiary of Household Finance Corporation ("HFC").
Under the terms of the Master Receivables Purchase Agreement, the Seller
shall from time to time purchase receivables from HAFC for a price equal to 100%
of the principal balance of the receivables plus the present value of the
anticipated excess interest spread on such receivables as defined. The Seller
will then from time to time convey all its right and title to, and interest in,
the receivables to the Trust.
The purchase of receivables is funded by the issuance of variable rate notes
to third-party investors ("Series 1998-A notes") and by the issuance of a trust
certificate (the "Series 1998-A certificate") which is held by the Seller. The
Series 1998-A certificate carries a stated yield and entitles the holder to
periodic payments plus residual cash flow generated by the receivables after
payments have been made to the noteholders and servicer. Residual cash flow is
reduced by the principal amount of defaulted receivables which is defined as
receivables becoming 60 days past due during a distribution period. Noteholders
receive a principal distribution for the amount of any defaulted receivables
during a period which is accounted for as a deemed capital contribution by the
certificateholder. Defaulted receivables for the period March 30, 1998 to
September 30, 1998 were $15.8 million.
To provide additional credit protection to the noteholders, the Seller was
required to fund an initial deposit of $14.8 million into a reserve account held
by the Issuer. The required reserve account level at any particular time is
based on the amount of receivables outstanding as well as various measures of
receivable pool performance. Any required increases are funded with monthly
excess cash flows from the receivables. The amounts on deposit in the reserve
account are available to cover any monthly noteholder distribution shortfall.
Upon amortization of the receivables, any excess reserve account amount will be
included in certificateholder distributions.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
RECEIVABLES. Receivables are carried at amortized cost. Interest is credited
to income as earned. Interest income is suspended when payments are more than
two months contractually past due.
PROVISION AND CREDIT LOSS RESERVES. Provision for credit losses is made in
an amount sufficient to maintain credit loss reserves at a level considered
adequate to cover probable losses of principal and interest on the existing
portfolio. Probable losses are estimated based on contractual delinquency status
and historical loss experience. Loss reserve estimates are reviewed periodically
and adjustments are reported in earnings when they become known. As these
estimates are influenced by factors outside the Trust's control, there is
uncertainty inherent in these estimates, making it reasonably possible that they
could change. Receivables are written off at the earlier of a) 60 days after a
vehicle has been repossessed,
B-6
<PAGE>
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b) if the financed vehicle has not been repossessed, the date on which at least
10% of a scheduled payment becomes 150 days contractually delinquent or c) upon
disposition of the vehicle. Repossessed vehicles are written down to net
realizable value at the time of repossession.
REPOSSESSED COLLATERAL. Vehicles acquired for nonpayment of indebtedness are
recorded at the lower of the estimated fair market value or the outstanding
receivable balance and generally are sold within 60 days of repossession. Any
difference between the sales price, net of expenses, and the carrying value is
charged to the reserve for credit losses as incurred.
INCOME TAXES. The Seller is the sole equity holder of the Issuer and has
elected, under the "check the box rules", to treat the Issuer as a division.
Accordingly, all income and expense related to the Issuer is recognized and
reported by the Seller, and the Issuer is not subject to federal or state income
tax. Thus, no provision for federal or state income taxes has been accrued in
the financial statements of the Trust.
2. RECEIVABLES (IN THOUSANDS)
The consumer receivables balance included the following at September 30,
1998:
<TABLE>
<CAPTION>
Receivables....................................................................... $ 812,575
<S> <C>
Credit loss reserves.............................................................. (22,671)
Accrued interest.................................................................. 10,103
---------
Total receivables, net.......................................................... $ 800,007
---------
---------
</TABLE>
As of September 30, 1998, the amount of nonearning receivables in the Trust
for which interest accrual has been suspended totaled $11.2 million.
An analysis of credit loss reserves for the period from March 30, 1998
(inception) to September 30, 1998 was as follows:
<TABLE>
<CAPTION>
Credit loss reserves at beginning of period....................................... --
<S> <C>
Provision for credit losses....................................................... $ 24,618
Chargeoffs........................................................................ (4,414)
Recoveries........................................................................ 2,467
---------
Credit loss reserves at September 30, 1998........................................ $ 22,671
---------
---------
</TABLE>
The range of contractual interest rates of the trust receivables is between
8.0% and 29.0%. At September 30, 1998, contractual maturities of finance
receivables were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Automobile Finance $ 38,295 $ 131,035 $ 157,966 $ 184,655 $ 179,459 $ 121,165 $ 812,575
</TABLE>
These contractual maturities do not take into account the impact of
prepayments. The above tabulation, therefore, is not to be regarded as a
forecast of future cash collections.
3. TRUST DEBT (IN THOUSANDS)
AT SEPTEMBER 30, 1998
Series 1998-A notes, variable rate; due September 2005 $649,272
Series 1998-A certificate, 10% stated yield; due September 2005 178,935
B-7
<PAGE>
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRUST DEBT (IN THOUSANDS) (CONTINUED)
The weighted average coupon interest rate on the notes during the period
ended September 30, 1998 was 5.86%. At September 30, 1998, the rate on the notes
was 5.80%. The weighted average rate on the notes and yield on the certificate
during the period ended September 30, 1998 was 6.68%.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Issuer has estimated the fair value of its financial instruments in
accordance with the Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("FAS No. 107"). Fair
value estimates, methods and assumptions set forth below for the Issuer's
financial instruments are made solely to comply with the requirements of FAS No.
107 and should be read in conjunction with the financial statements and notes in
these financial statements.
The carrying values of the receivable from servicer, reserve account cash,
interest payable, servicing fee payable and reserve deposit payable are
considered to be reasonable estimates of their fair values due to the relative
short-term nature of those items.
The fair value of the receivables and the Series 1998 certificate was
calculated by discounting estimated future cash flows, at estimated market
rates. Based upon this calculation, the estimated fair value of the receivables
and certificates approximate book value.
The fair value of the Series 1998-A notes was determined to approximate
carrying value because interest rates adjust with changes in market rates.
5. THE SERVICER
Under the terms of the Sale and Servicing Agreement, HFC, HAFC's parent, has
been appointed master servicer of the receivables held by the Issuer. As
compensation for its services, the servicer is entitled to receive a base
servicing fee, which is equal to one-twelfth of 3% times the pool balance as of
the first day of the respective collection period and a supplemental servicing
fee, which is equal to all administrative fees, expenses and charges paid by or
on behalf of obligors, including late fees, prepayment fees and liquidation fees
collected on the receivables during the respective collection period plus any
investment earnings with respect to any funds on deposit in the collection
account. HFC has appointed HAFC to subservice the receivables.
6. CONCENTRATION OF CREDIT RISK
A concentration of credit risk is defined as a significant credit exposure
with an individual group engaged in similar activities or affected similarly by
economic conditions.
Because the Trust contains only consumer receivables, there were no
receivables from any industry group at September 30, 1998. Of total receivables,
16.5% and 12.5% were located in the states of Texas and California. No other
states have concentrations greater than 10%.
B-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE SELLER, THE TRUST, HFC, HAFC OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER, SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE SELLER, HFC, HAFC OR THE TRUST SINCE SUCH DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 3
Financial Information........................... 3
Reports to the Noteholders...................... 3
Prospectus Summary.............................. 5
Risk Factors.................................... 15
The Seller...................................... 20
The Servicer.................................... 21
The Subservicer................................. 21
Use of Proceeds................................. 21
The Issuer...................................... 22
The Trust Assets................................ 22
Yield and Prepayment Considerations............. 28
The Automobile Financing Business of HAFC....... 32
Description of the Notes........................ 38
Description of the Trust Documents.............. 55
Description of the Receivables Purchase
Agreement..................................... 61
Certain Legal Aspects of the Receivables........ 62
Material Federal Income Tax Consequences........ 66
State and Local Tax Considerations.............. 69
ERISA Considerations............................ 69
Underwriting.................................... 70
Legal Matters................................... 70
Index of Defined Terms.......................... 71
Global Clearance, Settlement and Tax
Documentation Procedures...................... A-1
</TABLE>
UNTIL , 1999 ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$139,370,000
Class A-1 Notes
$54,000,000
Class A-2 Notes
$143,000,000
Class A-3 Notes
$80,832,000
Class A-4 Notes
$100,000,000
Class A-5 Notes
$99,303,000
Class B-1 Notes
HOUSEHOLD AUTOMOBILE
REVOLVING TRUST I
SERIES 1998-1
HOUSEHOLD
FINANCE
CORPORATION
Servicer
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred by Household Auto
Receivables Corporation in connection with the issuance and distribution of the
Notes.
<TABLE>
<S> <C>
SEC Filing Fee.................................................... $ 181,869*
Trustee's Fees and Expenses....................................... 10,000
Legal Fees and Expenses........................................... 75,000
Accounting Fees and Expenses...................................... 75,000
Printing and Engraving Expenses................................... 75,000
Blue Sky Qualification and Legal Investment Fees and Expenses..... 10,000
Rating Agency Fees................................................ 300,000
Miscellaneous..................................................... 3,131
---------
Total....................................................... $ 730,000
---------
---------
</TABLE>
- ------------------------
* Actual.
ITEM 16. EXHIBITS.
(a) Exhibits
<TABLE>
<S> <C> <C>
1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of Seller.
3.2 -- By-Laws of Seller.
4.1 -- Trust Agreement between the Owner Trustee and the Seller.
4.2 -- Form of Indenture between the Issuer, the Servicer and the Indenture Trustee.
4.3* -- Form of Series 1998-1 Supplement to the Indenture and the Trust Agreement.
4.4 -- Sale and Servicing Agreement among the Seller, the Servicer, the Issuer, and the
Indenture Trustee, including exhibits thereto.
4.5 -- Receivables Purchase Agreement between HAFC and the Seller
4.6* -- Form of Interest Rate Cap
5* -- Opinion of John W. Blenke, Esq., Vice President-Corporate Law and Assistant
Secretary of Household International, Inc.
8* -- Opinion of Dewey Ballantine LLP with respect to tax matters.
23.1 -- Consents of John W. Blenke and Dewey Ballantine LLP are included in opinions filed
as Exhibits 5 and 8 hereto, respectively.
23.2 -- Consent of Arthur Andersen LLP.
24 -- Powers of Attorney.
25.1 -- Statement of eligibility and qualification of the Indenture Trustee.
</TABLE>
- ------------------------
* Filed herewith.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Household Auto
Receivables Corporation certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Prospect Heights, State of
Illinois, on the 17th day of November, 1998.
<TABLE>
<S> <C> <C>
HOUSEHOLD AUTO RECEIVABLES CORPORATION
By: *
-----------------------------------------
Rellen M. Stewart
PRESIDENT
</TABLE>
The Registrant reasonably believes that the security ratings to be assigned
to the securities registered hereunder will make the securities "investment
grade securities" pursuant to Transaction Requirement B.2 of Form S-3, prior to
the sale of such securities.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed below by the following
persons in the capacities indicated on the 17th day of November, 1998.
SIGNATURE TITLE
- ------------------------------ ---------------------------
* President (Principal
- ------------------------------ Executive Officer) and
(Rellen M. Stewart) Director)
Senior Vice President,
* Treasurer and Director
- ------------------------------ (Principal Financial
(Edgar Ancona) Officer)
* Vice President, Secretary
- ------------------------------ and Director
(John W. Blenke)
* Vice President, Assistant
- ------------------------------ Treasurer and Director
(Steven H. Smith)
* Vice President and
- ------------------------------ Controller (Principal
(Steven L. McDonald) Accounting Officer)
<TABLE>
<S> <C> <C> <C>
*By: /s/ PATRICK D. SCHWARTZ
-------------------------
Patrick D. Schwartz
ATTORNEY-IN-FACT
</TABLE>
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Household Auto
Receivables Corporation certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Prospect Heights, State of
Illinois, on the 17th day of November, 1998.
<TABLE>
<S> <C> <C>
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I,
Issuer
By: HOUSEHOLD AUTO RECEIVABLES
CORPORATION, as originator and sole equity
owner of the Issuer
By: *
-----------------------------------------
Rellen M. Stewart
PRESIDENT
</TABLE>
The Registrant reasonably believes that the security ratings to be assigned
to the securities registered hereunder will make the securities "investment
grade securities" pursuant to Transaction Requirement B.2 of Form S-3, prior to
the sale of such securities.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed below by the following
persons in the capacities indicated on the 17th day of November, 1998.
SIGNATURE TITLE
- ------------------------------ ---------------------------
* President (Principal
- ------------------------------ Executive Officer) and
(Rellen M. Stewart) Director)
Senior Vice President,
* Treasurer and Director
- ------------------------------ (Principal Financial
(Edgar Ancona) Officer)
* Vice President, Secretary
- ------------------------------ and Director
(John W. Blenke)
* Vice President, Assistant
- ------------------------------ Treasurer and Director
(Steven H. Smith)
* Vice President and
- ------------------------------ Controller (Principal
(Steven L. McDonald) Accounting Officer)
<TABLE>
<S> <C> <C> <C>
*By: /s/ PATRICK D. SCHWARTZ
-------------------------
Patrick D. Schwartz
ATTORNEY-IN-FACT
</TABLE>
II-3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
HOUSEHOLD FINANCE CORPORATION,
as the Master Servicer,
together with
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I,
as Issuer,
HOUSEHOLD AUTO RECEIVABLES CORPORATION,
as Seller,
and
THE CHASE MANHATTAN BANK,
as Indenture Trustee and Trust Collateral Agent
and
WILMINGTON TRUST COMPANY,
as Owner Trustee
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SERIES 1998-1 SUPPLEMENT
Dated as of November 1, 1998
to the
INDENTURE
Dated as of November 1, 1998
and to the
TRUST AGREEMENT
Dated as of March 1, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I CREATION OF THE SERIES 1998-1 NOTES. . . . . . . . . . . . . . . . . 1
SECTION 1.01. DESIGNATION. . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. PLEDGE OF SERIES 1998-1 TRUST ESTATE.. . . . . . . . . . . 2
SECTION 1.03. PAYMENTS AND COMPUTATIONS. . . . . . . . . . . . . . . . . 3
SECTION 1.04. DENOMINATIONS. . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 2.01. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III DISTRIBUTIONS AND STATEMENTS TO SERIES 1998-1
NOTEHOLDERS; SERIES SPECIFIC COVENANTS . . . . . . . . . . . . . . .15
SECTION 3.01. SERIES 1998-1 TRUST ACCOUNTS.. . . . . . . . . . . . . . .15
SECTION 3.02. RESERVE ACCOUNT. . . . . . . . . . . . . . . . . . . . . .16
SECTION 3.03. DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . .16
SECTION 3.04. STATEMENTS TO NOTEHOLDERS. . . . . . . . . . . . . . . . .18
SECTION 3.05. REPORTING REQUIREMENTS.. . . . . . . . . . . . . . . . . .20
SECTION 3.06. COMPLIANCE WITH WITHHOLDING REQUIREMENTS.. . . . . . . . .20
SECTION 3.07. SPECIAL COVENANTS AND ACKNOWLEDGEMENTS.. . . . . . . . . .20
SECTION 3.08. TAX CHARACTERIZATION.. . . . . . . . . . . . . . . . . . .20
SECTION 3.09. DETERMINATION OF LIBOR.. . . . . . . . . . . . . . . . . .20
ARTICLE IV EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . .20
SECTION 4.01. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . .20
SECTION 4.02. RIGHTS UPON EVENT OF DEFAULT.. . . . . . . . . . . . . . .21
SECTION 4.03. REMEDIES.. . . . . . . . . . . . . . . . . . . . . . . . .22
SECTION 4.04. PRIORITIES.. . . . . . . . . . . . . . . . . . . . . . . .23
ARTICLE V PREPAYMENT AND REDEMPTION. . . . . . . . . . . . . . . . . . . . . .24
SECTION 5.01. OPTIONAL "CLEAN-UP" REDEMPTION.. . . . . . . . . . . . . .24
ARTICLE VI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .25
SECTION 6.01. RATIFICATION OF BASIC DOCUMENTS. . . . . . . . . . . . . .25
SECTION 6.02. COUNTERPARTS.. . . . . . . . . . . . . . . . . . . . . . .25
SECTION 6.03. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . .25
SECTION 6.04. AMENDMENTS WITHOUT CONSENT OF NOTEHOLDERS. . . . . . . . .26
SECTION 6.05. AMENDMENTS WITH CONSENT OF THE SERIES 1998-1
NOTEHOLDERS.. . . . . . . . . . . . . . . . . . . . . . . . . .27
SECTION 6.06. NON-PETITION CLAUSES.. . . . . . . . . . . . . . . . . . .28
Schedule I Schedule of Eligibility Criteria
Exhibit A-1 Form of Series 1998-1 Class A-1 Note
Exhibit A-2 Form of Series 1998-1 Class A-2 Note
Exhibit A-3 Form of Series 1998-1 Class A-3 Note
Exhibit A-4 Form of Series 1998-1 Class A-4 Note
Exhibit A-5 Form of Series 1998-1 Class A-5 Note
Exhibit B-1 Form of Series 1998-1 Class B-1 Note
Exhibit B-2 Form of Series 1998-1 Class B-2 Note
Exhibit C Form of Series 1989-1 Class C Note
<PAGE>
Exhibit D Form of Series 1998-1 Certificate
Exhibit E Form of Master Servicer's Certificate
2
<PAGE>
This Series 1998-1 Supplement, dated as of November 1, 1998, is by
and among Household Finance Corporation, a Delaware corporation, as master
servicer (the "MASTER SERVICER"), Household Automobile Revolving Trust I, a
Delaware business trust, as Issuer (the "ISSUER"), Household Auto Receivables
Corporation, a Nevada corporation, as Seller ("SELLER"), The Chase Manhattan
Bank, a New York banking corporation ("CHASE"), as trustee for the Noteholders
(the "INDENTURE TRUSTEE") and as Trust Collateral Agent, and Wilmington Trust
Company, a Delaware banking corporation, as owner trustee (the "OWNER TRUSTEE")
for the Certificateholders.
RECITALS
This Series 1998-1 Supplement, is executed and delivered by the
parties hereto pursuant to Section 9.3 of the Indenture dated as of November 1,
1998 (the "INDENTURE") among the Issuer, the Master Servicer, the Indenture
Trustee and the Trust Collateral Agent and pursuant to Section 3.2 of the Trust
Agreement (the "TRUST AGREEMENT") dated as of March 1, 1998 between the Seller
and the Owner Trustee. In the event that any term or provision contained
herein shall conflict with or be inconsistent with any term or provision
contained in the Indenture or the Trust Agreement, the terms and provisions of
this Series 1998-1 Supplement shall govern with respect to Series 1998-1.
ARTICLE I
CREATION OF THE SERIES 1998-1 NOTES
SECTION 1.01. DESIGNATION.
(a) There is hereby created a Series of Notes to be issued
pursuant to the Indenture and this Series 1998-1 Supplement to be known as
"Household Automobile Revolving Trust I, Series 1998-1 Notes." The Series
1998-1 Notes shall be issued in eight classes (each, a "CLASS"). The Class A-1
Notes in an aggregate initial principal amount of $________ (the "CLASS A-1
NOTES"), the Class A-2 Notes in an aggregate initial principal amount of
$________ (the "CLASS A-2 NOTES"), the Class A-3 Notes in an aggregate initial
principal amount of $________ (the "CLASS A-3 NOTES"), the Class A-4 Notes in
an aggregate initial principal amount of $________ (the "CLASS A-4 NOTES"), the
Class A-5 Notes in an aggregate initial principal amount of $________ (the
"CLASS A-5 NOTES", and together with Class A-1 Notes, the Class A-2 Notes, the
Class A-3 Notes and the Class A-4 Notes, the "CLASS A NOTES"), the Class B-1
Notes in an aggregate initial principal amount of $________ (the "CLASS B-1
NOTES"), the Class B-2 Notes in an aggregate initial principal amount of
$________ (the "CLASS B-2 NOTES", and together with the Class B-1 Notes, the
"CLASS B NOTES") and the Class C Notes in an aggregate initial principal amount
of $________ (the "CLASS C NOTES").
(b) There is hereby created a Series of Series Trust
Certificates to be issued pursuant to the Trust Agreement and this Series
1998-1 Supplement to be known as the "Household Automobile Revolving Trust I,
Series 1998-1 Certificates."
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SECTION 1.02. PLEDGE OF SERIES 1998-1 TRUST ESTATE.
The Issuer hereby Grants to the Indenture Trustee, for the benefit of
the Holders of the Notes all of the Issuer's right, title and interest (but
none of its obligations) in and to (a) each and every Receivable listed as a
Series 1998-1 Receivable on the Schedule of Receivables attached hereto as
Schedule I and all monies paid or payable thereon or in respect thereof after
the Cutoff Date (including amounts due on or before the Cutoff Date but
received by HAFC, the Seller, the Master Servicer or the Issuer after the
Cutoff Date); (b) an assignment of the security interests in the related
Financed Vehicles granted by Obligors pursuant to such Series 1998-1
Receivables and any other interest of the Issuer in the related Financed
Vehicles; (c) all rights of HAFC against Dealers pursuant to Dealer Agreements
or Dealer Assignments related to such Series 1998-1 Receivables; (d) any
proceeds and the right to receive proceeds with respect to such Series 1998-1
Receivables repurchased by a Dealer, pursuant to a Dealer Agreement as a result
of a breach of representation or warranty in the related Dealer Agreement; [(e)
all rights under any Service Contracts on the related Financed Vehicles;] (f)
any proceeds and the right to receive proceeds with respect to such Series
1998-1 Receivables from claims on any physical damage, credit life or
disability insurance policies covering the related Financed Vehicles or
Obligors including rebates of insurance premiums relating to such Series 1998-1
Receivables; (g) all funds on deposit from time to time in the Series 1998-1
Trust Accounts (including all investments and proceeds thereof from time to
time allocable to the Series 1998-1 Reserve Account, but excluding all
investments and proceeds thereof allocable to the other Series 1998-1 Trust
Accounts or allocable to the Master Collection Account); (h) all rights of the
Seller in and to the Purchase Agreement and the Purchase Agreement Supplement
or Purchase Agreement Supplements related to Series 1998-1, including the
delivery requirements, representations and warranties and the cure and
repurchase obligations of HAFC under the Purchase Agreement and such Purchase
Agreement Supplement, or Purchase Agreement Supplements, (i) all property
(including the right to receive future Net Liquidation Proceeds) that secures
such Series 1998-1 Receivables and that has been acquired by or on behalf of
the Issuer pursuant to liquidation of such Series 1998-1 Receivables; (j) all
items contained in the Receivable Files with respect such Series 1998-1
Receivables and any and all other documents that the Master Servicer or HAFC
keeps on file in accordance with its customary procedures relating to such
Series 1998-1 Receivables, or the related Financed Vehicles or Obligors, (k)
the Master Sale and Servicing Agreement and the Transfer Agreement or Transfer
Agreements related to Series 1998-1 (including all rights of the Seller under
the Purchase Agreement and the related Purchase Agreement Supplement or
Purchase Agreement Supplements, assigned to the Issuer pursuant to the Master
Sale and Servicing Agreement and the related Transfer Agreement or Transfer
Agreements); (l) one share of the Preferred Stock of the Seller and (m) all
present and future claims, demands, causes and chooses in action in respect of
any or all of the foregoing and all payments on or under and all proceeds of
every kind and nature whatsoever in respect of any or all of the foregoing,
including all proceeds of the conversion, voluntary or involuntary, into cash
or other liquid property, all cash proceeds, accounts, accounts receivable,
notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance
proceeds, condemnation awards, rights to payment of any and every kind and
other forms of obligations and receivables, instruments and other property
which at any time constitute all or part of or are included in the proceeds of
any of the foregoing (collectively, the "Series 1998-1 Trust Estate").
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The foregoing Grant is made in trust to the Indenture Trustee for the
benefit of the Holders of the Notes. The Indenture Trustee hereby acknowledges
such Grant, accepts the trusts under the Indenture and this Series 1998-1
Supplement in accordance with the provisions of the Indenture and this Series
1998-1 Supplement and agrees to perform its duties required in the Indenture
and in this Series 1998-1 Supplement in accordance with the provisions hereof
and of the Indenture to the best of its ability to the end that the interests
of such parties, recognizing the priorities of their respective interests may
be adequately and effectively protected.
SECTION 1.03. PAYMENTS AND COMPUTATIONS.
All amounts to be paid or deposited by any Person hereunder shall be
paid or deposited in accordance with the terms hereof no later than 12:00 noon
(New York City time) on the day when due in immediately available funds, or by
prior-day ACH debit.
SECTION 1.04. DENOMINATIONS.
The Notes of each Class will be issued in denominations of $100,000
and integral multiples of $1,000 in excess thereof, except for one Note of each
Class which may be issued in a denomination other than an integral multiple of
$1,000.
ARTICLE II
DEFINITIONS
SECTION 2.01. DEFINITIONS.
(a) Whenever used in this Series 1998-1 Supplement and when
used in the Series 1998-1 Related Documents with respect to the Series 1998-1
Notes or the Series 1998-1 Certificates, the following words and phrases shall
have the following meanings, and the definitions of such terms are applicable
to the singular as well as the plural forms of such terms and to the masculine
as well as to the feminine and neuter genders of such terms. Unless otherwise
defined in this Series 1998-1 Supplement, terms defined in the Basic Documents
are used herein as therein defined. A term used herein preceded by the
designation "Series 1998-1" but not defined herein, shall have the meaning
specified for such term in the Basic Documents as such term relates to Series
1998-1.
"Aggregate Note Principal Balance" means, as of any date, the
aggregate outstanding principal amount of all the Notes on such date.
"Aggregate Optimal Note Principal Balance" means, with respect to any
Distribution Date, the excess, if any, of (x) the Pool Balance as of the last
day of the prior Collection Period over (y) the Targeted Overcollateralization
Amount for such Distribution Date.
"Available Funds" means, with respect to any Collection Period, and
the related Distribution Date, the sum of (i) the Collected Funds for such
Collection Period, (ii) investment earnings realized during the related
Collection Period, (iii) all Repurchase Amounts deposited in
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the Collection Account during such Collection Period, (iv) any Insolvency
Proceeds or proceeds of any liquidation, in whole or in part, of the assets
of the Trust and (v) the lesser of (a) the excess, if any, of the aggregate
amount distributable pursuant to Section 3.03(a)(i) - (x) on such
Distribution Date, over the aggregate of the amounts specified in clauses
(i), (ii) and (iii) with respect to such Collection Period and (b) the
Reserve Account Balance.
"Base Servicing Fee" means, with respect to any Collection Period,
the fee payable to the Master Servicer for services rendered during such
Collection Period, which shall be equal to one-twelfth of the Servicing Fee
Rate multiplied by the Aggregate Principal Balances of the Series 1998-1
Receivables, as of the Accounting Date immediately preceding such Collection
Period.
"Basic Documents" means the Master Sale and Servicing Agreement, the
Indenture, the Trust Agreement, the Purchase Agreement, and other documents and
certificates delivered therewith or pursuant thereto in connection with Series
1998-1.
"Book Entry Notes" means any beneficial interest in the Notes,
ownership and transfers of which shall be made through book entries by a
Clearing Agency as described in Section 2.10 of the Indenture.
"Certificateholders" means the holders of Series 1998-1 Certificates.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the amount payable pursuant to Section 3.03 (a)(xiii)
hereof.
"Class A Distributable Amount" means, with respect to any
Distribution Date and each class of Class A Notes, the sum of (i) the Class A
Interest Distributable Amount for such Distribution Date and (ii) the Class A
Principal Distributable Amount for such Distribution Date.
"Class A Interest Carryover Shortfall" means, with respect to any
Distribution Date and each Class of Class A Notes, the sum of: (i) excess of
(a) the related Class A Interest Distributable Amount for the preceding
Distribution Date, over (b) the amount actually paid as interest to the Class A
Noteholders on such preceding Distribution Date, PLUS (ii) interest on such
excess, to the extent permitted by law, at a rate per annum equal to the
related Class A Note Rate from such preceding Distribution Date to but
excluding the current Distribution Date.
"Class A Interest Distributable Amount" means, with respect to any
Distribution Date and each class of Class A Notes, an amount equal to the sum
of: (i) the aggregate amount of interest accrued on the Class A Notes at the
related Class A Note Rate from and including the preceding Distribution Date
(or, in the case of the initial Distribution Date, from and including the
Closing Date) to but excluding the current Distribution Date PLUS (ii) the
related Class A Interest Carryover Shortfall for the current Distribution Date.
"Class A Monthly Principal Distributable Amount" means (i) with
respect to any Distribution Date, prior to the Distribution Date on which the
principal balance of the Class A-1 Notes is reduced to zero, 100% of the
Principal Distributable Amount, (ii) with respect to the
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Distribution Date on which the principal balance of the Class A-1 Notes is
reduced to zero, the sum of (x) the Class A-5 Monthly Principal Distributable
Amount, plus (y) 100% of the Principal Distributable Amount with respect to
that portion of the Principal Distributable Amount required to reduce the
principal balance of the Class A-1 Notes to zero, plus (z) the excess of the
amount described in clause (iii) of this definition for such Distribution
Date over the sum of the amounts described in clauses (ii)(x) (taking into
account payment of the principal balance of the Class A-1 Notes on such
Distribution Date) and (ii)(y) for such Distribution Date, (iii) with respect
to any Distribution Date on and after the Distribution Date on which the
Principal Balance of the Class A-1 Notes is reduced to zero until the
Distribution Date on which the Principal Balance of the Class A Notes is
reduced to zero, the greater of (1) the Class A-5 Monthly Principal
Distributable Amount and (2) the excess of (x) aggregate outstanding
principal balance of the Class A Notes over (y) (A) the product of 69.25% and
the Pool Balance as of the end of the related Collection Period minus (B) the
Targeted Overcollateralization Amount for such Distribution Date.
"Class A Noteholders" means the Holders of the Class A Notes.
"Class A Principal Carryover Shortfall" means, with respect to any
Distribution Date after the Distribution Date on which the principal balance of
the Class A-1 Notes is reduced to zero, the excess of the Class A Monthly
Principal Distributable Amount for the preceding Distribution Date over the
amount that was actually distributed in respect of principal of the Class A
Notes on such preceding Distribution Date.
"Class A Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of: (i) the Class A Monthly Principal Distributable
Amount for such Distribution Date and (ii) the Class A Principal Carryover
Shortfall for such Distribution Date; PROVIDED, HOWEVER, that (x) the sum of
clauses (i) and (ii) shall not exceed the outstanding principal amount of the
Class A Notes, and (y) on the Final Scheduled Distribution Date, the Class A
Principal Distributable Amount will include the amount, to the extent of the
remaining Available Funds, necessary (after giving effect to other amounts
having a higher payment priority on such Distribution Date) to reduce the
outstanding principal amount of the Class A Notes to zero.
"Class A-1 Noteholders" means the Holders of the Class A-1 Notes.
"Class A-1 Scheduled Maturity Date" means with respect to the Class
A-1 Notes, _______________.
"Class A-2 Noteholders" means the Holders of the Class A-2 Notes.
"Class A-3 Noteholders" means the Holders of the Class A-3 Notes.
"Class A-4 Noteholders" means the Holders of the Class A-4 Notes.
"Class A-5 Monthly Principal Distributable Amount" means, with
respect to any Distribution Date, the product of (i) a fraction, the numerator
of which is the original principal balance of the Class A-5 Notes and the
denominator of which is the Original Pool Balance, and
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(ii) the excess of the outstanding Pool Balance as of the close of business
on the last day of the second preceding Collection Period over the
outstanding Pool Balance as of the close of business on the last day of the
related Collection Period.
"Class A-5 Noteholders" means the Holders of the Class A-5 Notes.
"Class A-5 Principal Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Class A-5 Principal Distributable Amount
for the preceding Distribution Date over the amount that was actually
distributed in respect of principal of the Class A-5 Notes on such preceding
Distribution Date.
"Class A-5 Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of: (i) the Class A-5 Monthly Principal
Distributable Amount for such Distribution Date and (ii) the Class A-5
Principal Carryover Shortfall for such Distribution Date; PROVIDED HOWEVER,
that the sum of clauses (i) and (ii) shall not exceed the outstanding principal
amount of the Class A-5 Notes, and on the Final Scheduled Distribution Date,
the Class A-5 Principal Distributable Amount will include the amount, to the
extent of the remaining Available Funds, necessary (after giving effect to
other amounts having a higher payment priority on such Distribution Date) to
reduce the outstanding principal amount of the Class A-5 Notes to zero.
"Class B-1 Distributable Amount" means, with respect to any
Distribution Date, the sum of (i) the Class B-1 Interest Distributable Amount
for such Distribution Date and (ii) the Class B-1 Principal Distributable
Amount for such Distribution Date.
"Class B-1 Interest Carryover Shortfall" means, with respect to any
Distribution Date, the sum of: (i) the excess of (a) the Class B-1 Interest
Distributable Amount for the preceding Distribution Date, over (b) the amount
actually paid as interest to the Class B-1 Noteholders on such preceding
Distribution Date, PLUS (ii) interest on such excess, to the extent permitted
by law, at a rate per annum equal to the Class B-1 Note Rate from such
preceding Distribution Date to but excluding the current Distribution Date.
"Class B-1 Interest Distributable Amount" means, with respect to any
Distribution Date, an amount equal to the sum of: (i) the aggregate amount of
interest accrued on the Class B-1 Notes at the Class B-1 Note Rate from and
including the preceding Distribution Date (or, in the case of the initial
Distribution Date, from and including the Closing Date) to but excluding the
current Distribution Date PLUS (ii) the Class B-1 Interest Carryover Shortfall
for the current Distribution Date.
"Class B-1 Monthly Principal Distributable Amount" means, with
respect to each Distribution Date on and after the Distribution Date on which
the principal balance of the Class A-1 Notes is reduced to zero, until the
Distribution Date on which the outstanding principal amount of the Class B-1
Notes has been reduced to zero, an amount equal to the excess of: (i) the sum
of (x) the outstanding principal balance of the Class A Notes on such
Distribution Date (after giving effect to distribution of the Class A Principal
Distributable Amount for such Distribution Date) plus (y) the outstanding
principal balance of the Class B-1 Notes prior to such
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Distribution Date over (ii) (A) the product of 81.25% and the outstanding
Pool Balance as of the end of the related Collection Period minus (B) the
Targeted Overcollateralization Amount.
"Class B-1 Noteholders" means the Holders of the Class B-1 Notes."
"Class B-1 Principal Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Class B-1 Principal Distributable Amount
for the preceding Distribution Date over the amount that was actually
distributed in respect of principal of the Class B-1 Notes on such Preceding
Distribution Date.
"Class B-1 Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of: (i) the Class B-1 Monthly Principal
Distributable Amount for such Distribution Date and (ii) the Class B-1
Principal Carryover Shortfall for such Distribution Date; PROVIDED, HOWEVER,
that the sum of clauses (i) and (ii) shall not exceed the outstanding principal
amount of the Class B-1 Notes, and on the Final Scheduled Distribution Date,
the Class B-1 Principal Distributable Amount will include the amount, to the
extent of the remaining Available Funds, necessary (after giving effect to
other amounts having a higher payment priority on such Distribution Date) to
reduce the outstanding principal amount of the Class B-1 Notes to zero.
"Class B-2 Distributable Amount" means, with respect to any
Distribution Date, the sum of (i) the Class B-2 Interest Distributable Amount
for such Distribution Date and (ii) the Class B-2 Principal Distributable
Amount for such Distribution Date.
"Class B-2 Interest Carryover Shortfall" means, with respect to any
Distribution Date, the sum of: (i) the excess of (a) the Class B-2 Interest
Distributable Amount for the preceding Distribution Date, over (b) the amount
actually paid as interest to the Class B-2 Noteholders on such preceding
Distribution Date, PLUS (ii) interest on such excess, to the extent permitted
by law, at a rate per annum equal to the Class B-2 Note Rate from such
preceding Distribution Date to but excluding the current Distribution Date.
"Class B-2 Interest Distributable Amount" means, with respect to any
Distribution Date, an amount equal to the sum of: (i) the aggregate amount of
interest accrued on the Class B-2 Notes at the Class B-2 Note Rate from and
including the preceding Distribution Date (or, in the case of the initial
Distribution Date, from and including the Closing Date) to but excluding the
current Distribution Date PLUS (ii) the Class B-2 Interest Carryover Shortfall
for the current Distribution Date.
"Class B-2 Monthly Principal Distributable Amount" means, with
respect to each Distribution Date on and after the Distribution Date on which
the principal balance of the Class A-1 Notes is reduced to zero, until the
Distribution Date on which the outstanding principal amount of the Class B-2
Notes has been reduced to zero, an amount equal to the excess of: (i) the sum
of (x) the outstanding principal balance of the Class A Notes on such
Distribution Date (after giving effect to distribution of the Class A Principal
Distributable Amount for such Distribution Date) plus (y) the outstanding
principal balance of the Class B-1 Notes (after giving effect to distribution
of the Class B-1 Principal Distributable Amount for such Distribution Date) and
(z) the outstanding principal balance of the Class B-2 Notes (after giving
effect to
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distribution of the Class B-2 Principal Distributable Amount for such
Distribution Date) over (ii) (A) the product of 92.65% and the outstanding
Pool Balance as of the end of the related Collection Period minus (B) the
Targeted Overcollateralization Amount.
"Class B-2 Noteholders" means the Holders of the Class B-2 Notes.
"Class B-2 Principal Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Class B-2 Principal Distributable Amount
for the preceding Distribution Date over the amount that was actually
distributed in respect of principal of the Class B-2 Notes on such Preceding
Distribution Date.
"Class B-2 Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of: (i) the Class B-2 Monthly Principal
Distributable Amount for such Distribution Date and (ii) the Class B-2
Principal Carryover Shortfall for such Distribution Date; PROVIDED, HOWEVER,
that the sum of clauses (i) and (ii) shall not exceed the outstanding principal
amount of the Class B-2 Notes, and on the Final Scheduled Distribution Date,
the Class B-2 Principal Distributable Amount will include the amount, to the
extent of the remaining Available Funds, necessary (after giving effect to
other amounts having a higher payment priority on such Distribution Date) to
reduce the outstanding principal amount of the Class B-2 Notes to zero.
"Class C Distributable Amount" means, with respect to any
Distribution Date, the sum of (i) the Class C Interest Distributable Amount and
(ii) the Class C Principal Distributable Amount.
"Class C Interest Carryover Shortfall" means, with respect to any
Distribution Date the sum of: (i) excess of (a) the Class C Interest
Distributable Amount for the preceding Distribution Date, over (b) the amount
actually paid as interest to the Class C Noteholders on such preceding
Distribution Date, PLUS (ii) interest on such excess, to the extent permitted
by law, at a rate per annum equal to the Class C Note Rate from such preceding
Distribution Date to but excluding the current Distribution Date.
"Class C Interest Distributable Amount" means, with respect to any
Distribution Date an amount equal to the sum of: (i) the aggregate amount of
interest accrued on the Class C Notes at the related Class C Note Rate from and
including the preceding Distribution Date (or, in the case of the initial
Distribution Date, from and including the Closing Date) to but excluding the
current Distribution Date PLUS (ii) the Class C Interest Carryover Shortfall
for the current Distribution Date.
"Class C Monthly Principal Distributable Amount" means, with respect
to each Distribution Date on and after the Distribution Date on which the
outstanding principal amount of the Class A-1 Notes is reduced to zero, until
the Distribution Date on which the outstanding principal amount of the Class C
Notes has been reduced to zero, an amount equal to the excess, if any of: (i)
the sum of (x) the outstanding principal balance of the Class A Notes on such
Distribution Date (after giving effect to distribution of the Class A Principal
Distribution Amount for such Distribution Date), plus (y) the outstanding
principal balance of the Class B Notes on such Distribution Date (after giving
effect to distribution of the Class B-1 Principal
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Distributable Amount and the Class B-2 Principal Distributable Amount for
such Distribution Date), plus (z) the outstanding principal balance of the
Class C Notes immediately prior to such Distribution Date and (ii) (A) the
product of 100% and the outstanding Pool Balance as of the end of the related
Collection Period minus (B) the Targeted Overcollateralization Amount for
such Distribution Date.
"Class C Noteholders" means the Holders of the Class C Notes.
"Class C Principal Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Class C Principal Distributable Amount
for the preceding Distribution Date over the amount that was actually
distributed in respect of principal of the Class C Notes on such Preceding
Distribution Date.
"Class C Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of: (i) the Class C Monthly Principal
Distributable Amount for such Distribution Date and (ii) the Class C
Principal Carryover Shortfall for such Distribution Date; PROVIDED, HOWEVER,
that the sum of clauses (i) and (ii) shall not exceed the outstanding
principal amount of the Class C Notes, and on the Final Scheduled
Distribution Date, the Class C Principal Distributable Amount will include
the amount, to the extent of the remaining Available Funds, necessary (after
giving effect to other amounts having a higher payment priority on such
Distribution Date) to reduce the outstanding principal amount of the Class C
Notes to zero.
"Cutoff Date" means October 31, 1998.
"Definitive Notes" means the Notes that have been certificated and
fully registered in accordance with Section 2.12 of the Indenture.
"Distribution Date" means, with respect to each Collection Period,
the seventeenth day of the following calendar month, or if such day is not a
Business Day, the immediately following Business Day, commencing on _____
__, 1998.
"Eligibility Criteria" means the criteria for eligibility for
Eligible Receivables set forth on Schedule I hereto.
"Eligible Receivable" or "Series 1998-1 Eligible Receivable" means
a Series 1998-1 Receivable that satisfies the Eligibility Criteria set forth
in Schedule I hereto.
"Event of Default" shall have the meaning assigned to such term in
Section 4.01.
"Final Scheduled Distribution Date" means ____________.
"HAFC " means Household Automotive Finance Corporation.
"HFC " means Household Finance Corporation.
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"Indenture" means the indenture dated as of November 1, 1998 among
the Issuer, the Master Servicer and The Chase Manhattan Bank, as indenture
trustee, as supplemented by the Series 1998-1 Supplement.
"Initial Reserve Account Deposit" means 1% of the Pool Balance as
of the Cutoff Date.
"Interest Period" means, with respect to any Distribution Date, the
period from and including the prior Distribution Date (or, in the case of the
first Distribution Date, from and including the Series 1998-1 Closing Date)
through (and including) the day preceding such Distribution Date.
"Interest Rate Cap" means the agreement to be entered into on the
Closing Date between the Issuer and the Interest Rate Cap Provider.
"Interest Rate Cap Provider" means Westdeutsche Landesbank
Girozentrale, New York Branch.
"LIBOR" means the London interbank offered rate for one-month
United States dollar deposit. LIBOR will equal the rate for United States
dollar deposits for one month which appears on the Telerate Screen Page 3750
as of 11:00 A.M., London time, on the related LIBOR Determination Date.
"LIBOR Business Day" means any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the States of New York
or Illinois or in the City of London, England are required or authorized by
law to be closed.
"LIBOR Determination Date" for each Interest Period will be the
second LIBOR Business Day prior to the first day of such Interest Period.
"Master Servicer's Certificate" means, with respect to Series
1998-1, a report in substantially the form of EXHIBIT E hereto (appropriately
completed), furnished by the Master Servicer to the Indenture Trustee and the
Owner Trustee pursuant to the Master Sale and Servicing Agreement.
"Maximum Reserve Account Deposit Amount" for any Distribution Date
is equal to that portion of Collected Funds representing interest collections
on the Receivables (including amounts representing Net Liquidation Proceeds
for such Collection Period) for the related Collection Period less the sum
of: the Base Servicing Fee paid to any third party Master Servicer, the fees
due to the Interest Rate Cap Provider, the Indenture Trustee, Trust
Collateral Agent and Owner Trustee, to the extent not paid by the Servicer,
plus, the aggregate of the Class A, Class B-1, Class B-2 and Class C Interest
Distributable Amounts for such Distribution Date, plus the aggregate
Principal Balances of all Receivables which became Liquidated Receivables
during the related Collection Period, plus the aggregate amount of Cram Down
Losses during such Collection Period.
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"Note Account" means the Note Account.
"Noteholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Class A Distributable Amount, the Class B-1
Distributable Amount, the Class B-2 Distributable Amount and the Class C
Distributable Amount.
"Noteholders' Interest Distributable Amount" means with respect to
any Distribution Date, the sum of the Class A Interest Distributable Amount,
the Class B-1 Interest Distributable Amount, the Class B-2 Interest
Distributable Amount, and the Class C Interest Distributable Amount.
"Note Rate" means the per annum rate of interest due with respect
to each Class of Notes as set forth below for the respective Class of Note:
Class A-1 Notes: ___%
Class A-2 Notes: ___%
Class A-3 Notes: LIBOR plus ___%
Class A-4 Notes: LIBOR plus ___%
Class A-5 Notes: ___%
Class B-1 Notes: ___%
Class B-2 Notes: ___%
Class C Notes: ___%
Interest (including interest calculated with respect to Interest
Carryover Shortfalls) on the Class A-1, Class A-2, Class A-3 and Class A-4
Notes will be calculated on the basis of a 360-day year and the actual number
of days elapsed in an applicable Interest Period. Interest (including
interest calculated with respect to Interest Carryover Shortfalls) on the
Class A-5, Class B-1, Class B-2 and Class C Notes will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
"Notes" means the Class A Notes, the Class B-1 Notes, the Class B-2
and the Class C Notes, collectively.
"Original Pool Balance" means the aggregate of the Principal
Balance of the Receivables as of the Cutoff Date.
"Owner Trust Estate" has the meaning assigned to such term in the
Trust Agreement.
"Owner Trustee" means Wilmington Trust Company, not in its
individual capacity.
"Pledge" means the Grant by the Issuer hereunder to the Indenture
Trustee for the benefit of the Holders of Notes in accordance with Section
1.02 hereof in and to specified Pledged Property related thereto.
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"Pledged Property" means, with respect to the Series 1998-1 Trust
Estate, each Series 1998-1 Receivable, together with all associated property
and rights with respect thereto described in the definition of Series 1998-1
Trust Estate.
"Pool Balance" means, as of any date of determination, the
aggregate of the outstanding Principal Balances of the Receivables, unless
otherwise specified, as of the close of business on such Business Day.
"Principal Amount Available" means, with respect to any
Distribution Date, the amount remaining in the Note Account on such
Distribution Date after the payment of the amounts required to be paid
pursuant to clause (i) through (vi) of Section 3.03(a) on such Distribution
Date MINUS the Reserve Account Deposit Amount for such Distribution Date.
"Principal Distributable Amount" means, with respect to any
Distribution Date, the lesser of (A) the Principal Amount Available for such
Distribution Date and (B) the greater of (x) the excess, if any, of (i) the
Aggregate Note Principal Balance immediately prior to such Distribution Date
over (ii) the Aggregate Optimal Note Balance for such Distribution Date and
(y) the Class A-5 Principal Distributable Amount.
"Rating Agencies" means Standard & Poor's and Moody's. If such
organization or a successor does not maintain a rating on the Notes, "Rating
Agency" shall be a nationally recognized statistical rating organization or
other comparable Person designated by Seller, notice of which designation
shall be given to the Indenture Trustee, the Owner Trustee and the Master
Servicer.
"Redemption Price" has the meaning specified in Section 5.01 hereof.
"Reference Bank Rate" will be determined on the basis of the rates
at which deposits in U.S. Dollars are offered by the reference banks (which
shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Indenture Trustee after consultation with
the Servicer) as of 11:00 A.M., London time, on the day that is two LIBOR
Business Days prior to the immediately preceding Distribution Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the principal balance of the Class A-3 and Class A-4
Notes then outstanding. The Indenture Trustee will request the principal
London office of each of the reference banks to provide a quotation of its
rate. If at least two such quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Indenture Trustee after consultation with the
Servicer, as of 11:00 A.M., New York City time, on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the principal balance of the Class A-3 and Class A-4
Notes then outstanding. If no such quotations can be obtained, the rate will
be LIBOR for the prior Distribution Date.
"Reserve Account" means the Series 1998-1 Reserve Account which
shall be an Eligible Deposit Account created pursuant to Section 3.01 hereof,
which initially shall be
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account no. ________, reference Household Automobile Revolving Trust I,
Series 1998-1, at the Indenture Trustee, ABA No. _________.
"Reserve Account Balance" means, with respect to a Distribution
Date, the amount on deposit in the Reserve Account as of the opening of
business on such Distribution Date.
"Reserve Account Deposit Amount" means, with respect to any
Distribution Date, the lesser of: (x) the Maximum Reserve Account Deposit
Amount for such Distribution Date and (y) the Reserve Account Shortfall
Amount for such Distribution Date.
"Reserve Account Shortfall Amount" means, with respect to any
Distribution Date, the excess of: (x) the Targeted Reserve Account Balance
for such Distribution Date over (y) the Reserve Account Balance for such
Distribution Date less amounts, if any, included in the definition of
Available Funds for such Distribution Date.
"Schedule of Receivables" means the schedule of all retail
installment sales contracts and promissory notes held as part of the Series
1998-1 Trust Estate.
"Series 1998-1 Certificate" means the Series Trust Certificate (as
defined in the Trust Agreement) designated as the "Series 1998-1 Certificate".
"Series 1998-1 Closing Date" means _______________, 1998.
"Series 1998-1 Collected Funds" means, with respect to a date of
determination, the amount of Collected Funds with respect to the Collection
Period immediately preceding such date of determination, including all Net
Liquidation Proceeds collected during the related Collection Period (but
excluding any Purchase Amounts) and any funds deposited therein by the
Interest Rate Cap Provider pursuant to the Interest Rate Cap.
"Series 1998-1 Collection Account" means the Eligible Deposit
Account created pursuant to Section 3.01 hereof which initially shall be
account no. __________, reference Household Automobile Revolving Trust I,
Series 1998-1, at the Indenture Trustee, ABA No. _______________.
"Series 1998-1 Eligible Investments" means, with respect to funds
in the Series 1998-1 Collection Account and Reserve Account, "Eligible
Investments" as defined in the Master Sale and Servicing Agreement, except
that (i) all references in such definition to "rating satisfactory to the
Rating Agency" or words of similar import shall mean ratings of not less than
"A-1" by Standard & Poor's and "P-1" by Moody's (whichever is applicable),
and (ii) all such investments shall have maturities at the time of the
acquisition thereof occurring no later than the Business Day immediately
preceding the Distribution Date following such date of acquisition.
"Series 1998-1 Note Account" means the Eligible Deposit Account
created pursuant to Section 3.01 hereof, which initially shall be account no.
___, reference Household
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Automobile Revolving Trust I, Series 1998-1 at the Indenture Trustee, ATSA
No. ______________.
"Series 1998-1 Receivables" means each Receivable listed on the
Schedule of Receivables, which (a) has not been released from the Series
1998-1 Trust Estate as provided herein or in the Indenture and (b) is not a
Liquidated Receivable.
"Series 1998-1 Related Documents" means the Basic Documents, this
Series 1998-1 Supplement, each Purchase Agreement Supplement related to the
Series 1998-1 Trust Estate, each Transfer Agreement related to the Series
1998-1 Trust Estate, the Series 1998-1 Notes, the Series 1998-1 Certificates
and other documents and certificates delivered in connection therewith.
"Series 1998-1 Reserve Account" means the Reserve Account.
"Series 1998-1 Secured Obligations" means all amounts and
obligations which the Issuer may at any time owe to the Agent and the
Purchasers (including the principal of, and interest on, the Series 1998-1
Notes) and all other amounts owing at any time to the Agent and each
Purchaser under this Series 1998-1 Supplement or any other Series 1998-1
Related Documents.
"Series 1998-1 Securities" means the Series 1998-1 Notes and the
Series 1998-1 Certificates.
"Series 1998-1 Supplement" means this Series 1998-1 Supplement to
the Indenture and the Trust Agreement.
"Series 1998-1 Support" means, with respect to the Series 1998-1
Notes, the Series 1998-1 Certificates.
"Series 1998-1 Support Provider " means none.
"Series 1998-1 Trust Accounts" means the Series 1998-1 Collection
Account, the Series 1998-1 Reserve Account, and the Series 1998-1 Note
Account.
"Series 1998-1 Trust Estate" shall have the meaning set forth in
Section 1.02 hereof.
"Servicing Fee Rate" means 3% per annum.
"Supplemental Servicing Fee" means, with respect to any Collection
Period, (i) all administrative fees, expenses and charges actually paid by or
on behalf of Obligors, including late fees, prepayment fees and liquidation
fees collected on the Series 1998-1 Receivables during such Collection
Period, and (ii) the net realized investment earnings of funds on deposit in
the Series 1998-1 Collection Account or on deposit in the Master Collection
Account and allocable to the investment of Available Funds with respect to
Series 1998-1.
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"Targeted Credit Enhancement Amount" means, with respect to any
Distribution Date, 13.75% of the Pool Balance as of the of last day of the
related Collection Period.
"Targeted Overcollateralization Amount" means, with respect to any
Distribution Date, the excess (but not less than zero), if any, of: (i) the
Targeted Credit Enhancement Amount over (ii) the Targeted Reserve Account
Balance.
"Targeted Reserve Account Balance" means, with respect to any
Distribution Date, the lesser of: (i) the greater of (a) 3.0% of the
outstanding Pool Balance as of the end of the related Collection Period, and
(b) 2.0% of the Original Pool Balance, and (ii) the Aggregate Note Principal
Balance.
"Telerate Screen Page 3750" means the display designated as page
3750 on the Telerate Service (or such other page as may replace page 3750 on
that service for the purpose of displaying London interbank offered rates of
major banks). If such rate does not appear on such page (or such other page
as may replace that page on that service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may
be selected by the Indenture Trustee after consultation with the Servicer),
the rate will be the Reference Bank Rate.
"Trust" means the Issuer.
"Trust Agreement" means the Trust Agreement dated as of March 1,
1998 between the Seller and the Owner Trustee, as supplemented by the Series
1998-1 Supplement.
ARTICLE III
DISTRIBUTIONS AND STATEMENTS TO
SERIES 1998-1 NOTEHOLDERS; SERIES SPECIFIC COVENANTS
SECTION 3.01. SERIES 1998-1 TRUST ACCOUNTS.
(a) The Trust Collateral Agent, for the benefit of the
Holders of the Series 1998-1 Securities, shall establish and maintain an
account (the "SERIES 1998-1 COLLECTION ACCOUNT") as a segregated trust
account in the Trust Collateral Agent's corporate trust department,
identified as the "Collection Account for Household Automobile Revolving
Trust I, in trust for the registered Holders of the Series 1998-1
Securities." The Trust Collateral Agent shall make or permit withdrawals
from the Series 1998-1 Collection Account only as provided in this Series
1998-1 Supplement.
(b) On each Distribution Date, the Indenture Trustee pursuant
to Section 5.5(a) of the Master Sale and Servicing Agreement shall transfer
amounts with respect to Series 1998-1 and such Distribution Date from the
Master Collection Account to the Series 1998-1 Collection Account.
(c) The Indenture Trustee for the benefit of the Holders of
the Series 1998-1 Notes shall establish and maintain an account (the "SERIES
1998-1 RESERVE ACCOUNT") as a
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segregated trust account in the Indenture Trustee's corporate trust
department, identified as the "Series 1998-1 Reserve Account for Household
Automobile Revolving Trust I, in trust for the registered Holders of the
Series 1998-1 Notes." The Indenture Trustee shall make or permit withdrawals
from the Reserve Account only as provided in this Series 1998-1 Supplement.
On the Series 1998-1 Closing Date, the Series 1998-1 Reserve Account will be
funded with the Initial Reserve Account Deposit.
(d) The Indenture Trustee, for the benefit of the Holders of
Series 1998-1 Notes, shall establish and maintain an account (the "SERIES
1998-1 NOTE ACCOUNT") as a segregated trust account in the Indenture
Trustee's corporate trust department, identified as the "Note Account for
Household Automobile Revolving Trust I, in trust for the registered Holders
of the Series 1998-1 Notes." The Indenture Trustee shall make or permit
withdrawals from the Series 1998-1 Note Account only as provided in this
Series 1998-1 Supplement.
(e) On each Distribution Date, the Indenture Trustee shall
transfer Available Funds for such Distribution Date from the Series 1998-1
Collection Account and from the Series 1998-1 Reserve Account, if applicable,
to the Series 1998-1 Note Account.
(f) In the event that any Series 1998-1 Trust Account ceases
to be an Eligible Deposit Account, the Trust Collateral Agent or the
Indenture Trustee, as applicable, within five Business Days, shall establish
a new Eligible Deposit Account. No withdrawals may be made of funds in any
Series 1998-1 Trust Account except as provided in this Series 1998-1
Supplement. Except as specifically provided in this Series 1998-1 Supplement,
funds in the Series 1998-1 Trust Accounts shall not be commingled with any
other moneys. All moneys deposited from time to time in each of the Series
1998-1 Trust Accounts shall be invested and reinvested by the Owner Trustee
or the Indenture Trustee, as applicable, in Series 1998-1 Eligible
Investments selected in writing by the Master Servicer (pursuant to standing
instructions or otherwise) which, absent any instruction shall be the
investments specified in clause (d) of the definition of Eligible Investment.
The provisions of Section 5.1 of the Master Sale and Servicing Agreement
shall apply to investment of funds in the Series 1998-1 Trust Accounts to the
same extent as they apply to the Master Collection Account.
SECTION 3.02. RESERVE ACCOUNT.
On the earlier of (x) the maturity date of the Series 1998-1 Notes
(whether by acceleration or otherwise) or (y) the Final Scheduled
Distribution Date, the amount on deposit in the Reserve Account shall be
withdrawn from the Reserve Account and distributed in accordance with Section
4.04.
SECTION 3.03. DISTRIBUTIONS.
(a) On each Distribution Date, the Indenture Trustee shall
(based solely on the information contained in the Master Servicer's
Certificate delivered with respect to such Distribution Date) distribute the
following amounts from Available Funds with respect to such Distribution
Date, and in the following order of priority:
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(i) to the Master Servicer, any Supplemental Servicing
Fees for the related Collection Period and, if HFC is no longer
acting as Master Servicer, the Base Servicing Fee for the related
Collection Period;
(ii) to the Interest Rate Cap Provider, the fee for
maintaining the Interest Rate Cap and to the Indenture Trustee and
the Owner Trustee, any accrued and unpaid trustees' fees (in each
case, to the extent such fees have not been previously paid by the
Master Servicer);
(iii) to the Class A Noteholders, the Class A Interest
Distributable Amount;
(iv) to the Class B-1 Noteholders, the Class B-1 Interest
Distributable Amount;
(v) to the Class B-2 Noteholders, the Class B-2 Interest
Distributable Amount;
(vi) to the Class C Noteholders, the Class C Interest
Distributable Amount;
(vii) (i) to the Class A-5 Noteholders, the Class A-5
Principal Distributable Amount and to the Class A-1 Noteholders, 100%
of the Class A Principal Distributable Amount remaining after
distribution of the Class A-5 Principal Distributable Amount, until
the outstanding principal amount of the Class A-1 Notes has been
reduced to zero; and (ii) on and after the Distribution Date on which
the outstanding principal amount of the Class A-1 Notes has been
reduced to zero, the Class A-5 Principal Distributable Amount to the
Class A-2, Class A-3 and Class A-4 Notes, such amount to be
distributed in "sequential pay" fashion, beginning with the Class A-2
Notes, in each case until the respective outstanding principal amount
of the Class A-2, Class A-3 and Class A-4 Notes are paid in full;
(viii) to the Class B-1 Noteholders, the Class B-1 Principal
Distributable Amount;
(ix) to the Class B-2 Noteholders, the Class B-2 Principal
Distributable Amount;
(x) to the Class C Noteholders, the Class C Principal
Distributable Amount;
(xi) to the Reserve Account, the Reserve Account Deposit
Amount, if any, required to increase the amount therein to the
Targeted Reserve Account Balance;
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(xii) if HFC is acting as the Master Servicer, the Base
Servicing Fee for the related Collection period; and
(xiii) to the holders of the Series 1998-1 Certificates, any
remaining Available Funds.
In the event that on any Distribution Date after the Distribution
Date on which the principal balance of the Class A-1 Notes is reduced to
zero, Available Funds, available to be distributed in accordance with clause
(vii) of Payment Priorities, are less than the Class A Monthly Principal
Distributable Amount for such Distribution Date, such Available Funds shall
be allocated pro rata (based on the ratio between the respective amounts of
the Class A-5 Principal Distributable Amount for such Distribution Date and
the amount specified in clause (iii)(2) of the definition of Class A Monthly
Principal Distributable Amount for such Distribution Date).
(b) If on a Distribution Date, the Master Servicer's
Certificate delivered with respect to such Distribution Date indicates that
the amount specified in clauses (i) through (iv) of the definition of
Available Funds with respect to such Distribution Date is less than the sum
of the amounts required to be distributed pursuant to clauses (i) through (x)
of subsection (a) on such Distribution Date, the Indenture Trustee shall
withdraw from the Series 1998-1 Reserve Account an amount up to the amount of
such deficiency and distribute such amount as a component of Available Funds.
(c) Each Series 1998-1 Certificateholder by its acceptance of
its Certificate will be deemed to have consented to the provisions of
paragraph (a) above relating to the priority of distributions, and will be
further deemed to have acknowledged that no property rights in any amount of
or the proceeds of any such amount shall vest in such Certificateholder until
such amounts have been distributed to such Certificateholder pursuant to such
provisions; PROVIDED, THAT the foregoing shall not restrict the right of any
Certificateholder, upon compliance with the provisions hereof, from seeking
to compel the performance of the provisions hereof by the parties hereto.
Each Series 1998-1 Certificateholder, by acceptance of its Certificate,
further specifically acknowledges that it has no right to or interest in any
monies at any time held in the Series 1998-1 Reserve Account, such monies
being held in trust for the benefit of the Series 1998-1 Noteholders.
(d) In the event that the Series 1998-1 Collection Account is
maintained with an institution other than the Indenture Trustee, the Master
Servicer shall instruct and cause such institution to transfer the amounts to
be withdrawn therefrom in accordance with Section 3.03(a) or 3.03(b) to the
Indenture Trustee for distribution pursuant to Section 3.03(a) or Section
3.03(b), as the case may be, on the related Distribution Date.
(e) Unless Definitive Notes are issued pursuant to Section
2.12 of the Indenture, with respect to Notes registered on the related Record
Date in name of a nominee of the Clearing Agency, payment will be made by
wire transfer to an account designated by such nominee, without presentation
or surrender of the Series 1998-1 Notes or the making of any
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notation thereon, except that the final distribution with respect to the
Series 1998-1 Notes shall be made against tender thereof.
(f) If not theretofore paid in full, all amounts outstanding
with respect to the Class A-1 Notes shall be due and payable on the Class A-1
Scheduled Maturity Date, and if not theretofore paid in full, all amounts
outstanding with respect to the Class A-2 Notes, the Class A-3 Notes, the
Class A-4 Notes, the Class A-5 Notes, the Class B-1 Notes, the Class B-2
Notes and the Class C Notes shall be due and payable on the Final Scheduled
Distribution Date.
SECTION 3.04. STATEMENTS TO NOTEHOLDERS.
On or prior to each Determination Date, the Master Servicer shall
provide to the Trust Collateral Agent (with a copy to the Rating Agencies)
for the Trust Collateral Agent to forward to each Noteholder of record, and
to each Certificateholder of record, a statement setting forth at least the
following information as to the Notes to the extent applicable:
(i) the amount of such distribution allocable to principal
of each Class of Notes;
(ii) the amount of such distribution allocable to interest
on or with respect to each Class of Notes;
(iii) the aggregate outstanding principal amount of each
Class of the Notes after giving effect to payments allocated to
principal reported under (i) above;
(iv) the Class A Interest Carryover Shortfall, the
Class B-1 Interest Carryover Shortfall, the Class B-2 Interest
Carryover Shortfall, the Class C Interest Carryover Shortfall,
the Class A Principal Carryover Shortfall, the Class A-5
Principal Carryover Shortfall, the Class B-1 Principal Carryover
Shortfall, the Class B-2 Principal Carryover Shortfall, the
Class C Principal Carryover Shortfall, if any, and the change in
such amounts from the preceding statement.
(v) the amount of the Base Servicing Fee paid to the
Master Servicer with respect to such Collection Period;
(vi) the notional amount of the Interest Rate Cap, the
amount of the distribution attributable to a payment under the
Interest Rate Cap and the current LIBOR; and
(vii) the Targeted Reserve Account Balance and the amount on
deposit in the Reserve Account at the end of such Distribution Date.
Each amount set forth pursuant to paragraph (i)through (v) above shall be
expressed as a dollar amount per $1,000 of the initial principal balance of
the applicable Class of Notes.
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SECTION 3.05. REPORTING REQUIREMENTS.
(a) The Master Servicer's Certificate shall be in the form
attached hereto as EXHIBIT E hereto.
(b) By January 31 of each calendar year, commencing January 31,
1999, the Master Servicer on behalf of the Issuer shall prepare and distribute
to the Indenture Trustee a statement containing such information as is required
to be provided by an issuer of indebtedness under the Code and such other
customary information as is necessary to enable the Noteholders to prepare
their tax returns.
(c) If an Event of Default occurs and is continuing and if it
is either known by, or written notice of the existence thereof has been
delivered to, a Responsible Officer of the Indenture Trustee, the Indenture
Trustee shall mail to each Noteholder notice of the Default within [30] days
after such knowledge or notice occurs. Except in the case of a Default in
payment of principal of or interest on any Note, the Indenture Trustee may
withhold the notice if and so long as a committee of its Responsible Officers
in good faith determines that withholding the notice is in the interests of
Noteholders.
SECTION 3.06. COMPLIANCE WITH WITHHOLDING REQUIREMENTS.
Notwithstanding any other provisions of this Series 1998-1 Supplement
or the Indenture to the contrary, the Indenture Trustee, shall comply with all
federal withholding requirements respecting payments (or advances thereof) to
the Noteholders as may be applicable to instruments constituting indebtedness
for federal income tax purposes. Any amounts so withheld shall be treated as
having been paid to the applicable Noteholders for all purposes of the
Indenture. In no event shall the consent of any Noteholder be required for any
such withholding.
SECTION 3.07. SPECIAL COVENANTS AND ACKNOWLEDGEMENTS.
With respect to the Series 1998-1 Notes, the Issuer hereby represents
and warrants, as of the Series 1998-1 Closing Date:
(i) VALID PLEDGE. It is the intention of the Issuer that
each pledge herein contemplated constitutes the Grant of a perfected,
first priority security interest in all Pledged Property to the
Indenture Trustee for the benefit of the Series 1998-1 Noteholders.
(ii) GOVERNMENTAL AUTHORIZATION. Other than the filing of
the financing statements required hereunder, no authorization or
approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body is required for the due
execution, delivery and performance by the Issuer of this Series
1998-1 Supplement, the Indenture, and each Series 1998-1 Related
Document to which it is a party.
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SECTION 3.08. TAX CHARACTERIZATION.
It is the intent of the parties hereto that, for all Federal, state,
local and foreign taxes, the Series 1998-1 Notes will be evidence of
indebtedness. To the extent permitted by law, the parties hereto, and each
owner of a beneficial interest in the Series 1998-1 Notes by acceptance of such
interest, agrees to treat the Series 1998-1 Notes for purposes of all Federal,
state, local and foreign taxes as indebtedness secured by the Series 1998-1
Trust Estate.
SECTION 3.09. DETERMINATION OF LIBOR.
The Indenture Trustee will determine LIBOR for purposes of
calculating the Interest Rate for Class A-3, and the Class A-4 Notes for each
Interest Period.
ARTICLE IV
EVENTS OF DEFAULT; REMEDIES
SECTION 4.01. EVENTS OF DEFAULT.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) default in the payment of any interest on any Note
when the same becomes due and payable, and such default shall
continue for a period of five calendar days; or
(ii) default in the payment of the principal of or any
installment of the principal of any Note when the same becomes due
and payable, and such default shall continue for a period of five
calendar days; or
(iii) default in the observance or performance of any
covenant or agreement of the Issuer made in the Series 1998-1 Related
Documents (other than a covenant or agreement, a default in the
observance or performance of which is elsewhere in this Section
specifically dealt with), or any representation or warranty of the
Issuer made in the Series 1998-1 Related Documents or in any
certificate or other writing delivered pursuant thereto or in
connection therewith proving to have been incorrect in any material
respect as of the time when the same shall have been made and has a
material adverse effect on the Noteholders, and such default shall
continue or not be cured, or the circumstance or condition in respect
of which such misrepresentation or warranty was incorrect shall not
have been eliminated or otherwise cured, for a period of 60 days
after there shall have been given, by registered or certified mail,
to the Issuer by the Indenture Trustee or to the Issuer and the
Indenture Trustee by the Holders of at least 25% of the Outstanding
Amount of the Notes, a written notice specifying such default
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or incorrect representation or warranty and requiring it to be
remedied and stating that such notice is a "Notice of Default"
hereunder; or
(iv) the filing of a decree or order for relief by a court
having jurisdiction in the premises in respect of the Issuer or any
substantial part of the Trust Assets in an involuntary case under any
applicable Federal or state bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the
Issuer or for any substantial part of the Trust Property, or ordering
the winding-up or liquidation of the Issuer's affairs, and such
decree or order shall remain unstayed and in effect for a period of
60 consecutive days; or
(v) the commencement by the Issuer of a voluntary case
under any applicable Federal or state bankruptcy, insolvency or other
similar law now or hereafter in effect, or the consent by the Issuer
to the entry of an order for relief in an involuntary case under any
such law, or the consent by the Issuer to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or for any substantial
part of the Trust Assets, or the making by the Issuer of any general
assignment for the benefit of creditors, or the failure by the Issuer
generally to pay its debts as such debts become due, or the taking of
action by the Issuer in furtherance of any of the foregoing.
SECTION 4.02. RIGHTS UPON EVENT OF DEFAULT.
(a) If an Event of Default shall have occurred and be
continuing, the Indenture Trustee in its discretion may, or if so requested in
writing by Holders holding Notes representing at least 66 2/3% of the
Outstanding Amount of the Notes, declare by written notice to the Issuer that
the Notes have become due and payable, whereupon they shall become, immediately
due and payable at 100% of the outstanding principal balance of the Notes, and
accrued interest thereon (together with interest accrued at the relevant Note
Rate on such overdue interest).
(b) At any time after such declaration of acceleration of
maturity has been made and before a judgment or decree for payment of the money
due has been obtained by the Indenture Trustee, the Holders of Notes
representing a majority of the Outstanding Amount of the Notes, by written
notice to the Issuer and the Indenture Trustee, may rescind and annul such
declaration and its consequences if:
(i) the Issuer has paid or deposited with the Indenture
Trustee a sum sufficient to pay
(A) all payments of principal of and interest on all Notes
and all other amounts that would then be due hereunder or upon such
Notes if the Event of Default giving rise to such acceleration had
not occurred; and
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(B) all sums paid or advanced by the Indenture Trustee
hereunder and the reasonable compensation, expenses, disbursements
and advances of the Indenture Trustee and its agents and counsel; and
(ii) all Events of Default, other than the nonpayment of
the principal of the Notes that has become due solely by such
acceleration, have been cured or waived as provided in Section 5.9 of
the Indenture.
No such rescission shall affect any subsequent default or impair any right
consequent thereto.
SECTION 4.03. REMEDIES.
If an Event of Default shall have occurred and be continuing, the
Indenture Trustee, subject to Section 11.17 of the Indenture, may exercise any
of the remedies specified in Article V of the Indenture and, in addition, may
do one or more of the following.
(i) institute Proceedings in its own name and as trustee
of an express trust for the collection of all amounts then payable on
the Notes or under the Indenture with respect thereto, whether by
declaration or otherwise, enforce any judgment obtained, and collect
from the Issuer and any other obligor upon such Notes moneys adjudged
due;
(ii) institute Proceedings from time to time for the
complete or partial foreclosure of the Indenture with respect to the
Trust Assets;
(iii) exercise any remedies of a secured party under the UCC
and take any other appropriate action to protect and enforce the
rights and remedies of the Indenture Trustee and the Holders of the
Notes; and
(iv) direct the Trust Collateral Agent to sell the Trust
Assets or any portion thereof or rights or interest therein, at one
or more public or private sales called and conducted in any manner
permitted by law; provided, however, that the Indenture Trustee may
not sell or otherwise liquidate the Trust Assets following an Event
of Default unless
(x) the Holders of 100% of the Outstanding Amount of the
Notes consent thereto,
(y) the proceeds of such sale or liquidation distributable
to the Noteholders are sufficient to discharge in full all
amounts then due and unpaid upon such Notes for principal and
interest, or
(z) the Indenture Trustee determines that the Trust Assets
will not continue to provide sufficient funds for the payment of
principal of and interest on the Notes as they would have become
due if the Notes had
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not been declared due and payable, and the Indenture Trustee
obtains the consent of Holders of 66-2/3% of the Outstanding
Amount of the Notes.
In determining such sufficiency or insufficiency with respect to
clause (y) and (z), the Indenture Trustee may, but need not, obtain and rely
upon an opinion of an Independent investment banking or accounting firm of
national reputation as to the feasibility of such proposed action and as to the
sufficiency of the Trust Assets for such purpose.
SECTION 4.04. PRIORITIES.
(a) On and after the maturity date of the Series 1998-1 Notes
(by acceleration or otherwise) all Available Funds, all amounts on deposit in
the Reserve Account withdrawn in accordance with Section 3.02 and any proceeds
of the liquidation of all or any portion of the Series 1998-1 Trust Estate
pursuant to Section 4.03(iv), shall be applied by the Indenture Trustee on the
related Distribution Date in the following order of priority:
FIRST: amounts due and owing and required to be distributed
to the Master Servicer, the Owner Trustee and the Indenture Trustee,
respectively, pursuant to priorities (i) and (ii) of Section 3.03
hereof and not previously distributed, in the order of such
priorities and without preference or priority of any kind within such
priorities;
SECOND: to Class A Noteholders for amounts due and unpaid
on the Class A Notes for interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Class A Notes for interest;
THIRD: to the Class A Noteholders for amounts due and
unpaid on the Class A Notes for principal, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Class A Notes for principal.
FOURTH: to the Class B-1 Noteholders for amounts due and
unpaid on the Class B-1 Notes for interest, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Class B-1 Notes for interest.
FIFTH: to the Class B-1 Noteholders for amounts due and
unpaid on the Class B-1 Notes for principal, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Class B-1 Notes for principal.
SIXTH: to the Class B-2 Noteholders for amounts due and
unpaid on the Class B-2 Notes for interest, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Class B-2 Notes for interest.
24
<PAGE>
SEVENTH: to the Class B-2 Noteholders for amounts due and
unpaid on the Class B-2 Notes for principal, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Class B-2 Notes for principal.
EIGHTH: to the Class C Noteholders for amounts due and
unpaid on the Class C Notes for interest, ratably, without preference
or priority of any kind, according to the amounts due and payable on
the Class C Notes for interest.
NINTH: to the Class C Noteholders for amounts due and
unpaid on the Class C Notes for principal, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Class C Notes for principal.
TENTH: to the Series 1998-1 Certificateholders, any
remaining Available Funds.
(b) The Indenture Trustee may fix a record date and
Distribution Date for any payment to Series 1998-1 Noteholders pursuant to this
Section 4.04. At least 15 days before such record date, the Indenture Trustee
shall mail to the Noteholders a notice that states the record date, the
Distribution Date and the amount to be paid.
ARTICLE V
PREPAYMENT AND REDEMPTION
SECTION 5.01. OPTIONAL "CLEAN-UP" REDEMPTION.
On any Distribution Date occurring on or after the date upon which
the Series 1998-1 Aggregate Note Principal Balance shall have been reduced to
an amount which is less than or equal to 10% of the Aggregate Note Principal
Balance of the Series 1998-1 Notes as of the Series 1998-1 Closing Date, the
Master Servicer and the Seller on behalf of the Issuer, shall each have the
option to redeem the outstanding Series 1998-1 Notes at a redemption price (the
"REDEMPTION PRICE") which is not less than the then Aggregate Note Principal
Balance, plus all accrued and unpaid interest thereon and all fees and other
amounts owing to the Indenture Trustee, the Owner Trustee, the Trust Collateral
Agent and the Master Servicer (if other than HFC) under the Series 1998-1
Related Documents. The Master Servicer and the Seller, on behalf of the
Issuer, shall give the Master Servicer (if other than HFC), the Indenture
Trustee, and the Owner Trustee at least 10 days' irrevocable prior written
notice of the date on which the Master Servicer or the Seller, as applicable
intends to exercise such option to purchase. Not later than 12:00 P.M., New
York City time, on such Distribution Date, the Master Servicer or the Seller,
as applicable, shall deposit such amount in the Collection Account in
immediately available funds for distribution pursuant to Section 3.03 against
the presentment of the Notes for cancellation. Such purchase option is subject
to payment in full of the Redemption Price.
25
<PAGE>
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. RATIFICATION OF BASIC DOCUMENTS.
Each of the Basic Documents, and to the extent appropriate, as
supplemented by this Series 1998-1 Supplement, is in all respects ratified and
confirmed and each of the Basic Documents, as so supplemented by this Series
1998-1 Supplement shall be read, taken and construed as one and the same
instrument.
SECTION 6.02. COUNTERPARTS.
This Series 1998-1 Supplement may be executed in one or more
counterparts, each of which so executed shall be deemed to be an original, but
all of which shall together constitute but one and the same instrument.
SECTION 6.03. GOVERNING LAW.
THIS SERIES 1998-1 SUPPLEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.
SECTION 6.04. AMENDMENTS WITHOUT CONSENT OF NOTEHOLDERS.
(a) Without the consent of the Noteholders but with prior
written notice to the Rating Agencies, as evidenced to the Indenture Trustee
and the Issuer, when authorized by an Issuer Order, at any time and from time
to time, the parties hereto may enter into one or more amendments hereto, in
form satisfactory to the Indenture Trustee and the Owner Trustee, for any of
the following purposes:
(i) to correct or amplify the description of any property
at any time subject to the lien of the Indenture as supplemented by
this Series 1998-1 Supplement, or better to assure, convey and
confirm unto the Indenture Trustee, if any, any property subject or
required to be subjected to the lien of the Indenture as supplemented
by this Series 1998-1 Supplement, or to subject to the lien of the
Indenture as supplemented by this Series 1998-1 Supplement additional
property;
(ii) to evidence the succession, in compliance with the
applicable provisions hereof, of another person to the Issuer, and
the assumption by any such successor of the covenants of the Issuer
herein and in the Notes contained;
(iii) to add to the covenants of the Issuer, for the benefit
of the Noteholders, or to surrender any right or power herein
conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any
property to or with the Indenture Trustee, if any;
26
<PAGE>
(v) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein or to make any other provisions with respect to matters or
questions arising under the Indenture, the Trust Agreement or in this
Series 1998-1 Supplement; provided that such action shall not
adversely affect the interests of the Series 1998-1 Noteholders;
(vi) to evidence and provide for the acceptance of the
appointment hereunder and under the Indenture by a successor
indenture trustee with respect to the Notes and to add to or change
any of the provisions of the Indenture or of this Series 1998-1
Supplement as shall be necessary to facilitate the administration of
the trusts hereunder by more than one indenture trustee, pursuant to
the requirements of Article VI of the Indenture; or
(vii) to modify, eliminate or add to the provisions of the
Indenture or of this Series 1998-1 Supplement to such extent as shall
be necessary to effect the qualification of the Indenture under the
TIA or under any similar federal statute hereafter enacted and to add
to the Indenture such other provisions as may be expressly required
by the TIA.
Each of the Indenture Trustee and the Owner Trustee is hereby
authorized to join in the execution of any amendment and to make any further
appropriate agreements and stipulations that may be therein contained.
(b) Except as otherwise provided herein, the Issuer and the
Indenture Trustee, when authorized by an Issuer Order, may, also without the
consent of any of the Series 1998-1 Noteholders but with prior notice to the
Rating Agencies by the Issuer, as evidenced to the Indenture Trustee, enter
into an amendment hereto for the purpose of adding any provisions to, or
changing in any manner or eliminating any of the provisions of, the Indenture
or of this Series 1998-1 Supplement of modifying in any manner the rights of
the Series 1998-1 Noteholders under the Indenture or under this Series 1998-1
Supplement; provided, however, that such action shall not, as evidenced by an
Opinion of Counsel, adversely affect in any material respect the interests of
any Series 1998-1 Noteholder.
SECTION 6.05. AMENDMENTS WITH CONSENT OF THE SERIES 1998-1
NOTEHOLDERS.
Except as otherwise provided herein, the Issuer and the Indenture
Trustee, when authorized by an Issuer Order provided by the Master Servicer,
also may, upon satisfaction of the Rating Agency Condition and with the consent
of the Holders of not less than a majority of the Outstanding Amount of each
Class of affected Series 1998-1 Notes, by Act of such Holders delivered to the
Issuer and the Indenture Trustee, enter into an amendment hereto for the
purpose of adding any provisions to, or changing in any manner or eliminating
any of the provisions of, this Series 1998-1 Supplement or of modifying in any
manner the rights of the Series 1998-1 Noteholders under the Indenture or under
this Series 1998-1 Supplement; provided, however, that no such amendment shall,
without the consent of the Holder of each Outstanding Series 1998-1 Note
affected thereby:
27
<PAGE>
(i) change the date of payment of any installment of
principal of or interest on any Series 1998-1 Note, or reduce the
principal amount thereof, the interest rate thereon, change the
provision of the Indenture relating to the application of collections
on, or the proceeds of the sale of, all or any portion of any Series
1998-1 Trust Estate to payment of principal of or interest on the
Series 1998-1 Notes, or change any place of payment where, or the
coin or currency in which, any Series 1998-1 Note or the interest
thereon is payable;
(ii) impair the right to institute suit for the enforcement
of the provisions of the Indenture requiring the application of funds
available therefor, as provided in Article V of the Indenture, to the
payment of any such amount due on the Series 1998-1 Notes on or after
the respective due dates thereof;
(iii) reduce the percentage of the Outstanding Amount of the
Series 1998-1 Notes, the consent of the Holders of which is required
for this Series 1998-1 Supplement, or the consent of the Holders of
which is required for any waiver of compliance with certain
provisions of the Indenture or certain defaults hereunder and their
consequences provided for in the Indenture;
(iv) modify or alter the provisions of the proviso to the
definition of the term "Outstanding";
(v) reduce the percentage of the Outstanding Amount of the
Notes required to direct the Trustee to direct the Issuer to sell or
liquidate the Series 1998-1 Trust Estate pursuant to Section 5.4 of
the Indenture;
(vi) modify any provision of this Section except to
increase any percentage specified herein or to provide that certain
additional provisions of the Indenture or the Basic Documents cannot
be modified or waived without the consent of the Holder of each
Outstanding Series 1998-1 Note affected thereby;
(vii) modify any of the provisions of the Indenture in such
manner as to affect the calculation of the amount of any payment of
interest or principal due on any Series 1998-1 Note on any
Distribution Date (including the calculation of any of the individual
components of such calculation) or to affect the rights of the
Holders of Series 1998-1 Notes to the benefit of any provisions for
the mandatory redemption of the Series 1998-1 Notes contained herein;
or
(viii) permit the creation of any lien ranking prior to or on
a parity with the lien of the Indenture with respect to any part of
the a Series 1998-1 Trust Estate or, except as otherwise permitted or
contemplated herein or the Series 1998-1 Related Documents, terminate
the lien of the Indenture on any property at any time subject hereto
or deprive the Holder of any Series 1998-1 Note of the security
provided by the lien of the Indenture.
28
<PAGE>
Except as otherwise provided herein, the Indenture Trustee may
determine whether or not any Series 1998-1 Notes would be adversely affected by
any amendment upon receipt of an Opinion of Counsel to that effect and any such
determination shall be conclusive upon the Holders of all Series 1998-1 Notes,
whether theretofore or thereafter authenticated and delivered hereunder. The
Indenture Trustee shall not be liable for any such determination made in good
faith.
It shall not be necessary for any Act of Noteholders under this
Section to approve the particular form of this Series 1998-1 Supplement, but
it shall be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Indenture Trustee
of this Series 1998-1 Supplement, the Indenture Trustee shall mail to the
Series 1998-1 Noteholders a notice setting forth in general terms the substance
hereof. Any failure of the Indenture Trustee to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
the Series 1998-1 Supplement.
SECTION 6.06. NON-PETITION CLAUSES.
By its acceptance of its interest in the Series 1998-1 Notes, each
owner of a beneficial interest in a Note shall be deemed to have agreed that
prior to the date which is one year and one day after the termination of the
Indenture, such Person shall not acquiesce, petition or otherwise invoke or
cause the Issuer or the Seller to invoke the process of any governmental
authority for the purpose of commencing or sustaining a case against the Seller
or Issuer under any Federal or state bankruptcy, insolvency or similar law or
appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator
or other similar official of or for the Issuer or the Seller or any substantial
part of its property or ordering the winding-up or liquidation of the affairs
of the Issuer or the Seller.
(a)
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Series 1998-1
Supplement to be fully executed by their respective officers as of the day and
year first above written.
HOUSEHOLD FINANCE CORPORATION,
as Master Servicer
By
-------------------------------------
Name:
Title:
HOUSEHOLD AUTOMOBILE REVOLVING
TRUST I,
as Issuer
By WILMINGTON TRUST COMPANY
Not in its individual capacity but solely
as Owner Trustee
By
-------------------------------------
Name:
Title:
HOUSEHOLD AUTO RECEIVABLES
CORPORATION,
By
-------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
as Indenture Trustee
By
-------------------------------------
Name:
Title:
<PAGE>
WILMINGTON TRUST COMPANY,
as Owner Trustee
By
-------------------------------------
Name:
Title:
2
<PAGE>
INDEX OF TERMS
PAGE
Aggregate Note Principal Balance . . . . . . . . . . . . . . . . . . . . . . . 3
Aggregate Optimal Note Principal Balance . . . . . . . . . . . . . . . . . . . 3
Available Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Base Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Basic Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Book Entry Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Certificateholders' Distributable Amount . . . . . . . . . . . . . . . . . . . 4
Chase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class A Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . 4
Class A Interest Carryover Shortfall . . . . . . . . . . . . . . . . . . . . . 4
Class A Interest Distributable Amount. . . . . . . . . . . . . . . . . . . . . 4
Class A Monthly Principal Distributable Amount . . . . . . . . . . . . . . . . 4
Class A Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class A Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class A Principal Carryover Shortfall. . . . . . . . . . . . . . . . . . . . . 5
Class A Principal Distributable Amount . . . . . . . . . . . . . . . . . . . . 5
Class A-1 Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class A-1 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class A-1 Scheduled Maturity Date. . . . . . . . . . . . . . . . . . . . . . . 5
Class A-2 Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class A-2 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class A-3 Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class A-3 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class A-4 Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class A-4 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class A-5 Monthly Principal Distributable Amount . . . . . . . . . . . . . . . 5
Class A-5 Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class A-5 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class A-5 Principal Carryover Shortfall. . . . . . . . . . . . . . . . . . . . 6
Class A-5 Principal Distributable Amount . . . . . . . . . . . . . . . . . . . 6
Class B Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . 6
Class B Interest Distributable Amount. . . . . . . . . . . . . . . . . . . . . 7
Class B Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class B-1 Interest Carryover Shortfall . . . . . . . . . . . . . . . . . . . . 6
Class B-1 Interest Distributable Amount. . . . . . . . . . . . . . . . . . . . 6
Class B-1 Monthly Principal Distributable Amount . . . . . . . . . . . . . . . 6
Class B-1 Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Class B-1 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class B-1 Principal Carryover Shortfall. . . . . . . . . . . . . . . . . . . . 6
Class B-1 Principal Distributable Amount . . . . . . . . . . . . . . . . . . . 7
Class B-2 Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . 7
Class B-2 Interest Carryover Shortfall . . . . . . . . . . . . . . . . . . . . 7
Class B-2 Monthly Principal Distributable Amount . . . . . . . . . . . . . . . 7
Class B-2 Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Class B-2 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class B-2 Principal Carryover Shortfall. . . . . . . . . . . . . . . . . . . . 7
Class B-2 Principal Distributable Amount . . . . . . . . . . . . . . . . . . . 8
<PAGE>
Class C Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . 8
Class C Interest Carryover Shortfall . . . . . . . . . . . . . . . . . . . . . 8
Class C Interest Distributable Amount. . . . . . . . . . . . . . . . . . . . . 8
Class C Monthly Principal Distributable Amount . . . . . . . . . . . . . . . . 8
Class C Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Class C Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Class C Principal Carryover Shortfall. . . . . . . . . . . . . . . . . . . . . 9
Class C Principal Distributable Amount . . . . . . . . . . . . . . . . . . . . 9
Cutoff Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Definitive Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Distribution Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Eligibility Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Eligible Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Final Scheduled Distribution Date. . . . . . . . . . . . . . . . . . . . . . . 9
HAFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
HFC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 9
Indenture Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Initial Reserve Account Deposit. . . . . . . . . . . . . . . . . . . . . . . . 9
Interest Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Interest Rate Cap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Interest Rate Cap Provider . . . . . . . . . . . . . . . . . . . . . . . . . .10
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LIBOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
LIBOR Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Master Servicer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Master Servicer's Certificate. . . . . . . . . . . . . . . . . . . . . . . . .10
Maximum Reserve Account Deposit Amount . . . . . . . . . . . . . . . . . . . .10
Note Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Note Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Noteholders' Interest Distributable Amount . . . . . . . . . . . . . . . . . .10
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Original Pool Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Owner Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Owner Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Pledged Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Principal Amount Available . . . . . . . . . . . . . . . . . . . . . . . . . .11
Principal Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . .12
Rating Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12, 24
Reference Bank Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Reserve Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Reserve Account Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Reserve Account Deposit Amount . . . . . . . . . . . . . . . . . . . . . . . .12
Reserve Account Shortfall Amount . . . . . . . . . . . . . . . . . . . . . . .12
Schedule of Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series 1998-1 Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . .13
Series 1998-1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . .13
Series 1998-1 Collected Funds. . . . . . . . . . . . . . . . . . . . . . . . .13
2
<PAGE>
Series 1998-1 Collection Account . . . . . . . . . . . . . . . . . . . . .13, 15
Series 1998-1 Eligible Investments . . . . . . . . . . . . . . . . . . . . . .13
Series 1998-1 Eligible Receivable. . . . . . . . . . . . . . . . . . . . . . . 9
Series 1998-1 Note Account . . . . . . . . . . . . . . . . . . . . . . . .13, 15
Series 1998-1 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . .13
Series 1998-1 Related Documents. . . . . . . . . . . . . . . . . . . . . . . .13
Series 1998-1 Reserve Account. . . . . . . . . . . . . . . . . . . . . . .13, 15
Series 1998-1 Secured Obligations. . . . . . . . . . . . . . . . . . . . . . .13
Series 1998-1 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Series 1998-1 Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Series 1998-1 Support. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Series 1998-1 Support Provider . . . . . . . . . . . . . . . . . . . . . . . .14
Series 1998-1 Trust Accounts . . . . . . . . . . . . . . . . . . . . . . . . .14
Series 1998-1 Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . 2, 14
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Supplemental Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . .14
Targeted Credit Enhancement Amount . . . . . . . . . . . . . . . . . . . . . .14
Targeted Overcollateralization Amount. . . . . . . . . . . . . . . . . . . . .14
Targeted Reserve Account Balance . . . . . . . . . . . . . . . . . . . . . . .14
Telerate Screen Page 3750. . . . . . . . . . . . . . . . . . . . . . . . . . .14
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(MULTICURRENCY-CROSS BORDER)
ISDA -REGISTERED TRADEMARK-
INTERNATIONAL SWAP DEALERS ASSOCIATION, INC.
MASTER AGREEMENT
DATED AS OF
---------------------------------------
Westdeutsche Landesbank Girozentrale, The Chase Manhattan Bank, not in its
acting through its New York branch and individual capacity, but solely as
Trustee
have entered and/or anticipate entering into one or more transactions (each a
"Transaction") that are or will be governed by this Master Agreement, which
includes the schedule (the "Schedule"), and the documents and other
confirming evidence (each a "Confirmation") exchanged between the parties
confirming those Transactions.
Accordingly, the parties agree as follows:--
1. INTERPRETATION
(a) DEFINITIONS. The terms defined in Section 14 and in the Schedule will
have the meanings therein specified for the purpose of this Master Agreement.
(b) INCONSISTENCY. In the event of any inconsistency between the provisions
of the Schedule and the other provisions of this Master Agreement, the
Schedule will prevail. In the event of any inconsistency between the
provisions of any Confirmation and this Master Agreement (including the
Schedule), such Confirmation will prevail for the purpose of the relevant
Transaction.
(c) SINGLE AGREEMENT. All Transactions are entered into in reliance on the
fact that this Master Agreement and all Confirmations form a single agreement
between the parties (collectively referred to as this "Agreement"), and the
parties would not otherwise enter into any Transactions.
2. OBLIGATIONS
(a) GENERAL CONDITIONS.
(i) Each party will make each payment or delivery specified in each
Confirmation to be made by it, subject to the other provisions of this
Agreement.
(ii) Payments under this Agreement will be made on the due date for value
on that date in the place of the account specified in the relevant
Confirmation or otherwise pursuant to this Agreement, in freely
transferable funds and in the manner customary for payments in the required
currency. Where settlement is by delivery (that is, other than by payment),
such delivery will be made for receipt on the due date in the manner
customary for the relevant obligation unless otherwise specified in the
relevant Confirmation or elsewhere in this Agreement.
(iii) Each obligation of each party under Section 2(a)(i) is subject to
(1) the condition precedent that no Event of Default or Potential Event of
Default with respect to the other party has occurred and is continuing, (2)
the condition precedent that no Early Termination Date in respect of the
relevant Transaction has occurred or been effectively designated and (3)
each other applicable condition precedent specified in this Agreement.
Copyright -C- 1992 by International Swap Dealers Association, Inc.
<PAGE>
(b) CHANGE OF ACCOUNT. Either party may change its account for receiving a
payment or delivery by giving notice to the other party at least five Local
Business Days prior to the scheduled date for the payment or delivery to which
such change applies unless such other party gives timely notice of a reasonable
objection to such change.
(c) NETTING. If on any date amounts would otherwise be payable:--
(i) in the same currency; and
(ii) in respect of the same Transaction,
by each party to the other, then, on such date, each party's obligation to
make payment of any such amount will be automatically satisfied and
discharged and, if the aggregate amount that would otherwise have been
payable by one party exceeds the aggregate amount that would otherwise have
been payable by the other party, replaced by an obligation upon the party by
whom the larger aggregate amount would have been payable to pay to the other
party the excess of the larger aggregate amount over the smaller aggregate
amount.
The parties may elect in respect of two or more Transactions that a net
amount will be determined in respect of all amounts payable on the same date
in the same currency in respect of such Transactions, regardless of whether
such amounts are payable in respect of the same Transaction. The election may
be made in the Schedule or a Confirmation by specifying that subparagraph
(ii) above will not apply to the Transactions identified as being subject to
the election, together with the starting date (in which case subparagraph
(ii) above will not, or will cease to, apply to such Transactions from such
date). This election may be made separately for different groups of
Transactions and will apply separately to each pairing of Offices through
which the parties make and receive payments or deliveries.
(d) DEDUCTION OR WITHHOLDING FOR TAX.
(i) GROSS-UP. All payments under this Agreement will be made without any
deduction or withholding for or on account of any Tax unless such deduction or
withholding is required by any applicable law, as modified by the practice of
any relevant governmental revenue authority, then in effect. If a party is so
required to deduct or withhold, then that party ("X") will:--
(1) promptly notify the other party ("Y") of such requirement;
(2) pay to the relevant authorities the full amount required to be deducted
or withheld (including the full amount required to be deducted or withheld
from any additional amount paid by X to Y under this Section 2(d)) promptly
upon the earlier of determining that such deduction or withholding is
required or receiving notice that such amount has been assessed against Y:
(3) promptly forward to Y an official receipt (or a certified copy), or
other documentation reasonably acceptable to Y, evidencing such payment to
such authorities; and
(4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the
payment to which Y is otherwise entitled under this Agreement, such
additional amount as is necessary to ensure that the net amount actually
received by Y (free and clear of Indemnifiable Taxes, whether assessed
against X or Y) will equal the full amount Y would have received had no
such deduction or withholding been required. However, X will not be
required to pay any additional amount to Y to the extent that it would not
be required to be paid but for:--
(A) the failure by Y to comply with or perform any agreement contained
in Section 4(a)(i), 4(a)(iii) or 4(d); or
(B) the failure of a representation made by Y pursuant to Section 3(f)
to be accurate and true unless such failure would not have occurred
but for (I) any action taken by a taxing authority, or brought in a
court of competent jurisdiction, on or after the date on which a
Transaction is entered into (regardless of whether such action is
taken or brought with respect to a party to this Agreement) or (II) a
Change in Tax Law.
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(ii) LIABILITY. If:
(1) X is required by any applicable law, as modified by the practice
of any relevant governmental revenue authority, to make any deduction
or withholding in respect of which X would not be required to pay an
additional amount to Y under Section 2(d)(i)(4);
(2) X does not so deduct or withhold; and
(3) a liability resulting from such Tax is assessed directly against
X,
then, except to the extent Y has satisfied or then satisfies the liability
resulting from such Tax, Y will promptly pay to X the amount of such
liability (including any related liability for interest, but including any
related liability for penalties only if Y has failed to comply with or
perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)).
(e) DEFAULT INTEREST; OTHER AMOUNTS. Prior to the occurrence or effective
designation of an Early Termination Date in respect of the relevant Transaction,
a party that defaults in the performance of any payment obligation will, to the
extent permitted by law and subject to Section 6(c), be required to pay interest
(before as well as after judgment) on the overdue amount to the other party on
demand in the same currency as such overdue amount, for the period from (and
including) the original due date for payment to (but excluding) the date of
actual payment, at the Default Rate. Such interest will be calculated on the
basis of daily compounding and the actual number of days elapsed. If, prior to
the occurrence or effective designation of an Early Termination Date in respect
of the relevant Transaction, a party defaults in the performance of any
obligation required to be settled by delivery, it will compensate the other
party on demand if and to the extent provided for in the relevant Confirmation
or elsewhere in this Agreement.
3. REPRESENTATIONS
Each party represents to the other party (which representations will be deemed
to be repeated by each party on each date on which a Transaction is entered into
and, in the case of the representations in Section 3(f), at all times until the
termination of this Agreement) that:--
(a) BASIC REPRESENTATIONS.
(i) STATUS. It is duly organized and validly existing under the laws of the
jurisdiction of its organisation or incorporation and, if relevant under
such laws, in good standing;
(ii) POWERS. It has the power to execute this Agreement and any other
documentation relating to this Agreement to which it is a party, to deliver
this Agreement and any other documentation relating to this Agreement that
it is required by this Agreement to deliver and to perform its obligations
under this Agreement and any obligations it has under any Credit Support
Document to which it is a party and has taken all necessary action to
authorise such execution, delivery and performance;
(iii) NO VIOLATION OR CONFLICT. Such execution, delivery and performance do
not violate or conflict with any law applicable to it, any provision of its
constitutional documents, any order or judgment of any court or other
agency of government applicable to it or any of its assets or any
contractual restriction binding on or affecting it or any of its assets;
(iv) CONSENTS. All governmental and other consents that are required to
have been obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party have been obtained and are in full
force and effect and all conditions of any such consents have been complied
with; and
(v) OBLIGATIONS BINDING. Its obligations under this Agreement and any
Credit Support Document to which it is a party constitute its legal, valid
and binding obligations, enforceable in accordance with their respective
terms (subject to applicable bankruptcy, reorganisation, insolvency,
moratorium or similar laws affecting creditors' rights generally and
subject, as to enforceability, to equitable principles of general
application (regardless of whether enforcement is sought in a proceeding in
equity or at law)).
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(b) ABSENCE OF CERTAIN EVENTS. No Event of Default or Potential Event of
Default or, to its knowledge, Termination Event with respect to it has
occurred and is continuing and no such event or circumstance would occur
as a result of its entering into or performing its obligations under this
Agreement or any Credit Support Document to which it is a party.
(c) ABSENCE OF LITIGATION. There is not pending or, to its knowledge,
threatened against it or any of its Affiliates any action, suit or proceeding
at law or in equity or before any court, tribunal, governmental body, agency
or official or any arbitrator that is likely to affect the legality, validity
or enforceability against it of this Agreement or any Credit Support Document
to which it is a party or its ability to perform its obligations under this
Agreement or such Credit Support Document.
(d) ACCURACY OF SPECIFIED INFORMATION. All applicable information that is
furnished in writing by or on behalf of it to the other party and is
identified for the purpose of this Section 3(d) in the Schedule is, as of the
date of the information, true, accurate and complete in every material
respect.
(e) PAYER TAX REPRESENTATION. Each representation specified in the Schedule
as being made by it for the purpose of this Section 3(e) is accurate and true.
(f) PAYEE TAX REPRESENTATIONS. Each representation specified in the Schedule as
being made by it for the purpose of this Section 3(f) is accurate and true.
4. AGREEMENTS
Each party agrees with the other that, so long as either party has or may
have any obligation under this Agreement or under any Credit Support Document
to which it is a party:--
(a) FURNISH SPECIFIED INFORMATION. It will deliver to the other party or, in
certain cases under subparagraph (iii) below, to such government or taxing
authority as the other party reasonably directs:--
(i) any forms, documents or certificates relating to taxation specified in
the Schedule or any Confirmation;
(ii) any other documents specified in the Schedule or any Confirmation; and
(iii) upon reasonable demand by such other party, any form or document that
may be required or reasonably requested in writing in order to allow such
other party or its Credit Support Provider to make a payment under this
Agreement or any applicable Credit Support Document without any deduction
or withholding for or on account of any Tax or with such deduction or
withholding at a reduced rate (so long as the completion, execution or
submission of such form or document would not materially prejudice the
legal or commercial position of the party in receipt of such demand), with
any such form or document to be accurate and completed in a manner
reasonably satisfactory to such other party and to be executed and to be
delivered with any reasonably required certification,
in each case by the date specified in the Schedule or such Confirmation or,
if none is specified, as soon as reasonably practicable.
(b) MAINTAIN AUTHORISATIONS. It will use all reasonable efforts to maintain in
full force and effect all consents of any governmental or other authority that
are required to be obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party and will use all reasonable efforts to
obtain any that may become necessary in the future.
(c) COMPLY WITH LAWS. It will comply in all material respects with all
applicable laws and orders to which it may be subject if failure so to comply
would materially impair its ability to perform its obligations under this
Agreement or any Credit Support Document to which it is a party.
(d) TAX AGREEMENT. It will give notice of any failure of a representation
made by it under Section 3(f) to be accurate and true promptly upon learning
of such failure.
(e) PAYMENT OF STAMP TAX. Subject to Section II, it will pay any Stamp Tax
levied or imposed upon it or in respect of its execution or performance of this
Agreement by a jurisdiction in which it is incorporated,
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<PAGE>
organised, managed and controlled, or considered to have its seat, or in
which a branch or office through which it is acting for the purpose of this
Agreement is located ("Stamp Tax Jurisdiction") and will indemnify the other
party against any Stamp Tax levied or imposed upon the other party or in
respect of the other party's execution or performance of this Agreement by
any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction
with respect to the other party.
5. EVENTS OF DEFAULT AND TERMINATION EVENTS
(a) EVENTS OF DEFAULT. The occurrence at any time with respect to a party or,
if applicable, any Credit Support Provider of such party or any Specified Entity
of such party of any of the following events constitutes an event of default (an
"Event of Default") with respect to such party:--
(i) FAILURE TO PAY OR DELIVER. Failure by the party to make, when due, any
payment under this Agreement or delivery under Section 2(a)(i) or 2(e)
required to be made by it if such failure is not remedied on or before the
third Local Business Day after notice of such failure is given to the
party;
(ii) BREACH OF AGREEMENT. Failure by the party to comply with or perform
any agreement or obligation (other than an obligation to make any payment
under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give
notice of a Termination Event or any agreement or obligation under Section
4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party
in accordance with this Agreement if such failure is not remedied on or
before the thirtieth day after notice of such failure is given to the
party;
(iii) CREDIT SUPPORT DEFAULT.
(1) Failure by the party or any Credit Support Provider of such party
to comply with or perform any agreement or obligation to be complied
with or performed by it in accordance with any Credit Support Document
if such failure is continuing after any applicable grace period has
elapsed;
(2) the expiration or termination of such Credit Support Document or
the failing or ceasing of such Credit Support Document to be in full
force and effect for the purpose of this Agreement (in either case
other than in accordance with its terms) prior to the satisfaction of
all obligations of such party under each Transaction to which such
Credit Support Document relates without the written consent of the
other party; or
(3) the party or such Credit Support Provider disaffirms, disclaims,
repudiates or rejects, in whole or in part, or challenges the validity
of, such Credit Support Document;
(iv) MISREPRESENTATION. A representation (other than a representation under
Section 3(e) or (f)) made or repeated or deemed to have been made or
repeated by the party or any Credit Support Provider of such party in this
Agreement or any Credit Support Document proves to have been incorrect or
misleading in any material respect when made or repeated or deemed to have
been made or repeated;
(v) DEFAULT UNDER SPECIFIED TRANSACTION. The party, any Credit Support
Provider of such party or any applicable Specified Entity of such party
(1) defaults under a Specified Transaction and, after giving effect to any
applicable notice requirement or grace period, there occurs a liquidation
of, an acceleration of obligations under, or an early termination of, that
Specified Transaction, (2) defaults, after giving effect to any applicable
notice requirement or grace period, in making any payment or delivery due
on the last payment, delivery or exchange date of, or any payment on early
termination of, a Specified Transaction (or such default continues for at
least three Local Business Days if there is no applicable notice
requirement or grace period) or (3) disaffirms, disclaims, repudiates or
rejects, in whole or in part, a Specified Transaction (or such action is
taken by any person or entity appointed or empowered to operate it or act
on its behalf);
(vi) CROSS DEFAULT. If "Cross Default" is specified in the Schedule as
applying to the party, the occurrence or existence of (1) a default, event
of default or other similar condition or event (however
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described) in respect of such party, any Credit Support Provider of such
party or any applicable Specified Entity of such party under one or more
agreements or instruments relating to Specified Indebtedness of any of them
(individually or collectively) in an aggregate amount of not less than the
applicable Threshold Amount (as specified in the Schedule) which has
resulted in such Specified Indebtedness becoming, or becoming capable at
such time of being declared, due and payable under such agreements or
instruments, before it would otherwise have been due and payable or (2) a
default by such party, such Credit Support Provider or such Specified
Entity (individually or collectively) in making one or more payments on the
due date thereof in an aggregate amount of not less than the applicable
Threshold Amount under such agreements or instruments (after giving effect
to any applicable notice requirement or grace period);
(vii) BANKRUPTCY. The party, any Credit Support Provider of such party or
any applicable Specified Entity of such party:
(1) is dissolved (other than pursuant to a consolidation, amalgamation
or merger); (2) becomes insolvent or is unable to pay its debts or
fails or admits in writing its inability generally to pay its debts as
they become due; (3) makes a general assignment, arrangement or
composition with or for the benefit of its creditors; (4) institutes
or has instituted against it a proceeding seeking a judgment of
insolvency or bankruptcy or any other relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights, or a
petition is presented for its winding-up or liquidation, and, in the
case of any such proceeding or petition instituted or presented
against it, such proceeding or petition (A) results in a judgment of
insolvency or bankruptcy or the entry of an order for relief or the
making of an order for its winding-up or liquidation or (B) is not
dismissed, discharged, stayed or restrained in each case within 30
days of the institution or presentation thereof; (5) has a resolution
passed for its winding-up, official management or liquidation (other
than pursuant to a consolidation, amalgamation or merger); (6) seeks
or becomes subject to the appointment of an administrator, provisional
liquidator, conservator, receiver, trustee, custodian or other similar
official for it or for all or substantially all its assets; (7) has a
secured party take possession of all or substantially all its assets
or has a distress, execution, attachment, sequestration or other legal
process levied, enforced or sued on or against all or substantially
all its assets and such secured party maintains possession, or any
such process is not dismissed, discharged, stayed or restrained, in
each case within 30 days thereafter; (8) causes or is subject to any
event with respect to it which, under the applicable laws of any
jurisdiction, has an analogous effect to any of the events specified
in clauses (1) to (7) (inclusive); or (9) takes any action in
furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the foregoing acts; or
(viii) MERGER WITHOUT ASSUMPTION. The party or any Credit Support Provider
of such party consolidates or amalgamates with, or merges with or into, or
transfers all or substantially all its assets to, another entity and, at
the time of such consolidation, amalgamation, merger or transfer:--
(1) the resulting, surviving or transferee entity fails to assume
all the obligations of such party or such Credit Support Provider
under this Agreement or any Credit Support Document to which it or
its predecessor was a party by operation of law or pursuant to an
agreement reasonably satisfactory to the other party to this
Agreement; or
(2) the benefits of any Credit Support Document fail to extend
(without the consent of the other party) to the performance by such
resulting, surviving or transferee entity of its obligations under
this Agreement.
(h) TERMINATION EVENTS. The occurrence at any time with respect to a party or,
if applicable, any Credit Support Provider of such party or any Specified Entity
of such party of any event specified below constitutes an Illegality if the
event is specified in (i) below, a Tax Event if the event is specified in (ii)
below or a Tax Event Upon Merger if the event is specified in (iii) below, and,
if specified to be applicable, a Credit Event.
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Upon Merger if the event is specified pursuant to (iv) below or an Additional
Termination Event if the event is specified pursuant to (v) below:
(i) ILLEGALITY. Due to the adoption of, or any change in, any applicable
law after the date on which a Transaction is entered into, or due to the
promulgation of, or any change in, the interpretation by any court,
tribunal or regulatory authority with competent jurisdiction of any
applicable law after such date, it becomes unlawful (other than as a result
of a breach by the party of Section 4(b)) for such party (which will be the
Affected Party):--
(1) to perform any absolute or contingent obligation to make a payment
or delivery or to receive a payment or delivery in respect of such
Transaction or to comply with any other material provision of this
Agreement relating to such Transaction; or
(2) to perform, or for any Credit Support Provider of such party to
perform, any contingent or other obligation which the party (or such
Credit Support Provider) has under any Credit Support Document
relating to such Transaction.
(ii) TAX EVENT. Due to (x) any action taken by a taxing authority, or
brought in a court of competent jurisdiction, on or after the date on which
a Transaction is entered into (regardless of whether such action is taken
or brought with respect to a party to this Agreement) or (y) a Change in
Tax Law, the party (which will be the Affected Party) will or there is a
substantial likelihood that it will, on the next succeeding Scheduled
Payment Date (1) be required to pay to the other party an additional amount
in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in
respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a
payment from which an amount is required to be deducted or withheld for or
on account of a Tax (except in respect of interest under Section 2(e),
6(d)(ii) or 6(e)) and no additional amount is required to be paid in
respect of such Tax under Section 2(d)(i)(4) (other than by reason of
Section 2(d)(i)(4)(A) or (B));
(iii) TAX EVENT UPON MERGER. The party (the "Burdened Party") on the next
succeeding Scheduled Payment Date will either (1) be required to pay an
additional amount in respect of an Indemnifiable Tax under Section
2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or
6(e)) or (2) receive a payment from which an amount has been deducted or
withheld for or on account of any Indemnifiable Tax in respect of which the
other party is not required to pay an additional amount (other than by
reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a
party consolidating or amalgamating with, or merging with or into, or
transferring all or substantially all its assets to, another entity (which
will be the Affected Party) where such action does not constitute an event
described in Section 5(a)(viii);
(iv) CREDIT EVENT UPON MERGER. If "Credit Event Upon Merger" is specified
in the Schedule as applying to the party, such party ("X"), any Credit
Support Provider of X or any applicable Specified Entity of X consolidates
or amalgamates with, or merges with or into, or transfers all or
substantially all its assets to, another entity and such action does not
constitute an event described in Section 5(a)(viii) but the
creditworthiness of the resulting, surviving or transferee entity is
materially weaker than that of X, such Credit Support Provider or such
Specified Entity, as the case may be, immediately prior to such action
(and, in such event, X or its successor or transferee, as appropriate, will
be the Affected Party); or
(v) ADDITIONAL TERMINATION EVENT. If any "Additional Termination Event" is
specified in the Schedule or any Confirmation as applying, the occurrence
of such event (and, in such event, the Affected Party or Affected Parties
shall be as specified for such Additional Termination Event in the Schedule
or such Confirmation).
(c) EVENT OF DEFAULT AND ILLEGALITY. If an event or circumstance which would
otherwise constitute or give rise to an Event of Default also constitutes an
Illegality, it will be treated as an Illegality and will not constitute an Event
of Default.
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6. EARLY TERMINATION
(a) RIGHT TO TERMINATE FOLLOWING EVENT OF DEFAULT. If at any time an Event of
Default with respect to a party (the "Defaulting Party") has occurred and is
then continuing, the other party (the "Non-defaulting Party may, by not more
than 20 days notice to the Defaulting Party specifying the relevant Event of
Default, designate a day not earlier than the day such notice is effective as an
Early Termination Date in respect of all outstanding Transactions. If, however,
"Automatic Early Termination" is specified in the Schedule as applying to a
party, then an Early Termination Date in respect of all outstanding Transactions
will occur immediately upon the occurrence with respect to such party of an
Event of Default specified in Section 5(a)(vii)(l), (3), (5), (6) or, to the
extent analogous thereto, (8), and as of the time immediately preceding the
institution of the relevant proceeding or the presentation of the relevant
petition upon the occurrence with respect to such party of an Event of Default
specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
(b) RIGHT TO TERMINATE FOLLOWING TERMINATION EVENT.
(i) NOTICE. If a Termination Event occurs, an Affected Party will,
promptly upon becoming aware of it, notify the other party, specifying the
nature of that Termination Event and each Affected Transaction and will
also give such other information about that Termination Event as the other
party may reasonably require.
(ii) TRANSFER TO AVOID TERMINATION EVENT. If either an Illegality under
Section 5(b)(i)(l) or a Tax Event occurs and there is only one Affected
Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the
Affected Party, the Affected Party will, as a condition to its right to
designate an Early Termination Date under Section 6(b)(iv), use all
reasonable efforts (which will not require such party to incur a loss,
excluding immaterial, incidental expenses) to transfer within 20 days after
it gives notice under Section 6(b)(i) all its rights and obligations under
this Agreement in respect of the Affected Transactions to another of its
Offices or Affiliates so that such Termination Event ceases to exist.
If the Affected Party is not able to make such a transfer it will give
notice to the other party to that effect within such 20 day period;
whereupon the other party may effect such a transfer within 30 days after
the notice is given under Section 6(b)(i).
Any such transfer by a party under this Section 6(b)(ii) will be subject to
and conditional upon the prior written consent of the other party, which
consent will not be withheld if such other party's policies in effect at
such time would permit it to enter into transactions with the transferee on
the terms proposed.
(iii) TWO AFFECTED PARTIES. If an Illegality under Section 5(b)(i)(l) or a
Tax Event occurs and there are two Affected Parties, each party will use
all reasonable efforts to reach agreement within 30 days after notice
thereof is given under Section 6(b)(i) on action to avoid that Termination
Event.
(iv) RIGHT TO TERMINATE. If: --
(1) a transfer under Section 6(b)(ii) or an agreement under Section
6(b)(iii), as the case may be, has not been effected with respect to
all Affected Transactions within 30 days after an Affected Party gives
notice under Section 6(b)(i); or
(2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger
or an Additional Termination Event occurs, or a Tax Event Upon Merger
occurs and the Burdened Party is not the Affected Party,
either party in the case of an Illegality, the Burdened Party in the case
of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event
or an Additional Termination Event if there is more than one Affected
Party, or the party which is not the Affected Party in the case of a Credit
Event Upon Merger or an Additional Termination Event if there is only one
Affected Party may, by not more than 20 days notice to the other party and
provided that the relevant Termination Event is then
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continuing, designate a day not earlier than the day such notice is
effective as an Early Termination Date in respect of all Affected
Transactions.
(3) EFFECT OF DESIGNATION.
(i) If notice designating an Early Termination Date is given under Section
6(a) or (b), the Early Termination Date will occur on the date so
designated, whether or not the relevant Event of Default or Termination
Event is then continuing.
(ii) Upon the occurrence or effective designation of an Early Termination
Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in
respect of the Terminated Transactions will be required to be made, but
without prejudice to the other provisions of this Agreement. The amount, if
any, payable in respect of an Early Termination Date shall be determined
pursuant to Section 6(e).
(d) CALCULATIONS.
(i) STATEMENT. On or as soon as reasonably practicable following the
occurrence of an Early Termination Date, each party will make the
calculations on its part, if any, contemplated by Section 6(e) and will
provide to the other party a statement (1) showing, in reasonable detail,
such calculations (including all relevant quotations and specifying any
amount payable under Section 6(e)) and (2) giving details of the relevant
account to which any amount payable to it is to be paid. In the absence of
written confirmation from the source of a quotation obtained in determining
a Market Quotation, the records of the party obtaining such quotation will
be conclusive evidence of the existence and accuracy of such quotation.
(ii) PAYMENT DATE. An amount calculated as being due in respect of any
Early Termination Date under Section 6(e) will be payable on the day that
notice of the amount payable is effective (in the case of an Early
Termination Date which is designated or occurs as a result of an Event of
Default) and on the day which is two Local Business Days after the day on
which notice of the amount payable is effective (in the case of an Early
Termination Date which is designated as a result of a Termination Event).
Such amount will be paid together with (to the extent permitted under
applicable law) interest thereon (before as well as after judgment) in the
Termination Currency, from (and including) the relevant Early Termination
Date to (but excluding) the date such amount is paid, at the Applicable
Rate. Such interest will be calculated on the basis of daily compounding
and the actual number of days elapsed.
(e) PAYMENTS ON EARLY TERMINATION. If an Early Termination Date occurs, the
following provisions shall apply based on the parties' election in the Schedule
of a payment measure, either "Market Quotation" or "Loss", and a payment method,
either the "First Method" or the "Second Method". If the parties fail to
designate a payment measure or payment method in the Schedule, it will be deemed
that "Market Quotation" or the "Second Method", as the case may be, shall apply.
The amount, if any, payable in respect of an Early Termination Date and
determined pursuant to this Section will be subject to any Set-off.
(i) EVENTS OF DEFAULT. If the Early Termination Date results from an Event
of Default:--
(1) FIRST METHOD AND MARKET QUOTATION. If the First Method and Market
Quotation apply, the Defaulting Party will pay to the Non-defaulting:
Party the excess, if a positive number, of (A) the sum of the
Settlement Amount (determined by the Non-defaulting Party) in respect
of the Terminated Transactions and the Termination Currency Equivalent
of the Unpaid Amounts owing to the Non-defaulting Party over (B) the
Termination Currency Equivalent of the Unpaid Amounts owing to the
Defaulting Party,
(2) FIRST METHOD AND LOSS. If the First Method and Loss apply, the
Defaulting Party will pay to the Non-defaulting Party, if a positive
number, the Non-defaulting Party's Loss in respect of this Agreement.
(3) SECOND METHOD AND MARKET QUOTATION. If the Second Method and
Market Quotation apply, an amount will be payable equal to (A) the
sum of the Settlement Amount (determined by the
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Non-defaulting Party) in respect of the Terminated Transactions and the
Termination Currency Equivalent of the Unpaid Amounts owing to the
Non-defaulting Party less (B) the Termination Currency Equivalent of the
Unpaid Amounts owing to the Defaulting Party. If that amount is a positive
number, the Defaulting Party will pay it to the Non-defaulting Party; if it
is a negative number, the Non-defaulting Party will pay the absolute value
of that amount to the Defaulting Party.
(4) SECOND METHOD AND LOSS. If the Second Method and Loss apply, an amount
will be payable equal to the Non-defaulting Party's Loss in respect of this
Agreement. If that amount is a positive number, the Defaulting Party will
pay it to the Non-defaulting Party; if it is a negative number, the
Non-defaulting Party will pay the absolute value of that amount to the
Defaulting Party.
(ii) TERMINATION EVENTS. If the Early Termination Date results from a
Termination Event:--
(1) ONE AFFECTED PARTY. If there is one Affected Party, the amount
payable will be determined in accordance with Section 6(e)(i)(3), if Market
Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in
either case, references to the Defaulting Party and to the Non-defaulting
Party will be deemed to be references to the Affected Party and the party
which is not the Affected Party, respectively, and, if Loss applies and
fewer than all the Transactions are being terminated, Loss shall be
calculated in respect of all Terminated Transactions.
(2) TWO AFFECTED PARTIES. If there are two Affected Parties:--
(A) if Market Quotation applies, each party will determine a
Settlement Amount in respect of the Terminated Transactions, and an
amount will be payable equal to (I) the sum of (a) one-half of the
difference between the Settlement Amount of the party with the higher
Settlement Amount ("X") and the Settlement Amount of the party with
the lower Settlement Amount ("Y") and (b) the Termination Currency
Equivalent of the Unpaid Amounts owing to X less (II) the Termination
Currency Equivalent of the Unpaid Amounts owing to Y; and
(B) if Loss applies, each party will determine its Loss in respect of
this Agreement (or, if fewer than all the Transactions are being
terminated, in respect of all Terminated Transactions) and an amount
will be payable equal to one-half of the difference between the Loss
of the party with the higher Loss ("X") and the Loss of the party with
the lower Loss ("Y").
If the amount payable is a positive number. Y will pay it to X; if it is a
negative number, X will pay the absolute value of that amount to Y.
(iii) ADJUSTMENT FOR BANKRUPTCY. In circumstances where an Early Termination
Date occurs because "Automatic Early Termination" applies in respect of a party,
the amount determined under this Section 6(e) will be subject to such
adjustments as are appropriate and permitted by law to reflect any payments or
deliveries made by one party to the other under this Agreement (and retained by
such other party) during the period from the relevant Early Termination Date to
the date for payment determined under Section 6(d)(ii).
(iv) PRE-ESTIMATE. The parties agree that if Market Quotation applies an amount
recoverable under this Section 6(e) is a reasonable pre-estimate or loss and not
a penalty. Such amount is payable for the loss of bargain and the loss of
protection against future risks and except as otherwise provided in this
Agreement neither party will be entitled to recover any additional damages as a
consequence of such losses.
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7. TRANSFER
Subject to Section 6(b)(ii), neither this Agreement nor any interest or
obligation in or under this Agreement may be transferred (whether by way of
security or otherwise) by either party without the prior written consent of
the other party, except that:--
(a) a party may make such a transfer of this Agreement pursuant to a
consolidation or amalgamation with, or merger with or into, or transfer of
all or substantially all its assets to, another entity (but without prejudice
to any other right or remedy under this Agreement); and
(b) a party may make such a transfer of all or any part of its interest in
any amount payable to it from a Defaulting Party under Section 6(e).
Any purported transfer that is not in compliance with this Section will be
void.
8. CONTRACTUAL CURRENCY
(a) PAYMENT IN THE CONTRACTUAL CURRENCY. Each payment under this Agreement
will be made in the relevant currency specified in this Agreement for that
payment (the "Contractual Currency"). To the extent permitted by applicable
law, any obligation to make payments under this Agreement in the Contractual
Currency will not be discharged or satisfied by any tender in any currency
other than the Contractual Currency, except to the extent such tender results
in the actual receipt by the party to which payment is owed, acting in a
reasonable manner and in good faith in converting the currency so tendered
into the Contractual Currency, of the full amount in the Contractual Currency
of all amounts payable in respect of this Agreement. If for any reason the
amount in the Contractual Currency so received falls short of the amount in
the Contractual Currency payable in respect of this Agreement, the party
required to make the payment will, to the extent permitted by applicable law,
immediately pay such additional amount in the Contractual Currency as may be
necessary to compensate for the shortfall. If for any reason the amount in
the Contractual Currency so received exceeds the amount in the Contractual
Currency payable in respect of this Agreement, the party receiving the
payment will refund promptly the amount of such excess.
(b) JUDGMENTS. To the extent permitted by applicable law, if any judgment or
order expressed in a currency other than the Contractual Currency is rendered
(i) for the payment of any amount owing in respect of this Agreement, (ii)
for the payment of any amount relating to any early termination in respect of
this Agreement or (iii) in respect of a judgment or order of another court
for the payment of any amount described in (i) or (ii) above, the party
seeking recovery, after recovery in full of the aggregate amount to which
such party is entitled pursuant to the judgment or order, will be entitled to
receive immediately from the other party the amount of any shortfall of the
Contractual Currency received by such party as a consequence of sums paid in
such other currency and will refund promptly to the other party any excess of
the Contractual Currency received by such party as a consequence of sums paid
in such other currency if such shortfall or such excess arises or results
from any variation between the rate of exchange at which the Contractual
Currency is converted into the currency of the judgment or order for the
purposes of such judgment or order and the rate of exchange at which such
party is able, acting in a reasonable manner and in good faith in converting
the currency received into the Contractual Currency, to purchase the
Contractual Currency with the amount of the currency of the judgment or order
actually received by such party. The term "rate of exchange" includes without
limitation, any premiums and costs of exchange payable in connection with the
purchase of or conversion into the Contractual Currency.
(c) SEPARATE INDEMNITIES. To the extent permitted by applicable law, these
indemnities constitute separate and independent obligations from the other
obligations in this Agreement, will be enforceable as separate and
independent causes of action, will apply notwithstanding any indulgence
granted by the party to which any payment is owed and will not be affected by
judgment being obtained or claim or proof being made for any other sums
payable in respect of this Agreement.
(d) EVIDENCE OF LOSS. For the purpose of this Section 8, it will be
sufficient for a party to demonstrate that it would have suffered a loss had
an actual exchange or purchase been made.
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9. MISCELLANEOUS
(a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding of the parties with respect to its subject matter and
supersedes all oral communication and prior writings with respect thereto.
(b) AMENDMENTS. No amendment, modification or waiver in respect of this
Agreement will be effective unless in writing (including a writing evidenced
by a facsimile transmission) and executed by each of the parties or confirmed
by an exchange of telexes or electronic messages on an electronic messaging
system.
(c) SURVIVAL OF OBLIGATIONS. Without prejudice to Sections 2(a)(iii) and
6(c)(ii), the obligations of the parties under this Agreement will survive
the termination of any Transaction.
(d) REMEDIES CUMULATIVE. Except as provided in this Agreement, the rights,
powers, remedies and privileges provided in this Agreement are cumulative and
not exclusive of any rights, powers, remedies and privileges provided by law.
(e) COUNTERPARTS AND CONFIRMATIONS.
(i) This Agreement (and each amendment. modification and waiver in
respect of it) may be executed and delivered in counterparts (including
by facsimile transmission), each of which will be deemed an original.
(ii) The parties intend that they are legally bound by the terms of each
Transaction from the moment they agree to those terms (whether orally or
otherwise). A Confirmation shall be entered into as soon as practicable
and may be executed and delivered in counterparts (including by
facsimile transmission) or be created by an exchange of telexes or by an
exchange of electronic messages on an electronic messaging system, which
in each case will be sufficient for all purposes to evidence a binding
supplement to this Agreement. The parties will specify therein or
through another effective means that any such counterpart, telex or
electronic message constitutes a Confirmation.
(f) NO WAIVER OF RIGHTS. A failure or delay in exercising any right, power or
privilege in respect of this Agreement will not be presumed to operate as a
waiver, and a single or partial exercise of any right, power or privilege
will not be presumed to preclude any subsequent or further exercise of that
right, power or privilege or the exercise of any other right, power or
privilege.
(g) HEADINGS. The headings used in this Agreement are for convenience of
reference only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
10. OFFICES: MULTIBRANCH PARTIES
(a) If Section 10(a) is specified in the Schedule as applying, each party
that enters into a Transaction through an Office other than its head or home
office represents to the other party that, notwithstanding the place of
booking office or jurisdiction of incorporation or organisation of such
party, the obligations of such party are the same as if it had entered into
the Transaction through its head or home office. This representation will he
deemed to be repeated by such party on each date on which a Transaction is
entered into.
(b) Neither party may change the Office through which it makes and receives
payments or deliveries for the purpose of a Transaction without the prior
written consent of the other party.
(c) If a party is specified as a Multibranch Party in the Schedule, such
Multibranch Party may make and receive payments or deliveries under any
Transaction through any Office listed in the Schedule, and the Office through
which it makes and receives payments or deliveries with respect to a
Transaction will be specified in the relevant Confirmation.
11. EXPENSES
A Defaulting Party will, on demand, indemnify and hold harmless the other
party for and against all reasonable out-of-pocket expenses, including legal
fees and Stamp Tax, incurred by such other party by reason of the enforcement
and protection of its rights under this Agreement or any Credit Support
Document
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to which the Defaulting Party is a party or by reason of the early
termination of any Transaction, including, but not limited to, costs of
collection.
12. NOTICES
(a) EFFECTIVENESS. Any notice or other communication in respect of this
Agreement may be given in any manner set forth below (except that a notice or
other communication under Section 5 or 6 may not be given by facsimile
transmission or electronic messaging system) to the address or number or in
accordance with the electronic messaging system details provided (see the
Schedule) and will be deemed effective as indicated:--
(i) if in writing and delivered in person or by courier, on the date it
is delivered;
(ii) if sent by telex, on the date the recipient's answerback is
received;
(iii) if sent by facsimile transmission, on the date that transmission is
received by a responsible employee of the recipient in legible form (it
being agreed that the burden of proving receipt will be on the sender and
will not be met by a transmission report generated by the sender's
facsimile machine);
(iv) if sent by certified or registered mail (airmail, if overseas) or
the equivalent (return receipt requested), on the date that mail is
delivered or its delivery is attempted; or
(v) if sent by electronic messaging system, on the date that electronic
message is received,
unless the date of that delivery (or attempted delivery) or that receipt, as
applicable, is not a Local Business Day or that communication is delivered
(or attempted) or received, as applicable, after the close of business on a
Local Business Day, in which case that communication shall be deemed given
and effective on the first following day that is a Local Business Day.
(b) CHANGE OF ADDRESSES. Either party may by notice to the other change the
address, telex or facsimile number or electronic messaging system details at
which notices or other communications are to be given to it.
13. GOVERNING LAW AND JURISDICTION
(a) GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the law specified in the Schedule.
(b) JURISDICTION. With respect to any suit, action or proceedings relating
to this Agreement ("Proceedings"), each party irrevocably:--
(i) submits to the jurisdiction of the English courts, if this
Agreement is expressed to be governed by English law, or to the
non-exclusive jurisdiction of the courts of the State of New York and
the United States District Court located in the Borough of Manhattan in
New York City, if this Agreement is expressed to be governed by the laws
of the State of New York; and
(ii) waives any objection which it may have at any time to the laying of
venue of any Proceedings brought in any such court, waives any claim
that such Proceedings have been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceedings,
that such court does not have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in
any other jurisdiction (outside, if this Agreement is expressed to be
governed by English law, the Contracting States, as defined in Section I(3)
of the Civil Jurisdiction and Judgments Act 1982 or any modification,
extension or re-enactment thereof for the time being in force) nor will the
bringing of Proceedings in any one or more jurisdictions preclude the
bringing of Proceedings in any other jurisdiction.
(c) SERVICE OF PROCESS. Each party irrevocably appoints the Process Agent
(if any) specified opposite its name in the Schedule to receive, for it and
on its behalf, service of process in any Proceedings. If for any
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reason any party's Process Agent is unable to act as such, such party will
promptly notify the other party and within 30 days appoint a substitute
process agent acceptable to the other party. The parties irrevocably consent
to service of process given in the manner provided for notices in Section 12.
Nothing in this Agreement will affect the right of either party to serve
process in any other manner permitted by law.
(d) WAIVER OF IMMUNITIES. Each party irrevocably waives, to the fullest
extent permitted by applicable law, with respect to itself and its revenues
and assets (irrespective of their use or intended use), all immunity on the
grounds of sovereignty or other similar grounds from (i) suit, (ii)
jurisdiction of any court, (iii) relief by way of injunction, order for
specific performance or for recovery of property, (iv) attachment of its
assets (whether before or after judgment) and (v) execution or enforcement of
any judgment to which it or its revenues or assets might otherwise be
entitled in any Proceedings in the courts of any jurisdiction and irrevocably
agrees, to the extent permitted by applicable law, that it will not claim any
such immunity in any Proceedings.
14. DEFINITIONS
As used in this Agreement:--
"ADDITIONAL TERMINATION EVENT" has the meaning specified in Section 5(b).
"AFFECTED PARTY" has the meaning specified in Section 5(b).
"AFFECTED TRANSACTIONS" means (a) with respect to any Termination Event
consisting of an Illegality, Tax Event or Tax Event Upon Merger, all
Transactions affected by the occurrence of such Termination Event and (b)
with respect to any other Termination Event, all Transactions.
"AFFILIATE" means, subject to the Schedule, in relation to any person, any
entity controlled, directly or indirectly, by the person, any entity that
controls, directly or indirectly, the person or any entity directly or
indirectly under common control with the person. For this purpose, "control"
of any entity or person means ownership of a majority of the voting power of
the entity or person.
"APPLICABLE RATE" means:--
(a) in respect of obligations payable or deliverable (or which would have
been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(b) in respect of an obligation to pay an amount under Section 6(e) of
either party from and after the date (determined in accordance with Section
6(d)(ii)) on which that amount is payable, the Default Rate;
(c) in respect of all other obligations payable or deliverable (or which
would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the
Non-default Rate; and
(d) in all other cases, the Termination Rate.
"BURDENED PARTY" has the meaning specified in Section 5(b).
"CHANGE IN TAX LAW" means the enactment, promulgation, execution or
ratification of, or any change in or amendment to, any law (or in the
application or official interpretation of any law) that occurs on or after
the date on which the relevant Transaction is entered into.
"CONSENT" includes a consent, approval, action, authorisation, exemption,
notice, filing, registration or exchange control consent.
"CREDIT EVENT UPON MERGER" has the meaning specified in Section 5(b).
"CREDIT SUPPORT DOCUMENT" means any agreement or instrument that is specified
as such in this Agreement.
"CREDIT SUPPORT PROVIDER" has the meaning specified in the Schedule.
"DEFAULT RATE" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the relevant payee (as certified by it) if it
were to fund or of funding the relevant amount plus 1% per annum.
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"DEFAULTING PARTY" has the meaning specified in Section 6(a).
"EARLY TERMINATION DATE" means the date determined in accordance with Section
6(a) or 6(b)(iv).
"EVENT OF DEFAULT" has the meaning specified in Section 5(a) and, if
applicable, in the Schedule.
"ILLEGALITY" has the meaning specified in Section 5(b).
"INDEMNIFIABLE TAX" means any Tax other than a Tax that would not be imposed
in respect of a payment under this Agreement but for a present or former
connection between the jurisdiction of the government or taxation authority
imposing such Tax and the recipient of such payment or a person related to
such recipient (including, without limitation, a connection arising from such
recipient or related person being or having been a citizen or resident of
such jurisdiction, or being or having been organised, present or engaged in a
trade or business in such jurisdiction, or having or having had a permanent
establishment or fixed place of business in such jurisdiction, but excluding
a connection arising solely from such recipient or related person having
executed, delivered, performed its obligations or received a payment under,
or enforced, this Agreement or a Credit Support Document).
"LAW" includes any treaty, law, rule or regulation (as modified, in the case
of tax matters, by the practice of any relevant governmental revenue
authority) and "LAWFUL" and "UNLAWFUL" will be construed accordingly.
"LOCAL BUSINESS DAY" means, subject to the Schedule, a day on which
commercial banks are open for business (including dealings in foreign
exchange and foreign currency deposits) (a) in relation to any obligation
under Section 2(a)(i), in the place(s) specified in the relevant Confirmation
or, if not so specified, as otherwise agreed by the parties in writing or
determined pursuant to provisions contained, or incorporated by reference, in
this Agreement, (b) in relation to any other payment, in the place where the
relevant account is located and, if different, in the principal financial
centre, if any, of the currency of such payment, (c) in relation to any
notice or other communication, including notice contemplated under Section
5(a)(i), in the city specified in the address for notice provided by the
recipient and, in the case of a notice contemplated by Section 2(b), in the
place where the relevant new account is to be located and (d) in relation to
Section 5(a)(v)(2), in the relevant locations for performance with respect to
such Specified Transaction.
"LOSS" means, with respect to this Agreement or one or more Terminated
Transactions, as the case may be, and a party, the Termination Currency
Equivalent of an amount that party reasonably determines in good faith to be
its total losses and costs (or gain, in which case expressed as a negative
number) in connection with this Agreement or that Terminated Transaction or
group of Terminated Transactions as the case may be, including any loss of
bargain, cost of funding or, at the election of such party but without
duplication, loss or cost incurred as a result of its terminating,
liquidating, obtaining or reestablishing any hedge or related trading
position (or any gain resulting from any of them). Loss includes losses and
costs (or gains) in respect of any payment or delivery required to have been
made (assuming satisfaction of each applicable condition precedent) on or
before the relevant Early Termination Date and not made, except, so as to
avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies.
Loss does not include a party's legal fees and out-of-pocket expenses
referred to under Section 11. A party will determine its Loss as of the
relevant Early Termination Date, or, if that is not reasonably practicable,
as of the earliest date thereafter as is reasonably practicable. A party may
(but need not) determine its Loss by reference to quotations of relevant
rates or prices from one or more leading dealers in the relevant markets.
"MARKET QUOTATION" means, with respect to one or more Terminated Transactions
and a party making the determination, an amount determined on the basis of
quotations from Reference Market-makers. Each quotation will be for an
amount, if any, that would be paid to such party (expressed as a negative
number) or by such party (expressed as a positive number) in consideration of
an agreement between such party (taking into account any existing Credit
Support Document with respect to the obligations of such party) and the
quoting Reference Market-maker to enter into a transaction (the "Replacement
Transaction") that would have the effect of preserving for such party the
economic equivalent of any payment or delivery (whether the underlying
obligation was absolute or contingent and assuming the satisfaction of each
applicable condition precedent) by the parties under Section 2(a)(i) in
respect of such Terminated Transaction or group of Terminated Transactions
that would, but for the occurrence of the relevant Early Termination Date,
have
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been required after that date. For this purpose, Unpaid Amounts in respect of
the Terminated Transaction or group of Terminated Transactions are to be
excluded but, without limitation, any payment or delivery that would, but for
the relevant Early Termination Date, have been required (assuming
satisfaction of each applicable condition precedent) after that Early
Termination Date is to be included. The Replacement Transaction would be
subject to such documentation as such party and the Reference Market-maker
may, in good faith, agree. The party making the determination (or its agent)
will request each Reference Market-maker to provide its quotation to the
extent reasonably practicable as of the same day and time (without regard to
different time zones) on or as soon as reasonably practicable after the
relevant Early Termination Date. The day and time as of which those
quotations are to be obtained will be selected in good faith by the party
obliged to make a determination under Section 6(e), and, if each party is so
obliged, after consultation with the other. If more than three quotations are
provided, the Market Quotation will be the arithmetic mean of the quotations,
without regard to the quotations having the highest and lowest values. If
exactly three such quotations are provided, the Market Quotation will be the
quotation remaining after disregarding the highest and lowest quotations. For
this purpose, if more than one quotation has the same highest value or lowest
value, then one of such quotations shall be disregarded. If fewer than three
quotations are provided, it will be deemed that the Market Quotation in
respect of such Terminated Transaction or group of Terminated Transactions
cannot be determined.
"NON-DEFAULT RATE" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the Non-defaulting Party (as certified by it)
if it were to fund the relevant amount.
"NON-DEFAULTING PARTY" has the meaning specified in Section 6(a).
"OFFICE" means a branch or office of a party, which may be such party's head
or home office.
"POTENTIAL EVENT OF DEFAULT" means any event which, with the giving of notice
or the lapse of time or both, would constitute an Event of Default.
"REFERENCE MARKET-MAKERS" means four leading dealers in the relevant market
selected by the party determining a Market Quotation in good faith (a) from
among dealers of the highest credit standing which satisfy all the criteria
that such party applies generally at the time in deciding whether to offer or
to make an extension of credit and (b) to the extent practicable, from among
such dealers having an office in the same city.
"RELEVANT JURISDICTION" means, with respect to a party, the jurisdictions (a)
in which the party is incorporated, organised, managed and controlled or
considered to have its seat, (b) where an Office through which the party is
acting for purposes of this Agreement is located, (c) in which the party
executes this Agreement and (d) in relation to any payment, from or through
which such payment is made.
"SCHEDULED PAYMENT DATE" means a date on which a payment or delivery is to be
made under Section 2(a)(i) with respect to a Transaction.
"SET-OFF" means set-off, offset, combination of accounts, right of retention
or withholding or similar right or requirement to which the payer of an
amount under Section 6 is entitled or subject (whether arising under this
Agreement, another contract, applicable law or otherwise) that is exercised
by, or imposed on, such payer.
"SETTLEMENT AMOUNT" means, with respect to a party and any Early Termination
Date, the sum of:--
(a) the Termination Currency Equivalent of the Market Quotations (whether
positive or negative) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation is determined; and
(b) such party's Loss (whether positive or negative and without reference to
any Unpaid Amounts) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation cannot be determined or would not
(in the reasonable belief of the party making the determination) produce a
commercially reasonable result.
"SPECIFIED ENTITY" has the meaning specified in the Schedule.
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"SPECIFIED INDEBTEDNESS" means, subject to the Schedule, any obligation
(whether present or future, contingent or otherwise, as principal or surety
or otherwise) in respect of borrowed money.
"SPECIFIED TRANSACTION" means, subject to the Schedule, (a) any transaction
(including an agreement with respect thereto) now existing or hereafter
entered into between one party to this Agreement (or any Credit Support
Provider of such party or any applicable Specified Entity of such party) and
the other party to this Agreement (or any Credit Support Provider of such
other party or any applicable Specified Entity of such other party) which is
a rate swap transaction, basis swap, forward rate transaction, commodity
swap, commodity option, equity or equity index swap, equity or equity index
option, bond option, interest rate option, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, currency swap
transaction, cross-currency rate swap transaction, currency option or any
other similar transaction (including any option with respect to any of these
transactions), (b) any combination of these transactions and (c) any other
transaction identified as a Specified Transaction in this Agreement or the
relevant confirmation.
"STAMP TAX" means any stamp, registration, documentation or similar tax.
"TAX" means any present or future tax, levy, impost, duty, charge, assessment
or fee of any nature (including interest, penalties and additions thereto)
that is imposed by any government or other taxing authority in respect of any
payment under this Agreement other than a stamp, registration, documentation
or similar tax.
"TAX EVENT" has the meaning specified in Section 5(b).
"TAX EVENT UPON MERGER" has the meaning specified in Section 5(b).
"TERMINATED TRANSACTIONS" means with respect to any Early Termination Date
(a) if resulting from a Termination Event, all Affected Transactions and (b)
if resulting from an Event of Default, all Transactions (in either case) in
effect immediately before the effectiveness of the notice designating that
Early Termination Date (or, if "Automatic Early Termination" applies,
immediately before that Early Termination Date).
"TERMINATION CURRENCY" has the meaning specified in the Schedule.
"TERMINATION CURRENCY EQUIVALENT" means, in respect of any amount denominated
in the Termination Currency, such Termination Currency amount and, in respect
of any amount denominated in a currency other than the Termination Currency
(the "Other Currency"), the amount in the Termination Currency determined by
the party making the relevant determination as being required to purchase
such amount of such Other Currency as at the relevant Early Termination Date,
or, if the relevant Market Quotation or Loss (as the case may be), is
determined as of a later date, that later date, with the Termination Currency
at the rate equal to the spot exchange rate of the foreign exchange agent
(selected as provided below) for the purchase of such Other Currency with the
Termination Currency at or about 11:00 a.m. (in the city in which such
foreign exchange agent is located) on such date as would be customary for the
determination of such a rate for the purchase of such Other Currency for
value on the relevant Early Termination Date or that later date. The foreign
exchange agent will, if only one party is obliged to make a determination
under Section 6(e), be selected in good faith by that party and otherwise
will be agreed by the parties.
"TERMINATION EVENT" means an Illegality, a Tax Event or a Tax Event Upon
Merger or, if specified to be applicable, a Credit Event Upon Merger or an
Additional Termination Event.
"TERMINATION RATE" means a rate per annum equal to the arithmetic mean of the
cost (without proof or evidence of any actual cost) to each party (as
certified by such party) if it were to fund or of funding such amounts.
"UNPAID AMOUNTS" owing to any party means, with respect to an Early
Termination Date, the aggregate of (a) in respect of all Terminated
Transactions, the amounts that became payable (or that would have become
payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or
prior to such Early Termination Date and which remain unpaid as at such Early
Termination Date and (b) in respect of each Terminated Transaction, for each
obligation under Section 2(a)(i) which was (or would have been but for
Section 2(a)(iii)) required to be settled by delivery to such party on or
prior to such Early Termination Date and which has not been so settled as at
such Early Termination Date, an amount equal to the fair market
17
<PAGE>
value of that which was (or would have been) required to be delivered as of
the originally scheduled date for delivery, in each case together with (to the
extent permitted under applicable law) interest, in the currency of such
amounts, from (and including) the date such amounts or obligations were or
would have been required to have been paid or performed to (but excluding)
such Early Termination Date, at the Applicable Rate. Such amounts of interest
will be calculated on the basis of daily compounding and the actual number of
days elapsed. The fair market value of any obligation referred to in clause
(b) above shall be reasonably determined by the party obliged to make the
determination under Section 6(e) or, if each party is so obliged, it shall be
the average of the Termination Currency Equivalents of the fair market values
reasonably determined by both parties.
IN WITNESS WHEREOF the parties have executed this document on the respective
dates specified below with effect from the date specified on the first page
of this document.
WESTDEUTSCHE LANDESBANK GIROZENTRALE, THE CHASE MANHATTAN BANK, NOT IN ITS
ACTING THROUGH ITS NEW YORK BRANCH INDIVIDUAL CAPACITY, BUT SOLELY AS
TRUSTEE
- -------------------------------------- -------------------------------------
(Name of Party) (Name of Party)
By: By:
---------------------------------- -------------------------------------
Name: Name:
Title: Title:
Date: Date:
By:
---------------------------------
Name:
Title:
Date:
18
<PAGE>
Schedule
to the
Master Agreement
dated as of _____ __, 1998
between
WESTDEUTSCHE LANDESBANK GIROZENTRALE, and THE CHASE MANHATTAN BANK,
a bank organized under the laws of not in its individual capacity,
Germany but solely as Trustee (in that
capacity, the "Trustee") under
("PARTY A") the Indenture dated as of
November 1, 1998, among
Household Automobile Revolving
Trust I (the "Trust"), Household
Finance Corporation, Household
Auto Receivables Corporation and
Wilmington Trust Company, as
owner trustee, as supplemented
by the Series 1998-1 Supplement
thereto (the "Supplement") among
the same parties (as so
supplemented, the "Indenture")
("PARTY B")
PART 1
TERMINATION PROVISIONS
In this Agreement:
(a) SPECIFIED ENTITY. "Specified Entity" has no meaning in relation to
Party A or Party B.
(b) SPECIFIED TRANSACTIONS. "Specified Transaction" will have the meaning
specified in Section 14.
(c) CROSS DEFAULT. The "Cross Default" provision (Section 5(a)(vi)) will
not apply to either Party A or Party B.
(d) CREDIT EVENT UPON MERGER. The "Credit Event Upon Merger" provision
(Section 5(b)(iv)) will not apply to Party A or Party B.
(e) AUTOMATIC EARLY TERMINATION. The "Automatic Early Termination"
provision Of Section 6(a) will not apply to Party A or Party B.
(f) PAYMENTS ON EARLY TERMINATION. For the purpose of Section 6(e):
(i) Loss will apply, other than for an Additional Termination Event.
"Special Loss" (as defined under "Consequences of an Additional Termination
Event" below) will apply to any Additional Termination Event.
<PAGE>
(ii) The Second Method will apply, other than for an Additional
Termination Event. "Special Loss" will apply to any Additional Termination
Event.
(g) TERMINATION CURRENCY. "Termination Currency" shall be United States
Dollars.
(h) ADDITIONAL TERMINATION EVENT. Additional Termination Event will apply.
The occurrence of any of the following events (each a "Downgrade") shall be
an Additional Termination Event, with Party A as the sole Affected Party, and
notwithstanding anything to the contrary in this Agreement, Special Loss and
the provisions of part 1(j) will apply if any Additional Termination Event
occurs:
(i) any of the Specified Obligations (as defined below) of Party A
(including any successor to Party A under this Agreement as a result
of any merger, consolidation or transfer of assets involving Party A)
at any time is rated below the applicable Specified Rating (as so
defined) by any of the Rating Agencies (as so defined); or
(ii) any of the Rating Agencies withdraws its rating for any of the
Specified Obligations.
For purposes of this Agreement, "Rating Agency" means each of Standard &
Poor's, a division of The McGraw-Hill Companies ("S&P"), and Moody's Investors
Service, Inc. ("Moody's"), and the "Specified Obligations" of Party A and
related "Specified Ratings" for each of them are as follows:
Specified Obligations Specified Rating and Rating Agency
- --------------------- ----------------------------------
long-term debt "Aa3" --Moody's
short-term debt "A-1 +" --S&P
(i) CONSEQUENCES OF AN ADDITIONAL TERMINATION EVENT. Notwithstanding Section
6(b)(iv) of the Agreement, upon an occurrence of any of the Additional
Termination Events listed in Part 1(h) of this Schedule:
(A) Party A shall promptly give Party B notice of the circumstances
constituting the relevant Downgrade.
(B) Without prejudice to the other rights of Party B under this Agreement,
on or before the 10th Business Day after the date of a Downgrade Party A
may propose a substitute cap provider whose Specified Obligations have at
least the Specified Ratings from each of the Rating Agencies and, if the
proposed substitute cap provider is reasonably acceptable to the
Servicer, Party A shall transfer all of its rights and obligations under
the Transaction to that substitute cap provider so that the Transaction
is replaced with a transaction on identical terms, except that the
substitute cap provider shall be "Party A" (and any cost of the transfer
shall be borne entirely by Party A). If Party A has, during that period,
proposed at least three such substitute cap providers and none of them
has been found reasonably acceptable to the Servicer, Party A shall, on
or before the 12th Business Day after the Downgrade, (A) select two
additional substitute cap providers with Specified Obligations with at
least the applicable Specified Ratings from the Rating Agencies, (B) seek
to obtain (at substantially the same time on the same day) quotations
from each of the five substitute cap providers of the amount it would
charge to provide such a replacement transaction as the cap provider and
(C) pay to Party B on the Business Day following the day the quotations
are sought, an amount equal to the arithmetic average of the quotations
so obtained (regardless of whether all five are so obtained). Party A
shall provide to Party B and the Servicer such evidence of the
quotations obtained and any calculations made in respect of this
Additional Termination Event as may be
2
<PAGE>
reasonably requested by Party B or the Servicer.
(C) The payment provided for in the preceding subparagraph shall constitute
the payment of "Special Loss" by Party A to Party B.
PART 2
TAX REPRESENTATIONS
(a) PAYER TAX REPRESENTATIONS. For the purpose of Section 3(e), Party A and
Party B each makes the following representation:
It is not required by any applicable law, as modified by the practice of
any relevant governmental revenue authority, of any Relevant Jurisdiction
to make any deduction or withholding for or on account of any Tax from any
payment (other than interest under Section 2(e), 6(d)(ii) or 6(e)) to be
made by it to the other party under this Agreement. In making this
representation, it may rely on:
(i) the accuracy of any representation made by the other party pursuant
to Section 3(f);
(ii) the satisfaction of the agreement of the other party contained in
Section 4(a)(i) or 4(a)(iii) and the accuracy and effectiveness of
any document provided by the other party pursuant to Section 4(a)(i)
or 4(a)(iii); and
(iii) the satisfaction of the agreement of the other party contained in
Section 4(d);
provided that it shall be a breach of this representation where reliance is
placed on clause (ii), and the other party does not deliver a form or
document under Section 4(a)(iii) by reason of material prejudice to its
legal or commercial position.
(b) PAYEE TAX REPRESENTATIONS. For the purpose of Section 3(f), Party A
makes the following representation: Each payment received or to be received
by it in connection with this Agreement will be effectively connected with
its conduct of a trade or business in the Specified Jurisdiction.
For this purpose, "Specified Jurisdiction" means the United States of
America.
For the purpose of Section 3(f), Party B makes the following representation:
Its country of domicile is the United States of America.
PART 3
AGREEMENT TO DELIVER DOCUMENTS
For the purpose of Sections 4(a)(i) and (ii) of this Agreement, each party
agrees to deliver the following documents, as applicable:
(a) Tax forms, documents or certificates to be delivered by Party A:
Internal Revenue Service form 4224, duly executed in duplicate, to be
delivered not later than the first day on which Party B is required to make a
payment to Party A hereunder.
(b) Tax forms, documents or certificates to be delivered by Party B: None.
3
<PAGE>
(c) Other documents to be delivered by Party A and Party B: None.
PART 4
MISCELLANEOUS
(a) ADDRESSES FOR NOTICES. For the purpose of Section 12(a):
(i) Addresses for notices or communications to Party A (other than
by facsimile):
Address: [_______] Attention: [________]
Telephone No.: [_______] Facsimile No.: [__________]
(For all purposes.)
(ii) Address for notices or communications to Party B:
Address: [_________] Attention: [__________]
Telephone No.: [______] Facsimile No.: [_________]
(For all purposes.)
(b) PROCESS AGENT. For the purpose of Section 13(c):
Party A appoints as its Process Agent: None
Party B appoints as its Process Agent: None
(c) OFFICES. The provisions of Section 10(a) will apply to this Agreement.
(d) MULTIBRANCH PARTY. For the purpose of Section 10(c):
Party A is not a Multibranch Party.
Party B is not a Multibranch Party.
(e) CALCULATION AGENT. The Calculation Agent is Party A unless otherwise
agreed in a Confirmation in relation to the relevant Transaction.
(f) CREDIT SUPPORT DOCUMENT. Details of any Credit Support Document: NOT
APPLICABLE.
(g) CREDIT SUPPORT PROVIDER.
Credit Support Provider means in relation to Party A: NOT APPLICABLE.
Credit Support Provider means in relation to Party B: NOT APPLICABLE.
(h) GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the law
4
<PAGE>
of the State of New York, without reference to choice of laws doctrine.
(i) NETTING OF PAYMENTS. Section 2(c)(ii) of this Agreement will apply.
(j) AFFILIATE. Affiliate will have the meaning specified in Section 14.
PART 5
OTHER PROVISIONS
(a) NO SET-OFF, COUNTERCLAIM OR DEFENSE. Notwithstanding any provision in
this Agreement or in any Confirmation to the contrary, the obligations of
Party A under this Agreement shall be absolute, unconditional and irrevocable
and all payments required to be made by Party A under this Agreement shall be
made without any set-off and, to the extent permitted by applicable law,
without any counterclaim or defense.
(b) LIMITATION OF DEFAULTS AND TERMINATION. Notwithstanding the terms of
Section 5 and 6 of this Agreement, if at any time and so long as Party B
shall have satisfied in full all of its payment obligations under Section
2(a)(i) of this Agreement and shall at the time have no future payment
obligations under that Section, (i) the occurrence of an event described in
Section 5(a) of this Agreement with respect to Party B shall not constitute
an Event of Default or a Potential Event of Default with respect to Party B
as the Defaulting Party and (ii) Party A shall be entitled to designate an
Early Termination Date pursuant to Section 6 of this Agreement only as a
result of the occurrence of a Termination Event set forth in Section 5(b)(i)
of this Agreement with respect to Party A as the Affected Party.
(c) COVENANT NOT TO INSTITUTE PROCEEDINGS. In connection with this
Agreement, Party A hereby covenants and agrees that it will not, for a period
of one year following the date upon which all obligations of the Trust under
the Indenture are satisfied in full, institute against the Trust, or join in
any institution against the Trust of, any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings, or other proceedings
under any bankruptcy or similar law of the United States, any state thereof
or any other jurisdiction.
(d) SUCCESSORS. Notwithstanding any limitation imposed by Section 7 of this
Agreement or any other provision of this Agreement to the contrary, the term
"Party B" shall include all successors from time to time as "Trustee" under
the Indenture and all successors in interest to the Trustee thereunder, and
no consent of Party A shall be required for any transfer or assignment to
such a successor or successor in interest.
(e) NO PERSONAL LIABILITY. In the absence of gross negligence, willful
misconduct, or bad faith on the part of the Trust Collateral Agent, the Trust
Collateral Agent will have no personal liability for any amounts required to
be paid by the Trust under this Agreement.
(f) WAIVER OF JURY TRIAL. Each party hereto hereby irrevocably waives any
and all right to trial by jury in any Proceedings.
(g) REPRESENTATIONS AND WARRANTIES. Section 3(a) is amended by adding the
following paragraph (vi):
"(vi) ELIGIBLE SWAP PARTICIPANT. It is an "eligible swap participant" as
that term is defined by the United States Commodity Futures Trading
Commission in 17 C.F.R. Section 35.1(b)(2) and it has entered into this
Agreement and it is entering into the Transaction in connection with its
line of business (including financial intermediation services) or the
financing of its business; and the
5
<PAGE>
material terms of this Agreement and the Transaction have been individually
tailored and negotiated."
(h) EACH PARTY'S RELIANCE ON ITS OWN JUDGMENT. Each party has entered into
this Agreement and will enter into the Transaction solely in reliance on its
own judgment. Neither party has or will have any fiduciary obligation to the
other party relating to this Agreement or the Transaction. In addition,
neither party has held itself out or will hold itself out as advising, or has
held out or will hold out any of its employees or agents as having the
authority to advise, the other party as to whether or not the other party
should enter into this Agreement or the Transaction, any subsequent or any
other matters relating to this Agreement or the Transaction. Neither party
shall have any responsibility or liability whatsoever in respect of any
advice of this nature given, or views expressed, by it or any of such persons
to the other party relating to this Agreement or the Transaction, whether or
not such advice is given or such views are expressed at the request of the
other party.
(i) APPLICABLE ONLY TO ONE RATE CAP TRANSACTION. This Agreement shall be
effective only for a single rate cap transaction between the parties hereto
with a specified Effective Date identical to the issue date for the Trust's
securities issued pursuant to the Supplement referred to in the recital of
the parties (the "Transaction").
IN WITNESS WHEREOF, the parties hereto have caused this Schedule to be
duly executed by their officer, hereunto duly authorized, with effect from
the date specified on the first page of this Schedule.
THE CHASE MANHATTAN BANK, not in its individual
capacity, but solely as Trustee
By ______________________
Name:
Title:
WESTDEUTSCHE LANDESBANK Girozentrale,
acting through its New York Branch
By _______________________
Name:
Title:
6
<PAGE>
_______ __, 1998
RATE CAP TRANSACTION
The Chase Manhattan Bank, not in its
individual capacity, but solely as
Trustee (in that capacity, the
"Trustee") under the Indenture dated as
of November 1, 1998 among Household
Automobile Revolving Trust I (the
"Trust"), Household Finance
Corporation, Household Auto Receivables
Corporation and Wilmington Trust
Company, as owner trustee, as
supplemented by the Series 1998-1
Supplement thereto dated as of November 1,
1998 to the Indenture dated as of
November 1, 1998 and to the Trust
Agreement dated as of March 1, 1998
(that Indenture, as so supplemented,
the "Trust Documents")
Ladies and Gentlemen:
The purpose of this letter agreement is to confirm the terms and
conditions of the transaction entered into between us on the Trade Date
specified below (the "Transaction"). This letter agreement constitutes a
"Confirmation" as referred to in the Master Agreement specified below.
The definitions and provisions contained in the 1991 ISDA Definitions
(the "ISDA Definitions"), as published by the International Swap Dealers
Association, Inc., now known as the International Swaps and Derivatives
Association, Inc. ("ISDA"), are incorporated into this Confirmation. For
these purposes, all references in those Definitions to a "Swap Transaction"
shall be deemed to apply to the Transaction referred to herein. In the event
of any inconsistency between those definitions and provisions and this
Confirmation, this Confirmation will govern. Each party represents and
warrants to the other that (i) it is duly authorized to enter into the
Transaction and to perform its obligations hereunder and (ii) the person
executing and delivering this Confirmation on behalf of the party is duly
authorized to execute and deliver it.
1. This Confirmation supplements, forms part of, and is subject to,
the Master
<PAGE>
Agreement dated as of _______ __, 1998, as amended and supplemented from time
to time (the "Agreement"), between the Trustee and Westdeutsche Landesbank
Girozentrale ("WestLB"), acting through its New York Branch. All provisions
contained in the Agreement govern this Confirmation except as expressly
modified below.
2. The terms of the particular Transaction to which this Confirmation
relates--which is a rate cap--are as follows:
Notional Amount: For each Calculation Period, the aggregate outstanding
principal balance of the Household Automobile Revolving
Trust I, Series 1998-1, Class A-3 and Class A-4 Notes
(the "Trust Securities") used as the basis for
calculating regularly scheduled interest thereunder (the
"Trust Securities' Principal Balance") for the interest
period thereunder scheduled to begin and end on the first
and last days, respectively, of that Calculation Period
(the "Related Interest Period"), as identified to WestLB
by the entity acting at the relevant time as the Master
Servicer under the Trust Documents (the "Servicer")
pursuant to the Trust Documents
Trade Date: ________ __, 1998
Effective Date: ________ __, 1998
Termination Date: ________ __, ____ subject to the Following Business Day
convention
Fixed Amount:
Fixed Amounts:
Fixed Rate Payer: the Trustee
Fixed Rate Payer Payment Dates: the Effective Date and -
[Fixed Amount: USD ________ [per Fixed Rate Payer Payment Date] TO BE
REVISED IF CAP FEE IS TO BE CALCULATED AT A SPECIFIED RATE AND APPLYING A
SPECIFIED FORMULA]]
Floating Amounts:
Floating Rate Payer: WestLB
Cap Rate: __% per annum
Floating Rate Payer Payment Dates: The 17th day of each month in each
year prior to and including the Termination Date, commencing on _______
__, 1998, subject to the Following Business Day Convention
2
<PAGE>
[Floating Rate for initial Calculation Period: ___% per annum]
Floating Rate Option: USD-LIBOR-BBA, subject to part 5 of this Confirmation
Designated Maturity: 1 month
Floating Rate Day Count Fraction: Actual/360
Reset Dates: See Part 5(d) of this Confirmation
Compounding: Inapplicable
Business Days: New York and Chicago
Calculation Agent: WestLB, unless it is a Defaulting Party, in which case
the Calculation Agent will be an entity selected by the
Trustee that qualifies as a Reference Market-maker
3. Account Details
Account for Payments to the Trustee:
[___________________]
Account for Payments to WestLB:
[___________________]
4. Offices
The Office of WestLB for the Transaction is its New York Branch, at the
address specified for notices to it in the Schedule to the Agreement. The
Office of the Trustee for the Transaction is its office at the address
specified for notices to it in the Schedule to the Agreement.
5. Other Terms
a. Each party has entered in the Transaction solely in reliance on it
own judgment. Neither party has any fiduciary obligation to the other party
relating to the Transaction. In addition, neither party has held itself out
as advising, or has held out any of its employees or agents as having the
authority to advise, the other party as to whether or not the other party
should enter into the Transaction, any subsequent actions relating to the
Transaction or any other matters relating to the Transaction. Neither party
shall have any responsibility or liability whatsoever in respect of any
advice of this nature given, or views expressed, by it or
3
<PAGE>
any such person to the other party relating to the Transaction, whether or
not such advice is given or such views are expressed at the request of the
other party.
b. In making the calculations contemplated in this Confirmation,
WestLB shall be entitled to treat as the Notional Amount for each Calculation
Period the amount identified to it by the Servicer as the Trust Securities'
Principal Balance for the Related Interest Period, without any duty to verify
whether that amount was correctly so identified to it, and WestLB will
communicate that amount to the Trustee in giving notice of the Floating Rate
for that Calculation Period. As soon as practicable after receiving any such
notice, the Trustee will give WestLB notice if it believes the Notional
Amount so identified to it for the relevant Calculation Period is incorrect
and, if it does so, the parties shall confer with the Servicer to resolve the
issue.
c. For purposes of determining the Floating Rate for each Calculation
Period, if the primary source for determining USD-LIBOR-BBA as contemplated
in the definition of that term in the ISDA Definitions is not available,
notwithstanding anything to the contrary elsewhere in the ISDA Definitions,
the Calculation Agent shall determine the Floating Rate for the relevant
Calculation Period in the same manner as is used under the Trust Securities
for determining LIBOR for them for the Related Interest Period.
d. Notwithstanding anything to the contrary in the ISDA Definitions,
the Floating Rate for each Calculation Period will be determined on the
second "LIBOR Business Day" before the first day of the Related Interest
Period, as that term is defined in the Trust Securities.
THE AGREEMENT AND THIS CONFIRMATION REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR OR
CONTEMPORANEOUS WRITTEN OR ORAL AGREEMENTS BETWEEN THE PARTIES OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing the copy of this Confirmation enclosed for that
purpose and returning it to us or by sending to us a letter or telex
substantially similar to this letter, which letter or telex sets forth the
material terms of the Transaction to which this Confirmation relates and
indicates agreement to those terms.
Yours sincerely,
WESTDEUTSCHE LANDESBANK Girozentrale,
acting through its New York Branch
By:_________________________
Name:
Title:
4
<PAGE>
Confirmed as of the date first
above written:
THE CHASE MANHATTAN BANK,
not in its individual capacity, but solely as
Trustee under the Trust Documents
By:_________________________
Name:
Title:
5
<PAGE>
November 16, 1998 Exhibits 5 and 23.1
Household Auto Receivables Corporation
1111 Town Center Drive
Las Vegas, Nevada 89134
Gentlemen:
I am a Vice President-Corporate Law and Assistant Secretary of Household
International, Inc., a Delaware corporation ("Household"), the ultimate
parent corporation of Household Finance Corporation (the "Master Servicer"),
Household Auto Receivables Corporation (the "Seller"), Household Automotive
Finance Corporation ("HAFC"). Pursuant to your request I am providing this
opinion to you in connection with the issuance of the Household Automobile
Trust I, Series 1998-1 Notes (as defined herein), issued pursuant to a Trust
Agreement (the "Trust Agreement"), dated as of March 1, 1998, between the
Seller and Wilmington Trust Company, as Owner Trustee (the "Owner Trustee").
The Trust Agreement creates Household Automotive Revolving Trust I (the
"Issuer"), a statutory business trust established under the laws of the State
of Delaware.
Pursuant to a supplement to be dated as of November 1, 1998 among the
Master Servicer, the Issuer, the Seller, the Trustee (as defined below), and
the Owner Trustee (the "Series 1998-1 Supplement"), the Seller proposes to
direct the Owner Trustee to issue the Series 1998-1 Notes (the "Notes"). The
Series 1998-1 Supplement supplements the terms of the Trust Agreement and an
Indenture (the "Indenture"), to be dated as of November 1, 1998 among the
Issuer, the Master Servicer and The Chase Manhattan Bank as Trustee and Trust
Collateral Agent (the "Trustee"). The terms of the Indenture are governed by
the laws of the State of New York.
In connection with the issuance of the Notes, the HAFC has entered into
a Master Receivables Purchase Agreement with the Seller, dated as of March 1,
1998 (the "Purchase Agreement"), which as supplemented by Receivables
Purchase Agreement Supplements thereto, provides for the sale and transfer
from time to time of certain retail installment sales contracts secured by
new and used automobile and light trucks (the "Receivables") from the HAFC to
the Seller. In connection with each such transfer, the Seller intends to
transfer the Receivables to the Issuer pursuant to the terms of the Master
Sale and Servicing Agreement (the "Sale and
<PAGE>
Household Auto Receivables Corporation
November 16, 1998
Page 2
Servicing Agreement"), dated as of March 1, 1998 among the Issuer, the
Seller, the Master Servicer, and Norwest Bank Minnesota, National
Association, as Trust Collateral Agent, as supplemented from time to time by
certain Transfer Agreements. The Chase Manhattan Bank has succeeded Norwest
Bank Minnesota, National Association Collateral Agent under the Sale and
Servicing Agreement.
I refer to the Registration Statement, as amended, on Form S-3 (File
Nos. 333-59837 and 333-59837-01) (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended (the "Act"), pertaining to the Notes.
Terms used herein that are not defined herein shall have the meanings
ascribed thereto in the Registration Statement.
The Registration Statement relates to a financing program which involves
the sale by HAFC to the Seller and the assignment by the Seller to the Issuer
of the Receivables acquired by HAFC from automotive dealers. The Receivables
and certain other assets of the Issuer will be pledged by the Issuer to the
Trustee pursuant to the Indenture. The Notes will be debt of the Issuer and
will be offered pursuant to the Registration Statement. The Notes shall be
issued in seven classes under the Indenture as set forth in the Registration
Statement.
I am, or attorneys under my supervision are, familiar with the
proceedings to date with respect to the proposed offering and sale to the
public of the Notes and have examined such records, documents and matters of
law and satisfied myself as to such matters of fact as I have considered
relevant for the purposes of this opinion.
Based on the foregoing, it is my opinion that the Notes will be fully
paid and non-assessable, legally and validly issued and will be legal and
binding obligations of the Issuer, entitled to the benefits of the Indenture
and the Series 1998-1 Supplement when the following has occurred:
1) the Registration Statement shall have been declared effective
by the Commission under the Act,
2) the Indenture, the Trust Agreement, the Sale and Servicing
Agreement and the Series 1998-1 Supplement each shall be duly executed
and delivered by the parties thereto,
3) the Notes shall have been duly authenticated by the Indenture
Trustee in accordance with the Indenture, and delivered by the Seller
in accordance with the Underwriting Agreement among HFC, the Seller, HAFC
and the Underwriters named therein (the "Underwriting Agreement"), and
<PAGE>
Household Auto Receivables Corporation
November 16, 1998
Page 3
4) the Seller shall have received the agreed purchase price for
the Notes in accordance with the Underwriting Agreement.
In giving the opinions expressed herein, I express no opinion other than
as to the laws of the State of Illinois, the general corporation laws of the
States of Delaware and New York and the Federal laws of the United States. As
to matters of New York law, I have conferred with attorneys employed by
Household who are licensed to practice law in the State of New York.
I do not find it necessary for the purposes of this opinion, and
accordingly do not purport to cover herein, the application of the "Blue Sky"
or securities laws of the various states to sale of the Notes.
I hereby consent to the use of my name and my opinion in the Prospectus
filed pursuant to Rule 430A or 424 of Regulation C of the Act, in connection
with the Registration Statement, including any references to my opinions set
forth in the documents incorporated by reference therein, and to the filing
of this consent as an exhibit to the Registration Statement. In giving such
consent I do not admit that I am in the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Commission thereunder.
Very truly yours,
John W. Blenke
Vice President-Corporate Law
and Assistant Secretary
<PAGE>
November 16, 1998 EXHIBIT 8
Household Auto Receivables Corporation
2700 Sanders Road
Prospect Heights, IL 60070
Re: HOUSEHOLD AUTOMOTIVE REVOLVING TRUST I
SERIES 1998-1
Dear Ladies and Gentlemen:
We have acted as counsel to Household Auto Receivables Corporation in
connection with the preparation and filing of a registration statement on
Form S-3 (the "Registration Statement") being filed today with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended
(the "Act"), in respect of Household Automobile Revolving Trust I, Series
1998-1 Class A and Class B Notes (the "Offered Notes") which the Registrant
plans to offer.
We adopt and confirm the opinions contained in the relevant prospectus
under the heading "Material Federal Income Tax Consequences".
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the references to Dewey Ballantine LLP in the
Registration Statement and related prospectus under the heading "Material
Federal Income Tax Consequences."
Very truly yours,
Dewey Ballantine LLP
