<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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 TO BE APPLIED FOR
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 OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Household Automobile Revolving Trust I, Series
1998-1, Class A-1 Notes......................... $1,000,000 100% $1,000,000 $295
Household Automobile Revolving Trust I, Series
1998-1, Class A-2 Notes......................... $1,000,000 100% $1,000,000 $295
Household Automobile Revolving Trust I, Series
1998-1, Class A-3 Notes......................... $1,000,000 100% $1,000,000 $295
Household Automobile Revolving Trust I, Series
1998-1, Class A-4 Notes......................... $1,000,000 100% $1,000,000 $295
Household Automobile Revolving Trust I, Series
1998-1, Class B Notes........................... $1,000,000 100% $1,000,000 $295
</TABLE>
------------------------
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 JULY 24, 1998
PROSPECTUS
HOUSEHOLD AUTOMOBILE REVOLVING TRUST I
SERIES 1998-1
$ % Class A-1 Notes
$ % Class A-2 Notes
$ % Class A-3 Notes
$ % Class A-4 Notes
$ % Class B Notes
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 six classes of Series 1998-1 Notes
(collectively, the "Notes") in the respective aggregate principal amounts
set forth herein pursuant to an Indenture, dated as of March 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 $
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 Notes (the "Offered Notes") are offered by
this Prospectus. The 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.
Capitalized terms used herein are defined terms having specific meanings. An
"Index of Defined Terms" is set forth on page 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 13 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(2) SELLER(2)(3)
--------------------- --------------------- ---------------------
<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 B Note............................ % % %
Total....................................... $ $ $
</TABLE>
- ------------------------------
(1) Plus accrued interest, if any, from , 1998.
(2) The Seller and HFC have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, estimated to be $.
The Offered Notes are offered subject to prior sale and subject to the
Underwriters' 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
The date of this Prospectus is , 1998.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Notes will be secured by a segregated pool of assets held by the Issuer
(the "Trust Assets"). The Trust Assets will include non-prime retail installment
sales contracts secured by new and used automobiles, light trucks and vans (the
"Receivables"), all amounts paid or payable under the Receivables after the Cut-
Off Date, security interests in the financed vehicles, certain bank accounts and
proceeds thereof, the right to receive benefit payments under certain insurance
policies, and certain other property. The Receivables were purchased by
Household Automotive Finance Corporation ("HAFC") from motor vehicle dealers.
On or prior to the issuance of the Notes, the Receivables have been sold by
HAFC to the Seller and the Seller has sold the Receivables to the Issuer. The
aggregate principal balance of the pool of Receivables as of the Cut-Off Date
was $ .
Interest will accrue on each of the Offered Notes at the respective fixed
per annum rates specified above. See "Description of the Notes--Payments of
Interest", "--Payments of Principal" 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 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".
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED NOTES
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Until 90 days after the date of this Prospectus, 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) . 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.,
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.
2
<PAGE>
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 Securities Exchange Act of 1934, as
amended (the "1934 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 proceeds from the sale of the Notes will be used for
general corporate purposes. Commencing on , 1998 (the "Closing Date"),
the Issuer will engage in no activities other than those described herein.
Accordingly, no financial statements with respect to the Issuer are included in
this Prospectus.
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 Securities--Reports to
Noteholders" and "Description of the Issuer--as to Compliance" herein. Such
reports may be made available to the 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 1934
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 Noteholders................................ 3
Prospectus Summary.................................... 5
Risk Factors.......................................... 14
An investment in the Notes may be an illiquid
investment which may result in the Noteholder
holding such investment to maturity............... 14
Book-Entry registration may reduce the liquidity of
the Notes......................................... 14
Book-Entry registration may result in delays in
receipt of Payments............................... 14
Subordination provisions applicable to a class could
have adverse consequences for the subordinate
classes........................................... 14
Geographic concentration of receivables may result
in higher losses if particular regions experience
downturns......................................... 14
Prepayments of the Receivables may adversely affect
the yield to maturity of the Notes................ 15
Ratings and not recommendations to purchase, hold or
sell the Notes.................................... 15
Security interests in both the Receivables and the
underlying vehicles may not be valid under certain
circumstances..................................... 15
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.................. 15
Financial conditions of the Seller or Servicer may
affect an investor's return, even if the intended
bankruptcy characterization is sustained.......... 16
Insurance on vehicles will generally be required at
the time of organization, although no assurance
can be given that such insurance will be
maintained........................................ 16
Delinquencies may vary over time, and any increase
in delinquencies may result in unanticipated
losses............................................ 17
State and Federal credit protection laws may limit
collection of principal and interest on the
Receivables....................................... 17
Social, legal, economic and other factors may affect
investment........................................ 18
Nonprime lending may pose special risks to investors
in the Notes...................................... 18
Nonprime borrowers are consumers with relatively
weak credit who may be unable to (or unwilling) to
repay their loans................................. 18
Nonprime loans may also have less valuable
collateral........................................ 18
HAFC's underwriting process and subjective credit
standards......................................... 18
Restrictions on recoveries may result in the issuer
receiving substantially less than the face amount
of the related contract........................... 18
HAFC is not corporately liable on the Notes, and the
only source of repayment will be the Trust
Assets............................................ 19
The Seller............................................ 19
The Servicer.......................................... 19
The Subservicer....................................... 20
Use of Proceeds....................................... 20
The Issuer............................................ 20
General............................................. 20
The Owner Trustee................................... 20
The Indenture Trustee............................... 21
The Trust Assets...................................... 21
General............................................. 21
Eligibility Criteria................................ 21
Terms of the Receivables............................ 22
Composition of the Receivables...................... 22
<CAPTION>
CAPTION PAGE
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<S> <C>
The Reserve Account................................. 27
The Preferred Stock................................. 27
Yield and Prepayment Considerations................... 27
The Automobile Financing Business of HAFC............. 31
General............................................. 31
Application Processing and Purchasing Criteria...... 31
Funding Package Completion, Verification and
Funding........................................... 31
Post-Funding Quality Reviews........................ 32
Servicing of Contracts.............................. 32
Billing and Collection Process...................... 32
Repossession........................................ 33
Insurance........................................... 33
Delinquency and Loan Loss Information............... 34
Description of the Notes.............................. 36
General............................................. 36
Payments of Interest................................ 36
Payments of Principal............................... 36
Payment Priorities.................................. 37
Maturity Dates; Optional Redemption................. 42
Reports to Noteholders.............................. 42
Events of Default; Rights Upon Event of Default..... 43
Certain Covenants................................... 44
Annual Compliance Statement......................... 45
Satisfaction and Discharge of Indenture............. 45
Modification of Indenture........................... 45
Certain Matters Regarding the Indenture Trustee and
the Issuer........................................ 45
Limitation on Liability of the Indenture Trustee.... 46
Resignation of Indenture Trustee.................... 46
Registration of the Notes........................... 46
Description of the Trust Documents.................... 50
Sale and Assignment of Receivables.................. 50
Representation and Warranties; Repurchase
Obligation........................................ 50
Payments on Receivables; Deposits to Collection
Account........................................... 51
Collection and Other Servicing Procedures........... 51
Servicing Compensation and Payment of Expenses...... 52
Evidence as to Compliance........................... 52
Certain Matters Regarding the Servicer and the
Seller............................................ 52
Servicer Termination Event.......................... 53
Rights Upon Servicer Termination Event.............. 53
Amendment........................................... 54
Description of the Receivables Purchase Agreement..... 54
Sale of Receivables................................. 54
Representations and Warranties...................... 55
Amendments.......................................... 55
Certain Legal Aspects of the Receivables.............. 55
Security Interests in Vehicles...................... 55
Repossession........................................ 57
Notice of Sale; Redemption Rights................... 57
Deficiency Judgments and Excess Proceeds............ 57
Consumer Protection Laws............................ 58
Soldiers' and Sailors' Civil Relief Act of 1948..... 58
Other Limitations................................... 59
Material Federal Income Tax Consequences.............. 59
Tax Characterization of the Issuer.................. 59
Tax Consequences to Holders of the Notes............ 60
State and Local Tax Considerations.................... 62
ERISA Considerations.................................. 62
Underwriting.......................................... 63
Legal Matters......................................... 64
Index of Defined Terms................................ 65
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
</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 (collectively the "Class A Notes"), Class
B Notes, Class C Notes and the Certificates. 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. Payments of
principal on the Class B Notes will be subordinate to the
Class A Notes. Payments of principal on the Class A-4
Notes will be subordinate to the Class A-3, Class A-2 and
Class A-1 Notes. Payments of principal on the Class A-3
Notes will be subordinate to the Class A-2 and Class A-1
Notes. Payments of principal on the Class A-2 Notes will
be subordinate to the Class A-1 Notes. 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 Notes are offered hereby.
THE CLASS A-1 NOTES............. $ % Class A-1 Notes (the "Class A-1 Notes").
THE CLASS A-2 NOTES............. $ % Class A-2 Notes (the "Class A-2 Notes").
THE CLASS A-3 NOTES............. $ % Class A-3 Notes (the "Class A-3 Notes").
THE CLASS A-4 NOTES............. $ % Class A-4 Notes (the "Class A-4 Notes").
THE CLASS B NOTES............... $ % Class B Notes (the "Class B Notes").
THE CLASS C NOTES............... $ % Class C Notes (the "Class C Notes").
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" include, among other things, 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) certain bank
accounts and the proceeds thereof, (v) the right to
receive benefit payments under certain insurance policies,
(vi)
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
certain rights under the Sale and Servicing Agreement and
(vii) 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 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. 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 %, a weighted average original term of
months and a weighted average remaining term of
months. The Receivables had an aggregate Principal
Balance of (the "Original Pool Balance") as of
, 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. As a result, of 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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
characteristics as of the Cut-Off Date as presented in
this Prospectus, although such variance will not be
material.
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 % of the
Receivables have been extended.
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 respective Cut-Off
Date, minus (i) all collections credited against the
Principal Balance prior to such day, (ii) all related
Liquidated Amounts, (iii) any Cram Down Loss in respect of
such Receivable, and plus or minus (iv) any correcting
adjustments. Notwithstanding the above, the Principal
Balance of Liquidated 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) ninety 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 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. A "Liquidated Amount" is
the amount equal to the Principal Balance of a Liquidated
Receivable that the Servicer has charged off on its
servicing records in such Collection Period. 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.
COLLECTIONS..................... As to any Payment Date other than the first Payment Date,
the "Collection Period" is the calendar month preceding
the month of such Payment Date and in the case of the
first Payment Date, the period from the Cut-Off Date
through , 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.
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
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
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rate of interest accruing on each class of Notes is set
forth below and is referred to as the "Note Rate" for the
respective classes of Notes:
Class A-1 %
Class A-2 %
Class A-3 %
Class A-4 %
Class B %
Class C %
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 and Class A-2 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-3, Class A-4, 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.
Interest on the Class B 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 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."
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 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 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 and (ii) 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 before the Payment Date on which the
Class A-1 Notes have been paid in full, 100% of the
Principal Distribution Amount will be payable to the Class
A-1 Notes. On each Payment Date on and after the Payment
Date on which the
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Class A-1 Notes have been paid in full, the Class A
Principal Distributable Amount will be payable to the
Class A-2 Notes until the Class A-2 Notes are paid in full
(less any amount thereof applied on such Payment Date to
reduce the principal balance of the Class A-1 Notes to
zero). On each Payment Date on or after the Payment Date
on which the Class A-2 Notes have been paid in full, the
Class A Principal Distributable Amount will be payable to
the Class A-3 Notes until the Class A-3 Notes are paid in
full (less any amount thereof applied on such Payment Date
to reduce the principal balance of the Class A-1 and A-2
Notes to zero). On each Payment Date on or after the
Payment Date on which the Class A-3 Notes have been paid
in full, the Class A Principal Distributable Amount will
be payable to the Class A-4 Notes until the Class A-4
Notes are paid in full (less any amount thereof applied on
such Payment Date to reduce the principal balance of the
Class A-1, Class A-2 and Class A-3 Notes to zero).
The principal of the Class B Notes and Class C Notes will
generally 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 Notes and Class C Notes have been paid in full, in
an amount equal to the Class B Principal Distributable
Amount and the Class C Principal Distributable Amount,
respectively.
After an Event of Default and acceleration of the Notes,
the Class A Notes will be allocated 100% of the Principal
Distributable Amount on each Payment Date until the Class
A Notes have been paid in full. Such payments will be made
first, to the Class A-1 Notes until the Class A-1 notes
are paid in full, and then, pro rata to the holders of
record of the Class A-2, Class A-3 and Class A-4 Notes
according to the outstanding principal amounts of such
classes of Notes, rather than in accordance with the
"sequential pay" priorities which would otherwise apply.
Thereafter, the holders of record of the Class B Notes
(the "Class B Noteholders") will be allocated 100% of the
Principal Distributable Amount on each Payment Date until
the Class B Notes are paid in full. Thereafter, the
holders of record of the Class C Notes (the "Class C
Noteholders") will be allocated 100% of the Principal
Distributable Amount on each Payment Date until the Class
C Notes have been paid in full. See "Description of the
Notes-- Events of Default; Rights Upon Event of Default."
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 Available Funds will be applied in the
following order of priority:
first, if HFC is no longer acting as the master servicer,
to the Servicer, the Servicing Fee then due;
second, to the Indenture Trustee, Trust Collateral Agent,
and the Owner Trustee, their fees then due (in each case,
to the extent such fees have not been previously paid by
the Servicer);
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third, to the Noteholders, the interest then due with
respect to each Class of Notes;
fourth, (i) to the Class A-1 Noteholders, the 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, to the Class A-2, Class A-3 and
Class A-4 Noteholders, the Class A Principal Distributable
Amount, such amount to be distributed sequentially,
beginning with the Class A-2 Notes;
fifth, to the Class B Noteholders, the Class B Principal
Distributable Amount;
sixth, to the Class C Noteholders, the Class C Principal
Distributable Amount;
seventh, if HFC is acting as the master servicer, the
Servicing Fee then due;
eighth, to the Reserve Account, until the Reserve Account
is fully funded; and
ninth, any remainder to the holders of the Certificates.
RESERVE ACCOUNT................. An account will be created (the "Reserve Account") with an
initial deposit of $ (1% of Original Pool
Balance). 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, 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 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--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 Notes will initially be issued in
book-entry form. Persons acquiring beneficial ownership
interests in the 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 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
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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 the Noteholders. See "Risk
Factors" and "Description of the Notes--Registration of
Notes" herein.
RECORD DATE..................... So long as the Notes are Book-Entry Securities, the last
day preceding a Payment Date; if the Notes are no longer
Book-Entry Securities, 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 fifth 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 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
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and Servicing Agreement, including, without limitation,
fees and expenses 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 (the "Final
Scheduled Payment Date"); provided the Class A-1 Notes
will be due and payable on (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 HAFC exercises its option to purchase the
Receivables which can occur after the aggregate principal
balance of the Notes is less than or equal to $
(10% of the aggregate original principal balance of the
Notes) at a redemption price which is not less than the
aggregate principal balance of the Notes plus accrued and
unpaid interest thereon. See "Description of the
Notes--Maturity" 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.
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) or
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certain other covenants with respect to the Servicer, if
the breach has not been cured within the specified period.
TAX STATUS...................... Dewey Ballantine LLP, special tax counsel to the Seller is
of the opinion that under existing law, the 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 Notes as indebtedness for all federal, state and
local income and franchise tax purposes. By acceptance of
a 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 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.
The Class C Notes are not eligible for purchase by Benefit
Plans.
RATING.......................... As a condition to the issuance of the Notes, the Class
A-1, Class A-2, Class A-3 and Class A-4 Notes will be
rated "AAA" (or its equivalent) by at least two Nationally
Recognized Statistical Rating Organizations ("NRSROs" or
"Rating Agencies"); the Class B Notes will be rated at
least "A" (or its equivalent) by at least two NRSROs, and
the Class C Notes will be rated at least "BBB" (or its
equivalent) by at least two NRSROs. 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 is 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 rating
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.
AN INVESTMENT IN THE NOTES MAY BE AN ILLIQUID INVESTMENT WHICH MAY RESULT IN
THE NOTEHOLDER 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
holders of the Notes 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 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 Noteholder 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 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 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 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. 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 the Class A Notes has been paid. See "Description
of the Notes--Payment Priorities" herein.
If the Notes are accelerated following an Event of Default under the
Indenture resulting in the liquidation of the Trust Assets, the Class A Notes
must be paid in full prior to the payment of any principal on the Class B Notes
and the Class C Notes will not receive any principal payments until all
principal of the Class B Notes is paid in full. See "Description of the
Notes--Payments of Principal" and "--Events of Default."
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 %, %, % and % of the Receivables were located in
Texas, California, Florida, and Georgia respectively. Accordingly, adverse
economic conditions or other factors particularly affecting any of these states
could adversely affect the delinquency or loan loss experience of the Issuer
with respect to the Receivables. The location of the Receivables by state is
identified in the table on page based upon borrower mailing address. See "The
Trust Assets."
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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).
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
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 Indenture Trustee or the 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), 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
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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 any 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 or
reductions in the amounts of such payments could result. 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 the United States
Bankruptcy Code or similar applicable state laws ("Insolvency Laws") will result
in the consolidation of the assets and liabilities of the Issuer with 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 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. 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 or 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 of the contract origination,
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
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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 loan
and vehicle portfolio 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
service the Receivables comprising the Trust Assets adequately, 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 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. 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, or, in some circumstances, to the
Servicer. 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 or assigned to the Servicer, as the
case may be. In addition, in the event of the breach of certain representations
and warranties, the Seller may be obligated to accept the reassignment of the
entire Pool of 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, 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
17
<PAGE>
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 creditors.
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 to damages and administrative enforcement and possibly the Seller or
the Deposit Trust.
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 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 credit line use or repayment patterns. See "The Trust Assets."
NONPRIME LENDING MAY POSE SPECIAL RISKS TO INVESTORS IN THE NOTES. HAFC
specializes in the indirect financing of contracts in the automobile lending
industry for nonprime borrowers. The nonprime market for credit consists of
making loans which may not be made by 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 "nonprime" primarily for one, or both, of two
reasons: borrower credit considerations, and collateral considerations. It is
also possible that the nonprime automobile finance business is more susceptible
to loss than other segments of the nonprime lending business generally, such as
nonprime mortgage lending, due to the mobility and depreciation of the
collateral.
NONPRIME BORROWERS ARE CONSUMERS WITH RELATIVELY WEAK CREDIT WHO MAY BE
UNABLE TO (OR UNWILLING) TO REPAY THEIR LOANS. A borrower may be considered a
"nonprime" 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.
NONPRIME LOANS MAY ALSO HAVE LESS VALUABLE COLLATERAL. Collateral
considerations in the nonprime 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.
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 nonprime market including borrowers with below average credit
profiles who may not be able to receive financing from more traditional sources.
The HAFC finance program sets specific limits for the credit amount extended.
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. In generally, all contracts
will provide that the obligations of the borrowers thereunder are absolute and
unconditional, regardless of any defense, set-off or abatement which the
borrower
18
<PAGE>
may have against HAFC or any other person or entity whatsoever. 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 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 Federal and state bankruptcy and 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 IS NOT CORPORATELY LIABLE ON THE NOTES, AND THE ONLY SOURCE OF
REPAYMENT WILL BE THE TRUST ASSETS. Moreover, 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 Seller or
HAFC. No Notes of any series will be insured or guaranteed by HAFC, the
Servicer, or the Indenture Trustee. 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.
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 excess spread for 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 retain the
Servicing Fee, on behalf of itself and HAFC.
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 of cash loans, including home equity loans secured by first and second
mortgages, auto finance loans and unsecured credit advances (including revolving
and closed-end personal loans) directly 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.
- ------------------------
* Master Card and VISA are registered trademarks of MasterCard International
Incorporated and VISA USA, Inc., respectively.
19
<PAGE>
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.
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.
As of June 30, 1998, HFC had approximately $ billion in total
assets, approximately $ billion in total liabilities and approximately
$ billion in shareholder's equity.
THE SUBSERVICER
HAFC is a Delaware corporation and the surviving entity in a merger between
a subsidiary of Household International, Inc. 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 loans 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.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes and the
Certificates will be used by the Seller for general corporate purposes.
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.
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
20
<PAGE>
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 will include 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 dealers ("Dealers") under agreements between
the HAFC and the Dealers (the "Dealer Agreements"); (e) an assignment of the
right to receive proceeds from claims on certain physical damage, credit life
and disability insurance policies covering the financed vehicles or the
borrowers; (f) an assignment of all rights under contracts providing for the
repair of the financed vehicles securing the Receivables; (g) all funds on
deposit from time to time in the Collection Account, the Note Account and the
Reserve Account; (h) an assignment of all rights and benefits under the
Receivables Purchase Agreement and all supplements thereto; (i) 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, (j) a share of the preferred stock of
the Seller (the "Preferred Stock"); and (k) all proceeds of the foregoing.
Most of 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 were originated by Dealers and
purchased by HAFC in the ordinary course of HAFC's business pursuant to its
finance programs and underwriting standards.
ELIGIBILITY CRITERIA
The Receivables were selected according to several criteria, including the
following: each Receivable (i) was originated 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.
21
<PAGE>
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
amount of finance charges is earned 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.
COMPOSITION OF THE RECEIVABLES
Set forth below is a description of certain characteristics of the
Receivables as of the Cut-Off Date:
<TABLE>
<CAPTION>
TOTAL POOL OF RECEIVABLES
------------------------------
<S> <C>
Original Pool Balance............................................................. $
Number of Initial Receivables.....................................................
Average Principal Balance(1)......................................................
Range of Principal Balances....................................................... to
Average Original Amount Financed(2)...............................................
Range of Original Amounts Financed................................................ to
Weighted Average APR(3)........................................................... %
Range of Original APRs............................................................ % to %
Weighted Average Original Terms(3)................................................ months
Range of Original Terms........................................................... months to months
Weighted Average Remaining Terms(3)............................................... months
Range of Remaining Terms.......................................................... months to months
Weighted Average Months of Seasoning(3)........................................... months
Range of Months of Seasoning...................................................... months to months
</TABLE>
- ------------------------
(1) Sum of Original Pool Balance divided by total number of loans.
(2) Sum of aggregate amount financed divided by total number of loans.
(3) Weighted by Principal Balance as of the Cut-Off Date.
22
<PAGE>
COMPOSITION OF RECEIVABLES BY PRINCIPAL BALANCE
<TABLE>
<CAPTION>
RECEIVABLE NUMBER OF % OF PRINCIPAL % OF POOL BY
BALANCE RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- ----------------------------------------------------- --------------- --------------- ------------- -----------------------
<S> <C> <C> <C> <C>
3,000 to 4,000.....................................
4,001 to 5,000.....................................
5,001 to 6,000.....................................
6,001 to 7,000.....................................
7,001 to 8,000.....................................
8,001 to 9,000.....................................
9,001 to 10,000.....................................
10,001 to 11,000.....................................
11,001 to 12,000.....................................
12,001 to 13,000.....................................
13,001 to 14,000.....................................
14,001 to 15,000.....................................
15,001 to 16,000.....................................
16,001 to 17,000.....................................
17,001 to 18,000.....................................
18,001 to 19,000.....................................
19,001 to 20,000.....................................
20,001 to 21,000.....................................
21,001 to 22,000.....................................
22,001 to 23,000.....................................
23,001 to 24,000.....................................
24,001 to 25,000.....................................
25,001 to 26,000.....................................
26,001 to 27,000.....................................
--- --- ----- ---
Total............................................ % $ %
--- --- ----- ---
--- --- ----- ---
</TABLE>
23
<PAGE>
COMPOSITION BY APR OF THE RECEIVABLES
(AS OF CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL % OF POOL BY
APR RANGE RECEIVABLES % OF RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- --------------------------------------------------- --------------- ------------------- ------------- -------------------
<S> <C> <C> <C> <C>
10.50 to 10.99%....................................
11.00 to 11.99.....................................
12.00 to 12.99.....................................
13.00 to 13.99.....................................
14.00 to 14.99.....................................
15.00 to 15.99.....................................
16.00 to 16.99.....................................
17.00 to 17.99.....................................
18.00 to 18.99.....................................
19.00 to 19.99.....................................
20.00 to 20.99.....................................
21.00 to 21.99.....................................
22.00 to 22.99.....................................
23.00 to 23.99.....................................
24.00 to 24.99.....................................
25.00 to 25.99.....................................
26.00 to 27.00.....................................
--- --- ----- ---
Total.......................................... % $ %
--- --- ----- ---
--- --- ----- ---
</TABLE>
- ------------------------
(1) Due to rounding, may not add up to 100.00%
COMPOSITION BY INTEREST ACCRUAL METHOD
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL % OF POOL BY
INTEREST ACCRUAL METHOD RECEIVABLES % OF RECEIVABLES OUTSTANDING PRINCIPAL OUTSTANDING
- ----------------------------------------------- --------------- ------------------- ------------- -----------------------
<S> <C> <C> <C> <C>
Actuarial...................................... % $ %
Simple Interest................................
--- --- ----- ---
Total...................................... % $ %
--- --- ----- ---
--- --- ----- ---
</TABLE>
- ------------------------
(1) Due to rounding, may not add up to 100.00%
24
<PAGE>
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................................................. % $ %
Arizona.................................................
Arkansas................................................
California..............................................
Colorado................................................
Delaware................................................
Florida.................................................
Georgia.................................................
Idaho...................................................
Illinois................................................
Indiana.................................................
Iowa....................................................
Kansas..................................................
Louisiana...............................................
Maryland................................................
Michigan................................................
Mississippi.............................................
Missouri................................................
Nebraska................................................
Nevada..................................................
New Jersey..............................................
New Mexico..............................................
New York................................................
North Carolina..........................................
Ohio....................................................
Oklahoma................................................
Oregon..................................................
Pennsylvania............................................
South Carolina..........................................
South Dakota............................................
Tennessee...............................................
Texas...................................................
Virginia................................................
Washington..............................................
West Virginia...........................................
--- ----- --- ---
Total............................................... % $ %
--- ----- --- ---
--- ----- --- ---
</TABLE>
- ------------------------
(1) Due to rounding, may not add up to 100.00%
25
<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................................................ % $ %
24 to 29................................................
30 to 35................................................
36 to 41................................................
42 to 47................................................
48 to 53................................................
54 to 59................................................
60 to 65................................................
66 to 71................................................
72 to 72................................................
--- --- --- -----
Total............................................... % $ %
--- --- --- -----
--- --- --- -----
</TABLE>
- ------------------------
(1) Due to rounding, may not add up to 100.00%.
COMPOSITION OF RECEIVABLES BY DAYS DELINQUENT(1)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
DAYS DELINQUENT RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL OUTSTANDING
- ---------------------------------------------------- --------------- --------------- --------------- -----------------------
<S> <C> <C> <C> <C>
0 to 29............................................ % $ %
Over 29.............................................
--- --- --- -----
Total........................................... % $ %
--- --- --- -----
--- --- --- -----
</TABLE>
- ------------------------
(1) See the discussion on page as to delinquency and charge-off policies.
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................................................. % $ %
Used................................................
--- --- ----- ---
Total........................................... % $ %
--- --- ----- ---
--- --- ----- ---
</TABLE>
26
<PAGE>
THE RESERVE ACCOUNT
An initial deposit of $ (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, 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 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". On March , 1998, the Preferred
Stock was issued directly to the Issuer. The share of Preferred Stock held by
the Issuer is the only issued and outstanding share of the Seller's Preferred
Stock. 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 Issuer as holder 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.
Although a majority of the holders of Certificates is required to direct the
action of the Issuer with respect to any vote, pursuant to the Issuer's pledge
of its interest in the Trust Assets, the Indenture Trustee has the 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.
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 weighed average life (i.e., the weighted average life
assuming 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. Any reinvestment risks resulting from a faster or slower incidence
of prepayment of Receivables will be borne by the Noteholders.
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
27
<PAGE>
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 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 or 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 Trust Assets includes a pool of Receivables with
an aggregate principal balance of $ , a gross APR of %, an original term
to maturity of months, a remaining term to maturity of months, and an
assumed cut-off date of , 1998; (ii) the Receivables prepay in full
at the specified constant percentage of ABS monthly, with no defaults, losses or
repurchases; (iii) each scheduled monthly payment on the Receivables is made on
the last day of each month and each month has 30 days; (iv) the initial
principal amount of each class of Offered Notes are as set forth on the cover
page hereof; (v) interest accrues during each Interest Period at the following
assumed coupon rates: Class A-1 Notes, %; Class A-2 Notes, %; Class A-3
Notes, %; Class A-4 Notes, %; and Class B Notes, %; (vi) payments on
the Notes are made on the 17th day of each month whether or not a Business Day;
(vii) the Notes are purchased on the Closing Date; (viii) the scheduled monthly
payment for each Receivable has been calculated on the basis of the assumed
characteristics set forth in (i) above, such that each Receivable will amortize
in amounts sufficient to repay the Principal Balance of such Receivable by its
indicated remaining term to maturity; (ix) the first due date for each
Receivable is the last day of the month of the assumed cut-off date (x) HAFC
does not exercise its option to purchase the Receivables; and (xi) the
difference between the gross APR and the net APR is equal to the Servicing Fee.
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.
28
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
DISTRIBUTION ------------------------- -------------------------
DATE 0.0% 1.0% 1.7% 2.5% 0.0% 1.0% 1.7% 2.5%
- ---------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/17/98
11/17/98
12/17/98
1/17/99
2/17/99
3/17/99
4/17/99
5/17/99
6/17/99
7/17/99
8/17/99
9/17/99
10/17/99
11/17/99
12/17/99
1/17/00
2/17/00
3/17/00
4/17/00
5/17/00
6/17/00
7/17/00
8/17/00
9/17/00
10/17/00
11/17/00
12/17/00
1/17/01
2/17/01
3/17/01
4/17/01
5/17/01
6/17/01
7/17/01
8/17/01
9/17/01
10/17/01
11/17/01
12/17/01
1/17/02
2/17/02
3/17/02
4/17/02
5/17/02
6/17/02
7/17/02
8/17/02
9/17/02
10/17/02
11/17/02
12/17/02
1/17/03
2/17/03
<CAPTION>
CLASS A-3 NOTES CLASS A-4 NOTES
DISTRIBUTION ------------------------- -------------------------
DATE 0.0% 1.0% 1.7% 2.5% 0.0% 1.0% 1.7% 2.5%
- ---------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
10/17/98
11/17/98
12/17/98
1/17/99
2/17/99
3/17/99
4/17/99
5/17/99
6/17/99
7/17/99
8/17/99
9/17/99
10/17/99
11/17/99
12/17/99
1/17/00
2/17/00
3/17/00
4/17/00
5/17/00
6/17/00
7/17/00
8/17/00
9/17/00
10/17/00
11/17/00
12/17/00
1/17/01
2/17/01
3/17/01
4/17/01
5/17/01
6/17/01
7/17/01
8/17/01
9/17/01
10/17/01
11/17/01
12/17/01
1/17/02
2/17/02
3/17/02
4/17/02
5/17/02
6/17/02
7/17/02
8/17/02
9/17/02
10/17/02
11/17/02
12/17/02
1/17/03
2/17/03
<CAPTION>
CLASS B NOTES
DISTRIBUTION -------------------------
DATE 0.0% 1.0% 1.7% 2.5%
- ---------------- ----- ----- ----- -----
10/17/98
11/17/98
12/17/98
1/17/99
2/17/99
3/17/99
4/17/99
5/17/99
6/17/99
7/17/99
8/17/99
9/17/99
10/17/99
11/17/99
12/17/99
1/17/00
2/17/00
3/17/00
4/17/00
5/17/00
6/17/00
7/17/00
8/17/00
9/17/00
10/17/00
11/17/00
12/17/00
1/17/01
2/17/01
3/17/01
4/17/01
5/17/01
6/17/01
7/17/01
8/17/01
9/17/01
10/17/01
11/17/01
12/17/01
1/17/02
2/17/02
3/17/02
4/17/02
5/17/02
6/17/02
7/17/02
8/17/02
9/17/02
10/17/02
11/17/02
12/17/02
1/17/03
2/17/03
</TABLE>
(CONTINUED ON NEXT PAGE)
29
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
(CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
DISTRIBUTION ------------------------- -------------------------
DATE 0.0% 1.0% 1.7% 2.5% 0.0% 1.0% 1.7% 2.5%
- ---------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/17/03
4/17/03
5/17/03
6/17/03
7/17/03
8/17/03
9/17/03
10/17/03
11/17/03
12/17/03
1/17/04
2/17/04
3/17/04
4/17/04
5/17/04
6/17/04
7/17/04
8/17/04
9/17/04
10/17/04
11/17/04
12/17/04
1/17/05
2/17/05
3/17/05
4/17/05
5/17/05
6/17/05
7/17/05
8/17/05
9/17/05
10/17/05
11/17/05
12/17/05
1/17/06
2/17/06
3/17/06
Weighted Average
Life in Years(2)
<CAPTION>
CLASS A-3 NOTES CLASS A-4 NOTES
DISTRIBUTION ------------------------- -------------------------
DATE 0.0% 1.0% 1.7% 2.5% 0.0% 1.0% 1.7% 2.5%
- ---------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
3/17/03
4/17/03
5/17/03
6/17/03
7/17/03
8/17/03
9/17/03
10/17/03
11/17/03
12/17/03
1/17/04
2/17/04
3/17/04
4/17/04
5/17/04
6/17/04
7/17/04
8/17/04
9/17/04
10/17/04
11/17/04
12/17/04
1/17/05
2/17/05
3/17/05
4/17/05
5/17/05
6/17/05
7/17/05
8/17/05
9/17/05
10/17/05
11/17/05
12/17/05
1/17/06
2/17/06
3/17/06
Weighted Average
Life in Years(2)
<CAPTION>
CLASS B NOTES
DISTRIBUTION -------------------------
DATE 0.0% 1.0% 1.7% 2.5%
- ---------------- ----- ----- ----- -----
3/17/03
4/17/03
5/17/03
6/17/03
7/17/03
8/17/03
9/17/03
10/17/03
11/17/03
12/17/03
1/17/04
2/17/04
3/17/04
4/17/04
5/17/04
6/17/04
7/17/04
8/17/04
9/17/04
10/17/04
11/17/04
12/17/04
1/17/05
2/17/05
3/17/05
4/17/05
5/17/05
6/17/05
7/17/05
8/17/05
9/17/05
10/17/05
11/17/05
12/17/05
1/17/06
2/17/06
3/17/06
Weighted Average
Life in Years(2)
</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.
30
<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'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 certain
criteria under HAFC's policy guidelines and 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
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. HAFC generally requires that funding packages
include verification of the borrower's income, an agreement of the borrower to
obtain insurance and a guarantee of 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 borrowers 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
31
<PAGE>
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, extended payment
arrangements, deferment pending a change in circumstances, referred 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 not 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 no longer considered delinquent. Under the
HAFC's current policies, a contract will generally be charged off if (i) 90 days
have elapsed since the financed vehicle was repossessed, (ii) a good faith
determination has been made that all amounts expected to be recovered have been
received, (iii) ninety 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.
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 and
attempts to identify the underlying causes of a borrower's delinquency and to
32
<PAGE>
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 90 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 to incur a loss whenever it repossesses a vehicle. When HAFC
sells a repossessed vehicle, it records a net loss equal to the outstanding
principal balance of the contract, less the proceeds from the sale of the
vehicle.
If an account 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 an account 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.
33
<PAGE>
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 charge-off policies during the periods shown.
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 if a group of contracts were artificially isolated at a point in
time and the information showed the activity only in that isolated group. The
tables below present HAFC's retail installment sales contract data including
contracts managed in states which are not represented in the pool consisting of
the Receivables and include loans sold in asset-backed securities for which
servicing is performed by HAFC.
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>
Amount Outstanding (1)...
Delinquencies (2)........
31-60 Days.............
61-90 Days.............
Over 90 Days...........
Subtotal.............
Skips....................
Bankruptcies.............
Repossession on hand
(3)....................
Total Delinquencies and
Repossession on hand...
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
------------------------
1997 1998
------------------------ ------------------------
DOLLARS PERCENT DOLLARS PERCENT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amount Outstanding (1)...
Delinquencies (2)........
31-60 Days.............
61-90 Days.............
Over 90 Days...........
Subtotal.............
Skips....................
Bankruptcies.............
Repossession on hand
(3)....................
Total Delinquencies and
Repossession on hand...
</TABLE>
- ------------------------
(1) Amount outstanding is the outstanding principal balance.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Amounts shown represent the remaining balance of contracts for which the
financed vehicles have been repossessed, but not yet liquidated.
34
<PAGE>
HISTORICAL NET LOSS EXPERIENCE
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997(1) 1998(1)(2)
--------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Principal amount outstanding (1).......................
Average principal amount outstanding (2)...............
Number of contracts outstanding........................
Average number of contracts outstanding (2)............
Number of repossessions................................
Principal amount of repossessions (3)..................
Number of repossessions as a percent of average number
of contracts outstanding (4).........................
Principal amount of repossessions as a percent of
average principal amount outstanding (4).............
Net losses (5).........................................
Net losses as a percent of average principal amount
outstanding (4)(5)...................................
</TABLE>
- ------------------------
(1) Principal amount outstanding is the outstanding principal balance.
(2) For the three-month periods ended after October 1, 1996, average principal
outstanding as of the beginning and the end of each month during the period.
For prior periods, average of principal outstanding as of the beginning and
the end of the period presented.
(3) Remaining principal balance at time of repossession.
(4) Annualized.
(5) Net Losses are net of recoveries and include remaining 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.
The data presented in the above tables are for illustrative purposes only.
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, vans and mini-vans.
35
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes offered hereby will be issued pursuant to the terms of the
Indenture. A form of the Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following summary
describes certain terms of the Notes and the Indenture. It does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Notes and the Indenture.
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, which
will initially act as Note Registrar. See "--Registration of 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 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 set forth below and is referred to as the "Note Rate" for the
respective classes of Notes:
Class A-1 %
Class A-2 %
Class A-3 %
Class A-4 %
Class B %
Class C %
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 and Class A-2 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-3, Class A-4, Class B
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.
Interest on the Class B 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 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.
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,
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that (i) no principal payments will be made with respect to the Class B 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 and (ii) 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 before the Payment Date on which the Class A-1 Notes
have been paid in full, 100% of the Principal Distribution Amount will be
payable to the Class A-1 Notes. On each Payment Date on and after the Payment
Date on which the Class A-1 Notes have been paid in full, the Class A Principal
Distributable Amount will be payable to the Class A-2 Notes until the Class A-2
Notes have been paid in full (less any amount thereof applied on such Payment
Date to reduce the principal balance of the Class A-1 Notes to zero). On each
Payment Date on or after the Payment Date on which the Class A-2 Notes have been
paid in full, the Class A Principal Distributable Amount will be payable to the
Class A-3 Notes until the Class A-3 Notes have been paid in full (less any
amount thereof applied on such Payment Date to reduce the principal balance of
the Class A-1 and A-2 Notes to zero). On each Payment Date on or after the
Payment Date on which the Class A-3 Notes have been paid in full, the Class A
Principal Distributable Amount will be payable to the Class A-4 Notes until the
Class A-4 Notes have been paid in full (less any amount thereof applied on such
Payment Date to reduce the principal balance of the Class A-1, Class A-2 and
Class A-3 Notes to zero).
The principal of the Class B Notes and Class C Notes will generally 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 Notes and Class C Notes have been paid in full, in an amount
equal to the Class B Principal Distributable Amount and the Class C Principal
Distributable Amount, respectively.
After an Event of Default and acceleration of the Notes, the Class A Notes
will be allocated 100% of the Principal Distributable Amount on each Payment
Date until the Class A Notes have been paid in full. Such payments will be made
first, to the Class A-1 Notes until the Class A-1 Notes are paid in full, and
then, PRO RATA to the holders of record of the Class A-2, Class A-3 and Class
A-4 Notes according to the outstanding principal amounts of such classes of
Notes, rather than in accordance with the "sequential pay" priorities which
would otherwise apply. Thereafter, the holders of record of the Class B Notes
(the "Class B Noteholders") will be allocated 100% of the Principal
Distributable Amount on each Payment Date until the Class B Notes are paid in
full. Thereafter, the holders of record of the Class C Notes (the "Class C
Noteholders") will be allocated 100% of the Principal Distributable Amount on
each Payment Date until the Class C Notes have been paid in full. See "--Events
of Default; Rights Upon Event of Default
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 or priority:
(i) From Available Funds, to the Servicer, if HFC is no longer acting as
master servicer, the Servicing Fee for the related Collection Period, and
certain other amounts relating to mistaken deposits, postings or checks
returned for insufficient funds to the extent the Servicer has not
reimbursed itself in respect of such amount or to the extent not retained by
the Servicer;
(ii) from the Available Funds, to the Indenture Trustee and the Owner
Trustee, any accrued and unpaid trustees' fees and any accrued and unpaid
fees of the Trust Collateral Agent (in each case, to the extent such fees
have not been previously paid by the Servicer);
(iii) from the Available Funds, to the holders of the Class A Notes ("the
Class A Noteholders"), the Class A Interest Distributable Amount;
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(iv) from the Available Funds, to the Class B Noteholders, the Class B
Interest Distributable Amount;
(v) from the Available Funds, to the Class C Noteholders, the Class C
Interest Distributable Amount;
(vi) from the Available Funds, (i) to the Class A-1 Noteholders, 100% of
the 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, to the Class A-2, Class A-3 and Class A-4
Noteholders, the Class A Principal Distributable Amount, such amount to be
distributed in "sequential pay" fashion, beginning with the Class A-2 Notes;
(vii) from the Available Funds, to the Class B Noteholders, the Class B
Principal Distributable Amount;
(viii) from the Available Funds, to the Class C Noteholders, the Class C
Principal Distributable Amount;
(ix) from the Available Funds, if HFC is acting as the master servicer,
the Servicing Fee for the related Collection Period;
(x) from the Available Funds, to the Reserve Account, the amount, if
necessary, required to increase the amount therein to its then required
level; and
(xi) from the Available Funds, to the holders of the Certificates, any
remainder.
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 Requirement 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, plus income
on investments held in the Collection Account, (iii) the proceeds of any
liquidation of the assets of the Trust, (iv) the lesser of (a) the excess of the
aggregate amount determined under items (i)-(ix) of the Payment Priorities set
forth on page , 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.
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"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.
"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, with respect to any
Payment Date, the Principal Distributable Amount MINUS the Class B Monthly
Principal Distributable Amount and the Class C Monthly Principal Distributable
Amount.
"CLASS A PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date, 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 the sum of clauses (i) and (ii) shall not
exceed the outstanding principal amount of the Class A Notes, and 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 B DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date, the
sum of: (i) the Class B Interest Distributable Amount and (ii) the Class B
Principal Distributable Amount.
"CLASS B INTEREST CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the sum of: (i) the excess of (a) the Class B Interest Distributable
Amount for the preceding Payment Date, over (b) the amount actually paid as
interest to the Class B 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 B 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 Notes at % per annum from and including the preceding
Payment Date (or, in the case of the initial Payment Date, from an including the
Closing Date) to but excluding the current Payment Date PLUS (ii) the Class B
Interest Carryover Shortfall for the current Payment Date.
"CLASS B MONTHLY PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any
Payment Date until the Payment Date or which the outstanding principal amount of
the Class B Notes has been reduced to zero, an amount equal to the excess of:
(i) the excess, if any, of (a) the outstanding principal amount of the Class B
Notes and the Class C Notes immediately prior to such Payment Date over (b)
26.25% of the outstanding Pool Balance as of the end of the related Collection
Period over (ii) the Class C Monthly Principal Distributable Amount for such
Payment Date.
"CLASS B PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date, the excess of the Class B Principal Distributable Amount for the preceding
Payment Date over the amount that was actually distributed in respect of
principal of the Class B Notes on such preceding Payment Date.
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"CLASS B PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date, the sum of: (i) the Class B Monthly Principal Distributable Amount for
such Payment Date and (ii) the Class B 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 Notes, and on the Final
Scheduled Maturity Date, the Class B 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 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 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 outstanding principal amount of the Class C Notes immediately
prior to such Payment Date over (ii) 5.50% of the outstanding Pool Balance as of
the end of the related Collection Period.
"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 Maturity 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 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).
"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.
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"DETERMINATION DATE" means, with respect to any Payment Date, the 5th
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 for the related Collection Period less the Servicing Fee, the fees
due to the Indenture Trustee, Trust Collateral Agent and Owner Trustee, to the
extent not paid by the Servicer, the aggregate Noteholders' Interest
Distributable Amount, the aggregate Principal Balances of all Liquidated
Receivables during such Collection Period and further less 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 Distributable Amount
and the Class C Distributable Amount.
"POOL BALANCE" means, as of any date of determination, the aggregate
Principal Balances of the Receivables 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 (v) 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 (x) the Principal Amount Available and (y) 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.
"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 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 Amount.
"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.
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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 (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 , or,
all outstanding classes of Notes on , subject to a five day grace
period, an Event of Default will occur. See "--Events of Default; Rights Upon
Event of Default" herein. In addition, the Issuer will pay the Notes in full on
the Payment Date following exercise by HAFC of its option to purchase the
Receivables after the aggregate principal balance of the Notes is reduced to an
amount less than or equal to $ (10% of the aggregate original principal
balance of the Notes). The purchase price will be equal to the sum of the
aggregate unpaid principal balance of the Notes 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 Interest
Carryover Shortfall, the Class C Interest Carryover Shortfall, the Class A
Principal Carryover Shortfall, the Class B 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; and
(vi) 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 (v) 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
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 hereto 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 Noteholders, and such default shall
continue or not be cured, or the circumstance or condition in respect of which
such representation 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% in principal
amount of the Notes then outstanding, a written notice specifying such default
or incorrect representation or warranty and requiring it to be remedied and
stating that such notice is a notice of default hereunder; (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.
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 then
outstanding may 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. After payment of the
amounts due and owing the Indenture Trustee, the proceeds of any sale,
liquidation or other deposition of the Trust Assets will be applied first, to
pay all amounts due and owing on the Class A Notes, second, to pay all amounts
due and owing on the Class B Notes, third to pay all amounts due and owing on
the Class C Certificates, and fourth, to pay all amounts distributable on the
Certificates.
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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 Noteholders, by accepting 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 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
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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 execute a supplemental
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. Without the consent of the holder of each outstanding Note
affected thereby, however, no supplemental indenture 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 of
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 enter into supplemental
indentures 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.
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
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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 the Rating Agencies).
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.
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.
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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 Annex I 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 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.
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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 1934 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 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.
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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 and the Trust Agreement together, the ("Trust Documents"). Copies of
the Trust Documents may be obtained by the Noteholders upon request in writing
to the Servicer, at its address set forth under "The Servicer". The summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Trust Documents.
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 rights 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 Seller will be obligated to repurchase any Receivable sold to the Issuer as
to which a breach has occurred as to the representation and warranty that a
security interest in the financed vehicle securing such Receivable has not been
perfected (or was not, at the time such representation and warranty was made, in
the process of perfection) in favor of HAFC (or any predecessor of HAFC or
subsidiary thereof), if such breach will materially adversely affect such
Receivable or the interests of the Noteholders and, if such failure or breach is
not cured by the last day of the second calendar month following the discovery
by or notice to the breaching party of the breach.
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 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 the perfected
security interest of HAFC (or any predecessor of HAFC or any subsidiary thereof)
in the related financed vehicles is maintained) or certain other covenants with
regard to the Servicer, in each case only in a manner that materially and
adversely affects the interests of any Receivable or the interests of the
Noteholders or the interests of the Issuer, the Servicer shall, unless such
breach shall have been cured in all material respects, purchase such Receivable
from 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.
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PAYMENTS ON RECEIVABLES; DEPOSITS TO COLLECTION ACCOUNT
The Servicer has established and will maintain with the Indenture Trustee 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 or
HAFC will deposit such amounts in the Collection Account. 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
Investors Service, Inc. and A-1 from Standard & Poor's Corporation, which is
currently the case, the Servicer need not 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 at which
time 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 conditions
of this sentence not applied. Amounts deposited in the Collection Account may be
invested in Eligible Investments (as described in the Sale and Servicing
Agreement) 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.
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
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.
Eligible Investments are specified in the Sale and Servicing Agreement and
are limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then-current ratings of the Notes.
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
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time to time with respect to motor vehicle retail installment sales contracts in
its servicing portfolio which are comparable to the Receivables. Consistent with
the above, the Servicer may in its 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.
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. Such fee attributable to the Notes 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.
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.
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 to the
effect that the Servicer has fulfilled its material obligations 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 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.
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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, without any diminution of such duties and obligations and
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.
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 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
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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.
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 Receivables Purchase Agreement entered into by
and between the Seller, as purchaser of the Receivables, and HAFC, as owner and
seller of the Receivables. 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 certain terms of the Receivables Purchase
Agreement and is qualified in its entirety by reference to 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 anticipated excess spread.
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
applicable date of designation. The records and agreements relating to the
Receivables 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, but 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 Both the Receivables and the Underlying Vehicles May not be Valid
under Certain Circumstances" and "Certain Legal Aspects of the Receivables".
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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, and in the
proceeds thereof or, if held not to constitute a sale, constitutes a grant of a
security interest in the Receivables, and (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. 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, HAFC will repurchase the affected Receivables
retransferred to the Seller 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.
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 contracts
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."
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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 was not obtained, the
Issuer's security interest would 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 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 Internal
Revenue Code of 1986 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.
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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, (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 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, 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. 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.
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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 impose finance charge ceilings and other restrictions on
consumer transactions and require contract disclosures in addition to those
required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply with their provisions. In some
cases, this liability could affect 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 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 1948. 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
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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 loans 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.
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 anticipated 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, some of which may be
subject to special rules. Investors should 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 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.
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TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES OF INDEBTEDNESS. The Seller agrees, and the
Noteholders will agree by their purchase of Notes, to treat the 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 Notes. In general, whether instruments such as the 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, counsel is expected to conclude that, for federal
income tax purposes, the Class A and Class B Notes will be, and the Class C
Notes should 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.
If the Notes are characterized as indebtedness, interest paid or accrued on
a Note will be treated as ordinary income to the Noteholders and principal
payments on a Note will be treated as a return of capital to the extent of the
Noteholder's basis in the Note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the 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 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 Class A and Class B Notes will be,
and the Class C Notes should 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 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 Notes were held to constitute
partnership interests, rather than indebtedness. Since the Issuer will treat the
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 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 Notes.
ORIGINAL ISSUE DISCOUNT. It is anticipated that the 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 a Note multiplied by its expected weighted
average life.
MARKET DISCOUNT. A subsequent purchaser who buys a Note for less than its
principal amount may be subject to the "market discount" rules of section 1276
through 1278 of the Code. If subsequent purchaser of a Note disposes of such
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
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<PAGE>
the period that such purchaser holds the 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 Notes and thereafter.
Market discount generally will equal the excess, if any, of the then current
unpaid principal balance of the Note over the purchaser's basis in the Note
immediately after such purchaser acquired the Note. In general, market discount
on a Note will be treated as accruing over the term of such 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 a 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 a 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.
Notwithstanding the above rules, market discount on a 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 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 a 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 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 Note. The amortization of such premium on an
obligation that provides for a 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 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 NOTES. If a 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 a 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 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 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
61
<PAGE>
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 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 Notes, may be subject to the
"backup withholding tax" under Section 3406 of the Code at 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.
STATE AND LOCAL TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the 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 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,
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<PAGE>
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 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.
The Class C Notes may not be acquired by any Benefit Plan.
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<PAGE>
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
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3
UNDERWRITERS NOTES NOTES NOTES
- ------------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Credit Suisse First Boston...................................
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
CLASS A-4 CLASS B
UNDERWRITERS NOTES NOTES
- ------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Credit Suisse First Boston...................................
</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,
and Class B 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, and Class B
Notes to certain brokers and dealers. After the Notes are released for sale to
the public, the offering price and other selling terms may be varied by the
Underwriters.
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 be also 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.
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
1934 Act.......................................................................... 3
ACC............................................................................... 20
Actuarial Receivables............................................................. 22
ABS............................................................................... 28
ABS Table......................................................................... 28
Aggregate Note Principal Balance.................................................. 38
Aggregate Optimal Note Principal Balance.......................................... 38
Amount Financed................................................................... 38
APR............................................................................... 6
Available Funds................................................................... 38
Benefit Plan...................................................................... 62
Business Day...................................................................... 7
Cedel............................................................................. 10
Cedel Participants................................................................ 48
Certificates...................................................................... 1, 5
Class A Noteholders............................................................... 37
Class A Notes..................................................................... 5
Class A Distributable Amount...................................................... 38
Class A Interest Carryover Shortfall.............................................. 39
Class A Interest Distributable Amount............................................. 39
Class A Monthly Principal Distributable Amount.................................... 39
Class A Principal Carryover Shortfall............................................. 39
Class A Principal Distributable Amount............................................ 39
Class A-1 Notes................................................................... 5
Class A-1 Scheduled Maturity Date................................................. 12
Class A-2 Notes................................................................... 5
Class A-3 Notes................................................................... 5
Class A-4 Notes................................................................... 5
Class B Noteholders............................................................... 9, 37
Class B Notes..................................................................... 5
Class B Distributable Amount...................................................... 39
Class B Interest Carryover Shortfall.............................................. 39
Class B Interest Distributable Amount............................................. 39
Class B Monthly Principal Distributable Amount.................................... 39
Class B Principal Carryover Shortfall............................................. 39
Class B Principal Distributable Amount............................................ 40
Class C Noteholders............................................................... 9, 37
Class C Notes..................................................................... 5
Class C Distributable Amount...................................................... 40
Class C Interest Carryover Shortfall.............................................. 40
Class C Interest Distributable Amount............................................. 40
Class C Monthly Principal Distributable Amount.................................... 40
Class C Principal Carryover Shortfall............................................. 40
Class C Principal Distributable Amount............................................ 40
Closing Date...................................................................... 3
Code.............................................................................. 44
Collected Funds................................................................... 40
Collection Account................................................................ 7, 51
</TABLE>
65
<PAGE>
<TABLE>
<S> <C>
Collection Period................................................................. 7
Commission........................................................................ 2
Cooperative....................................................................... 48
Cram Down Loss.................................................................... 40
Cut-Off Date...................................................................... 6
Dealer Agreements................................................................. 21
Dealers........................................................................... 21
Depositaries...................................................................... 11, 47
Depositary........................................................................ 47
Determination Date................................................................ 11, 41
DTC............................................................................... 3, A-1
Eligible Account.................................................................. 51
ERISA............................................................................. 13
Euroclear......................................................................... 10
Euroclear Operator................................................................ 48
Euroclear Participants............................................................ 48
Event of Default.................................................................. 43
Final Scheduled Payment Date...................................................... 12, 42
FTC Rule.......................................................................... 58
Global Securities................................................................. A-1
HAFC.............................................................................. 2
HFC............................................................................... 6
Holders........................................................................... 11
Indenture......................................................................... 1
Indenture Trustee................................................................. 1
Indirect Participants............................................................. 48
Insolvency Laws................................................................... 16
Interest Period................................................................... 8, 36
IRA............................................................................... 62
IRS............................................................................... 60
Issuer............................................................................ 1, 5
Liquidated Amount................................................................. 7
Liquidated Receivable............................................................. 7
Maximum Reserve Account Deposit Amount............................................ 41
Net Liquidation Proceeds.......................................................... 41
Note Account...................................................................... 9
Noteholders....................................................................... 11
Noteholders' Distributable Amount................................................. 41
Note Owners....................................................................... 3, 10
Note Rate......................................................................... 8, 36
Notes............................................................................. 1
NRSRO............................................................................. 13
Offered Notes..................................................................... 1
OID............................................................................... 60
Original Pool Balance............................................................. 6
Owner Trustee..................................................................... 1
Participants...................................................................... 48
Payment Date...................................................................... 2, 7, 36
Plan Asset Regulation............................................................. 62
Pool Balance...................................................................... 7, 41
Preferred Stock................................................................... 21, 27
</TABLE>
66
<PAGE>
<TABLE>
<S> <C>
Principal Amount Available........................................................ 41
Principal Balance................................................................. 7
Principal Distributable Amount.................................................... 41
Purchase Amount................................................................... 41
Purchased Receivable.............................................................. 7
PTCE.............................................................................. 63
Rating Agencies................................................................... 13
Receivables....................................................................... 2
Receivables Purchase Agreement.................................................... 6
Relief Act........................................................................ 58
Replacement Note.................................................................. 11, 47
Reserve Account................................................................... 10, 27
Reserve Account Deposit Amount.................................................... 41
Reserve Account Shortfall Amount.................................................. 41
Rules............................................................................. 47
Sale and Servicing Agreement...................................................... 6
Schedule of Receivables........................................................... 50
Seller............................................................................ 1
Seller's Bankruptcy Initiatives................................................... 27
Series 1998-1 Securities.......................................................... 1
Servicer.......................................................................... 1, 6
Servicer Credit Facility.......................................................... 51
Servicer Termination Event........................................................ 53
Servicing Fee..................................................................... 11, 52
Simple Interest Receivables....................................................... 22
Subservicer....................................................................... 6
Targeted Credit Enhancement Amount................................................ 41
Targeted Overcollateralization Amount............................................. 41
Targeted Reserve Account Balance.................................................. 41
Terms and Conditions.............................................................. 49
Trust Agreement................................................................... 1
Trust Assets...................................................................... 2, 5
Trust Documents................................................................... 50
UCC............................................................................... 55
Underwriters...................................................................... 64
Underwriting Agreement............................................................ 64
</TABLE>
67
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Household
Automobile Revolving Trust I, Series 1998-1 Notes (the "Global Securities") will
be available only in book-entry form. 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 Home
Equity Loan Asset Backed Certificates issues in same-day funds.
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<PAGE>
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.
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 coupon 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
coupon payment 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
A-2
<PAGE>
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 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 Certificate 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
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<PAGE>
be imposed at that rate unless the filer alternatively files Form W-8. Form 1001
may be filed by the Certificate 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).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owners 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 or trust the
income of which is includible in gross income for United States tax purposes,
regardless of its source. 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MAKE 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.............................. 4
Risk Factors.................................... 13
The Seller...................................... 18
The Servicer.................................... 18
The Subservicer................................. 19
Use of Proceeds................................. 19
The Issuer...................................... 19
The Trust Assets................................ 20
Yield and Prepayment Considerations............. 26
The Automobile Financing Business of HAFC....... 30
Description of the Notes........................ 35
Description of the Trust Documents.............. 49
Description of the Receivables Purchase
Agreement..................................... 53
Certain Legal Aspects of the Receivables........ 54
Material Federal Income Tax Consequences........ 58
State and Local Tax Considerations.............. 61
ERISA Considerations............................ 61
Underwriting.................................... 62
Legal Matters................................... 63
Index of Defined Terms.......................... 64
Global Clearance, Settlement and Tax
Documentation Procedures...................... A-1
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, 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.
$
Class A-1 Notes
$
Class A-2 Notes
$
Class A-3 Notes
$
Class A-4 Notes
$
Class B Notes
HOUSEHOLD AUTOMOBILE
REVOLVING TRUST I
SERIES 1998-1
HOUSEHOLD
FINANCE
CORPORATION
Servicer
--------------
PROSPECTUS
, 1998
--------------
CREDIT SUISSE FIRST BOSTON
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.................................................... $ 1,475*
Trustee's Fees and Expenses....................................... +
Legal Fees and Expenses........................................... +
Accounting Fees and Expenses...................................... +
Printing and Engraving Expenses................................... +
Blue Sky Qualification and Legal Investment Fees and Expenses..... +
Rating Agency Fees................................................ +
Miscellaneous..................................................... +
---------
Total....................................................... $ +
---------
---------
</TABLE>
- ------------------------
* Actual
+ To be filed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A. Indemnification. The General Corporation Law of Delaware (Section 145)
gives Delaware corporations broad powers to indemnify their present and former
directors and officers and those of affiliated corporations against expenses
incurred in the defense of any lawsuit to which they are made parties by reason
of being or having been such directors or officers, subject to specified
conditions and exclusions; gives a director or officer who successfully defends
an action the right to be so indemnified; and authorizes said corporation to buy
directors' and officers' liability insurance. Such indemnification is not
exclusive of any other right to which those indemnified may be entitled under
any bylaw, agreement, vote of stockholders or otherwise.
The General Corporation Law of Nevada (Section 78.751) permits Nevada
corporations to indemnify their present and former directors and officers and
those serving at the request of the corporation against expenses reasonably
incurred in connection with: 1) an action other than one by or in the right of
the corporation, and 2) an action by or in the right of the corporation if a
court determines that such indemnification is proper; gives a director or
officer who successfully defends an action the right to be so indemnified; and
authorizes said corporation to buy directors' and officers' liability insurance.
Such indemnification: 1) must be authorized in the specific case upon a
determination by the stockholders, disinterested directors, or independent
counsel that it is proper, and 2) is not exclusive of any other right to which
those indemnified may be entitled under any bylaw, agreement, vote of
stockholders or otherwise, so long as the defendant's acts or conduct did not
involve intentional misconduct, fraud or a knowing violation of the law.
A bylaw adopted by Household Finance Corporation, a Delaware corporation
("HFC"), and the immediate parent of the Seller states and makes mandatory the
indemnification expressly authorized under the General Corporation Law of
Delaware, in the absence of other indemnification by contract, vote of
stockholders or otherwise except that the bylaw makes no distinction between
litigation brought by third parties and litigation brought by or in the right of
HFC as regards the required standard of conduct
II-1
<PAGE>
imposed upon the individual in order to be entitled to indemnification. The
bylaw standard applicable in all cases (excepting indemnification in connection
with the successful defense of any proceeding or matter therein, which is
mandatory under the General Corporation Law of Delaware and the bylaw without
reference to any such standard) is that the individual shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of HFC, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Further, the bylaw would
protect directors, officers, employees and agents against any and all expenses
and liability with respect to actions brought against them by or in the right of
HFC if the required standard of conduct is met. The bylaw is qualified in its
entirety in that no indemnification will be made if prohibited by applicable
law. The bylaw is applicable only to claims, actions, suits or proceedings made
or commenced after its adoption, whether arising from prior or subsequent acts
or omissions to act. The bylaw is applicable to directors, officers, employees
or agents of HFC and also to persons who are serving at the request of HFC as
directors, officers, employees or agents or other corporations (including
subsidiaries such as the Seller).
Article VII of Household International, Inc.'s Certificate of Incorporation
provides for indemnification to the fullest extent permitted by Section 145 of
the General Corporation of Delaware for directors, officers and employees of
Household International, Inc., and also to persons who are serving at the
request of Household International, Inc. as directors, officers or employees of
other corporations (including subsidiaries such as the Seller). Household
International, Inc. has also purchased liability policies which indemnify the
Seller, officers and directors against loss arising from claims by reason of
their legal liability for acts as officers and directors, subject to limitations
and conditions as set forth in the policies.
Articles Ninth and Tenth of the Seller's charter also provides for
indemnification as permitted by the Nevada Revised Statutes.
Pursuant to agreements which Seller may enter into with underwriters or
agents (forms of which are included as exhibits to this Registration Statement),
officers and directors of the Seller, and affiliates thereof, may be entitled to
indemnification by such underwriters or agents against certain liabilities,
including liabilities under the Securities Act of 1933, arising from information
which has been furnished to the Seller by such underwriters or agents that
appears in the Registration Statement or any Prospectus.
B. Sale and Servicing Agreement. The Sale and Servicing Agreement provides
that no director, officer, employee or agent of HFC, as Servicer, or the Seller
is liable to any holder of the Notes or to the Indenture Trustee on behalf of
the holders of Notes, except for such person's own willful misfeasance, bad
faith, negligence or reckless disregard of duty.
II-2
<PAGE>
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+ -- 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
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.
24 -- Powers of Attorney (included on Pages II-4 and II-5 hereto).
25.1+ -- Statement of eligibility and qualification of the Indenture Trustee.
</TABLE>
- ------------------------
+ To be filed by amendment.
(b) Financial statements filed as part of the Registration Statement: Not
applicable with respect to the Seller.
II-3
<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
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 24th
day of July, 1998.
<TABLE>
<S> <C> <C>
HOUSEHOLD AUTO RECEIVABLES CORPORATION
By: /s/ RELLEN M. STEWART
-----------------------------------------
Rellen M. Stewart
PRESIDENT
</TABLE>
Each person whose signature appears below constitutes and appoints J.W.
Blenke, L.S. Mattenson and P.D. Schwartz and each or any of them (with full
power to act alone), as his/her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him/her in his/her name,
place and stead, in any and all capacities, to sign and file with the Securities
and Exchange Commission, any and all amendments (including post-effective
amendments to the Registration Statement, granting unto each such
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he/she might or could do in person, hereby ratifying and
confirming all that such attorney-in-fact and agent or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 24th day of July, 1998.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ RELLEN M. STEWART President (Principal
- ------------------------------ Executive Officer) and
(Rellen M. Stewart) Director)
Senior Vice President,
/s/ EDGAR ANCONA Treasurer and Director
- ------------------------------ (Principal Financial
(Edgar Ancona) Officer)
/s/ JOHN W. BLENKE Vice President, Secretary
- ------------------------------ and Director
(John W. Blenke)
/s/ STEVEN H. SMITH Vice President, Assistant
- ------------------------------ Treasurer and Director
(Steven H. Smith)
/s/ STEVEN L. MCDONALD Vice President and
- ------------------------------ Controller (Principal
(Steven L. McDonald) Accounting Officer)
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.
II-4
<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
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 24th
day of July, 1998.
<TABLE>
<S> <C> <C>
HOUSEHOLD AUTO RECEIVABLES CORPORATION, as
originator of the Issuer
By: /s/ RELLEN M. STEWART
-----------------------------------------
Rellen M. Stewart
PRESIDENT
</TABLE>
Each person whose signature appears below constitutes and appoints J.W.
Blenke, L.S. Mattenson and P.D. Schwartz and each or any of them (with full
power to act alone), as his/her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him/her in his/her name,
place and stead, in any and all capacities, to sign and file with the Securities
and Exchange Commission, any and all amendments (including post-effective
amendments to the Registration Statement, granting unto each such
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he/she might or could do in person, hereby ratifying and
confirming all that such attorney-in-fact and agent or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 24th day of July, 1998.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ RELLEN M. STEWART President (Principal
- ------------------------------ Executive Officer) and
(Rellen M. Stewart) Director)
Senior Vice President,
/s/ EDGAR ANCONA Treasurer and Director
- ------------------------------ (Principal Financial
(Edgar Ancona) Officer)
/s/ JOHN W. BLENKE Vice President, Secretary
- ------------------------------ and Director
(John W. Blenke)
/s/ STEVEN H. SMITH Vice President, Assistant
- ------------------------------ Treasurer and Director
(Steven H. Smith)
/s/ STEVEN L. MCDONALD Vice President and
- ------------------------------ Controller (Principal
(Steven L. McDonald) Accounting Officer)
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.
II-5
<PAGE>
ARTICLES OF INCORPORATION
OF
HOUSEHOLD AUTO RECEIVABLES CORPORATION
FIRST. The name of the corporation is HOUSEHOLD AUTO RECEIVABLES
CORPORATION (the "Corporation").
SECOND. Its resident agent in the State of Nevada is Corporation Trust
Company of Nevada and is located at One East First Street, Reno, Nevada 89501.
THIRD. The nature of the business, or objects or purposes proposed to be
transacted, promoted or carried on are:
(a) to borrow money on a non-recourse basis, to make deposits of money in
bank accounts, to grant security interests in such deposits for its
own benefit or the benefit of others and to purchase or otherwise
acquire securities evidencing ownership of, or other interests in,
assets securitized by third parties.
(b) to acquire from Household Automotive Finance Corporation or
subsidiaries and affiliates thereof, and to hold, sell and pledge
retail installment sales contracts secured by new and used automobiles
and light trucks ("Receivables") and to enter into agreements relating
to the servicing of Receivables.
(c) to enter into any agreement (including, without limitation, any
agreements creating one or more trusts) providing for the
authorization, issuance, sale and delivery of pass-through
certificates, notes, participation interests and other debt
instruments or equity interests (collectively, "Securities") whether
directly or through a trust, secured or supported by Receivables or
collections thereon.
(d) to acquire hold, pledge or otherwise deal with any Securities
representing a residual interest or other ownership interest in the
Receivables ("Seller Interests").
(e) to invest proceeds from Receivables, funds received in respect of any
Seller Interests, and any other income as determined by the
Corporation's Board of Directors, including investing in other
Receivables.
(f) to engage in any lawful act or activity for which corporations may be
organized under the laws of the State of Nevada that are incidental to
and necessary or convenient for the accomplishment of the purposes
stated in (a) through (e) above; PROVIDED that the Corporation
<PAGE>
shall not engage in the business of personal finance, consumer
finance, sales finance, commercial finance, banking or factoring.
FOURTH. The amount of the total authorized capital stock of the
Corporation is One Thousand Ten Dollars ($1,010.00) consisting of One Thousand
Shares (1,000) of a class of common stock of the par value of One Dollar ($1.00)
designated as Common Stock and Ten Shares (10) of a class of special voting
preferred stock of the par value of One Dollar ($1.00) designated as Class SV
Preferred Stock.
The holder of Common Stock shall be entitled to all of the rights and
privileges pertaining to common stock without any limitations, prohibitions,
restrictions, or qualifications under the Nevada Revised Statutes.
The holder of Class SV Preferred Stock shall be entitled to no rights or
privileges (including, but not limited to, no rights of the holder to receive
dividends) under the Nevada Revised Statutes except that the holders shall be
entitled to vote with respect to any matters to come before the stock holders of
the Corporation with respect to the consent of all holders of the Class SV
Preferred Stock required by Article Fifteenth hereof and shall be entitled to
receive only upon liquidation an amount equal to One Dollar ($1.00), which is to
be received prior to any distribution to holders of Common Stock.
FIFTH. The name and post office address of each of the incorporators
signing the certificate of incorporation is as follows:
<TABLE>
<CAPTION>
NAME POST OFFICE ADDRESS
---- -------------------
<S> <C>
John W. Blenke 2700 Sanders Road
Prospect Heights, IL 60070
Patrick D. Schwartz 2700 Sanders Road
Prospect Heights, IL 60070
</TABLE>
SIXTH. The governing board of the Corporation shall be known as the board
of directors. The names and post office addresses of the first board of
directors, which shall be three in number, are as follows:
-2-
<PAGE>
<TABLE>
<CAPTION>
NAME POST OFFICE ADDRESS
---- -------------------
<S> <C>
E. D. Ancona 2700 Sanders Road
Prospect Heights, IL 60070
S. H. Smith 2700 Sanders Road
Prospect Heights, IL 60070
J. W. Blenke 2700 Sanders Road
Prospect Heights, IL 60070
</TABLE>
SEVENTH. The Corporation is to have perpetual existence.
EIGHTH. Provisions for the management of the business and for the conduct
of the affairs of this Corporation and provisions creating, defining, limiting
and regarding the powers of the Corporation, the directors and stockholders are
as follows:
(1) subject to the bylaws, if any, adopted by the stockholders, the
board of directors shall have the power to make, alter, amend or repeal the
bylaws of the Corporation.
(2) the board of directors shall have the power to make, adopt,
alter, amend and repeal the bylaws of this Corporation without the assent
or vote of the stockholders, including, without limitation, the power to
fix, from time to time, the number of directors which shall constitute the
whole board of directors of this Corporation subject to the right of the
stockholders to alter, amend and repeal the bylaws made by the board of
directors.
(3) Election of directors of this Corporation need not be by written
ballot unless the bylaws so provide.
(4) The directors in their discretion may submit any contract or act
for approval or ratification at any annual meeting of the stockholders or
at any meeting of the stockholders called for the purpose of considering
any such act or contract, and any contract or act that shall be approved or
be ratified by the vote of the holders of a majority of the stock of this
Corporation which is represented in person or by proxy at such meeting and
entitled to vote thereat (provided that a lawful quorum of stockholders be
there represented in person or by proxy) shall be as valid and as binding
upon this Corporation and upon all the stockholders as though it had been
approved or ratified by every stockholder of this Corporation, whether or
not the contract or act would otherwise be open to legal attack because of
directors' interest, or for any other reason.
-3-
<PAGE>
(5) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the board of directors of this
Corporation are hereby expressly empowered to exercise all such powers and
to do all such acts and things as may be exercised or done by this
Corporation; subject, nevertheless, to the provisions of the statutes of
the State of Nevada and of the Articles of Incorporation as they may be
amended, altered or changed from time to time and to any bylaws from time
to time made by the directors or stockholders; provided, however, that no
bylaw so made shall invalidate any prior act of the board of directors
which would have been valid if such bylaw had not been made.
(6) Whenever this Corporation shall be authorized to issue more than
one class of stock, the holders of the stock of any class which is not
otherwise entitled to voting power shall not be entitled to vote upon the
increase or decrease in the number of authorized shares of such class.
NINTH. To the fullest extent permitted by the Nevada Revised Statutes as
the same exists or may hereafter be amended, a director of this Corporation
shall not be personally liable to this Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. If the Nevada
Revised Statutes are amended, after approval by the stockholders of this
provision to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of this
Corporation shall be eliminated or limited to the fullest extent permitted by
the Nevada Revised Statutes, as so amended. Any repeal or modification of this
Article NINTH by the stockholders of this Corporation shall not adversely affect
any right or protection of a director of this Corporation existing at the time
of such repeal or modification or with respect to events occurring prior to such
time.
TENTH. (A) This Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of this Corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
this Corporation, or is or was serving at the request of this Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such act, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of this Corporation, and with respect to any criminal action or
proceeding,
-4-
<PAGE>
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of this
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(B) This Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of this Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of this Corporation, or is or was serving at the request of this
Corporation as a director, officer, employee or agent of another Corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of this Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to this Corporation unless and only to the extent
that the District Court of the State of Nevada or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the District Court of the State of Nevada or such other court shall deem proper.
(C) Expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon the
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in the Nevada Revised Statutes.
Such expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(D) In addition to the right of indemnification provided for in this
Article TENTH, this Corporation shall, to the fullest and broadest extent
permitted by applicable law, including, without limitation, the Nevada Revised
Statutes as they may be amended from time to time, indemnify all persons whom it
may indemnify pursuant thereto.
-5-
<PAGE>
(E) The right of indemnification provided by this Article TENTH shall
apply as to action by any person in his or her official capacity and as to
action in another capacity while holding such office and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
(F) The right of indemnification provided by this Article TENTH shall
not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(G) The right of indemnification provided by this Article TENTH shall
be deemed to be a contract between this Corporation and each director, officer,
employee or agent of this Corporation who serves in such capacity, both as to
action in his official capacity and as to action in another capacity while
holding such office, at any time while this Article TENTH and the relevant
provisions of the Nevada Revised Statutes and other applicable law, if any, are
in effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought or
threatened based in whole or in part upon any such state of facts.
(H) Notwithstanding any provision of this Article TENTH to the
contrary, this Corporation may, but shall not be obligated to, purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of this Corporation, or is or was serving at the request of
this Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his or her status as such, whether or not this Corporation would
have the power to indemnify him or her against such liability.
(I) For purposes of this Article TENTH, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
-6-
<PAGE>
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries, and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner he or she reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this Article TENTH.
ELEVENTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the Nevada Revised Statutes, or on the application of trustees in dissolution or
of any receiver or receivers appointed for this Corporation under the Nevada
Revised Statutes, order a meeting of the creditors or class of creditors, and/or
of the stockholders or class of stockholders of this Corporation, as the case
may be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation, as a consequence of such compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders of
this Corporation, as the case may be, and also on this Corporation.
TWELFTH. This Corporation reserves the right to amend, alter, change or
repeal any provision contained in the articles of incorporation, in the manner
now or hereafter prescribed by statute, or by the certificate of incorporation,
and all rights conferred upon stockholders herein are granted subject to this
reservation.
THIRTEENTH. The Corporation shall be operated in such a manner that it
would not be substantially consolidated in the trust estate of any other
individual, corporation, partnership, joint venture, trust or unincorporated
organization or any other legal entity, whether acting in an individual,
fiduciary or other capacity (each, a "Person") in the event of a bankruptcy or
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insolvency of such Person and in such regard, the Corporation shall:
(a) not become involved in the day-to-day management of any other Person;
(b) not engage in transactions with any other Person except as expressly
set forth herein and matters necessarily incident thereto;
(c) maintain separate corporate records and books of account and a
separate business office from any direct shareholder;
(d) maintain its assets separately from the assets of any other Person
(including through the maintenance of a separate bank account);
(e) maintain separate financial statements, books and records from any
other Person;
(f) not guarantee any other Person's obligations or advance funds to any
other Person for the payment of expenses or otherwise;
(g) conduct all business correspondence of the Corporation and other
communications in the Corporation's own name, on its own stationery
and through a separately-listed telephone number; and
(h) not act as an agent of any other Person in any capacity.
FOURTEENTH. Notwithstanding any other provision of the Articles of
Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation shall not, without the unanimous consent of the
board of directors of the Corporation:
(a) amend, alter, change or repeal Article THIRD, THIRTEENTH or FIFTEENTH
hereof or this Article FOURTEENTH.
(b) engage in any business or activity other than as authorized by Article
THIRD hereof;
(c) dissolve or liquidate, in whole or in part; or
(d) consolidate with or merge into any other entity or convey, transfer or
lease its properties and assets substantially as an entirety to any
entity, or permit any entity to merge into the Corporation or convey,
transfer
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or lease its properties and assets substantially as an entirety to the
Corporation.
FIFTEENTH. Notwithstanding any other provision of the Articles of
Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation shall not, without the unanimous consent of all of
the holders of the Class SV Preferred Stock of the Corporation, institute
proceedings to be adjudicated insolvent, or consent to the institution of any
bankruptcy or insolvency case or proceedings against it, or file or consent to a
petition under any applicable federal or state law relating to bankruptcy,
seeking the Corporation's liquidation or reorganization or any other relief for
the Corporation as debtor, or consent to the appointment of a receiver,
liquidator, assignee, trustee, custodian or sequestrator (or other similar
official) of the Corporation or a substantial part of its property, or make any
assignment for the benefit of creditors, or admit in writing its inability to
pay its debts generally as they become due, or take any corporate action in
furtherance of any such action. This Article Fifteenth may not be amended
without the consent of all the stockholders of the Corporation entitled to vote
on the matters contained in this Article Fifteenth.
WE, THE UNDERSIGNED, being the incorporators hereinbefore named, for the
purpose of forming a Corporation pursuant to the Nevada Revised Statutes, do
make and file these articles of incorporation, hereby declaring and certifying
that the facts herein stated are true, and accordingly have hereunto set our
hands this 23rd day of March, 1998.
/s/ Patrick D. Schwartz /s/ John W. Blenke
Patrick D. Schwartz John W. Blenke
On this 23rd day of March, 1998, before me, a Notary Public personally appeared
John W. Blenke and Patrick D. Schwartz, who severally acknowledged that they
executed the above instrument.
/s/ Christina J. Lankton
Notary Public
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BYLAWS OF
HOUSEHOLD AUTO RECEIVABLES CORPORATION
(as approved March 26, 1998)
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ARTICLE I.
DEFINITIONS, PLACES OF MEETINGS.
SECTION 1. DEFINITIONS. When used herein, "Board" shall mean the Board of
Directors of this Corporation, and "Chairman" shall mean Chairman of the Board
of Directors.
SECTION 2. PLACES OF MEETINGS OF STOCKHOLDERS AND DIRECTORS. Meetings of
stockholders and of the Board shall be held at such place, within or outside the
State of Nevada, as specified by the person or persons calling the meeting.
ARTICLE II.
STOCKHOLDERS MEETINGS.
SECTION 1. ANNUAL MEETINGS OF STOCKHOLDERS. The annual meeting of
stockholders shall be held on the third Wednesday in September at 9:30 a.m.
unless the Board shall fix a different date or time.
SECTION 2. SPECIAL MEETINGS.
CALL. Special meetings of the stockholders may be called at any time by
the Chairman of the Board, the President, or one or more members of the Board of
Directors.
REQUISITES OF CALL. A call for a special meeting of stockholders shall be
in writing, filed with the Secretary, and shall specify the time and place of
holding such meeting and the purpose or purposes for which it is called.
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SECTION 3. NOTICE OF MEETINGS. Written notice of a meeting of
stockholders setting forth the place, date, and hour of the meeting and the
purpose or purposes for which the meeting is called shall be mailed not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at the meeting.
SECTION 4. QUORUM. At any meeting of stockholders, and except as
otherwise required by law, the Certificate of Incorporation, or the bylaws, the
holders of one-third of all the outstanding shares entitled to vote, present in
person or by proxy, shall constitute a quorum for the transaction of business,
and a majority vote of such quorum shall prevail, except with respect to the
election of directors in which case a plurality of the votes of such quorum
shall prevail. Where a separate vote by class or classes is required, and
except as otherwise provided by law, the Certificate of Incorporation, or the
bylaws, one-third of the outstanding shares of such class or classes, present in
person or by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter, and a majority vote of such quorum shall
prevail, except with respect to the election of directors in which case a
plurality of the votes of such quorum shall prevail.
If the stockholders necessary for a quorum shall fail to be present in
person or by proxy at the time and place fixed for any meeting, the holders of a
majority of the shares entitled to vote who are present in person or by proxy
may adjourn the meeting from time to time, until a quorum is present, and at any
such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the original meeting.
SECTION 5. PROXIES. At each meeting of stockholders the proxies shall be
delivered to the Secretary and, unless otherwise required by law, all questions
touching the validity or sufficiency of the proxies shall be decided by the
Secretary.
SECTION 6. LIST OF STOCKHOLDERS. The Secretary shall prepare, at least
ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall be produced and kept at the
time and
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place of the meeting during the whole time thereof and may be inspected by any
stockholder present.
ARTICLE III.
BOARD OF DIRECTORS.
SECTION 1. GENERAL POWERS. The business and affairs of this Corporation
shall be managed under the direction of the Board.
NUMBER. The number of directors shall be fixed from time to time by
resolution of the Board.
TENURE. The directors shall be elected at the annual meeting of
stockholders. Each director shall hold office until his successor is elected
and qualified or until his earlier resignation or removal.
VACANCIES. Unless otherwise provided by law, the Articles of Incorporation
or the bylaws, vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office though less than a quorum.
Unless otherwise provided by law or the Articles of Incorporation, whenever
the holders of any class or classes of stock or series thereof are entitled to
elect one or more directors by the provisions of the Articles of Incorporation,
vacancies and newly created directorships of such class or classes or series may
be filled by a majority of the directors elected by such class or classes or
series thereof then in office, or by a sole remaining director so elected, or if
there is no remaining director elected by such class or classes or series
thereof, then by a majority of the remaining directors of the entire Board.
SECTION 2. ANNUAL MEETINGS OF BOARD. The annual meeting of the Board
shall be held following the annual meeting of stockholders, or as soon
thereafter as practicable, and shall be a meeting of the directors elected at
such meeting of stockholders. No notice shall be required.
SECTION 3. REGULAR MEETINGS OF BOARD. Regular meetings of the Board shall
be held at such times and places as the Board may fix. No notice shall be
required.
SECTION 4. SPECIAL MEETINGS OF THE BOARD. Special meetings of the Board
shall be held whenever called by the Chairman, the President, or any one or more
directors. At least twenty-four
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hours' written or oral notice of each special meeting shall be given to each
director. If mailed, notice must be deposited in the United States mail at
least seventy-two hours before the meeting.
SECTION 5. QUORUM. Forty percent of the members of the Board shall
constitute a quorum for the transaction of business, but if at any meeting of
the Board there is less than a quorum the majority of those present may adjourn
the meeting from time to time until a quorum is present. At any such adjourned
meeting, a quorum being present, any business may be transacted which might have
been transacted at the original meeting.
Except as otherwise provided by law, the Certificate of Incorporation, or
the bylaws, all actions of the Board shall be decided by vote of a majority of
those present.
SECTION 6. COMMITTEES. The Board may, by resolution passed by a majority
of the entire Board, designate one or more committees of directors which to the
extent provided in the resolution shall have and may execute powers and
authority of the Board in the management of the business and affairs of the
Corporation. A majority of the members of any such committee shall constitute a
quorum for the transaction of business by such committee, and except as
otherwise provided by law, the Certificate of Incorporation, or the bylaws, all
actions of such committee shall be decided by vote of a majority of those
present.
SECTION 7. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting (including the annual meeting of the Board) if all the members
of the Board or committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
ARTICLE IV.
OFFICERS.
SECTION 1. OFFICERS. The General Officers of the Corporation shall be a
President, such number of Vice Presidents as may be determined by the Board, a
Secretary and a Treasurer. The President shall be a director.
The Board or the President may from time to time designate, employ, or
appoint such other officers and assistant officers, agents, employees, counsel,
and attorneys at law or in fact as it
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shall deem desirable for such periods and on such terms as it may deem
advisable, and such persons shall have such titles, only such power and
authority, and perform such duties as the Board or the President may determine.
SECTION 2. DUTIES OF PRESIDENT. The President shall be the principal
executive officer and shall have general authority over the business and affairs
of the Corporation subject to the control and direction of the Board and, in
general, perform all other duties incident to the office of President and shall
perform such other duties as may be prescribed by the Board or the bylaws. In
the absence or inability of the Chairman of the Board to act, the President
shall also perform the duties of the Chairman at Board meetings.
SECTION 3. DUTIES OF VICE PRESIDENTS. In the absence or inability to act
of the President, the senior of the Vice Presidents available at the time shall
perform the duties of the President. Each Vice President shall have such other
powers and perform such other duties as may be prescribed by the President or
the Board. The order of seniority among the Vice Presidents shall be as
designated from time to time in writing by the President of the Corporation and
filed with the Secretary.
SECTION 4. DUTIES OF SECRETARY. The Secretary shall record the
proceedings of meetings of the stockholders and directors, give notices of
meetings, and shall, in general, perform all duties incident to the office of
Secretary and such other duties as may be prescribed by the Board.
SECTION 5. DUTIES OF TREASURER. The Treasurer shall be the principal
financial officer and shall have custody of all funds, securities, evidences of
indebtedness, and other similar property of the Corporation, and shall, in
general, perform all duties incident to the office of Treasurer and such other
duties as may be prescribed by the Board.
ARTICLE V.
MISCELLANEOUS PROVISIONS.
SECTION 1. WAIVER OF NOTICE. Whenever notice is required to be given, a
written waiver thereof signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting,
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at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 2. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action; except that the
establishment of a record date for determination of stockholders entitled to
express consent to corporate action in writing without a meeting shall be
established pursuant to Article VI of the bylaws.
SECTION 3. AMENDMENT OF BYLAWS. The bylaws may be amended at any time by
action of the Board.
ARTICLE VI.
CONSENTS TO CORPORATE ACTION.
SECTION 1. ACTION BY WRITTEN CONSENT. Unless otherwise provided in the
Certificate of Incorporation, any action which is required to be or may be taken
at any annual or special meeting of stockholders of the Corporation, subject to
the provisions of Sections (2) and (3) of this Article VI, may be taken without
a meeting, without prior notice and without a vote if a consent in writing,
setting forth the action so taken, shall have been signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or to take such action at a meeting at which all shares
entitled to vote thereon were present and voted; PROVIDED, HOWEVER, that prompt
notice of the taking of the corporate action without a meeting and by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
SECTION 2. DETERMINATION OF RECORD DATE FOR ACTION BY WRITTEN CONSENT.
The record date for determining stockholders entitled to express consent to
corporate action in writing without a meeting shall be fixed by the Board of
Directors of the Corporation. Any stockholder seeking to have the stockholders
authorize or take corporate action by written consent without a meeting shall,
by written notice to the Secretary, request the Board of Directors to fix a
record date. Upon receipt of such a request, the Secretary shall, as promptly
as practicable, call a special meeting of the
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Board of Directors to be held as promptly as practicable. At such meeting, the
Board of Directors shall fix a record date; that record date, however, shall not
be more than 10 days after the date upon which the resolution fixing the record
date is adopted by the Board nor more than 15 days from the date of the receipt
of the stockholder's request. Notice of the record date shall be published in
accordance with the rules and policies of any stock exchange on which securities
of the Corporation are then listed, if applicable. Should the Board fail to fix
a record date as provided for in this Section 2, then the record date shall be
the day on which the first written consent is duly delivered pursuant to
applicable state law, or, if prior action is required by the Board with respect
to such matter, the record date shall be at the close of business on the day on
which the Board adopts the resolution taking such action.
SECTION 3. PROCEDURES FOR WRITTEN CONSENT. In the event of the delivery
to the Corporation of a written consent or consents purporting to represent the
requisite voting power to authorize or take corporate action and/or related
revocations, the Secretary of the Corporation shall provide for the safekeeping
of such consents and revocations. The Corporation shall promptly engage one or
more inspectors of elections for the purpose of promptly performing a
ministerial review of the validity of the consents and revocations. No action
by written consent without a meeting shall be effective until such inspectors
have completed their review, determined that the requisite number of valid and
unrevoked consents has been obtained to authorize or take the action specified
in the consents, and certified such determination for entry in the records of
the Corporation kept for the purpose of recording the proceedings of meetings of
stockholders.
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