<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HOUSEHOLD AUTO RECEIVABLES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 36-4220459
(State or other jurisdiction (IRS Employer
of incorporation or organization Identification Number)
</TABLE>
------------------------
1111 Town Center Drive
Las Vegas, Nevada 89134
(Address of principal executive offices of Registrant)
------------------------------
PATRICK D. SCHWARTZ, ESQ.
Associate General Counsel and Assistant Secretary
HOUSEHOLD INTERNATIONAL, INC.
2700 Sanders Road
Prospect Heights, Illinois 60070
(847) 564-6301
(Name, Address, telephone number, including area code, of agent for service)
------------------------------
CHRISTOPHER J. DI ANGELO, ESQ.
DEWEY BALLANTINE LLP
1301 Avenue of the Americas
New York, New York 10019
(212) 259-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(1)(2)
<S> <C> <C> <C> <C>
Household Automotive Trust III, Series 1999-1
Notes.......................................... $1,000,000 100% $1,000,000 $278.00
</TABLE>
(1) Pursuant to Rule 457(a) the filing fee has been calculated based upon a bona
fide estimate of the maximum offering price for the securities.
(2) Paid by wire transfer on April 16, 1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE NOTES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
AND IT IS NOT SOLICITING AN OFFER TO BUY THESE NOTES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
$
HOUSEHOLD AUTOMOTIVE TRUST III
ISSUER
SERIES 1999-1 NOTES
HOUSEHOLD AUTO RECEIVABLES CORPORATION, SELLER
HOUSEHOLD FINANCE CORPORATION, SERVICER
THE ISSUER WILL ISSUE--
- Four classes of notes which are to be offered by this prospectus; and
- Certain interests in the issuer which are to be held by the seller are not
offered by this prospectus but serve as credit support to the notes offered
by this prospectus.
THE NOTES--
- Are backed by a pledge of assets of the issuer. The assets of the issuer
securing the notes will include a pool of non-prime retail installment sales
contracts secured by new and used automobiles, light trucks and vans;
- Receive monthly distributions on the 17th day of each month beginning on
, 1999;
- Represent debt obligations of Household Automotive Trust III; and -
Currently have no trading market.
- --------------------------------------------------------------------------------
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE 8 OF THIS
PROSPECTUS AND CONSIDER THESE FACTORS BEFORE MAKING A DECISION TO INVEST IN THE
NOTES.
The notes are only secured by the assets of the issuer. The notes are not debt
obligations of any other person or entity.
The notes will not be insured or guaranteed by any person or entity or
governmental agency or instrumentality.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INITIAL
FINAL PUBLIC
ISSUANCE INTEREST SCHEDULED OFFERING UNDERWRITING PROCEEDS
AMOUNT RATE PAYMENT DATE PRICE(1) DISCOUNT TO SELLER(2)
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Notes $ % 100.00 % % %
Class A-2 Notes $ % 100.00 % % %
Class A-3 Notes $ % 100.00 % % %
Class A-4 Notes $ % 100.00 % % %
</TABLE>
(1) Plus accrued interest, if any, from , 1999.
(2) Before deducting expenses, estimated to be $ .
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
J.P. Morgan & Co.
The date of this Prospectus is , 1999
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission, including annual, quarterly and special
reports, proxy statements and other information. You can read and copy these
documents at the public reference facility maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can also copy
and inspect such reports, proxy statements and other information at the
following regional offices of the SEC:
<TABLE>
<S> <C>
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. SEC filings are also available to the public on the SEC's web
site at http://www.sec.gov.
This prospectus is part of a registration statement filed by the seller with
the SEC (Registration No. 333- ).
You should rely only on the information provided in this prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus is accurate as of any date
other than the date on the cover page of this prospectus.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under "Index of Defined Terms" beginning on page 67 in
this prospectus.
We include cross-references in this prospectus to captions in these
materials where you can find further related discussions. The following table of
contents provides the pages on which these captions are located.
In this prospectus, the terms "we", "us" and "our" refer to Household Auto
Receivables Corporation.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ----------------------------------------------- -----
<S> <C>
Where You Can Find More Information............ 2
Prospectus Summary............................. 4
Risk Factors................................... 8
Use of Proceeds................................ 14
The Issuer..................................... 14
General...................................... 14
The Owner Trustee............................ 14
The Indenture Trustee........................ 14
The Seller..................................... 14
The Servicer................................... 15
The Subservicer................................ 15
The Trust Assets............................... 16
General...................................... 16
Eligibility Criteria......................... 16
Terms of the Receivables..................... 17
Composition of the Receivables............... 18
The Reserve Account.......................... 22
The Preferred Stock.......................... 22
Yield and Prepayment Considerations............ 23
The Automobile Financing Business of the
Subservicer.................................. 27
General...................................... 27
Application Processing and Purchasing
Criteria................................... 27
Funding Package Completion, Verification and
Funding.................................... 28
Post-Funding Quality Reviews................. 28
Servicing of Contracts....................... 28
Billing and Collection Process............... 29
Repossession................................. 30
Insurance.................................... 30
Delinquency and Loss Information............. 30
Description of Notes........................... 34
General...................................... 34
Payments of Interest......................... 34
Payments of Principal........................ 35
Payment Priorities........................... 35
Maturity Dates; Optional Redemption.......... 39
Reports to Noteholders....................... 39
Events of Default; Rights Upon Event of
Default; Distributions following
Acceleration............................... 40
Certain Covenants............................ 42
Annual Compliance Statement.................. 42
Satisfaction and Discharge of Indenture...... 42
Modification of Indenture.................... 42
Certain Matters Regarding the Indenture
Trustee and the Issuer..................... 43
<CAPTION>
CAPTION PAGE
- ----------------------------------------------- -----
<S> <C>
Limitation on Liability of the Indenture
Trustee.................................... 43
Resignation of Indenture Trustee............. 44
Registration of the Notes.................... 44
Description of the Trust Documents............. 48
Sale and Assignment of Receivables........... 48
Representation and Warranties; Repurchase
Obligation 48
Payments on Receivables; Deposits to
Collection Account......................... 50
Collection and Other Servicing Procedures.... 52
Servicing Compensation and Payment of
Expenses................................... 52
Evidence as to Compliance.................... 52
Certain Matters Regarding the Servicer and
the Seller................................. 53
Servicer Termination Event................... 53
Rights Upon Servicer Termination Event....... 54
Amendment.................................... 54
Description of the Receivables Purchase
Agreement.................................... 55
Sales of Receivables......................... 55
Representations and Warranties............... 55
Amendments................................... 56
Certain Legal Aspects of the Receivables....... 56
Security Interests in Vehicles............... 56
Repossession................................. 57
Notice of Sale; Redemption Rights............ 58
Deficiency Judgments and Excess Proceeds..... 58
Consumer Protection Laws..................... 59
Soldiers' and Sailors' Civil Relief Act of
1940....................................... 60
Other Limitations............................ 60
Material Federal Income Tax Consequences....... 61
Tax Characterization of the Issuer........... 61
Tax Consequences to Holders of the Notes..... 61
State and Local Tax Considerations............. 64
ERISA Considerations........................... 64
Underwriting................................... 66
Legal Matters.................................. 66
Index of Defined Terms......................... 67
Global Clearance, Settlement and Tax
Documentation Procedures..................... A-1
Initial Settlement........................... A-1
Secondary Market Trading..................... A-1
Certain U.S. Federal Income Tax Documentation
Requirements............................... A-3
Financial Statements of the Issuer............. F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
- - This summary highlights select information from this prospectus and does not
contain all of the information that you need to consider in making your
investment decision. This summary provides general, simplified descriptions of
matters which, in some cases, are highly technical and complex. To understand
all of the terms of the offering of the notes, carefully read this entire
prospectus.
- - This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding. To understand all of the terms of
the offering, carefully read this entire document and, in particular, the full
description of these calculations, cash flows and other information in this
prospectus.
SERIES 1999-1 NOTES
The issuer will issue the notes offered by this prospectus in book-entry form
through the facilities of The Depository Trust Company.
ISSUER
Household Automotive Trust III. The issuer will be a Delaware business trust
formed under the laws of the State of Delaware. The address of the issuer is in
care of Wilmington Trust Company at 1100 North Market Street, Wilmington,
Delaware 19890.
SELLER
Household Auto Receivables Corporation. The seller has purchased the receivables
from Household Automotive Finance Corporation and will sell them to the issuer.
The seller will also own certain interests in the issuer. The address of the
Seller is 1111 Town Center Drive, Las Vegas, Nevada 89134.
SERVICER
Household Finance Corporation. The servicer is responsibile for servicing the
receivables and has subcontracted with the subservicer to perform the servicing
responsibilities. The address of the servicer is 2700 Sanders Road, Prospect
Heights, Illinois 60070.
SUBSERVICER
Household Automotive Finance Corporation. The receivables were originated by
automobile dealers that have no affiliation with the subservicer and were
purchased by the subservicer under its various financing programs. The
subservicer will service the receivables in accordance with policies established
in consultation with the servicer. The address of the subservicer is 11452 El
Camino Real, San Diego, California 92130.
OWNER TRUSTEE
Wilmington Trust Company. The address of the owner trustee is 1100 North Market
Street, Wilmington, Delaware 19890.
INDENTURE TRUSTEE
The Chase Manhattan Bank. The address of the indenture trustee is 450 West 33rd
Street, New York, New York 10001.
THE TRUST ASSETS
The issuer will pledge assets to secure payments on the notes. The pledged
assets will include a pool of receivables, cash on deposit in a collection
account and a reserve account and other assets as described in detail elsewhere
in this prospectus.
RECEIVABLES
- - On the closing date, the seller will assign to the issuer a pool of
receivables and the right to receive payments under certain insurance
policies. The insurance policies provide
4
<PAGE>
coverage for loss, damage, theft, credit life, credit disability and other
insurance coverage with respect to the financed vehicle or the borrower. On
the closing date the issuer will pledge the receivables to the indenture
trustee as collateral for the notes. As of , 1999 the aggregate
principal balance of the pool of receivables pledged as collateral was
$ . Payments on the notes will be made from payments on the pledged
receivables and payments received under related insurance policies.
- - The receivables will consist of non-prime retail installment sales contracts
secured by new and used automobiles, light trucks and vans which were
purchased from automobile dealers under the subservicer's financing program.
The subservicers's finance programs target automobile purchasers with below
average credit who have difficulty obtaining credit from traditional lending
sources.
- - No receivable will be more than 30 days delinquent as of , 1999.
- - Each receivable requires the borrower to make fixed, level payments that will
fully pay the balance of the amount borrowed by its maturity date.
- - We will pay the notes from payments on the receivables and amounts recovered
when financed vehicles are repossessed and sold, after deducting expenses.
CUT-OFF DATE
The opening of business on 1, 1999.
PAYMENT DATE
The 17th day of each month if the seventeenth is a business day. If the
seventeenth is not a business day, the payment date will be the following day
that is a business day. The first payment date will be 17, 1999.
DETERMINATION DATE
The earliest of the fifth calendar day or the third business day before a
payment date. The servicer will calculate and instruct the issuer and the
indenture trustee as to the amounts to be paid on the notes on the next payment
date.
RECORD DATE
The last business day preceding a payment date unless the notes are no longer
book-entry notes. If the notes are definitive notes, the record date is the last
business day of the month preceding a payment date.
CLOSING DATE
On or about , 1999.
DENOMINATIONS
The issuer will issue the notes in minimum denominations of $1,000 and integral
multiples of $1,000. One note of each class may be issued in another
denomination.
PRIORITY OF DISTRIBUTIONS
Each month, the issuer will distribute the amounts received on the receivables
and any other collections available as property of the issuer as follows:
INTEREST DISTRIBUTIONS
On each payment date, interest that accrued during the interest accrual period
is payable at the applicable note interest rate. The note rate for each class is
listed on the cover page of this prospectus.
Except in the event a default is declared on the notes, amounts paid to holders
of the notes will be shared by the Class A-1, Class A-2, Class A-3 and Class A-4
noteholders in proportion to the interest due on each class.
5
<PAGE>
PRINCIPAL DISTRIBUTIONS
On each payment date, the issuer will pay principal in reduction of the
outstanding principal balance of the notes.
Principal payments will be an amount usually equal to the decrease in the
principal value of the receivables between determination dates. The issuer will
pay principal in the following order of priority:
- - to the Class A-1 noteholders only, until the principal amount on the Class A-1
Notes has been reduced to zero;
- - when the Class A-1 Notes have been paid in full:
- to the Class A-2 noteholders, until the principal amount on the Class A-2
Notes has been reduced to zero, an amount generally equal to % of the
decrease in the principal value of the receivables;
- when the Class A-2 Notes have been paid in full, to the Class A-3
noteholders, until the principal amount on the Class A-3 Notes has been
reduced to zero, an amount generally equal to % of the decrease in the
principal value of the receivables; and
- when the Class A-3 Notes have been paid in full, to the Class A-4
noteholders, until the principal amount on the Class A-4 Notes has been
reduced to zero, an amount generally equal to % of the decrease in the
principal value of the receivables.
THIS GENERAL DESCRIPTION OF DISTRIBUTIONS OF PRINCIPAL TO THE NOTES IS SUBJECT
TO CERTAIN TARGETS AND FLOORS. WE REFER YOU TO "DESCRIPTION OF THE
NOTES--PAYMENTS OF INTEREST", "--PAYMENTS OF PRINCIPAL",
"--OVERCOLLATERALIZATION AMOUNT" AND "--PAYMENT PRIORITIES". IN THIS PROSPECTUS
FOR FURTHER INFORMATION REGARDING THE PAYMENT OF INTEREST AND PRINCIPAL ON THE
NOTES.
OVERCOLLATERALIZATION AMOUNT
As of the closing date, the overcollateralization amount will be equal to
$ or [37.50]% of the pool balance as of , 1999. On any date, the
overcollateralization amount will equal the amount by which the pool balance
exceeds the outstanding principal balance of the notes. The
overcollateralization amount will be available to absorb any losses that
noteholders would otherwise incur.
RESERVE ACCOUNT
The owner trustee will hold the reserve account. An initial deposit of
$ will be placed in the reserve account on the closing date. The
servicer will deposit collections received from the receivables into the reserve
account on each payment date after interest and principal payments on the notes
and payment of certain fees and expenses have been made. The servicer will
continue to make such deposits on each payment date until the balance in the
reserve account is the greater of (a) [3%] of the principal balance of the
receivables at the end of last day of the calendar month preceding the current
payment date, (b) $ , and (c) the outstanding principal amount of
the notes. We will use funds in the reserve account to pay shortfalls in amounts
due to the noteholders and to pay any fees due to the servicer (provided the
servicer is not Household Finance Corporation).
OPTIONAL REDEMPTION
On any payment date when the outstanding principal balance of the notes is less
than or equal to $ (10% of the total principal value of the
notes as of 1, 1999), the servicer or the seller may purchase the
receivables from the issuer. This will redeem the notes. If redemption occurs,
we will pay you a final distribution equaling the entire unpaid principal
balance of the notes plus any accrued and unpaid interest.
6
<PAGE>
SCHEDULED MATURITY DATES
If the notes have not already been paid in full, we will pay the outstanding
principal amount of the notes in full on the following payment dates:
<TABLE>
<S> <C>
Class A-1 , 20
Class A-2 , 20
Class A-3 , 20
Class A-4 , 20
</TABLE>
Final payment on the notes will probably be earlier than the scheduled maturity
date set forth above for the related class of notes.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes:
- - Dewey Ballantine LLP, special tax counsel to the issuer and counsel to the
underwriters, is of the opinion that the notes will be treated as debt and the
issuer will not be treated as an association (or publicly traded partnership)
taxable as a corporation. By your acceptance of a note, you agree to treat the
notes as debt.
- - Interest on the notes will be taxable as ordinary income when received by a
holder on the cash method of accounting and when accrued by a holder on the
accrual method of accounting.
- - Dewey Ballantine LLP has prepared the discussion under "Material Federal
Income Tax Consequences" and is of the opinion that such discussion accurately
states all material federal income tax consequences of the purchase, ownership
and disposition of the notes to their original purchaser.
ERISA CONSIDERATIONS
Subject to the important considerations described under "ERISA Considerations"
in this prospectus, pension, profit-sharing and other employee benefit plans may
purchase notes. You should consult with your counsel regarding the applicability
of the provisions of the Employee Retirement Income Security Act of 1974, as
amended, before purchasing a note.
RATINGS
- - The issuer will not issue the notes unless they have been assigned the ratings
set forth below:
<TABLE>
<CAPTION>
RATING
----------------------------------------
CLASS * *
- ------------ ------------------- -------------------
<S> <C> <C>
A-1
A-2
A-3
A-4
</TABLE>
- ------------------------
* Rating Agency to be named in an amendment
- - You should know that the ratings could be lowered, qualified or withdrawn by
the rating agencies.
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO INVEST IN THE NOTES OFFERED BY THIS PROSPECTUS.
<TABLE>
<S> <C>
LIMITED ABILITY TO RESELL YOUR The notes will not be listed on any securities exchange
NOTES and there is currently no public market for the notes.
The underwriters expect, but are not obligated, to make
a market in the notes. If no public market develops, as
a noteholder, you may not be able to sell the notes you
purchased prior to maturity. There is no assurance that
any such market will be created or, if created, will
continue.
Transfers of the notes can only be made through The
Depository Trust Company, Cedel, Euroclear, and direct
and indirect participating organizations. You may not be
able to pledge a note as collateral to an entity or
person that does not participate in those transfer
systems. In addition, some investors may be unwilling to
purchase notes for which there is no physical
certificate.
PREPAYMENTS AND RELATED All of the receivables may be prepaid at any time
REINVESTMENT RISK MAY REDUCE without penalty. If a note is purchased at a discount
YIELD TO NOTEHOLDERS and repayment is slower than anticipated, it will result
in an actual yield that is less than the anticipated
yield. Conversely, if a note is purchased at a premium
and repayment is faster than anticipated, it will result
in a higher yield than anticipated.
Be aware that you bear the risk of reinvesting
unscheduled distributions resulting from prepayments of
the notes.
The rate of repayment of principal on the notes is
unpredictable because the rate of payment on the notes
will depend on, among other things, the rate of payment
on the underlying receivables. In addition to the
normally scheduled payments on the receivables, payments
may come from a number of different sources, including
amounts received from the seller or servicer to purchase
the receivables. Sources of payments will include the
following:
- payments (including prepayments) by borrowers;
- payments as a result of resale of repossessed
vehicles;
- payments as a result of exercise of the seller's or
servicer's options to repurchase the receivables when
the balance of the notes is $ or less;
- payments due to loss, theft, destruction or other
casualty; and
- payments upon repurchases by the seller or servicer
due to a breach of certain representations and
warranties.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
The rate of prepayment and default of receivables may be
influenced by a variety of economic and other factors.
For example, changes in economic conditions, interest
rates and certain natural disasters such as floods,
hurricanes, earthquakes and tornadoes may affect
prepayments.
NON-PRIME RECEIVABLES WILL INCUR A loan is usually considered non-prime because the
HIGHER LOSSES borrower has limited income, past credit problems (e.g.,
prior bankruptcy or a history of delinquent payments on
other debt), or a limited or no credit history.
Non-prime loans experience a higher rate of delinquency
and loss than "prime" loans.
Non-prime automobile installment sales contracts
frequently finance the purchase of used vehicles.
Because the value of a used vehicle is more difficult to
determine, upon sale of a repossessed vehicles, a
greater loss may be incurred.
The added risk presented by non-prime receivables has
been considered in establishing the
overcollateralization and subordination levels
supporting payments on each class of notes. However,
there can be no assurance that the subordination levels
established will be adequate to prevent losses to some
or all of the noteholders.
SECURITY INTERESTS MAY NOT BE In connection with the sale and assignment of the
PERFECTED GIVING OTHERS SUPERIOR receivables to the issuer, security interests in the
RIGHTS TO THE TRUST ASSETS financed vehicles which have been assigned first, by the
subservicer, 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
effectively conveys a security interest without
identifying the successive interest holder on a
vehicle's certificate of title. 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 party
receiving the assignment. 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.
Due to the administrative expense and burden in doing
so, the certificates of title for the financed vehicles
will continue to be held by the subservicer. The
certificates of title will not be endorsed or amended to
identify the seller, issuer, owner trustee or indenture
trustee as a secured party. Because this will not be
done, the security interests of the issuer and the
indenture trustee may be defeated through fraud,
forgery,
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
negligence or error and will not be perfected in every
state. If it is determined that another person or entity
has a security interest in a vehicle that is superior to
the interest of the indenture trustee, depending upon
the circumstances, either the seller or the servicer
will be obligated to purchase the related receivable
from the issuer. If the seller or the servicer is not
capable of purchasing any affected receivable and the
overcollateralization and applicable subordination
provisions are not sufficient to ensure payments are
made to noteholders, payments could be delayed or
noteholders may incur a loss.
STATE AND FEDERAL LAW MAY AFFECT State and federal laws and regulations impose
THE ABILITY OF THE ISSUER TO requirements and restrictions relating to the
RECOUP THE FULL AMOUNT DUE ON origination, enforcement and collection of the
THE RECEIVABLES receivables. Violations of these laws and regulations
may limit recoveries of all or part of the principal and
interest due on the receivables.
The Issuer's ability to recoup the full amount due on a
receivable may be affected by violations of provisions
relating to:
- the failure to file financing statements to perfect
the issuer's or indenture trustee's security interest in
the vehicles;
- disclosure of financing terms to the borrower at the
time of origination;
- discrimination in the lending process;
- collection practices of debt collectors;
- use and reporting of information relating to the
borrower's credit experience; and
- the application of federal and state bankruptcy and
insolvency laws.
If a violation of a law or regulation existed at the
time a receivable was assigned to the issuer and that
violation cannot be corrected, the seller will be
obligated to purchase the affected receivable from the
issuer. If the seller is not capable of purchasing any
affected receivable and the overcollateralization or
applicable subordination provisions are not sufficient
to ensure payments are made to noteholders, noteholders
may be subject to delays in receiving payments and/or
losses.
INSOLVENCY OF THE SELLER OR In some circumstances, a bankruptcy of the seller or
SUBSERVICER MAY REDUCE OR DELAY subservicer may delay or reduce payments to noteholders.
PAYMENTS TO NOTEHOLDERS The subservicer will sell the receivables to the seller,
and the seller will in turn transfer the receivables to
the issuer. However, in the event of a bankruptcy of the
subservicer or
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
the seller, a court or bankruptcy trustee could conclude
the subservicer or seller still owns the receivables or
that the seller and subservicer should be considered one
entity for bankruptcy purposes. If a court or bankruptcy
trustee would reach these conclusions, you could
experience delays in payments or a loss on your
investment in the notes as a result of, among other
things:
- an "automatic stay" which prevents secured creditors
from exercising remedies against a debtor in bankruptcy
without permission from the court and provisions of
the U.S. Bankruptcy Code that permit substitution of
collateral in certain circumstances;
- certain tax or government liens on the seller's or
subservicer's property (that arose prior to the
transfer of a receivable to the trust) having a prior
claim on collections before the collections are used
to make payments on the notes; and
- the issuer not having a perfected security interest
in (a) one or more of the vehicles securing the
receivables or (b) any cash collections held by the
subservicer at the time that the subservicer becomes
the subject of a bankruptcy proceeding.
The seller and the subservicer have taken steps in
structuring the transactions described in this
prospectus to minimize the risk that a court would
consolidate the seller with the subservicer for
bankruptcy purposes and conclude that the sale of the
receivables to the seller was not a sale.
Counsel to the seller and the subservicer has advised
that based upon certain facts, assumptions and
qualifications, a court would not order a consolidation
of the seller and subservicer for bankruptcy purposes or
determine that the sale of the receivables to the seller
was actually a pledge rather than a sale.
NO RECOURSE AGAINST THE SELLER, The notes represent debt of the issuer secured primarily
SERVICER OR SUBSERVICER FOR by the receivables. If the payments on the receivables
PAYMENT ON THE NOTES and the other trust assets pledged to secure the notes
are insufficient to pay the notes in full, you have no
rights to obtain payment from the seller, servicer,
subservicer or any of their affiliates. No note will be
insured or guaranteed by the seller, servicer,
subservicer or any other person or entity. Consequently,
the noteholders must rely solely upon payments on the
receivables, recoveries on repossessed vehicles and
funds on deposit in the reserve account, note account
and collection account for repayment.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
GEOGRAPHIC CONCENTRATION OF Adverse economic conditions or other factors
RECEIVABLES MAY ADVERSELY AFFECT particularly affecting any state or region where a high
THE NOTES concentration of receivables is located could adversely
affect the notes. As of 1, 1999, approximately
% and % of the receivables (based on the principal
balance and mailing address of the borrowers) were
located in California and Texas, respectively. The
issuer is unable to determine and has no basis to
predict, with respect to any state or region, whether
any such events have occurred or may occur, or to what
extent any such events may affect the receivables or the
repayment of amounts due under the notes. The location
of the receivables by state (based upon borrower
address) is set out in the table beginning on page 18 of
this prospectus.
INSURANCE ON VEHICLES MAY NOT BE At the time the subservicer purchases installment sales
MAINTAINED contracts from dealers it requires that the borrower
obtain an insurance policy naming the subservicer as
beneficiary, and covers the risk of physical damage to
the vehicle. There can be no assurance that the borrower
will maintain the appropriate coverage on the vehicle.
It is not expected that the subservicer will obtain
insurance coverage without the consent of the borrower
if it learns that a vehicle is uninsured. If an
uninsured loss occurs and the borrower defaults on
payments on the contract and the overcollateralization
or applicable subordination provisions are not
sufficient to ensure payments are made to noteholders,
noteholders may be subject to a delay in receiving
payments or a loss on their investment in the notes.
LIMITATIONS OF NOTE RATINGS On the closing date at least two nationally recognized
statistical rating organizations will rate the notes.
Ratings address the likelihood that the notes will
receive principal and interest payments in accordance
with the terms of the notes. The ratings depend
primarily on an assessment by the rating agencies of the
credit quality of the receivables and the credit support
provided by the overcollateralization described in this
prospectus. The initial assigned ratings for each class
of Notes are listed on page 7 of this prospectus.
Ratings are not recommendations to purchase, hold or
sell the notes as they do not consider market price or
suitability for particular investors. We cannot assure
you that any rating will continue for any period of time
or that a rating will not be reduced or withdrawn by a
rating agency if, in its judgment, circumstances so
require. A reduction or withdrawal of a rating may have
an adverse effect on the market price or your ability to
resell a note.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
PREPAYMENT OF NOTES AND CHANGE IN Upon the occurrence of an event of default under the
ORDER OF PRIORITY OF PAYMENTS indenture, the indenture trustee may, or if so directed
FOLLOWING AN EVENT OF DEFAULT by noteholders of two-thirds of the outstanding
UNDER THE INDENTURE principal of the notes, will, order the issuer to
immediately repay the notes. If this occurs, the Class A
Notes will first, receive distributions of interest
ratably, without preference or priority, and second,
receive distributions of principal ratably, without
preference or priority.
The following are events of default under the indenture:
- failure to pay principal or interest within five days
of the date a payment was due;
- certain declared breaches of an agreement relating to
the Series 1999-1 notes; and
- certain actions relating to an admission or court
declaration of the issuer's insolvency or bankruptcy.
RISKS ASSOCIATED WITH YEAR 2000 The servicer and subservicer are in the process of
COMPLIANCE addressing issues arising from the year 2000 issue that
could impact the timely payment of principal and
interest on the notes. The year 2000 issue is the result
of prior computer programs being written using two
digits to define the applicable year. Computer programs
that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000.
Any such occurrence could result in major computer
system failure or miscalculations. Although the servicer
and subservicer reasonably believe that their servicing
systems will be year 2000 compliant prior to the year
2000, they are presently engaged in various procedures
to determine if their computer systems and software, and
those of their material suppliers, customers and agents
will be year 2000 compliant.
In the event that the servicer or the subservicer, or
any of their suppliers, customers or agents do not
successfully and timely achieve year 2000 compliance,
the servicer's performance of its obligations under the
sale and servicing agreement could be adversely
affected. This could result in delays in processing
payments on the receivables and could cause a delay in
payments to you.
</TABLE>
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the notes offered by this
prospectus (the "Series 1999-1 Notes" or the "Notes") will be used to fund the
initial deposit in the Reserve Account (as defined herein) and to obtain the
release of a security interest maintained against certain of the Receivables
held in warehouse funding facility prior to the Closing Date.
THE ISSUER
GENERAL
The Issuer, Household Automotive Trust III, will be a Delaware business
trust formed under the laws of the State of Delaware pursuant to a Trust
Agreement, dated as of 1, 1999, between the Seller and the Owner
Trustee (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, which will be the Owner Trustee under the Trust
Agreement, is a Delaware banking corporation and its principal offices are
located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001. The Owner Trustee will perform limited administrative functions
under the Trust Agreement. The Owner Trustee's liability in connection with the
issuance and sale of the Notes is limited solely to the express obligations of
the Owner Trustee set forth in the Trust Agreement and the Master Sale and
Servicing Agreement, to be dated as of 1, 1999, among the Issuer, the
Seller, the Servicer and the Indenture Trustee (the "Sale and Servicing
Agreement").
THE INDENTURE TRUSTEE
The Chase Manhattan Bank will be the Indenture Trustee under an Indenture,
dated as of 1, 1999, among the Issuer, the Servicer and The Chase
Manhattan Bank, as indenture trustee. 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 SELLER
Household Auto Receivables Corporation (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 Household Finance Corporation ("HFC"). The Seller was
organized for the limited purposes of engaging in the type of transactions
described herein and other similar transactions and any activities incidental to
and necessary or convenient for the accomplishment of such purposes. Neither
HFC's nor the Seller's board of directors intends to change the business purpose
of the Seller. The Seller's principal executive office is located at 1111 Town
Center Drive, Las Vegas, Nevada 89134. The Seller is not subject to any legal
proceedings.
14
<PAGE>
The Seller has purchased or will purchase non-prime retail installment sales
contracts secured by new and used automobiles, light trucks and vans (the
"Receivables") from Household Automotive Finance Corporation (the
"Subservicer"). The purchase price for each Receivable will equal to its
principal balance as of the date it is acquired, plus the present value of the
anticipated excess spread discounted to account for uncertainty in future
performance of such Receivable. The Seller will sell each Receivable to the
Issuer at a price equal to its principal balance. The Receivables will be
subserviced by the Subservicer on behalf of HFC as Servicer. The Servicer will
be entitled to the Servicing Fee and any Supplemental Servicing Fees, on behalf
of itself and the Subservicer.
THE SERVICER
Household Finance Corporation 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. ("Household").
HFC and its subsidiaries offer a diversified range of financial services.
The principal product of HFC's consumer financial services business is the
making or purchasing of cash loans and sales finance contracts, including home
equity loans secured by first and second mortgages, automotive retail
installment sales finance contracts and unsecured credit advances (including
revolving and closed-end personal loans) to middle-income consumers in the
United States. Loans are made through branch lending offices and through direct
marketing efforts. Through banking subsidiaries, HFC also offers both
MasterCard* and VISA* credit cards to residents throughout the United States.
Through its subsidiaries, HFC also purchases and services revolving charge
card accounts originated by merchants. The accounts result from consumer
purchases of goods and services from the originating merchant. Closed-end sales
contracts are also directly originated by an HFC subsidiary.
Where applicable laws permit, HFC offers credit life and credit accident,
health and disability insurance to its customers. Such insurance is generally
written directly by, or reinsured with, one of HFC's insurance affiliates.
HFC also operates a cooperative program with H&R Block Tax Services, Inc.
and certain of its franchises and independent tax preparers to provide loans to
borrowers who are entitled to tax refunds and who electronically file their
income tax returns with the IRS.
As of December 31, 1998, HFC had approximately $42.4 billion in total
assets, approximately $36.6 billion in total liabilities and approximately $5.8
billion in shareholder's equity. The Servicer is not subject to legal
proceedings which are expected to have a material impact on its business or
financial condition, taken as a whole.
THE SUBSERVICER
Household Automotive Finance Corporation is a Delaware corporation and the
surviving entity in a merger between a subsidiary of Household and ACC Consumer
Finance Corporation ("ACC"). The merger closed on October 21, 1997 and ACC
changed its name to Household Automotive Finance Corporation shortly thereafter.
ACC was the successor to a California corporation also named ACC
- ------------------------
* Master Card and VISA are registered trademarks of MasterCard International
Incorporated and VISA USA, Inc., respectively.
15
<PAGE>
Consumer Finance Corporation which was formerly named American Credit
Corporation. The principal executive offices of the Subservicer are located at
11452 El Camino Real, Suite 400, San Diego, CA 92130.
The Subservicer is an automobile finance company specializing in the
indirect financing of automotive retail installment sales contracts to consumers
with non-prime credit. Through a subsidiary, the Subservicer 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 the
Subservicer from originating automobile dealers.
The Subservicer is licensed, where required, to purchase and service retail
installment sales contracts. The Subservicer is not subject to any legal
proceedings which are expected to have a material impact on its business or
financial condition.
THE TRUST ASSETS
GENERAL
The "Trust Assets" consist of the following: (a) the Receivables; (b) all
amounts paid or payable under the Receivables after the Cut-Off Date; (c)
security interests in the financed vehicles granted by the borrowers; (d) an
assignment of the Subservicer's rights against automobile dealers ("Dealers")
under agreements between the Subservicer and the Dealers (the "Dealer
Agreements"); (e) an assignment of the right to receive proceeds from claims on
loss, physical damage, credit life, disability, theft, mechanical breakdown, or
similar insurance policies covering the financed vehicles or the borrowers; (f)
all funds on deposit from time to time in accounts maintained by the Indenture
Trustee pursuant to the Sale and Servicing Agreement (the "Collection Account")
and pursuant to the Indenture (the "Reserve Account"); (g) an assignment of all
rights and benefits under a Master Receivables Purchase Agreement, dated as of
December 1, 1998 between the Seller and the Subservicer (the "Receivables
Purchase Agreement") and all supplements thereto; (h) all documents related to
the Receivables, including the original contracts, documents evidencing
insurance, original credit applications and original certificates of title or
copies of applications therefor, (i) a share of the preferred stock of the
Seller (the "Preferred Stock"); and (j) all proceeds of the foregoing.
The Receivables were originated by Dealers in accordance with the
Subservicer's requirements under agreements with Dealers, have been assigned by
the Dealers to the Subservicer, and evidence the indirect financing made
available to the borrowers by the Subservicer. 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 the Subservicer 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 the Subservicer in the ordinary course of the Subservicer's
business pursuant to its finance programs and underwriting standards. The files
relating to the Receivables will be held by the Subservicer as custodian for the
Indenture Trustee.
ELIGIBILITY CRITERIA
The Receivables were selected according to several criteria, including the
following: each Receivable (i) was originated by a Dealer located in the United
States to a borrower who was a resident of the United States with a mailing
address in the United States, (ii) has a contractual annual
16
<PAGE>
percentage rate ("APR") of not less than 10.5% or more than 27%, (iii) provides
for level monthly payments which provide interest at the APR and fully amortize
the amount financed over an original term no greater than 72 months, (iv) is not
more than 30 days past due as of the Cut-Off Date, (v) is attributable to the
purchase of a new or used automobile, light duty truck or van, (vi) as of the
Cut-Off Date has a remaining term of not more than 72 months and (vii) had an
original principal balance of at least $3,000 and not more than $27,000. No
selection procedures adverse to the Noteholders were utilized in selecting the
Receivables to be conveyed to the Issuer.
TERMS OF THE RECEIVABLES
Each Receivable provides for the allocation of payments according to (i) the
simple interest method ("Simple Interest Receivables") or (ii) the "sum of
periodic balances" or "sum of monthly payments" method ("Actuarial
Receivables"). Except as otherwise described, the scheduled payment on each
Receivable is a fixed level monthly payment which will amortize the full amount
of the Receivable over its term assuming, in the case of each Simple Interest
Receivable, that the borrower does not pay any installment before or after its
scheduled due date.
Payments on Simple Interest Receivables will be applied first to interest
accrued through the date immediately preceding the date of payment and then to
unpaid principal. Accordingly, if a borrower pays an installment before its due
date, the portion of the payment allocable to interest for the payment period
will be less than if the payment had been made on the due date, the portion of
the payment applied to reduce the principal balance will be correspondingly
greater, and the principal balance will be amortized more rapidly than
scheduled. Conversely, if a borrower pays an installment after its due date, the
portion of the payment allocable to interest for the payment period will be
greater than if the payment had been made on the due date, the portion of the
payment applied to reduce the principal balance will be correspondingly less,
and the principal balance will be amortized more slowly than scheduled, in which
case a larger portion of the principal balance may be due on the final scheduled
payment date.
An Actuarial Receivable provides for the payment by the borrower of a
specified total amount of payments, payable in monthly installments on the
related due date, which total represents the principal amount financed and
finance charges in an amount calculated on the basis of a stated APR for the
term of such Receivable. Notwithstanding the foregoing, the rate at which such
finance charge accrues and, correspondingly, the amount of each scheduled
payment allocated to reduction of the outstanding principal balance of an
Actuarial Receivable is calculated in accordance with the actuarial method and
all payments (other than partial prepayments) received by the Servicer on or in
respect of the Actuarial Receivables will be allocated pursuant to the Sale and
Servicing Agreement on an actuarial basis. Collections on an Actuarial
Receivable made during a Collection Period will be applied first, to the
scheduled payment on such Actuarial Receivable, and second, to any late fees
accrued with respect to such Actuarial Receivable.
17
<PAGE>
COMPOSITION OF THE RECEIVABLES
Set forth below is a description of the material characteristics of the
Receivables as of the Cut-Off Date:
<TABLE>
<CAPTION>
TOTAL POOL OF RECEIVABLES
---------------------------
<S> <C>
Original Pool Balance................................................................ $
Number of 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 Term(3).................................................... months
Range of Original Terms............................................................ months to months
Weighted Average Remaining Term(3)................................................... months
Range of Remaining Terms........................................................... months to months
Weighted Average Months of Seasoning(3).............................................. months
Range of Months of Seasoning....................................................... 0 months to months
Number of Receivables more than 30 days delinquent................................... None
</TABLE>
- ------------------------
(1) Pool Balance as of the Cut-Off Date divided by total number of Receivables.
(2) Aggregate amount financed divided by total number of Receivables.
(3) Weighted by Principal Balance as of the Cut-Off Date.
18
<PAGE>
COMPOSITION OF RECEIVABLES BY PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PRINCIPAL NUMBER OF % OF PRINCIPAL % OF POOL BY
BALANCE RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- ----------------------------------------------- ----------- ----------- ----------------- -------------------
<S> <C> <C> <C> <C>
$3,000 to 4,000............................... % $ %
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...................................... 100.00% $ 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
19
<PAGE>
COMPOSITION BY APR OF THE RECEIVABLES
(AS OF CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
APR RANGE RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- ------------------------------------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
11.00 to 11.99%.................................. % $ %
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........................................ 100.00% $ 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
COMPOSITION BY INTEREST ACCRUAL METHOD
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
INTEREST ACCRUAL METHOD RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL OUTSTANDING
- ---------------------------------------------- ----------- ----------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Actuarial..................................... % $ %
Simple Interest...............................
----------- ----------- ----------------- ------
Total..................................... 100.00% $ 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
COMPOSITION BY STATE OF RESIDENCE
(AS OF CUT-OFF DATE)
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
LOCATION OF MAILING ADDRESS OF BORROWER RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- ------------------------------------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Alabama.......................................... % $ %
Alaska...........................................
Arizona..........................................
Arkansas.........................................
California.......................................
Colorado.........................................
Connecticut......................................
Delaware.........................................
District of Columbia.............................
Florida..........................................
Georgia..........................................
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
LOCATION OF MAILING ADDRESS OF BORROWER RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL BALANCE
- ------------------------------------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Hawaii...........................................
Idaho............................................
Illinois.........................................
Indiana..........................................
Iowa.............................................
Kansas...........................................
Kentucky.........................................
Louisiana........................................
Maine............................................
Maryland.........................................
Massachusetts....................................
Michigan.........................................
Minnesota........................................
Mississippi......................................
Missouri.........................................
Montana..........................................
Nebraska.........................................
Nevada...........................................
New Hampshire....................................
New Jersey.......................................
New Mexico.......................................
New York.........................................
North Carolina...................................
North Dakota.....................................
Ohio.............................................
Oklahoma.........................................
Oregon...........................................
Pennsylvania.....................................
Rhode Island.....................................
South Carolina...................................
South Dakota.....................................
Tennessee........................................
Texas............................................
Utah.............................................
Vermont..........................................
Virginia.........................................
Washington.......................................
West Virginia....................................
Wisconsin........................................
Wyoming..........................................
----------- ----------- ----------------- ------
Total........................................ % $ 100.00%
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
21
<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...............................................
----------- ----------- ----------------- ------
Total........................................ % $ %
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
COMPOSITION OF RECEIVABLES BY TYPE OF FINANCED VEHICLE
<TABLE>
<CAPTION>
NUMBER OF % OF PRINCIPAL % OF POOL BY
TYPE OF FINANCING RECEIVABLES RECEIVABLES OUTSTANDING PRINCIPAL OUTSTANDING
- ---------------------------------------------- ----------- ----------- ----------------- ---------------------
<S> <C> <C> <C> <C>
New........................................... % $ %
Used..........................................
----------- ----------- ----------------- ------
Total..................................... % $ %
----------- ----------- ----------------- ------
----------- ----------- ----------------- ------
</TABLE>
THE RESERVE ACCOUNT
An initial deposit of $ ([1%] of the Pool Balance as of the Cut-Off
Date) will be placed in an account (the "Reserve Account"). The Reserve Account
will be increased on each Payment Date by the deposit in the Reserve Account of
amounts remaining after payments to Noteholders and any fees then payable
pursuant to the priorities set forth in "Description of the Notes--Payment
Priorities," until the amount on deposit therein equals the Targeted Reserve
Account Balance. Amounts in the Reserve Account on any Payment Date (after
giving effect to all payments to be made to the Servicer and the Noteholders on
such Payment Date) in excess of the Targeted Reserve Account Balance for such
Payment Date will be paid, first to the Servicer for any Servicing Fees and
Supplemental Servicing Fees then due, and any remainder to the Seller.
Funds will be withdrawn from the Reserve Account on each Payment Date to pay
any Servicing Fee then payable to a master servicer other than HFC, and to make
required distributions on the Notes to the extent funds are not otherwise
available, as described herein. See "Description of the Notes-- Payment
Priorities".
THE PREFERRED STOCK
The Trust Assets include one share of preferred stock of the Seller (the
"Preferred Stock"). The Preferred Stock has a par value of $1.00 and is
designated the "Class SV Preferred Stock". Issuance of the Preferred Stock to
the Issuer is intended to prevent the Seller from instituting any of the
Seller's Bankruptcy Initiatives described below and will have no impact on the
bankruptcy remoteness of the Issuer. As discussed in "Risk Factors--Insolvency
of the Seller or Subservicer May Reduce or Delay
22
<PAGE>
Payments to Noteholders", a bankruptcy of the Seller may reduce, delay or
prevent payments to Noteholders. In March 1998, one share of Preferred Stock was
issued to Household Automobile Revolving Trust I. In December 1998, one share of
Preferred Stock was issued to Household Automotive Trust II. Upon formation of
the Issuer, one share of Preferred Stock also will be issued to the Issuer.
Wilmington Trust Company also acts as owner trustee to each of the trusts. As
the Seller sponsors other trusts to issue notes backed by other pools of
automotive retail installment sales contracts, an additional share of Preferred
Stock will be issued to each such trust. Pursuant to the Articles of
Incorporation of the Seller (included as an exhibit to the Registration
Statement of which this prospectus forms a part), the sole rights of the holders
of the Preferred Stock are to (a) vote in the event the Seller desires to:
institute proceedings to be adjudicated insolvent, consent to the institution of
any bankruptcy or insolvency case or petition, make an assignment for the
benefit of creditors, or admit in writing its inability to pay its debts as they
become due (collectively, the "Seller's Bankruptcy Initiatives"), and (b)
receive $1.00 upon liquidation of the Seller. The unanimous affirmative vote of
the holders of the Preferred Stock is required to approve any of the Seller's
Bankruptcy Initiatives. Holders of the Preferred Stock of the Seller have no
other rights, including the right to receive dividends or to vote on any other
matter.
Pursuant to the Issuer's pledge of its interest in the Trust Assets, the
Indenture Trustee has the exclusive authority to vote the interest of the Issuer
in the Preferred Stock. In the Indenture, the Indenture Trustee covenants that
it will not consent to any of the Seller's Bankruptcy Initiatives. The
provisions of Household Automobile Revolving Trust I and the notes issued by
such trust as they relate to the Preferred Stock, the voting rights related
thereto and the covenants with respect to voting of such shares are identical to
the provisions applicable to the Issuer and the Notes. It is expected that each
trust sponsored by the Seller and each series of notes issued by such trusts
will be structured with the same provisions. As a result, regardless of how many
shares of Preferred Stock are outstanding, it is expected that all shares of
Preferred Stock will be voted to prevent the Seller's Bankruptcy Initiatives.
However, because unanimous consent of the holders of the Preferred Stock is
required to approve any of the Seller's Bankruptcy Initiatives, the holders of
the Notes will be able to unilaterally prevent the implementation of the
Seller's Bankruptcy Initiatives.
YIELD AND PREPAYMENT CONSIDERATIONS
All the Receivables are prepayable at any time. If prepayments are received
on the Receivables, the actual weighted average life of the Receivables may be
shorter than the scheduled weighted average life (i.e., the scheduled weighted
average life assumes that payments will be made as scheduled, and that no
prepayments will be made). (For this purpose, the term "prepayments" also
includes liquidations due to default, as well as receipt of proceeds from credit
life, credit disability, and casualty insurance policies.) Weighted average life
means the average amount of time during which each dollar of principal of a
Receivable is outstanding.
The rate of prepayments on the Receivables may be influenced by a variety of
economic, social, and other factors, including the fact that a borrower may not
sell or transfer a financed vehicle without the consent of the Subservicer. The
Subservicer believes that the actual rate of prepayments will result in a
substantially shorter weighted average life than the scheduled weighted average
life of the Receivables. If a Note is purchased at a premium, and the actual
rate of prepayments exceed the rate of prepayments anticipated at the time the
Note was purchased, the actual yield to maturity of the Note will be less than
the yield anticipated at the time of purchase. If a Note is purchased at a
discount, and the rate of prepayments is less than the rate of prepayments
anticipated at the time the Note was purchased, the actual yield to maturity
will be less than the yield anticipated at the time of purchase.
23
<PAGE>
Any reinvestment risks (i.e., that a Noteholder will not be able to reinvest
amounts received in payment on the Notes at interest rates that are greater than
or equal to the applicable Note Rate) resulting from a faster or slower
incidence of prepayment of Receivables will be borne by owners of beneficial
interests in the Notes (the "Note Owners").
The rate of payment of principal of each class of Notes will depend on the
rate of payment (including prepayments) of the Principal Balance of the
Receivables. As a result, final payment of each class of Notes could occur
significantly earlier than the Final Scheduled Payment Date for such class.
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 of any pool of receivables, including the Receivables.
The table captioned "Percent of Initial Note Principal Balance at Various
ABS Percentages" (the "ABS Table") has been prepared on the basis of the
following assumptions: (i) the Receivables prepay in full at the specified
constant percentage of ABS monthly, with no defaults, losses or repurchases;
(ii) each scheduled monthly payment on the Receivables is made on the last day
of each month and each month has 30 days; (iii) the initial principal amount of
each class of Notes are as set forth on the cover page hereof; (iv) interest
accrues during each Interest Period at the following assumed coupon rates: Class
A-1 Notes, %; Class A-2 Notes, %; Class A-3 Notes, %; and Class
A-4 Notes, %; (v) payments on the Notes are made on the 17th day of each
month whether or not a Business Day; (vi) the Notes are purchased on the Closing
Date; (vii) the scheduled monthly payment for each Receivable has been
calculated on the basis of the assumed characteristics set forth in the table
below, such that each Receivable will amortize in amounts sufficient to repay
the Principal Balance of such Receivable by its indicated remaining term to
maturity; and (viii) the Seller or the Servicer exercise the option to purchase
the Receivables.
The ABS Table also assumes that the Receivables have been aggregated into
hypothetical pools with all of the Receivables within each such pool having the
following characteristics and that the level of scheduled monthly payment for
each of the pools (which is based on its aggregate principal balance, gross APR,
original number of scheduled payments and remaining number of scheduled payments
as of the Cut-Off Date) will be such that each pool will be fully amortized by
the end of its remaining term to maturity.
<TABLE>
<CAPTION>
REMAINING
TERM
AGGREGATE TO MATURITY SEASONING
POOL PRINCIPAL BALANCE APR (IN MONTHS) (IN MONTHS)
- ----------- ----------------- --------- ----------------- -------------------
<S> <C> <C> <C> <C>
1 $ %
2
3
4
5
6
</TABLE>
24
<PAGE>
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 Notes.
25
<PAGE>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES CLASS A-2 NOTES
------------------------------ ------------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- -------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100
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
3/17/03
4/17/03
5/17/03
Weighted Average
Life in Years(2)
<CAPTION>
CLASS A-3 NOTES CLASS A-4 NOTES
------------------------------ ------------------------------
PAYMENT DATE 0.5% 1.0% 1.7% 2.5% 0.5% 1.0% 1.7% 2.5%
- -------------------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100
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
3/17/03
4/17/03
5/17/03
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.
26
<PAGE>
THE AUTOMOBILE FINANCING BUSINESS OF THE SUBSERVICER
GENERAL
The Subservicer purchases retail installment sales 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 installment sales contracts are
secured by new or used automobiles, light duty trucks and vans. The
Subservicer'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 sales contracts typically bear a higher annual percentage
rate than charged by a traditional source of financing.
APPLICATION PROCESSING AND PURCHASING CRITERIA
The Subservicer markets it services to Dealers under several different
programs and uses a tiered pricing structure designed to price loans according
to the borrower's credit characteristics. Programs exist for borrowers with
limited credit histories and for borrowers who have been the subject of a
bankruptcy that was discharged within the last five years. In addition, multiple
programs are offered that provide more favorable rates and terms to borrowers
meeting progressively more stringent credit criteria. The criteria examined
include length of employment, length at current residence, income, length of
credit history, credit bureau score, the ratio of required monthly debt payments
to monthly gross income and the ratio of proposed monthly payment on the auto
contract to monthly gross income.
For new vehicles, the Subservicer will finance up to 110% of the Dealer's
invoice price, plus taxes, license fees, insurance, any dealer handling or
documentation charges, and the cost of any service contract. For used vehicles,
the Subservicer will finance up to 115% of the value quoted in industry-accepted
used car guides (such as the Kelly Wholesale Blue Book), plus the same additions
as for new vehicles. In each case, the total amount financed may not exceed 150%
of the invoice or wholesale value as quoted in the used car guide. The maximum
amount financed will not exceed $27,000. Financing is not offered for vehicles
that are more than eight years old or that have been driven more than 90,000
miles.
The amount of the required downpayment varies by program. For qualifying
borrowers with higher credit profiles, no downpayment is required while other
programs require a minimum downpayment of $1,000. The value of a trade-in
vehicle (as determined by reference to industry accepted used car guides) may be
applied to the downpayment; however manufacturer rebates may not be applied
toward the required downpayment.
The Subservicer's application processing is conducted in seven 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 either by
an automated decision model for applications meeting certain criteria, or by the
credit officer after evaluating the application, credit bureau data, and whether
the application meets the criteria under the Subservicer's policy guidelines and
its proprietary credit scoring model. Despite certain deficiencies that may
exist in a borrower's credit history, the credit scoring model is predictive of
future delinquency and credit loss based on statistical modelling of the
Subservicer's historical portfolio. Additional factors considered that may
offset past credit deficiencies include the borrower's residence stability,
employment stability, income
27
<PAGE>
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 the Subservicer, prohibit the sale or transfer of the
financed vehicle without the Subservicer'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 the Subservicer's regional credit
centers and compiling a set of documents the Dealers believe to be consistent
with the Subservicer's documentation requirements, the Dealers send funding
packages to the Subservicer's central funding group in San Diego, California.
The Subservicer generally requires that funding packages include verification of
the borrower's income, an agreement of the borrower to obtain insurance and
evidence that application has been made to transfer title.
The Subservicer'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, the borrower's agreement to
obtain insurance on the vehicle, the terms of the contract, the source of the
down payment and the equipment on the vehicle. The Subservicer requires a
telephone interview of the borrower prior to funding a contract with a borrower
that is deemed by the Subservicer to be a higher credit risk. The Subservicer
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 the Subservicer discovers facts that were not
disclosed during the approval process. As an additional quality control check,
the Subservicer's data processing systems perform an automated review of the
contracts and identify any characteristics not in compliance with the
Subservicer's minimum underwriting standards.
POST-FUNDING QUALITY REVIEWS
The Subservicer 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 the Subservicer'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 the Subservicer's quality
control manager considers overly aggressive.
SERVICING OF CONTRACTS
The Subservicer services all of the contracts it purchases or originates.
The Subservicer's servicing generally consists of payment and pay-off
processing, collecting, insurance tracking, title tracking, responding to
borrower inquiries, investigating delinquencies, repossessing and reselling
28
<PAGE>
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 the
Subservicer in consultation with 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 the Subservicer, including,
but not limited to, extending payment arrangements, deferment pending a change
in circumstances, referral for repossession and/or legal action and contract
restructuring. The Subservicer's current policies require that the aggregate of
all extensions on a contract may not exceed six months over the life of the
contract and no more than two months in any contract in a consecutive twelve
month period.
A Receivable is considered contractually delinquent if less than 90% of the
required payment due from the borrower has been received by the Subservicer.
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 Subservicer's current policies, a contract will generally
be charged-off upon the earlier of: (i) the elapse of 90 days since the financed
vehicle was repossessed, (ii) a good faith determination that all amounts
expected to be recovered have been received, (iii) if the financed vehicle has
not been repossessed, the date on which at least 10% of a scheduled payment
becomes 150 or more days delinquent, or in the case of a borrower who is subject
to bankruptcy proceedings, 210 or more days delinquent or (iv) the date on which
the financed vehicle has been sold and the proceeds received. See
"--Repossession" below for discussion of how the amount to be charged-off upon
repossession of a financed vehicle is determined.
The delinquency and charge-off policies and collection practices discussed
herein may change over time in accordance with the business judgment of the
Subservicer and the Servicer, changes in applicable laws and regulations, and
other considerations.
BILLING AND COLLECTION PROCESS
The Subservicer 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 the Subservicer. 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 the Subservicer for posting to computerized records.
The Subservicer's collection process is based on a strategy of closely
monitoring contracts and maintaining frequent contact with borrowers. As part of
this process, the Subservicer makes early, frequent contact with delinquent
borrowers in an attempt to identify the underlying causes of a borrower's
delinquency and to make an early collection risk assessment. The Subservicer
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, the Subservicer 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, the Subservicer attempts to contact each borrower whose account
becomes past due.
Although the Subservicer emphasizes telephonic contact, the Subservicer also
typically sends past due notices to borrowers when an account becomes ten days
past due. In some cases, the Subservicer
29
<PAGE>
uses the Western Union Quick Collection Service to collect borrowers' payments
and to reduce the incidence of bad checks.
REPOSSESSION
The Subservicer repossesses a vehicle when resolution of a delinquency is
not likely or when it believes that the collateral is at risk. The Subservicer
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. The Subservicer uses independent, licensed and
bonded repossession agencies to repossess vehicles as well as the services of an
agency that traces skips (where neither the borrower nor the vehicle can be
located) to supplement its own efforts in locating vehicles. When a vehicle is
repossessed, it generally is sold through a public auction within 60 days of
repossession. The Subservicer generally uses its own staff to pursue recoveries
of deficiency balances, but it may also use outside collection agencies which
share in any recoveries. If the Subservicer has reason to believe that a Dealer
violated any representations or warranties made to the Subservicer on a
defaulted contract, the Subservicer may pursue its remedies against the Dealer
under the Dealer Agreement.
The Subservicer expects that a charge-off will be incurred whenever a
vehicle is repossessed. Unless a determination is made to charge-off a contract
earlier, upon sale of a repossessed vehicle, the Subservicer records a net loss
equal to the outstanding principal balance of the contract, less the proceeds
from the sale of the vehicle.
If a contract becomes 150 days delinquent (other than accounts in
bankruptcy) and the Subservicer has repossessed the vehicle, but not yet
received the sale proceeds, then the Subservicer reports a loss equal to the
outstanding principal balance of the contract, less the estimated auction value
of the vehicle (which is based upon wholesale used car values published by
nationally recognized firms) and any expected recoveries under any insurance. If
a contract becomes 150 days delinquent (or 210 days delinquent in the case of a
bankrupt borrower) and the Subservicer has not repossessed the vehicle, then the
Subservicer 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
The Subservicer requires that physical damage insurance policies be
maintained by the borrowers naming the Subservicer (or any predecessor to the
Subservicer or any subsidiary thereof), as the loss payee.
The Subservicer maintains fidelity bond coverage insuring against losses
through wrongdoing of its officers, employees and agents.
DELINQUENCY AND LOSS INFORMATION
Set forth below is certain information concerning the Subservicer'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
30
<PAGE>
to eliminate the effect of the significant growth in the size of the
Subservicer's portfolio or changes to its underwriting or charge-off policies
during the periods shown. In response to competitive and market conditions, the
Subservicer's underwriting policies have changed in various respects over the
periods presented. The Subservicer does not believe these changes had a material
impact on the historical delinquency and loss experience presented below. With
respect to changes to the Subservicer's charge-off policies, in the fourth
quarter of 1997 the Subservicer began charging off non-securitized contracts at
the earlier of: (a) the date a contract becomes 150 days delinquent and (b) 90
days after a vehicle has been repossessed if it remains unsold. Prior to that
change (and continuing for all contracts securitized prior to 1998), contracts
were charged off (a) at 120 days delinquent and (b) 60 days after a vehicle was
repossessed if it remained unsold. The impact of these changes did not have a
material impact on the delinquency and loss experience as reported for year-end
1997 and 1998 and for the three months ended March 31, 1999. In footnote 4 to
the table, the amount of the impact on the delinquency ratios for such periods
is reported. It is also not expected that the change in the charge-off policy
will have a material impact on the delinquency or loss rates in the future.
If adjustments were made for the growth of the portfolio, loss and
delinquency as percentages of Receivables serviced for each period would be
higher than those shown. The tables below present all retail installment sales
contract data for contracts purchased by the Subservicer, including contracts
managed in states which are not represented in the pool consisting of the
Receivables. The majority of the Subservicer's portfolio was previously sold in
privately placed asset-backed securities for which servicing is performed by the
Subservicer. Following the merger in which Household acquired ACC (see "The
Subservicer"), the Subservicer assumed management and servicing responsibilities
for a portfolio of automotive retail installment sales contracts purchased or
acquired by another Household subsidiary. None of the contracts held by such
entity are included in the Receivables or the performance results presented in
the following tables.
31
<PAGE>
HISTORICAL DELINQUENCY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1994 1995 1996 1997(4) 1998(4)
---------------------- ---------------------- ---------------------- ---------------------- ----------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT DOLLARS
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal
Outstanding.... 42,837 100% 117,539 100% 251,751 100% 607,802 100% 1,593,434
Delinquencies
(1)(2).........
31-60 Days..... 1,014 2.37% 3,218 2.74% 8,297 3.30% 23,784 3.91% 65,220
61-90 Days..... 247 0.58% 1,171 1.00% 2,847 1.13% 8,498 1.40% 21,607
Over 90 Days... 133 0.31% 607 0.52% 1,515 0.60% 3,939 0.65% 13,155
Subtotal..... 1,394 3.25% 4,996 4.25% 12,659 5.03% 36,221 5.96% 99,982
Repossession on
hand (3)....... 261 0.61% 861 0.73% 2,241 0.89% 6,495 1.07% 17,746
Total
Delinquencies
and
Repossession on
hand........... 1,655 3.86% 5,857 4.98% 14,900 5.92% 42,716 7.03% 117,728
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------------
1999(4)
-----------------------
PERCENT DOLLARS PERCENT
----------- ---------- -----------
<S> <C> <C> <C>
Principal
Outstanding.... 100% 100%
Delinquencies
(1)(2).........
31-60 Days..... 4.09%
61-90 Days..... 1.36%
Over 90 Days... 0.83%
Subtotal..... 6.27%
Repossession on
hand (3)....... 1.11%
Total
Delinquencies
and
Repossession on
hand........... 7.39%
</TABLE>
- ------------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) Delinquencies include bankruptcies. Bankruptcies represent approximately
0.5% of outstanding principal for each period presented.
(3) Amounts shown represent the expected net realizable value for repossessed
vehicles that have not been sold.
(4) In October 1997, the Subservicer implemented changes to its charge-off
policy for owned receivables. The former policy for owned receivables was to
charge-off at 120 days past due. For repossessed vehicles for which the
account was not yet 120 days past due, charge-off occurred at 60 days after
the repossession date. The revised policy for owned receivables is to
charge-off at 150 days past due, or for repossessed vehicles for which the
account is not yet 150 days past due, the charge-off occurs at 90 days after
the repossession date. The impact of this change increased the December 31,
1997, December 31, 1998 and March 31, 1999 delinquency ratios by
approximately .01%, . % and . %, respectively.
32
<PAGE>
HISTORICAL NET LOSS EXPERIENCE
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------- MARCH 31,
1994 1995 1996 1997(3) 1998(3) 1999(3)
--------- --------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Principal outstanding.................. $ 42,837 $ 117,539 $ 251,751 $ 607,802 $ 1,593,434 $
Average principal amount outstanding... $ 19,099 $ 79,304 $ 178,316 $ 411,194 $ 1,051,007 $
Number of contracts outstanding........ 3,951 10,935 23,145 53,856 130,382
Average number of contracts
outstanding.......................... 1,750 7,340 16,515 36,964 88,616
Number of repossessions................ 61 520 1,530 3,686 8,493
Number of repossessions as a percent of
average number of contracts
outstanding (1)...................... 3.48% 7.08% 9.26% 9.97% 9.58% %
Net losses (2)......................... $ 262 $ 3,042 $ 7,918 $ 23,700 $ 53,469 $
Net losses as a percent of average
principal amount outstanding
(1)(2)............................... 1.37% 3.84% 4.44% 5.76% 5.09% %
</TABLE>
- ------------------------
(1) Annualized.
(2) Net Losses are net of recoveries and include principal balance at time of
charge-off. In the case of repossession, net losses include the remaining
balance at the time of repossession less liquidation proceeds (for disposed
vehicles) or the NADA wholesale value (for vehicles repossessed but not
sold). Net losses do not include repossessions that are less than 150 days
delinquent and are not charged off.
(3) In October 1997, the Subservicer implemented changes to its charge-off
policy for owned receivables. The former policy for owned receivables was to
charge-off at 120 days past due. For repossessed vehicles for which the
account was not yet 120 days past due, charge-off occurred at 60 days after
the repossession date. The revised policy for owned receivables is to
charge-off at 150 days past due, or for repossessed vehicles for which the
account is not yet 150 days past due, the charge-off occurs at 90 days after
the repossession date. The impact of this change decreased the December 31,
1997, December 31, 1998 and March 31, 1999 charge-off ratios by
approximately .01%, . % and . %, respectively.
The Seller expects that the delinquency, loss and repossession experience
for the Receivables will be generally consistent with the information provided
in the above tables. However, as the Subservicer's portfolio matures and the
rate of growth slows (which is likely), it can be expected that the delinquency,
loss and repossession percentages for the portfolio will increase, and may
increase significantly. This is because a higher portion of the portfolio will
consist of contracts proceeding through a typical delinquency and loss pattern.
The amount of such increases cannot be estimated. There is no assurance that
delinquency, credit loss and repossession experience with respect to automobile,
light duty truck, and van installment sale contracts in the future, or the
experience of the Issuer with respect to the Receivables, will be similar to
that set forth above. Losses and delinquencies are affected by, among other
things, general and regional economic conditions and the supply of and demand
for automobiles, light duty trucks and vans.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture. The base
indenture and a form of the Series 1999-1 Supplement to such indenture have been
filed as exhibits to the Registration Statement of which this prospectus is a
part. Such base indenture as supplemented by the Series 1999-1 Supplement is
referred to as the "Indenture". The following summary describes certain terms of
the Notes and the Indenture.
The Notes will be issued only in fully registered form, in denominations of
$100,000 and integral multiples of $1,000 in excess thereof. The Notes will be
secured by the Trust Assets pledged by the Issuer to the Indenture Trustee
pursuant to the Indenture. Replacement Notes, if issued, will be transferable
and exchangeable at the corporate trust office of the Indenture Trustee. See "--
Registration of the Notes" below. No service charge will be made for any
registration, exchange or transfer of Notes, but the Indenture Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
PAYMENTS OF INTEREST
Interest on each class of Notes will be payable monthly on the seventeenth
day of each month or, if such day is not a Business Day, on the next succeeding
Business Day (each, a "Payment Date"), commencing on 17, 1999, in an
amount equal to interest accrued during the related Interest Period (as defined
below) at the applicable Note Rate on the outstanding principal balance for the
related class of Notes. The per annum rate of interest accruing on each class of
Notes is referred to as the "Note Rate" for the respective classes of Notes. The
Note Rates for the Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be
%, %, %, and %, respectively.
Interest on the outstanding principal balance of the Notes of each class in
respect of any Payment Date will accrue from (and including) the preceding
Payment Date (or in the case of the first Payment Date, from the Closing Date)
through (and including) the day preceding such Payment Date (each such period,
an "Interest Period"). Interest on the Class A-1 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 and Class A-4 Notes
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months. The amount of interest payable on the Class A-3 and Class A-4 Notes for
any period shorter than a complete Interest Period will be computed on the basis
of actual number of days elapsed in the 30-day month. Interest for any Payment
Date due but not paid on such Payment Date shall bear interest, to the extent
permitted by applicable law, at the related Note Rate until paid. Failure to pay
interest in full on any Payment Date after expiration of the applicable grace
period is an Event of Default under the Indenture.
On each Payment Date, Available Funds remaining after making the
distributions referred to in items (i) and (ii) under "Description of the Notes
- -- Payment Priorities" will be allocated pro rata to the Class A Interest
Distributable Amount of each of the Class A-1, Class A-2, Class A-3 and Class
A-4 Notes.
If the Notes are accelerated following the occurrence of an Event of
Default, interest payments will be allocated to the Notes in the priority
described in "-- Events of Default; Rights Upon Event of Default; Distributions
following Acceleration."
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PAYMENTS OF PRINCIPAL
On each Payment 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.
On each Payment Date on or prior to the Payment Date on which the Class A-1
Notes have been paid in full, the Class A Principal Distributable Amount will be
allocated to payment of the principal balance of the Class A-1 Notes. On each
Payment Date after the Payment Date on which the Class A-1 Notes have been paid
in full, the Class A Principal Distributable Amount will be allocated to payment
of the principal of the Class A-2 Notes until the Class A-2 Notes have been paid
in full. On each Payment Date after the Payment Date on which the Class A-2
Notes have been paid in full, the Class A Principal Distributable Amount will be
allocated to payment of the principal of the Class A-3 Notes until the Class A-3
Notes have been paid in full. On each Payment Date after the Payment Date on
which the Class A-3 Notes have been paid in full, the Class A Principal
Distributable Amount will be allocated to payment of principal of the Class A-4
Notes until the Class A-4 have been paid in full. On a Payment Date on which the
Class A-1, Class A-2, Class A-3 or Class A-4 Notes are paid in full, the Class A
Principal Distributable Amount may also be allocable to payments of the class of
Class A Notes next entitled to distributions in respect of principal.
If the Notes are accelerated following the occurrence of an Event of
Default, principal payments will be allocated to the Notes in the priority
described in "-- Events of Default; Rights Upon Event of Default; Distributions
following Acceleration."
OVERCOLLATERALIZATION AMOUNT
As of any date, the "Overcollateralization Amount" is equal to the
difference between the Pool Balance and the Aggregate Note Principal Balance. As
of Closing Date, the Overcollateralization Amount will be equal to $ or
[37.50]% of the Pool Balance as of the Cut-Off-Date. The Overcollateralization
Amount will be available to absorb losses that would otherwise be allocated to
Noteholders.
PAYMENT PRIORITIES
On or prior to each Payment Date, the Servicer will instruct the Indenture
Trustee to make the following distributions in the following order of priority:
(i) from the Available Funds, to the Servicer, any Supplemental
Servicing Fees for the related Collection Period and if HFC is no longer
acting as master servicer, the Servicing Fee for the related Collection
Period;
(ii) from the Available Funds, to the Indenture Trustee and the Owner
Trustee, any accrued and unpaid trustees' fees (in each case, to the extent
such fees have not been previously paid by the Servicer);
(iii) from the Available Funds, to the holders of the Class A Notes, the
Class A Interest Distributable Amount;
(iv) from the Available Funds, (i) to the holders of the Class A-1
Notes, 100% of the Class A Principal Distributable Amount until the
outstanding principal amount of the Class A-1 Notes has been reduced to
zero; and (ii) on and after the Payment Date on which the outstanding
principal amount of the Class A-1 Notes has been reduced to zero, the Class
A Principal
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Distributable Amount will be allocated to payment to the Class A-2, Class
A-3 and Class A-4 Notes in "sequential pay" fashion, beginning with the
Class A-2 Notes, in each case, until the respective outstanding principal
amount of the Class A-2, Class A-3 and Class A-4 Notes are paid in full;
(v) from the Available Funds, to the Reserve Account, the Reserve
Account Deposit Amount, if necessary, required to increase the amount
therein to its then required level;
(vi) from the Available Funds, if HFC is acting as the master servicer,
the Servicing Fee for the related Collection Period; and
(vii) any remainder to the Seller.
In the event that on any Payment Date after the Payment Date on which the
principal balance of the Class A-1 Notes is reduced to zero, Available Funds,
available to be distributed in accordance with clause (iv) of Payment
Priorities, are less than the Class A Monthly Principal Distributable Amount for
such Payment Date, such Available Funds shall be allocated pro rata to the Class
A Notes.
Amounts on deposit in the Reserve Account on any Payment Date (after giving
effect to all distributions made on such Payment Date and the related Payment
Date) in excess of the Targeted Reserve Account Balance for such Payment Date
may be released first, to the Servicer for any Servicing Fees and Supplemental
Servicing Fees then due, and any remainder to the Seller.
The terms used in this description of Payment Priorities on the Series
1999-1 Notes are defined as follows:
"AGGREGATE NOTE PRINCIPAL BALANCE" means, as of any date, the aggregate
outstanding principal amount of all the Notes on such date.
"AGGREGATE OPTIMAL NOTE PRINCIPAL BALANCE" means, with respect to any
Payment Date, the excess, if any, of (x) the Pool Balance as of the end of the
prior Collection Period over (y) the Targeted Overcollateralization Amount for
such Payment Date.
"AMOUNT FINANCED" means, with respect to a Receivable, the aggregate amount
advanced under such Receivable toward the purchase price of the financed vehicle
and related costs, including amounts advanced in respect of accessories,
insurance premiums, service, car club and warranty contracts, other items
customarily financed as part of retail automobile installment sale contracts or
promissory notes and related costs.
"AVAILABLE FUNDS" means, with respect to any Collection Period, the sum of
(i) the Collected Funds for such Collection Period, (ii) all Purchase Amounts
deposited in the Collection Account during such Collection Period, (iii) income
on investments held in the Collection Account, (iv) the proceeds of any
liquidation of the assets of the Trust, (v) the lesser of (a) the excess of the
aggregate amount determined under items (i)-(viii) of the Payment Priorities set
forth beginning on page 31, over the amount on deposit in the Collection Account
and (b) the Reserve Account Balance.
"CLASS A DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date and
each class of Class A Notes, the sum of (i) the related Class A Interest
Distributable Amount and (ii) the Class A Principal Distributable Amount.
"CLASS A INTEREST CARRYOVER SHORTFALL" means, with respect to any Payment
Date and each class of Class A Notes, the sum of: (i) excess of (a) the related
Class A Interest Distributable Amount for the preceding Payment Date, over (b)
the amount actually paid as interest to the Noteholders on such preceding
Payment Date, PLUS (ii) interest on such excess, to the extent permitted by law,
at a rate per
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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, (i) with respect to
any Payment Date prior to the Payment Date on which the principal balance of the
Class A-1 Notes is reduced to zero, 100% of the Principal Distributable Amount,
(ii) with respect to the Payment Date on which the principal balance of the
Class A-1 Notes is reduced to zero, the sum of (x) 100% of the Principal
Distributable Amount with respect to that portion of the Principal Distributable
Amount required to reduce the principal balance of the Class A-1 Notes to zero,
plus (y) the excess of the amount described in clause (iii) of this definition
for such Payment Date over the sum of the amounts described in clauses (ii)(x)
(taking into account payment of the principal balance of the Class A-1 Notes on
such Payment Date) and (ii)(y) for such Payment Date, (iii) with respect to any
Payment Date after the Payment Date on which the Principal Balance of the Class
A-1 Notes is reduced to zero until the Payment Date on which the Principal
Balance of the Class A Notes is reduced to zero, the excess of (x) aggregate
outstanding principal balance of the Class A Notes over (y)(A) the outstanding
Pool Balance as of the end of the related Collection Period minus (B) the
Targeted Overcollateralization Amount for such Payment Date.
"CLASS A PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any Payment
Date after the Payment Date on which the principal balance of the Class A-1
Notes is reduced to zero, the excess of the Class A Principal Distributable
Amount for the preceding Payment Date over the amount that was actually
distributed in respect of principal of the Class A Notes on such preceding
Payment Date.
"CLASS A PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any Payment
Date, the sum of: (i) the Class A Monthly Principal Distributable Amount for
such Payment Date and (ii) the Class A Principal Carryover Shortfall for such
Payment Date; PROVIDED HOWEVER, that (x) the sum of clauses (i) and (ii) shall
not exceed the outstanding principal amount of the Class A Notes, and (y) on the
Final Scheduled Payment Date, the Class A Principal Distributable Amount will
include the amount, to the extent of the remaining Available Funds, necessary
(after giving effect to other amounts having a higher payment priority on such
Payment Date) to reduce the outstanding principal amount of the Class A Notes to
zero.
"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).
"COLLECTION PERIOD" means, as to any Payment Date other than the first
Payment Date, the calendar month preceding the month in which such Payment Date
occurs, and in the case of the first Payment Date, the period from the Cut-Off
Date through , 1999.
"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
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order over the Principal Balance of such Receivable as so reduced and/or (ii) if
such court shall have issued an order reducing the effective rate of interest on
such Receivable, the excess of the Principal Balance of such Receivable
immediately prior to such order over the net present value (using as the
discount rate the higher of the APR on such Receivable or the rate of interest,
if any, specified by the court in such order) of the scheduled payments as so
modified or restructured. A Cram Down Loss shall be deemed to have occurred on
the date of issuance of such order.
"DETERMINATION DATE" means, with respect to any Payment Date, the earlier of
the fifth calendar day or the third Business Day prior to such Payment Date.
"LIQUIDATED RECEIVABLE" means, a Receivable as to which (i) 90 days have
elapsed since the financed vehicle was repossessed, (ii) the Servicer has
determined in good faith that all amounts it expects to recover have been
received, (iii) ten percent or more of a scheduled payment shall have become 150
or more days delinquent, or in the case of a borrower who is subject to
bankruptcy proceedings, 210 or more days delinquent or (iv) the financed vehicle
has been sold and the proceeds received.
"MAXIMUM RESERVE ACCOUNT DEPOSIT AMOUNT" for any Payment Date is equal to
that portion of Collected Funds representing interest collections on the
Receivables and Net Liquidation Proceeds for the related Collection Period less
the sum of: the Servicing Fee paid to any master servicer other than HFC, the
fees due to the Indenture Trustee, and Owner Trustee, to the extent not paid by
the Servicer, the Class A Interest Distributable Amount, the aggregate Principal
Balances of all Receivables which became Liquidated Receivables during such
Collection Period, plus the aggregate amount of Cram Down Losses during such
Collection Period.
"NET LIQUIDATION PROCEEDS" means, with respect to Liquidated Receivables,
(i) proceeds from the disposition of the underlying financed vehicle securing
the Liquidated Receivables, less the Servicer's reasonable out-of-pocket costs,
including repossession and resale expenses not already deducted from such
proceeds, and any amounts required by law to be remitted to the borrower, (ii)
any insurance proceeds, or (iii) other monies received from the borrower or
otherwise.
"POOL BALANCE" means, as of any date of determination, the aggregate
Principal Balances of the Receivables, unless otherwise specified, as of the
close of business on the preceding Business Day.
"PRINCIPAL AMOUNT AVAILABLE" means, with respect to any Payment Date, the
amount remaining in the Note Account after the payment of the amounts listed in
(i) through (iii) of "Payment Priorities", MINUS the Reserve Account Deposit
Amount for such Payment Date.
"PRINCIPAL BALANCE" means, with respect to any Receivable, as of any date,
the Amount Financed minus (a) that portion of all amounts received on or prior
to such date and allocable to principal in accordance with the terms of the
Receivable, and (b) any Cram Down Loss in respect of such Receivable.
"PRINCIPAL DISTRIBUTABLE AMOUNT" means, with respect to any Payment Date the
lesser of (A) the Principal Amount Available and (B) the 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.
"PURCHASED RECEIVABLE" means, a Receivable that is repurchased by the Seller
or the Servicer as a result of a breach of a representation or warranty with
respect to such Receivable.
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"RESERVE ACCOUNT DEPOSIT AMOUNT" means, with respect to any Payment Date,
the lesser of: (x) the Maximum Reserve Account Deposit Amount for such Payment
Date and (y) the Reserve Account Shortfall Amount for such Payment Date.
"RESERVE ACCOUNT SHORTFALL AMOUNT" means, with respect to any Payment Date,
the excess of: (x) the Targeted Reserve Account Balance for such Payment Date
over (y) the amount on deposit in the Reserve Account as of the beginning of
such Payment Date.
"TARGETED CREDIT ENHANCEMENT AMOUNT" means, with respect to any Payment
Date, [44.50]% of the outstanding Pool Balance as of the end of the related
Collection Period.
"TARGETED OVERCOLLATERALIZATION AMOUNT" means, with respect to any Payment
Date, the excess (but not less than zero), if any, of: (i) the Targeted Credit
Enhancement Amount over (ii) the Targeted Reserve Account Balance.
"TARGETED RESERVE ACCOUNT BALANCE" means, with respect to any Payment Date,
the lesser of: (i) the greater of (a) [3.0]% of the outstanding Pool Balance as
of the end of the related Collection Period, and (b) $ ([2.0]% of the Pool
Balance as of the Cut-Off Date) and (ii) the Aggregate Note Principal Balance.
MATURITY DATES; OPTIONAL REDEMPTION
Each class of Notes will mature on the earlier of the date such class of
Notes is paid in full or the respective scheduled maturity date for such class.
The "Class A-1 Scheduled Maturity Date" is , the "Class A-2 Scheduled
Maturity Date" is , the "Class A-3 Scheduled Maturity Date" is
and the "Class A-4 Scheduled Maturity Date" is . The Payment
Date occurring on is also referred as the "Final Scheduled Payment
Date". In the event there are insufficient funds to retire any class of Notes by
its respective scheduled maturity date in each case, subject to a five day grace
period, an Event of Default will occur. See "--Events of Default; Rights Upon
Event of Default; Distributions following Acceleration" herein. In addition, the
Issuer will pay the Notes in full on the Payment Date following exercise by the
Seller or the Servicer of the option to purchase the Receivables from the
Issuer. This will cause a redemption of the Notes. Such option may be exercised
after the Aggregate Note Principal Balance is reduced to an amount less than or
equal to $ (10% of the original aggregate principal balance of the
Notes). The redemption price will be equal to the sum of the Aggregate Note
Principal Balance and accrued and unpaid interest thereon through the day
preceding the call date.
REPORTS TO NOTEHOLDERS
Concurrently with each distribution to the Noteholders, the Indenture
Trustee will prepare and forward to each Noteholder a statement setting forth
certain information with respect to the related Payment Date, including the
following:
(i) the amount of the distribution allocable to interest on or with
respect to each class of the Notes;
(ii) the amount of the distribution allocable to principal with respect
to each class of the Notes;
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(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 and the Class A 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 (iv) above shall be
expressed as a dollar amount per $1,000 in face amount of Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT; DISTRIBUTIONS FOLLOWING
ACCELERATION
With respect to the Notes, an "Event of Default" under the Indenture will
have occurred at any time when any one of the following events occurs: (i) a
default in the payment of any interest on any Note when the same becomes due and
payable, and such default continues for a period of five days; (ii) a default in
the payment of the principal of or any installment of the principal of any Note
when the same becomes due and payable, and such default continues for a period
of five days; (iii) default in the observance or performance of any covenant or
agreement of the Issuer made in the Indenture, or any representation or warranty
of the Issuer made in the Indenture or in any certificate or other writing
delivered pursuant to the Indenture proving to have been incorrect in any
material respect as of the time when made which has a material adverse effect on
Note Owners, and such default shall continue or not be cured, or the
circumstance or condition in respect of which such representation or warranty
was incorrect is not eliminated or otherwise cured, for a period of 60 days
after notice is given to the Issuer by the Indenture Trustee or to the Issuer
and the Indenture Trustee by the Holders of at least 25% in principal amount of
the Notes then outstanding, specifying such default or incorrect representation
or warranty; (iv) the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Issuer or any substantial part of
the Trust Assets in an involuntary case under any applicable federal or state
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Issuer or for any substantial part of the Trust Assets,
or ordering the winding-up or liquidation of the Issuer's affairs, and such
decree or order shall remain unstayed and in effect for a period of 60
consecutive days; or (v) the commencement by the Issuer of a voluntary case
under any applicable federal or state bankruptcy, insolvency or other similar
law now or hereafter in effect, or the consent by the Issuer to the entry of an
order for relief in an involuntary case under any such law, or the consent by
the Issuer to the appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Issuer or
for any substantial part of the Trust Assets, or the making by the Issuer of any
general assignment for the benefit of creditors, or the failure by the Issuer
generally to pay its debts as such debts become due, or the taking of any action
by the Issuer in furtherance of any of the foregoing. The amount of principal
required to be paid to Noteholders on any Payment Date will be limited to
amounts available to be deposited in the Collection Account. Therefore, the
failure to pay principal on a class of Notes will not result in the occurrence
of an Event of Default until the scheduled maturity date for such class of
Notes.
If there is an Event of Default due to late payment or nonpayment of
interest or principal on a Note, interest will continue to accrue on such
principal and the overdue interest at the applicable interest rate on such Note
until such overdue principal and interest is paid. If an Event of Default
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should occur and be continuing with respect to the Notes, the Indenture Trustee
may, and at the direction of Noteholders representing at least 66 2/3% of the
aggregate outstanding principal amount of the Notes shall, declare the principal
of such Notes to be immediately due and payable. Such declaration may, under
certain circumstances, be rescinded by the holders of a majority in principal
amount of the Notes then outstanding.
If the Notes are due and payable following an Event of Default with respect
thereto, the Indenture Trustee may institute proceedings to collect amounts due
or foreclose on property comprising Trust Assets or exercise remedies as a
secured party. Unless the Indenture Trustee determines that the Receivables will
not provide sufficient funds for the payment of principal and interest on the
Notes as such payments would become due, any sale, liquidation or other
disposition of the Trust Assets for an amount less than the amounts due on the
Notes will not occur without the consent of all of the Noteholders. If the
Indenture Trustee makes such a determination, it may sell, liquidate or
otherwise dispose of the Trust Assets for less than the amount due on the Notes
provided that the consent of Noteholders of not less than 66 2/3% of the
outstanding principal balance of the Notes is obtained.
If the Notes are accelerated following the occurrence of an Event of
Default, after payment of the amounts specified in items (i) and (ii) under
"Description of the Notes--Payment Priorities," all Available Funds, all amounts
on deposit in the Reserve Account and the proceeds of any sale, liquidation or
other disposition of the Trust Assets will be applied as follows: first, to pay
all amounts due and unpaid on the Class A Notes for interest, ratably without
preference or priority; second, to pay all amounts due and unpaid on the Class A
Notes for principal, ratably without preference or priority; and third, to pay
all remaining amounts to the Seller.
If an Event of Default occurs and is continuing with respect to the Notes,
the Indenture Trustee will be under no obligation to exercise any of the rights
or powers under the Indenture at the request or direction of any of the Holders
of the Notes, if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the Holders
of a majority in principal amount of the outstanding Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the Holders of a majority in principal
amount of the Notes then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of all the Holders of the outstanding
Notes. No Holder of a Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
Holders of not less than 25% of the aggregate principal balance of all
outstanding Notes have made written request to the Indenture Trustee to
institute such proceeding in its own name as Indenture Trustee, (iii) such
Holder or Holders have offered the Indenture Trustee reasonable indemnity
against costs, expenses and liabilities to be incurred in complying with the
request, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to the Indenture Trustee during the 60-day period by the Holders of a
majority of the aggregate principal balance of all outstanding Notes. In
addition, the Indenture Trustee and the Note Owners, by accepting a beneficial
interest in the Notes, will covenant that they will not at any time institute
against the Issuer or the Seller, or join in any institution against the Issuer
or the Seller of, any bankruptcy, reorganization or other proceeding under any
federal or state bankruptcy or similar law. With respect to the Issuer, neither
the Indenture Trustee nor the Owner Trustee in its individual capacity, nor any
Holder representing an ownership interest in the Issuer nor
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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 proceeds thereof. The Issuer may not engage in any activity other than as
specified under the Trust Agreement.
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing the
Notes upon the delivery to the Indenture Trustee for cancellation of all the
Notes or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of outstanding principal
balance of each class of Notes affected thereby and upon confirmation that the
ratings of the Notes then in effect would not be reduced or withdrawn by any
Rating Agency, the Issuer and the Indenture Trustee may amend the Indenture to
add provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders. However, without the consent of the Holder of each outstanding Note
affected thereby, no amendment will: (i) change the
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due date of any installment of principal of or interest on any Note or reduce
the principal amount thereof, the interest rate specified thereon or the
redemption price with respect thereto or change any place of payment where or
the coin or currency in which any Note or any interest thereon is payable; (ii)
impair the right to institute suit for the enforcement of certain provisions of
the Indenture regarding payment; (iii) reduce the percentage of the aggregate
principal balance of the outstanding Notes, which is required to approve any
supplemental indenture, waive compliance with certain provisions of the
Indenture or waive certain defaults thereunder and their consequences as
provided for in the Indenture; (iv) modify or alter the provisions of the
Indenture regarding the voting of Notes held by the Issuer, the Seller or an
affiliate of any of them; (v) decrease the percentage of the aggregate
outstanding principal balance of Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate outstanding
principal balance of the Notes necessary to amend the Indenture or certain other
related agreements; (vi) modify any of the provisions of the Indenture in such
manner as to affect the calculation of the amount of any payment of interest or
principal due on any Note (including the calculation of any of the individual
components of such calculation); or (vii) permit the creation of any lien
ranking prior to or, except as otherwise contemplated by the Indenture, on a
parity with the lien of the Indenture with respect to any of the collateral for
the Notes or, except when the full amount required to pay the Notes in full has
been deposited or is held in trust, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Note of the security afforded by
the lien of the Indenture.
The Issuer and the Indenture Trustee may also amend the Indenture without
obtaining the consent of the Noteholders, for the purpose of, among other
things, to cure any ambiguity or to correct or supplement any provision in the
Indenture that may be inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Issuer, the Indenture Trustee nor any director, officer or
employee of the Issuer or the Indenture Trustee will be under any liability to
the Issuer or the related Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Issuer and any director, officer or employee thereof will be protected against
any liability which would otherwise be imposed by reason of willful malfeasance,
bad faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Indenture. Subject to certain
limitations set forth in the Indenture, the Indenture Trustee and any director,
officer, employee or agent of the Indenture Trustee shall be indemnified by the
Servicer and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any loss,
liability or expense incurred by reason of willful malfeasance, bad faith or
negligence in the performance of its duties under such Indenture or by reason of
reckless disregard of its obligations and duties under the Indenture. All
persons into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
LIMITATION ON LIABILITY OF THE INDENTURE TRUSTEE
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Indenture, the Notes or of the Trust Assets or related
documents. If no Event of Default has occurred, the Indenture Trustee is
required to perform only those duties specifically required of it under the
Indenture. Upon receipt of the various certificates, statements, reports or
other instruments required to
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be furnished to it, the Indenture Trustee is required to examine them to
determine whether they are in the form required by the Indenture; however, the
Indenture Trustee will not be responsible for the accuracy or content of any
such documents furnished by it.
The Indenture Trustee may be held liable for its own negligent action or
failure to act, or for its own misconduct; provided, however, the Indenture
Trustee will not be personally liable with respect to any action taken, suffered
or omitted to be taken by it in good faith in accordance with the direction of
the required percentage of the Noteholders in an Event of Default. The Indenture
Trustee is not required to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties under the Indenture,
or in the exercise of any of its rights or powers, if it has reasonable grounds
for believing that repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
RESIGNATION OF INDENTURE TRUSTEE
The Indenture Trustee may, upon written notice to the Seller and the Issuer,
resign at any time, in which event the Servicer will be obligated to use its
best efforts to appoint a successor Indenture Trustee. If no successor Indenture
Trustee has been appointed and has accepted the appointment within 60 days after
giving such notice of resignation, the resigning Indenture Trustee or the Issuer
may petition any court of competent jurisdiction for appointment of a successor
Indenture Trustee. The Indenture Trustee may also be removed at any time by the
Servicer. In addition, the Issuer may, and at the request of a majority of the
Noteholders shall remove the Indenture Trustee (i) if the Indenture Trustee
ceases to be eligible to continue as such under the Indenture, (ii) if the
Indenture Trustee becomes insolvent or (iii) the Indenture Trustee's long-term
debt ratings are lower than "BBB" or its equivalent by either Rating Agency. Any
resignation or removal of the Indenture Trustee and appointment of a successor
Indenture Trustee will not become effective until acceptance of the appointment
by the successor Indenture Trustee.
REGISTRATION OF THE NOTES
Purchasers of Notes ("Note Owners") may hold their Notes through the
Depository Trust Company ("DTC") (in the United States) or Cedel Bank, societe
anonyme ("Cedel") or the Euroclear System ("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 issued in global form and registered in the name
of CEDE & Co., the nominee of DTC. All references in this prospectus to
"Holders" or "Noteholders" shall refer to CEDE & Co., unless the context clearly
requires otherwise. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Cedel and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Depositary" and collectively the "Depositaries").
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through electronic
book-entry changes in accounts of Participants,
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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").
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures. No person
acquiring a beneficial ownership interest in any Note will be entitled to
receive such Note in fully registered certificated form (a "Replacement Note")
except in the limited circumstances described herein.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in Cedel or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedel or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures relating to the Notes, see "Material Federal
Income Tax Consequences" and "Global Clearance, Settlement and Tax Documentation
Procedures" in Appendix A hereto.
Note Owners who are not Participants but desire to purchase, sell or
otherwise transfer ownership of Notes may do so only through Participants or
indirect participants (unless and until Replacement Notes, as defined below, are
issued). In addition, Note Owners will receive all distributions of principal
of, and interest on, the Notes from the Indenture Trustee through DTC and
Participants. Note Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below.
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.
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
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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.
DTC has advised the Issuer 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.
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.
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 38
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
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Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Material Federal Income Tax Consequences". Cedel or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Noteholder under the Indenture on behalf of a Cedel Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf through
DTC.
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.
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and interest payments) to security holders, book-entry
deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to properly perform its services is also dependent
upon other parties, including, but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information and the provision of
services, including telecommunications and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In additional, DTC is in the process of
developing such contingency plans as it deems appropriate.
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According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
Replacement Notes will be issued in registered form to Note Owners, or their
nominees, rather than to DTC, only if (i) DTC or the Issuer 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 the Issuer or the Indenture Trustee is unable to locate a qualified
successor, (ii) the Issuer, at its sole option and with the consent of the
Indenture 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 Noteholders evidencing not less than 51% of the then outstanding
principal balance of each Class, advises the Indenture 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.
DESCRIPTION OF THE TRUST DOCUMENTS
The following summary describes certain terms of the Sale and Servicing
Agreement, the Indenture and the Trust Agreement (collectively, the "Trust
Documents"). Copies of the Trust Documents are filed as exhibits to the
Registration Statement of which this Prospectus is a part. Copies may be
obtained by the Note Owners upon request in writing to the Servicer, at its
address set forth under "The Servicer".
SALE AND ASSIGNMENT OF RECEIVABLES.
The Seller has entered into a Sale and Servicing Agreement with the Issuer,
the Servicer and the Indenture Trustee pursuant to which the Seller, on or prior
to the Closing Date, will have sold and assigned to the Issuer, without
recourse, its entire interest in and to the Receivables, including its security
interest in the financed vehicles securing the Receivables and its right to
receive all payments on, or proceeds with respect to the Receivables to the
extent paid or payable after the Cut-Off Date. Pursuant to the Sale and
Servicing Agreement, the Seller agreed that, upon the occurrence of a breach of
a representation or warranty under the Trust Documents with respect to any of
the Receivables, the Issuer will be entitled to require the Seller to repurchase
such Receivables from the Issuer. Such rights of the Issuer under the Sale and
Servicing Agreement will constitute part of the property of the Issuer and may
be enforced directly by the Owner Trustee. In addition, the Issuer will pledge
such rights to the Indenture Trustee as collateral for the Notes, and such
rights may be enforced directly by the Indenture Trustee.
Each Receivable transferred by the Seller to the Issuer will be identified
in a schedule appearing as an exhibit to the Sale and Servicing Agreement (the
"Schedule of Receivables").
REPRESENTATION AND WARRANTIES; REPURCHASE OBLIGATION
In connection with the sale of the Receivables, the security interests in
the financed vehicles securing the Receivables have been assigned by the
Subservicer to the Seller, by the Seller to the Issuer and by the Issuer to the
Indenture Trustee. The Sale and Servicing Agreement provides that if the Seller
breaches certain representations and warranties relating to the Receivables and
the financed
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vehicles in a manner that materially and adversely affects any Receivable or the
interests of the Noteholders or the interests of the Issuer, the Seller shall,
unless such breach shall have been cured in all material respects, repurchase
such Receivable from the Issuer. The Seller shall be obligated to repurchase
such Receivable if its breach under the Sale and Servicing Agreement is not
cured by the last day of the second calendar month following the discovery by or
notice to the Seller of the breach.
The representations and warranties made by the Seller under the Sale and
Servicing Agreement state that each Receivable: (a) was originated by a properly
licensed Dealer in the ordinary course of business, purchased by the Subservicer
pursuant to a Dealer Agreement, sold to the Seller pursuant to the Receivables
Purchase Agreement, assigned to the Issuer pursuant to the Sale and Servicing
Agreement and assigned by the Issuer to the Indenture Trustee pursuant to the
Indenture, (b) assignment was valid and made pursuant to the respective
agreements upon customary and enforceable terms, (c) is fully amortizing with
level monthly payments, (d) was originated and sold to the Seller without fraud
or material misrepresentation on the part of the Dealer or the borrower, (e) was
originated in material compliance with all applicable laws and regulations
relating to the Receivable and all applicable laws and regulations were complied
with in writing any insurance policies with respect thereto, and such Receivable
and any such insurance policies continue to be in compliance with applicable
laws and regulations, (f) was originated in the United States and complied at
the time of purchase with the Subservicer's then current underwriting and
funding policies, (g) is a valid, legal and binding obligation of the borrower,
enforceable in accordance with its terms subject to certain exceptions related
to bankruptcy, insolvency or the Relief Act, (h) is not due from any
governmental body, (i) had an original maturity of at least 18 months and not
more than 72 months, an original balance between $3,000 and $27,000, an original
APR between 10.5% and 27%, was not more than 30 days past due, as to which no
funds have been advanced by any party to maintain the contract as current and no
provision of which has been waived, altered or modified since origination, (j)
as to which the information on the Schedule of Receivables is true and correct
in all material respects, (k) with respect to which the Subservicer's and the
Servicer's records reflect to successive assignments or pledge from the
Subservicer to the Seller, from the Seller to the Issuer and by the Issuer to
the Indenture Trustee, (l) will be accurately reflected in any list of
Receivables provided by the Subservicer, (m) constitutes chattel paper under the
UCC, (n) is documented by only one original executed contract, (o) with respect
to which the related file contains the executed original contract, evidence of
physical damage insurance coverage, the original lien certificate naming the
Subservicer or any predecessor or affiliate as first lienholder and an original
credit application, (p) has not been satisfied, subordinated or rescinded and
the related financed vehicle has not been released from the lien, (q) was not
originated in, or subject to laws of a jurisdiction, the laws of which make it
unlawful, void or voidable to sell, transfer or assign the Receivable and the
Receivable is not subject to any agreement restricting or conditioning the
assignment thereof, (r) has not been sold, transferred, assigned or pledged
other than as described in this prospectus and no other person holds any right
to receive any proceeds with respect to such Receivable, any related insurance
policy or related Dealer Agreement, (s) which creates a valid, binding and
enforceable first priority security interest in favor of the Subservicer in the
financed vehicle, which security interest is prior to all other liens and
security interests (other than those for taxes, labor or material for a vehicle)
and as to which no such prior liens exist, (t) as to which all filings required
to give the Indenture Trustee a first priority perfected lien on, or ownership
interest in, the Receivable and the proceeds thereof have been made, (u) as to
which, the Subservicer, or any predecessor or affiliate thereof, has not
conveyed any interest thereto to any person that would impair the rights of the
Indenture Trustee thereto, (v) is not assumable, (w) is not subject to recision,
set off, counterclaim or defense and as to which no such right has been asserted
or threatened with respect thereto, (x) as to which no event has occurred
permitting acceleration and no condition
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exists or event has occurred and is continuing that would with notice, lapse of
time or both would constitute a default, breach, violation or event permitting
acceleration, nor any waiver of a default, breach, violation or other event
permitting acceleration, and with respect to which the financed vehicle has not
been repossessed, (y) at the time of origination was covered by comprehensive,
collision, loss and damage insurance naming the Subservicer, its successors and
assigns as loss payee, (z) with respect to which the lien certificate names, or
will name, the Subservicer (or any predecessor or affiliate thereof) as the
original secured party and all required filings and recordings required to name
such entity as the original secured party have been made, (aa) as to which no
selection procedures adverse to the Noteholder were utilized and (bb) as to
which 10% or more of a scheduled payment is not 30 or more days delinquent, no
determination has been made that no further payments are likely to be made with
respect thereto, and the borrower is not subject to a bankruptcy proceeding.
The Sale and Servicing Agreement also provides that if the Servicer breaches
certain of its servicing obligations under the Sale and Servicing Agreement
(including, but not limited to its obligation to ensure that a perfected
security interest is maintained in favor of the Subservicer (or any predecessor
of the Subservicer or any subsidiary thereof) in the related financed vehicles)
or certain other covenants with regard to the Servicer, the Servicer shall,
unless such breach shall have been cured in all material respects, purchase such
Receivable from the Issuer. The obligation to purchase the affected Receivables
arises only if a breach materially and adversely affects any Receivable or the
interests of the Noteholders or the interests of the Issuer. The Servicer shall
be obligated to repurchase such Receivable if a breach under the Sale and
Servicing Agreement is not cured by the last day of the second calendar month
following the discovery by or notice to the Servicer of the breach.
In addition to the warranty that it will maintain the Subservicer's
perfected security interest in the financed vehicles, the Servicer represented
and warranted in the Sale and Servicing Agreement that it (a) will do nothing to
impair the rights of the Issuer or Noteholders in the Receivables, Dealer
Agreements, the Receivables Purchase Agreement, any insurance policies related
to a Receivable or any other Trust Asset, (b) will not create or allow to exist
any lien or restriction on transfer of the Receivables except for the lien in
favor of the Indenture Trustee, or sign or file under the UCC of any
jurisdiction any financing statement or security agreement naming the
Subservicer, the Servicer or any affiliate thereof as debtor or authorizing any
such filing, (c) will not extend or amend any Receivable other than as specified
in the Sale and Servicing Agreement, (d) will service the Receivables in
compliance with the Sale and Servicing Agreement and in material compliance with
its standard and customary procedures for servicing and (e) will notify the
Indenture Trustee of any change in its principal offices and will maintain the
files relating to the Receivables in the United States.
PAYMENTS ON RECEIVABLES; DEPOSITS TO COLLECTION ACCOUNT
The Indenture Trustee will establish and maintain a separate trust account
(the "Collection Account") for the benefit of the Noteholders and the Issuer.
The Collection Account will be an Eligible Account (as defined herein). Except
as otherwise described herein and subject to the investment provision described
in the following paragraphs, within two Business Days following receipt by the
Servicer or the Subservicer of amounts in respect of the Receivables excluding
amounts representing administrative charges, annual fees, taxes, assessments,
credit insurance charges, or similar items, the Servicer will cause such amounts
to be deposited in the Collection Account. 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 and New York are authorized or obligated to be closed.
Amounts deposited in the Collection Account may be invested in Eligible
Investments maturing so that funds will be available for distribution no later
than the close of business on the day prior to the related Payment Date. On the
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fifth calendar day prior to each Payment Date, the Servicer will notify the
Indenture Trustee and the Issuer of the amount of such deposit to be included in
the Available Funds for the related Payment Date. On or prior to each Payment
Date, the Servicer will deposit to the Collection Account amounts which are to
be included in the Available Funds for the related Payment Date. Notwithstanding
the foregoing, for as long as HFC remains the Servicer under the Sale and
Servicing Agreement and maintains a commercial paper rating of at least P-1 from
[Moody's] and A-1 from [Standard & Poor's], which is currently the case, the
Servicer is not required to deposit collections into the Collection Account on
the day indicated in the preceding sentence, but may use for its own benefit all
such collections until the related Payment Date. So long as such ratings are
maintained, the Servicer will make such deposits in an amount equal to the net
amount of such deposits and withdrawals which would have been made had the
ratings conditions described in this paragraph not applied.
"Eligible Investments" shall mean negotiable instruments or securities which
evidence: (a) direct obligations of, or obligations fully guaranteed as to
timely payment by, the United States of America, (b) demand deposits, time
deposits or certificates of deposit of depository institutions or trust
companies incorporated under the laws of the United States of America or any
state thereof and subject to supervision and examination by federal or state
banking or depository institution authorities; provided the short-term debt
rating of such depository institution or trust company shall be in the highest
rating category of the Rating Agencies, (c) commercial paper having, at the time
of the Issuer's investment or a contractual commitment to invest, a rating in
the highest rating category of the Rating Agencies, (d) demand deposits, time
deposits and certificates of deposit which are fully insured by the FDIC having,
at the time of the Issuer's investment therein, a rating in the highest rating
category of the Rating Agencies, (e) bankers' acceptances issued by any
depository institution or trust company described in (b) above, (f) money market
funds having, at the time of the Issuer's investment therein, a rating in the
highest rating category of the Rating Agencies, (g) time deposits, other than as
referred to in (d) above (having maturities not later than the succeeding
Payment Date), with an entity, the commercial paper of such entity having a
credit rating in the highest rating category of the Rating Agencies, (h) demand
notes of HFC for so long as HFC commercial paper has, at the time of the
Issuer's investment thereof, a rating in the highest rating category of the
Rating Agencies and (i) any other investment acceptable to the Rating Agencies.
At any time that the commercial paper issued by HFC does not satisfy the
rating requirements specified above, HFC may continue to hold collections prior
to distribution as described above so long as HFC causes to be maintained an
irrevocable letter of credit or surety bond or other credit enhancement
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.
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The Servicer will have the revocable power to withdraw funds from the
Collection Account and to instruct the Indenture Trustee to make withdrawals and
payments from the Collection Account for the purpose of carrying out its duties
under the Sale and Servicing Agreement and the Indenture.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments called for
under the Receivables and will, consistent with the Sale and Servicing
Agreement, follow such collection procedures as it follows from time to time
with respect to motor vehicle retail installment sales contracts in its
servicing portfolio which are comparable to the Receivables. The Subservicer,
will follow the Servicer's collection procedures as they may be revised from
time to time. Consistent with the above, the Subservicer or the Servicer may in
their discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the
Receivables.
The Subservicer or the Servicer may arrange with a borrower a schedule for
the payment of interest due and unpaid for a period, provided that any such
arrangement is consistent with the Servicer's policies with respect to
comparable retail installment sales contracts held in its portfolio.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As long as HFC is the master servicer it will receive, or be entitled to
retain a servicing fee on behalf of itself and the Subservicer, after making
payments on the Notes and making required deposits in the Reserve Account. Such
fee will be paid monthly in arrears in the amount of 3.00% per annum of the Pool
Balance as of the beginning of the related Collection Period (the "Servicing
Fee"). If HFC is no longer the master servicer, the Servicing Fee will be paid
the successor master servicer prior to any distributions on the Notes and making
required deposits in the Reserve Account. The Servicer is also entitled to
retain all administrative fees, expenses and charges paid on behalf of
borrowers, including late fees, prepayment fees and liquidation fees (the
"Supplemental Servicing Fees").
The Servicer will pay certain ongoing expenses associated with the Issuer
and the Notes, and incurred by it in connection with its responsibilities under
the Sale and Servicing Agreement, including, without limitation, payment of the
fees and disbursements of the Indenture Trustee and the Owner Trustee. In
addition, the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with its servicing duties, such right of
reimbursement being prior to the rights of Noteholders to payments of principal
and interest.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides for delivery on or before April 30
in each year, to the Owner Trustee, the Indenture Trustee and the Rating
Agencies of an annual statement signed by an officer of the Servicer or of the
Subservicer to the effect that the Servicer or the Subservicer has fulfilled the
material obligations of the Servicer under the Sale and Servicing Agreement
throughout the preceding calendar year, except as specified in such statement.
On or before April 30 of each year, the Servicer will furnish a report
prepared by a firm of independent certified public accountants to the Owner
Trustee, the Indenture Trustee and the Rating Agencies to the effect that such
accountants have examined certain documents and the records relating to
servicing of the Receivables (including the Sale and Servicing Agreement) and
compared mathematical calculations for monthly servicing reports selected by
such accountants with the Servicer's computer reports, and such examination, has
disclosed no items of noncompliance with the
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provision of the Sale and Servicing Agreement or variations in the results of
such calculations which, in the opinion of the firm, are material, except for
such items of non-compliance as shall be referred to in the report.
CERTAIN MATTERS REGARDING THE SERVICER AND THE SELLER
The Sale and Servicing Agreement provides that the Servicer may not resign
from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or (ii) upon the satisfaction of the following conditions: (a) the
Servicer has delivered an executed assumption agreement in form satisfactory to
the Indenture Trustee, assigning its obligations and duties to an entity as to
which the Rating Agencies have confirmed that such assumption will not result in
a lowering of the then current ratings of the Notes, and (b) the successor meets
the eligibility requirements specified in the Sale and Servicing Agreement. No
such resignation will become effective until the Indenture Trustee or a
successor servicer has assumed the Servicer's obligations and duties under the
Sale and Servicing Agreement.
The Servicer may perform any of its duties and obligations under the Sale
and Servicing Agreement through one or more subservicers or delegates, which may
be affiliates of the Servicer. Notwithstanding any such arrangement, the
Servicer will remain liable and obligated to the Issuer, the Indenture Trustee,
and the Noteholders for the Servicer's duties and obligations under the Sale and
Servicing Agreement, as if the Servicer itself were performing such duties and
obligations. It is expected that so long as HFC is the master servicer, the
Subservicer 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
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to observe or perform in any material respect certain material covenants and
agreements set forth in the Sale and Servicing Agreement which failure continues
unremedied for 60 days after written notice of such failure is given; (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings with respect to the Servicer or certain
actions by the Servicer indicating its insolvency, inability to pay its
obligations or initiating a reorganization under bankruptcy laws; and (iv) the
material breach of certain of the Servicer's representations or warranties and
the Servicer's failure to cure such breach within 60 days after notice thereof.
Notwithstanding the foregoing, a delay in or failure of performance referred
to under clause (i) above, for five Business Days and (ii) above, for a period
of 60 days, shall not constitute a Servicer Termination Event if such delay or
failure could not be prevented by the exercise of reasonable diligence by the
Servicer and such delay or failure was caused by an act of God or other similar
occurrence. Upon the occurrence of any such event the Servicer shall not be
relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of the Sale and Servicing Agreement and the
Servicer shall provide the Seller prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations.
RIGHTS UPON SERVICER TERMINATION EVENT
If a Servicer Termination Event under the Sale and Servicing Agreement
remains unremedied, the Indenture Trustee may terminate all the rights and
obligations of the Servicer under such Agreement, whereupon the Indenture
Trustee or such other successor servicer as shall have been appointed by the
Indenture Trustee will succeed to all the responsibilities, duties, and
liabilities of the Servicer under such Agreement. Any such successor master
servicer will succeed to all the responsibilities, duties, and liabilities of
the Servicer under the Sale and Servicing Agreement and will be entitled to
similar compensation arrangements. There is no assurance that the succession of
a successor servicer will not result in a material disruption in the performance
of the duties of the master servicer.
AMENDMENT
The Sale and Servicing Agreement may be amended by the Seller, the Servicer,
the Owner Trustee and the Indenture Trustee, but without the consent of the
Noteholders, provided that such action shall not adversely affect in any
material respect the interests of any Noteholder. The Seller, the Servicer and
the Indenture Trustee may also amend the Sale and Servicing Agreement with the
consent of Noteholders holding a majority of the principal amount of the Notes
outstanding to add, change or eliminate any provisions of such Agreement;
provided that such action will not (i) reduce in any manner the amount of, or
delay the timing of, collections on Receivables or payments that are required to
be made for the benefit of the Noteholders without the consent of holders of all
the outstanding Notes; (ii) change the manner of calculating the interest of any
Noteholder without the consent of holders of all the outstanding Notes; (iii)
adversely affect any rating of the Notes by the Rating Agencies without the
consent of not less than a majority of the outstanding principal balance of the
Notes; or (iv) reduce the aforesaid percentage of the Noteholders required to
consent to any such amendment without the consent of the holders of all Notes
outstanding.
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DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENT
The Receivables transferred to the Issuer by the Seller were acquired by the
Seller from the Subservicer pursuant to the Master Receivables Purchase
Agreement, dated as of December 1, 1998 entered into by and between the Seller,
as purchaser of the Receivables, and the Subservicer, as seller of the
Receivables (the "Receivables Purchase Agreement"). The Receivables Purchase
Agreement is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Pursuant to the Sale and Servicing Agreement, the
Receivables were transferred by the Seller to the Issuer, and the Seller
assigned its rights in, to and under the Receivables Purchase Agreement with
respect to such balances to the Issuer. The following summary describes the
material terms of the Receivables Purchase Agreement.
SALE OF RECEIVABLES
Pursuant to the Receivables Purchase Agreement, the Subservicer sold to the
Seller all its right, title and interest in and to all of the Receivables. The
purchase price of the Receivables was not less than the principal amount thereof
as of the time of sale, plus the present value of the anticipated excess spread
discounted to account for uncertainty in future performance of the Receivables.
In connection with such sale of the Receivables to the Seller, the
Subservicer 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, the Subservicer has
provided to the Seller a computer file or a microfiche list containing a true
and complete list showing each Receivable, identified by account number and by
total outstanding balance on the date the Receivable was sold to the Seller. In
its capacity as Subservicer, the Subservicer has retained possession of the
records and agreements relating to the Receivables. Such records and agreements
are not segregated by the Subservicer from other documents and agreements
relating to other receivables and are not stamped or marked to reflect the sale
or transfer of the Receivables to the Seller. However, the computer records of
the Subservicer are or will be marked to evidence such sale or transfer. The
Subservicer 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 May Not Be Perfected Giving Others
Superior Rights to the Trust Assets" and "Certain Legal Aspects of the
Receivables".
REPRESENTATIONS AND WARRANTIES
In the Receivables Purchase Agreement, the Subservicer 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 the Subservicer, (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 the Subservicer in
and to the Receivables, the security interests in the financed vehicles, and in
the proceeds thereof or, if held not to constitute a sale, constitutes a grant
of a security interest in the Receivables, (d) the assignment pursuant to the
Receivables Purchase Agreement constitutes a valid sale to the Seller of all
right, title and interest in and to any related service contracts on financed
vehicles and rights against Dealers pursuant to Dealer Agreements, and (e) the
assignment pursuant to the Receivables Purchase Agreement constitutes a valid
sale to the Seller of all right, title and interest in and to any physical
damage, credit life or disability insurance policies covering financed vehicles
or borrowers. If the breach of any of the representations and warranties
described in this paragraph results in the obligation of the Seller under
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the Sale and Servicing Agreement to accept retransfer of the Receivables, either
the Seller, or at the Seller's election, the Subservicer, will repurchase the
affected Receivables for an amount equal to the unpaid principal balance
thereof, plus accrued and unpaid finance charges from the last date billed
through the end of the current Collection Period.
AMENDMENTS
The Receivables Purchase Agreement may be amended by the Seller and the
Subservicer without the consent of the Noteholders. However, as certified by the
Seller, no such amendment may adversely affect in any material respect the
interests of any Noteholder.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTERESTS IN VEHICLES
In all the states in which the Receivables have been originated, retail
installment sale contracts such as the Receivables evidence the credit sale of
automobiles, light duty trucks and vans by Dealers to borrowers. The Receivables
also constitute personal property security agreements and include grants of
security interests in the financed vehicles under the Uniform Commercial Code
(the "UCC").
Perfection of security interests in the financed vehicles is generally
governed by the motor vehicle registration laws of the state in which the
vehicle is located. In the states in which a majority of the Receivables have
been originated, a security interest in a vehicle generally may be perfected
only by causing such vehicle's certificate of title to be amended to note the
security interest of the secured party. Such notation of a secured party's
security interest is generally effected in such states by depositing with the
applicable state highway department, motor vehicles registrar, or similar
authority along with any necessary registration fees, the vehicle's certificate
of title and an application containing the name and address of the secured
party.
Pursuant to the Receivables Purchase Agreement, the Subservicer 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, the Subservicer, 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, the Subservicer, as agent for the
Servicer, may continue to hold any certificates of title relating to the
financed vehicles in its possession. See "Description of the Trust
Documents--Sale and Assignment of Receivables."
In most states, assignments such as those under the Receivables Purchase
Agreement and the Sale and Servicing Agreement are an effective conveyance of a
security interest without amendment of any lien noted on a vehicle's certificate
of title, and the assignee succeeds thereby to the assignor's rights as secured
party. In the absence of fraud or forgery by the vehicle owner, the Subservicer,
or the Servicer, or administrative error by state or local agencies, the
notation of the Subservicer's (or any predecessor of the Subservicer's or any
subsidiary's) lien on the certificates of title and, if applicable, the
Subservicer's or the Servicer's possession of the certificate of title will be
sufficient to protect the Issuer against the rights of subsequent purchasers of
a financed vehicle or subsequent lenders who take a security interest in a
financed vehicle. If there are any financed vehicles as to which a perfected
security interest is not obtained, the Issuer's security interest will be
subordinate to, among others, subsequent purchasers of the financed vehicles and
holders of perfected security interests. Such a failure, however, would
constitute a breach of the Seller's warranties under the Sale and Servicing
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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, the Subservicer
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, the Subservicer must surrender possession of the certificate of title
or will receive notice as a result of its security interest noted thereon and
accordingly will have an opportunity to require satisfaction of the related
Receivable before release of the security interest. Under the Sale and Servicing
Agreement, the Servicer is obligated to take appropriate steps, at the
Servicer's expense, to maintain perfection of security interests in the financed
vehicles.
Under the laws of most states, liens for repairs performed on, and for
storage of, a motor vehicle and liens for certain unpaid taxes take priority
over even a perfected security interest in a financed vehicle. The Code also
grants priority to certain federal tax liens over the lien of a secured party.
The laws of certain states, and federal law permit the confiscation of motor
vehicles under certain circumstances if used in unlawful activities, which may
result in the loss of a secured party's perfected security interest in the
confiscated motor vehicle. The Seller will represent to the Issuer in the Sale
and Servicing Agreement that each security interest in a financed vehicle is or
will be prior to all other present liens (other than tax liens and liens that
arise by operation of law) upon, and security interests in, such financed
vehicle. However, liens for repairs or taxes, or the confiscation of a financed
vehicle, could arise or occur at any time during the term of a Receivable. No
notice will be given to the Indenture Trustee in the event such a lien arises or
confiscation occurs.
REPOSSESSION
In the event of a default by vehicle purchasers, the holder of the retail
installment sales contract has all the remedies of a secured party under the UCC
of the state in which enforcement is to take place, except where specifically
limited by other laws. In states other than Louisiana and Wisconsin, (i) the UCC
remedies of a secured party include the right to repossession by self-help
means, unless
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such means would constitute a breach of the peace; (ii) unless a vehicle is
voluntarily surrendered, self-help repossession is the method that will be
employed by the Subservicer in the majority of instances in which a default
occurs and is accomplished by retaking possession of the financed vehicle; and
(iii) in cases where the borrower objects or raises a defense to repossession,
or if otherwise required by applicable state law, a court order must be obtained
from the appropriate state court, and the vehicle must then be repossessed in
accordance with that order. In Louisiana and Wisconsin, unless the vehicle is
voluntarily surrendered or abandoned, judicial means must be employed in order
to seize the vehicle. In certain states under certain circumstances after the
vehicle has been repossessed, the borrower may reinstate the contract by paying
the delinquent installments on the contract and other amounts due.
NOTICE OF SALE; REDEMPTION RIGHTS
In the event of default by the borrower, some jurisdictions require that the
borrower be notified of the default and be given a time period within which the
borrower may cure the default prior to repossession. 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 the
Subservicer 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 may impose finance charge ceilings and other restrictions
on consumer transactions and require contract disclosures in addition to those
required under federal law. These requirements may impose specific statutory
liabilities upon creditors who fail to comply with their provisions. In some
cases, this liability could affect an assignee's (such as the Issuer's) ability
to enforce retail installment sales contracts such as the Receivables.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule"), the provisions of which are generally duplicated by the
Uniform Consumer Credit Code, state statutes or the common law in certain
states, has the effect of subjecting a seller (and certain related lenders and
their assignees, such as the Issuer) in a consumer credit transaction and any
assignee of the seller to all claims and defenses which the borrower in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by the borrower under the contract, and
the holder of the contract may also be unable to collect any balance remaining
due thereunder from the borrower. The 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.
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In several cases, borrowers have asserted that the self-help remedies of
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. Courts have generally upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by the
creditor do not involve sufficient state action to afford constitutional
protection to consumers.
The Seller will warrant under the Sale and Servicing Agreement, that each
Receivable complies with all requirements of law in all material respects.
Accordingly, if a borrower has a claim against the Issuer for violation of any
law and such claim materially and adversely affects the Issuer's interest in a
Receivable, such violation would constitute a breach of warranty under the Sale
and Servicing Agreement and would create an obligation of the Seller to
repurchase the Receivable unless the breach is cured. See "Description of the
Trust Documents--Sale and Assignment of the Receivables."
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940. Under the terms of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"),
a borrower who enters military service after the origination of such borrower's
Receivable (including a borrower who was in reserve status and is called to
active duty after origination of the Receivable), may not be charged interest
(including fees and charges) above an annual rate of 6% during the period of
such borrower's active duty status, unless a court orders otherwise upon
application of the lender. The Relief Act applies to borrowers who are members
of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast Guard,
and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military service
(including reservists who are called to active duty) after origination of the
related Receivable, no information can be provided as to the number of
Receivables that may be effected by the Relief Act. Application of the Relief
Act would adversely affect, for an indeterminate period of time, the ability of
the Servicer to collect full amounts of interest on certain of the Receivables.
Any shortfall in interest collections resulting from the application of the
Relief Act or similar legislation or regulations, which would not be recoverable
from the related Receivables, would result in a reduction of the amounts
distributable to the holders of the Notes. In addition, the Relief Act imposes
limitations that would impair the ability of the Servicer to foreclose on an
affected Receivable during the borrower's period of active duty status, and,
under certain circumstances, during an additional three month period thereafter.
Thus, in the event that the Relief Act or similar legislation or regulations
applies to any Receivable which goes into default, there may be delays in
payment and losses on the Notes in connection therewith. Any other interest
shortfalls, deferrals or forgiveness of payments on the Receivables resulting
from similar legislation or regulations may result in delays in payments or
losses to Noteholders.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the United States Bankruptcy Code
and similar applicable state 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.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
considerations to investors of the purchase, ownership and disposition of the
securities offered hereby. The discussion is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below does not purport to deal with all federal tax considerations
applicable to all categories of investors. Certain holders, including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
taxpayers subject to the alternative minimum tax, and holders that will hold the
Securities as other than capital assets, may be subject to special rules that
are not discussed below. It is recommended that investors consult their own tax
advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the securities.
TAX CHARACTERIZATION OF THE ISSUER
Dewey Ballantine LLP ("Tax Counsel") is of the opinion that, assuming the
parties will comply with the terms of the Trust Agreement and related documents,
the Issuer will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes.
If the Issuer were taxable as a corporation for federal income tax purposes,
the Issuer would be subject to corporate income tax on its taxable income. The
Issuer's taxable income would include all its income on the Receivables,
possibly reduced by its interest expense on the Notes. Any such corporate income
tax could materially reduce cash available to make payments on the Notes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS 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, Tax Counsel is of the opinion that, for federal income
tax purposes, the Notes will be treated as indebtedness, 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.
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Although, as described above, it is the opinion of Dewey Ballantine LLP
that, for federal income tax purposes, the Notes will be characterized as debt,
such opinion is not binding on the IRS and thus no assurance can be given that
such a characterization will prevail. If the IRS successfully asserted that one
or more of the 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. See "TAXATION OF CERTAIN FOREIGN INVESTORS" below.
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 a 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 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 offered 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
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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 partial principal payments prior to maturity should
be governed by the methods for accrual of market discount on such an obligation
(described above). A holder that elects to amortize premium must reduce his tax
basis in the related obligation by the amount of the aggregate deductions (or
interest offsets) allowable for amortization of premium. If a debt instrument
purchased at a premium is redeemed in full prior to its maturity, a purchaser
who has elected to amortize premium should be entitled to a deduction for any
remaining unamortized premium in the taxable year of redemption.
SALE OR REDEMPTION OF 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 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 a rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but that does not do so in the proper manner.
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STATE AND LOCAL TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the 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 the Employee Retirement Income Security Act of 1974 ("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 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 Notes, including the
reasonable expectation of purchasers of such Notes that the Notes will be repaid
when due, as well as the absence of conversion rights, warrants and other
typical equity features. The debt treatment of the Notes for ERISA purposes
could change if the Issuer incurred losses. However, without regard to whether
the Notes are treated as an equity interest for such purposes, the acquisition
or holding of 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
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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 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 Notes, or to whom the
Notes are transferred, will be deemed to have represented that the acquisition
and continued holding of the 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 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 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.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated , 1999 (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 Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITERS NOTES NOTES NOTES NOTES
- -------------------------------------------------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
The Underwriters propose to offer the 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 and Class A-4, Notes.
The Underwriters may allow, and such dealers may reallow, concessions not to
exceed % of the respective Security Balance of each class of the Notes to
certain brokers and dealers.
The Seller and HFC have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
In connection with this offering the Underwriters may over-allot or effect
transactions which stabilize or maintain the market prices of the notes at
levels above those which might otherwise prevail in the open market. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters relating to the Notes will be passed upon for the
Seller by John W. Blenke, Vice President-Corporate Law and Assistant Secretary
of Household International, Inc., the parent company of HFC, HAFC and the
Seller, and by Dewey Ballantine LLP, New York, New York, special counsel to the
Seller. Certain legal matters will also be passed upon for the Underwriters by
Dewey Ballantine LLP. As of the date of this Prospectus, Mr. Blenke is a
full-time employee and an officer of Household International, Inc. and
beneficially owns, and holds options to purchase, shares of Common Stock of
Household International, Inc.
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
ACC.............................................................................. 15
Actuarial Receivables............................................................ 17
ABS.............................................................................. 24
ABS Table........................................................................ 24
Aggregate Note Principal Balance................................................. 36
Aggregate Optimal Note Principal Balance......................................... 36
Amount Financed.................................................................. 36
APR.............................................................................. 17
Available Funds.................................................................. 36
Benefit Plan..................................................................... 64
Business Day..................................................................... 50
Cedel............................................................................ 44
Cedel Participants............................................................... 46
Class A Distributable Amount..................................................... 36
Class A Interest Carryover Shortfall............................................. 36
Class A Interest Distributable Amount............................................ 37
Class A Monthly Principal Distributable Amount................................... 37
Class A Principal Carryover Shortfall............................................ 37
Class A Principal Distributable Amount........................................... 37
Class A-1 Notes.................................................................. 1
Class A-1 Scheduled Maturity Date................................................ 39
Class A-2 Notes.................................................................. 1
Class A-2 Scheduled Maturity Date................................................ 39
Class A-3 Notes.................................................................. 1
Class A-3 Scheduled Maturity Date................................................ 39
Class A-4 Notes.................................................................. 1
Class A-4 Scheduled Maturity Date................................................ 39
Closing Date..................................................................... 5
Code............................................................................. 42
Collected Funds.................................................................. 37
Collection Account............................................................... 16, 50
Collection Period................................................................ 37
Cooperative...................................................................... 46
Cram Down Loss................................................................... 37
Cut-Off Date..................................................................... 5
Dealer Agreements................................................................ 16
Dealers.......................................................................... 16
Depositaries..................................................................... 44
Depositary....................................................................... 44
Determination Date............................................................... 5, 38
DTC.............................................................................. 44, A-1
Eligible Account................................................................. 51
Eligible Investments............................................................. 51
ERISA............................................................................ 64
Euroclear........................................................................ 44
Euroclear Operator............................................................... 46
</TABLE>
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<TABLE>
<S> <C>
Euroclear Participants........................................................... 46
Event of Default................................................................. 40
Final Scheduled Payment Date..................................................... 39
FTC Rule......................................................................... 59
Global Securities................................................................ A-1
HFC.............................................................................. 14
Holders.......................................................................... 44
Household........................................................................ 15
Indenture........................................................................ 34
Indenture Trustee................................................................ 4, 14
Indirect Participants............................................................ 45
Industry......................................................................... 47
Interest Period.................................................................. 34
IRA.............................................................................. 64
IRS.............................................................................. 61
Issuer........................................................................... 4, 14
Liquidated Receivable............................................................ 38
Maximum Reserve Account Deposit Amount........................................... 38
[Moody's......................................................................... ]
Net Liquidation Proceeds......................................................... 38
Noteholders...................................................................... 44
Note Owners...................................................................... 24, 44
Note Rate........................................................................ 34
Notes............................................................................ 14
OID.............................................................................. 62
Overcollateralization Amount..................................................... 35
Owner Trustee.................................................................... 4, 14
Participants..................................................................... 44
Payment Date..................................................................... 5, 34
Plan Asset Regulation............................................................ 64
Pool Balance..................................................................... 38
Preferred Stock.................................................................. 16, 22
Principal Amount Available....................................................... 38
Principal Balance................................................................ 38
Principal Distributable Amount................................................... 38
Purchase Amount.................................................................. 38
Purchased Receivable............................................................. 38
PTCE............................................................................. 65
Rating Agencies.................................................................. To come
Receivables...................................................................... 15
Receivables Purchase Agreement................................................... 16, 55
Record Date...................................................................... 5
Relief Act....................................................................... 60
Replacement Note................................................................. 45
Reserve Account.................................................................. 16, 22
Reserve Account Deposit Amount................................................... 39
Reserve Account Shortfall Amount................................................. 39
Rules............................................................................ 45
Sale and Servicing Agreement..................................................... 14
</TABLE>
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<TABLE>
<S> <C>
Schedule of Receivables.......................................................... 48
Seller........................................................................... 4, 14
Seller's Bankruptcy Initiatives.................................................. 23
Series 1999-1 Notes.............................................................. 14
Servicer......................................................................... 4, 15
Servicer Credit Facility......................................................... 57
Servicer Termination Event....................................................... 53
Servicing Fee.................................................................... 52
Simple Interest Receivables...................................................... 17
[Standard & Poor's............................................................... ]
Subservicer...................................................................... 4, 15
Systems.......................................................................... 47
Supplemental Servicing Fees...................................................... 52
Targeted Credit Enhancement Amount............................................... 39
Targeted Overcollateralization Amount............................................ 39
Targeted Reserve Account Balance................................................. 39
Tax Counsel...................................................................... 61
Terms and Conditions............................................................. 47
Trust Agreement.................................................................. 14
Trust Assets..................................................................... 16
Trust Documents.................................................................. 48
UCC.............................................................................. 56
Underwriters..................................................................... 66
Underwriting Agreement........................................................... 66
</TABLE>
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APPENDIX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Series 1999-1 Notes will be
available only in book-entry form (the "Global Securities"). Investors in the
Global Securities may hold such Global Securities through any of The Depository
Trust Company ("DTC"), Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities through
Cedel and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Global Securities 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 U.S. corporate
debt obligations in same-day funds.
A-1
<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 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
A-2
<PAGE>
through a Cedel Participant or Euroclear Participant at least one business day
prior to settlement. In these cases, Cedel or Euroclear will instruct the
respective Depositary, as appropriate, to deliver the Global Securities to the
DTC Participant's account against payment. Payment will include interest accrued
on the Global Securities from and including the last Payment Date to and
excluding the settlement date on the basis of (i) the actual number of days in
such accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of the Cedel Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be backed-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Cedel Participant or Euroclear Participant have a 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.
A-3
<PAGE>
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM 1001). Non-U.S. Persons that are Note Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Note Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Note Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof or (iii) an estate the income of
which is includible in gross income for United States tax purposes, regardless
of its source or (iv) a trust other than a "foreign trust" as defined in Section
7701(a)(31) of the Internal Revenue Code of 1986 as amended. The term "Non-U.S.
Person" means any person who is not a U.S. Person. The prospectus does not deal
with all aspects of U.S. federal income tax withholding that may be relevant to
foreign holders of the Notes. 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>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Household Automotive Trust III
We have audited the accompanying balance sheet of Household Automotive Trust
III as of 1999. These financial statements are the responsibility of
the Issuer's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Household Automotive Trust III as
of , 1999, in conformity with generally accepted accounting
principles.
Chicago, Illinois
, 1999
F-1
<PAGE>
HOUSEHOLD AUTOMOTIVE TRUST III
BALANCE SHEET
, 1999
ASSETS
<TABLE>
<S> <C>
Cash............................................................................ $1,000
----------
Total Assets.................................................................... $1,000
----------
----------
</TABLE>
LIABILITIES AND TRUST PRINCIPAL
<TABLE>
<S> <C>
Intererst in the Issuer......................................................... $1,000
----------
Total liabilities and trust principal........................................... $1,000
----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-2
<PAGE>
HOUSEHOLD AUTOMOTIVE TRUST III
NOTES TO FINANCIAL STATEMENT
1. NATURE OF OPERATIONS:
Household Automotive Trust III (the "Issuer"), was formed in the State of
Delaware on , 1999. The Issuer has been inactive since that date.
The Issuer was organized to engage exclusively in the following business and
financial activities: to acquire motor vehicle retail installment sale contracts
from Household Auto Receivables Corporation; to issue and sell notes
collateralized by its assets; and to engage in any lawful act or activity and to
exercise any power that is incidental and is necessary or convenient to the
foregoing.
2. CAPITAL CONTRIBUTION:
Household Auto Receivables Corporation purchased, for $1,000, a 100%
beneficial ownership interest in the Issuer.
F-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT
WE MAY HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANY PERSON TO PROVIDE YOU
WITH ANY OTHER INFORMATION. THE INFORMATION IN THIS DOCUMENT SPEAKS ONLY AS OF
ITS DATE, AND MAY NOT BE ACCURATE AT ANY TIME AFTER ITS DATE. THIS DOCUMENT IS
NOT AN OFFER TO SELL THE NOTES, AND IT IS NOT SOLICITING AN OFFER TO BUY THE
NOTES IN ANY CASE WHERE THE OFFER OR SALE IS NOT PERMITTED.
--------------
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.................................... 8
Use of Proceeds................................. 14
The Issuer...................................... 14
The Seller...................................... 14
The Servicer.................................... 15
The Subservicer................................. 15
The Trust Assets................................ 16
Yield and Prepayment Considerations............. 23
The Automobile Financing Business of the
Subservicer................................... 27
Description of the Notes........................ 34
Description of the Trust Documents.............. 48
Description of the Receivables Purchase
Agreement..................................... 55
Certain Legal Aspects of the Receivables........ 56
Material Federal Income Tax Consequences........ 61
State and Local Tax Considerations.............. 64
ERISA Considerations............................ 64
Underwriting.................................... 66
Legal Matters................................... 66
Index of Defined Terms.......................... 67
Global Clearance, Settlement and Tax
Documentation Procedures...................... A-1
</TABLE>
UNTIL , 1999 ALL DEALERS THAT EFFECT TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
$
Class A-1 Notes
$
Class A-2 Notes
$
Class A-3 Notes
$
Class A-4 Notes
HOUSEHOLD AUTOMOTIVE
TRUST III
SERIES 1999-1
HOUSEHOLD
FINANCE
CORPORATION
Servicer
PROSPECTUS
J.P. Morgan & Co.
<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.................................................... $ 278*
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,
II-1
<PAGE>
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 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 (incorporated by reference to Exhibit 3.1
to File No. 333-59837).
3.2 -- By-Laws of Seller (incorporated by reference to Exhibit 3.2 to File No.
333-59837).
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 1999-1 Supplement to the Indenture and the Trust Agreement.
4.4+ -- Master Sale and Servicing Agreement among the Seller, the Servicer, the Issuer,
and the Indenture Trustee, including exhibits thereto.
4.5+ -- Master 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.
23.2+ -- Consent of Arthur Andersen LLP.
24 -- Powers of Attorney (included on page II-4 hereto).
25.1+ -- Statement of eligibility and qualification of the Indenture Trustee.
</TABLE>
- ------------------------
+ To be filed by amendment.
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 16th
day of April, 1999.
<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 Registrants 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.
The Registrant reasonably believes that the security ratings to be assigned
to the securities registered hereunder will make the securities "investment
grade securities" pursuant to Transaction Requirement B.2 of Form S-3, prior to
the sale of such securities.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 16th day of April, 1999.
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)
II-4
