<PAGE>
Filed Pursuant to Rule 424(b)(5)
File Nos. 333-38036 and 333-38036-01
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement and the accompanying prospectus +
+is not complete and may be amended. We may not sell these securities until we +
+deliver a final prospectus supplement and accompanying prospectus. This +
+prospectus supplement and the accompanying prospectus are not an offer to +
+sell nor an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated January 16, 2001
Prospectus Supplement to Prospectus dated January , 2001
Household Credit Card Master Note Trust I
Issuer
Household Receivables Funding, Inc. III
Transferor
Series 2001-1 Asset Backed Notes
<TABLE>
<CAPTION>
Class A Notes Class B Notes
------------------------------ ------------------------------
<C> <S> <C>
Principal Amount................. $689,583,000 $60,417,000
Interest Rate.................... One-Month LIBOR One-Month LIBOR
plus . % per year plus . % per year
Interest Payment Dates........... Monthly on the 15th Monthly on the 15th
beginning February 15, 2001 beginning February 15, 2001
Expected Principal Payment Date.. January 2006 Distribution Date January 2006 Distribution Date
Final Maturity Date.............. October 15, 2008 October 15, 2008
Price to Public.................. $ (or %) $ (or %)
Underwriting Discount............ $ (or %) $ (or %)
Proceeds to Issuer............... $ (or %) $ (or %)
</TABLE>
The Class B notes are subordinated to the Class A notes.
The primary assets of the trust are receivables originated under the Union Plus
program in MasterCard and VISA revolving credit card accounts.
We expect to issue your series of notes on or about January , 2001. We will
deliver your series of notes in book-entry form.
You should consider carefully the risk factors
beginning on page 7 in the accompanying prospectus.
A note is not a deposit and neither the notes nor
the underlying accounts or receivables are insured
or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency.
The notes are obligations of Household Credit Card
Master Note Trust I only and are not obligations of
Household Receivables Funding, Inc. III, Household
Finance Corporation, Household Bank (Nevada), N.A.
or any other person.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these notes or determined that this prospectus
supplement is accurate or complete. Any representation to the contrary is a
criminal offense.
Underwriters of the Series 2001-1 Notes
Deutsche Banc Alex. Brown
Banc One Capital Markets, Inc.
Barclays Capital
Merrill Lynch & Co.
January , 2001
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents: (1)
this prospectus supplement, which describes the specific terms of your series
of notes, and (2) the accompanying prospectus, which provides general
information, some of which may not apply to your series of notes.
You should rely only on the information provided in this prospectus
supplement and the accompanying prospectus, including the information
incorporated by reference. We have not authorized anyone to provide you with
different information. We are not offering the notes in any state where the
offer is not permitted.
We include cross references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents in the accompanying prospectus provide the pages on which these
captions are located.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Transaction Summary................. S-3
Prospectus Supplement Summary....... S-4
The Issuer........................ S-4
The Receivables................... S-4
The Series 2001-1 Notes........... S-4
Interest........................ S-4
Principal....................... S-4
Purchase of Series 2001-1 Notes by
the Transferor................... S-5
Credit Enhancement................ S-5
Subordination................... S-5
Overcollateralization........... S-5
Events of Default................. S-6
Amortization Events............... S-6
Other Interests in the Trust...... S-7
Other Series of Notes........... S-7
The Transferor Interest......... S-7
Allocations of Collections........ S-7
Groups............................ S-7
Excess Finance Charge Sharing
Group One...................... S-7
Principal Sharing Group One..... S-8
Application of Collections........ S-8
Finance Charge and
Administrative Collections..... S-8
Principal Collections........... S-9
Optional Redemption............... S-9
Denominations..................... S-9
Registration, Clearance and
Settlement....................... S-9
Material Federal Income Tax
Consequences..................... S-10
ERISA Considerations.............. S-10
Risk Factors...................... S-10
Exchange Listing.................. S-10
Glossary............................ S-11
The Originator, The Servicer, The
Subservicer and The Transferor..... S-11
Household Bank (Nevada), N.A...... S-11
Household Finance Corporation..... S-11
Household Credit Services, Inc.... S-11
Household Receivables Funding,
Inc. III......................... S-12
The Bank's Credit Card Portfolio.... S-12
Billing and Payments.............. S-12
Collection of Delinquent
Accounts......................... S-14
Revenue Experience................ S-16
Interchange....................... S-17
Recoveries........................ S-18
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Payment Rates.................... S-18
The Trust Portfolio................ S-18
Description of Series Provisions... S-21
General.......................... S-21
Interest Payments................ S-22
Principal Payments............... S-22
Revolving Period............... S-22
Controlled Accumulation
Period........................ S-23
Postponement of Controlled
Accumulation Period........... S-23
Early Amortization Period...... S-24
Principal Funding Account...... S-24
Reserve Account................ S-25
Principal Sharing Group One.... S-26
Paired Series.................. S-26
Subordination.................... S-26
Overcollateralization............ S-27
Events of Default................ S-27
Amortization Events.............. S-27
Allocation Percentages........... S-29
Application of Collections....... S-29
Payment of Interest, Fees and
Other Items................... S-29
Payments of Principal.......... S-30
Purchase of Series 2001-1 Notes
by the Transferor............... S-31
Excess Finance Charge Sharing
Group One....................... S-31
Subordinated Principal
Collections; Defaulted Amount;
Investor Charge-Offs............ S-31
Servicing Compensation and
Payment of Expenses............. S-31
Reports To Noteholders........... S-32
ERISA Considerations............... S-32
Underwriting....................... S-33
Legal Matters...................... S-35
Glossary........................... S-36
Annex I: Other Series Issued And
Outstanding....................... S-46
</TABLE>
i
<PAGE>
TRANSACTION SUMMARY
<TABLE>
<S> <C>
Trust: Household Credit Card Master Note Trust I
Transferor: Household Receivables Funding, Inc. III
Originator: Household Bank (Nevada), N.A.
Servicer: Household Finance Corporation
Indenture Trustee: Wells Fargo Bank Minnesota, National Association
Owner Trustee: Wilmington Trust Company
Closing Date: January , 2001
Clearance and
Settlement: DTC/Clearstream/Euroclear
Primary Trust Assets: Receivables originated under the Union Plus(R) program
in MasterCard(R) and VISA(R) accounts
Annual Servicing Fee
Rate: 2.0%
Principal Sharing Group: Group One
Excess Finance Charge
Sharing Group: Group One
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
------- -------
<S> <C> <C>
Initial Principal Amount $689,583,000 $60,417,000
Anticipated Ratings: Aaa/AAA/AAA Aa3/A/A+
Moody's/Standard &
Poor's/Fitch
Credit Enhancement: Subordination of Class B Notes The O/C Amount
and the O/C Amount
Interest Rate: One-Month LIBOR One-Month LIBOR
plus % per annum plus % per annum
Interest Accrual Method: Actual/360 Actual/360
Interest Payment Dates: Monthly (15th day of each month, Monthly (15th day of each month,
unless the 15th is not a business unless the 15th is not a business
day in which case it will be the day in which case it will be the
next business day) next business day)
Interest Rate Index Two London business days before Two London business days before
Reset Date: each interest payment date each interest payment date
First Interest Payment February 15, 2001 February 15, 2001
Date:
Expected Principal January 2006 distribution date January 2006 distribution date
Payment Date:
Commencement of
Controlled Accumulation
Period (subject to
adjustment): November 1, 2004 November 1, 2004
Final Maturity Date: October 15, 2008 October 15, 2008
</TABLE>
S-3
<PAGE>
Prospectus Supplement Summary
This summary highlights information about the notes and does not contain all
of the information that you need to consider in making your investment
decision. You should carefully read this entire document and the accompanying
prospectus before you purchase any notes.
The Issuer
The notes will be issued by Household Credit Card Master Note Trust I, a
Delaware common law trust, under an indenture supplement to an indenture, each
between the trust and the indenture trustee.
The indenture trustee is Wells Fargo Bank Minnesota, National Association.
The Receivables
The primary assets of the trust in pool one are receivables originated by
the bank under the Union Plus program in MasterCard and VISA revolving credit
card accounts. The Union Plus program is an affinity arrangement between the
bank and Union Privilege, a marketing company, under which the bank offers a
credit card program to members of unions affiliated with the American
Federation of Labor and Congress of Industrial Organizations. The receivables
consist of principal receivables and finance charge and administrative
receivables.
The following information is as of December 1, 2000:
. Receivables in the trust: $3,215,817,577
. Accounts designated to the trust: 2,219,234
For more information, see "The Trust Portfolio" in this prospectus
supplement.
The Series 2001-1 Notes
Interest
The Class A notes will bear interest at one-month LIBOR as determined each
month plus % per annum.
The Class B notes will bear interest at one-month LIBOR as determined each
month plus % per annum.
For each class of the Series 2001-1 notes, interest will be calculated as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Principal Number of
balance days in Interest
at end of interest rate
prior due X period X
period 360
</TABLE>
Each interest period begins on and includes a distribution date and ends on
but excludes the next distribution date. However, the first interest period
will begin on and include the closing date.
Interest on the Series 2001-1 notes will be paid on each distribution date.
Distribution dates will be February 15, 2001, and the 15th day of each
following month if the 15th is a business day and, if not, the following
business day.
You may obtain the interest rates for the current interest period and the
immediately preceding interest period by telephoning the indenture trustee at
(800) 344-5128.
See "Description of Series Provisions--Interest Payments" in this prospectus
supplement for a description of how and when LIBOR will be determined.
Principal
Principal of the Class A notes and the Class B notes is expected to be paid
in full on the January 2006 distribution date. However no principal will be
paid on the Class B notes until the Class A notes are paid in full.
Principal collections will be applied to reduce the O/C amount during the
controlled accumulation period if all required deposits have been made to the
principal funding account for the Class A notes and the Class B notes and the
O/C amount is greater than the required O/C amount. Prior to the early
amortization period, the required O/C amount
S-4
<PAGE>
decreases as deposits are made to the principal funding account.
We are scheduled to begin accumulating collections of principal receivables
starting on November 1, 2004 for payment to the Series 2001-1 noteholders on
the expected principal payment date, but we may begin accumulating at a later
date.
Principal of the Series 2001-1 notes may be paid earlier or later than the
expected principal payment date. You will not be entitled to any premium for
early or late payment of principal. If specified adverse events known as
amortization events occur, principal may be paid earlier than expected. If
collections of the credit card receivables are less than expected or are
collected more slowly than expected, then principal payments may be delayed. If
the Series 2001-1 notes are not paid in full on the expected principal payment
date, collections of principal receivables will continue to be used to pay
principal on the Series 2001-1 notes until the notes are paid in full or until
October 15, 2008, whichever occurs first. October 15, 2008 is the final
maturity date for Series 2001-1.
For more information about principal payments, see "Description of Series
Provisions--Principal Payments" and "--Allocation Percentages" in this
prospectus supplement.
Purchase of Series 2001-1 Notes by the Transferor
If the transferor purchases Series 2001-1 notes from Series 2001-1
noteholders, the transferor may, on any distribution date (after giving effect
to all required allocations and payments on that distribution date), cancel the
purchased notes by delivering a written request to do so to the indenture
trustee; provided, however, that the transferor may only cancel Class A notes
and Class B notes to the extent that the cancellation would not result in a
credit enhancement deficiency and if the rating agency condition is satisfied.
As a result of any cancellation of Series 2001-1 notes, the invested amount
shall be reduced by the aggregate principal amount of the purchased Series
2001-1 notes and the reduction in the O/C amount and the transferor's interest
shall be increased in an amount equal to the reduction in the invested amount.
Credit Enhancement
Subordination
Credit enhancement for the Class A notes is provided by the subordination of
the Class B notes and the O/C amount.
Credit enhancement for the Class B notes is provided by the O/C amount. The
O/C amount represents a subordinated interest in the receivables allocated to
this series. The transferor will hold the ownership interest in the O/C amount
and will receive any distributions in reduction of the O/C amount.
Overcollateralization
The required O/C amount will initially be $83,333,334 and thereafter, an
amount equal to 10% of the adjusted invested amount after taking into account
deposits to be made to the principal funding account on that distribution date,
but not less than 3% of the initial invested amount; provided that:
. if an amortization event has occurred, the required O/C amount for any
distribution date shall equal the amount of that requirement immediately
preceding that amortization event,
. in no event shall the required O/C amount exceed the Class A note
principal balance and the Class B note principal balance on any date,
. the required O/C amount may be reduced at any time if the rating agency
condition is satisfied and an officer's certificate of the transferor has
been delivered to the effect that in the reasonable belief of the
transferor, the reduction will not result in an adverse effect, and
. the transferor, in its sole discretion may increase the required O/C
amount at any time.
Credit enhancement for your series is for your series' benefit only, and you
are not entitled to the benefits of credit enhancement available to other
series.
S-5
<PAGE>
For more information about credit enhancement, see "Description of Series
Provisions--Application of Collections" and "--Subordinated Principal
Collections; Defaulted Amount; Investor Charge-Offs" in this prospectus
supplement.
Events Of Default
The Series 2001-1 notes are subject to specified events of default described
under "Description of Series Provisions--Events of Default" in this prospectus
supplement and "Description of the Indenture--Events of Default; Rights Upon
Event of Default" in the accompanying prospectus. These include, among other
things, the failure to pay interest for 35 days after it is due or the failure
to pay principal on the final maturity date.
If any event of default occurs and continues with respect to the Series
2001-1 notes, the indenture trustee or holders of more than 50% of the
outstanding principal amount of the Series 2001-1 notes may declare the Series
2001-1 notes to be immediately due and payable. That declaration may, under
limited circumstances, be rescinded by holders of more than 50% of the
outstanding principal amount of the Series 2001-1 notes. See "Description of
the Indenture--Events of Default; Rights Upon Event of Default" in the
accompanying prospectus.
After an event of default and the acceleration of the Series 2001-1 notes,
funds on deposit in the collection account, the principal funding account and
the reserve account will be applied to pay principal of and interest on the
Series 2001-1 notes to the extent permitted by law. Principal collections and
finance charge and administrative collections allocated to Series 2001-1 will
be applied to make monthly principal and interest payments on the Series 2001-1
notes until the earlier of the date those notes are paid in full or the final
maturity date of those notes.
If the Series 2001-1 notes are accelerated or the issuer fails to pay the
principal of the Series 2001-1 notes on the final maturity date, once the
conditions described in the prospectus under "Description of the Indenture--
Events of Default; Rights Upon Event of Default" are satisfied, the indenture
trustee may or, in limited cases, will at the direction of the holders of a
specified percentage of the outstanding principal amount of each class of
Series 2001-1 notes:
. institute proceedings in its own name for the collection of all amounts
then payable on the Series 2001-1 notes;
. take any other appropriate action to protect and enforce the rights and
remedies of the indenture trustee and the Series 2001-1 noteholders; or
. foreclose on a portion of the trust's assets by causing the trust to sell
a portion of the assets of the trust to permitted purchasers under the
indenture.
Amortization Events
The documents under which the Series 2001-1 notes will be issued include a
list of adverse events known as amortization events. If an amortization event
that applies to Series 2001-1 or to all series occurs, the trust will use
collections of principal receivables and other specified amounts allocated to
Series 2001-1 each month to pay principal on the Series 2001-1 notes.
Amortization events may occur if the transferor fails to make required
payments or deposits, violates other covenants and agreements or makes
representations and warranties that are materially incorrect.
The following also are amortization events:
. The average series portfolio yield for any three consecutive months is
less than the average base rate in the same three consecutive months;
. The Class A notes or the Class B notes are not paid in full on their
expected principal payment dates;
. Bankruptcy, insolvency or similar events relating to the transferor,
including any additional transferor, or the bank or other account owner,
unless, with respect to the bank or other account owner, the rating
agency condition is satisfied for the removal of the bank or other
account owner from this amortization event;
S-6
<PAGE>
. The transferor, including any additional transferor, is unable to
transfer receivables to the trust as required under the transfer and
servicing agreement;
. The transferor does not transfer receivables in additional accounts to
the trust within five business days of when required under the transfer
and servicing agreement;
. The occurrence of a servicer default that has an adverse effect on the
Series 2001-1 noteholders;
. The trust becomes subject to regulation as an "investment company" under
the Investment Company Act of 1940; or
. An event of default occurs for the Series 2001-1 notes and the notes are
accelerated.
For a more detailed discussion of the amortization events, see "Description
of Series Provisions--Amortization Events" in this prospectus supplement and
"Description of the Notes-- Amortization Events" in the accompanying
prospectus.
Other Interests in the Trust
Other Series of Notes
The trust will issue other series of notes secured by the assets of the
trust from time to time in the future. A summary of the outstanding series is
in "Annex I: Other Series Issued and Outstanding" included at the end of this
prospectus supplement. The issuance of future series will occur without prior
review or consent by you or any other noteholder.
The Transferor Interest
The interest in the trust not securing your series or any other series is
the transferor interest. The transferor interest is owned by the transferor.
The transferor may, however, sell all or a portion of its interest in the
transferor interest. The transferor interest does not provide credit
enhancement for your series.
Allocations of Collections
Household Finance Corporation, as servicer, will collect payments on the
receivables and will deposit those collections in an account. It will keep
track of those collections that are finance charge and administrative
receivables, those collections that are principal receivables and those
receivables that are written off as uncollectible, called the defaulted amount.
Each month, the servicer will allocate collections received among:
. your series;
. other series outstanding; and
. the transferor interest in the trust.
The amount allocated to your series will be determined based mainly upon the
size of the invested amount of your series compared to the total amount of
principal receivables in the trust. At the time of issuance of the Series 2001-
1 notes, the initial invested amount for Series 2001-1 will be $833,333,334,
consisting of the initial note principal balance and the initial O/C amount.
You are entitled to receive payments of interest and principal only from
collections of receivables and other trust assets allocated to your series. If
the invested amount of your series declines, amounts allocated and available
for payment to your series and to you may be reduced. For a description of the
allocation calculations and the events which may lead to these reductions, see
"Description of Series Provisions--Allocation Percentages" and "--Subordinated
Principal Collections; Defaulted Amount; Investor Charge-Offs" in this
prospectus supplement.
Groups
This series will not share in principal collections allocated to the
transferor and will not be part of a shared enhancement group or a reallocation
group.
Excess Finance Charge Sharing Group One
This series will be included in a group of series designated as excess
finance charge sharing group one. To the extent that available investor finance
S-7
<PAGE>
charge and administrative collections exceed the amount necessary to make
required payments for this series, those excess collections may be applied to
cover shortfalls of collections of finance charge and administrative
receivables allocable to other series in excess finance charge sharing group
one. In addition, you may receive the benefits of excess collections of finance
charge and administrative receivables in excess finance charge sharing group
one. However, this is the second series issued in excess finance charge sharing
group one and there can be no assurance that the trust will issue additional
series in excess finance charge sharing group one. See "Description of the
Notes--Groups--Excess Finance Charge Sharing Group" in the accompanying
prospectus.
Principal Sharing Group One
This series will be included in a group of series designated as principal
sharing group one. To the extent that collections of principal receivables
allocated to your series are not needed to make payments or deposits to a trust
account for the benefit of your series, these collections will be applied to
cover principal payments for other series, if any, in principal sharing group
one. Any reallocation for this purpose will not reduce the invested amount for
your series. In addition, you may receive the benefits of collections of
principal receivables and other amounts allocated to other series in principal
sharing group one. This is the fifth series issued in principal sharing group
one. There can be no assurance that the trust will issue additional series in
principal sharing group one.
See "Description of the Notes--Groups--Principal Sharing Group" in the
accompanying prospectus.
Application of Collections
Finance Charge and Administrative Collections
The trust will apply available investor finance charge and administrative
collections each month in the following order of priority:
. to pay interest on the Class A notes;
. to pay interest on the Class B notes;
. to pay to the servicer an amount equal to the monthly servicing fee due
for the related distribution date, and past due for any prior
distribution date, if Household Finance Corporation or any of its
affiliates is not the servicer;
. to pay to the administrator an amount equal to the monthly administration
fee for the related distribution date, and past due for any prior
distribution date, if Household Finance Corporation or any of its
affiliates is not the administrator;
. to cover your series' allocation of defaulted receivables;
. to cover reductions in your series' invested amount resulting from
investor charge-offs and from subordinated principal collections, in each
case that have not been reimbursed;
. upon the occurrence of an event of default with respect to Series 2001-1
and acceleration of the maturity of the Series 2001-1 notes, the balance,
if any, up to the outstanding note principal balance will be treated as
principal collections for that distribution date for distribution to the
Series 2000-1 noteholders to be applied as described under "Description
of Series Provisions--Application of Collections" in this prospectus
supplement;
. to pay to the servicer an amount equal to the monthly servicing fee due
for the related distribution date, and past due for any prior
distribution date, if Household Finance Corporation or any of its
affiliates is the servicer;
. to pay to the administrator an amount equal to the monthly administration
fee due for the related distribution date, and past due for any prior
distribution date, if Household Finance Corporation or any of its
affiliates is the administrator;
. to fund, in limited circumstances, a reserve account to cover interest
payment shortfalls for the Class A Notes and Class B Notes during the
controlled accumulation period; and
S-8
<PAGE>
. to other series in excess finance charge sharing group one or to the
holders of the transferor certificates.
For a more detailed description of these applications, see "Description of
Series Provisions-- Application of Collections" in this prospectus supplement.
Principal Collections
The trust will apply your series' share of principal collections each month
as follows:
. During the revolving period, no principal will be paid to you or
accumulated in a trust account. Instead, your series' share of principal
collections will be applied to reduce the O/C amount to the required O/C
amount and then treated as shared principal collections and may be
available to make principal payments for other series in principal
sharing group one.
. The controlled accumulation period is scheduled to begin on November 1,
2004, but may begin at a later date. During the controlled accumulation
period, your series' share of principal collections will be first,
deposited in a trust account, up to the controlled deposit amount and
second, applied to reduce the O/C amount to the required O/C amount. On
the expected principal payment date, amounts on deposit in that account
will be paid first, to the Class A noteholders, second, to the Class B
noteholders and third, to reduce the O/C amount.
. If an amortization event occurs, the early amortization period will
begin. During the early amortization period, your series' share of
principal collections will be paid first, to the Class A noteholders,
second, to the Class B noteholders and third, to reduce the O/C amount to
the required O/C amount.
. During any of the above periods, principal collections allocated to your
series may be reallocated, if necessary, to make required interest
payments on the Class A notes and the Class B notes, and, if Household
Finance Corporation or any of its affiliates is not the servicer, the
servicing fee, and if Household Finance Corporation or any of its
affiliates is not the administrator, the administration fee, in each case
to the extent not made from available investor finance charge and
administrative collections and excess finance charge and administrative
collections, if any, allocated from other series. However, for any due
period, the sum of these subordinated principal collections cannot exceed
17.25% of the initial invested amount of your series, as reduced due to
the writing off of receivables or for previously subordinated principal
collections, in each case that have not been reimbursed.
. Any remaining principal collections will first be made available to other
series in principal sharing group one and then be paid to the holders of
the transferor certificates or deposited in the special funding account.
For a more detailed description of these applications, see "Description of
Series Provisions-- Application of Collections" in this prospectus supplement.
Optional Redemption
The trust has the option to repurchase your notes when the outstanding
principal amount of the Class A notes and the Class B notes, for your series
has been reduced to 10% or less of the initial principal amount of the Class A
notes and the Class B notes. See "Description of the Notes--Final Payment of
Principal; Termination" in the accompanying prospectus.
Denominations
Beneficial interests in the Series 2001-1 notes may be purchased in minimum
denominations of $1,000 and multiples of $1,000 in excess of that amount.
Registration, Clearance and Settlement
The Series 2001-1 notes will be in book-entry form and will be registered in
the name of Cede & Co., as the nominee of The Depository Trust Company. Except
in limited circumstances, you will not receive a definitive instrument
representing your notes. See "Description of the Notes--Definitive Notes" in
the accompanying prospectus.
S-9
<PAGE>
You may elect to hold your Series 2001-1 notes through The Depository Trust
Company, in the United States, or Clearstream Banking, societe anonyme or the
Euroclear System, in Europe.
Transfers will be made in accordance with the rules and operating procedures
of those clearing systems. See "Description of the Notes--Book-Entry
Registration" in the accompanying prospectus.
Material Federal Income Tax Consequences
Subject to important considerations described under "Material Federal Income
Tax Consequences" in the accompanying prospectus, Orrick, Herrington &
Sutcliffe LLP, as special tax counsel to the trust, is of the opinion that
under existing law your Series 2001-1 notes will be characterized as debt for
federal income tax purposes, and that the trust will not be classified as an
association or publicly traded partnership taxable as a corporation and
accordingly will not be subject to federal income tax. By your acceptance of a
Series 2001-1 note, you will agree to treat your Series 2001-1 notes as debt
for federal, state and local income and franchise tax purposes. See "Material
Federal Income Tax Consequences" in the accompanying prospectus for additional
information concerning the application of federal income tax laws.
ERISA Considerations
Subject to important considerations described under "ERISA Considerations"
in this prospectus supplement and in the accompanying prospectus, the Series
2001-1 notes are eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. A fiduciary or other person
contemplating purchasing the Series 2001-1 notes on behalf of or with "plan
assets" of any plan or account should consult with its counsel regarding
whether the purchase or holding of the Series 2001-1 notes could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Internal Revenue Code.
Risk Factors
Investment in the Series 2001-1 notes involves risks. You should consider
carefully the risk factors beginning on page 7 in the accompanying prospectus.
Exchange Listing
We will apply to list the Series 2001-1 notes on the Luxembourg Stock
Exchange. We cannot guarantee that the application for the listing will be
accepted.
S-10
<PAGE>
Glossary
This prospectus supplement uses defined terms. Definitions can be found in
the "Glossary" beginning on page S-36 in this prospectus supplement and
beginning on page 65 in the accompanying prospectus.
The Originator, The Servicer, The Subservicer and The Transferor
Household Bank (Nevada), N.A.
Household Bank (Nevada), N.A., located in Las Vegas, Nevada, was chartered
on April 1, 1993 and is a wholly-owned operating subsidiary of Household
Finance Corporation. The bank is principally a nationwide credit card bank
offering MasterCard and VISA credit cards. The principal executive office of
the bank is located at 1111 Town Center Drive, Las Vegas, Nevada 89134
(telephone (702) 243-1000).
Household Finance Corporation
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. The address of its principal
executive office is 2700 Sanders Road, Prospect Heights, Illinois 60070
(telephone (847) 564-5000). The servicer is a subsidiary of Household
International, Inc.
The servicer and its subsidiaries offer a diversified range of financial
services. The principal product of the servicer's consumer finance business is
the making of cash loans, including home equity loans secured by first and
second mortgages, sales finance loans and unsecured loans directly to consumers
in the United States. Loans are made through branch lending offices, direct
mail, telemarketing and the Internet. The business also includes purchasing
portfolios of open-end and closed-end, secured and unsecured loans.
The servicer through its subsidiaries also offers both MasterCard and VISA
credit card accounts to residents throughout the United States. It also
purchases and services revolving credit or charge card accounts originated by
merchants and directly originates closed-end sales contracts. A subsidiary of
the servicer also makes loans to non-prime borrowers for the purchase of new
and used vehicles, which loans are secured by the vehicles. The servicer also
makes tax refund anticipation loans.
In conjunction with its consumer finance operations and where applicable
laws permit, the servicer makes available to customers credit life, accident,
health and disability insurance. Credit life, accident, health and disability
insurance is generally directly written by, or reinsured with, its insurance
affiliates.
As of September 30, 2000, the servicer had approximately $56.2 billion in
total assets, approximately $49.2 billion in total liabilities and
approximately $7.0 billion in shareholder's equity.
Household Credit Services, Inc.
The subservicer, Household Credit Services, Inc., has serviced credit card
accounts and non-credit card products since 1987 and was incorporated in 1989
by Household International, Inc. to provide origination, servicing and
administrative services to subsidiaries of Household International, Inc., that
offered or held private label, VISA and MasterCard credit card accounts. The
subservicer provides services for all credit card accounts owned by the bank,
under an agreement with the bank. That agreement establishes performance
standards, including detailed underwriting criteria, that are to be followed by
the subservicer on behalf of the bank. In its capacity of providing services in
connection with VISA and MasterCard credit card accounts, the subservicer has
approximately 2,600 employees operating from its facilities primarily located
in Salinas, California, Chesapeake, Virginia and Las Vegas, Nevada. The
principal executive office of the subservicer is located at 2700 Sanders Road,
Prospect Heights Illinois 60070 (telephone (847) 564-5000).
S-11
<PAGE>
Household Receivables Funding, Inc. III
The transferor, Household Receivables Funding, Inc. III was formed under the
laws of the State of Delaware on July 28, 2000 and is a Delaware corporation,
all of the common stock in which is held by Household Finance Corporation. The
transferor was organized for the limited purposes of engaging in the type of
transactions described herein and other transactions entered into in connection
with the trust and any activities incidental to and necessary or convenient for
the accomplishment of its limited purpose. Neither the bank nor the
transferor's board of directors intends to change the business purpose of the
transferor. The transferor has its principal office located at 1111 Town Center
Drive, Las Vegas, Nevada 89134 (telephone (702) 243-1341).
The Bank's Credit Card Portfolio
The following discussion describes the material terms and characteristics
that generally apply to the accounts in the Bank Portfolio from which the
accounts in the Trust Portfolio were selected and the material terms and
characteristics of the Union Plus program. The accounts selected for the Trust
Portfolio do not represent the entire Bank Portfolio. Currently, the accounts
included in the Trust Portfolio consist of credit card accounts issued by the
bank under the Union Plus program. The Union Plus program is an affinity
arrangement between the bank and Union Privilege under which the bank offers a
credit card program to members of unions affiliated with the American
Federation of Labor and Congress of Industrial Organizations, usually referred
to as the AFL-CIO. Union Privilege is a marketing company that works with the
AFL-CIO to provide new benefits and services for union members and their
families. Currently 60 unions participate representing approximately 14 million
members in the Union Plus program. All of the unions in the program have
participation agreements with Union Privilege. As of November 2000, the largest
union in the Union Plus program accounts for approximately ten percent of the
outstanding receivables in the Union Plus credit card portfolio.
Additional accounts will consist of Eligible Accounts which may or may not
currently be in existence and which may be selected using different criteria
from those used in selecting the accounts already included in the Trust
Portfolio. See "Description of the Transfer and Servicing Agreement--Addition
of Trust Assets" in the accompanying prospectus. Consequently, actual loss and
delinquency, revenue and monthly payment rate experience with respect to the
initial accounts and the additional accounts may be different from the
historical experience of the Bank Portfolio. Also, the additional accounts may
be chosen from the bank's portfolio at large, not just from the Union Plus
program. For additional information regarding the bank's credit card
activities, see "The Bank's Credit Card Activities" in the accompanying
prospectus.
Billing and Payments
General. The credit card accounts of the bank have fixed and variable annual
percentage rates and have different billing and payment structures, including
varying fees, depending on the type of account. The following reflects the
typical billing and payment characteristics of the accounts.
Various cardmember agreements and disclosure statements govern the credit
card accounts. Each cardmember agreement provides that, subject to applicable
law, the bank may change the terms and conditions of that agreement at any
time, including, but not limited to, those terms pertaining to minimum
payments, the rate or amount of finance charges, fees or other charges and the
method of computing the balance upon which finance charges are assessed. If
required by applicable law, the bank will provide prior written notice before
implementation of any change in the terms and conditions of a cardmember's
agreement. There can be no assurance that the finance charges, fees and other
charges discussed below will remain at current levels in the future.
Monthly billing statements for the credit card accounts are sent to the
cardholder at the end of each billing cycle generally within five business days
after the cycle date assigned to the related account. Currently, the
S-12
<PAGE>
subservicer has cycle dates corresponding to twenty-eight cycle days within
each calendar month. The monthly billing statement reflects all purchases; cash
advances; administrative charges; including currency conversion charges, late
charges, returned payment charges, and copying charges, if applicable; annual
fees, if any, credit insurance charges and finance charges incurred by the
credit card account during the billing cycle or a prior billing cycle and
reported to the subservicer; all payments or credits applicable to the account;
and the outstanding balance of the account as of the cycle date, including the
available credit thereunder.
Minimum Payments. Each month, unless a payment holiday is granted by the
bank, each cardholder is required to make a minimum payment. The required
minimum monthly payment for the accounts varies. As for Union Plus accounts,
the cardholder must make a minimum payment equal to $10 or, if the new balance
is less than $10, the new balance, or 1/60 of the new balance as it appears on
the monthly statement, whichever is greater, plus any past due amounts
appearing on the billing statement.
The bank may offer qualified holders of a premium or nonpremium VISA or
MasterCard account the option to enjoy a payment holiday for a particular
billing cycle which gives the cardholder the opportunity to not pay any minimum
payment on his account that cycle. To be qualified, a cardholder's account must
be open and not past due or over the credit limit. During a payment holiday,
finance charges continue to accrue, and the amount of the next minimum monthly
payment is determined as described herein, based on the account balance at the
end of the next billing cycle.
Under the Union Plus program, qualified cardholders are allowed two payment
holidays each twelve-month period. The cardholder's membership organization
sets the dates of payment holidays. In addition, a qualified Union Plus
cardholder can elect to skip payments during a union sanctioned strike that
occurred after the opening of his or her account and that has been in effect
for at least 30 days. The cardholder must request each strike related skip
payment. Qualified cardholders can request up to four strike related skip
payments per twelve-month period. However, no cardholder can take more than
three consecutive skip payments.
Finance Charges. Finance charges are based on an account's average daily
balance. Finance charges are calculated by multiplying the daily periodic rate
by the average daily balance of the account, and then multiplying the result by
the number of days in the billing cycle. To obtain the average daily balance,
all daily balances for the billing cycle are added together and divided by the
number of days in the billing cycle. The daily balance for an account is
computed as its beginning balance each day adjusted by adding new purchases,
any previous day's periodic finance charges, credit insurance charges, cash
advances, any late charges and any other administrative charges to the account
generally on the day they were incurred and subtracting any payments and
credits. The daily periodic rate is 1/365 of the account's variable or fixed
rate in effect.
The majority of the accounts of the bank have a 25-day grace period for
purchases. However, currently a majority of the accounts in the Union Plus
program do not have a grace period for purchases. For accounts with a grace
period for purchases, if the previous balance has been paid in full within 25
days after the close of the cycle, no purchase finance charges will be assessed
on new credit card purchases for merchandise or services made during a billing
cycle. Cash advances and purchases on accounts without a grace period are not
entitled to any grace period and are assessed finance charges from the date of
the transaction.
The bank primarily offers variable annual percentage rate or APR credit card
accounts. Most accounts have two separate rates, one for purchases and another
for cash advances. The periodic finance charge assessed on balances in most
credit card accounts from purchases is indexed to the prime rate plus an add-on
percentage. For the Union Plus program, the add-on percentage ranges from 1.24%
to 10.99%. The bank also from time to time offers temporary promotional rates.
Temporary promotional rates include special APRs ranging from 3.99% to 9.99%
offered to holders of credit card accounts of other credit card companies if
these holders transfer their balances from those credit card accounts to credit
card accounts of the bank.
For cash advances, the periodic finance charge assessed is either a variable
APR or a fixed APR, with the accounts in the Union Plus program having a fixed
APR of 19.99% with some existing cash advance balances
S-13
<PAGE>
having an APR of 17.99% until they are paid in full. On all accounts, the bank
has instituted performance based pricing, the terms of which vary by account
type. With respect to most accounts, a promotional rate will be terminated
early if a cardholder's minimum monthly payment is not received within 30 days
of the end of the billing cycle.
The Union Plus program accounts presently have a cash advance fee on cash
advances and promotional credit card checks equal to 3.00% of the cash
advance, with a minimum fee of $5 and a maximum fee for promotional credit
card checks of $39. On cash advances obtained through non-promotional credit
card checks, the cash advance fee is equal to 2.00% of the cash advance, with
a minimum fee of $3. Generally no minimum cash advance fees are charged for
cash advances obtained through balance transfer checks.
There are some pricing limitations on the Union Plus program to assure that
it is competitively priced. For instance, credit card products offered under
the Union Plus program must have APRs on purchases which are lower than the
APRs on purchases for similar products offered by the bank in comparable
market segments under its other programs, other than its co-branded programs.
Also, in general, any introductory or "teaser" APRs offered under the Union
Plus program must be lower than the most widely advertised teaser APR in
effect on the bank's other credit card solicitations, other than any co-
branded program solicitation. For existing accounts, the average APR for
purchases on the accounts must be below the major credit card bank average APR
for purchases published in a mutually agreed upon source. Currently, the bank
cannot impose an APR on purchases greater than 19.99% without the permission
of its program partner and cannot increase the APR on purchases for existing
cardholders more than once in any rolling six-month period except for rate
increases on variable rate accounts due to an increase on the prime rate or
performance based pricing increases. In addition, the APR imposed on cash
advances, as well as any late, overlimit, returned check, cash advance fees or
other fees disclosed in the cardholder agreement, on existing accounts, only
can be increased once per rolling twelve-month period and only can be
increased to rate or fee amounts being charged by other comparable credit card
issuers. Any of the above restrictions can be waived by the program partner.
Fees and Charges. Accounts may be assessed administrative charges which may
include:
(1) late charges of $29 if the required minimum payment on the account
is not received on the due date shown on the monthly billing statement;
(2) returned payment charges of $29 for each time a payment on the
account is returned unsatisfied by the bank or other financial institution
on which the payment was drawn
(3) overlimit charges of $29 if the cardholder exceeds the credit limit
any time during a billing cycle; and
(4) reasonable copying fees if a request is made for duplicate
statements, checks or other documents.
Most Union Plus accounts do not have annual membership fees.
Payments. Payments to the bank by cardholders are processed by the
subservicer and are currently generally applied in the following order: first,
to finance charges; second, to fees; third, to promotional cash advances;
fourth, to promotional purchase transactions; fifth, to purchase transactions;
and sixth, to cash advances.
Collection of Delinquent Accounts
Minimum scheduled payments for the accounts are generally due 25 days from
the end of the last billing cycle. A credit card account is contractually
delinquent if less than 90% of the minimum payment is made by the payment due
date. For collections purposes, however, an account is considered delinquent
if at least 90% of the minimum payment required to be made is not received by
the subservicer within five days after the due date reflected in the
respective monthly billing statement. Upon receipt of two consecutive payments
on their respective due dates, delinquent accounts may qualify to be
redesignated as non-delinquent. Generally, this
S-14
<PAGE>
redesignation can occur once every six months. At lower credit scores or more
serious levels of delinquency, two consecutive payments would allow for these
accounts to be redesignated as non-delinquent only once every twelve months,
and three consecutive payments would allow for these accounts to be
redesignated as non-delinquent once every six months.
Based on the account's behavioral score, balance, level of delinquency and
cash utilization and length of the account's history, the subservicer
structures the timing of the collection activity to be implemented for the
account. The subservicer believes that the use of behavioral scoring enables it
to manage accounts which have a greater probability of experiencing a loss, at
an earlier stage in order to reduce its exposure.
Efforts to collect delinquent credit card receivables are made principally
by the personnel of the subservicer, supplemented by collection agencies and
attorneys retained by the subservicer when deemed necessary. Currently,
collection activity may begin with telephone contact with the cardholder as
quickly as one day after the date the account becomes delinquent and continues
with follow-up contacts of at least one time per week until the account is 59
days delinquent. In the event the collector is unable to establish telephone
contact with the cardholder, the collector is required to send a series of
collection letters to that person until the matter is resolved.
The servicer will service and administer the receivables, will collect and
deposit into the collection account payments due under the receivables, and
will charge-off as uncollectible receivables, all in accordance with its
customary and usual servicing procedures for servicing comparable revolving
credit receivables and in accordance with the credit guidelines of the bank,
servicer or other account owner, as applicable. Except in limited
circumstances, the current policy is to charge-off an account at the end of the
month in which that account becomes 180 days delinquent. In the case of
bankruptcy, an account will be charged-off at the end of the month 60 days
after that account is flagged to indicate that notice has been received of
voluntary or involuntary bankruptcy proceeding being filed.
Depending on the behavioral score established by the subservicer, extension
of credit to an account that is delinquent may be restricted as early as one
day after the date that account becomes delinquent. Typically, the subservicer
will suspend all authorizations of extensions of credit on accounts 30 or more
days delinquent and will close any account that is 60 or more days delinquent.
The subservicer also may suspend extensions of credit to an account if that
account exceeds its maximum established credit limit. Its behavioral score, as
well as other factors including the length of the account's history with the
bank and its credit limit amount, determine the amount by which an account may
exceed its established credit limit without being suspended. The subservicer
may, in its sole discretion, enter into arrangements with delinquent
cardholders to extend or otherwise modify payment schedules.
The risk evaluation, servicing, charge-off policies and collection practices
discussed above are constantly being reviewed and may change over time in
accordance with the business judgment of the bank and the subservicer and
applicable law and guidelines established by governing regulatory authorities.
The following tables set forth the aggregate delinquency and loss experience
on the Union Plus credit card accounts in the Bank Portfolio for each of the
periods shown. Average receivables outstanding in the Loss Experience table is
the average of the average monthly beginning and average monthly ending
receivables balance for the indicated period. The receivables balance includes
both Principal Receivables and Finance Charge and Administrative Receivables
for the indicated period. Net charge-offs include charge-offs of Principal
Receivables and Finance Charge and Administrative Receivables net of Recoveries
during the indicated periods. The loss rates for the nine months ended
September 30, 2000 and the three months ended December 31, 1996 have been
annualized based on that nine-month period and three-month period,
respectively.
The bank acquired this portfolio in mid-1996. During the year 1997, as the
bank developed experience with the unique characteristics of the portfolio,
changes were made in the type and timing of collection
S-15
<PAGE>
procedures. The lower delinquency in 1998 was the result of implementing these
improved strategies. Delinquency improvement in 1998 was partially off-set by a
high level of personal bankruptcies experienced by the portfolio and the
industry. The maintenance of lower credit limits on higher risk accounts, re-
engineered collection efforts and declining consumer bankruptcies contributed
to the decrease in delinquency and losses for the year ended December 31, 1999,
and the nine months ended September 30, 2000. Though risk factors described in
the accompanying prospectus may cause future results to materially differ from
the historical results presented in the following tables, the bank is not
currently aware of any reason to expect negative trends.
Loss Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine months Year ended Year ended Year ended Three months
ended Sept. 30, Dec. 31, Dec. 31, Dec. 31, ended Dec. 31,
2000 1999 1998 1997 1996
--------------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Average Receivables
Outstanding............ $4,167,927 $3,788,562 $3,813,938 $3,568,815 $3,452,238
Total Net Charge-offs... 126,643 160,410 179,303 171,342 32,732
Total Net Charge-offs as
a Percent of Average
Receivables............ 4.05% 4.23% 4.70% 4.80% 3.79%
</TABLE>
Average delinquencies shown in the Delinquency Experience table are the
average of month end delinquent receivables. The percentages are calculated by
dividing the average of the month end delinquent receivables during the period
by the average of the month end receivables balances for the indicated period.
Receivables include both Principal Receivables and Finance Charge and
Administrative Receivables.
Delinquency Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Average of nine Average of Average of Average of Average of three
months ended year ended year ended year ended months ended
Sept. 30, 2000 Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------------------------ ------------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-29 days............... $ 139,008 3.32% $129,402 3.41% $134,122 3.51% $172,026 4.80% $ 146,597 4.23%
30-59 days.............. 39,510 0.94% 35,072 0.92% 39,407 1.03% 44,020 1.23% 31,317 0.90%
60-89 days.............. 24,228 0.58% 21,034 0.55% 24,796 0.65% 28,554 0.80% 18,303 0.53%
90-119 days............. 17,393 0.42% 15,191 0.40% 18,477 0.48% 21,194 0.59% 16,473 0.48%
120 days or more........ 26,116 0.62% 25,147 0.66% 29,938 0.78% 32,611 0.91% 26,557 0.77%
--------- ----- -------- ---- -------- ---- -------- ---- ---------- ------
Total.................. $ 246,255 5.88% $225,846 5.95% $246,740 6.47% $298,405 8.33% $ 239,247 6.91%
</TABLE>
Revenue Experience
The revenues for the Union Plus accounts in the Bank Portfolio shown in the
Revenue Experience table are related to finance charges, together with fees,
billed to holders of the accounts. The revenues exclude Interchange
attributable to the accounts. The revenues related to finance charges depend in
part upon the collective preference of cardholders to use their credit cards as
revolving debt instruments for purchases and cash advances and paying off
credit card account balances over several months as opposed to convenience use,
where the cardholders prefer instead to pay off their entire balance each
month, thereby avoiding finance charges on purchases, and upon other services
of which cardholders choose to avail themselves and which are paid for by the
use of the card. Revenues related to finance charges and fees also depend on
the types of charges and fees assessed by the bank on the accounts in the Bank
Portfolio. Accordingly, revenues will be affected by future changes in the
types of charges and fees assessed on the accounts. Revenues could be adversely
affected by future changes in the charges and fees assessed by the bank and
other factors. See "The Bank's Credit Card Activities" in the accompanying
prospectus.
S-16
<PAGE>
The historical revenue figures in the Revenue Experience table include
interest on purchases and cash advances and fees accrued during the cycle. Cash
collections on the receivables may not reflect the historical experience in the
table. During periods of increasing delinquencies, billings of finance charges
and fees may exceed cash payments as amounts collected on credit card
receivables lag behind amounts billed to cardholders. Conversely, as
delinquencies decrease, cash payments may exceed billings of finance charges
and fees as amounts collected in a current period may include amounts billed
during prior periods. Revenues from finance charges and fees on both a billed
and a cash basis will be affected by numerous factors, including the periodic
finance charges on the receivables, the amount of annual membership fees, other
fees paid by cardholders, the percentage of cardholders who pay off their
balances in full each month and do not incur periodic finance charges on
purchases and changes in the level of delinquencies on the receivables. See
"Risk Factors" in the accompanying prospectus.
Average receivables outstanding as used in the Revenue Experience table is
the average of the average monthly beginning and average monthly ending
receivables balance. The receivables balance includes both Principal
Receivables and Finance Charge and Administrative Receivables. Revenue excludes
Interchange. The revenue rates for the nine months ended September 30, 2000 and
the three months ended December 31, 1996 have been annualized based on that
nine-month period and three-month period, respectively.
Revenue for the year ended December 31, 1999, and the nine-month period
ended September 30, 2000, benefited from the implementation of risk-based
repricing of the Union Plus portfolio which commenced in the second quarter of
1999. Additionally, changes in the program's fee structure during 1999, have
resulted in increased fee revenue for both the year ended December 31, 1999,
and the nine months ended September 30, 2000. Increases in the prime rate have
also contributed to higher billed revenue for the year ended December 31, 1999,
and the nine months ended September 30, 2000.
Revenue Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine months ended Year ended Year ended Year ended Three months ended
Sept. 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2000 1999 1998 1997 1996
----------------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Average Receivables
Outstanding............ $4,167,927 $3,788,562 $3,813,938 $3,568,815 $3,452,238
Total Finance Charges
and Administrative
Receivables Billed..... 549,718 616,532 553,813 533,394 119,201
Total Finance Charges
and Administrative
Receivables Billed as a
Percentage of Average
Receivables
Outstanding............ 17.59% 16.27% 14.52% 14.95% 13.81%
</TABLE>
Interchange
Creditors participating in the VISA USA and MasterCard International
associations receive fees, called Interchange as partial compensation for
taking credit risk, absorbing fraud losses and funding receivables for a
limited period prior to initial billing. Under the VISA USA and MasterCard
International systems, a portion of this Interchange in connection with
cardholder charges for merchandise and services is passed from banks which
clear the transactions for merchants to credit card-issuing banks. MasterCard
and VISA set Interchange fees annually based on the number of credit card
transactions and the amount charged per transaction. Interchange ranges between
1% and 2% of the transaction amount. The bank and the transferor will be
required to transfer to the trust Interchange attributed to cardholder charges
for merchandise and services in the related accounts. Interchange will be
allocated to the trust as may be reasonably determined or estimated by the
servicer. VISA USA and MasterCard International may from time to time change
the amount of Interchange reimbursed to banks issuing their credit cards.
S-17
<PAGE>
Recoveries
Under the terms of the transfer and servicing agreement, the transferor will
be required to transfer to the trust all of the Recoveries that are reasonably
estimated by the servicer on receivables in charged-off accounts of the trust.
Collections of Recoveries will be treated as collections of Finance Charge and
Administrative Receivables.
Payment Rates
The following table sets forth the highest and lowest cardholder monthly
payment rates on the Union Plus credit card accounts during any month in the
periods shown and the average cardholder monthly payment rates for all months
in the periods shown, in each case calculated as a percentage of total opening
monthly account balances during the periods shown. Payment rates shown in the
table are based on amounts which would be deemed payments of Principal
Receivables and Finance Charge and Administrative Receivables with respect to
the accounts.
Cardholder Monthly Payment Rates
<TABLE>
<CAPTION>
Year ended
Nine months Dec. 31, Three months
ended ----------------- ended
Sept. 30, 2000 1999 1998 1997 Dec. 31, 1996
-------------- ----- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
Lowest Month.................... 8.57% 8.09% 7.28% 6.42% 6.48%
Highest Month................... 10.56% 10.96% 9.41% 8.38% 7.43%
Monthly Average................. 9.24% 9.30% 8.51% 7.46% 7.00%
</TABLE>
We cannot assure you that the cardholder monthly payment rates in the future
will be similar to the historical experience set forth above. The amount of
collections of receivables may vary from month to month due to seasonal
variations, general economic conditions, payment holidays and payment habits of
individual cardholders. In addition, the payment rates set forth in the table
include collections of both Principal Receivables and Finance Charge and
Administrative Receivables.
The Trust Portfolio
The receivables conveyed to the trust arise in accounts selected from the
Bank Portfolio. The receivables conveyed to the trust may include receivables
that are contractually delinquent; however, the receivables may not include
receivables that have been charged off or with respect to which the servicer
believes the related obligor is bankrupt, in each case as of the Initial Cut-
Off Date or any future additional cut-off date, as applicable. The transferor
has the right to designate additional accounts for inclusion in the Trust
Portfolio and to transfer to the trust all receivables of those additional
accounts, whether the receivables already exist or arise after the designation,
if the conditions described under "Description of the Transfer and Servicing
Agreement--Addition of Trust Assets" in the accompanying prospectus are
satisfied. In addition, the transferor will be required to designate additional
accounts, to the extent available, to maintain, for so long as notes of any
series remain outstanding, an aggregate amount of Principal Receivables in the
Trust Portfolio equal to or greater than the Required Minimum Principal
Balance, as adjusted for any series having a paired series as described in the
related indenture supplement.
The transferor also has the right to designate removed accounts and to
require the indenture trustee to transfer all receivables in the removed
accounts back to the transferor, whether the receivables already exist or arise
after the designation, if the conditions described in "Description of the
Transfer and Servicing Agreement--Removal of Trust Assets" in the accompanying
prospectus are satisfied.
Throughout the term of the trust, the accounts from which the receivables
arise will be the accounts designated by the transferor at the time the trust
is established plus any additional accounts minus any removed
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<PAGE>
accounts. As a result, the composition of the trust assets is expected to
change over time. For a general description of the receivables in the trust,
see "The Trust Portfolio" in the accompanying prospectus.
The following is particular information about the receivables as of the
beginning of the day on December 1, 2000:
. The receivables in the Trust Portfolio included $3,127.8 million of
Principal Receivables and $88.0 million of Finance Charge and
Administrative Receivables.
. The accounts designated for the Trust Portfolio had an average receivable
balance of $1,449 and an average credit limit of $6,729.
. The percentage of the average gross receivable balance to the average
credit limit was 21.5%. The principal weighted average age of the
accounts was approximately 91 months.
. Cardholders whose accounts are designated for the Trust Portfolio had
billing addresses in all 50 states and the District of Columbia.
The following tables summarize the Trust Portfolio by various criteria as of
the beginning of the day on December 1, 2000. Because the future composition of
the Trust Portfolio may change over time, these tables are not necessarily
indicative of the composition of the Trust Portfolio at any subsequent time.
Composition by Account Balance
Trust Portfolio
<TABLE>
<CAPTION>
Percentage
of Total Percentage
Number of Number of Total
Account Balance Range Accounts of Accounts Receivables Receivables
--------------------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than or equal to
$1,000.00................... 1,525,401 68.74% $ 128,162,802 3.99%
$1,000.01 to $2,000.00....... 176,294 7.94 262,172,925 8.15
$2,000.01 to $3,000.00....... 122,598 5.52 303,270,350 9.43
$3,000.01 to $4,000.00....... 90,240 4.07 314,400,003 9.78
$4,000.01 to $5,000.00....... 72,840 3.28 327,114,801 10.17
$5,000.01 to $6,000.00....... 55,890 2.52 306,461,888 9.53
$6,000.01 to $7,000.00....... 44,106 1.99 286,117,651 8.90
$7,000.01 to $8,000.00....... 35,174 1.58 263,129,270 8.18
$8,000.01 to $9,000.00....... 26,417 1.19 224,007,375 6.97
$9,000.01 to $10,000.00...... 21,268 0.96 201,839,638 6.28
Over $10,000.00.............. 49,006 2.21 599,140,874 18.63
--------- ------ -------------- ------
Total...................... 2,219,234 100.00% 3,215,817,577 100.00%
========= ====== ============== ======
</TABLE>
S-19
<PAGE>
Composition by Credit Limit
Trust Portfolio
<TABLE>
<CAPTION>
Percentage
of Total Percentage
Number of Number of Total
Credit Limit Range Accounts of Accounts Receivables Receivables
------------------ --------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Less than or equal to
$1,000.00................... 85,634 3.86% $ 15,489,496 0.48%
$1,000.01 to $2,000.00....... 156,682 7.06 116,802,814 3.63
$2,000.01 to $3,000.00....... 203,298 9.16 118,141,844 3.67
$3,000.01 to $4,000.00....... 175,575 7.91 167,503,718 5.21
$4,000.01 to $5,000.00....... 269,187 12.13 227,915,759 7.09
$5,000.01 to $6,000.00....... 177,273 7.99 200,326,066 6.23
$6,000.01 to $7,000.00....... 176,524 7.95 227,123,171 7.06
$7,000.01 to $8,000.00....... 245,991 11.08 268,364,317 8.35
$8,000.01 to $9,000.00....... 138,301 6.23 186,470,517 5.80
$9,000.01 to $10,000.00...... 180,433 8.13 267,885,440 8.33
Over $10,000.00.............. 410,336 18.49 1,419,794,435 44.15
--------- ------ -------------- ------
Total...................... 2,219,234 100.00% $3,215,817,577 100.00%
========= ====== ============== ======
</TABLE>
Composition by Period of Delinquency
Trust Portfolio
<TABLE>
<CAPTION>
Percentage
of Total Percentage
Period of Delinquency (Days Number of Number of Total
Contractually Delinquent) Accounts of Accounts Receivables Receivables
--------------------------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Up to 29 days................ 2,199,297 99.10% $3,134,534,108 97.47%
30 to 59 Days................ 7,104 0.32 26,584,541 0.83
60 to 89 Days................ 4,920 0.22 20,009,422 0.62
90 to 119 Days............... 3,172 0.14 13,277,916 0.41
120 or More Days............. 4,741 0.21 21,411,590 0.67
--------- ------ -------------- ------
Total...................... 2,219,234 100.00% $3,215,817,577 100.00%
========= ====== ============== ======
</TABLE>
Composition by Account Age
Trust Portfolio
<TABLE>
<CAPTION>
Percentage
of Total Percentage
Number of Number of Total
Account Age Accounts of Accounts Receivables Receivables
----------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Not More than 6 Months.... 0 0.00% $ 0 0.00%
Over 6 Months to 12
Months................... 143,317 6.46 186,224,750 5.79
Over 12 Months to 24
Months................... 128,897 5.81 201,748,923 6.27
Over 24 Months to 48
Months................... 700,588 31.57 667,429,354 20.75
Over 48 Months to 72
Months................... 47,530 2.14 63,409,033 1.97
Over 72 Months to 96
Months................... 375,816 16.93 641,394,681 19.94
Over 96 Months to 120
Months................... 290,402 13.09 491,024,707 15.27
Over 120 Months........... 532,684 24.00 964,586,129 30.00
--------- ------ -------------- ------
Total................... 2,219,234 100.00% $3,215,817,577 100.00%
========= ====== ============== ======
</TABLE>
S-20
<PAGE>
Geographic Distribution of Accounts
Trust Portfolio
<TABLE>
<CAPTION>
Percentage
of Total Percentage
Number of Number of Total
State Accounts of Accounts Receivables Receivables
----- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
New York....................... 300,568 13.54 $ 443,398,912 13.79
California..................... 248,401 11.19 421,720,071 13.11
Pennsylvania................... 173,341 7.81 224,966,099 7.00
Ohio........................... 131,278 5.92 178,494,151 5.55
Illinois....................... 123,626 5.57 178,070,755 5.54
New Jersey..................... 102,800 4.63 153,112,018 4.76
Michigan....................... 105,369 4.75 151,225,083 4.70
Texas.......................... 64,180 2.89 103,563,579 3.22
Florida........................ 69,463 3.13 97,672,547 3.04
Massachusetts.................. 63,250 2.85 84,763,427 2.64
Wisconsin...................... 70,124 3.16 84,812,514 2.64
All Other...................... 766,834 34.55 1,094,018,421 34.02
--------- ----- -------------- -----
Total........................ 2,219,234 100.0 3,215,817,577 100.0
========= ===== ============== =====
</TABLE>
Description of Series Provisions
The following is a summary of the material provisions of the terms unique to
the Series 2001-1 notes and the indenture supplement. You also should refer to
the accompanying prospectus for a further discussion of material provisions
common to all notes issued under the indenture. The form of each of the
transfer and servicing agreement, the indenture, an indenture supplement, and
the receivables purchase agreement has been filed with the SEC as an exhibit to
the registration statement relating to the notes.
General
The Class A notes and Class B notes comprise the Series 2001-1 notes and
will be issued under the indenture, as supplemented by the indenture supplement
relating to the Series 2001-1 notes, in each case between the trust and the
indenture trustee. As described under "Description of the Notes--New Issuances"
in the accompanying prospectus, the transferor may cause the owner trustee, on
behalf of the trust, and the indenture trustee to execute further indenture
supplements in order to issue additional series.
The closing date for Series 2001-1 is January , 2001. The Series 2001-1
notes will be issued in denominations of $1,000 and integral multiples of
$1,000 and will be available only in book-entry form, registered in the name of
Cede & Co., as nominee of DTC. As described under "Description of the Notes--
General," "--Book-Entry Registration" and "--Definitive Notes" in the
accompanying prospectus, unless and until Definitive Notes are issued, you will
be able to transfer your notes only through the facilities of DTC. You will
receive payments and notices through DTC and its participants. Payments of
interest and principal will be made on each Distribution Date on which those
amounts are due to the noteholders in whose names Series 2001-1 notes were
registered on the Record Date.
Application will be made to list the notes on the Luxembourg Stock Exchange;
however, we cannot assure you that the listing will be obtained. You should
consult with DEXIA - Banque Internationale a Luxembourg, the Luxembourg listing
agent for the notes, 69 Route d'Esch, L-1470 Luxembourg, telephone number (352)
4590-3550, for the status of the listing.
S-21
<PAGE>
Interest Payments
The Class A notes will accrue interest from and including the closing date
through but excluding February 15, 2001, and for each following Interest
Period, at a rate of % per annum above LIBOR for the related LIBOR
Determination Date with respect to each Interest Period.
The Class B notes will accrue interest from and including the closing date
through but excluding February 15, 2001, and for each following Interest
Period, at a rate of % per annum above LIBOR for the related LIBOR
Determination Date with respect to each Interest Period.
The indenture trustee will determine LIBOR for each Interest Period on the
LIBOR Determination Date.
The Class A Note Interest Rate and the Class B Note Interest Rate
applicable to the then current and immediately preceding Interest Period may
be obtained by telephoning the indenture trustee at its corporate trust office
at (800) 344-5128.
Interest on the notes will be calculated on the basis of the actual number
of days in the related Interest Period and a 360-day year.
Interest will be paid on each Distribution Date, which will be February 15,
2001 and the 15th day of each following month or, if the 15th day is not a
business day, the following business day.
Interest payments on the Class A notes and the Class B notes on any
Distribution Date will be calculated on the aggregate principal balance of the
Class A notes and the Class B notes, as applicable, as of the preceding Record
Date, except that interest for the first Distribution Date will accrue at the
applicable note interest rate on the initial aggregate principal balance of
the Class A notes and the Class B notes, as applicable, from the closing date.
Interest due on the Class A notes and the Class B notes but not paid on any
Distribution Date will be payable on the following Distribution Date, together
with additional interest on that amount at the applicable note interest rate.
Additional interest will accrue on the same basis as interest on the Series
2001-1 notes, and will accrue from the Distribution Date on which the overdue
interest became due, to but excluding the Distribution Date on which the
additional interest is paid.
Interest payments on the Series 2001-1 notes on any Distribution Date will
be paid from Investor Finance Charge and Administrative Collections for the
related Due Period and, to the extent Investor Finance Charge and
Administrative Collections are insufficient to pay the interest, from Excess
Finance Charge and Administrative Collections and Subordinated Principal
Collections, to the extent available, for the related Due Period.
Principal Payments
You are expected to receive payment of principal in full on the January
2006 Distribution Date. You may, however, receive payments of principal
earlier than the Expected Principal Payment Date if an Amortization Event
occurs and the Early Amortization Period begins. The holders of the Class B
notes will not begin to receive payments of principal until the final
principal payment on the Class A notes has been made.
Revolving Period
The Revolving Period for the Series 2001-1 notes begins on the closing date
and ends on the earlier of the date the Controlled Accumulation Period or the
Early Amortization Period begins. During the Revolving Period, the Investor
Percentage of collections of Principal Receivables, excluding principal
payments used to reduce the O/C Amount to the Required O/C Amount and any
Subordinated Principal Collections for that Due Period, will be treated as
Shared Principal Collections and used to pay principal to other series in
principal sharing group one or will be paid to the holders of the Transferor
Certificates.
S-22
<PAGE>
Controlled Accumulation Period
Principal for payment to the Series 2001-1 noteholders will accumulate
during the Controlled Accumulation Period in the principal funding account
established by the indenture trustee. The Controlled Accumulation Period for
the Series 2001-1 notes is scheduled to begin on November 1, 2004, but may be
postponed, as discussed under "--Postponement of Controlled Accumulation
Period" in this prospectus supplement, and ends on the earliest of:
(1) the beginning of the Early Amortization Period;
(2) the payment in full of the Note Principal Balance; and
(3) the Expected Principal Payment Date.
If an Amortization Event occurs before the Controlled Accumulation Period
begins, there will be no Controlled Accumulation Period and the Early
Amortization Period will begin.
On each Distribution Date relating to the Controlled Accumulation Period,
the indenture trustee will deposit in the Principal Funding Account an amount
equal to the least of:
(1) Available Investor Principal Collections with respect to that
Distribution Date;
(2) the applicable Controlled Deposit Amount; and
(3) the Adjusted Invested Amount prior to any deposits on that date.
Amounts in the principal funding account will be paid:
first, to Class A noteholders, up to the aggregate principal balance of
the Class A notes; and
second, to Class B noteholders, up to the aggregate principal balance of
the Class B notes.
in each case, on the Expected Principal Payment Date unless paid earlier due to
the commencement of the Early Amortization Period.
During the Controlled Accumulation Period, the portion of Available Investor
Principal Collections not applied for the payment of principal on the Class A
notes or the Class B notes on a Distribution Date generally will be applied to
reduce the O/C Amount to the Required O/C Amount and then treated as Shared
Principal Collections.
We expect, but cannot assure you, that the amounts available in the
principal funding account on the Expected Principal Payment Date will be
sufficient to pay in full the aggregate principal balance of the Class A notes
and the Class B notes. If these amounts are not available on the Expected
Principal Payment Date, an Amortization Event will occur and the Early
Amortization Period will begin.
Postponement of Controlled Accumulation Period
The Controlled Accumulation Period is scheduled to last 14 months. However,
the servicer may elect to extend the Revolving Period and postpone the
Controlled Accumulation Period by providing a notice to the indenture trustee.
The servicer can make this election only if the number of months needed to fund
the principal funding account based on expected principal collections needed to
pay principal on the Series 2001-1 notes is less than 14 months.
On each Determination Date beginning in October 2004 and ending when the
Controlled Accumulation Period begins, the servicer will review the amount of
expected principal collections and determine the number of months expected to
be required to fully fund the principal funding account by the Expected
Principal Payment Date and may elect to postpone the Controlled Accumulation
Period. In making its decision, the servicer is required to assume that the
principal payment rate, calculated as collections of Principal Receivables
S-23
<PAGE>
for the Due Period over the Principal Receivables as of the beginning of the
Due Period, will be no greater than the lowest Monthly Principal payment rate
for the prior 12 months and will consider the amount of principal expected to
be allocable to noteholders of all other series, if any, in principal sharing
group one which are expected to be amortizing or accumulating principal during
the Controlled Accumulation Period for Series 2001-1. In no case will the
Controlled Accumulation Period be reduced to less than one month.
The method for determining the number of months required to fully fund the
principal funding account may be changed upon receipt of an officer's
certificate from the transferor indicating that, in the reasonable belief of an
authorized officer, the change will not result in an Adverse Effect.
Early Amortization Period
The Early Amortization Period for the Series 2001-1 notes will begin on the
first day of the Due Period on which an Amortization Event with respect to
Series 2001-1 is deemed to have occurred or, if the servicer is required to
make daily deposits into the collection account, on the day an Amortization
Event is deemed to have occurred, and ending upon the earlier to occur of:
(1) the payment in full of the Note Principal Balance to the Series
2001-1 noteholders; and
(2) the Series 2001-1 Final Maturity Date.
If an Amortization Event occurs during the Controlled Accumulation Period,
on the next Distribution Date any amount on deposit in the principal funding
account will be paid to the Class A noteholders and, after the principal
balance of the Class A notes has been paid in full, any remaining amount will
be paid to the Class B noteholders.
If the principal balance of the Class A notes has not been paid in full,
Available Investor Principal Collections will be paid to the Class A
noteholders on each Distribution Date until the earlier of:
(1) the date the Class A notes are paid in full; and
(2) the Series 2001-1 Final Maturity Date.
After the Class A notes have been paid in full, and if the Series 2001-1
Final Maturity Date or the Trust Termination Date has not occurred, Available
Investor Principal Collections will be paid to the Class B noteholders on each
Distribution Date until the earlier of:
(1) the date the Class B notes are paid in full; and
(2) the Series 2001-1 Final Maturity Date.
See "--Amortization Events" below for a discussion of events that might lead
to the commencement of the Early Amortization Period.
Principal Funding Account
The indenture trustee will establish and maintain with an Eligible
Institution a segregated trust account held for the benefit of the noteholders
to serve as the principal funding account. During the Controlled Accumulation
Period, the indenture trustee at the direction of the servicer will transfer
Available Investor Principal Collections from the collection account to the
principal funding account as described under "--Application of Collections" in
this prospectus supplement.
Funds on deposit in the principal funding account will be invested to the
following Distribution Date by the indenture trustee at the direction of the
servicer in Eligible Investments. Principal Funding Investment Proceeds will be
deposited in the collection account and included in Available Investor Finance
Charge and Administrative Collections for the related Due Period.
S-24
<PAGE>
Reserve Account
The indenture trustee will establish and maintain with an Eligible
Institution a segregated trust account held for the benefit of the noteholders
to serve as the reserve account. The reserve account is established to assist
with the subsequent distribution of interest on the notes during the Controlled
Accumulation Period and on the first Distribution Date with respect to the
Early Amortization Period. On each Distribution Date from and after the Reserve
Account Funding Date, but prior to the termination of the reserve account, the
indenture trustee, acting in accordance with the servicer's instructions, will
apply Available Investor Finance Charge and Administrative Collections and
Excess Finance Charge and Administrative Collections allocated to the Series
2001-1 notes (to the extent described under "--Application of Collections--
Payment of Interest, Fees and Other Items") to increase the amount on deposit
in the reserve account, to the extent that amount is less than the Required
Reserve Account Amount.
As long as no Event of Default for your series has occurred and is
continuing, on each Distribution Date, after giving effect to any deposit to be
made to, and any withdrawal to be made from, the reserve account on that
Distribution Date, the indenture trustee will withdraw from the reserve account
an amount equal to the excess, if any, of the amount on deposit in the reserve
account over the Required Reserve Account Amount and will distribute that
excess to the holders of the Transferor Certificates. Any amounts withdrawn
from the reserve account and distributed to the holders of the Transferor
Certificates as described above will not be available for distribution to the
noteholders. On any day following an Event of Default and an acceleration of
the notes, funds available in the reserve account will be used to fund any
amounts owed to the noteholders.
So long as the reserve account is not terminated, all amounts on deposit in
the reserve account on any Distribution Date, after giving effect to any
deposits to, or withdrawals from, the reserve account to be made on that
Distribution Date, will be invested to the following Distribution Date by the
indenture trustee at the direction of the servicer in Eligible Investments. The
interest and other investment income, net of investment expenses and losses,
earned on these investments will be retained in the reserve account, to the
extent the amount on deposit is less than the Required Reserve Account Amount,
or deposited in the collection account and treated as Available Investor
Finance Charge and Administrative Collections.
On or before each Distribution Date with respect to the Controlled
Accumulation Period and on the first Distribution Date with respect to the
Early Amortization Period, a withdrawal will be made from the reserve account,
and the amount of this withdrawal will be deposited in the collection account
and included as Available Investor Finance Charge and Administrative
Collections, as provided in the Series 2001-1 indenture supplement, for that
Distribution Date in an aggregate amount equal to the least of:
(1) the amount then on deposit in the reserve account with respect to
that Distribution Date
(2) the Required Reserve Account Amount; and
(3) the Reserve Draw Amount with respect to that Distribution Date.
However, the amount of the withdrawal will be reduced to the extent that funds
otherwise would be available to be deposited in the reserve account on that
Distribution Date.
If, for any Distribution Date, the Principal Funding Investment Proceeds are
less than the sum of:
(1) the product of (a) the balance of the principal funding account, up
to the principal balance of the Class A notes, on the Record Date
immediately preceding that Distribution Date, (b) the Class A Note Interest
Rate for the related Interest Period, and (c) the number of days in the
related Interest Period divided by 360, and
(2) the product of (a) the lesser of (1) the balance of the principal
funding account in excess of the principal balance of the Class A notes and
(2) the principal balance of the Class B notes on the Record Date
immediately preceding that Distribution Date, (b) the Class B Note Interest
Rate for the related Interest Period, and (c) the number of days in the
related Interest Period divided by 360,
S-25
<PAGE>
then the indenture trustee will withdraw the shortfall, called the "Reserve
Draw Amount," to the extent required and available, from the reserve account
and deposit it in the collection account for use as Available Investor Finance
Charge and Administrative Collections.
The reserve account will be terminated upon the earliest to occur of:
(1) the first Distribution Date for the Early Amortization Period;
(2) the Expected Principal Payment Date; and
(3) the termination of the trust.
Upon the termination of the reserve account, all amounts on deposit in the
reserve account (after giving effect to any withdrawal from the reserve account
on that date as described above) will be distributed by the indenture trustee,
at the direction of the servicer, first, to the O/C Holder for reduction of the
O/C Amount to zero and second, to the holders of the Transferor Certificates.
Principal Sharing Group One
This series will be included in a group of series designated as principal
sharing group one. Collections of Principal Receivables for any Due Period
allocated to the Invested Amount will first be used to cover, during the
Controlled Accumulation Period, deposits of the applicable Controlled Deposit
Amount to the principal funding account and the amount applied to reduce the
O/C Amount to the Required O/C Amount, and during the Early Amortization
Period, payments to the noteholders and the O/C Holder. Shared Principal
Collections will be determined and allocated by the servicer to cover Principal
Shortfalls. Shared Principal Collections will not be used to cover Investor
Charge-Offs or unreimbursed Subordinated Principal Collections for any series.
If Principal Shortfalls exceed Shared Principal Collections for any Due Period,
Shared Principal Collections will be allocated pro rata among the applicable
series in principal sharing group one based on the relative amounts of
Principal Shortfalls. To the extent that Shared Principal Collections exceed
Principal Shortfalls, the balance will, subject to limitations described under
"Description of the Notes--Application of Collections" in the accompanying
prospectus, be paid to the holders of the Transferor Certificates.
Paired Series
Your series of notes may be paired with one or more series of notes issued
at a later time once the Controlled Accumulation Period or the Early
Amortization Period for your series begins. We call each of these later issued
series a paired series. Series 2001-1 is not a paired series. All or a portion
of a paired series may be pre-funded with an initial deposit to a funding
account that is for the sole benefit of the paired series; in the alternative,
a paired series may have a principal amount that can be increased. As your
series amortizes, if there have been no unreimbursed Investor Charge-Offs for
any paired series, the Invested Amount of the paired series will be increased
by an amount equal to the related amortized amount. The issuance of the paired
series will be subject to the conditions described under "Description of the
Notes--New Issuances" in the accompanying prospectus.
We cannot assure you that the terms of any paired series will not have an
impact on the calculation of the Investor Percentage or the timing or amount of
payments received by you as a Series 2001-1 noteholder. The extent to which the
timing or amount of payments received by you may be affected will depend on
many factors, only one of which is a change in the calculation of the Investor
Percentage.
Subordination
The Class B notes are subordinated to the Class A notes. Interest payments
will be made on the Class A notes prior to being made on the Class B notes.
Principal payments on the Class B notes will not begin until the Class A notes
have been paid in full. If collections of Principal Receivables allocated to
your series are
S-26
<PAGE>
reallocated to pay the interest on the Class A notes, the principal amount of
the Class B notes may not be repaid. If a foreclosure and sale of trust assets
after an Event of Default occurs, the net proceeds of that sale which are
available to pay principal and interest on the Series 2001-1 notes will be paid
first to the Class A notes before any remaining net proceeds will be available
for payments due to the Class B notes.
The O/C Amount will act as credit enhancement for the Class A notes and the
Class B notes. The O/C Amount represents a subordinated interest in the
receivables allocated to this series. The transferor will hold the ownership
interest in the O/C Amount and will receive any distributions in reduction of
the O/C Amount. Collections of Principal Receivables will be applied to reduce
the O/C Amount during the Controlled Accumulation Period if all required
deposits have been made to the principal funding account for the Class A notes
and the Class B notes and the O/C Amount is greater than the Required O/C
Amount. Prior to the Early Amortization Period, the Required O/C Amount
decreases as deposits are made to the principal funding account.
Overcollateralization
The Required O/C Amount will initially be $83,333,334 and thereafter, an
amount equal to 10% of the Adjusted Invested Amount but not less than 3% of the
Initial Invested Amount, after taking into account deposits to be made to the
principal funding account on that Distribution Date; provided that
(1) if an Amortization Event has occurred, the Required O/C Amount for
any Distribution Date shall equal the amount of that requirement
immediately preceding that Amortization Event,
(2) in no event shall the Required O/C Amount exceed the Class A Note
Principal Balance and the Class B Note Principal Balance on any date,
(3) the Required O/C Amount may be reduced at any time to a lesser
amount if the Rating Agency Condition is satisfied and an officer's
certificate of the transferor has been delivered to the effect that in the
reasonable belief of the transferor, that reduction will not result in an
Adverse Effect, and
(4) the transferor, in its sole discretion may increase the Required O/C
Amount at any time.
Credit enhancement for your series is for your series' benefit only, and you
are not entitled to the benefits of credit enhancement available to other
series.
Events Of Default
The Events of Default for Series 2001-1, as well as the rights and remedies
available to the indenture trustee and the Series 2001-1 noteholders when an
Event of Default occurs, are described under "Description of the Indenture--
Events of Default; Rights Upon Event of Default" in the accompanying
prospectus.
If an Event of Default for Series 2001-1 occurs, the indenture trustee or
the holders of a majority of the outstanding principal amount of the Series
2001-1 notes may declare the Series 2001-1 notes to be immediately due and
payable. If the Series 2001-1 notes are accelerated, you may receive principal
prior to the Expected Principal Payment Date for your notes.
Amortization Events
As described above, the Revolving Period will continue through October 31,
2004 (unless that date is postponed as described under "--Principal Payments--
Postponement of Controlled Accumulation Period" in this prospectus supplement),
unless an Amortization Event occurs prior to that date.
An "Amortization Event" refers to any of the following events:
(1) failure by the transferor (a) to make any payment or deposit on the
date required under the transfer and servicing agreement, the indenture or
the Series 2001-1 indenture supplement, within the
S-27
<PAGE>
applicable grace period which shall not exceed five business days or (b) to
observe or perform in any material respect any other covenants or
agreements of the transferor set forth in the transfer and servicing
agreement, the indenture or the Series 2001-1 indenture supplement, which
failure has an Adverse Effect on the Series 2001-1 noteholders and
continues to have an Adverse Effect for a period of 60 days after written
notice of the failure, requiring the same to be remedied;
(2) any representation or warranty made by the transferor in the
transfer and servicing agreement, the indenture or the Series 2001-1
indenture supplement, or any information required to be given by the
transferor to the indenture trustee to identify the accounts proves to have
been incorrect in any material respect when made or delivered and which
continues to be incorrect in any material respect for a period of 60 days
after written notice of the failure, requiring the same to be remedied, and
as a result an Adverse Effect occurs with respect to the Series 2001-1
noteholders and the Adverse Effect continues for the designated period;
except that an Amortization Event described in this subparagraph (2) will
not occur if the transferor has accepted reassignment of the related
receivable or all related receivables, if applicable, during the designated
period in accordance with the provisions of the transfer and servicing
agreement;
(3) any Servicer Default occurs which would have an Adverse Effect on
the Series 2001-1 noteholders;
(4) the average of the Series Portfolio Yields for any three consecutive
Due Periods is less than the average of the Base Rates for the same Due
Periods;
(5) insufficient moneys are available to pay in full the aggregate
principal balances of all the Series 2000-1 notes on the Expected Principal
Payment Date;
(6) a failure by the transferor to convey receivables in additional
accounts or Participations to the trust within five business days after the
date required by the transfer and servicing agreement;
(7) bankruptcy, insolvency, liquidation, conservatorship, receivership
or similar events relating to the transferor, including any additional
transferor, or the bank or other account owner, unless written confirmation
from each Rating Agency that the removal of the bank or other account owner
from this Amortization Event will not result in a reduction or withdrawal
of its rating of any outstanding series or class;
(8) the transferor is unable for any reason to transfer receivables to
the trust in accordance with the provisions of the transfer and servicing
agreement;
(9) the trust becomes subject to regulation as an "investment company"
within the meaning of the Investment Company Act of 1940, as amended; or
(10) an Event of Default with respect to Series 2001-1 and acceleration
of the maturity of the notes for Series 2001-1 occurs under the indenture.
In the case of any event described in clause (1), (2) or (3) above, an
Amortization Event will be deemed to have occurred with respect to the notes
only if, after any applicable grace period, either the indenture trustee or the
Series 2001-1 noteholders evidencing interests aggregating not less than 50% of
the aggregate unpaid principal amount of the Series 2001-1 notes, by written
notice to the transferor and the servicer (and to the indenture trustee if
given by the Series 2001-1 noteholders), declare that an Amortization Event has
occurred with respect to the Series 2001-1 notes as of the date of the notice.
In the case of any event described in clause (6), (7), (8) or (9), an
Amortization Event with respect to all series then outstanding, and in the case
of any event described in clause (4), (5) or (10), an Amortization Event with
respect to only the Series 2001-1 notes, will occur without any notice or other
action on the part of the indenture trustee or the Series 2001-1 noteholders
immediately upon the occurrence of the event.
The Early Amortization Period will begin on the first day of the Due Period
in which an Amortization Event is deemed to have occurred, unless the servicer
is at that time required to make daily deposits into the collection account, in
which case the Early Amortization Period will begin on the day an Amortization
Event occurs.
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<PAGE>
See "Description of the Notes--Amortization Events" in the accompanying
prospectus for an additional discussion of the consequences of an insolvency,
conservatorship or receivership of the transferor.
Allocation Percentages
Under the indenture, with respect to each Due Period, the servicer will
allocate to all series outstanding and to the transferor, all amounts collected
on Finance Charge and Administrative Receivables, all amounts collected on
Principal Receivables and all Defaulted Amounts with respect to that Due
Period. These amounts will be allocated based on the Investor Percentage.
Collections of Finance Charge and Administrative Receivables during any
period other than an Early Amortization Period, Principal Receivables during
the Revolving Period and Defaulted Amounts at any time, will be allocated to
the Invested Amount based on the Floating Investor Percentage.
Collections of Principal Receivables during any period other than the
Revolving Period and collections of Finance Charge and Administrative
Receivables during the Early Amortization Period, will be allocated to the
Invested Amount based on the Fixed Investor Percentage.
Interest payments on Series 2001-1 notes will be paid from Available
Investor Finance Charge and Administrative Collections and Excess Finance
Charge and Administrative Collections. Principal payments on the Series 2001-1
notes will be paid from Available Investor Principal Collections.
Application of Collections
Payment of Interest, Fees and Other Items
On each Distribution Date, the servicer will direct the indenture trustee to
apply Available Investor Finance Charge and Administrative Collections and
Excess Finance Charge and Administrative Collections on deposit in the
collection account in the following order:
(1) an amount equal to the Class A Monthly Interest plus Class A
Additional Interest due for the related Distribution Date, and past due for
any prior Distribution Dates, will be paid to the Class A noteholders on
that Distribution Date;
(2) an amount equal to the Class B Monthly Interest plus Class B
Additional Interest due for the related Distribution Date, and past due for
any prior Distribution Dates, will be paid to the Class B noteholders on
that Distribution Date;
(3) if Household Finance Corporation or any of its affiliates is not the
servicer, an amount equal to the Monthly Servicing Fee due for the related
Distribution Date, and past due for any prior Distribution Date, will be
paid to the servicer and if Household Finance Corporation or any of its
affiliates is not the administrator, an amount equal to the Monthly
Administration Fee for the related Distribution Date, and past due for any
prior Distribution Date, will be paid to the administrator;
(4) an amount equal to the Investor Defaulted Amount, if any, for the
related Due Period, will be treated as Available Investor Principal
Collections;
(5) an amount equal to the sum of the unreimbursed Investor Charge-Offs
and the amount of unreimbursed Subordinated Principal Collections will be
treated as Available Investor Principal Collections;
(6) upon the occurrence of an Event of Default with respect to Series
2001-1 and acceleration of the maturity of the Series 2001-1 notes, the
balance, if any, up to the outstanding Note Principal Balance will be
treated as Principal Collections for that Distribution Date for
distribution to the Series 2001-1 noteholders to be applied as described
under "--Payments of Principal" in this prospectus supplement;
S-29
<PAGE>
(7) if Household Finance Corporation or any of its affiliates is the
servicer, an amount equal to the Monthly Servicing Fee due for the related
Distribution Date, and past due for any prior Distribution Date, will be
paid to the servicer;
(8) if Household Finance Corporation or any of its affiliates is the
administrator, an amount equal to the Monthly Administration Fee due for
the related Distribution Date, and past due for any prior Distribution
Date, will be paid to the administrator;
(9) on and after the Reserve Account Funding Date, an amount equal to
the excess, if any, of the Required Reserve Account Amount over the amount
then on deposit in the reserve account will be deposited into the reserve
account; and
(10) all remaining amounts will be treated as Excess Finance Charge and
Administrative Collections and will be available to cover any shortfalls in
Finance Charge and Administrative Collections for other outstanding series
in excess finance charge sharing group one and, after payment of these
shortfalls, the remaining amount will be paid to the transferor.
Payments of Principal
On each Distribution Date, the servicer will direct the indenture trustee to
apply Available Investor Principal Collections on deposit in the collection
account in the following priority:
. on each Distribution Date with respect to the Revolving Period, all
Available Investor Principal Collections will be applied to reduce the
O/C Amount to the Required O/C Amount and then treated as Shared
Principal Collections and applied as described under "--Principal
Payments--Principal Sharing Group One" in this prospectus supplement and
"Description of the Notes--Groups--Principal Sharing Group" in the
accompanying prospectus;
. on each Distribution Date with respect to the Controlled Accumulation
Period and the Early Amortization Period, all Available Investor
Principal Collections will be distributed or deposited in the following
priority:
(1) during the Controlled Accumulation Period, an amount equal to
Monthly Principal will be first, deposited in the principal funding account
in an amount not to exceed the Controlled Deposit Amount and second,
applied to reduce the O/C Amount to the Required O/C Amount;
(2) during the Early Amortization Period, an amount equal to the Monthly
Principal will be distributed to the Paying Agent for payment to the Class
A noteholders until the principal balance of the Class A notes has been
paid in full;
(3) during the Early Amortization Period, an amount equal to Monthly
Principal will, after the principal balance of the Class A notes has been
paid in full, be distributed to the Paying Agent for payment to the Class B
noteholders until the principal balance of the Class B notes has been paid
in full;
(4) during the Early Amortization Period, an amount equal to Monthly
Principal will, after the principal balances of the Class A notes and the
Class B notes have been paid in full, be distributed to reduce the O/C
Amount to zero; and
(5) on each Distribution Date with respect to the Controlled
Accumulation Period and the Early Amortization Period, the balance of
Available Investor Principal Collections not applied as described in
clauses (1) through (4) above, if any, will be treated as Shared Principal
Collections with respect to principal sharing group one and applied as
described under "--Principal Payments--Principal Sharing Group One" in this
prospectus supplement and "Description of the Notes--Groups--Principal
Sharing Group" in the accompanying prospectus; and
. on the earlier to occur of (1) the first Distribution Date for the Early
Amortization Period and (2) the Expected Principal Payment Date, the
indenture trustee will withdraw from the principal funding account and
distribute first, to the Class A noteholders up to the Class A Note
Principal Balance and
S-30
<PAGE>
second, to the Class B noteholders up to the Class B Note Principal
Balance, the amounts deposited into the principal funding account.
Purchase of Series 2001-1 Notes by the Transferor
If the transferor purchases Series 2001-1 notes from Series 2001-1
noteholders, the transferor may, on any Distribution Date (after giving effect
to all required allocations and payments on that Distribution Date), cancel
the purchased notes by delivering a written request to the indenture trustee
to do so; provided, however, that the transferor may only cancel Class A notes
and Class B notes to the extent that the cancellation would not result in a
credit enhancement deficiency and if the Rating Agency Condition is satisfied.
As a result of any cancellation of Series 2001-1 notes, the Invested Amount
shall be reduced by the aggregate principal amount of the purchased Series
2001-1 notes and the reduction in the O/C Amount, and the transferor's
interest shall be increased in an amount equal to the reduction in the
Invested Amount.
Excess Finance Charge Sharing Group One
This series will be included in a group of series designated as excess
finance charge sharing group one. Available Investor Finance Charge and
Administrative Collections in excess of the amount required to make payments
or deposits for your series will be made available to other series included in
excess finance charge sharing group one whose allocation of Investor Finance
Charge and Administrative Collections is not sufficient to make its required
payments or deposits. If Available Investor Finance Charge and Administrative
Collections are insufficient to make all required payments, your series will
have access to Excess Finance Charge and Administrative Collections--and other
amounts treated like Excess Finance Charge and Administrative Collections--
from other series in excess finance charge sharing group one. Each series that
is part of excess finance charge sharing group one and has a shortfall will
receive a share of the total amount of Excess Finance Charge and
Administrative Collections available for that month based on the amount of
shortfall for that series divided by the total shortfall for all series for
that same month.
Subordinated Principal Collections; Defaulted Amount; Investor Charge-Offs
On each Distribution Date, if the sum of Class A Monthly Interest, Class B
Monthly Interest, Monthly Servicing Fee, if Household Finance Corporation or
any of its affiliates are not the servicer, and the Monthly Administration
Fee, if Household Finance Corporation or any of its affiliates are not the
administrator, and past due amounts thereon cannot be paid from Available
Investor Finance Charge and Administrative Collections and Excess Finance
Charge and Administrative Collections as described under "--Application of
Collections," then collections of Principal Receivables allocated to the
Invested Amount will be available to pay these amounts, in an amount equal to
the Subordinated Principal Collections, and the Invested Amount will be
reduced accordingly. The Investor Defaulted Amount represents the series'
share of losses from the Trust Portfolio. On each Determination Date, the
servicer will calculate the Investor Defaulted Amount for the prior Due
Period. If the Investor Defaulted Amount exceeds the amount of Investor
Finance Charge and Administrative Collections and Excess Finance Charge and
Administrative Collections allocated to fund this amount for the prior Due
Period, then the Invested Amount will be reduced by the excess. This excess is
referred to as an Investor Charge-Off.
In no event will the Invested Amount be reduced below zero. Reductions in
the Invested Amount from Investor Charge-Offs and Subordinated Principal
Collections may be reimbursed from subsequent Available Investor Finance
Charge and Administrative Collections and Excess Finance Charge and
Administrative Collections allocated for reimbursement, if available. A
reduction in the Invested Amount may reduce the allocation of collections of
Finance Charge and Administrative Receivables and Principal Receivables to
your series. If the Invested Amount is reduced to zero, your series will not
receive any further allocations of collections of Finance Charge and
Administrative Receivables or Principal Receivables.
Servicing Compensation and Payment of Expenses
The share of the servicing fee allocable to the Invested Amount with
respect to any Distribution Date is the Monthly Servicing Fee.
S-31
<PAGE>
The servicer will pay from its servicing compensation expenses incurred in
connection with servicing the receivables including, without limitation,
payment of the fees and disbursements of the indenture trustee and independent
certified public accountants and other fees which are not expressly stated in
the transfer and servicing agreement, the indenture or the Series 2001-1
indenture supplement to be payable by the trust or the noteholders other than
federal, state and local income and franchise taxes, if any, of the trust.
Reports To Noteholders
On each Distribution Date, the Paying Agent, on behalf of the indenture
trustee will forward to each noteholder of record, a statement prepared by the
servicer setting forth the items described in "Description of the Notes--
Reports to Noteholders" in the accompanying prospectus.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended, and Section
4975 of the Code impose requirements on Plans, and on persons who are
fiduciaries with respect to Plans, in connection with the investment of "plan
assets" of any Plan. ERISA generally imposes on Plan fiduciaries general
fiduciary requirements, including those of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" and Parties in Interest who have specified
relationships to a Plan or its "plan assets," unless a statutory or
administrative exemption is available. Parties in Interest that participate in
a prohibited transaction may be subject to a penalty imposed under ERISA and/or
an excise tax imposed under Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
Subject to the considerations described in this section and in the
accompanying Prospectus, the notes are eligible for purchase with "plan assets"
of any Plan.
Any fiduciary or other Plan investor considering whether to purchase the
notes with "plan assets" of any Plan should determine whether that purchase is
consistent with its fiduciary duties and whether that purchase would constitute
or result in a non-exempt prohibited transaction under ERISA and/or Section
4975 of the Code because any of the transferor, the servicer, the indenture
trustee, the owner trustee or any other party may be Parties in Interest with
respect to the investing Plan and may be deemed to be benefiting from the
issuance of the notes. If the transferor or the servicer is a Party in Interest
with respect to the prospective Plan investor, any fiduciary or other Plan
investor considering whether to purchase or hold the notes should consult with
its counsel regarding the availability of exemptive relief under PTCE Class
Exemptions 96-23 (relating to transactions determined by "in-house asset
managers"), 95-60 (relating to transactions involving insurance company general
accounts), 91-38 (relating to transactions involving bank collective investment
funds), 90-1 (relating to transactions involving insurance company pooled
separate accounts) or 84-14 (relating to transactions determined by independent
"qualified professional asset managers") or any other PTCE. A purchaser of the
notes should be aware, however, that even if the conditions specified in one or
more of the above-referenced exemptions are met, the scope of the exemptive
relief provided by the exemption might not cover all acts which might be
construed as prohibited transactions.
In addition, under DOL Regulation Section 2510.3-101, the purchase of equity
interests in the issuer with "plan assets" of a Plan could, in many
circumstances, cause the receivables and other assets of the issuer to be
S-32
<PAGE>
deemed "plan assets" of the investing Plan which, in turn, would subject the
issuer and its assets to the fiduciary responsibility provisions of ERISA and
the prohibited transaction provisions of ERISA and Section 4975 of the Code.
Nevertheless, because the notes (a) are expected to be treated as indebtedness
under local law and will, in the opinion of Special Tax Counsel, be treated as
debt, rather than equity, for federal tax purposes (see "Material Federal
Income Tax Consequences--Tax Characterization of the Trust and the Notes--
Treatment of the Notes as Debt" in the accompanying prospectus), and (b) should
not be deemed to have any "substantial equity features," purchases of the notes
with "plan assets" of a Plan should not be treated as equity investments and,
therefore, the receivables and other assets included as assets of the issuer
should not be deemed to be "plan assets" of the investing Plans. Those
conclusions are based, in part, upon the traditional debt features of the
notes, including the reasonable expectation of purchasers of the notes that the
notes will be repaid when due, as well as the absence of conversion rights,
warrants and other typical equity features.
The notes may not be purchased or held by any Plan, or any person investing
"plan assets" of any Plan, if any of the transferor, the servicer, the
indenture trustee, the owner trustee or any of their respective affiliates (a)
has investment or administrative discretion with respect to the "plan assets"
used to effect the purchase; (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to the "plan assets," for a fee
and under an agreement or understanding that the advice (1) will serve as a
primary basis for investment decisions with respect to the "plan assets," and
(2) will be based on the particular investment needs of that Plan; or (c)
unless PTCE 95-60, 91-38 or 90-1 is applicable, is an employer maintaining or
contributing to that Plan. Each purchaser or holder of the notes or any
interest in the notes will be deemed to have represented by its purchase and
holding of its notes that it is not subject to the foregoing limitation.
Any fiduciary or other Plan investor considering whether to purchase any
notes on behalf of or with "plan assets" of any Plan should consult with its
counsel and refer to this prospectus supplement for guidance regarding the
ERISA considerations applicable to the notes offered by this prospectus
supplement and the accompanying prospectus.
Underwriting
Subject to the terms and conditions set forth in the underwriting agreement
among the transferor, the originator, the servicer and the underwriters named
below, the transferor has agreed to cause the trust to sell to the
underwriters, and each of the underwriters has severally agreed to purchase,
the principal amount of the notes set forth opposite its name:
<TABLE>
<CAPTION>
Principal
Balance of
Class A Underwriters Class A Notes
-------------------- -------------
<S> <C>
Deutsche Banc Alex. Brown Inc...............................
Banc One Capital Markets, Inc...............................
Barclays Capital, Inc.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
------------
$689,583,000
============
<CAPTION>
Principal
Balance of
Class B Underwriters Class B Notes
-------------------- -------------
<S> <C>
Deutsche Banc Alex. Brown Inc...............................
Banc One Capital Markets, Inc...............................
Barclays Capital, Inc. .....................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
------------
$ 60,417,000
============
</TABLE>
The seller will indemnify the placement agents against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or
contribute to payments the placement agents may be required to make in respect
thereof.
In the underwriting agreement, the underwriters have agreed, subject to the
terms and conditions set forth in that agreement, to purchase all of the notes
offered hereby if any of the notes are purchased.
S-33
<PAGE>
The Class A underwriters propose initially to offer the Class A notes to the
public at % of their principal amount and to dealers at that price less
concessions not in excess of % of the principal amount of the Class A notes.
The Class A underwriters may allow, and the dealers may reallow, concessions
not in excess of % of the principal amount of the Class A notes to brokers
and dealers. After the initial public offering, the public offering price and
other selling terms may be changed by the Class A underwriters.
The Class B underwriters propose initially to offer the Class B notes to the
public at % of their principal amount and to dealers at that price less
concessions not in excess of % of the principal amount of the Class B notes.
The Class B underwriters may allow, and the dealers may reallow, concessions
not in excess of % of the principal amount of the Class B notes to brokers
and dealers. After the initial public offering, the public offering price and
other selling terms may be changed by the Class B underwriters.
We will receive proceeds of approximately $ from the sale of the notes,
representing % of the principal amount of each Class A note and % of the
principal amount of each Class B note, after paying the underwriting discount
which equals $ , representing % of the principal amount of each Class A
note and % of the principal amount of each Class B note. Additional offering
expenses are estimated to be $ .
Each underwriter has represented and agreed that:
(1) it has complied and will comply with all applicable provisions of
the Financial Services Act 1986 with respect to anything done by it in
relation to the notes in, from or otherwise involving the United Kingdom;
(2) it has only issued or passed on and will only issue or pass on in
the United Kingdom any document received by it in connection with the issue
or sale of the notes to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom that document may otherwise
lawfully be issued or passed on;
(3) if it is an authorized person under Chapter III of part I of the
Financial Services Act 1986, it has only promoted and will only promote (as
that term is defined in Regulation 1.02(2) of the Financial Services
(Promotion of Unregulated Schemes) Regulations 1991) to any person in the
United Kingdom the scheme described in this Prospectus Supplement and the
accompanying Prospectus if that person is of a kind described either in
Section 76(2) of the Financial Services Act 1986 or in Regulation 1.04 of
the Financial Services (Promotion of Unregulated Schemes) Regulations 1991;
and
(4) it is a person of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996.
The transferor will indemnify the underwriters against liabilities,
including liabilities under the Securities Act, or contribute to payments the
underwriters may be required to make in respect of those liabilities.
The underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the notes in accordance with Regulation M under the Securities Exchange Act of
1934, as amended. Over-allotment transactions involve syndicate sales in excess
of the offering size, which creates a syndicate short position. Stabilizing
transactions involve bids to purchase the notes so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transactions involve
purchases of the notes in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
notes originally sold by that syndicate member are purchased in a syndicate
covering transaction. Over-allotment transactions, stabilizing transactions,
syndicate covering transactions and penalty bids may cause the prices of the
notes to be higher than they would otherwise be in the absence of those
transactions. Neither the transferor nor the underwriters represent that the
underwriters will engage in any of these transactions or that those
transactions, once commenced, will not be discontinued without notice at any
time.
The underwriters may purchase and sell notes in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the
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<PAGE>
sale by the underwriters of a greater number of notes than they are required to
purchase in the offering. "Covered" short sales are sales made in an amount not
greater than the underwriters' option to purchase additional notes from the
issuer in the offering. The underwriters may close out any covered short
position by either exercising their option to purchase additional notes or
purchasing notes in the open market. In determining the source of notes to
close out the covered short position, the underwriters will consider, among
other things, the price of notes available for purchase in the open market as
compared to the price at which they may purchase notes through the over-
allotment option. "Naked" short sales are any sales in excess of that option.
The underwriters must close out any naked short position by purchasing notes in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the notes in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of notes made by the underwriters in the open
market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased notes sold
by or for the account of that underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales may have the effect of raising or maintaining the
market price of the notes or preventing or retarding a decline in the market
price of the notes. As a result, the price of the notes may be higher than the
price that might otherwise exist in the open market.
Legal Matters
Legal matters relating to the issuance of the notes will be passed upon for
the transferor by John W. Blenke, Vice President--Corporate Law of Household
International, Inc., the parent company of the transferor, the servicer and the
bank. Legal matters relating to the federal tax consequences of the issuance of
the notes will be passed upon for the transferor by Orrick, Herrington &
Sutcliffe LLP. Legal matters relating to the issuance of the notes will be
passed upon for the underwriters by Orrick, Herrington & Sutcliffe LLP. As of
the date of this prospectus supplement, Mr. Blenke is a full-time employee and
officer of Household International, Inc. and beneficially owns, and holds
options to purchase, shares of common stock of Household International, Inc.
S-35
<PAGE>
Glossary
"Adjusted Invested Amount" means, for any date of determination, an amount
equal to:
(1) the Invested Amount as of that date, minus
(2) the amount on deposit in the principal funding account for that
date.
"Adjusted Principal Balance" means an amount equal to the greater of:
(1) the sum of (a) the total amount of Principal Receivables as of the
close of business on the last day of the immediately preceding Due Period,
or with respect to the first Due Period, the total amount of Principal
Receivables as of the Series 2001-1 Cut-Off Date, and (b) the principal
amount on deposit in the special funding account as of the close of
business on the last day of the immediately preceding Due Period (or with
respect to the first Due Period, the Series 2001-1 Cut-Off Date); and
(2) the sum of the numerators used to calculate the Investor Percentages
for all outstanding series of notes for allocations with respect to
Principal Receivables, Finance Charge and Administrative Receivables or
Defaulted Amounts, as applicable, as of the date as to which that
determination is being made;
provided, however, that with respect to any Due Period in which an Addition
Date for an Aggregate Addition or a removal date occurs, the amount in clause
(1)(a) above shall be the sum of the amounts for each day in that Due Period
computed as follows and divided by the number of days in that Due Period:
(A) the aggregate amount of Principal Receivables as of the close of
business on the last day of the prior Due Period, for each day in the
period from and including the first day of that Due Period to but excluding
the related additional cut-off date or removal date; and
(B) the aggregate amount of Principal Receivables as of the close of
business on the related additional cut-off date or removal date after
adjusting for the aggregate amount of Principal Receivables added to or
removed on the related additional cut-off date or removal date, as the case
may be, for each day in the period from and including the related
additional cut-off date or removal date to and including the last day of
that Due Period.
"Administration Fee" means an annual fee payable to the administrator in an
amount equal to $1,200.
"Amortization Event" has the meaning set forth on page S-27.
"Available Investor Finance Charge and Administrative Collections" means,
for any Due Period, an amount equal to the sum of:
(1) the Investor Finance Charge and Administrative Collections deposited
in the collection account for that Due Period;
(2) an amount equal to the Principal Funding Investment Proceeds, if
any, for the related Distribution Date; and
(3) amounts, if any, to be withdrawn from the reserve account which are
required to be included in Available Investor Finance Charge and
Administrative Collections under the Series 2001-1 indenture supplement for
the related Distribution Date.
"Available Investor Principal Collections" means, for any Due Period, an
amount equal to the sum of:
(1) the Investor Percentage of collections of Principal Receivables
received during that Due Period; minus the amount of Subordinated Principal
Collections for that Due Period;
(2) any Shared Principal Collections from other principal sharing series
in principal sharing group one allocated to your series;
S-36
<PAGE>
(3) any Refunding Proceeds; and
(4) any other amounts treated as Available Investor Principal Collections
for the related Distribution Date.
"Base Rate" means, with respect to any Due Period, the sum of (i) the
product of the weighted average of the Class A Note Interest Rate and the
Class B Note Interest Rate for the Interest Period commencing in such Due
Period (weighted based on the Class A Note Principal Balance and the Class B
Note Principal Balance as of the last day of the prior Due Period) multiplied
by a fraction, the numerator of which is the Note Principal Balance and the
denominator of which is the sum of the Note Principal Balance and the O/C
Amount as of the last day of the prior Due Period and (ii) the Servicing Fee
Rate.
"Class A Additional Interest" means with respect to any Distribution Date,
the product of:
(1) the excess of Class A Monthly Interest for that Distribution Date
and any unpaid Class A Monthly Interest for a prior Distribution Date over
the aggregate amount of funds allocated and available to pay Class A
Monthly Interest for that Distribution Date;
(2) the Class A Note Interest Rate for the Interest Period related to
the current Distribution Date; and
(3) the actual number of days in the Interest Period related to the
current Distribution Date.
"Class A Monthly Interest" means with respect to any Distribution Date, the
product of:
(1) the Class A Note Interest Rate for the related Interest Period;
(2) the actual number of days in that Interest Period divided by 360;
and
(3) the principal balance of the Class A notes as of the close of
business on the last day of the prior Due Period or, with respect to the
first Distribution Date, the principal balance of the Class A notes as of
the closing date.
"Class A Note Initial Principal Balance" means $689,583,000.
"Class A Note Interest Rate" means, for any Interest Period, a rate of %
per annum above LIBOR for the related LIBOR Determination Date.
"Class A Note Principal Balance" means with respect to any date, the sum of
the Class A Note Initial Principal Balance minus the aggregate amount of any
principal payments made to the Class A noteholders prior to that date.
"Class B Additional Interest" means with respect to any Distribution Date,
the product of:
(1) the excess of Class B Monthly Interest for that Distribution Date
and any unpaid Class B Monthly Interest for a prior Distribution Date over
the aggregate amount of funds allocated and available to pay Class B
Monthly Interest for that Distribution Date;
(2) the Class B Note Interest Rate for the Interest Period related to
the current Distribution Date; and
(3) the actual number of days in the Interest Period related to the
current Distribution Date.
"Class B Monthly Interest" means with respect to any Distribution Date, the
product of:
(1) the Class B Note Interest Rate for the related Interest Period;
(2) the actual number of days in that Interest Period divided by 360;
and
(3) the principal balance of the Class B notes as of the close of
business on the last day of the prior Due Period or, with respect to the
first Distribution Date, the principal balance of the Class B notes as of
the closing date.
"Class B Note Initial Principal Balance" means $60,417,000.
"Class B Note Interest Rate" means, for any Interest Period, a rate of %
per annum above LIBOR for the related LIBOR Determination Date.
S-37
<PAGE>
"Class B Note Principal Balance" means with respect to any date, the sum of
the Class B Note Initial Principal Balance minus the aggregate amount of any
principal payments made to the Class B noteholders prior to that date.
"Controlled Accumulation Amount" means, for any Distribution Date with
respect to the Controlled Accumulation Period, $53,571,429. However, if the
commencement of the Controlled Accumulation Period is postponed as described
under "Description of Series Provisions--Principal Payments--Postponement of
Controlled Accumulation Period," the Controlled Accumulation Amount may be
higher than the amount stated above for each Distribution Date with respect to
the Controlled Accumulation Period and will be determined by the servicer in
accordance with the Series 2001-1 indenture supplement based on the principal
payment rates for the accounts and on the invested amounts of other series,
other than excluded series, which are scheduled to be in their Revolving
Periods and then scheduled to create Shared Principal Collections during the
Controlled Accumulation Period.
"Controlled Accumulation Period" means the period during which principal is
accumulated in specified amounts per month and paid on the Expected Principal
Payment Date. The Controlled Accumulation Period will commence at the close of
business on October 31, 2004 unless postponed as described under "Description
of Series Provisions--Principal Payments--Postponement of Controlled
Accumulation Period." The Controlled Accumulation Period will end when any of
the following occur:
(1) the payment in full of the principal balance on the Series 2001-1
notes to the Series 2001-1 noteholders;
(2) the Early Amortization Period starts; or
(3) the Expected Principal Payment Date.
"Controlled Deposit Amount" means, for any Distribution Date, the sum of:
(1) the Controlled Accumulation Amount for that Distribution Date, plus
(2) the Deficit Controlled Accumulation Amount, if any.
"Deficit Controlled Accumulation Amount" means:
(1) on the first Distribution Date during the Controlled Accumulation
Period, the excess, if any, of the Controlled Accumulation Amount for that
Distribution Date over the amount deposited in the principal funding
account on that Distribution Date; and
(2) on each subsequent Distribution Date during the Controlled
Accumulation Period, the excess, if any, of the applicable Controlled
Deposit Amount for that subsequent Distribution Date over the amount
deposited in the principal funding account on that subsequent Distribution
Date.
"Distribution Date" means February 15, 2001 and the 15th day of each
following month or, if the 15th day is not a business day, the following
business day.
"DOL" means the U.S. Department of Labor.
"Due Period" means the period from and including the first day of a calendar
month to and including the last day of that calendar month.
"Early Amortization Period" means the period commencing on the first day of
the Due Period in which an Amortization Event with respect to Series 2001-1 is
deemed to have occurred or, if the servicer is required to make daily deposits
into the collection account, on the day an Amortization Event is deemed to have
occurred, and ending upon the earlier to occur of (i) the payment in full to
the Series 2001-1 noteholders of the Note Principal Balance and (ii) the Series
2001-1 Final Maturity Date.
"Eligible Investments" means, with respect to funds allocable to Series
2001-1 in the collection account, the principal funding account and the reserve
account, "Eligible Investments" as defined in the prospectus, except that:
(1) all references in the definition to "rating satisfactory to the
Rating Agency" shall mean ratings of not less than "A-1+", "P-1" and "F-1"
(unless otherwise specified by the Rating Agency), and
(2) all investments shall have maturities at the time of the acquisition
thereof occurring no later than the Distribution Date following the date of
acquisition.
S-38
<PAGE>
"Excess Finance Charge and Administrative Collections" means Investor
Finance Charge and Administrative Collections, and other amounts treated like
Finance Charge and Administrative Collections, in excess of the amount
required to make payments or deposits for your series.
"Excess O/C Amount" shall mean, with respect to any Due Period, the excess
of the O/C Amount over the Required O/C Amount.
"Expected Principal Payment Date" means the January 2006 Distribution Date.
"Fixed Investor Percentage" means, for any Due Period, the percentage
equivalent of a fraction:
(1) the numerator of which is the Adjusted Invested Amount as of the
close of business on the last day of the Revolving Period; and
(2) the denominator of which is the Adjusted Principal Balance.
"Floating Investor Percentage" means, for any Due Period, the percentage
equivalent of a fraction:
(1) the numerator of which is the Adjusted Invested Amount as of the
close of business on the last day of the preceding Due Period (or with
respect to the first Due Period, the Initial Invested Amount); and
(2) the denominator of which is the Adjusted Principal Balance.
"Initial O/C Amount" shall mean $83,333,334.
"Initial Invested Amount" shall mean $833,333,334.
"Interest Period" means the period beginning on and including a
Distribution Date and ending on but excluding the next Distribution Date;
provided that the first Interest Period will begin on and include the closing
date.
"Invested Amount" means, for any date of determination, an amount equal to:
(1) the Initial Invested Amount of the Series 2001-1 notes and the O/C
Amount, minus
(2) the amount of principal previously paid to the Series 2001-1
noteholders (including the principal amount of any notes purchased and
cancelled by the transferor) and the O/C Holder, minus
(3) the amount of unreimbursed Investor Charge-Offs and Subordinated
Principal Collections.
"Investor Charge-Offs" means, for any Due Period, the excess of:
(1) the Investor Defaulted Amount for the related Due Period; over
(2) the amount available for reimbursement of Investor Defaulted Amounts
described under clause (4) under "Description of Series Provisions--
Application of Collections--Payment of Interest, Fees and Other Items."
"Investor Defaulted Amount" means, for any date of determination, an amount
equal to the product of:
(1) the Investor Percentage for the related Due Period; and
(2) the Defaulted Amount.
"Investor Finance Charge and Administrative Collections" means, for any
Distribution Date, an amount equal to the product of:
(1) the Investor Percentage for the related Due Period; and
(2) collections of Finance Charge and Administrative Receivables
deposited in the collection account for the related Due Period.
S-39
<PAGE>
"Investor Percentage" means:
(1) the Floating Investor Percentage with respect to:
. Finance Charge and Administrative Receivables during any period
other than the Early Amortization Period;
. Principal Receivables during the Revolving Period; and
. Defaulted Amounts at any time; and
(2) the Fixed Investor Percentage with respect to:
. Principal Receivables during any period other than the Revolving
Period; and
. Finance Charge and Administrative Receivables during the Early
Amortization Period.
"LIBOR" means, for any LIBOR Determination Date, the rate for deposits in
United States dollars for a one-month period which appears on Telerate Page
3750 as of 11:00 a.m., London time, on that date. If that rate does not appear
on Telerate Page 3750, the rate for that LIBOR Determination Date will be
determined based on the rates at which deposits in United States dollars are
offered by four major banks selected by the servicer at approximately 11:00
a.m., London time, on that day to prime banks in the London interbank market
for a one-month period. The indenture trustee will request the principal London
office of each of those banks to provide a quotation of its rate. If at least
two quotations are provided, the rate for that LIBOR Determination Date will be
the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that LIBOR Determination Date will be the arithmetic
mean of the rates quoted by major banks in New York City, selected by the
servicer, at approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a one-month
period.
"LIBOR Determination Date" means, for any Interest Period, two London
Business Days before that Interest Period commences, provided that the LIBOR
Determination Date for the first Interest Period will be two London Business
Days before the closing date.
"London Business Day" is any business day on which dealings in deposits in
United States dollars are transacted in the London interbank market.
"Monthly Administration Fee" means an amount equal to the product of one-
twelfth of the Administration Fee and the Floating Investor Percentage.
"Monthly Interest" means, for any Distribution Date, an amount equal to the
sum of the Class A Monthly Interest and the Class B Monthly Interest for that
Distribution Date.
"Monthly Principal" means, for any Distribution Date during the Controlled
Accumulation Period and the Early Amortization Period, an amount equal to the
least of:
(1) the Available Investor Principal Collections on deposit in the
collection account with respect to that Distribution Date;
(2) for each Distribution Date with respect to the Controlled
Accumulation Period, the Controlled Deposit Amount and the Excess O/C
Amount for that Distribution Date; and
(3) the Adjusted Invested Amount (as adjusted for any Investor Charge-
Offs and Subordinated Principal Collections on that Distribution Date).
"Monthly Servicing Fee" means, for any Distribution Date, an amount equal to
one-twelfth of the product of:
(1) the Servicing Fee Rate;
(2) the Floating Investor Percentage for the related Due Period; and
S-40
<PAGE>
(3) the total amount of Principal Receivables as of the close of
business on the last day of the immediately preceding Due Period, or with
respect to the first Due Period, the total amount of Principal Receivables
as of the closing date, in either case, excluding the principal portion of
Participations;
provided, however, that with respect to any Due Period in which an Addition
Date for an Aggregate Addition or a removal date occurs, the amount in clause
(3) above shall be the sum of the amounts for each day in that Due Period
computed as follows and divided by the number of days in that Due Period:
(A) the aggregate amount of Principal Receivables, excluding the
principal portion of Participations, as of the close of business on the
last day of the prior Due Period, for each day in the period from and
including the first day of that Due Period to but excluding the related
additional cut-off date or removal date; and
(B) the aggregate amount of Principal Receivables, excluding the
principal portion of Participations, as of the close of business on the
related additional cut-off date or removal date after adjusting for the
aggregate amount of Principal Receivables, excluding the principal portion
of Participations, added to or removed on the related additional cut-off
date or removal date, as the case may be, for each day in the period from
and including the related additional cut-off date or removal date to and
including the last day of that Due Period;
provided further, that with respect to the first Distribution Date, the Monthly
Servicing Fee will equal $1,388,888.89.
"Monthly Subordination Amount" means, for any Due Period, the sum of:
(1) the lower of:
(a) the excess of the amounts needed to pay current and past due
Class A Monthly Interest and Class A Additional Interest as described
in clause (1) under "Description of Series Provisions--Application of
Collections--Payment of Interest, Fees and Other Items" over the
Available Investor Finance Charge and Administrative Collections and
Excess Finance Charge and Administrative Collections allocated to cover
these amounts; and
(b) 17.25% of the Initial Invested Amount minus cumulative principal
payments to the O/C Holder and minus the amount of unreimbursed
Investor Charge-Offs and unreimbursed Subordinated Principal
Collections; plus
(2) the lower of:
(a) the excess of the amounts needed to pay current and past due
Class B Monthly Interest and Class B Additional Interest, the Monthly
Servicing Fee and the Monthly Administration Fee, if Household Finance
Corporation or any of its affiliates is no longer the servicer and
administrator, and any Monthly Servicing Fee and the Monthly
Administration Fee, previously due but unpaid on any prior Distribution
Date, as described in clauses (2) and (3) under "Description of Series
Provisions--Application of Collections--Payments of Interest, Fees and
Other Items" over the Available Investor Finance Charge and
Administrative Collections and Excess Finance Charge and Administrative
Collections allocated to cover these amounts; and
(b) 10% of the Initial Invested Amount minus cumulative principal
payments to the O/C Holder and minus the amount of unreimbursed
Investor Charge-Offs and unreimbursed Subordinated Principal
Collections, including any amounts allocated pursuant to clause (1)
above with respect to the related Distribution Date.
"Note Principal Balance" shall mean, at any time of determination, the sum
of the Class A Note Principal Balance and the Class B Note Principal Balance.
"O/C Amount" shall mean, with respect to any date, an amount equal to the
Invested Amount minus the Note Principal Balance.
S-41
<PAGE>
"O/C Holder" shall mean initially Household Receivables Funding Inc., III,
a Delaware corporation, as initial holder of the Transferor Certificate.
"Parties in Interest" means "parties in interest" under ERISA and
"disqualified persons" under the Code.
"Plan" means any of the following: employee benefit plans and other plans
and arrangements, including individual retirement accounts and annuities,
Keogh plans and most collective investment funds or insurance company general
or separate accounts in which the plans, accounts or arrangements are
invested, that are subject to the fiduciary responsibility provisions of ERISA
and/or Section 4975 of the Code.
"Principal Funding Investment Proceeds" means investment earnings, net of
investment losses and expenses, on funds on deposit in the principal funding
account.
"Principal Shortfalls" means any scheduled or permitted principal
distributions to noteholders and deposits to principal funding accounts, if
any, for any series in principal sharing group one which have not been covered
out of the collections of Principal Receivables allocable to such series in
principal sharing group one and other amounts for those series.
"PTCE" means the DOL Prohibited Transaction Class Exemption.
"Rating Agency" means each of Standard & Poor's, Moody's and Fitch.
"Reassignment Amount" means, with respect to any Distribution Date, after
giving effect to any deposits and distributions otherwise to be made on that
Distribution Date, the sum of:
(1) the Note Principal Balance and the O/C Amount on that Distribution
Date, plus
(2) Monthly Interest for that Distribution Date and any Monthly Interest
previously due but not distributed to the Series 2001-1 noteholders, plus
(3) the amount of Class A Additional Interest and Class B Additional
Interest, if any, for that Distribution Date and any Class A Additional
Interest and Class B Additional Interest previously due but not distributed
to the Series 2001-1 noteholders on a prior Distribution Date.
"Record Date" means, for any Distribution Date, the last day of the
calendar month preceding that Distribution Date.
"Recoveries" are the amounts received by the transferor or the servicer
from the purchaser, obligor or transferee with respect to the sale or other
disposition of receivables in defaulted accounts.
"Reference Banks" shall mean four major banks in the London interbank
market selected by the servicer.
"Refunding Proceeds" shall mean with respect to any Distribution Date, any
proceeds of the issuance of a new series of notes remitted by the transferor,
with the prior written consent of the indenture trustee at least one business
day prior to that Distribution Date, for deposit into the collection account
and application as Available Investor Principal Collections.
"Required Minimum Principal Balance" means with respect to any date for all
outstanding series, unless otherwise provided in the related indenture
supplement for a series having a paired series, the sum of the series adjusted
invested amounts for each series outstanding on that date plus the Required
Transferor Amount on that date, minus the amounts on deposit in the special
funding account.
"Required O/C Amount" means, as of the closing date, the Initial O/C Amount
and, as of any Distribution Date thereafter, an amount equal to 10% of the
Adjusted Invested Amount but not less than 3% of the Initial Invested Amount,
after taking into account deposits to be made to the principal funding account
on that Distribution Date; provided that
S-42
<PAGE>
(1) if an Amortization Event has occurred, the Required O/C Amount for
any Distribution Date shall equal the amount of that requirement
immediately preceding that Amortization Event,
(2) in no event shall the Required O/C Amount exceed the Class A Note
Principal Balance and the Class B Note Principal Balance on any date,
(3) the Required O/C Amount may be reduced at any time to a lesser
amount if the Rating Agency Condition is satisfied and an officer's
certificate of the transferor has been delivered to the effect that in the
reasonable belief of the transferor, that reduction will not result in an
Adverse Effect, and
(4) the transferor, in its sole discretion may increase the Required O/C
Amount at any time.
"Required Reserve Account Amount" means for any Distribution Date on or
after the Reserve Account Funding Date an amount equal to:
(1) 0.5% of the Class A Note Principal Balance; or
(2) any other amount designated by the transferor; provided, however, if
the designation is of a lesser amount, the transferor will provide the
servicer and the indenture trustee with written confirmation that the
Rating Agency Condition shall have been satisfied and the transferor will
deliver to the indenture trustee a certificate of an authorized officer of
the transferor to the effect that, based on the facts known to that officer
at the time, in the reasonable belief of the transferor, the designation
will not result in an Adverse Effect.
"Required Transferor Amount" will be calculated as follows:
Required aggregate series
Transferor X adjusted invested
Percentage amounts of all series
related to pool one
"Required Transferor Percentage" means initially 7.0%, but may be reduced if
the transferor provides the servicer and the indenture trustee with written
confirmation that the designation will not result in:
(1) the reduction or withdrawal by any Rating Agency of its rating of
any outstanding series or class; and
(2) an Adverse Effect.
"Reserve Account Funding Date" means the Distribution Date with respect to
the Due Period which commences no later than three months prior to the Due
Period in which, as of the related Determination Date, the Controlled
Accumulation Period is scheduled to commence.
"Reserve Draw Amount" has the meaning set forth on page S-26.
"Series 2001-1 Cut-Off Date" means the close of business on December 31,
2000.
"Series 2001-1 Final Maturity Date" means the earlier of:
(1) the October 2008 Distribution Date;
(2) the payment in full of the aggregate principal balance of the notes;
(3) the dissolution of the trust in accordance with applicable law; and
(4) at the option of the transferor, the day on which the right of all
series of notes to receive payments from the trust has terminated.
S-43
<PAGE>
"Series Adjusted Invested Amount" means, with respect to any Due Period:
(1) during the Revolving Period, the Invested Amount as of the last day
of the immediately preceding Due Period;
(2) during the Controlled Accumulation Period, the amount specified in
clause (1) above as of the close of business on the last day of the
Revolving Period less any unreimbursed Investor Charge-Offs thereafter;
provided, however, that on any date, at the option of the transferor, that
amount may be reduced below the amount specified for the previous Due
Period to an amount not less than the greater of:
(A) the Adjusted Invested Amount as of the last day of the
immediately preceding Due Period (less any amounts deposited into the
principal funding account since the last day of the immediately
preceding Due Period); and
(B) an amount that, if used as the numerator of the Fixed Investor
Percentage for the remainder of the Controlled Accumulation Period,
would assure that Available Investor Principal Collections for this
series plus the product of the aggregate amount of the Shared Principal
Collections during each Due Period multiplied by a fraction the
numerator of which is the Invested Amount of this series and the
denominator of which is the aggregate invested amount of all series not
scheduled to be in their Revolving Period during that Due Period would
equal at least 125% of the applicable Controlled Accumulation Amount for
that Due Period for so long as the Invested Amount is greater than zero,
assuming for this purpose that
. the payment rate with respect to collections of Principal
Receivables remains constant at the level of the immediately
preceding Due Period,
. the total amount of Principal Receivables theretofore conveyed to
and in the trust (and the special funding amount) remains constant
at the level existing on the date of the reduction,
. no Amortization Event with respect to any series will subsequently
occur and
. no additional series (other than any series being issued on the
date of the reduction) will be subsequently issued; and
(3) during any Early Amortization Period, the Invested Amount as of the
last day of the Revolving Period less any unreimbursed Investor Charge-Offs
thereafter or, if less, the amount last determined pursuant to clause (2)
above during the Controlled Accumulation Period.
"Servicing Fee Rate" means 2% per annum or the lesser percentage as may be
specified by the servicer and which, in the reasonable belief of the servicer,
will not result in an Adverse Effect.
"Series Portfolio Yield" means, for any Due Period, the annualized
percentage equivalent of a fraction:
(1) the numerator of which is the sum of Available Investor Finance
Charge and Administrative Collections and Excess Finance Charge and
Administrative Collections, if any, deposited in the collection account and
allocable to the Series 2001-1 notes for that Due Period, less the Investor
Defaulted Amount for that Due Period; and
(2) the denominator of which is the Note Principal Balance and the O/C
Amount as of the close of business on the last day of the immediately
preceding Due Period.
"Shared Principal Collections" means the amount of collections of Principal
Receivables for any Due Period allocated to the Invested Amount remaining
after covering required payments to the noteholders and the O/C Holder, any
similar amount remaining for any other series in principal sharing group one
and, at the option of the issuer as specified in the indenture, specified net
proceeds from the issuance of a new series.
S-44
<PAGE>
"Subordinated Principal Collections" means, for any Due Period, Available
Investor Principal Collections used to pay interest on the Class A notes and
the Class B notes or used to pay the Servicing Fee, if Household Finance
Corporation or any of its affiliates are not the servicer, in an amount equal
to the lesser of:
(1) the Monthly Subordination Amount for that Due Period; and
(2) the Invested Amount after giving effect to any Investor Charge-Offs
for that Distribution Date.
"Transferor Amount" means an amount equal to the difference between:
(1) the sum of (a) the total amount of Principal Receivables in the
Trust Portfolio on the immediately preceding day and (b) the special
funding account balance; and
(2) the aggregate series adjusted invested amounts of all series of
notes then outstanding.
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Capital Markets Report, or any other page as may replace that
page on that service for the purpose of displaying comparable rates or prices.
S-45
<PAGE>
Annex I
Other Series Issued And Outstanding
1. Series 1994-A-1
<TABLE>
<S> <C>
Maximum Class A Invested Amount................. $1,400,000,000
Initial Class A Invested Amount................. $1,158,000,000
Class A note interest rate...................... floating rate
Maximum Class B Invested Amount................. $155,556,000
Initial Class B Invested Amount................. $128,670,111.78
Class B note interest rate...................... floating rate
Annual servicing fee percentage................. 2% per annum
Enhancement for the Class A notes............... Subordination of Class B notes
Enhancement for the Class B notes............... none
Series 1994-A-1 final maturity date............. December 2005 distribution date
Series Issuance Date............................ September 25, 2000
</TABLE>
2. Series 1996-B-1
<TABLE>
<S> <C>
Maximum Class A Invested Amount.................. $1,000,000,000
Initial Class A Invested Amount.................. $849,800,000
Class A note interest rate....................... floating rate
Maximum Class B Invested Amount.................. $111,112,000
Initial Class B Invested Amount.................. $94,427,000
Class B note interest rate....................... floating rate
Annual servicing fee percentage.................. 2% per annum
Enhancement for the Class A notes................ Subordination of Class B notes
Enhancement for the Class B notes................ none
Series 1996-B-1 final maturity date.............. January 2005 distribution date
Series Issuance Date............................. September 25, 2000
</TABLE>
3. Series 1998-A-1
<TABLE>
<S> <C>
Maximum Class A Invested Amount.................. $500,000,000
Initial Class A Invested Amount.................. $500,000,000
Class A note interest rate....................... floating rate
Maximum Class B Invested Amount.................. $55,557,000
Initial Class B Invested Amount.................. $55,557,000
Class B note interest rate....................... floating rate
Annual servicing fee percentage.................. 2% per annum
Enhancement for the Class A notes................ Subordination of Class B notes
Enhancement for the Class B notes................ none
Series 1998-A-1 final maturity date.............. April 2004 distribution date
Series Issuance Date............................. September 25, 2000
</TABLE>
4. Series 2000-1
<TABLE>
<S> <C>
Initial Class A Invested Amount............... $1,103,333,000
Class A note interest rate.................... One month LIBOR plus 0.140%
Initial Class B Invested Amount............... $96,667,000
Class B note interest rate.................... One month LIBOR plus 0.400%
Controlled accumulation amount................ $85,714,286(/1/)
Commencement of controlled accumulation
period....................................... September 1, 2004(/1/)
Expected principal payment date............... November 2005 distribution date
</TABLE>
S-46
<PAGE>
<TABLE>
<S> <C>
Annual servicing fee percentage................. 2% per annum
Enhancement for the Class A notes............... Subordination of Class B notes
and overcollaterlization amount
Enhancement for the Class B notes............... Overcollaterlization amount
Series 2000-1 final maturity date............... August 15, 2008
Series Issuance Date............................ November 16, 2000
</TABLE>
--------
(/1/Subject)to change if the commencement of the controlled accumulation period
is delayed.
S-47
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus and the accompanying prospectus supplement +
+is not complete and may be amended. We may not sell these securities until we +
+deliver a final prospectus supplement and accompanying prospectus. This +
+prospectus and the accompanying prospectus supplement are not an offer to +
+sell nor an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated January 16, 2001
Prospectus
Household Credit Card Master Note Trust I
Issuer
Household Receivables Funding, Inc. III
Transferor
Household Finance Corporation
Servicer
Asset Backed Notes
The Trust--
. may periodically issue asset backed notes in one or more series with one
or more classes; and
. will own--
. receivables in a portfolio of revolving credit accounts;
. payments due on those receivables; and
. other property described in this prospectus and in the accompanying
prospectus supplement.
The Notes--
. offered with this prospectus will be rated in one of the four highest
rating categories by at least one nationally recognized rating
organization;
. will be paid only from the trust assets;
. may have one or more forms of credit enhancement; and
. will be issued as part of a designated series which may include one or
more classes of notes and credit enhancement.
You should consider carefully the risk factors beginning on page 7 in this
prospectus.
A note is not a deposit and neither the notes
nor the underlying accounts or receivables are
insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental
agency.
The notes are obligations of Household Credit
Card Master Note Trust I only and are not
obligations of Household Receivables Funding,
Inc. III, Household Finance Corporation,
Household Bank (Nevada), N.A. or any other
person.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these notes or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal
offense.
January , 2001
<PAGE>
Important Notice about Information Presented in this Prospectus and the
Accompanying Prospectus Supplement
We provide information to you about the notes in two separate documents:
(1) this prospectus, which provides general information, some of which may
not apply to your series of notes; and
(2) the accompanying prospectus supplement, which describes the specific
terms of your series of notes, including:
. the terms, including interest rates, for each class;
. the timing of interest and principal payments;
. information about the receivables;
. information about credit enhancement, if any, for each class;
. the ratings for each class being offered; and
. the method for selling the notes.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. We are not offering the notes in any state where the offer is not
permitted.
We include cross references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
in the accompanying prospectus supplement provide the pages on which these
captions are located.
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TABLE OF CONTENTS
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Prospectus Summary......................................................... 1
The Issuer............................................................... 1
Risk Factors............................................................. 1
Indenture Trustee........................................................ 1
Owner Trustee............................................................ 1
Transferor............................................................... 1
Servicer and Administrator............................................... 1
Trust Assets............................................................. 1
Interest Payments on the Notes........................................... 2
Principal Payments on the Notes.......................................... 2
Revolving Period....................................................... 2
Controlled Accumulation Period......................................... 3
Controlled Amortization Period......................................... 3
Early Amortization or Early Accumulation Period........................ 3
Amortization Events.................................................... 4
Events of Default........................................................ 4
General................................................................ 4
Events of Default Remedies............................................. 4
Note Ratings............................................................. 5
Credit Enhancement....................................................... 5
Tax Status............................................................... 5
Collections and Allocations.............................................. 5
Groups................................................................... 6
General................................................................ 6
Excess Finance Charge Sharing Group.................................... 6
Reallocation Group..................................................... 6
Shared Enhancement Group............................................... 6
Principal Sharing Group................................................ 6
Shared Transferor Principal Collections.................................. 6
Risk Factors............................................................... 7
Glossary................................................................... 14
The Issuer................................................................. 14
Use of Proceeds............................................................ 14
The Bank's Credit Card Activities.......................................... 14
General.................................................................. 14
Origination.............................................................. 15
Account Management....................................................... 16
Interchange.............................................................. 16
The Trust Portfolio........................................................ 17
Description of the Notes................................................... 19
General.................................................................. 19
Note Ratings............................................................. 20
Book-Entry Registration.................................................. 20
Definitive Notes......................................................... 23
New Issuances............................................................ 24
Funding Period........................................................... 25
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Paired Series........................................................... 26
Interest Payments....................................................... 26
Principal Payments...................................................... 26
Credit Enhancement...................................................... 27
General............................................................... 27
Subordination......................................................... 28
Overcollateralization................................................. 29
Cash Collateral Guaranty or Account................................... 29
Spread Account........................................................ 29
Reserve Account....................................................... 29
Letter of Credit...................................................... 29
Surety Bond or Insurance Policy....................................... 30
Amortization Events..................................................... 30
Final Payment of Principal; Termination................................. 31
Defeasance.............................................................. 31
Reports to Noteholders.................................................. 32
Investor Percentage, Transferor Percentage and Credit Enhancement
Percentage............................................................. 33
Groups.................................................................. 33
General............................................................... 33
Excess Finance Charge Sharing Group................................... 33
Reallocation Group.................................................... 33
Shared Enhancement Group.............................................. 34
Principal Sharing Group............................................... 34
Shared Transferor Principal Collections................................. 34
Trust Bank Accounts..................................................... 34
Application of Collections.............................................. 34
Defaulted Amount; Investor Charge-Offs.................................. 36
Description of the Indenture.............................................. 37
Events of Default; Rights Upon Event of Default......................... 37
Material Covenants...................................................... 39
Modification of the Indenture........................................... 40
Annual Compliance Statement............................................. 42
Indenture Trustee's Annual Report....................................... 42
List of Noteholders..................................................... 42
Satisfaction and Discharge of Indenture................................. 42
Resignation and Removal of the Indenture Trustee........................ 42
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Description of the Transfer and Servicing Agreement....................... 43
General................................................................. 43
Representations and Warranties of the Transferor........................ 43
Regarding No Conflict................................................. 43
Regarding Enforceability.............................................. 43
Regarding the Accounts and the Receivables............................ 44
Additional Representations and Warranties in the Prospectus
Supplement........................................................... 44
Additional Transferors.................................................. 44
Eligible Accounts....................................................... 45
Eligible Receivables.................................................... 45
Addition of Trust Assets................................................ 46
Removal of Trust Assets................................................. 48
Discount Option......................................................... 48
Servicing Compensation and Payment of Expenses.......................... 49
Matters Regarding the Servicer and the Transferor....................... 49
Servicer Default........................................................ 51
Evidence of Compliance.................................................. 52
Assumption of a Transferor's Obligations................................ 52
Amendments.............................................................. 53
Description of the Receivables Purchase Agreement......................... 54
Sale of Receivables..................................................... 54
Representations and Warranties.......................................... 55
Amendments.............................................................. 55
Termination............................................................. 56
Material Legal Aspects of the Receivables................................. 56
Transfer of Receivables................................................. 56
Matters Relating to Conservatorship, Receivership and Bankruptcy........ 57
Consumer Protection Laws................................................ 59
Material Federal Income Tax Consequences.................................. 59
General................................................................. 59
Tax Characterization of the Trust and the Notes......................... 60
Consequences to Holders of the Offered Notes............................ 61
State and Local Tax Consequences........................................ 63
ERISA Considerations...................................................... 63
Plan of Distribution...................................................... 63
Reports to Noteholders.................................................... 64
Where You Can Find More Information....................................... 64
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Glossary.................................................................. 65
Annex I: Global Clearance, Settlement and Tax Documentation Procedures.... I-1
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PROSPECTUS SUMMARY
This summary highlights information and does not contain all of the
information that you need to consider in making your investment decision. You
should carefully read this entire document and the accompanying prospectus
supplement before you purchase any notes.
The Issuer
Household Credit Card Master Note Trust I, a Delaware common law trust, is
the issuer of the notes. The trust's principal place of business is located at
Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001. Its
phone number is (302) 651-8856.
The trust is a master trust and will issue notes in series. Each series of
notes will consist of one or more classes. The classes of a series may be
issued at the same time or at different times. The notes of each series will be
issued from an indenture supplement to an indenture, in each case between the
trust and the indenture trustee.
Some classes or series may not be offered by this prospectus. They may be
offered, for example, in a private placement.
Risk Factors
Investment in the notes of a series involves risks. You should consider
carefully the risk factors beginning on page 7 in this prospectus.
Indenture Trustee
Wells Fargo Bank Minnesota, National Association is the indenture trustee
under the indenture. Its address is MAC N9311-161, 6th & Marquette,
Minneapolis, MN 55479 attention: Asset Backed Securities. Its phone number is
(612) 667-8058.
Owner Trustee
Wilmington Trust Company is the owner trustee under the trust agreement. Its
address is Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-
0001. Its phone number is (302) 651-8856.
Transferor
Household Receivables Funding, Inc. III is the transferor of the credit card
receivables to the trust. Its address is 1111 Town Center Drive, Las Vegas,
Nevada 89134. Its phone number is (702) 243-1341. Household Receivables
Funding, Inc. III is a special purpose Delaware corporation whose stock is held
by Household Finance Corporation.
Servicer and Administrator
Household Finance Corporation will service the receivables for the trust
through its affiliate, Household Credit Services, Inc., acting as subservicer,
and will act as the trust's administrator. Its address is 2700 Sanders Road,
Prospect Heights, Illinois 60070. Its phone number is (847) 564-5000. Household
Finance Corporation is a wholly-owned subsidiary of Household International,
Inc.
In limited cases, the servicer may resign or be removed, and either the
indenture trustee or a third party may be appointed as the new servicer. The
servicer receives a servicing fee from the trust, and each series is obligated
to pay a portion of that fee. In addition, Household Finance Corporation,
acting as the trust's administrator, will receive an administration fee from
the trust.
Trust Assets
Household Bank (Nevada), N.A. is the originator of the credit card
receivables. It has designated revolving credit card accounts from its
portfolio and has sold the receivables in those accounts to Household
Receivables Funding, Inc. III under a receivables purchase agreement. Household
Receivables Funding, Inc. III has, in turn, sold those receivables to the trust
under the transfer and servicing agreement.
All new receivables generated in the accounts will be transferred
automatically to the trust. The total amount of receivables in the trust
fluctuates daily as new receivables are generated and payments are received on
existing receivables.
The receivables transferred to the trust are the primary trust assets.
Additional assets may be
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transferred to the trust as described under "Description of the Transfer and
Servicing Agreement--Addition of Trust Assets" in this prospectus. The
transferor may also remove receivables that it transferred to the trust as
described under "Description of the Transfer and Servicing Agreement--Removal
of Trust Assets" in this prospectus.
The transferor is also permitted to add, from time to time, participations
and related collections to the trust. These participations must be undivided
interests in a pool of assets primarily consisting of receivables arising under
revolving credit accounts. Participations may be issued under separate
agreements that are similar to the agreements governing the issuance of the
notes and that entitle the holder of the participation to receive percentages
of collections generated by the pool of assets supporting the participation.
Participations may have their own credit enhancement, amortization events,
servicing obligations and servicer defaults, all of which are likely to be
enforceable by a separate trustee under these participation agreements and may
be different from those specified in this prospectus. The rights and remedies
of the trust as the holder of a participation, and, therefore, the noteholders,
will be subject to all the terms and provisions of those participation
agreements.
For more information about the receivables, see "The Trust Portfolio" in
this prospectus.
All trust assets will initially be in a pool of assets designated as pool
one. All series of notes offered by this prospectus will be backed by the
assets in pool one unless the prospectus supplement for a series specifies a
different pool of assets for that series. In the event that assets are
deposited into the trust and designated as being in a pool of assets other than
pool one, a separate collection account and special funding account will be
created for that pool. Series of notes which are issued to finance assets in a
different pool will be backed solely by those assets and not by assets in pool
one. All references in this prospectus and the accompanying prospectus
supplement to receivables, accounts and notes shall refer to pool one only,
unless otherwise stated.
Interest Payments on the Notes
Each note entitles the holder to receive payments of interest as described
in the applicable prospectus supplement. If a series of notes consists of more
than one class, each class may differ in, among other things, priority of
payments, payment dates, interest rates, methods for computing interest, and
rights to series enhancement.
Each class of notes may have fixed, floating or any other type of interest
rate. Generally, interest will be paid monthly, quarterly, semi-annually or on
other scheduled dates over the life of the notes. See "Description of the
Notes--Interest Payments" in this prospectus.
Principal Payments on the Notes
Each note entitles the holder to receive payments of principal as described
in the applicable prospectus supplement. If a series of notes consists of more
than one class, each class may differ in, among other things, the amounts
allocated for principal payments, priority of payments, payment dates,
maturity, and rights to series enhancement. See "Description of the Notes--
Principal Payments" in this prospectus.
Revolving Period
Each series of notes will begin with a period during which the trust will
not pay or accumulate principal for payment to the noteholders of that series.
The period when no principal is paid or accumulated is known as the revolving
period. The trust, during the revolving period, will pay available principal to
noteholders of other series in a principal sharing group as shared principal
collections or to the transferor as holder of the transferor interest, or in
limited circumstances described under "Description of the Notes--Application of
Collections" will deposit the available principal in the special funding
account. The revolving period for a series begins on the closing date described
in the applicable prospectus supplement and ends at the start of an
amortization period or an accumulation period.
Following the revolving period, each class of notes will have one or more of
the following periods in which:
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. principal is accumulated in specified amounts per month and paid on an
expected principal payment date, known as a controlled accumulation
period;
. principal is paid in fixed amounts at scheduled intervals, known as a
controlled amortization period; or
. principal is paid or accumulated in varying amounts each month based on
the amount of principal receivables collected following an amortization
event, known as an early amortization period or early accumulation
period, respectively.
In addition, each class may have other types of accumulation or amortization
periods as specified in the related prospectus supplement.
Controlled Accumulation Period
If a series or class of notes is in a controlled accumulation period, the
trust is expected to pay available principal to those noteholders on the date
specified in the prospectus supplement for that class or series. If the series
has more than one class, each class may have a different priority for payment,
a different payment methodology and a different expected principal payment
date. For a period of time prior to the expected principal payment date, the
trust will deposit specified amounts of available principal in an account. The
controlled accumulation period for a series or class begins on a date specified
in the applicable prospectus supplement and ends when any one of the following
occurs:
. the notes of that series or class are paid in full;
. the early amortization or early accumulation period starts; or
. the expected principal payment date.
Controlled Amortization Period
If a series or class of notes is in a controlled amortization period, the
trust will pay available principal up to a fixed amount to those noteholders on
each distribution date during that period. The trust will pay available
principal in a fixed amount, plus any amounts not previously paid. If the
series has more than one class, each class may have a different priority for
payment and a different payment methodology. The controlled amortization period
for a series or class starts on the date specified in the applicable prospectus
supplement and ends when any one of the following occurs:
. the notes of that series or class are paid in full;
. the early amortization or early accumulation period starts; or
. the expected principal payment date.
Early Amortization or Early Accumulation Period
If a series or class of notes is in an early amortization or early
accumulation period, the trust will pay available principal to those
noteholders on each distribution date or accumulate available principal by
making a deposit into an account on each distribution date. If the series has
more than one class, each class may have a different priority for payment. The
early amortization period for a series or class will begin on the first day of
the due period in which an amortization event is deemed to have occurred,
unless the servicer is at that time required to make daily deposits into the
collection account in which case the early amortization period will begin on
the day an amortization event occurs. The early amortization period will end
when any of the following occurs:
. the notes of that series or class are paid in full;
. the series final maturity date; or
. the trust termination date.
The early accumulation period for a series or class will begin on the first
day of the due period in which an amortization event is deemed to have
occurred, unless the servicer is at that time required to make daily deposits
into the collection account in which case the early accumulation period will
begin on the day an amortization event occurs. The early accumulation period
will end when any of the following occurs:
. the notes of that series or class are paid in full;
. the expected principal payment date; or
. the trust termination date.
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Amortization Events
An amortization event for any series of notes will include adverse events
described in the prospectus supplement for that series. In addition, the
following will be amortization events for all series:
. bankruptcy, insolvency or similar events relating to the transferor,
including any additional transferor, or the bank or other account owner
unless, with respect to the bank or other account owner, the rating
agency condition is satisfied for the removal of the bank or other
account owner from this amortization event;
. the transferor, including any additional transferor, is unable to
transfer receivables to the trust as required under the transfer and
servicing agreement; or
. the trust becomes subject to regulation as an "investment company" under
the Investment Company Act of 1940.
See "Description of the Notes--Amortization Events" in this prospectus.
Events of Default
General
The indenture and related indenture supplement governing the terms and
conditions of the notes include a list of adverse events called events of
default.
. If an event of default occurs, then, after any applicable cure period,
the indenture trustee or the holders of a majority of the outstanding
principal amount of the affected series of outstanding notes may
accelerate the notes by declaring all the notes of that series to be
immediately due and payable. That declaration may, under limited
circumstances described under "Description of the Indenture--Events of
Default; Rights Upon Event of Default", be rescinded by the holders of a
majority of the outstanding principal amount of the affected series of
outstanding notes.
Events of default include the following:
. the trust fails to pay interest on any note within 35 days of its due
date;
. the trust fails to pay in full the principal on any note on its series
final maturity date;
. the trust defaults on any covenant or breaches any agreement under the
indenture and the default or breach continues unremedied for 60 days
after written notice of the default or breach is given to the trust by
the indenture trustee or to the trust and the indenture trustee by
holders of at least 25% of the outstanding principal amount of the
affected series of notes; or
. the filing of a decree or order for relief by a court having jurisdiction
in the premises in respect of the trust relating to the bankruptcy,
insolvency, conservatorship, receivership, liquidation or similar events
and such decree or order remains unstayed and in effect for 60
consecutive days.
See "Description of the Indenture--Events of Default; Rights Upon Event of
Default" in this prospectus for a description of the events of default and
their consequences to noteholders.
It is not an event of default if the principal of a note is not paid on its
expected principal payment date.
Events of Default Remedies
After an event of default and the acceleration of a series of notes, funds
on deposit in the collection account and any series accounts will be applied to
pay principal of and interest on those notes to the extent permitted by law.
After an event of default, principal collections and finance charge and
administrative collections allocated to the series of notes will be applied to
make monthly principal and interest payments on those notes until the earlier
of the date those notes are paid in full or the series final maturity date of
those notes.
After an event of default, the indenture trustee, acting on its own or at
the direction of holders of a specified percentage of the outstanding principal
amount of the accelerated notes, will have a limited right to foreclose on the
portion of the receivables allocable to the accelerated series of notes by
causing the trust to sell principal receivables in an amount generally equal to
the invested amount of the accelerated series of notes plus the related finance
charge and administrative receivables. The proceeds from the sale of the
receivables will be used to pay
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principal of and interest on your notes. See "Description of the Indenture--
Events of Default; Rights Upon Event of Default" in this prospectus.
Note Ratings
Any note offered by this prospectus and an accompanying prospectus
supplement will be rated in one of the four highest rating categories by at
least one nationally recognized rating organization.
The ratings of the notes address the likelihood of the timely payment of
interest on and the ultimate payment of principal of the notes. The rating
agencies have not rated the ability to pay principal of the notes in full on
the expected principal payment date or any other date prior to the series final
payment date.
A rating is not a recommendation to buy, sell or hold securities, and may be
revised or withdrawn at any time by the assigning agency. Each rating should be
evaluated independently of any other rating. See "Description of the Notes--
Note Ratings" in this prospectus.
Credit Enhancement
Each class of a series may be entitled to credit enhancement. Credit
enhancement for the notes of any class may take the form of one or more of the
following:
. subordination
. collateral interest
. insurance policy
. cash collateral guaranty or account
. swap arrangements
. interest rate cap agreement
. overcollateralization
. letter of credit
. surety bond
. spread account
. reserve account
. guaranteed rate agreement
. tax protection agreement
The type, characteristics and amount of any credit enhancement for a series
will be:
. based on several factors, including the characteristics of the
receivables and accounts at the time a series of notes is issued; and
. established based on the requirements of the rating agencies.
See "Description of the Notes--Credit Enhancement" in this prospectus.
Tax Status
Subject to important considerations described under "Material Federal Income
Tax Consequences" in this prospectus, Orrick, Herrington & Sutcliffe LLP, as
special tax counsel to the trust, is of the opinion that, for United States
federal income tax purposes the notes will be treated as indebtedness and the
trust will not be an association or a publicly traded partnership taxable as a
corporation and accordingly will not be subject to federal income tax. In
addition, noteholders will agree, by acquiring notes, to treat the notes as
debt of the transferor for federal, state and local income and franchise tax
purposes.
Collections and Allocations
The servicer receives collections on the receivables, deposits those
collections in the collection account and keeps track of them as finance charge
and administrative receivables or principal receivables.
The servicer then allocates those collections among each series of notes
outstanding and the transferor interest. The servicer allocates collections of
finance charge and administrative receivables and principal receivables, and
receivables in accounts written off as uncollectible to each series based on
varying percentages. The accompanying prospectus supplement describes the
allocation percentages applicable to your series.
The interest in the assets not allocated to any series of notes is the
transferor interest. The principal amount of the transferor interest fluctuates
with the amount of the principal receivables held in the trust and the amount
of notes outstanding. The transfer and servicing agreement requires the
transferor to transfer receivables in additional accounts to the trust if the
total amount of principal receivables, as of the last business day of any
calendar month, is less than the sum of the series adjusted invested amounts
for each series outstanding, less any amount in the special funding
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account, plus an amount referred to as the required transferor amount. The
transferor may sell all or part of its interest in the transferor amount by
issuing a supplemental certificate.
Groups
General
The notes of a series may be included in one or more groups of series that
share collections of finance charge and administrative receivables and/or
principal receivables. The prospectus supplement will identify whether your
series has been included in one or more of the following groups.
Excess Finance Charge Sharing Group
The notes of a series may be included in a group of series, called an excess
finance charge sharing group, that shares excess collections of finance charge
and administrative receivables, including excess collections of finance charge
and administrative receivables which have been reallocated to a series which is
included in both an excess finance charge sharing group and a reallocation
group. If specified in the prospectus supplement for any of these series, to
the extent that collections of finance charge and administrative receivables
allocated to a series are not needed for that series, those collections may be
applied to other series in the same excess finance charge sharing group. See
"Description of the Notes--Groups--Excess Finance Charge Sharing Group" in this
prospectus.
Reallocation Group
The notes of a series may be included in a group of series, called a
reallocation group, that reallocates collections of finance charge and
administrative receivables and other amounts among the series in that group.
Collections of finance charge and administrative receivables which would
otherwise be allocated to each series in the reallocation group will instead be
combined and will be available for required payments, described in the
prospectus supplement, to all series in that group. Any issuance of a new
series in a reallocation group may reduce or increase the amount of finance
charge collections allocated to any other series of notes in that group. See
"Description of the Notes--Groups--Reallocation Group" in this prospectus.
Shared Enhancement Group
The notes of a series may be included in a group of series, called a shared
enhancement group, that shares collections of finance charge and administrative
receivables and other amounts and shares in the same credit enhancement for
each series in that shared enhancement group. Shared enhancement may take the
form, among others, of classes of notes of one or more series in a particular
shared enhancement group issued from time to time which are subordinate to
other classes issued at the same or a different time in the same series or in
different series in that shared enhancement group. In addition, if specified in
its prospectus supplement, a series may consist of one or more classes of notes
issued in one or more subseries. References to a series in this prospectus
include any subseries of a series. All subseries of that series would share
collections of finance charge and administrative receivables and other amounts,
described in the prospectus supplement, and share in the same credit
enhancement for that series.
Principal Sharing Group
The notes of a series may be included in a group of series, called a
principal sharing group, that shares collections of principal receivables for
each series in that group. If a series is identified in its prospectus
supplement as being in a group of series that share principal collections, to
the extent that collections of principal receivables allocated to that series
are not needed for that series, those collections may be applied to cover
principal payments for other principal sharing series in the same principal
sharing group, and vice versa. See "Description of the Notes--Groups--Principal
Sharing Group" in this prospectus.
Shared Transferor Principal Collections
If a series is identified in its prospectus supplement as being entitled to
receive shared transferor principal collections, collections of principal
receivables otherwise payable to the transferor may be applied to cover
principal payments for that series. See "Description of the Notes--Shared
Transferor Principal Collections" in this prospectus.
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RISK FACTORS
The risk factors disclosed in this section of the prospectus and in the
prospectus supplement describe the principal risk factors of an investment in
the notes.
Some liens may be given Although the bank, HRAC II, and each other
priority over your notes account owner or receivables seller will treat
which could cause your its transfer of the receivables as a sale for
receipt of payments to be accounting purposes, a court could conclude
delayed or reduced. that any of the trust, the transferor, the
bank, HRAC II, or other account owner or
receivables seller owns the receivables. Even
so, the indenture trustee would still have a
first priority perfected security interest;
however, the following interests may receive
priority above the indenture trustee's and your
interest:
. a tax or governmental lien, or other lien
imposed under applicable state or federal
law without consent, on the property of
the person that owns the receivables
arising before those receivables come
into existence;
. the fees and expenses relating to an
insolvency or bankruptcy proceeding
commenced by or against the bank, HRAC
II, any other account owner or
receivables seller, or the servicer;
. the interests of other creditors in
collections commingled and used for the
benefit of the servicer, if insolvency or
bankruptcy proceedings were commenced by
or against the servicer or if certain
time periods were to pass.
If any of these events were to occur, payments
to you could be delayed or reduced. See
"Material Legal Aspects of the Receivables--
Transfer of Receivables" and "Description of
the Transfer and Servicing Agreement--
Representations and Warranties of the
Transferor" in this prospectus.
In addition, with respect to the addition of
additional accounts and participations to the
trust, the indenture trustee may not have a
first-priority perfected security interest with
respect to those additional accounts and
participations before the required delivery
date of the computer file or microfiche list
reflecting the addition of those additional
accounts and participations to the trust. The
required delivery date for new accounts and
participations may be as long as 109 days after
the related addition date. If insolvency or
bankruptcy proceedings were commenced by or
against the transferor, the bank, HRAC II, or
any other account owner or receivables seller
after the related addition date but prior to
the related required delivery date, other
secured or unsecured creditors of that entity
could have claims ranking higher than yours
and, consequently, payments to you could be
reduced.
If a conservator or receiver Although the bank (or other account owner or
were appointed for the bank receivables seller that is a similarly
or other account owner or regulated financial institution, which in this
receivables seller, or section we also refer to as the "bank") will
HRAC II or other account treat its transfer of the receivables as a sale
owner or receivables seller for accounting purposes, the transfer may
became a debtor in a constitute the grant of a security interest
bankruptcy under general applicable
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case, delays or reductions law. Nevertheless, the FDIC has issued
in payment of your notes regulations surrendering certain rights under
could occur. the Federal Deposit Insurance Act, as amended
by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, to reclaim,
recover, or recharacterize a financial
institution's transfer of financial assets such
as the receivables if (i) the transfer involved
a securitization of the financial assets and
meets specified conditions for treatment as a
sale under relevant accounting principles, (ii)
the financial institution received adequate
consideration for the transfer, (iii) the
parties intended that the transfer constitute a
sale for accounting purposes, and (iv) the
financial assets were not transferred
fraudulently, in contemplation of the financial
institution's insolvency, or with the intent to
hinder, delay, or defraud the financial
institution or its creditors. The receivables
purchase agreements to which the bank is a
party and the transfer of the receivables by
the bank are intended to satisfy all of these
conditions.
If a condition required under the FDIC's
regulations were found not to have been met,
however, the FDIC could reclaim, recover, or
recharacterize the bank's transfer of the
receivables. FDIC staff positions taken prior
to the passage of the 1989 amendment to the
FDIA do not suggest that the FDIC would
interrupt the timely transfer to the transferor
and the trust of payments collected on the
receivables. If the FDIC were to assert a
different position, the FDIA would limit the
damages in this event to "actual direct
compensatory damages" determined as of the date
that the FDIC was appointed as conservator or
receiver for the bank. The FDIC, moreover,
could delay its decision whether to reclaim,
recover, or recharacterize the bank's transfer
of the receivables for a reasonable period
following its appointment as conservator or
receiver for the bank. Therefore, if the FDIC
were to reclaim, recover, or recharacterize the
bank's transfer of the receivables, payments to
noteholders could be delayed or reduced.
Even if the conditions set forth in the
regulations were satisfied and the FDIC did not
reclaim, recover, or recharacterize the bank's
transfer of the receivables, noteholders could
suffer a loss on their investment if (i) any
receivables purchase agreement to which the
bank is a party or the bank's transfer of the
receivables were found to violate the
regulatory requirements of the FDIA, (ii) the
transferor, the trust, or the indenture trustee
were required to comply with the claims process
established under the FDIA in order to collect
payments on the receivables, (iii) the FDIC
were to request a stay of any action by the
transferor, the trust, or the indenture trustee
to enforce any receivables purchase agreement
or the notes, or (iv) the FDIC were to
repudiate other obligations of the bank
relating to the receivables or the issuance of
the notes.
Payments to you also could be delayed or
reduced if the transfer of receivables by HRAC
II, or another account owner or receivables
seller eligible to be a debtor in a bankruptcy
case were construed as the grant of a security
interest rather than an absolute assignment or
if the assets and liabilities of the transferor
were substantively consolidated with those of
an entity in bankruptcy.
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If a conservator or receiver were appointed for
the bank or any account owner or receivables
seller, or if HRAC II, the transferor, or any
account owner or receivables seller other than
the bank became a debtor in a bankruptcy case,
an early payment of principal on all
outstanding series could result. Under the
terms of the receivables purchase agreements
and the transfer and servicing agreement, new
principal receivables would not be transferred
to the trust. However, the bankruptcy court,
the conservator or the receiver may have the
power, regardless of the terms of the
receivables purchase agreements, the transfer
and servicing agreement, the indenture, or the
instructions of those authorized to direct the
indenture trustee's actions, (i) to prevent or
require the commencement of an amortization
period or accumulation period, (ii) to prevent,
limit, or require the early liquidation of the
receivables and termination of the trust, or
(iii) to require, prohibit, or limit the
continued transfer of receivables to the trust.
If any of these events were to occur, payments
to noteholders could be delayed or reduced.
In addition, in the event the servicer became a
debtor in a bankruptcy case, a court overseeing
the servicer's bankruptcy case may have the
power to prevent the transferor, the indenture
trustee or the noteholders from appointing a
new servicer.
See "Material Legal Aspects of the
Receivables--Matters Relating to
Conservatorship, Receivership and Bankruptcy"
in this prospectus.
You may have limited or no Under the indenture, noteholders holding a
ability to control actions specified percentage of the outstanding
under the indenture. This principal amount of notes of a series or class
may result in, among other or all the notes may take actions, or may
things, payment of principal direct the indenture trustee to take various
being accelerated when it is actions described under "Description of the
in your interest to receive Indenture--Events of Default, Rights Upon
payment of principal at the Events of Default", including accelerating the
scheduled principal payment payment of principal of the notes. In the case
date, or it may result in of votes by series or votes by holders of all
payment of principal not the notes, the most senior class of notes will
being accelerated when it is generally be substantially greater than the
in your interest to receive subordinate class or classes of notes. The
early payment of principal. holders of the most senior class of notes will
therefore generally have the ability to
determine whether and what actions are to be
taken. The holders of the subordinate class or
classes of notes will generally need the
concurrence of the holders of the most senior
class of notes to cause actions to be taken.
Therefore, the actions taken or not taken by
the controlling noteholders may be contrary to
the actions that you determine to be in your
best interest.
If an event of default Your remedies may be limited if an event of
occurs, your remedy options default under your class or series of notes
will be limited and you may occurs. After an event of default and the
not receive full payment of acceleration of your series of notes,
principal and accrued collections of principal receivables and
interest. finance charge and administrative receivables
allocated to those notes and, if applicable,
any funds in the principal funding account for
your series, will be applied to make payments
of monthly interest and principal on those
notes until the earlier of the date those notes
are paid in full and the final maturity date of
those notes. However, no principal collections
will be allocated to a class of notes if its
invested amount is zero, even if the stated
principal balance of the notes has not been
paid in full. If your series includes a
principal funding account, funds in that
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principal funding account, if any, that are not
reallocated to other classes of that series
will still be available to pay principal of and
interest on classes of notes with an invested
amount of zero. If your notes are subordinated
notes as specified in the prospectus
supplement, you will receive payment of
principal of those notes only if and to the
extent that, after giving effect to that
payment, the amount of subordination, as
specified in the prospectus supplement, will be
maintained for the senior classes of notes in
that series.
If the transferor breaches Household Receivables Funding, Inc. III, as
representations and transferor of the receivables, makes
warranties relating to the representations and warranties relating to the
receivables, payments on validity and enforceability of the receivables
your notes may be reduced. arising under the accounts in the trust
portfolio, and as to the perfection and
priority of the indenture trustee's interest in
the receivables. However, neither the owner
trustee nor the indenture trustee will make any
examination of the receivables or the related
assets to determine the presence of defects,
compliance with the representations and
warranties or for any other purpose.
If a representation or warranty relating to the
receivables is violated, the related obligors
may have defenses to payment or offset rights,
or creditors of the other account owner or
receivables seller or the transferor may claim
rights to the trust assets. If a representation
or warranty is violated, the transferor may
have an opportunity to cure the violation. If
it is unable to cure the violation within the
specified time period or if there is no right
to cure the violation, the transferor must
accept reassignment of the receivables affected
by the violation. These reassignments are the
only remedy for breaches of representations and
warranties, even if your damages exceed your
share of the reassignment price. See
"Description of the Transfer and Servicing
Agreement--Representations and Warranties of
the Transferor" in this prospectus.
Changes to consumer Receivables that do not comply with consumer
protection laws may impede protection laws may not be valid or enforceable
collection efforts or reduce under their terms against the obligors of those
collections which may result receivables.
in a reduction in payments
on your notes.
Federal and state consumer protection laws
regulate the creation and enforcement of
consumer loans, including credit card accounts
and receivables. Changes or additions to those
regulations could make it more difficult for
the servicer of the receivables to collect
payments on the receivables or reduce the
finance charges and other fees that the
originator can charge on credit card account
balances, resulting in reduced collections.
If a cardholder sought protection under federal
or state bankruptcy or debtor relief laws, a
court could reduce or discharge completely the
cardholder's obligations to repay amounts due
on its account and, as a result, the related
receivables would be written off as
uncollectible. See "Material Legal Aspects of
the Receivables--Consumer Protection Laws" in
this prospectus.
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Competition in the credit The credit card industry is highly competitive.
card industry may result in As new credit card companies enter the market
a decline in the bank's or and companies try to expand their market share,
other account owner's effective advertising, target marketing and
ability to generate new pricing strategies grow in importance. The
receivables. This may result bank's or other account owner's ability to
in the payment of principal compete in this industry environment will
to you earlier or later than affect its ability to generate new receivables
your scheduled principal and might also affect payment patterns on the
payment date. receivables. If the rate at which the bank or
other account owner generates new receivables
declines significantly, the bank or other
account owner might be unable to transfer
additional receivables or designate additional
accounts to the trust and an amortization event
could occur, resulting in payment of principal
sooner than expected. If the rate at which the
bank or other account owner generates new
receivables decreases significantly at a time
when noteholders are scheduled to receive
principal, noteholders might receive principal
more slowly than planned.
Affinity program The accounts, the receivables of which
restrictions on pricing and currently have been conveyed or will be
other account terms could conveyed to the trust on the closing date, were
limit the ability of the originated under an affinity agreement between
bank or other account owner the bank and Union Privilege. The Union Plus
to change account terms. program contains, and other affinity programs
These restrictions may cause may contain, restrictions on pricing and other
collections to decline or practices. In the future, additional accounts
may affect the rate at which may also be designated for inclusion in the
new receivables are trust relating to other affinity or non-
generated in the accounts. affinity programs. The current pricing
This may result in early restrictions in the Union Plus programs and
payments of principal to changes in the terms of these programs may
you. reduce collections or may affect the rate at
which new receivables are generated in the
accounts. See "The Bank's Credit Card
Portfolio--Billing and Payments" in the
accompanying prospectus supplement.
The account owner may change As owner of the accounts, the bank or other
the terms and conditions of account owner retains the right to change
the accounts in a way that various account terms including finance
reduces collections. These charges, other fees and the required monthly
changes may result in minimum payment. Those changes may be voluntary
reduced or early payments to on the part of the bank or may be forced by law
you. or market conditions. Changes by the bank or
other account owner in interest rate and fees
charged to its customers could decrease the
effective yield on the accounts and this could
result in an early payment or reduced payment
of principal of your notes. Changes in the
required monthly minimum payment could result
in delays in the payment of your notes. Changes
in account terms could also cause a reduction
in the credit ratings on your notes.
Payment patterns of The receivables transferred to the trust may be
cardholders may not be paid at any time. We cannot assure the creation
consistent over time and of additional receivables in the trust's
variations in these payment accounts or that any particular pattern of
patterns may result in cardholder payments will occur. A significant
reduced payment of decline in the amount of new receivables
principal, or receipt of generated could result in the occurrence of an
payment of principal earlier amortization event for one or more series and
or later than expected. the commencement of the early amortization
period or, if applicable, the early
accumulation period for each of those series.
If an amortization event occurs, you could
receive payment of principal sooner than
expected. The bank's ability to compete in the
current industry environment will affect
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its ability to generate new receivables and
might also affect payment patterns on the
receivables. In addition, changes in finance
charges can alter the monthly payment rates of
cardholders. A significant decrease in monthly
payment rates, including the effect of payment
holidays, could slow the return or accumulation
of principal during an amortization period or
accumulation period. See "Description of the
Notes--Principal Payments" in this prospectus.
The transferor may designate a percentage of
Recharacterization of the receivables that would otherwise be treated
principal receivables would as principal receivables to be treated as
reduce principal receivables finance charge and administrative receivables.
and may require the addition This designation should decrease the likelihood
of new receivables. If new of an early amortization event occurring as a
receivables are unavailable result of a reduction of the series portfolio
when required you may yield for a given period. However, this
receive payment of principal designation will also reduce the aggregate
earlier than expected. amount of principal receivables, which may
increase the likelihood that the transferor
will be required to add receivables to the
trust. If the transferor were unable to add
receivables and could not make a sufficient
cash deposit into the special funding account,
one or more series of notes, including your
series, could go into early amortization
resulting in principal being paid before the
scheduled payment date.
Additions to trust assets The transferor expects that it will
may decrease the credit periodically add additional accounts to the
quality of the assets trust and may, at times, be obligated to add
securing the repayment of additional accounts. While each additional
your notes. If this occurs, account must be an eligible account at the time
your receipt of payments of of its designation, additional accounts may not
principal and interest may be of the same credit quality as the initial
be reduced, delayed or accounts. There are many reasons which could
accelerated. cause differences in credit quality including
the fact that the additional accounts may have
been originated by the bank or other account
owner, as applicable, using credit criteria
different from those which were applied by the
bank to the initial accounts or may have been
acquired by the bank or other account owner, as
applicable, from an institution which may have
had different credit criteria. Consequently,
there is no assurance that future additional
accounts will have the same credit quality as
those currently designated to the trust. If
additional accounts added to the trust reduce
the credit quality of the trust assets, it will
increase the likelihood that your receipt of
payments will be reduced or not be received on
the scheduled principal payment date.
The note interest rate and Some accounts have finance charges set at a
the receivables interest variable rate based on a designated index, such
rate may re-set at different as the prime rate, while others have finance
times, resulting in reduced charges based upon a fixed rate. A series of
or early payments to you. notes may bear interest either at a fixed rate
or at a floating rate based on a different
index. If the interest rate charged on the
accounts declines, collections of finance
charge and administrative receivables may be
reduced without a corresponding reduction in
the amounts of interest payable on your notes
and other amounts required to be paid out of
collections of finance charge and
administrative receivables. This could result
in delayed or reduced payments to you.
A decrease in the spread, or difference,
between collections of finance charge and
administrative receivables and those
collections
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allocated to make interest payments on your
notes could also increase the risk of early
repayment of your notes.
Subordinated classes bear One or more classes of notes in a series may be
losses before senior subordinated to one or more senior classes of
classes. If you own notes in the same series. Principal allocations
subordinated notes, the to the subordinated class or classes generally
priority of allocations do not begin until each of the more senior
among classes of notes may classes has been paid in full. Therefore, if
result in payment on your you own subordinate notes, your receipt of
notes being reduced or principal payments may be delayed or reduced to
delayed. the extent the senior noteholders have not
received full and timely payments with respect
to their notes. Additionally, if collections of
finance charge and administrative receivables
allocated to a series are insufficient to cover
amounts due for that series' senior notes, the
invested amount for the series might be
reduced. This would reduce the amount of the
collections of finance charge and
administrative receivables allocated to the
series in future periods and could cause a
possible delay or reduction in principal and
interest payments on the subordinated notes.
Allocations of defaulted The servicer will write off the receivables
receivables could reduce arising in accounts in the trust portfolio if
payments to you. the receivables become uncollectible. Your
series will be allocated a portion of these
defaulted receivables. See "Description of
Series Provisions--Allocation Percentages" and
"The Bank's Credit Card Portfolio--Collection
of Delinquent Accounts" in the accompanying
prospectus supplement. If the amount of
defaulted receivables allocated to your series
of notes exceeds the amount of funds available
to reimburse those amounts, you may not receive
the full amount of principal and interest due
to you. See "Description of Series Provisions--
Application of Collections" and "--Subordinated
Principal Collections; Defaulted Amount;
Investor Charge-Offs" in the accompanying
prospectus supplement.
There is no public market The underwriters may assist in resales of the
for the notes. As a result notes but they are not required to do so. A
you may be unable to sell secondary market for any notes may not develop.
your notes or the price of If a secondary market does develop, it might
the notes may suffer. not continue or it might not be sufficiently
liquid to allow you to resell any of your
notes.
Issuance of additional The trust is expected to issue additional
series by the trust may series from time to time. The trust may issue
affect the timing of additional series with terms that are different
payments to you. from your series without your prior review or
consent. It is a condition to the issuance of
each new series that each rating agency that
has rated an outstanding series confirm in
writing that the issuance of the new series
will not result in a reduction or withdrawal of
its rating of any class of any outstanding
series. The rating agency confirmation
primarily will be based on the trust's ability
to pay principal by the series final maturity
date and interest on each distribution date.
The rating agency confirmation will not
consider how the terms of a new series could
affect the timing and amounts of payments on
your series on its expected principal payment
date. Therefore, the issuance of a new series
may cause payments of principal and interest on
your notes to be reduced, delayed or
accelerated.
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GLOSSARY
This prospectus uses defined terms. You can find a listing of defined terms
in the "Glossary" beginning on page 65 in this prospectus.
THE ISSUER
Household Credit Card Master Note Trust I is a common law trust created
under the laws of the State of Delaware on September 25, 2000. It is operated
under a trust agreement, dated as of September 25, 2000, between Household
Receivables Funding, Inc. III, as transferor, and Wilmington Trust Company, as
owner trustee.
The activities of the issuer are limited to:
. acquiring, owning and managing the trust assets and the proceeds of those
assets;
. issuing and making payments on the notes; and
. engaging in related activities.
Household Finance Corporation, in its capacity as administrator under the
administration agreement, dated as of September 25, 2000, between the
administrator and the issuer, will provide the notices and perform on behalf of
the issuer other administrative obligations required by the transfer and
servicing agreement, the indenture and the indenture supplement for each
series, and will be compensated for acting as the administrator with a monthly
fee as specified in the prospectus supplement. The transferor is responsible
for payment of the administrator's fees, to the extent not paid under the
prospectus supplement, and will reimburse the administrator for any of its
liabilities and extra out-of-pocket expenses related to its performance under
the administration agreement and any other document relating to the issuance of
the notes.
The issuer's principal offices are in Delaware, in care of Wilmington Trust
Company, as owner trustee, at the following address: Rodney Square North, 1100
North Market Street, Wilmington, DE 19890-0001. Its phone number is 302-651-
8856.
The transferor will pay the fees of the owner trustee and will reimburse it
for particular liabilities and expenses.
USE OF PROCEEDS
The net proceeds from the sale of each series of notes offered by this
prospectus will be paid to the transferor. The transferor will use those
proceeds to pay the bank or other receivables seller the purchase price of the
receivables transferred to the transferor by the bank or other receivables
seller under the receivables purchase agreement. Any receivables seller other
than the bank will use those proceeds to pay the bank or other account owner
the purchase price of the receivables purchased by it. The bank will use any
proceeds received for its general corporate purposes.
THE BANK'S CREDIT CARD ACTIVITIES
General
The credit card accounts owned by Household Bank (Nevada), N.A. primarily
are serviced on behalf of the servicer, Household Finance Corporation, by the
subservicer, Household Credit Services, Inc., an affiliate of the bank. The
accounts are serviced principally from the subservicer's facilities in Salinas,
California, Las Vegas, Nevada and Chesapeake, Virginia.
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The credit card accounts currently consist of mostly MasterCard credit card
accounts and a small number of VISA credit card accounts. The accounts in the
trust initially will consist of credit cards issued by Household Bank (Nevada),
N.A. under the Union Plus program.
Origination
The bank principally generates credit card accounts through:
. direct mail and telemarketing account solicitation on a pre-selected
credit basis;
. applications mailed directly to prospective cardholders;
. applications made available to prospective cardholders at various events
and retail outlets;
. applications generated by advertising in magazines and newspapers;
. applications marketed on and submitted through the internet; and
. purchases of accounts from other issuers.
In originating new credit card accounts, the bank generally evaluates the
ability of an applicant for a credit card to repay credit card balances by
applying a credit scoring system using credit risk models developed in-house
and credit bureau score models and bankruptcy score models developed in
conjunction with third parties. Credit scoring is intended to provide a general
idea, based on the information available, of a person's likelihood to repay his
or her debts. Credit scoring evaluates a potential cardholder's credit profile
to arrive at an estimate of the associated credit risk. The credit scoring
model used depends on a number of factors, including whether it is a
prescreened offer or an unsolicited application. Models for credit scoring are
developed using statistics to evaluate common cardholder characteristics and
their correlation with credit risk. Periodically, the bank reviews its credit
scoring models and, if necessary, updates them to reflect more current
statistical data.
New account originations mainly are the result of direct mailings. These
mailings are conducted on a nationwide basis, are targeted to particular states
or, in the case of the Union Plus program, are directed to particular
membership groups. The direct mailings are either done on a pre-selected basis
or an application basis. Persons qualifying for a pre-selected offer are
offered a credit card without having to complete a detailed application. For
direct mailings, the bank obtains lists containing the names and addresses of
individuals from one or more of the independent national credit bureaus or, for
the Union Plus program, from its program partner.
For pre-selected offers, the persons on the lists are credit scored to
evaluate credit risk in accordance with the bank's established credit quality
standards. Based on the outcome of credit scoring and the evaluation of other
credit characteristics such as total amount of outstanding credit card debt and
payment history as well as demographic data, the bank selects the individuals
to receive a pre-selected mailing. The pre-selection process attempts to match
these prospects with a product that would be acceptable to that individual.
Therefore, the bank offers credit cards with different annual percentage rates
and annual fee combinations and enhancement features, i.e. insurance coverage,
extended warranties, cash back rewards and travel services. A predetermined
credit limit is also reserved for each member of the group being solicited, the
amount being dependent on each member's individual credit scores and other
credit characteristics.
To accept a pre-selected credit card offer, the prospective cardholder must
provide requested information via an acceptance certificate, the telephone or
the internet. Upon receipt, the subservicer begins its post-screening process.
First, it automatically requests, in most cases, an updated credit report. This
updated credit report is also credit scored. Pre-selected candidates may be
declined based on their new credit scores, other credit characteristics such as
the presence of bankruptcy filings, tax liens, judgments and foreclosures and
payment history on the credit bureau report, as well as the level of existing
and potential revolving debt relative to stated income. The initial credit line
assigned also may be adjusted based upon the updated credit scores and credit
characteristic data on the bureau report.
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The bank also conducts direct mail campaigns which involve sending
applications on a non-pre-selected basis. It selects candidates for these
campaigns by using demographic models designed to identify persons most likely
to respond to direct mail solicitations. When the bank receives a credit card
application from a direct mail solicitation or other source, it reviews that
application for completeness and applies the same post-screening process
described above for pre-selected offers. The subservicer, on behalf of the
bank, may verify information regarding the applicant and request additional
information as deemed necessary to make a decision on the creditworthiness of
the applicant.
Credit limits are established for each prospective cardholder based on
credit scores, income and other credit characteristics. Credit limits range
from $250 to $25,000. The majority of non-premium accounts are in the $1,500 to
$10,000 range, while premium accounts generally are assigned credit limits of
$5,000 or more, with the majority having a credit limit of approximately
$7,000. Credit limits are reviewed regularly for both upward and downward
action. Upward action is based upon a combination of the credit risk and usage
by the customer. Accounts are reviewed for increases approximately once per
quarter. Customers can also request credit line increases. Delinquent accounts
with high risk profiles can experience a line decrease up to once per quarter.
The bank and its affiliates have made portfolio acquisitions in the past and
additional acquisitions are possible in the future. Prior to acquiring a
portfolio, the bank reviews the historical performance and seasoning of the
portfolio and the policies and practices of the selling institution. There can
be no assurance that accounts so acquired were originated in a manner
consistent with the bank's policies or that the underwriting and qualification
of these accounts conformed to any given standard. After acquisition, however,
all accounts periodically are credit screened as described under "--Account
Management."
Account Management
Each month all credit card accounts that have been open for more than four
months are scored using a behavioral scoring system that predicts the
likelihood of serious future delinquency or filing bankruptcy. The behavioral
scoring system incorporates an account's previous history as well as credit
bureau data. The bank uses behavioral scoring for virtually all portfolio
management functions, including to manage credit lines, authorizations,
collections, card re-issuance, re-pricing, credit card upgrades, such as
upgrading a classic card to a gold or platinum card, and balance transfer
offers. As opposed to the credit screening done in originations, the account
management credit screening places more weight on the account's previous
history than credit bureau scoring and data.
Interchange
Creditors participating in the VISA USA and MasterCard International
associations receive fees, called Interchange, as partial compensation for
taking credit risk, absorbing fraud losses and funding receivables for a
limited period prior to initial billing. Under the VISA USA and MasterCard
International systems, a portion of this Interchange in connection with
cardholder charges for merchandise and services is passed from banks which
clear the transactions for merchants to credit card-issuing banks. MasterCard
and VISA set Interchange fees annually based on the number of credit card
transactions and the amount charged per transaction. Interchange ranges between
1% and 2% of the transaction amount. The bank and the transferor may be
required, as described in the accompanying prospectus supplement, to transfer
to the trust Interchange attributed to cardholder charges for merchandise and
services in the related accounts. If so, Interchange will be allocated to the
trust as may be reasonably determined or estimated by the servicer. VISA USA
and MasterCard International may from time to time change the amount of
Interchange reimbursed to banks issuing their credit cards.
For additional information regarding the bank's credit card activities, see
"The Bank's Credit Card Portfolio" in the accompanying prospectus supplement.
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THE TRUST PORTFOLIO
The assets of the trust include receivables generated through certain
revolving credit accounts, all of which are owned by the bank. The bank has
transferred and assigned to the transferor, for transfer and assignment by the
transferor to the trust, all of the bank's right, title and interest in and to
the receivables in the Trust Portfolio. In addition to the receivables in the
Trust Portfolio, the trust assets include, to the extent noted below:
. all monies due or to become due in payment of these receivables;
. all proceeds of these receivables;
. all proceeds of any credit insurance policies relating to these
receivables;
. Interchange, if the prospectus supplement for your series of notes so
indicates;
. any recoveries allocable to the trust because of these receivables;
. any Participations and the related collections conveyed to the trust;
. all monies on deposit in specified accounts or investments made with
these monies, including any earned investment proceeds if the prospectus
supplement for your series of notes so indicates;
. proceeds of any credit enhancement, as described in the prospectus
supplement for your series of notes;
. proceeds of any derivative contracts between the trust and a
counterparty, as described in the prospectus supplement for your series
of notes; and
. any other amounts so specified in the prospectus supplement.
Receivables in the trust consist of:
. Principal Receivables; and
. Finance Charge and Administrative Receivables.
The trust considers collections of Interchange and recoveries as collections
of Finance Charge and Administrative Receivables. In addition, Principal
Receivables include the principal portion of Participations, as determined
under the terms and provisions of the participation agreements. If the bank
exercises the Discount Option, a portion of monthly collections of Principal
Receivables will be considered Finance Charge and Administrative Collections
and Principal Receivables will be reduced by that amount. See "Description of
the Transfer and Servicing Agreement--Discount Option" for a description of the
manner of and the conditions to exercise the Discount Option.
Each of the bank and the transferor has indicated and, in connection with
each future transfer of receivables to the trust, the bank, or any other
account owner or receivables seller, and the transferor, including any
additional transferor, will indicate in its computer files or books and records
that the receivables have been conveyed to the trust. In addition, each of the
bank and the transferor, including any additional transferor, has provided or
caused to be provided to the owner trustee on the Required Delivery Date
computer files or microfiche lists, containing a true and complete list showing
each account, identified by account number and by total outstanding balance on
the date of transfer. None of the bank, or any other account owner or
receivables seller, or the transferor, including any additional transferor,
will deliver to the owner trustee any other records or agreements relating to
the accounts or the receivables, except in connection with additions or
removals of accounts. Except as stated above, the records and agreements
relating to the accounts and the receivables maintained by any of the bank, or
any other account owner or receivables seller, and the transferor, including
any additional transferor, are not and will not be segregated from other
documents and agreements relating to other credit card accounts and receivables
and are not and will not be stamped or marked to reflect the transfers
described above, but the computer records of each of the bank, or any other
account owner or receivables seller, and the transferor, including any
additional transferor, are and will be required to be marked to evidence these
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transfers. Each of the bank and the transferor has filed in all appropriate
jurisdictions Uniform Commercial Code financing statements with respect to the
receivables meeting the requirements of applicable law. See "Risk Factors--Some
liens may be given priority over your notes which could cause your receipt of
payments to be delayed or reduced" and "Material Legal Aspects of the
Receivables" in this prospectus.
All trust assets will initially be in a pool of assets designated as pool
one. All series of notes offered by this prospectus will be backed by the
assets in pool one unless the prospectus supplement for a series specifies a
different pool of assets for that series. In the event that assets are
deposited into the trust and designated as being in a pool of assets other than
pool one, a separate collection account and special funding account will be
created for that pool. Series of notes which are issued to finance assets in a
different pool will be backed solely by those assets and not by assets in pool
one. All references in this prospectus and the accompanying prospectus
supplement to receivables, accounts and notes shall refer to pool one only,
unless otherwise stated.
Initially, a group of revolving credit accounts were selected and designated
for inclusion in the trust. In the future, additional revolving credit accounts
may be designated for inclusion in the trust as well as Participations in lieu
of, or in addition to, additional accounts. Revolving credit accounts initially
designated and any future accounts designated for inclusion in the trust must
meet eligibility criteria set forth in the transfer and servicing agreement.
Receivables conveyed to the trust must also meet eligibility criteria set forth
in the transfer and servicing agreement. If receivables conveyed to the trust
are found to have been ineligible when created or designated for inclusion, the
transferor must accept retransfer of these receivables.
The transferor has the right, and may be required to, designate additional
accounts for inclusion in the Trust Portfolio, as described under "Description
of the Transfer and Servicing Agreement--Addition of Trust Assets" in this
prospectus.
The transferor also has the right to remove accounts from the Trust
Portfolio, as described under "Description of the Transfer and Servicing
Agreement--Removal of Trust Assets" in this prospectus. If the transferor does
so, the trust will reconvey all receivables in these removed accounts, whether
existing or to be created, to the transferor.
When the trust issues a new series of notes, the transferor will represent
and warrant to the trust that, as of the closing date for the new series, the
revolving credit accounts designated for inclusion in the trust met the
eligibility criteria set forth in the transfer and servicing agreement at their
time of designation. See "Description of the Transfer and Servicing Agreement--
Representations and Warranties of the Transferor" in this prospectus for more
information on eligibility criteria for revolving credit accounts and
receivables.
The prospectus supplement relating to each series of notes will provide
information about the Trust Portfolio as of the date specified. This
information will include:
. the amount of Principal Receivables;
. the amount of Finance Charge and Administrative Receivables;
. the range and average of balances of the accounts;
. the range and average of credit limits of the accounts;
. the range and average of ages of the accounts;
. the geographic distribution of the accounts; and
. delinquency statistics relating to the accounts.
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DESCRIPTION OF THE NOTES
The notes will be issued in series. Each series will represent an obligation
of the trust. Each series of notes will be issued from the indenture, as
supplemented by an indenture supplement, in each case entered into by the trust
and the indenture trustee. The following summaries describe the material
provisions common to each series of notes. The accompanying prospectus
supplement gives you additional information specific to the notes of your
series.
General
The notes will be secured by and paid from the assets of the trust. Each
series will be allocated collections of Principal Receivables and Finance
Charge and Administrative Receivables based on the Investor Percentage. The
Investor Percentage will be based on the Invested Amount for a series.
References to a series in this prospectus include any subseries of a series.
Each series of notes may consist of one or more classes, one or more of
which may be senior notes and/or one or more of which may be subordinated
notes. Each class of a series will evidence the right to receive a specified
portion of each distribution of principal or interest or both. Each class of a
series may differ from other classes in some aspects, including:
. note rating;
. availability and amount of enhancement;
. priority of entitled payments;
. amounts allocated to interest and principal payments;
. interest rate; and
. maturity date.
Payments and deposits of interest and principal will be made on payment
dates to noteholders in whose names the notes were registered on the record
dates specified in the accompanying prospectus supplement. Interest will be
distributed to noteholders in the amounts, for the periods and on the dates
specified in the accompanying prospectus supplement.
The transferor initially will own the Transferor Certificate. The holder of
the Transferor Certificate, subject to limitations, will have the right to the
Transferor Percentage of all cardholder payments from the receivables in the
trust. The Transferor Certificate may be transferred, in whole or in part,
subject to the limitations and conditions set forth in the trust agreement and
the transfer and servicing agreement, and, at the discretion of the transferor,
the Transferor Certificate may be held in either certificated or uncertificated
form. See "Description of the Transfer and Servicing Agreement--Matters
Regarding the Servicer and the Transferor" in this prospectus.
During the Revolving Period, the Invested Amount of a series will remain
constant except under limited circumstances. See "--Defaulted Amount; Investor
Charge-Offs" in this prospectus. The amount of Principal Receivables in the
trust, however, will vary each day as new Principal Receivables are created and
others are paid. The Transferor Amount will fluctuate each day, therefore, to
reflect the changes in the amount of the Principal Receivables in the trust.
When a series is amortizing, the Invested Amount of that series will decline as
customer payments of Principal Receivables are collected and distributed, or
accumulated for distribution, to the noteholders. As a result, the Transferor
Amount will generally increase to reflect reductions in the Invested Amount for
that series and will also change to reflect the variations in the amount of
Principal Receivables in the trust. The Transferor Amount may also be reduced
as the result of new issuances. See "--New Issuances" in this prospectus.
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If the servicer adjusts the amount of any Principal Receivable because of
transactions occurring in respect of a rebate or refund to a cardholder, or
because that Principal Receivable was created in respect of merchandise which
was refused or returned by a cardholder, then the Transferor Amount will be
reduced by the amount of the adjustment. In addition, the Transferor Amount
will be reduced as a result of transactions in respect of any Principal
Receivable which was discovered as having been created through a fraudulent or
counterfeit charge.
Note Ratings
Any rating of the notes by a Rating Agency will indicate:
. its view on the likelihood that noteholders will receive required
interest and principal payments; and
. its evaluation of the receivables and the availability of any credit
enhancement for the notes.
Among the things a rating will not indicate are:
. the likelihood that interest or principal payments will be paid on a
scheduled date;
. the likelihood that an Amortization Event will occur;
. the likelihood that a U.S. withholding tax will be imposed on non-U.S.
noteholders;
. the marketability of the notes;
. the market price of the notes; or
. whether the notes are an appropriate investment for any purchaser.
A rating will not be a recommendation to buy, sell or hold the notes. A
rating may be lowered or withdrawn at any time by a Rating Agency.
The transferor will request a rating of the notes offered by this prospectus
and the accompanying prospectus supplement from at least one Rating Agency.
Rating agencies other than those requested could assign a rating to the notes
and, if so, that rating could be lower than any rating assigned by a Rating
Agency chosen by the transferor.
Book-Entry Registration
Generally, notes offered through the prospectus and the accompanying
prospectus supplement:
. will be represented by notes registered in the name of a DTC nominee;
. will be available for purchase in minimum denominations of $1,000 and
multiples of $1,000 in excess of that amount; and
. will be available for purchase in book-entry form only.
The accompanying prospectus supplement will specify if your notes have
different characteristics from those listed above.
DTC has informed the transferor that its nominee will be Cede & Co.
Accordingly, Cede & Co. is expected to be the holder of record of each series
of notes. As an owner of beneficial interests in the notes, you will generally
not be entitled to a Definitive Note representing your interest in the issued
notes because you will own notes through a book-entry record maintained by DTC.
References in this prospectus and the accompanying prospectus supplement to
distributions, reports, notices and statements to noteholders refer to DTC or
Cede & Co., as registered holder of the notes, for distribution to you in
accordance with DTC procedures. All references in this prospectus and the
accompanying prospectus supplement to actions by noteholders shall refer to
actions taken by DTC upon instructions from DTC participants.
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The accompanying prospectus supplement may state that application will be
made to list your series or class of notes on the Luxembourg Stock Exchange or
another exchange.
Following is a description of the form your notes will take. We also
describe how your notes may be transferred and how payments will be made to
you.
The information in this section concerning DTC and DTC's book-entry system
has been provided by DTC. The transferor has not independently verified the
accuracy of this information.
You may hold your notes through DTC in the U.S., Clearstream Luxembourg or
Euroclear in Europe or in any other manner described in the accompanying
prospectus supplement. You may hold your notes directly with one of these
systems if you are a participant in the system, or indirectly through
organizations which are participants.
Cede & Co., as nominee for DTC, will hold the global notes. Clearstream
Luxembourg and Euroclear will hold omnibus positions on behalf of the
Clearstream customers and the Euroclear participants, respectively, through
customers' securities accounts in Clearstream's and Euroclear's names on the
books of their respective Depositaries which in turn will hold those positions
in customers' securities accounts in the Depositaries' names on the books of
DTC.
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 under the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of participants,
thereby eliminating the need for physical movement of certificates or notes.
Participants include securities brokers and dealers, who may include the
underwriters of any series, banks, trust companies and clearing corporations
and may include other organizations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies, as
indirect participants, that clear through or maintain a custodial relationship
with a participant, either directly or indirectly.
Transfers between DTC participants will occur in accordance with DTC rules.
Transfers between Clearstream customers and Euroclear participants will occur
in the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
customers or Euroclear participants, on the other, will be effected through DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its depositary; however, those cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that 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. Clearstream
customers and Euroclear participants may not deliver instructions directly to
the Depositaries.
Because of time-zone differences, credits of securities in Clearstream
Luxembourg or Euroclear as a result of a transaction with a participant will be
made during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and those credits or any transactions in
those securities settled during the subsequent securities settlement processing
will be reported to the relevant Clearstream customer or Euroclear participant
on that business day. Cash received in Clearstream Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream customer or a
Euroclear participant to a DTC participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream or
Euroclear cash account only as of the business day following settlement in DTC.
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Note Owners that are not participants or indirect participants but desire to
purchase, sell or otherwise transfer ownership of, or other interest in, notes
may do so only through participants and indirect participants. In addition,
Note Owners will receive all distributions of principal of and interest on the
notes from the indenture trustee through the participants who in turn will
receive them from DTC. Under a book-entry format, Note Owners may experience
some delay in their receipt of payments, since those payments will be forwarded
by the indenture trustee to Cede & Co., as nominee for DTC. DTC will forward
those payments to its participants, which thereafter will forward them to
indirect participants or Note Owners. It is anticipated that the only
"noteholder" will be Cede & Co., as nominee of DTC. Note Owners will not be
recognized by the indenture trustee as noteholders, as that term is used in the
indenture, and Note Owners will only be permitted to exercise the rights of
noteholders indirectly through the participants who in turn will exercise the
rights of noteholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, 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 and interest on the notes. Participants
and indirect participants with which Note Owners have accounts with respect to
the notes similarly are required to make book-entry transfers and receive and
transmit those payments on behalf of their respective Note Owners. Accordingly,
although Note Owners will not possess notes, Note Owners will receive payments
and will be able to transfer their interests.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a Note Owner to
pledge notes to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of those notes, may be limited due to the
lack of a physical certificate for those notes.
DTC has advised the transferor that it 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 account with DTC the notes are credited. Additionally,
DTC has advised the transferor that it will take those actions with respect to
specified percentages of the Invested Amount only at the direction of and on
behalf of participants whose holdings include interests that satisfy those
specified percentages. DTC may take conflicting actions with respect to other
interests to the extent that those actions are taken on behalf of participants
whose holdings include those interests.
Clearstream Banking, societe anonyme, was incorporated in 1970 as "Cedel
S.A.," a company with limited liability under Luxembourg law, a societe
anonyme. Clearstream Luxembourg holds securities for its customers and
facilitates the clearance and settlement of securities transactions between
Clearstream customers through electronic book-entry changes in accounts of
Clearstream customers, thereby eliminating the need for physical movement of
certificates. Transactions may be settled by Clearstream Luxembourg in any of
36 currencies, including United States dollars. Clearstream Luxembourg provides
to its customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream Luxembourg is registered as a bank in
Luxembourg. Clearstream Luxembourg is subject to regulation by the Commission
de Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers, and dealers, banks, trust companies and
clearing corporations. Clearstream U.S. customers are limited to securities
brokers and dealers, and banks. Currently, Clearstream Luxembourg has
approximately 2,000 customers located in over 80 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream
Luxembourg.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System 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 notes and any
risk from lack of simultaneous
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transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System 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. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office as the Euroclear operator, under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation. 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 the Euroclear
System on behalf of Euroclear participants. Euroclear participants include
banks, including central banks, securities brokers and dealers and other
professional financial intermediaries and may include the underwriters of any
series of notes. Indirect access to the Euroclear System 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. 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. These rules and laws govern transfers of securities and cash within the
Euroclear System, withdrawal of securities and cash from the Euroclear System,
and receipts of payments with respect to securities in the Euroclear System.
All securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates or notes to specific securities clearance
accounts. The Euroclear Operator acts under these rules and laws 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 Clearstream Luxembourg or
Euroclear will be credited to the cash accounts of Clearstream customers or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by its depositary. Distributions with
respect to notes held through Clearstream Luxembourg or Euroclear will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax Consequences" in this prospectus.
Clearstream Luxembourg 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 Clearstream customer or Euroclear participant only in accordance
with its relevant rules and procedures and subject to its depositary's ability
to effect those actions on its behalf through DTC.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of notes among
participants of DTC, Clearstream Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform those procedures and those
procedures may be discontinued at any time.
Definitive Notes
The notes of each series will be issued as Definitive Notes to Note Owners
or their nominees, rather than to DTC or its nominee, only if:
. the administrator advises the indenture trustee for that series in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to a given class of notes,
and the administrator is unable to locate and reach an agreement on
satisfactory terms with a qualified successor;
. the administrator, at its option, advises the indenture trustee in
writing that it elects to terminate the book-entry system through DTC; or
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. after the occurrence of a Servicer Default or an Event of Default,
beneficial owners of a class representing more than 50% of the
outstanding principal amount of that class of notes advise the indenture
trustee and DTC through participants in writing that the continuation of
a book-entry system through DTC, or a successor thereto, is no longer in
the best interests of the Note Owners of that class of notes.
If any of these events occur, DTC must notify all participants of the
availability through DTC of Definitive Notes. Upon surrender by DTC of the
definitive instrument representing the notes and instructions for re-
registration, the indenture trustee will issue the notes as Definitive Notes,
and thereafter the indenture trustee will recognize the registered holders of
those Definitive Notes as noteholders under the indenture.
Distribution of principal and interest on the notes will be made by the
indenture trustee directly to holders of Definitive Notes in accordance with
the procedures set forth in this prospectus and in the indenture. Interest
payments and any principal payments on each payment date will be made to
holders in whose names the Definitive Notes were registered at the close of
business on the related record date. Distributions will be made by check mailed
to the address of the noteholders as it appears on the register maintained by
the indenture trustee. The final payment on any note, whether Definitive Notes
or the notes registered in the name of Cede & Co. representing the notes,
however, will be made only upon presentation and surrender of that note at the
office or agency specified in the notice of final distribution to noteholders.
The indenture trustee will provide this notice to registered noteholders not
later than the fifth day of the month of the final distributions.
Definitive Notes will be transferable and exchangeable at the offices of the
transfer agent and registrar, which will initially be the indenture trustee. No
service charge will be imposed for any registration of transfer or exchange,
but the transfer agent and registrar may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection with the
transfer or exchange. The transfer agent and registrar will not be required to
register the transfer or exchange of Definitive Notes for a period of fifteen
days preceding the due date for any payment on those Definitive Notes.
New Issuances
The indenture provides that, under any one or more indenture supplements,
the trust may cause the owner trustee to issue one or more new series of notes
and may define all principal terms of those series. Each series issued may have
different terms and enhancements than any other series. Upon the issuance of an
additional series of notes, the transferor, the servicer, the indenture trustee
or the trust are not required and do not intend to obtain the consent of any
noteholder of any other series previously issued by the trust. However, as a
condition of a new issuance, the indenture trustee must receive written
confirmation that the new issuance will not result in the reduction or
withdrawal by any applicable Rating Agency of its rating of any outstanding
series or class. The trust may offer any series under a prospectus or other
disclosure document in offerings under this prospectus or in transactions
either registered under the Securities Act, or exempt from registration under
the Securities Act directly, through one or more other underwriters or
placement agents, in fixed-price offerings or in negotiated transactions or
otherwise.
Unless otherwise specified in the accompanying prospectus supplement, a new
issuance may only occur upon the satisfaction of conditions provided in the
indenture. The transferor may cause the owner trustee, on behalf of the trust,
to issue new series of notes by notifying the owner trustee, the indenture
trustee, the servicer and each Rating Agency at least five days in advance of
the date upon which the new issuance is to occur. The notice will state the
date upon which the new issuance is to occur.
The owner trustee will execute, and the indenture trustee will authenticate,
the notes of any series only upon delivery to them of the following items, or
satisfaction of the following conditions, among others:
(1) an indenture supplement specifying the principal terms of the new
series;
(2) a Tax Opinion;
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(3) if required by the related indenture supplement, the form of credit
enhancement and an appropriate credit enhancement agreement with respect to
that credit enhancement executed by the transferor and the issuer of the
credit enhancement;
(4) written confirmation from each Rating Agency that the new issuance
will not result in a reduction or withdrawal of its rating of any
outstanding series or class;
(5) a certificate of an authorized officer of the transferor to the
effect that it reasonably believes the new issuance will not have an
Adverse Effect; and
(6) after giving effect to the new issuance, the total amount of
Principal Receivables plus the principal amount of any Participations
previously transferred to the trust exceeds the Required Minimum Principal
Balance.
To the extent set forth in the prospectus supplement, additional notes of
the same series may be issued subject to the conditions set forth in the
applicable indenture supplement.
Funding Period
For any series of notes, the total amount of Principal Receivables in the
trust available to that series may be less than the total principal amount of
the notes of that series. If this occurs, the initial invested amount for that
series of notes will be less than the principal amount of that series of notes.
In this case, the related prospectus supplement will set forth the terms of the
Funding Period.
During the Funding Period, the portion of the series amount not invested in
receivables will be maintained in a pre-funding account. On the closing date
for that series of notes, this amount may be up to 100% of the principal
balance of that series of notes. The Invested Amount for that series will
increase as new receivables are transferred to the trust or as the Invested
Amounts of other outstanding series are reduced. The Invested Amount may
decrease due to charge-offs allocated to the series.
During the Funding Period, funds on deposit in the pre-funding account will
be paid to the transferor as the Invested Amount increases. If the Invested
Amount for that series is not increased so that it equals the principal balance
of the notes of that series by the end of the Funding Period, any amount
remaining in the pre-funding account will be repaid to noteholders. This type
of event may also cause repayment of other amounts to noteholders, as set forth
in the related prospectus supplement.
If so specified in the related prospectus supplement, funds on deposit in
the pre-funding account will be invested by the indenture trustee in Eligible
Investments or will be subject to a guaranteed rate or investment agreement or
other similar arrangement. On each distribution date during the Funding Period,
earnings on funds in the pre-funding account during the related monthly period
will be withdrawn from the pre-funding account and deposited, together with any
applicable payment under a guaranteed rate or investment agreement or other
similar arrangement, into the collection account as Finance Charge and
Administrative Collections to make interest payments on the notes of the
related series in the manner specified in the related prospectus supplement.
The prospectus supplement for a series with a Funding Period will set forth:
. the series' initial Invested Amount;
. the series' full Invested Amount;
. the date on which the series' Invested Amount is expected to equal the
full Invested Amount;
. the date by which the Funding Period will end; provided that the Funding
Period will not exceed one year; and
. what other events, if any, will occur if the end of the Funding Period is
reached before the full Invested Amount is funded.
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Paired Series
The prospectus supplement for a series of notes will specify whether that
series may be paired with a previously or later issued series so that a
decrease in the Invested Amount of the previously issued series results in a
corresponding increase in the Invested Amount of the later issued series. In
general, a series may be issued as a paired series so the trust can fund the
amount by which the previously issued series has amortized and will amortize in
the future.
If an Amortization Event occurs for the previously issued series or its
paired series when the previously issued series is amortizing, the Investor
Percentage for the allocation of collections of Principal Receivables for the
previously issued series may be reset to a lower percentage as described in the
prospectus supplement for that series and the period over which it will
amortize may be lengthened as a result. The extent to which the period over
which it amortizes is lengthened will depend on many factors, only one of which
is the reduction of its Investor Percentage. For a discussion of these factors,
see "Risk Factors--Issuance of additional series by the trust may affect the
timing of payments to you" in this prospectus and "Description of Series
Provisions--Principal Payments--Controlled Accumulation Period" and "--Early
Amortization Period" in the accompanying prospectus supplement.
Interest Payments
For each series of notes and each related class, interest will accrue from
the relevant closing date on the applicable principal balance at the applicable
interest rate. The interest rate on any note may be a fixed, floating or any
other type of rate as specified in the accompanying prospectus supplement.
Interest on the notes, other than zero coupon notes, will generally be paid, or
deposited for later payment, to noteholders on the applicable distribution
dates.
Interest payments or deposits on any distribution date will be funded from:
. collections of Finance Charge and Administrative Receivables allocated to
the Invested Amount during the preceding due period or periods;
. investment earnings, if any, on any funds held in trust accounts;
. any credit enhancement, to the extent described in the accompanying
prospectus supplement;
. any derivative counterparty, to the extent described in the accompanying
prospectus supplement; and
. other amounts specified in the prospectus supplement.
If interest payments will be made less frequently than monthly, an interest
funding account may be established to accumulate the required interest amount.
If a series has more than one class of notes, that series may have more than
one interest funding account.
Your class of notes will pay interest on the dates and at the interest rate
specified in the accompanying prospectus supplement. If your notes bear
interest at a floating or variable rate, the accompanying prospectus supplement
will describe how that rate is calculated.
Principal Payments
Generally, each series will begin with a Revolving Period during which no
principal payments will be made to the noteholders of that series. Following
its Revolving Period, each series of notes is expected to begin to accumulate
principal or begin to distribute principal to noteholders. The accompanying
prospectus supplement describes the conditions under which an accumulation or
amortization period will begin for your class of notes.
Principal payments for any series or the related class will be funded from
collections of Principal Receivables and other trust assets received during the
related due period or periods as specified in the
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accompanying prospectus supplement and allocated to that series or class.
Principal payments may also be funded from proceeds from the issuance of notes
in the same principal sharing group, subject to the consent of the noteholders
of a series or class representing a majority of the outstanding principal
amount of the notes of that series or class.
Principal will accumulate in a principal funding account if your series
features a Controlled Accumulation Period or an Early Accumulation Period and
one of these accumulation periods begins. As described in the accompanying
prospectus supplement, during a Controlled Accumulation Period, on each
distribution date an amount of principal, up to the amount specified, will be
set aside in a principal funding account. If an Amortization Event occurs and
your series features an Early Accumulation Period after that Amortization
Event, the full amount of Principal Available to your series will be deposited
in the principal funding account, up to the amount specified in the related
prospectus supplement. This accumulated principal is expected to be paid to you
on the date specified in the prospectus supplement for your class or series, or
earlier if an amortization period begins before your Expected Principal Payment
Date. Note that although your series may feature an accumulation period, your
class of notes might not make use of it.
Funds on deposit in any principal funding account for a series may be
subject to a guaranteed rate agreement or guaranteed investment contract or
other arrangement specified in the accompanying prospectus supplement intended
to assure a minimum rate of return on the investment of those funds. In order
to enhance the likelihood of the payment in full of the principal amount of a
series or a related class of notes at the end of an accumulation period, that
series or class of notes may be subject to a principal guaranty or other
similar arrangement specified in the accompanying prospectus supplement.
If your series features a Controlled Amortization Period and this
amortization period begins, principal will be paid to you in increments, up to
the amount specified in the accompanying prospectus supplement. Your class of
notes might also begin to pay the full amount of available principal owed to
you if the accompanying prospectus supplement specifies that your class will
begin early amortization and an Amortization Event occurs.
If the series described in the accompanying prospectus supplement features
multiple classes, different classes of your series may have differing
priorities for the accumulation or payment of principal. This means that
noteholders of other classes could begin to receive payments of principal
before you do. The accompanying prospectus supplement will specify the manner,
timing and priority of principal payments to noteholders of each class.
We cannot assure you that principal will be available when expected, either
to accumulate or to pay to you. The Expected Principal Payment Date for your
class of notes is based upon assumptions about payment rates on the
receivables, as detailed in the accompanying prospectus supplement. We cannot
assure you that these payment rate assumptions will be correct. Payment rates
generally depend on collections of Principal Receivables. Collections can vary
seasonally and are also affected by general economic conditions and the payment
habits of individual cardholders. The accompanying prospectus supplement will
provide historical payment rates, total charge-offs and other information
relating to the Bank Portfolio. We cannot assure you that future events will be
consistent with this historical performance. The life of your notes might be
longer than expected if principal is collected more slowly. Alternatively, the
occurrence of any Amortization Event may substantially shorten the average life
of your notes.
Credit Enhancement
General
For any series, credit enhancement may be provided by one or more of the
related classes or one or more other series. Credit enhancement may be in the
form of the subordination of one or more classes of the notes of that series or
one or more other series, overcollateralization, a letter of credit, the
establishment of a cash collateral guaranty or account, a surety bond, an
insurance policy, a spread account, a reserve account, the use
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of cross support features or another method of credit enhancement described in
the accompanying prospectus supplement, or any combination of these. If so
specified in the accompanying prospectus supplement, any form of credit
enhancement may be structured so as to be drawn upon by more than one class or
series to the extent described in that accompanying prospectus supplement.
Unless otherwise specified in the accompanying prospectus supplement for a
series, the credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
notes and interest thereon. If losses occur which exceed the amount covered by
the credit enhancement or which are not covered by the credit enhancement,
noteholders will bear their allocable share of deficiencies.
If credit enhancement is provided with respect to a series, the accompanying
prospectus supplement will include a description of:
. the amount payable under that credit enhancement;
. any conditions to payment not described here;
. the conditions, if any, under which the amount payable under that credit
enhancement may be reduced and under which that credit enhancement may be
terminated or replaced; and
. any material provision of any agreement relating to that credit
enhancement.
Additionally, the accompanying prospectus supplement may set forth
information with respect to any credit enhancement provider, including:
. a brief description of its principal business activities;
. its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
. if applicable, the identity of regulatory agencies which exercise primary
jurisdiction over the conduct of its business; and
. its total assets, and its stockholders' or policy holders' surplus, if
applicable, and other appropriate financial information as of the date
specified in the prospectus supplement.
If so specified in the accompanying prospectus supplement, credit
enhancement with respect to a series may be available to pay principal of the
notes of that series following the occurrence of specified Amortization Events
with respect to that series. In this event, the credit enhancement provider
will have an interest, called a collateral invested amount, in specified cash
flows in respect of the receivables to the extent described in that prospectus
supplement.
Subordination
If so specified in the accompanying prospectus supplement, a series or one
or more classes of any particular series will be subordinated as described in
the accompanying prospectus supplement to the extent necessary to fund payments
with respect to other series or to the senior notes within that series. The
rights of the holders of these subordinated notes to receive distributions of
principal and/or interest on any distribution date for that series will be
subordinate in right and priority to the rights of the holders of other senior
series or senior notes within that series, but only to the extent set forth in
the accompanying prospectus supplement. If so specified in the accompanying
prospectus supplement, subordination may apply only in the event of specified
types of losses not covered by another credit enhancement.
The accompanying prospectus supplement will also set forth information
concerning:
. the amount of subordination of a series or a class or classes of
subordinated notes within a series;
. the circumstances in which that subordination will be applicable;
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. the manner, if any, in which the amount of subordination will decrease
over time; and
. the conditions under which amounts available from payments that would
otherwise be made to holders of those subordinated notes will be
distributed to holders of other senior series or senior notes of that
series.
If collections of receivables otherwise distributable to holders of a
subordinated class of a series will be used as support for another series or
another class in that series, the accompanying prospectus supplement will
specify the manner and conditions for applying that cross-support feature.
Overcollateralization
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes will be provided by a subordinated
interest, which may be held by the transferor, in receivables collateral not
allocable to other series or evidenced by the Transferor Certificate. The
rights of the holders of this overcollateralization interest to receive
distributions of principal and/or interest on any distribution date for that
series will be subordinate in right or priority to the rights of holders of
senior notes within that series, but only to the extent set forth in the
accompanying prospectus supplement.
Cash Collateral Guaranty or Account
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes will be provided by a guaranty,
referred to as the cash collateral guaranty, secured by the deposit of cash or
permitted investments in an account, referred to as the cash collateral
account, reserved for the beneficiaries of the cash collateral guaranty or by a
cash collateral account alone. The amount available under the cash collateral
guaranty or the cash collateral account will be the lesser of amounts on
deposit in the cash collateral account and an amount specified in the
accompanying prospectus supplement. The accompanying prospectus supplement will
set forth the circumstances under which payments are made to beneficiaries of
the cash collateral guaranty from the cash collateral account or from the cash
collateral account directly.
Spread Account
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes will be provided by the periodic
deposit of available excess cash flow from the trust assets into an account,
referred to as the spread account, intended to assist with subsequent
distribution of interest and principal on the notes of that class or series in
the manner specified in the accompanying prospectus supplement.
Reserve Account
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes or any related enhancement will be
provided by the establishment of an account, referred to as the reserve
account. The reserve account may be funded, to the extent provided in the
accompanying prospectus supplement, by an initial cash deposit, the retention
of specified periodic distributions of principal or interest or both otherwise
payable to one or more classes of notes, including the subordinated notes, or
the provision of a letter of credit, guarantee, insurance policy or other form
of credit or any combination of these arrangements. The reserve account will be
established to assist with the subsequent distribution of principal or interest
on the notes of that series or the related class or any other amount owing on
any related enhancement in the manner provided in the accompanying prospectus
supplement.
Letter of Credit
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes will be provided by one or more
letters of credit. A letter of credit may provide limited
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protection against specified losses in addition to or in lieu of other credit
enhancement. The issuer of the letter of credit, referred to as the L/C bank,
will be obligated to honor demands with respect to that letter of credit, to
the extent of the amount available thereunder, to provide funds under the
circumstances and subject to any conditions as are specified in the
accompanying prospectus supplement.
The maximum liability of an L/C bank under its letter of credit will
generally be an amount equal to a percentage specified in the accompanying
prospectus supplement of the initial invested amount of a series or a class of
that series. The maximum amount available at any time to be paid under a letter
of credit will be set forth in the accompanying prospectus supplement.
Surety Bond or Insurance Policy
If so specified in the accompanying prospectus supplement, insurance with
respect to a series or one or more of the related classes will be provided by
one or more insurance companies. The insurance policy will guarantee, with
respect to one or more classes of the related series, distributions of interest
or principal in the manner and amount specified in the accompanying prospectus
supplement.
If so specified in the accompanying prospectus supplement, a surety bond
will be purchased for the benefit of the holders of any series or class of that
series to assure distributions of interest or principal with respect to that
series or class of notes in the manner and amount specified in the accompanying
prospectus supplement.
Amortization Events
Unless otherwise specified in the accompanying prospectus supplement, as
described above, the Revolving Period will continue through the date specified
in the accompanying prospectus supplement unless an Amortization Event occurs
prior to that date. An Amortization Event may occur with respect to any series
upon the occurrence of any other event specified in the accompanying prospectus
supplement.
The Early Amortization Period (or, if so specified in the accompanying
prospectus supplement, the Early Accumulation Period) will begin on the first
day of the due period in which an Amortization Event is deemed to have
occurred, unless the servicer is at that time required to make daily deposits
into the collection account in which case the Early Amortization Period (or, if
so specified in the accompanying prospectus supplement, the Early Accumulation
Period) will begin on the day an Amortization Event occurs. If, because of the
occurrence of an Amortization Event, the Early Amortization Period begins
earlier than the scheduled commencement of an amortization period or prior to
an Expected Principal Payment Date, noteholders will begin receiving
distributions of principal earlier than they otherwise would have, which may
shorten the average life of the notes.
In addition to the consequences of an Amortization Event discussed above,
unless otherwise specified in the accompanying prospectus supplement, if
bankruptcy, insolvency or similar proceedings under the Bankruptcy Code or
similar laws occur with respect to the transferor, on the day of that event the
transferor will immediately cease to transfer Principal Receivables to the
trust and promptly give notice to the indenture trustee and the owner trustee
of this event. Any Principal Receivables transferred to the trust prior to this
event, as well as collections on those Principal Receivables and Finance Charge
and Administrative Receivables accrued at any time with respect to those
Principal Receivables, will continue to be part of the trust assets and will be
applied as specified above in "--Interest Payments," "--Principal Payments" and
in the accompanying prospectus supplement.
If the only Amortization Event to occur is either the insolvency of the
transferor or the commencement of a bankruptcy case by or against the
transferor, the bankruptcy court may have the power to require the continued
transfer of Principal Receivables to the trust. See "Risk Factors--If a
conservator or receiver were appointed for the bank or other account owner or
receivables seller, or the transferor or other account owner or receivables
seller became a debtor in a bankruptcy case, delays or reductions in payment of
your notes could occur" in this prospectus.
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Final Payment of Principal; Termination
For each series, the transferor has the option to repurchase the notes at
any time after the remaining outstanding principal amount of that series,
excluding any portion of a class of notes held by the transferor or an
affiliate, is 10% or less of the initial principal amount of that series if
conditions set forth in the related indenture supplement are met. The
repurchase price will equal:
(1) the outstanding principal amount of the notes of that series, plus
(2) any accrued and unpaid interest through the day preceding the
distribution date on which the repurchase occurs or, if the repurchase
occurs on any other date, through the day preceding the distribution date
immediately following the repurchase date.
Any amounts on deposit in the principal funding account for that series will
be applied toward the repurchase price on behalf of the transferor.
For any series of notes, the related prospectus supplement may specify
different conditions to the transferor's repurchase option and a different
method for determining the repurchase price; provided, that:
. the repurchase price of a series of notes will never be less than the
outstanding principal amount of the notes of that series and accrued and
unpaid interest through the repurchase date; and
. the transferor may only exercise its repurchase option if noteholders
will receive an amount equal to the outstanding principal amount of their
notes together with accrued and unpaid interest thereon through the
repurchase date.
The notes of each series will be retired on the day following the date on
which the final payment of principal is scheduled to be made to the
noteholders, whether as a result of optional reassignment to the transferor or
otherwise. Each prospectus supplement will specify the latest date by which
principal and interest for the series of notes can be paid, known as the Series
Final Maturity Date. However, the notes may be subject to prior termination as
provided above. For any series the failure to pay principal of the related
notes on the Series Final Maturity Date will be an Event of Default and the
indenture trustee or holders of a specified percentage of the notes of that
series will have the rights described under "Description of the Indenture--
Events of Default; Rights Upon Event of Default" in this prospectus.
Unless the servicer and the holder of the Transferor Certificate instruct
the indenture trustee otherwise, the trust will terminate on the Trust
Termination Date. Upon the termination of the trust and the surrender of the
Transferor Certificates, the indenture trustee will convey to the holders of
the Transferor Certificates all right, title and interest of the trust in and
to the receivables and other funds of the trust. Upon termination of the trust,
the trust or noteholders as sellers of the trust receivables back to the
holders of the Transferor Certificate will not retain any direct or indirect
liability to the holders of the Transferor Certificate with respect to those
receivables.
Defeasance
If so specified in the prospectus supplement relating to a series, the
transferor may terminate its substantive obligations in respect of that series
or the trust by depositing with the indenture trustee, from amounts
representing, or acquired with, collections of receivables, money or Eligible
Investments sufficient to make all remaining scheduled interest and principal
payments on that series or all outstanding series of notes of the trust, as the
case may be, on the dates scheduled for those payments and to pay all amounts
owing to any credit enhancement provider with respect to that series or all
outstanding series, as the case may be, if that action would not result in an
Amortization Event for any series. Prior to its first exercise of its right to
substitute money or Eligible Investments for receivables, the transferor will
deliver to the indenture trustee:
. a statement from a firm of nationally recognized independent public
accountants, who may also render other services to the transferor, to the
effect that the deposit is sufficient to make all the payments specified
above;
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. an officer's certificate stating that the transferor reasonably believes
that the deposit and termination of obligations will not, based on the
facts known to that officer at the time of the certification, then cause
an Event of Default or an Amortization Event with respect to any series;
. written confirmation from each Rating Agency that the deposit and
termination of obligations will not result in a reduction or withdrawal
of its rating of any outstanding series or class; and
. an opinion of counsel to the effect that:
. for federal income tax purposes, the deposit and termination of
obligations will not cause the trust, or any portion of the trust, to
be deemed to be an association, or publicly traded partnership,
taxable as a corporation; and
. the deposit and termination of obligations will not result in the
trust being required to register as an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
Reports to Noteholders
Noteholders of each series issued by the trust will receive reports with
information on the series and the trust. The Paying Agent will forward to each
noteholder of record a report, prepared by the servicer, for its series on the
distribution dates for that series. The report will set forth information as
specified in the related prospectus supplement. If a series has multiple
classes, information will be provided for each class, as specified in the
related prospectus supplement.
Periodic information to noteholders generally will include:
. the total amount distributed;
. the amount of principal and interest for distribution;
. if the series or a class of the series bears interest at a floating or
variable rate, information relating to that rate;
. collections of Principal Receivables and Finance Charge and
Administrative Receivables allocated to the series;
. the aggregate investor defaulted amount as defined in the accompanying
prospectus supplement allocated to the series;
. Investor Charge-Offs for the series and any reimbursements of previous
Investor Charge-Offs;
. the monthly servicing fee for that series;
. the aggregate amount of Principal Receivables, the outstanding principal
amount of the notes and the outstanding principal amount of the notes as
a percentage of the aggregate amount of the Principal Receivables in the
Trust Portfolio;
. the Invested Amount and the adjusted invested amount as defined in the
accompanying prospectus supplement for that series;
. the amount available under any enhancement and credit enhancement, if
any, for the series or each class of the series;
. the base rate and the series portfolio yield, each as defined in the
accompanying prospectus supplement, for the series;
. the aggregate outstanding balance of accounts broken out by delinquency
status; and
. the Pool Factor.
In addition, with respect to a series that incorporates a Funding Period, as
described under "Description of the Notes--Funding Period" periodic information
to noteholders will include:
. the series' initial Invested Amount, the series' full Invested Amount,
and the series' current Invested Amount; and
. the amount on deposit in the pre-funding account.
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By January 31 of each calendar year, the Paying Agent will also provide to
each person who at any time during the preceding calendar year was a noteholder
of record a statement, prepared by the servicer, containing the type of
information presented in the periodic reports, aggregated for that calendar
year or the portion of that calendar year that the notes were outstanding,
together with other information that is customarily provided to holders of
debt, to assist noteholders in preparing their United States tax returns.
In addition, noteholders will receive reports with information regarding the
indenture trustee. See "Description of the Indenture--Indenture Trustee's
Annual Report" in this prospectus.
Investor Percentage, Transferor Percentage and Credit Enhancement Percentage
The servicer will allocate all collections of Finance Charge and
Administrative Receivables, all collections of Principal Receivables and all
Defaulted Amounts among:
(1) each series issued and outstanding;
(2) the transferor's interest; and
(3) if the related prospectus supplement so states, to any credit
enhancement providers.
All allocations of these amounts will be made through the respective investor
percentages for each series, the Transferor Percentage and, where applicable,
the credit enhancement percentage. The related prospectus supplements will set
forth how the investor percentages are calculated.
Groups
General
The notes of a series may be included in one or more groups of series that
share specified collections of Finance Charge and Administrative Receivables
and/or Principal Receivables. The prospectus supplement will identify whether
your series has been included in one or more of the following groups.
Excess Finance Charge Sharing Group
If a series is identified in the prospectus supplement for that series as
included in an excess finance charge sharing group, collections of Finance
Charge and Administrative Receivables in the Trust Portfolio allocated to the
series in excess of the amount needed to make deposits or payments may be
shared with other series identified in the prospectus supplements for those
other series as included in the same group. If one series requires more
collections of Finance Charge and Administrative Receivables than allocated
through its Investor Percentage, it will have access to all of these shared
excess finance charge and administrative collections from other series in its
group. If two or more series require more collections of Finance Charge and
Administrative Receivables, excess finance charge and administrative
collections in the group will be shared among the series in the manner and
priority set forth in the related prospectus supplements.
Reallocation Group
If a series is identified in the prospectus supplement for that series as
included in a reallocation group, collections of Finance Charge and
Administrative Receivables which would otherwise be allocated to each series in
the reallocation group will instead be combined and will be available for
specified required payments to all series in that group. Any issuance of a new
series in a reallocation group may reduce or increase the amount of collections
of Finance Charge and Administrative Receivables allocated to any other series
of notes in that group. See "Risk Factors--Issuance of additional series by the
trust may affect the timing of payments to you." The prospectus supplement with
respect to a series offered hereby will specify whether that series will be
included in a reallocation group or another type of group and whether any
previously issued series have been included in that group. Any series offered
hereby may, if so specified in the related prospectus supplement, be included
in a reallocation group. Other series issued in the future may also be included
in that reallocation group.
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Shared Enhancement Group
If a series is identified in the prospectus supplement for that series as
included in a shared enhancement group, that series may share collections of
Finance Charge and Administrative Receivables and other amounts and share in
the same credit enhancement for each series in that group. Any issuance of a
new series in a shared enhancement group may reduce or increase the amount of
collections of Finance Charge and Administrative Receivables allocated to any
other series of notes in that group. See "Risk Factors--Issuance of additional
series by the trust may affect the timing of payments to you." Sharing may take
the form, among others, of classes of notes of one or more series in a
particular shared enhancement group issued from time to time which are
subordinate to other classes issued at the same or a different time in
different series in that group. In addition, if specified in its prospectus
supplement a series may consist of one or more classes of notes issued in one
or more subseries. All subseries of that series would share collections of
Finance Charge and Administrative Receivables and other amounts and share in
the same credit enhancement for that series.
Principal Sharing Group
If a series is identified in the prospectus supplement for that series as
included in a principal sharing group, to the extent that principal allocated
to that series is in excess of the amount needed for deposit or distribution
for that series, this excess amount will be available to make principal
payments or deposits required by other series, if any, in the same principal
sharing group. If collections of Principal Receivables in the Trust Portfolio
allocated to a series are shared with another series, the Invested Amount for
the series from which collections were shared will not be reduced.
Shared Transferor Principal Collections
If a series is identified in its prospectus supplement as being entitled to
receive shared transferor principal collections, collections of Principal
Receivables in the Trust Portfolio otherwise payable to the holders of the
Transferor Certificate may be available to make principal payments or deposits
required by noteholders of one or more series. These shared transferor
principal collections will be limited to those series identified in the
prospectus supplements as being entitled to receive shared transferor principal
collections. If two or more series require more collections of Principal
Receivables, transferor principal collections will be shared among the series
in the manner and priority set forth in the related prospectus supplements.
Trust Bank Accounts
The servicer will establish and maintain in the name of the indenture
trustee, for the benefit of noteholders of all series, a collection account,
which shall be a Qualified Account. The servicer will also establish and
maintain in the name of the indenture trustee, a special funding account, which
also is required to be a Qualified Account. Funds in the collection account and
the special funding account will be assets of the trust and will be invested,
at the direction of the servicer, in Eligible Investments. Net investment
earnings on funds on deposit in the special funding account shall be treated as
collections of Finance Charge and Administrative Receivables except as
otherwise specified in the accompanying prospectus supplement.
The Paying Agent will have the revocable power to withdraw funds from the
collection account for the purpose of making payments to the noteholders of any
series under the related indenture supplement.
Application of Collections
Except in the circumstance described in this section, the servicer must
deposit into the collection account, no later than two business days after
processing, all payments made on receivables in the Trust Portfolio. The
servicer must also allocate these deposits between accounts and to various
parties. However, the servicer will be able to make these deposits on a monthly
or other periodic basis if one of the following is true:
(1) Household Finance Corporation remains the servicer under the
transfer and servicing agreement and maintains a commercial paper rating of
not less than A-1 by Standard & Poor's, P-1 by Moody's and F-1 by Fitch;
(2)(a) Household Finance Corporation remains the servicer under the
transfer and servicing agreement;
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(b) no Amortization Event, Reinvestment Event or Event of Default has
occurred;
(c) Household International, Inc. maintains a commercial paper rating of
not less than A-1 by Standard & Poor's, P-1 by Moody's and F-1 by Fitch;
(d) Household Finance Corporation remains a wholly-owned subsidiary of
Household International, Inc., directly or indirectly; and
(e) in the event of a material change in the financial relationship
between Household Finance Corporation and Household International, Inc.:
(i) Household Finance Corporation notifies each Rating Agency; and
(ii) written confirmation is received from each Rating Agency that
the material change will not result in a reduction or withdrawal of its
rating of any outstanding series or class; or
(3) any other arrangements are made and written confirmation is received
from each Rating Agency that the arrangements will not result in a
reduction or withdrawal of its rating of any outstanding series or class.
The servicer must make daily or periodic deposits to the collection account
only to the extent that the funds are needed for deposit into other accounts or
distribution to noteholders or other parties. If the collection account balance
ever exceeds this amount for deposit or distribution, the servicer will be able
to withdraw the excess. Subject to the immediately preceding sentence, the
servicer may retain its servicing fee with respect to any series and will not
be required to deposit it in the collection account.
Each time a collection account deposit is made, the servicer will withdraw
from, or retain in, the collection account, as applicable, the following
amounts and apply them as indicated:
(1) the Transferor Percentage of collections of Finance Charge and
Administrative Receivables in the Trust Portfolio will be paid to the
holders of the Transferor Certificates in accordance with the trust
agreement,
(2) collections of Principal Receivables in the Trust Portfolio
allocable to the holders of the Transferor Certificates will be:
(a) paid to the holders of the Transferor Certificates in accordance
with the trust agreement only if the Transferor Amount exceeds zero and
those collections are not required to be used as shared transferor
principal collections;
(b) deposited in the special funding account; or
(c) available to make principal payments or deposits required by
noteholders of one or more series if those collections are required to
be treated as shared transferor principal collections;
(3) for each series, the relevant Investor Percentage of collections of
Finance Charge and Administrative Receivables in the Trust Portfolio will
be retained in the collection account for allocation and payment as set
forth in the related prospectus supplement;
(4) if the series is in its Revolving Period, the applicable Investor
Percentage of collections of Principal Receivables in the Trust Portfolio
allocated to the series will be:
(a) paid to the holders of the Transferor Certificates in accordance
with the trust agreement only if the Transferor Amount is greater than
the Required Transferor Amount and those collections are not required
to be used as shared principal collections;
(b) deposited in the special funding account; or
(c) available to make principal payments or deposits required by
noteholders of one or more series if those collections are required to
be treated as shared principal collections;
(5) if the series is in its Controlled Accumulation Period, Controlled
Amortization Period or Early Accumulation Period, as applicable, the
applicable Investor Percentage of collections of Principal Receivables in
the Trust Portfolio allocated to the series up to the amount, if any,
specified in the
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accompanying prospectus supplement will be retained in the collection
account or deposited in a principal funding account, as applicable, for
allocation and payment to noteholders as described in the accompanying
prospectus supplement; provided that if collections of Principal
Receivables exceed the principal payments which may be allocated or
distributed to noteholders, the excess will be paid to other noteholders or
to the holders of the Transferor Certificates in accordance with the trust
agreement, subject to the limitations described in clause (2)(a) above; and
(6) if the series is in its Early Amortization Period, the applicable
Investor Percentage of collections of Principal Receivables in the Trust
Portfolio will be retained in the collection account for application and
payment as provided in the accompanying prospectus supplement.
In the case of a series of notes having more than one class, the amounts in
the collection account will be allocated and applied to each class in the
manner and order of priority described in the accompanying prospectus
supplement.
Any amounts collected in respect of Principal Receivables and not paid to
the holders of the Transferor Certificates in accordance with the trust
agreement because the Transferor Amount is less than the Required Transferor
Amount as described in paragraph (2) above, together with any adjustment
payments, will be paid to and held in the special funding account and paid to
the holders of the Transferor Certificates in accordance with the trust
agreement if, and only to the extent that, the Transferor Amount is greater
than the Required Transferor Amount. If an amortization period or accumulation
period has commenced, the amounts described in the previous sentence will be
held for distribution to the noteholders on the dates specified in the
accompanying prospectus supplement or accumulated for distribution on the
Expected Principal Payment Date, as applicable, and distributed to the
noteholders of each class or held for and distributed to the noteholders of
other series of notes issued by the trust in the manner and order of priority
specified in the accompanying prospectus supplement.
If the servicer determines, based upon the yield of special funding account
investments during the previous due period, that by decreasing the amount on
deposit in the special funding account, any outstanding series which permits
the partial amortization of the principal balance of its notes may be prevented
from experiencing an Amortization Event based upon insufficiency of yield, the
servicer will on the next distribution date instruct the indenture trustee to
apply funds on deposit in the special funding account as Partial Amortization
SFA Amounts to that series, and if more than one series, to each on a pro rata
basis according to each Invested Amount, in an amount such that the special
funding account is reduced to an amount which, based on the then current
investment yield, would not cause a yield insufficiency amortization event for
any series then outstanding.
Defaulted Amount; Investor Charge-Offs
Unless otherwise specified in the accompanying prospectus supplement, for
each series of notes, on the Determination Date, the servicer will calculate
the aggregate investor default amount for the preceding due period, which will
be equal to the aggregate amount of the Investor Percentage of Defaulted
Amounts. If so provided in the accompanying prospectus supplement, an amount
equal to the investor defaulted amount for any due period may be paid from
collections of Finance Charge and Administrative Receivables allocable to that
series and other amounts specified in the accompanying prospectus supplement,
including from credit enhancement, and applied to pay principal to noteholders
or, subject to limitations, the holder of the Transferor Certificate, as
appropriate.
With respect to each series of notes, the Invested Amount with respect to
that series will be reduced by Investor Charge-Offs. Investor Charge-Offs will
be reimbursed on any distribution date to the extent amounts on deposit in the
collection account and otherwise available exceed the interest, the investor
defaulted amount and any other fees specified in the accompanying prospectus
supplement which are payable on that date. This reimbursement of Investor
Charge-Offs will result in an increase in the Invested Amount with respect to
that series.
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DESCRIPTION OF THE INDENTURE
The following summarizes the material terms of the indenture.
Events of Default; Rights Upon Event of Default
With respect to the notes of any series, "Events of Default" under the
indenture will be any of the following:
(1) the trust fails to pay principal when it becomes due and payable for
that series of notes on the Series Final Maturity Date;
(2) the trust fails to pay interest on the notes when it becomes due and
payable and the default continues for a period of 35 days;
(3) the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the trust relating to the
bankruptcy, insolvency, conservatorship, receivership, liquidation or
similar events and such decree or order remains unstayed and in effect for
60 consecutive days;
(4) the trust fails to observe or perform covenants or agreements made
in the indenture and the failure continues, or is not cured, for 60 days
after notice to the trust by the indenture trustee or to the trust and the
indenture trustee by noteholders representing 25% or more of the
outstanding principal amount of the affected series; or
(5) any other Events of Default described in the accompanying prospectus
supplement.
Failure to pay the full principal amount of a note on its Expected Principal
Payment Date will not constitute an Event of Default.
An Event of Default with respect to one series of notes will not necessarily
be an Event of Default with respect to any other series of notes.
If an Event of Default, other than with respect to clause (3) above, should
occur and be continuing with respect to the notes, the indenture trustee or
noteholders holding more than 50% of the outstanding principal amount of the
notes of the affected series may declare all the notes of that series to be
immediately due and payable. This declaration may, under limited circumstances,
be rescinded by noteholders holding more than 50% of the outstanding principal
amount of the notes of that series. If an event of bankruptcy, insolvency,
conservatorship, receivership, liquidation, or similar events relating to the
trust should occur and be continuing, the indenture trustee will declare all of
the notes immediately due and payable. Upon such declaration, the Revolving
Period, or other period of principal payment or accumulation, other than an
Early Amortization Period, with respect to the affected series will terminate
and an Early Amortization Period will commence.
Generally, in the case of any Event of Default, the indenture trustee will
be under no obligation to exercise any of the rights or powers under the
indenture if requested or directed by any of the holders of the notes of the
affected series 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 that request. Subject to those provisions
for indemnification and limitations contained in the indenture, noteholders
holding more than 50% of the outstanding principal amount of the notes of the
affected series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the indenture trustee,
and noteholders holding more than 50% of the outstanding principal amount of
the notes of the affected series may, in limited cases, waive any default with
respect to the notes, except a default in the payment of principal or interest
or a default relating to a covenant or provision of the indenture that cannot
be modified without the waiver or consent of all noteholders of the affected
series.
After acceleration of a series of notes, collections of Principal
Receivables and Finance Charge and Administrative Receivables allocated to
those notes will be applied to make monthly principal and interest
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payments on the notes until the earlier of the date the notes are paid in full
or the final maturity date of the notes. Funds in the collection account and
other accounts for an accelerated series of notes will be applied immediately
to pay principal of and interest on those notes.
Upon acceleration of the maturity of a series of notes following an Event of
Default, the indenture trustee will have a lien on the collateral for those
notes for its unpaid fees and expenses that ranks senior to the lien of those
notes on the collateral.
In general, the indenture trustee will enforce the rights and remedies of
the holders of the accelerated series of notes. However, noteholders will have
the right to institute any proceeding with respect to the indenture if the
following conditions are met:
(1) the noteholders of at least 25% of the outstanding principal amount
of the affected series make a written request to the indenture trustee to
institute a proceeding in its own name as indenture trustee;
(2) the noteholders give the indenture trustee written notice of a
continuing Event of Default;
(3) the noteholders offer reasonable indemnification to the indenture
trustee against the costs, expenses and liabilities of instituting a
proceeding;
(4) the indenture trustee has not instituted a proceeding within 60 days
after receipt of the notice, request and offer of indemnification; and
(5) the indenture trustee has not received during the 60-day period
described in clause (4) above, from noteholders holding more than 50% of
the outstanding principal amount of the notes of that series a direction
inconsistent with the request;
provided, however, you may at any time institute a proceeding to enforce your
right to receive all amounts of principal and interest due and owing to you
under your note.
If any series of notes has been accelerated following an Event of Default,
and the indenture trustee has not received any valid directions from the
noteholders regarding the time, method and place of conducting any proceeding
for any remedy available to the indenture trustee, the indenture trustee may
elect to continue to hold the portions of the trust assets that secures those
notes and apply distributions on the trust assets to make payments on those
notes to the extent funds are available.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case any Event of Default occurs and is continuing with
respect to the notes, the indenture trustee:
. may institute proceedings in its own name for the collection of all
amounts then payable on the notes of the affected series; or
. may take any other appropriate action to protect and enforce the rights
and remedies of the indenture trustee and the noteholders of the affected
series.
. may, at its own election or at the direction of noteholders holding more
than 50% of the outstanding principal amount of the accelerated series of
notes, excluding any portion of a class of notes held by the transferor
or an affiliate, foreclose on the portion of the receivables which secure
that accelerated series of notes by causing the trust to sell to a
permitted assignee Principal Receivables in an amount generally equal to
the Invested Amount of the accelerated series notes plus the related
Finance Charge and Administrative Receivables to a third party, who would
not cause the trust to be taxable as a publicly traded partnership for
federal income tax purposes, but only if it determines that the proceeds
of the sale of Principal Receivables will be sufficient to pay principal
of and interest on the accelerated series of notes in full; and
. must, at the direction of noteholders holding more than 66 2/3% of the
outstanding principal amount of each class of notes of the accelerated
series, excluding any portion of a class of notes held by the
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transferor or an affiliate, foreclose on the portion of the receivables
which secure that accelerated series of notes regardless of the
sufficiency of proceeds thereof, by causing the trust to sell Principal
Receivables in an amount generally equal to the Invested Amount of the
accelerated notes plus the related Finance Charge and Administrative
Receivables to a third party, who would not cause the trust to be taxable
as a publicly traded partnership for federal income tax purposes,
regardless of the sufficiency of the proceeds recovered from the sale of
Principal Receivables.
Following the foreclosure and sale of the collateral, or portion of the
collateral, for the notes of a series and the application of the proceeds of
that sale to that series and the application of the amounts then held in the
collection account, the special funding account and any series accounts for
that series and any amounts available under the series enhancement for that
series, that series will no longer be entitled to any allocation of
collections or other property constituting the collateral for the notes of
that series under the indenture and the notes of that series will no longer be
outstanding.
None of the transferor, the administrator, the owner trustee, the indenture
trustee, the servicer, the bank or the trust, in its individual capacity, nor
any holder of an ownership interest in the trust, nor any of their respective
owners, beneficiaries, agents, officers, directors, managers, employees,
successors or assigns shall, 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 trust contained in the indenture.
The notes will represent obligations solely of the trust, and the notes will
not be insured or guaranteed by the transferor, the servicer, the
administrator, the owner trustee, the indenture trustee, the bank or any other
person or entity.
Material Covenants
The indenture provides that the trust may not consolidate with, merge into
or sell its business to, another entity, unless:
. the entity formed by or surviving the consolidation or merger, or that
acquires the Issuer's business, is organized under the laws of the United
States, any state of the United States or the District of Columbia;
. the entity is not subject to regulation as an "investment company" under
the Investment Company Act of 1940, as amended;
. the entity expressly assumes, by supplemental indenture, the trust's
obligation to make due and punctual payments upon the notes and the
performance of every covenant of the trust under the indenture;
. no Amortization Event or Event of Default with respect to any outstanding
series shall have occurred and be continuing immediately after the
merger, consolidation or sale;
. the Rating Agency Condition has been satisfied with respect to the
transaction;
. the trust has received an opinion of counsel to the effect that the
consolidation, merger or sale would have no material adverse federal
income tax consequence to any noteholder;
. any action as is necessary to maintain the lien and security interest
created by the indenture shall have been taken; and
. the trust has delivered to the indenture trustee an opinion of counsel
and officer's certificate each stating that the consolidation, merger or
sale satisfies all requirements under the indenture and that the
supplemental indenture is duly authorized, executed and delivered and is
valid, binding and enforceable.
The trust will not, among other things:
. except as expressly permitted by the indenture, the transfer and
servicing agreement or related documents, sell, transfer, exchange or
otherwise dispose of any of the assets of the trust;
. claim any credit on or make any deduction from payments in respect of the
principal of and interest on the notes, other than amounts withheld under
the Code or applicable state law, or assert any claim
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against any present or former noteholders because of the payment of taxes
levied or assessed upon the trust;
. voluntarily dissolve or liquidate in whole or in part; or
. permit (1) the validity or effectiveness of the indenture to be impaired,
or permit the lien under the indenture to be amended, hypothecated,
subordinated, terminated or discharged, 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 by the
indenture; (2) 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 trust or any part of the trust,
except as may be created by the terms of the indenture; or (3) the lien
of the indenture not to constitute a valid first priority perfected
security interest in the assets of the trust that secure the notes.
The trust may not engage in any activity other than as specified under "The
Issuer" in this prospectus. The trust will not incur, assume or guarantee any
indebtedness other than indebtedness incurred under the notes and the
indenture.
Modification of the Indenture
The trust and the indenture trustee may, without the consent of any
noteholders, enter into one or more supplemental indentures, upon receiving
written confirmation from each Rating Agency that the action will not result in
a reduction or withdrawal of its rating of any outstanding series or class, for
any of the following purposes:
. to correct or enhance the description of any property subject to the lien
of the indenture, or to take any action that will enhance the indenture
trustee's lien under the indenture, or to add to the property pledged to
secure the notes;
. to reflect the agreement of another person to assume the role of the
trust;
. to add to the covenants of the trust, for the benefit of the noteholders,
or to surrender any right or power of the trust;
. to transfer or pledge any property to the indenture trustee;
. to appoint a successor to the indenture trustee with respect to the notes
and to add to or change any of the provisions of the indenture to allow
more than one indenture trustee to act under the indenture;
. to modify, eliminate or add to the provisions of the indenture as
necessary to qualify the indenture under the Trust Indenture Act of 1939,
as amended, or any similar federal statute later enacted;
. to permit the issuance of one or more new series of notes in accordance
with the indenture; or
. to terminate any interest rate swap agreement or other credit enhancement
in accordance with the related indenture supplement.
The trust and the indenture trustee may also, without the consent of any
noteholders and without prior notice to each Rating Agency, enter into one or
more supplemental indentures in order to:
. cure any ambiguity, correct or supplement any provision in the indenture
or in any supplemental indenture that may be inconsistent with any other
provision in the indenture or in any supplemental indenture;
. make any other provisions with respect to matters or questions arising
under the indenture or in any supplemental indenture; and
. qualify for sale treatment under generally accepted accounting
principles;
in each case, upon receipt of a certificate of an authorized officer of the
transferor to the effect that, in the transferor's reasonable belief, the
action will not have an Adverse Effect.
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The trust and the indenture trustee may also, without the consent of any
noteholders, enter into one or more supplemental indentures to add provisions
to, change in any manner or eliminate any provision of the indenture, or to
change the rights of the noteholders under the indenture, upon:
. receipt of written confirmation from each Rating Agency that the action
will not result in a reduction or withdrawal of its rating of any
outstanding series or class;
. receipt of a certificate of an authorized officer of the transferor to
the effect that, in the transferor's reasonable belief, the action will
not have an Adverse Effect; and
. receipt of a Tax Opinion.
The trust and the indenture trustee may also, without the consent of the
noteholders of any series or the Series Enhancers for any series, enter into
one or more supplemental indentures to add, modify or eliminate any provisions
necessary or advisable in order to enable the trust or any portion of the trust
to qualify as, and to permit an election to be made for the trust to be treated
as, a "financial asset securitization investment trust" under the Internal
Revenue Code of 1986, as amended and to avoid the imposition of state or local
income or franchise taxes on the trust's property or its income. The following
conditions apply for the amendments described in this paragraph:
. delivery to the owner trustee and the indenture trustee of a certificate
of an authorized officer of the transferor to the effect that the
requirements under the indenture applicable to the proposed amendments
have been met;
. receipt of written confirmation from each Rating Agency that the action
will not result in a reduction or withdrawal of its rating of any
outstanding series or class; and
. the amendment must not affect the rights, duties or obligations of the
indenture trustee or the owner trustee under the indenture.
The trust and the indenture trustee will not, without prior notice to each
Rating Agency and without the consent of each noteholder affected, enter into
any supplemental indenture to:
. change the date of payment of any installment of principal of or interest
on any note or reduce the principal amount of a note, the note interest
rate or the redemption price of the note or change any place of payment
where, or the currency in which, any note is payable;
. impair the right to institute suit for the enforcement of specified
payment provisions of the indenture;
. reduce the percentage which constitutes a majority of the outstanding
principal amount of the notes of any series, whose consent is required
for execution of any supplemental indenture or for any waiver of
compliance with specified provisions of the indenture or of some defaults
under the indenture and their consequences provided in the indenture;
. reduce the percentage of the outstanding principal amount of the notes
required to direct the indenture trustee to sell or liquidate the trust
assets if the proceeds of the sale would be insufficient to pay the
principal amount and interest due on those notes;
. decrease the percentage of the outstanding principal amount of the notes
required to amend the sections of the indenture that specify the
percentage of the aggregate principal amount of the notes of a series
necessary to amend the indenture or other related agreements;
. modify any provisions of the indenture regarding the voting of notes held
by the trust, any other party obligated on the notes, or the bank, any
other account owner or any of their affiliates; or
. permit the creation of any lien superior or equal to the lien of the
indenture with respect to any of the collateral for any notes or, except
as otherwise permitted or contemplated in the indenture, terminate the
lien of the indenture on the collateral or deprive any noteholder of the
security provided by the lien of the indenture.
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The trust and the indenture trustee may otherwise, with prior notice to each
Rating Agency and with the consent of noteholders holding more than 66 2/3% of
the outstanding principal amount of the notes of each series adversely
affected, enter into one or more supplemental indentures to add provisions to,
change in any manner or eliminate any provision of the indenture, or to change
the rights of the noteholders under the indenture.
Annual Compliance Statement
The trust will be required to present to the indenture trustee each year a
written statement as to the performance of its obligations under the indenture.
Indenture Trustee's Annual Report
The indenture trustee will be required to mail to the noteholders each year
a brief report relating to its eligibility and qualification to continue as
indenture trustee under the indenture, the property and funds physically held
by the indenture trustee and any action it took that materially affects the
notes and that has not been previously reported.
List of Noteholders
Upon the issuance of Definitive Notes, three or more holders of the notes
who have each owned a note for at least six months may obtain access to the
list of noteholders the indenture trustee maintains for the purpose of
communicating with other noteholders. The indenture trustee may elect not to
allow the requesting noteholders access to the list of noteholders if it agrees
to mail the requested communication or proxy, on behalf and at the expense of
the requesting noteholders, to all noteholders of record.
Satisfaction and Discharge of Indenture
An indenture will be discharged with respect to the notes upon the delivery
to the indenture trustee for cancellation of all the notes or, with specific
limitations, upon deposit with the indenture trustee of funds sufficient for
the payment in full of all the notes.
Resignation and Removal of the Indenture Trustee
The indenture trustee may resign at any time, in which event your
administrator will appoint a successor indenture trustee for your series. The
administrator may also remove the indenture trustee if it ceases to be eligible
to continue as an indenture trustee under the indenture or if the indenture
trustee becomes insolvent. The administrator will then be obligated to appoint
a successor indenture trustee for your series. If an Event of Default occurs
under the indenture and the accompanying prospectus supplement provides that a
given class of notes of your series is subordinated to one or more other
classes of notes of your series, under the Trust Indenture Act of 1939, as
amended, the indenture trustee may be deemed to have a conflict of interest and
be required to resign as indenture trustee for one or more of those classes of
notes. In that case, a successor indenture trustee will be appointed for one or
more of those classes of notes and may provide for rights of senior noteholders
to consent to or direct actions by the indenture trustee which are different
from those of subordinated noteholders. Any resignation or removal of the
indenture trustee and appointment of a successor indenture trustee for any
series of notes will not become effective until the successor indenture trustee
accepts its appointment for your series.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENT
General
On the initial closing date the transferor will transfer the receivables to
the issuer under the transfer and servicing agreement. In the transfer and
servicing agreement, Household Finance Corporation will agree to service the
receivables for the trust through its affiliate, Household Credit Services,
Inc., acting as subservicer. The following summarizes the material terms of the
transfer and servicing agreement. A form of this agreement is filed as an
exhibit to the registration statement of which this prospectus is a part.
Representations and Warranties of the Transferor
When the trust issues a new series of notes, the transferor will make
several representations and warranties to the trust in the transfer and
servicing agreement, including the following:
Regarding No Conflict
. the execution and delivery by the transferor of the transfer and
servicing agreement and each other document relating to the issuance to
which it is a party will not conflict with any law or any other agreement
to which the transferor is a party; and
. all required governmental approvals in connection with the execution and
delivery by the transferor of the transfer and servicing agreement and
each other document relating to the issuance have been obtained and
remain in force and effect.
If a representation or warranty made by the transferor is later found to be
materially incorrect when made, and:
. continues to be materially incorrect for 60 days after notice to the
transferor by the indenture trustee, or to the transferor and the
indenture trustee by any noteholder; and
. as a result, the interests of the noteholders are materially and
adversely affected, and continue to be materially and adversely affected
during the 60-day period,
then the indenture trustee or noteholders holding more than 50% of the
outstanding principal amount of the notes of the affected series may give
notice to the transferor and the servicer, and to the indenture trustee if
given by the noteholders, declaring that an Amortization Event has occurred.
Declaring an Amortization Event will automatically begin early amortization or,
if specified in the accompanying prospectus supplement, early accumulation of
principal.
Regarding Enforceability
The transferor will make other representations and warranties to the trust
in the transfer and servicing agreement, including the following:
. as of the closing date, the transferor is duly incorporated and in good
standing and has the authority to consummate the issuance;
. the transfer and servicing agreement and each other document relating to
the issuance to which it is a party constitutes a legal, valid and
binding obligation enforceable against the transferor; and
. the trust has all right, title and interest in the receivables in the
Trust Portfolio or has a first priority perfected security interest in
these receivables.
In the event:
. any representation or warranty described immediately above is breached;
and
. as a result, the interests of noteholders in the receivables in the Trust
Portfolio are materially and adversely affected;
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then any of the owner trustee, the indenture trustee or noteholders
representing 50% or more of the outstanding principal amount of all of the
trust's outstanding series may give notice to the transferor and the servicer,
and to the owner trustee and indenture trustee if given by the noteholders,
directing the transferor to accept reassignment of the entire Trust Portfolio
and to pay into the trust's collection account a cash deposit equal to the sum
of the amounts specified with respect to each outstanding series in the related
indenture supplement. However, no reassignment will be required if:
. within 60 days, or up to 120 days if specified in the notice, the
transferor cures the breach and any material adverse effect caused by the
breach; or
. on any day within the applicable 60-day to 120-day period the relevant
representation and warranty is then true and correct in all material
respects and the transferor delivers to the owner trustee a certificate
of an authorized officer describing the nature of the breach and the
manner in which the relevant representation and warranty became true and
correct.
Reassignment of the Trust Portfolio and the transferor's obligation to make
the cash deposit in the trust's collection account are the only remedies to any
breach of the representations and warranties described above.
Regarding the Accounts and the Receivables
The transferor makes representations and warranties in the transfer and
servicing agreement concerning the accounts and the receivables in the Trust
Portfolio. Only Eligible Accounts can be designated as accounts for the Trust
Portfolio. We can give you no assurance that Eligible Accounts will remain
eligible once added to the trust.
The transferor also represents that each receivable in the Trust Portfolio
is an Eligible Receivable when created. If a receivable in the Trust Portfolio
is found to be ineligible when created, and, as a result, the interests of
noteholders in any receivable in the Trust Portfolio are materially and
adversely affected, the transferor must accept reassignment of the principal
amount of this ineligible receivable. However, the transferor will have 60
days, or up to 120 days if agreed to by the indenture trustee and the servicer,
from the earlier to occur of discovery of the breach by the transferor or
receipt by the transferor of written notice of the breach given by the owner
trustee, the indenture trustee or the servicer, to cure the ineligibility
before reassignment is required.
The transferor will accept reassignment of an ineligible receivable by
directing the servicer to deduct the principal amount of the ineligible
receivable from the Transferor Amount. If this would reduce the Transferor
Amount below the Required Transferor Amount, the transferor will make a cash
deposit in the trust's special funding account in the amount by which the
Transferor Amount would have been reduced below the Required Transferor Amount.
Any deduction or deposit is considered a repayment in full of the ineligible
receivable. The transferor's obligation to accept reassignment of any
ineligible receivable is the only remedy for any breach of a representation
concerning eligibility of receivables.
Additional Representations and Warranties in the Prospectus Supplement
The accompanying prospectus supplement may specify additional
representations and warranties made by the transferor when your notes are
issued. The indenture trustee is not required to make periodic examinations of
receivables in the Trust Portfolio or any records relating to them. However,
the servicer will deliver to the indenture trustee once each year an opinion of
counsel affirming, among other things, that no further action is necessary to
maintain the trust's perfected security interest in the receivables.
Additional Transferors
The transferor may, from time to time, designate one or more of its
affiliates as additional transferors under the transfer and servicing
agreement. In connection with this designation, the transferor will exchange
the Transferor Certificate for a newly issued Transferor Certificate modified
to reflect any additional ownership
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interest in the Transferor Amount. The transfer and servicing agreement may be
amended to permit the designation of these additional transferors and the
exchange of the Transferor Certificate without noteholder consent upon:
. delivery to the owner trustee and the indenture trustee of a Tax Opinion
regarding the exchange; and
. receipt of written confirmation from each Rating Agency that the exchange
will not result in a reduction or withdrawal of its rating of any
outstanding series or class.
Eligible Accounts
An "Eligible Account" means, with respect to the initial accounts, the
Initial Cut-Off Date, or with respect to additional accounts, the related
additional cut-off date, each revolving credit account owned by the bank or
other account owner:
. which was in existence and maintained by the bank or other account owner,
as applicable;
. which is payable in United States dollars;
. the obligor of which has provided, as his or her most recent billing
address, an address located in the United States or its territories,
possessions or military bases; provided, however, that as of any date of
determination, up to 1% of the Principal Receivables arising under the
revolving credit accounts may have account obligors who have provided as
their billing addresses, addresses located outside of such jurisdictions;
. which has an obligor who has not been identified by the servicer in its
computer files as currently being involved in a bankruptcy proceeding;
. which has not been classified as an account with respect to which the
related card, if any, has been lost or stolen or the related account
number has been stolen;
. which has not been sold or pledged to any other party except for any sale
to another account owner that has either entered into a receivables
purchase agreement or is an additional transferor or to Household
Receivables Funding, Inc. III under a receivables purchase agreement;
. which, with respect to the initial accounts, is an account in existence
and maintained by the bank or other account owner as of the Initial Cut-
Off Date or with respect to additional accounts, the related additional
cut-off date;
. which does not have any receivables that are defaulted receivables; and
. which does not have any receivables that have been identified by the
servicer or the relevant obligor as having been incurred as a result of
fraudulent use of any related credit card, if any, or related account
number.
Under the transfer and servicing agreement, the definition of Eligible
Account may be changed by amendment to the agreement without the consent of the
noteholders if the transferor delivers to the owner trustee and the indenture
trustee a certificate of an authorized officer to the effect that, in the
reasonable belief of the transferor, the amendment will not as of the date of
the amendment adversely affect in any material respect the interest of the
noteholders, and if the Rating Agency Condition is satisfied.
Eligible Receivables
With respect to each series of notes, an "Eligible Receivable" means each
receivable:
. which has arisen in an Eligible Account;
. which was created in compliance, in all material respects, with all
requirements of law applicable to the institution that owned the
receivable at the time of its creation, and under the terms of a credit
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agreement which complies in all material respects with all requirements of
law applicable to the bank or other account owner, as applicable;
. with respect to which all material consents, licenses or authorizations
of, or registrations with, any governmental authority required to be
obtained or given in connection with the creation of the receivable or
the execution, delivery and performance by the bank or other account
owner or receivables seller, as applicable, of the related credit
agreement have been duly obtained or given and are in full force and
effect;
. as to which, at the time of its transfer to the trust, the transferor or
the trust has good title, free and clear of all liens and security
interests arising under or through the transferor, other than some tax
liens for taxes not then due or which the transferor is contesting;
. which has been the subject of either a valid transfer and assignment from
the transferor to the trust of all of the transferor's right, title and
interest in the receivable, including any proceeds of the receivable, or
the grant of a first priority perfected security interest in the
receivable, and in the proceeds of the receivable, effective until the
termination of the trust;
. which is the legal, valid and binding payment obligation of the obligor
under the receivable, legally enforceable against that obligor in
accordance with its terms, subject to some bankruptcy-related exceptions;
. which, at the time of transfer to the trust, has not been waived or
modified except as permitted under the customary policies and procedures,
as amended from time to time, of the bank or other account owner or
receivables seller, as applicable, and then only if the waiver or
modification is reflected in the servicer's computer file of revolving
credit accounts;
. which, at the time of transfer to the trust, is not subject to any right
of rescission, setoff, counterclaim or any other defense, including
defenses arising out of violations of usury laws, of the obligor, other
than defenses arising out of bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights in general;
. which, at the time of transfer to the trust, the bank or other account
owner or receivables seller, as applicable, has satisfied all of its
obligations required to be satisfied by that time;
. which, at the time of transfer to the trust, none of the transferor, the
bank or any other account owner or receivables seller, as applicable, has
taken any action, or omitted to take any action, that would impair the
rights of the trust or the noteholders; and
. which constitutes an "account" or "general intangible" under Article 9 of
the UCC as then in effect in the State of Nevada or any other state where
the filing of a financing statement is required to perfect the trust's
interest in the receivables and the proceeds of those receivables.
Addition of Trust Assets
As described above under "The Trust Portfolio," the transferor will have
the right to designate, from time to time, additional accounts to be included
as accounts for the trust. The additional accounts will consist of either
Aggregate Addition Accounts or New Accounts. In addition, the transferor will
be required to designate additional accounts under the circumstances and in
the amounts specified in the accompanying prospectus supplement. The
transferor will convey to the trust its interest in all receivables of those
additional accounts, whether the receivables are then existing or subsequently
created.
Each additional account will be selectively or randomly chosen from
Eligible Accounts in the bank's or other account owner's portfolio of
revolving credit accounts and thus may not be a Union Plus account. These
additional accounts may not be of the same credit quality as the initial
accounts. Additional accounts may have been originated by the bank or other
account owner, as applicable, using credit criteria different from those which
were applied by the bank to the initial accounts or may have been acquired by
the bank or other account owner, as applicable, from an institution which may
have had different credit criteria.
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The transferor is also permitted to add, from time to time, Participations
and related collections to the trust. These Participations must be undivided
interests in a pool of assets primarily consisting of receivables arising under
revolving credit accounts. Participations may be issued under separate
agreements that are similar to the agreements governing the issuance of the
notes and that entitle the holder of the Participation to receive percentages
of collections generated by the pool of assets supporting the Participation.
Participations may have their own credit enhancement, Amortization Events,
servicing obligations and servicer defaults, all of which are likely to be
enforceable by a separate trustee under these participation agreements and may
be different from those specified in this prospectus. The rights and remedies
of the trust as the holder of a Participation, and, therefore, the noteholders,
will be subject to all the terms and provisions of those participation
agreements.
Any Participations to be included as trust assets or any Eligible Accounts,
other than New Accounts, designated to be included as accounts after the
initial selection date, are collectively referred to as an Aggregate Addition.
When the transferor transfers receivables in additional accounts or
Participations, it must satisfy several conditions, including, as applicable:
. with respect to any Aggregate Addition, notice to the owner trustee, the
indenture trustee, the servicer and each Rating Agency;
. delivery and acceptance by the owner trustee of a written assignment of
receivables in the additional accounts or Participations to the trust;
. delivery on the Required Delivery Date to the owner trustee of a computer
file or microfiche list with an accurate list of all additional accounts;
. delivery to the owner trustee and the indenture trustee of a certificate
of an authorized officer to the effect that:
(1) as of the Addition Date, each additional account is an Eligible
Account;
(2) the transferor has deposited into the collection account any
collections relating to additional accounts or Participations;
(3) in circumstances where the transferor is not required to designate
additional accounts to be included as accounts for the trust, or to
add Participations to the trust, each Rating Agency then rating any
series of notes outstanding under the trust shall have previously
consented to the designation of the Aggregate Addition;
(4) as of the Addition Date, none of the bank, or any other account
owner or receivables seller, or the transferor is insolvent and the
transfer of the receivables was not made in contemplation of
insolvency;
(5) in the transferor's reasonable belief, adding the receivables in
Aggregate Addition Accounts or Participations will not have an
Adverse Effect;
. delivery on the Required Delivery Date of opinions of counsel with
respect to the transfer of the receivables in the additional accounts or
the Participations to the trust; and
. in circumstances where the transferor, in its discretion, designates
Aggregate Addition Accounts to be included as accounts for the trust or
adds Participations to the trust, written confirmation from each Rating
Agency that the Aggregate Addition will not result in the reduction or
withdrawal of its rating of any outstanding series or class.
In addition to the periodic reports otherwise required to be filed by the
servicer with the SEC under the Securities Exchange Act of 1934, the servicer
intends to file, on behalf of the trust, a Report on Form 8-K with respect to
any addition to the trust of receivables in additional accounts or
Participations that would have a material effect on the composition of the
assets of the trust.
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Removal of Trust Assets
The transferor has the right to designate Zero Balance Accounts, specific
terminated merchant or co-branding participant accounts and randomly chosen
removed accounts and to remove Participations from the trust and to require the
indenture trustee to transfer all receivables in the removed accounts and
removed Participations back to the transferor, whether the receivables already
exist or arise after the designation. As long as the removal of accounts
satisfies the conditions listed below, the removed accounts may, individually
or in the aggregate, be of higher credit quality than the accounts that remain
in the trust. The removal of accounts from the trust will reduce the Transferor
Amount. The transferor's rights to removal are subject to satisfaction of
several conditions, including:
. written notice to the owner trustee, the indenture trustee, the servicer,
each Rating Agency and each Series Enhancer;
. delivery to the owner trustee for execution of a written reassignment of
receivables in the removed accounts and removed Participations to the
transferor or its designee;
. delivery on the Required Delivery Date to the owner trustee of a computer
file or microfiche list with an accurate list of all removed accounts;
. written confirmation from each Rating Agency that the removal will not
result in the reduction or withdrawal of its rating of any outstanding
series or class;
. delivery to the owner trustee and the indenture trustee of a certificate
of an authorized officer to the effect that, in the transferor's
reasonable belief:
. the removal will not have an Adverse Effect;
. the accounts to be removed were not chosen through a selection
process believed to be materially adverse to the interests of the
noteholders; and
. any other conditions specified in the accompanying prospectus
supplement.
The conditions described above relating to rating agency confirmation and
the delivery of an officer's certificate will not apply if the removed accounts
are Zero Balance Accounts or the transferor is purchasing receivables in
accounts designated for re-purchase by a merchant or co-branding participant
upon termination of its affinity agreement with the bank or other account
owner, as applicable.
In addition, any receivable that becomes a defaulted receivable will be
automatically removed from the trust and will be transferred to the transferor
without any further action or consideration by the indenture trustee, provided
that recoveries with respect to those accounts will be applied as collections
of Finance Charge and Administrative Receivables.
Discount Option
The transferor has the option to reclassify at any time and from time to
time a percentage, called the Discount Percentage, of Principal Receivables in
the Trust Portfolio as Finance Charge and Administrative Receivables. This
option is referred to as the Discount Option. The transferor may use the
Discount Option to compensate for a decline in the Portfolio Yield, but only if
there would be sufficient Principal Receivables to allow for that discounting.
Exercise of the Discount Option would result in a larger amount of collections
of Finance Charge and Administrative Receivables and a smaller amount of
collections of Principal Receivables. By doing so, the transferor would reduce
the likelihood that an Amortization Event would occur as a result of a
decreased Portfolio Yield and, at the same time, would increase the likelihood
that the transferor will have to add Principal Receivables to the trust.
Collections of Discount Option Receivables will be considered collections of
Finance Charge and Administrative Receivables in the Trust Portfolio and
allocated with all other collections of Finance Charge and Administrative
Receivables in the Trust Portfolio.
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The Transferor may increase, reduce or withdraw the Discount Percentage, at
any time and from time to time, on and after a Discount Option Date. To
increase, reduce or withdraw the Discount Percentage, the transferor must
satisfy the conditions in the transfer and servicing agreement, including:
(1) receipt of a certificate of an authorized officer of the transferor
to the effect that, in the transferor's reasonable belief, the action will
not have an Adverse Effect; and
(2) the satisfaction of the Rating Agency Condition;
provided, however, the Discount Percentage will be reduced or withdrawn on the
date on which the transferor delivers to the indenture trustee a certificate of
an authorized officer of the transferor to the effect that, in the transferor's
reasonable belief, the continued discounting of Principal Receivables would
have an adverse regulatory implication for the transferor.
Servicing Compensation and Payment of Expenses
For each series of notes, the servicer will be responsible for servicing and
administering the receivables in accordance with the servicer's policies and
procedures for servicing revolving credit receivables comparable to the
receivables.
The servicer receives a fee for its servicing activities and reimbursement
of expenses incurred in administering the trust. This servicing fee accrues for
each outstanding series in the amounts and is calculated on the balances set
forth in the related prospectus supplement. Each series' servicing fee is
payable each period from collections of Finance Charge and Administrative
Receivables allocated to the series; some series, however, may direct all or a
portion of the Interchange arising from the accounts toward paying the
servicing fee. Neither the trust nor the noteholders are responsible for any
servicing fee allocable to the holder of the Transferor Certificate.
Matters Regarding the Servicer and the Transferor
The servicer may not resign from its obligations and duties under the
transfer and servicing agreement, except:
. upon a determination that performance of its duties is no longer
permissible under applicable law and there is no reasonable action which
the servicer could take to make the performance of its duties permissible
under applicable law; or
. upon assumption of its obligations and duties by one of its affiliates
that is a wholly owned subsidiary of Household International, Inc. or by
appointment of any other eligible successor if written confirmation is
received from each Rating Agency that the appointment will not result in
a reduction or withdrawal of its rating of any outstanding series or
class.
If within 120 days of the determination that the servicer is no longer
permitted to act as servicer and the indenture trustee is unable to appoint a
successor, the indenture trustee will act as servicer. If the indenture trustee
is unable to act as servicer, it will petition an appropriate court to appoint
an eligible successor.
The servicer may not resign until the indenture trustee or another successor
has assumed the servicer's obligations and duties. Household Finance
Corporation is permitted to assign part or all of its obligations and duties as
servicer to one of its affiliates if it guarantees its affiliates performance.
The servicer will indemnify the owner trustee and the indenture trustee for
any losses suffered as a result of its actions or omissions as servicer or the
administration by the owner trustee of the trust, except in each case, for
losses resulting from the negligence or willful misconduct of the owner trustee
or the indenture trustee, as applicable.
Neither the servicer nor any of its directors, officers, employees or agents
will be under any other liability to the trust, the owner trustee, the
indenture trustee, the noteholders, any Series Enhancer or any other person
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for any action taken, or for refraining from taking any action, in good faith
under the transfer and servicing agreement. However, none of them will be
protected against any liability resulting from willful wrongdoing, bad faith or
gross negligence in the performance of its duties or by reason of reckless
disregard of obligations and duties under the transfer and servicing agreement.
In addition, the transfer and servicing agreement provides that the servicer is
not under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its servicing responsibilities under the transfer
and servicing agreement and which in its opinion may expose it to any expense
or liability.
Each transferor will be severally, but not jointly, liable for all of its
obligations, covenants, representations and warranties under the transfer and
servicing agreement. No transferor nor any of its directors, managers,
officers, employees, incorporators or agents will be liable to the trust, the
owner trustee, the indenture trustee, the noteholders, any Series Enhancer or
any other person for any action taken, or for refraining from taking any
action, in good faith under the transfer and servicing agreement. However, none
of them will be protected against any liability resulting from willful
wrongdoing, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of obligations and duties under the transfer
and servicing agreement.
The trust agreement provides that the transferor may transfer its interest
in all or a portion of the Transferor Certificate by exchanging its Transferor
Certificate for a Supplemental Certificate. The terms of the Supplemental
Certificate must be defined in a supplement to the trust agreement. Before a
Supplemental Certificate is issued, the following must occur:
. notice of the exchange to the owner trustee, the indenture trustee, the
servicer and each Rating Agency;
. delivery to the owner trustee and the indenture trustee of an executed
supplement to the trust agreement;
. written confirmation from each Rating Agency that the exchange will not
result in a reduction or withdrawal of its rating of any outstanding
series or class;
. delivery to the owner trustee and the indenture trustee of a certificate
of an authorized officer of the transferor to the effect that it
reasonably believes the exchange will not have an Adverse Effect;
. delivery to the owner trustee and the indenture trustee of a Tax Opinion
regarding the exchange; and
. the total amount of Principal Receivables in the Trust Portfolio, plus
the principal amount of any Participations transferred to the trust must
exceed the Required Minimum Principal Balance on the date of the
exchange.
No Supplemental Certificate may be transferred or exchanged unless a Tax
Opinion is delivered to the owner trustee and the indenture trustee regarding
the exchange.
The transferor or the servicer may consolidate with, merge into, or sell its
business to, another entity, in accordance with the transfer and servicing
agreement, and the surviving entity will be the successor to the transferor or
servicer, as the case may be, upon satisfaction of the following conditions:
. execution of an agreement relating to the succession that supplements the
transfer and servicing agreement;
. in the case of a succession relating to the transferor, delivery to the
owner trustee and the indenture trustee of a certificate of an authorized
officer of the transferor and an opinion of counsel, each addressing
compliance with the applicable provisions of the transfer and servicing
agreement and the validity and enforceability of the supplemental
agreement, and written confirmation from each Rating Agency that the
succession will not result in a reduction or withdrawal of its rating of
any outstanding series or class; and
. in the case of a succession relating to the servicer, delivery to the
owner trustee and the indenture trustee of a certificate of an authorized
officer of the servicer and an opinion of counsel, each addressing
compliance with the applicable provisions of the transfer and servicing
agreement, notification of the succession to each Rating Agency, and that
the successor is eligible to act as servicer.
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Servicer Default
The transfer and servicing agreement specifies the duties and obligations of
the servicer. A failure by the servicer to perform its duties or fulfill its
obligations can result in a Servicer Default.
A "Servicer Default" includes each of the following:
(1) failure by the servicer to make any payment, transfer or deposit, or
to give instructions or to give notice to the indenture trustee to do so,
on the required date under the transfer and servicing agreement, the
indenture or any indenture supplement or within the applicable grace period
not exceeding five business days;
(2) failure on the part of the servicer to observe or perform in any
material respect any of its other covenants or agreements if the failure:
(a) has an Adverse Effect; and
(b) continues unremedied for a period of 60 days after written
notice to the servicer by the owner trustee or the indenture trustee,
or the servicer, the owner trustee and the indenture trustee by
noteholders of 10% or more of the outstanding principal amount of all
of the trust's outstanding series or, where the servicer's failure does
not relate to all series, 10% or more of the outstanding principal
amount of all series affected; or the assignment or the delegation by
the servicer of its duties, except as specifically permitted under the
transfer and servicing agreement;
(3) any representation, warranty or certification made by the servicer
in the transfer and servicing agreement, or in any certificate delivered as
required by the transfer and servicing agreement, proves to have been
incorrect when made if it:
(a) has an Adverse Effect; and
(b) continues to be incorrect and to materially adversely affect
those noteholders for a period of 60 days after written notice to the
servicer by the owner trustee or the indenture trustee, or to the
servicer, the owner trustee and the indenture trustee by noteholders of
10% or more of the outstanding principal amount of all of the trust's
outstanding series or, where the servicer's inaccuracy does not relate
to all series, of 10% or more of the outstanding principal amount of
all series affected;
(4) specific bankruptcy, insolvency, liquidation, conservatorship,
receivership or similar events relating to the servicer; or
(5) any other event specified in the accompanying prospectus supplement.
A delay in or failure of performance referred to in clause (1) above for a
period of 10 business days after the applicable grace period, or referred to
under clause (2) or (3) for a period of 60 business days after the applicable
grace period, will not constitute a Servicer Default if the delay or failure
could not be prevented by the exercise of reasonable diligence by the servicer
and the delay or failure was caused by an act of God or other similar
occurrence. Upon the occurrence of any of these events, the servicer shall not
be relieved from using all commercially reasonable efforts to perform its
obligations in a timely manner in accordance with the terms of the transfer and
servicing agreement and the servicer must provide the indenture trustee, the
owner trustee, each transferor and any Series Enhancer with an officer's
certificate giving prompt notice of its failure or delay, together with a
description of its efforts to perform its obligations.
If a Servicer Default occurs, for as long as it has not been remedied, the
indenture trustee or noteholders representing a majority of the outstanding
principal amount of all of the trust's outstanding series may give a notice to
the servicer and the owner trustee, and to the indenture trustee if given by
the noteholders, terminating all of the rights and obligations of the servicer
under the transfer and servicing agreement and the indenture trustee may
appoint a new servicer. The indenture trustee will as promptly as possible
appoint an eligible successor to the servicer. If no successor has been
appointed or has accepted the appointment by the time the servicer ceases to
act as servicer, the indenture trustee will automatically become the successor.
If the indenture
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trustee is unable to obtain bids from eligible servicers and the servicer
delivers a certificate of an authorized officer to the effect that it cannot in
good faith cure the Servicer Default which gave rise to a transfer of
servicing, and if the indenture trustee is legally unable to act as successor,
then the indenture trustee will give the transferor a right of first refusal to
purchase the interests of the noteholders in the trust on the distribution date
in the next calendar month at a price equal to the sum of the amounts specified
for each series outstanding in the related indenture supplement.
The rights and obligations of the transferor under the transfer and
servicing agreement will be unaffected by any change in servicer.
In the event of the bankruptcy of the servicer, the bankruptcy court may
have the power to prevent either the indenture trustee or the noteholders from
appointing a successor servicer.
Evidence of Compliance
The transfer and servicing agreement provides that on or before March 31 of
each calendar year, the servicer will have a firm of independent certified
public accountants furnish a report showing that, for the prior calendar year:
. the accounting firm has reviewed management's assertion that the system
of internal control over servicing of securitized credit card receivables
met the criteria for effective internal control and that, in the
accounting firm's opinion, management's assertion is fairly stated in all
material respects, and
. the accounting firm has compared amounts set forth in the periodic
reports prepared by the servicer for the prior calendar year with the
servicer's computer reports and that, in the accounting firm's opinion,
the amounts are in agreement, except for any discrepancies disclosed.
The transfer and servicing agreement also provides that by March 31 of each
calendar year, the servicer will deliver to the owner trustee, the indenture
trustee and each Rating Agency a certificate of an authorized officer to the
effect that the servicer has fully performed its obligations under the transfer
and servicing agreement during the preceding year, or, if there has been a
default in the performance of any of its obligations, specifying the nature and
status of default.
Assumption of a Transferor's Obligations
A transferor may, from time to time, consider a transfer of all or a portion
of its right, title and interest in and to the receivables and/or its interest
in the Transferor Certificate, collectively referred to as the assigned assets,
together with all servicing functions, if any, and other obligations under the
transfer and servicing agreement or relating to the transactions contemplated
thereby, collectively referred to as, the assumed obligations, to another
entity, called the assuming entity, which may be an entity that is not
affiliated with the transferor. In the transfer and servicing agreement, each
transferor is permitted to assign, convey and transfer assigned assets and
assumed obligations to the assuming entity without the consent or approval of
the holders of any outstanding notes if the following conditions, among others,
are satisfied:
(1) the assuming entity, that transferor and the trustee shall have
entered into and delivered to the trustee a supplement to the transfer and
servicing agreement or an assumption agreement providing for the assuming
entity to assume the assumed obligations, including the obligation under
the transfer and servicing agreement to transfer the Transferor Amount in
the receivables arising under the accounts and the receivables arising
under any additional accounts to the trust;
(2) all UCC filings required to perfect the interest of the indenture
trustee in the receivables arising under those accounts shall have been
duly made and copies of all UCC filings shall have been delivered by each
transferor to the indenture trustee;
(3) if the assuming entity shall be eligible to be a debtor in a case
under the bankruptcy code, that transferor shall have delivered to the
Rating Agencies, with a copy to the servicer and the trustee, notice of
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the transfer and assumption, and that each Rating Agency that has rated an
outstanding series of notes confirms in writing that the transfer will not
result in a reduction or withdrawal of its rating of any class of any
outstanding series of notes or, if the assuming entity shall not be
eligible to be a debtor under the bankruptcy code, that transferor shall
have delivered to the Rating Agencies notice of the transfer and
assumption;
(4) the trustee shall have received an opinion of counsel to the effect
that
(a) the transfer of the receivables by the assuming entity shall
constitute either a sale of, or the granting of a security interest in,
the receivables by the assuming entity to the trust,
(b) the condition specified in clause (2) shall have been satisfied,
and
(c) if the assuming entity shall be subject to the FDIA, the
interest of the trust in the receivables should not be subject to
avoidance by the FDIC if the FDIC were to become the receiver or
conservator of the assuming entity; and
(5) the trustee shall have received a Tax Opinion.
The transfer and servicing agreement provides that the transferor, the
assuming entity and the owner trustee may enter into amendments to the
transfer and servicing agreement to permit the transfer and assumption
described above without the consent of the holders of any outstanding
notes. After any permitted transfer and assumption, the assuming entity
will be considered to be a "transferor" for all purposes hereof, and that
transferor will have no further liability or obligation under the transfer
and servicing agreement, other than those liabilities that arose prior to
that transfer.
Amendments
The transfer and servicing agreement may be amended by the transferor, the
servicer and the owner trustee, without the consent of the indenture trustee or
the noteholders of any series, on the following conditions:
. the transferor delivers to the owner trustee and the indenture trustee a
certificate of an authorized officer stating that, in the transferor's
reasonable belief, the amendment will not have an Adverse Effect; and
. written confirmation from each Rating Agency that the amendment will not
result in a reduction or withdrawal of its rating of any outstanding
series or class.
The transfer and servicing agreement may also be amended by the servicer,
the transferor and the owner trustee, without the consent of any noteholders
and without prior notice to each Rating Agency, in order to
. cure any ambiguity, correct or supplement any provision in the transfer
and servicing agreement that may be inconsistent with any other provision
in the transfer and servicing agreement;
. make any other provisions with respect to matters or questions arising
under the transfer and servicing agreement; and
. qualify for sale treatment under generally accepted accounting
principles;
in each case, upon receipt of a certificate of an authorized officer of the
transferor to the effect that, in the transferor's reasonable belief, the
action will not have an Adverse Effect, and in addition, with respect to
qualification for sale treatment under generally accepted accounting
principles, upon the delivery of a Tax Opinion to the indenture trustee.
The transfer and servicing agreement may also be amended by the servicer and
the owner trustee at the direction of the transferor, without the consent of
the indenture trustee, the noteholders of any series or the Series Enhancers
for any series to add, modify or eliminate any provisions necessary or
advisable in order to enable the trust or any portion of the trust to
(1) qualify as, and to permit an election to be made for the trust to be
treated as, a "financial asset securitization investment trust" under the
Internal Revenue Code of 1986, as amended and
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(2) avoid the imposition of state or local income or franchise taxes on
the trust's property or its income.
The following conditions apply for the amendments described in the preceding
paragraph:
. delivery to the owner trustee and the indenture trustee of a certificate
of an authorized officer of the transferor to the effect that the
requirements under the transfer and servicing agreement applicable to the
proposed amendments have been met;
. receipt of written confirmation from each Rating Agency that the
amendment will not result in a reduction or withdrawal of its rating of
any outstanding series or class; and
. the amendment must not affect the rights, duties or obligations of the
indenture trustee or the owner trustee under the transfer and servicing
agreement.
The amendments which the transferor may make without the consent of the
noteholders of any series or the Series Enhancers for any series in accordance
with the preceding paragraph may include, without limitation, the addition of a
sale of receivables in the Trust Portfolio.
The transfer and servicing agreement may also be amended by the transferor,
the servicer and the owner trustee with the consent of noteholders representing
at least 66 2/3% of the outstanding principal amount of the notes of all series
adversely affected by the amendment. Even with consent, no amendment may occur
if it:
(1) reduces the amount of, or delays the timing of:
(a) any distributions to be made to noteholders of any series;
however, changes in Amortization Events or Reinvestment Events that
decrease the likelihood of the occurrence of those events will not be
considered delays in the timing of distributions for purposes of this
clause;
(b) deposits of amounts to be distributed; or
(c) the amount available under any series enhancement, without the
consent of each affected noteholder;
(2) changes the manner of calculating the interests of any noteholder,
without the consent of each affected noteholder;
(3) reduces the percentage of the outstanding principal amount of the
notes required to consent to any amendment, without the consent of each
affected noteholder; or
(4) adversely affects the rating of any series or class by each Rating
Agency, without the consent of noteholders representing at least 66 2/3% of
the outstanding principal amount of the notes of each affected series or
class.
DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENTS
The following summarizes the material terms of the receivables purchase
agreements. References to the bank below include additional receivables sellers
contemplated by the receivables purchase agreements.
Sale of Receivables
Under the receivables purchase agreement between the bank and the
transferor, the bank sold and, in the future, may sell to the transferor all of
its right, title and interest in and to all of the receivables existing in the
initial accounts and in additional accounts as of their date of designation for
inclusion in the trust and recoveries allocable to these receivables and other
property. Under the receivables purchase agreement between the bank and HRAC
II, the bank agrees that it will, from time to time, sell to HRAC II all of its
right, title and interest in and to receivables existing in certain accounts
and recoveries allocable to those receivables and other property. Under the
receivables purchase agreement between HRAC II and the transferor, HRAC II
agrees that it will sell to the transferor all of its right, title and interest
in and to receivables existing in additional accounts originated by the bank as
of their date of designation for inclusion in the trust and recoveries
allocable to these receivables and other property.
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In connection with the sale of receivables to the transferor by either the
bank or HRAC II, the bank or HRAC II, as the case may be, will indicate in its
respective computer files that these receivables have been sold to the
transferor and that these receivables will be sold or transferred by the
transferor to the trust. Similarly, in connection with the sale of receivables
by the bank to HRAC II, the bank will indicate in its computer files that these
receivables have been sold to HRAC II. The records and agreements relating to
the accounts and receivables for the Trust Portfolio may not be segregated by
the bank from other documents and agreements relating to other credit accounts
and receivables. The bank, HRAC II and the transferor will file UCC financing
statements meeting the requirements of applicable law in each of the
jurisdictions necessary to perfect the ownership or security interest of HRAC
II or the transferor, as the case may be, in these receivables. See "Risk
Factors--Some liens may be given priority over your notes which could cause
your receipt of payments to be delayed or reduced" and "Material Legal Aspects
of the Receivables" in this prospectus.
Representations and Warranties
In each receivables purchase agreement, the seller of the receivables
represents and warrants to the purchaser that, among other things, as of the
date of each receivables purchase agreement and, with respect to any
receivables in any designated additional accounts, as of the date of
designation of these additional accounts, it is duly organized and in good
standing and has the authority to consummate the transactions contemplated by
the receivables purchase agreement. In each receivables purchase agreement in
which the transferor purchases receivables, the transferor receives the
additional representation and warranty that as of the Initial Cut-Off Date and,
with respect to any receivables in any designated additional accounts, as of
each date of designation of these additional accounts, each receivable
transferred thereunder is an Eligible Receivable. In the event of a breach of
any representation and warranty set forth in these receivables purchase
agreements which results in the requirement that the transferor accept
retransfer of an ineligible receivable under the transfer and servicing
agreement, then the bank or HRAC II, as the case may be, will repurchase that
ineligible receivable from the transferor on the date of the retransfer. The
purchase price for the ineligible receivables will be the principal amount of
those receivables plus applicable Finance Charge and Administrative
Receivables.
Under each receivables purchase agreement, the seller of receivables also
represents and warrants to the purchaser that, among other things, as of the
date of the receivables purchase agreement and, with respect to any receivables
in any designated additional accounts, as of each date of designation of these
additional accounts the receivables purchase agreement constitutes a valid and
binding obligation of the seller, and the receivables purchase agreement
constitutes a valid sale to the purchaser of all right, title and interest of
the seller in and to the receivables existing in the accounts as of the Initial
Cut-Off Date and, with respect to any receivables in any designated additional
accounts, as of each date of designation of these additional accounts to the
Trust Portfolio and in the proceeds of the Trust Portfolio. If the breach of
any of the representations or warranties described in this paragraph results in
the obligation of the transferor under the transfer and servicing agreement to
accept retransfer of the receivables, the bank or HRAC II, as the case may be,
will repurchase the receivables retransferred to the transferor for an amount
of cash at least equal to the amount of cash the transferor is required to
deposit under the transfer and servicing agreement in connection with the
retransfer.
Amendments
The receivables purchase agreement between the transferor and the bank may
be amended by the transferor and the bank without the consent of the
noteholders:
(1) to cure any ambiguity,
(2) to correct or supplement any provisions therein which may be
inconsistent with any other provisions therein or in any conveyance paper,
(3) to add any other provisions with respect to matters or questions
arising thereunder or any conveyance papers which shall not be inconsistent
with the provisions of the receivables purchase agreement or any conveyance
papers,
(4) to change or modify the purchase price of the receivables, and
(5) to change, modify, delete or add any other obligation of the bank or
the transferor; provided that no amendment pursuant to this clause (5) will
be effective unless the Rating Agency Condition is satisfied.
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No amendment to this receivables purchase agreement, however, may have an
Adverse Effect, unless the indenture trustee shall consent thereto.
The receivables purchase agreements between the bank and HRAC II and between
HRAC II and the transferor may be amended by the parties thereto without the
consent of the noteholders provided that the amendment does not have an Adverse
Effect.
Termination
The receivables purchase agreements will terminate immediately after the
trust terminates. In addition, if a receiver or conservator is appointed for
the bank or HRAC II or other bankruptcy, liquidation, insolvency or similar
events occur, the bank or HRAC II, as the case may be, will immediately cease
to sell receivables to the transferor and promptly give notice of that event to
the transferor and the indenture trustee, unless the bankruptcy court, receiver
or conservator instructs otherwise.
MATERIAL LEGAL ASPECTS OF THE RECEIVABLES
Transfer of Receivables
The bank, HRAC II, and each other account owner or receivables seller in the
applicable receivables purchase agreement will represent and warrant that its
transfer of receivables constitutes a valid sale and assignment of all of its
right, title and interest in and to the receivables. In the transfer and
servicing agreement, the transferor will represent and warrant that its
transfer of receivables constitutes a valid sale and assignment of all of its
right, title and interest in and to the receivables, except for its interest as
the holder of the Transferor Certificate, or creates in favor of the trust a
first-priority perfected security interest in the transferor's rights in the
receivables in existence at the time that the trust is formed or at the time
that receivables in accounts are transferred, as the case may be, and a first-
priority perfected security interest in the transferor's rights in the
receivables arising in accounts already designated for the trust on and after
their creation, in each case until termination of the trust. For a discussion
of the trust's rights arising from these representations and warranties not
being satisfied, see "Description of the Transfer and Servicing Agreement--
Representations and Warranties of the Transferor" in this prospectus.
Each of the transferor in the transfer and servicing agreement and the bank,
HRAC II, and each other account owner or receivables seller in the applicable
receivables purchase agreement will represent that the receivables are
"accounts" or "general intangibles" for purposes of the UCC. Both the sale of
accounts and the transfer of accounts as security for an obligation are subject
to the provisions of Article 9 of the UCC. In addition, a transfer of general
intangibles as security for an obligation is subject to the provisions of
Article 9 of the UCC. Therefore, the bank, HRAC II, each other account owner or
receivables seller, and the transferor will file appropriate UCC financing
statements to perfect the respective transferee's security interest in the
receivables. Article 9 of the UCC, however, does not apply to the sale of
general intangibles. As a consequence, some other action under applicable state
law may be required in order to perfect that sale against the interests of
third parties.
There are limited circumstances in which prior or subsequent transferees of
receivables coming into existence after a series closing date could have an
interest in those receivables with priority over the trust's interest. Under
the applicable receivables purchase agreement, the bank, HRAC II, and each
other account owner or receivables seller will represent and warrant that it
has transferred the receivables free and clear of the lien of any third party,
other than the indenture trustee. In addition, the bank, HRAC II, and each
other account owner or receivables seller will covenant that it will not sell,
pledge, assign, transfer or grant any lien on any receivable, or any interest
in any receivables, other than to its respective transferee or the indenture
trustee. Similarly, under the transfer and servicing agreement, the transferor
will represent and warrant that it has transferred the receivables to the trust
free and clear of the lien of any third party, other than the indenture
trustee, and the transferor will covenant that it will not sell, pledge,
assign, transfer, or grant any lien on any receivable, or any interest in any
receivable, other than to the trust. Nevertheless, a tax, governmental or other
nonconsensual lien on property of the transferor, the bank, HRAC II, or another
account owner or receivables
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seller, arising prior to the time a receivable comes into existence may have
priority over the interest of the trust in that receivable. Furthermore,
administrative expenses relating to an insolvency or bankruptcy proceeding
commenced by or against the bank, HRAC II, another account owner or receivables
seller, or the servicer may have priority over the interest of the trust in the
receivables.
For as long as one of the following is true:
(1) Household Finance Corporation remains the servicer under the
transfer and servicing agreement and maintains a commercial paper rating of
not less than A-1 by Standard & Poor's, P-1 by Moody's and F-1 by Fitch;
(2)(a) Household Finance Corporation remains the servicer under the
transfer and servicing agreement;
(b) no Amortization Event, Reinvestment Event or Event of Default has
occurred;
(c) Household International, Inc. maintains a commercial paper rating
of not less than A-1 by Standard & Poor's, P-1 by Moody's and F-1 by
Fitch;
(d) Household Finance Corporation remains a wholly-owned subsidiary of
Household International, Inc., directly or indirectly; and
(e) in the event of a material change in the financial relationship
between Household Finance Corporation and Household International, Inc.:
. Household Finance Corporation notifies each Rating Agency; and
. written confirmation is received from each Rating Agency that the
material change will not result in a reduction or withdrawal of
its rating of any outstanding series or class; or
(3) any other arrangements are made and written confirmation is received
from each Rating Agency that the arrangements will not result in a
reduction or withdrawal of its rating of any outstanding series or class,
cash collections held by the servicer may be commingled and used for the
benefit of the servicer prior to each distribution date and, in the event of
the insolvency or bankruptcy of the servicer or, in limited circumstances, the
lapse of specified time periods, the trust may not have a first-priority
perfected security interest in those commingled cash collections. If the trust
does not have a first priority perfected security interest in commingled cash
collections, the amount payable to you could be lower than the outstanding
principal and accrued interest on the notes, thus resulting in losses to you.
However, if the conditions specified in (1), (2) or (3) above are not
satisfied, the servicer will begin within five business days to deposit
collections directly into the collection account within two business days of
each date of processing.
Matters Relating to Conservatorship, Receivership and Bankruptcy
The bank is chartered as a national banking association and is regulated and
supervised by the Office of the Comptroller of the Currency, which is
authorized to appoint the FDIC as conservator or receiver for the bank if
specified events occur relating to the bank's financial condition or the
propriety of its actions. In addition, the FDIC could appoint itself as
conservator or receiver for the bank.
Although the bank (or other account owner or receivables seller that is a
similarly regulated financial institution, which in this section we also refer
to as the "bank") will treat its transfer of the receivables as a sale for
accounting purposes, the transfer may constitute the grant of a security
interest under general applicable law. Nevertheless, the FDIC has issued
regulations surrendering certain rights under the Federal Deposit Insurance
Act, as amended by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989, to reclaim, recover, or recharacterize a financial institution's
transfer of financial assets such as the receivables if (i) the transfer
involved a securitization of the financial assets and meets specified
conditions for treatment as a sale under relevant accounting principles, (ii)
the financial institution received adequate consideration for the transfer,
(iii) the parties intended that the transfer constitute a sale for accounting
purposes, and (iv) the financial assets were not transferred fraudulently, in
contemplation of the financial institution's insolvency, or with the intent to
hinder, delay, or defraud the financial institution or its creditors. The
receivables purchase
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agreements to which the bank is a party and the transfer of the receivables by
the bank are intended to satisfy all of these conditions.
If a condition required under the FDIC's regulations were found not to have
been met, however, the FDIC could reclaim, recover, or recharacterize the
bank's transfer of the receivables. FDIC staff positions taken prior to the
passage of the 1989 amendment to the FDIA do not suggest that the FDIC would
interrupt the timely transfer to the transferor and the trust of payments
collected on the receivables. If the FDIC were to assert a different position,
the FDIA would limit the damages in this event to "actual direct compensatory
damages" determined as of the date that the FDIC was appointed as conservator
or receiver for the bank. The FDIC, moreover, could delay its decision whether
to reclaim, recover, or recharacterize the bank's transfer of the receivables
for a reasonable period following its appointment as conservator or receiver
for the bank. Therefore, if the FDIC were to reclaim, recover, or
recharacterize the bank's transfer of the receivables, payments to noteholders
could be delayed or reduced.
Even if the conditions set forth in the regulations were satisfied and the
FDIC did not reclaim, recover, or recharacterize the bank's transfer of the
receivables, noteholders could suffer a loss on their investment if (i) any
receivables purchase agreement to which the bank is a party or the bank's
transfer of the receivables were found to violate the regulatory requirements
of the FDIA, (ii) the transferor, the trust, or the indenture trustee were
required to comply with the claims process established under the FDIA in order
to collect payments on the receivables, (iii) the FDIC were to request a stay
of any action by the transferor, the trust, or the indenture trustee to enforce
any receivables purchase agreement to which the bank is a party or the notes,
or (iv) the FDIC were to repudiate other obligations of the bank relating to
the receivables or the issuance of the notes.
In the event of the bankruptcy of the servicer, the bankruptcy court may
have the power to prevent the transferor, the indenture trustee or the
noteholders from appointing a successor servicer. In addition, if the servicer
becomes a debtor in a bankruptcy case, the servicer's rights under the transfer
and servicing agreement, including the right to service the receivables, would
be property of the estate of the servicer and, under the Bankruptcy Code,
subject to the servicer's right to assume or reject the transfer and servicing
agreement. See "Description of the Transfer and Servicing Agreement--Servicer
Default" in this prospectus.
The transferor has been structured such that the filing of a voluntary or
involuntary petition for relief by or against the transferor under the
Bankruptcy Code and the substantive consolidation of the assets and liabilities
of the transferor with those of an affiliate is unlikely. The transferor is a
separate, limited purpose corporation, and its articles of incorporation
contain limitations on the nature of its business and restrictions on its
ability to commence a voluntary case or proceeding under the Bankruptcy Code or
similar laws without the prior unanimous consent of all of its directors and
the holders of its preferred stock. The transferor's preferred stock has been
issued to the issuer and pledged to the indenture trustee. The indenture
trustee will hold the pledged preferred stock of the transferor in trust for
the benefit of the noteholders and vote such preferred stock only according to
the written instructions of the noteholders representing more than 50% of the
outstanding principal amount of the notes of all series. The preferred stock is
non-transferable except by a vote of the noteholders representing 100% of the
outstanding principal amount of all series of notes and written confirmation
from each Rating Agency that such transfer of the preferred stock will not
result in the reduction or withdrawal by any Rating Agency of its rating of any
outstanding series or class of notes. In addition, the indenture trustee will
covenant in the indenture that it will not at any time institute against the
transferor any bankruptcy, insolvency or similar proceedings under the
Bankruptcy Code or similar laws. Nevertheless, if HRAC II or another account
owner or receivables seller were to become a debtor in a bankruptcy case and if
a bankruptcy trustee or creditor of such entity or such entity as debtor-in-
possession were to take the position that the transfer of the receivables by
such entity should be characterized as a pledge of those receivables, or if the
assets and liabilities of the transferor were substantively consolidated with
those of an entity in bankruptcy, then delays in payments on the notes and
possible reductions in the amount of those payments could result.
If bankruptcy, insolvency or similar proceedings under the Bankruptcy Code
or similar laws occur with respect to the transferor, the bank, HRAC II, or any
account owner or receivables seller, the transferor will promptly notify the
indenture trustee, an Amortization Event will occur with respect to each
series, and newly
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created receivables will not be transferred to the trust. Any Principal
Receivables transferred to the trust prior to the event, as well as collections
on those Principal Receivables and Finance Charge and Administrative
Receivables accrued at any time with respect to those Principal Receivables,
will continue to be part of the trust assets and will be applied as specified
above in "Description of the Notes--Application of Collections" and in the
accompanying prospectus supplement.
Regardless of the terms of the receivables purchase agreements, the transfer
and servicing agreement, the indenture, or the instructions of those authorized
to direct the indenture trustee's actions, a conservator or receiver or a
bankruptcy court may have the power (i) to prevent or require the commencement
of an amortization period or accumulation period, (ii) to prevent, limit, or
require the early liquidation of the receivables and termination of the trust,
or (iii) to require, prohibit, or limit the continued transfer of receivables
to the trust. If any of these events were to occur, payments to noteholders
could be delayed or reduced. See "Risk Factors--If a conservator or receiver
were appointed for the bank or other account owner or receivables seller, or
the transferor or other account owner or receivables seller became a debtor in
a bankruptcy case, delays or reductions in payment of your notes could occur"
in this prospectus.
Consumer Protection Laws
The relationship of the consumer and the provider of consumer credit is
extensively regulated by federal and state consumer protection laws. With
respect to credit accounts issued by the bank, the most significant federal
laws include the Federal Truth-in-Lending, Equal Credit Opportunity, Fair
Credit Reporting and Fair Debt Collection Practices Acts. These statutes impose
various disclosure requirements either before or when an account is opened, or
both, and at the end of monthly billing cycles, and, in addition, limit account
holder liability for unauthorized use, prohibit particular discriminatory
practices in extending credit, and regulate practices followed in collections.
In addition, account holders are entitled under these laws to have payments and
credits applied to the revolving credit account promptly and to request prompt
resolution of billing errors. Congress and the states may enact new laws and
amendments to existing laws to regulate further the consumer revolving credit
industry. The trust may be liable for violations of consumer protection laws
that apply to the receivables, either as assignee from the transferor with
respect to obligations arising before transfer of the receivables to the trust
or as the party directly responsible for obligations arising after the
transfer. In addition, an account holder may be entitled to assert those
violations by way of set-off against the obligation to pay the amount of
receivables owing. All receivables that were not created in compliance in all
material respects with the requirements of applicable consumer protection laws,
if noncompliance has an Adverse Effect, will be reassigned to the transferor.
The servicer has also agreed in the transfer and servicing agreement to
indemnify the trust, among other things, for any liability arising from
violations described in the preceding sentence. For a discussion of the trust's
rights if the receivables were not created in compliance in all material
respects with applicable laws, see "Description of the Transfer and Servicing
Agreement--Representations and Warranties of the Transferor" in this
prospectus.
Application of federal and state bankruptcy and debtor relief laws would
affect the interests of the noteholders if those laws result in any receivables
being charged-off as uncollectible. See "Description of the Notes--Defaulted
Amount; Investor Charge-Offs" in this prospectus.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following summary describes the material United States federal income
tax consequences of the purchase, ownership and disposition of the notes.
Additional federal income tax considerations relevant to a particular series
may be set forth in the accompanying prospectus supplement. The following
summary has been prepared and reviewed by Orrick, Herrington & Sutcliffe LLP as
special tax counsel to the Issuer. The summary is based on the Internal Revenue
Code of 1986, as amended as of the date hereof, and existing final, temporary
and proposed Treasury regulations, revenue rulings and judicial decisions, all
of which are subject to
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prospective and retroactive changes. The summary is addressed only to original
purchasers of the notes, deals only with notes held as capital assets within
the meaning of Section 1221 of the Code and, except as specifically set forth
below, does not address tax consequences of holding notes that may be relevant
to investors in light of their own investment circumstances or their special
tax situations, such as particular financial institutions, tax-exempt
organizations, life insurance companies, dealers in securities, non-U.S.
persons, or investors holding the notes as part of a conversion transaction, as
part of a hedge or hedging transaction, or as a position in a straddle for tax
purposes. Further, this discussion does not address alternative minimum tax
consequences or any tax consequences to holders of interests in a noteholder.
Special tax counsel is of the opinion that the following summary of federal
income tax consequences is correct in all material respects. An opinion of
special tax counsel, however, is not binding on the IRS or the courts, and no
ruling on any of the issues discussed below will be sought from the IRS.
Further, such opinion, as well as the opinions set forth below, are subject to
finalization of documents including those which are exhibits to the
registration statement of which this prospectus forms a part in a form which is
satisfactory to special tax counsel and which is not inconsistent with the
descriptions in the body of this prospectus and the related prospectus
supplement. Moreover, there are no authorities on similar transactions
involving interests issued by an entity with terms similar to those of the
notes described in this prospectus. Accordingly, it is suggested that persons
considering the purchase of notes should consult their own tax advisors with
regard to the United States federal income tax consequences of an investment in
the notes and the application of United States federal income tax laws, as well
as the laws of any state, local or foreign taxing jurisdictions, to their
particular situations.
Tax Characterization of the Trust and the Notes
Treatment of the Trust as an Entity Not Subject to Tax. Special tax counsel
is of the opinion that, although no transaction closely comparable to that
contemplated herein has been the subject of any Treasury Regulation, revenue
ruling or judicial decision, the trust will not be classified as an association
or as a publicly traded partnership taxable as a corporation for federal income
tax purposes and accordingly the trust will not be subject to federal income
tax. However, as discussed above, this opinion is not binding on the IRS and no
assurance can be given that this characterization will prevail.
The precise tax characterization of the trust for federal income tax
purposes is not certain. It might be viewed as merely holding assets on behalf
of the transferor as collateral for notes issued by the transferor. On the
other hand, the trust could be viewed as a separate entity for tax purposes
issuing its own notes. This distinction, however, should not have a significant
tax effect on noteholders except as stated below under "Possible Alternative
Characterizations."
Treatment of the Notes as Debt. Special tax counsel is of the opinion that,
although no transaction closely comparable to that contemplated herein has been
the subject of any Treasury regulation, revenue ruling or judicial decision,
the notes will be characterized as debt for United States federal income tax
purposes. Additionally, the trust will agree by entering into the Indenture,
and the noteholders will agree by their purchase and holding of notes, to treat
the notes as debt for United States federal income tax purposes.
Possible Alternative Characterizations. If, contrary to the opinion of
special tax counsel, the IRS successfully asserted that a series or class of
notes did not represent debt for United States federal income tax purposes,
those notes might be treated as equity interests in the trust or some other
entity for such purposes. If so treated, investors could be treated for such
purposes either as partners in a partnership or, alternatively, as shareholders
in a taxable corporation. Treatment of a noteholder as a partner could have
adverse tax consequences to some holders; for example, income to non-U.S.
persons generally would be subject to United States tax and United States tax
return filing and withholding requirements, and individual holders might be
subject to limitations on their ability to deduct their share of partnership
expenses. If notes instead were treated as corporate stock, the taxable
corporation would not be able to reduce its taxable income by deductions for
interest expense on notes recharacterized as equity, and any increase in the
corporate tax imposed with respect to such corporation could materially reduce
cash available to make payments on the notes; further, noteholders might not be
entitled to any dividends received deduction in respect of payments of interest
on notes treated as
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dividends. In addition, even if the notes are treated as debt, the trust is
also able to issue other securities which may be treated as debt or as equity
interests in the trust. The issuance of those securities requires the delivery
of a new opinion of counsel generally to the effect that issuance of those
securities will not cause the trust to become taxable as a separate entity for
federal income tax purposes; however, any new opinion would not bind the IRS,
and the trust could become taxable as a corporation as a result of the issuance
of those securities, potentially diminishing cash available to make payments on
the notes. Prospective investors should consult with their own tax advisors
with regard to the consequences of each possible alternative characterization
to them in their particular circumstances; the following discussion assumes
that the characterization of the notes as debt is correct.
Consequences to Holders of the Offered Notes
Interest and Original Issue Discount. In general, stated interest on a note
will be includible in gross income as it accrues or is received in accordance
with an noteholder's usual method of tax accounting. If a class of notes is
issued with original issue discount, the provisions of Sections 1271 through
1273 and 1275 of the Code will apply to those notes. Under those provisions, a
holder of a note with original issue discount, including a cash basis holder,
generally would be required to include the OID on a note in income for federal
income tax purposes on a constant yield basis, resulting in the inclusion of
OID in income in advance of the receipt of cash attributable to that income. In
general, a note will be treated as having OID to the extent that its "stated
redemption price" exceeds its "issue price," if that excess equals or exceeds
0.25 percent multiplied by the weighted average life of the note, determined by
taking into account the number of complete years following issuance until
payment is made for each partial principal payment. Under Section 1272(a)(6) of
the Code, special provisions apply to debt instruments on which payments may be
accelerated due to prepayments of other obligations securing those debt
instruments. However, no regulations have been issued interpreting those
provisions, and the manner in which those provisions would apply to the notes
is unclear, but the application of Section 1272(a)(6) could affect the rate of
accrual of OID and could have other consequences to holders of the notes.
Additionally, the IRS could take the position based on Treasury regulations
that none of the interest payable on a note is "unconditionally payable" and
hence that all of the interest payable on a note should be included in the
note's stated redemption price at maturity. If sustained, that treatment should
not significantly affect tax liabilities for most holders of the notes, but
prospective noteholders should consult their own tax advisors concerning the
impact to them in their particular circumstances. The trust intends to take the
position that interest on the notes constitutes "qualified stated interest" and
that the above consequences do not apply.
Market Discount. A holder of a note who purchases an interest in a note at a
discount that exceeds any OID not previously includible in income may be
subject to the "market discount" rules of Sections 1276 through 1278 of the
Code. These rules provide, in part, that gain on the sale or other disposition
of a note and partial principal payments on a note are treated as ordinary
income to the extent of accrued market discount. The market discount rules also
provide for deferral of interest deductions with respect to debt incurred to
purchase or carry a note that has market discount.
Market Premium. A holder of a note who purchases an interest in a note at a
premium may elect to amortize the premium against interest income over the
remaining term of the note in accordance with the provisions of Section 171 of
the Code.
Disposition of the Notes; Defeasance. Upon the sale, exchange or retirement
of a note, the holder of the note generally will recognize taxable gain or loss
in an amount equal to the difference between the amount realized on the
disposition, other than amounts attributable to accrued interest, and the
holder's adjusted tax basis in the note. A taxable exchange of a note could
also occur as a result of the transferor's substitution of money or investments
for the receivables in the Trust Portfolio. See "Description of the Notes--
Defeasance" in this prospectus. The holder's adjusted tax basis in the note
generally will equal the cost of the note to that holder, increased by any
market or original issue discount previously included in income by that holder
with respect to the note, and decreased by the amount of any bond premium
previously amortized and any payments
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of principal or OID previously received by that holder with respect to such
note. Any gain or loss generally will be capital gain or loss, except to the
extent of accrued market discount not previously included in income, and will
be long-term capital gain or loss if at the time of sale the note has been held
for more than one year.
Foreign Holders. Under United States federal income tax law now in effect,
payments of interest by the trust to a holder of a note who, as to the United
States, is a nonresident alien individual or a foreign corporation generally
will be considered "portfolio interest," and generally will not be subject to
United States federal income tax and withholding tax, provided the interest is
not effectively connected with the conduct of a trade or business within the
United States by the Foreign Person and the Foreign Person
(1) is not for United States federal income tax purposes
(a) actually or constructively a "10 percent shareholder" of the
transferor or the trust,
(b) a "controlled foreign corporation" with respect to which the
transferor or the trust is a "related person" within the meaning of the
Code, or
(c) a bank extending credit under a loan agreement entered into in
the ordinary course of its trade or business, and
(2) provides the person who is otherwise required to withhold United
States tax with respect to the notes with an appropriate statement, on IRS
Form W-8BEN or a substitute form, signed under penalties of perjury,
certifying that the beneficial owner of the note is a Foreign Person and
providing the Foreign Person's name, address and other specified
information.
If a note is held through a securities clearing organization or other
financial institutions, as is expected to be the case unless Definitive Notes
are issued, the organization or institution may provide the relevant signed
statement generally to the withholding agent; in that case, however, the signed
statement generally must be accompanied by an IRS Form W-8BEN or substitute
form provided by the Foreign Person that owns the note. If interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated under an
applicable tax treaty or interest is effectively connected with the conduct of
a trade or business within the United States and, in either case, the
appropriate statement has been provided. Special rules apply to partnerships,
estates and trusts, and in certain circumstances certifications as to foreign
status and other matters may be required to be provided by partners and
beneficiaries thereof.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a Foreign Person will be exempt from United
States federal income tax and withholding tax; provided that
(1) that gain is not effectively connected with the conduct of a trade
or business in the United States by the Foreign Person, and
(2) in the case of an individual Foreign Person, that individual is not
present in the United States for 183 days or more in the taxable year.
The U.S. Treasury Department has recently issued final Treasury regulations
which revise various procedural matters relating to withholding taxes.
Noteholders should consult their tax advisors regarding the procedures whereby
they may establish an exemption from withholding.
Backup Withholding and Information Reporting. Payments of principal and
interest, as well as payments of proceeds from the sale, retirement or
disposition of a note, may be subject to "backup withholding" tax under Section
3406 of the Code at a rate of 31% if a recipient of such payments fails to
furnish to the payor particular identifying information. Any amounts deducted
and withheld would be allowed as a credit against such recipient's United
States federal income tax, provided appropriate proof is provided under rules
established by the IRS. Furthermore, penalties may be imposed by the IRS on a
recipient of payments that is required to supply information but that does not
do so in the proper manner. Backup withholding will not apply with respect to
payments made to some exempt recipients, such as corporations and financial
institutions. Information may also be required to be provided to the IRS
concerning payments, unless an exemption applies. Holders of the notes should
consult their tax advisors regarding their qualification for exemption from
backup withholding and information reporting and the procedure for obtaining
such an exemption.
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The United States federal income tax discussion set forth above is included
for general information only, may not be applicable depending upon a holder's
particular tax situation, and does not purport to address the issues described
with the degree of specificity that would be provided by a taxpayer's own tax
advisor. Prospective purchasers should consult their own tax advisors with
respect to the tax consequences to them of the purchase, ownership and
disposition of the notes and the possible effects of changes in federal tax
laws.
State and Local Tax Consequences
The discussion above does not address the taxation of the trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
notes under any state or local tax law. Each investor should consult its own
tax adviser regarding state and local tax consequences.
ERISA CONSIDERATIONS
Subject to the considerations described under this heading, and in the
accompanying prospectus supplement, the notes may be purchased by, on behalf
of, or with "plan assets" of any employee benefit or other plan that is subject
to ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended
(each, a "Plan"). Any Plan fiduciary that proposes to cause a Plan to acquire
any of the notes should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership
of the Notes. See "ERISA Considerations" in the accompanying prospectus
supplement.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans from
engaging in specified transactions involving "plan assets" with persons that
are "parties in interest" under ERISA or "disqualified persons" under the Code
(collectively, "Parties in Interest") with respect to the Plan. A violation of
these "prohibited transaction" rules may generate excise tax and other
liabilities under ERISA and Section 4975 of the Code for such persons, unless a
statutory, regulatory or administrative exemption is available.
Some employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and most church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the notes without
regard to the ERISA considerations described herein, subject to the provisions
or other applicable federal and state law. However, any such plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
is subject to the prohibited transaction rules set forth in Section 503 of the
Code.
Fiduciaries or other persons contemplating purchasing the notes on behalf or
with "plan assets" of any Plan should consult their own counsel regarding
whether the trust assets represented by the notes would be considered "plan
assets," the consequences that would apply if the trust's assets were
considered "plan assets," and the availability of exemptive relief from the
prohibited transaction rules.
Finally, Plan fiduciaries and other Plan investors should consider the
fiduciary standards under ERISA or other applicable law in the context of the
Plan's particular circumstances before authorizing an investment of a portion
of the Plan's assets in the notes. Accordingly, among other factors, Plan
fiduciaries and other Plan investors should consider whether the investment
(1) satisfies the diversification requirement of ERISA or other
applicable law,
(2) is in accordance with the Plan's governing instruments, and
(3) is prudent in light of the "Risk Factors" and other factors
discussed in this prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
to be entered into with respect to each series of notes, the transferor will
cause the notes to be sold by the trust to each of the underwriters
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named in that underwriting agreement and in the accompanying prospectus
supplement, and each of those underwriters will severally agree to purchase
from the trust, the principal amount of notes set forth in that underwriting
agreement and in the accompanying prospectus supplement, subject to
proportional adjustment on the terms and conditions set forth in the related
underwriting agreement in the event of an increase or decrease in the aggregate
amount of notes offered by this prospectus and by the accompanying prospectus
supplement.
In each underwriting agreement, the several underwriters will agree, subject
to the terms and conditions set forth in that underwriting agreement, to
purchase all the notes offered by this prospectus and by the accompanying
prospectus supplement if any of those notes are purchased. In the event of a
default by any underwriter, each underwriting agreement will provide that, in
particular circumstances, purchase commitments of the nondefaulting
underwriters may be increased or the underwriting agreement may be terminated.
Each prospectus supplement will set forth the price at which each series of
notes or class being offered initially will be offered to the public and any
concessions that may be offered to dealers participating in the offering of
those notes. After the initial public offering, the public offering price and
such concessions may be changed.
Each underwriting agreement will provide that the transferor will indemnify
the related underwriters against some liabilities, including liabilities under
the Securities Act of 1933, as amended.
The place and time of delivery for any series of notes in respect of which
this prospectus is delivered will be set forth in the accompanying prospectus
supplement.
REPORTS TO NOTEHOLDERS
The servicer will prepare monthly and annual reports that will contain
information about the trust. The financial information contained in the reports
will not be prepared in accordance with generally accepted accounting
principles. Unless and until Definitive Notes are issued, the reports will be
sent to Cede & Co. which is the nominee of The Depository Trust Company and the
registered holder of the notes. No financial reports will be sent to you. See
"Description of the Notes--Book-Entry Registration," "--Reports to Noteholders"
and "Description of the Transfer and Servicing Agreement--Evidence of
Compliance" in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement relating to the notes with the SEC. This
prospectus is part of the registration statement, but the registration
statement includes additional information.
The servicer, on behalf of the trust will file with the SEC all required
annual, monthly and special SEC reports and other information about the trust.
You may read and copy any reports, statements or other information the
servicer files on behalf of the Trust at the SEC's public reference room in
Washington, D.C. You can request copies of these documents, upon payment of a
duplicating fee, by writing to the SEC. Please call the SEC at (800) SEC-0330
for further information on the operation of the public reference rooms. The SEC
filings relating to the trust are also available to the public on the SEC
internet site (http://www.sec.gov.).
The SEC allows us to "incorporate by reference" information filed with the
SEC on behalf of the trust, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information filed later with the SEC, on our behalf, will automatically update
the information in this prospectus. In all cases, you should rely on the later
information over different information included in this prospectus or the
accompanying prospectus supplement. We incorporate by reference any future
annual, monthly and special SEC reports and proxy materials filed by or on
behalf of the trust until we terminate our offering of the notes.
As a recipient of this prospectus, you may request a copy of any document
incorporated by reference, except exhibits to the documents, unless the
exhibits are specifically incorporated by reference, at no cost, by writing or
calling us at: Household Finance Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Office of Secretary, Telephone: (847) 564-
5000.
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GLOSSARY
"Addition Date" means:
(1) with respect to Aggregate Addition Accounts and New Accounts, the
date from and after which such Aggregate Addition Accounts and New Accounts
are to be included as accounts; and
(2) with respect to Participations, the date from and after which such
Participations are to be included as assets of the trust.
"Adverse Effect" means any action, the result of which:
(1) causes an Amortization Event, Reinvestment Event or an Event of
Default; or
(2) materially and adversely affects the amount or timing of payments to
be made to the noteholders of any series or class.
"Aggregate Addition" means any Participations to be included as trust assets
or any Eligible Accounts, other than New Accounts, designated to be included as
accounts after the initial selection date.
"Aggregate Addition Accounts" are Eligible Accounts designated to be
included as accounts.
"Amortization Event" means, with respect to all series issued by the trust,
the occurrence of any of the following events:
(1) bankruptcy, insolvency, liquidation, conservatorship, receivership
or similar events relating to the transferor, including any additional
transferor, or the bank or other account owner, unless written confirmation
is received from each Rating Agency that the removal of the bank or other
account owner from this Amortization Event will not result in a reduction
or withdrawal of its rating of any outstanding series or class;
(2) the transferor is unable for any reason to transfer receivables to
the trust in accordance with the provisions of the transfer and servicing
agreement;
(3) the trust becomes subject to regulation as an "investment company"
within the meaning of the Investment Company Act of 1940; or
(4) any other Amortization Event specified in the related prospectus
supplement.
"Bank Portfolio" means the portfolio of accounts held by the bank.
"Clearstream Luxembourg" means Clearstream Banking, societe anonyme.
"Code" means the Internal Revenue Code of 1986, as amended.
"Controlled Accumulation Period" means the period during which principal is
accumulated in specified amounts per month and paid on an Expected Principal
Payment Date. The Controlled Accumulation Period will commence at the close of
business on the date or dates specified in the prospectus supplement and ends
when any of the following occur:
(1) the notes of that series or class are paid in full;
(2) the Early Amortization Period or Early Accumulation Period starts;
or
(3) an Expected Principal Payment Date.
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"Controlled Amortization Period" means the period during which principal is
paid in fixed amounts at scheduled intervals. The Controlled Accumulation
Period will commence at the close of business on the date or dates specified in
the prospectus supplement and ends when any of the following occur:
(1) the notes of that series or class are paid in full;
(2) the Early Amortization Period or Early Accumulation Period starts;
or
(3) an Expected Principal Payment Date.
"Credit Enhancement Percentage" means the percentage interest of credit
enhancement providers.
"Defaulted Amounts" means, for any due period, an amount equal to:
(1) the amount of Principal Receivables which became defaulted
receivables in such due period, minus
(2) the amount of any defaulted receivables of which the transferor or
the servicer became obligated to accept reassignment or assignment, as
described under "Description of the Transfer and Servicing Agreement--
Representations and Warranties of the Transferor--Regarding the Accounts
and the Receivables".
"Definitive Notes" means notes issued in fully registered, certificated
form.
"Determination Date" means the earlier of the third business day and the
fifth calendar day, or if the fifth calendar day is not a business day the
preceding business day, preceding the fifteenth day of each calendar month.
"Depositaries" Citibank, N.A., as depositary for Clearstream Luxembourg, and
Morgan Guaranty Trust Company of New York, as depositary for Euroclear.
"Discount Percentage" means the percentage designated by the transferor,
which may be a fixed or variable percentage.
"Discount Option" means the transferor's option to designate at any time all
or any specified portion of Principal Receivables existing on and after a
discount option date to be treated as Finance Charge and Administrative
Receivables.
"Discount Option Receivables" means any Principal Receivables designated by
the transferor to be treated as Finance Charge and Administrative Receivables.
"DTC" means The Depository Trust Company.
"Early Accumulation Period" means the period during which principal is
accumulated in varying amounts each month based on the amount of Principal
Receivables collected following an Amortization Event. The Early Accumulation
Period for a series or class starts on the day an Amortization Event occurs and
ends when any of the following occurs:
(1) the notes of that series or class are paid in full;
(2) an Expected Principal Payment Date; or
(3) the Trust Termination Date.
"Early Amortization Period" means the period during which principal is paid
in varying amounts each month based on the amount of Principal Receivables
collected following an Amortization Event. The Early
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Amortization Period for a series or class starts on the day an Amortization
Event occurs and ends when any of the following occurs:
(1) the notes of that series or class are paid in full;
(2) the Series Final Maturity Date; or
(3) the Trust Termination Date.
"Eligible Account" has the meaning set forth on page 45 of this prospectus.
"Eligible Institution" means:
(1) (a) a depository institution, which may include the owner trustee or
the indenture trustee;
(b) an entity organized under the laws of the United States or any one of
the states of the United States, including the District of Columbia, or
any domestic branch of a foreign bank; and
(c) which at all times is a member of the FDIC and has either a long-term
unsecured debt rating or a short-term rating in the highest rating
catagory of Standard & Poor's, Moody's and, if rated by Fitch, of Fitch,
or such other rating category acceptable to the Rating Agency; or
(2) any other institution acceptable to each Rating Agency selected by
the transferor to rate a series or class of notes.
"Eligible Investments" mean instruments, investment property or other
property with respect to any of the following (but does not include any
security issued by or obligations of Household Receivables Acquisition Company
II):
(1) direct obligations of, or obligations fully guaranteed as to timely
payment by, the United States of America;
(2) demand deposits, time deposits or certificates of deposit, having
original maturities of no more than 365 days, of depository institutions or
trust companies incorporated under the laws of the United States or any
state of the United States, including the District of Columbia, or domestic
branches of foreign banks, and subject to supervision and examination of
federal or state banking or depository institution authorities; provided
that at the time of the trust's investment or contractual commitment to
invest, the short-term debt rating of that depository institution or trust
company shall be in the highest rating category of Standard & Poor's,
Moody's and, if rated by Fitch, of Fitch, or such other rating satisfactory
to the Rating Agency;
(3) commercial paper, having original or remaining maturities of no more
than 30 days, having, at the time of the trust's investment or contractual
commitment to invest, a rating in the highest rating category of Standard &
Poor's, Moody's and, if rated by Fitch, of Fitch, or such other rating
satisfactory to the Rating Agency;
(4) demand deposits, time deposits and certificates of deposit which are
fully insured by the FDIC having, at the time of the trust's investment, a
rating in the highest rating category of Standard & Poor's, Moody's and, if
rated by Fitch, of Fitch, or such other rating satisfactory to the Rating
Agency;
(5) bankers' acceptances, having original maturities of no more than 365
days, issued by any depository institution or trust company referred to in
clause (2) above;
(6) money market funds having, at the time of the trust's investment, a
rating in the highest rating category of Standard & Poor's, Moody's and, if
rated by Fitch, of Fitch, or such other rating satisfactory to the Rating
Agency, including funds for which the indenture trustee or any of its
affiliates is investment manager or advisor;
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(7) time deposits, having maturities not later than the next
distribution date, other than those referred to in clause (4) above, with a
person whose commercial paper has a credit rating satisfactory to Standard
& Poor's, Moody's and, if rated by Fitch, to Fitch; or
(8) any other investment upon receipt of written confirmation from each
Rating Agency that the additional form of investment will not result in a
reduction or withdrawal of its rating of any outstanding series or class.
"Eligible Receivable" has the meaning set forth on page 45 of this
prospectus.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Expected Principal Payment Date" has the meaning set forth in the
prospectus supplement.
"Events of Default" has the meaning set forth on page 37 of this
prospectus.
"Finance Charge and Administrative Receivables" means all amounts billed to
the obligors on any account in respect of all periodic rate finance charges,
cash advance fees, annual membership fees and annual service charges, late
fees, overlimit fees, Discount Option Receivables and any other fees with
respect to the accounts designated by the transferor at any time and from time
to time to be included as Finance Charge and Administrative Receivables.
Finance Charge and Administrative Receivables shall also include the interest
portion of Participations, as shall be determined pursuant to the applicable
participation interest supplement or indenture supplement for any series.
"Foreign Person" means any holder of a note who, as to the United States,
is a nonresident alien individual or a foreign corporation.
"Funding Period" is the period from the series' closing date to the earlier
of:
(1) the date the series' Invested Amount equals the principal amount of
that series of notes; and
(2) the date specified in the related prospectus supplement; provided
that the Funding Period shall not exceed one year.
"HRAC II" means Household Receivables Acquisition Company II, a Delaware
corporation.
"Initial Cut-Off Date" means September 25, 2000.
"Interchange" means interchange fees payable to the bank or any other
Account Owner, in its capacity as credit issuer, through MasterCard or VISA or
any similar entity or organization with respect to any type of revolving
credit accounts included as accounts (except as otherwise provided in the
initial assignment with respect to these accounts), in connection with obligor
charges for goods or services with respect to the accounts, as calculated as
described in the prospectus supplement.
"Invested Amount" for a series on any date will be equal to:
(1) the initial outstanding principal amount of that series of notes as
of the related closing date for that series; minus
(2) the amount of principal paid to the related noteholders prior to
that date; minus
(3) the amount of unreimbursed Investor Charge-Offs with respect to that
series prior to that date.
If so specified in the prospectus supplement relating to any series of
notes, under limited circumstances the Invested Amount may be further adjusted
by funds on deposit in any specified account, and any other amount specified
in the accompanying prospectus supplement.
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"Investor Charge-Offs" means with respect to any series the excess of the
investor defaulted amount for that series over the amount available to
reimburse such investor defaulted amount described in the prospectus
supplement.
"Investor Percentage" means for any class or series of notes, the Investor
Percentage calculated in the related prospectus supplement.
"New Accounts" are those Eligible Accounts that the transferor may from time
to time, at its sole discretion, designate to be included as accounts subject
to the limitations and conditions specified in this paragraph. For purposes of
the definition of New Accounts, Eligible Accounts will be deemed to include
only revolving credit accounts originated or underwritten by the bank or any
other affiliate of Household International, Inc. which are of the same nature
as those included as initial accounts or which have previously been included in
any Aggregate Addition if the assignment related to that Aggregate Addition
provides that type of revolving credit account or other revolving credit
account is permitted to be designated as a New Account. The number of New
Accounts designated with respect to any of the three consecutive due periods
commencing in January, April, July and October of each calendar year shall not
exceed 15% of the number of accounts as of the first day of the calendar year
during which these due periods commence (or the Initial Cut-Off Date, in the
case of 2000) and the number of New Accounts designated during any calendar
year shall not exceed 20% of the number of accounts as of the first day of that
calendar year (or the Initial Cut-Off Date, in the case of 2000); provided,
however, New Accounts may be designated in excess of the 15% and 20%
limitations if the Rating Agency Condition is satisfied with respect to this
designation. To the extent New Accounts are designated for inclusion in the
trust, the transferors will deliver to the trustee, at least quarterly on each
distribution date relating to each of the three consecutive due periods ending
in March, June, September and December, an opinion of counsel with respect to
the receivables in New Accounts included as accounts confirming the creation
and perfection of a security interest in respect of each transfer of those
receivables. If the opinion of counsel with respect to receivables in any New
Accounts is not so received, all receivables arising in the New Accounts to
which that failure relates will be removed from the trust.
"Note Owner" means the beneficial owner of a note.
"Partial Amortization SFA Amounts" means the amount withdrawn from the
special funding account and applied to one or more outstanding series of notes
to prevent those series from experiencing an Amortization Event based upon
insufficiency of yield.
"Participations" are undivided interests in a pool of assets primarily
consisting of receivables arising under revolving credit accounts.
"Parties in Interest" has the meaning set forth on page 63.
"Paying Agent" means the indenture trustee, acting as the initial paying
agent, together with any successor to the indenture trustee acting in that
capacity, and any entity specified in an indenture supplement to act in that
capacity for the related series.
"Pool Factor" means the ratio of the note principal balance to the initial
note principal balance.
"Portfolio Yield" means with respect to any due period, the annualized
percentage equivalent of a fraction the numerator of which is equal to the
collections of Finance Charge and Administrative Receivables during that due
period calculated on a cash basis, after subtracting therefrom the Defaulted
Amount with respect to that due period and the denominator of which is the sum
of total amount of Principal Receivables plus the special funding amount each
as of the last day of the immediately preceding due period.
"Principal Receivables" means all receivables other than Finance Charge and
Administrative Receivables or Defaulted Receivables; provided, however, that
after a specified discount option date, Principal Receivables
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shall mean Principal Receivables as otherwise determined pursuant to this
definition minus the amount of any Discount Option Receivables. Principal
Receivables shall also include the principal portion of Participations as
determined pursuant to the applicable participation interest supplement or
indenture supplement for any series. In calculating the aggregate amount of
Principal Receivables on any day, the amount of Principal Receivables shall be
reduced by the aggregate amount of credit balances in the accounts on such day.
"Qualified Account" means either a segregated account established with the
corporate trust department of a Securities Intermediary or a segregated account
with a Securities Intermediary that is an Eligible Institution.
"Rating Agency" means any rating agency selected by the transferor to rate
the notes of a series or class issued by the trust.
"Rating Agency Condition" means, with respect to any action, the condition
that each Rating Agency indicates in writing that such action will not result
in a reduction or withdrawal of the then-existing rating of any outstanding
series or class with respect to which it is a Rating Agency or, with respect to
any outstanding series or class not rated by any Rating Agency, the written
consent of such series or class.
"Reinvestment Event" means, if a series is subject to Reinvestment Events,
the definition of Reinvestment Event as it would appear in the prospectus
supplement.
"Required Delivery Date" means:
(1) on or prior to the closing date in the case of the initial accounts;
(2) the date that is five business days after the applicable Addition
Date, in the case of an Aggregate Addition;
(3) the distribution date on which the opinion of counsel is required to
be delivered as described above, in the case of New Accounts; and
(4) the date that is five business days after the applicable date of
removal, in the case of removed accounts.
"Required Minimum Principal Balance" means unless otherwise described in the
prospectus supplement, relating to a series having a paired series, with
respect to any date:
(1) the sum of the series adjusted invested amounts for each series
outstanding on such date; plus
(2) the Required Transferor Amount; minus
(3) the amount on deposit in the special funding account.
"Required Transferor Amount" means the product of the required Transferor
Percentage and the aggregate series adjusted invested amounts of all series
outstanding.
"Revolving Period" means, with respect to a series, a period during which
the trust will not pay or accumulate principal for payment to the noteholders
of that series. The Revolving Period for a series begins on the closing date
described in the applicable prospectus supplement and ends at the start of an
amortization period or an accumulation period.
"Securities Intermediary" means Wells Fargo Bank Minnesota, National
Association or any other entity which is a person, including a bank or broker,
that in the ordinary course of its business maintains securities accounts for
others and is acting in that capacity and which is also a depository
institution organized under the laws of the United States or any one of the
states of the United States, including the District of Columbia, or any
domestic branch of a foreign bank, and having a credit rating from each Rating
Agency in one of its generic credit rating categories which signifies
investment grade.
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"Series Enhancer" means any provider of enhancement and/or any issuer of any
third-party credit enhancement.
"Series Final Maturity Date" means with respect to each series, the meaning
set forth in the related prospectus supplement.
"Servicer Default" has the meaning set forth on page 51.
"Supplemental Certificate" means a supplemental certificated or
uncertificated interest in the Transferor Amount.
"Tax Opinion" means, with respect to any action, an opinion of counsel to
the effect that, for federal income tax purposes:
(1) such action will not adversely affect the tax characterization as
debt of the notes of any outstanding series or class that were
characterized as debt at the time of their issuance;
(2) such action will not cause the trust to be deemed to be an
association (or publicly traded partnership) taxable as a corporation; and
(3) such action will not cause or constitute an event in which gain or
loss would be recognized by any noteholder.
"Transferor Amount" means on any date of determination an amount equal to
the sum of:
(1) the total amount of Principal Receivables at the end of the day
immediately prior to such date of determination plus
(2) the related special funding amount at the end of the day immediately
prior to such date of determination minus
(3) the aggregated series adjusted invested amounts of all series of
notes issued and outstanding on that date of determination.
"Transferor Certificate" means a certificated or uncertificated interest in
the Transferor Amount.
"Transferor Percentage" means, on any date of determination, a percentage
equal to:
(1) 100%; minus
(2) the total investor percentages for all outstanding series; and, if
applicable, minus
(3) the total credit enhancement percentages for all outstanding series.
"Trust Portfolio" means the portfolio of accounts designated by the bank as
accounts of the trust.
"Trust Termination Date" means the earlier of:
(1) at the option of the transferor, the day on which the right of all
series of notes to receive payments from the trust has terminated; and
(2) dissolution of the trust in accordance with applicable law.
"Zero Balance Account" means an account which, according to the servicer's
records, has had a balance of zero for a period of at least 180 consecutive
days.
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Annex I
Global Clearance, Settlement and Tax Documentation Procedures
Except in limited circumstances, the globally offered Household Credit Card
Master Note Trust I Asset Backed Notes to be issued in series from time to time
will be available only in book-entry form. Investors in the global securities
may hold those global securities through any of The Depository Trust Company,
Clearstream Luxembourg or Euroclear. The global securities will be tradable 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
Clearstream Luxembourg 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 Clearstream Luxembourg or Euroclear
and DTC participants holding notes will be effected on a delivery-against-
payment basis through the respective Depositaries of Clearstream Luxembourg and
Euroclear, in that capacity, and as DTC participants.
Non-U.S. holders of global securities will be subject to U.S. withholding
taxes unless those holders meet 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, Clearstream Luxembourg
and Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold those positions in accounts as
DTC participants.
Investors electing to hold their global securities through DTC, other than
through accounts at Clearstream Luxembourg or Euroclear, will follow the
settlement practices applicable to U.S. corporate debt obligations. 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 Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds in registered form. Global securities will
be credited to the securities custody accounts on the settlement date against
payment for value on the settlement date.
Secondary Market Trading
Because 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, other than Citibank, N.A. and Morgan Guaranty Trust Company of
New York as depositories for Clearstream Luxembourg and Euroclear,
respectively, will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
Trading between Clearstream Customers and/or Euroclear
Participants. Secondary market trading between Clearstream customers or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
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Trading between DTC seller and Clearstream or Euroclear purchaser. When
global securities are to be transferred from the account of a DTC participant,
other than Citibank and Morgan as depositories for Clearstream Luxembourg and
Euroclear, respectively, to the account of a Clearstream customer or a
Euroclear participant, the purchaser must send instructions to Clearstream
Luxembourg prior to 12:30 P.M. on the settlement date. Clearstream Luxembourg
or Euroclear, as the case may be, will instruct Citibank or Morgan,
respectively, to receive the global securities for payment. Payment will then
be made by Citibank or Morgan, as the case may be, to 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 Clearstream customer's or Euroclear participant's account. Credit for the
global securities will appear the next day (European time) and the cash debit
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, for
example, if the trade fails, the Clearstream Luxembourg or Euroclear cash debit
will be valued instead as of the actual settlement date.
Clearstream customers 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 pre-position funds
for settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Clearstream Luxembourg or Euroclear.
Under this approach, they may take on credit exposure to Clearstream Luxembourg
or Euroclear until the global securities are credited to their accounts one day
later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream customers or Euroclear participants can
elect not to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Clearstream customers 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 those overdraft charges, although this result
will depend on each Clearstream customer'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
Citibank or Morgan for the benefit of Clearstream customers 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 from a trade between two DTC participants.
Trading between Clearstream or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Clearstream customers and Euroclear
participants may employ their customary procedures for transactions in which
global securities are to be transferred by the respective clearing system,
through Citibank or Morgan, to another DTC participant. The seller will send
instructions to Clearstream Luxembourg before 12:30 P.M. on the settlement
date. In these cases, Clearstream Luxembourg or Euroclear will instruct
Citibank or Morgan, as appropriate, to credit the global securities to the DTC
participant's account against payment. The payment will then be reflected in
the account of the Clearstream customer or Euroclear participant the following
day, and receipt of the cash proceeds in the Clearstream customer's or
Euroclear participant's account would be back-valued to the value date, which
would be the preceding day, when settlement occurred in New York. If the
Clearstream customer or Euroclear participant has a line of credit with its
respective clearing system and elects to draw on that line of credit in
anticipation of receipt of the sale proceeds in its account, the back-valuation
may substantially reduce or offset any overdraft charges incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., if the trade fails), receipt of the cash proceeds in the Clearstream
customer's or Euroclear participant's account would instead be valued as of the
actual settlement date.
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U.S. Federal Income Tax Documentation Requirements
A beneficial owner of global securities holding securities through
Clearstream Luxembourg 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 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 that beneficial owner takes
appropriate steps to obtain an exemption or reduced tax rate. See "Material
Federal Income Tax Consequences."
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Household Credit Card Master Note Trust I
Issuer
Household Receivables Funding, Inc. III
Transferor
Series 2001-1
$689,583,000
Class A Floating Rate Asset Backed Notes
$60,417,000
Class B Floating Rate Asset Backed Notes
------------------
Prospectus Supplement
------------------
Underwriters of the Series 2001-1 Notes
Deutsche Banc Alex. Brown
Banc One Capital Markets, Inc.
Barclays Capital
Merrill Lynch & Co.
You should rely only on the information contained or incorporated
by reference in this prospectus supplement and the accompanying
prospectus. We have not authorized anyone to provide you with
different information.
We are not offering the notes in any state where the offer is not
permitted.
We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other
than the dates stated on their respective covers.
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the notes and with respect to their
unsold allotments or subscriptions. In addition, all dealers
selling the notes will deliver a prospectus supplement and
prospectus until April , 2001.
