<PAGE> 1
HOUSEHOLD AFFINITY CREDIT CARD MASTER TRUST I
ISSUER
SERIES 1998-1
$844,000,000 FLOATING RATE CLASS A CREDIT CARD PARTICIPATION CERTIFICATES
$46,100,000 FLOATING RATE CLASS B CREDIT CARD PARTICIPATION CERTIFICATES
HOUSEHOLD AFFINITY FUNDING CORPORATION
SELLER
HOUSEHOLD FINANCE CORPORATION
SERVICER
The Floating Rate Class A Credit Card Participation Certificates, Series
1998-1 (the "Class A Certificates") and the Floating Rate Class B Credit Card
Participation Certificates, Series 1998-1 (the "Class B Certificates"; and
together with the Class A Certificates, the "Investor Certificates") offered
hereby evidence undivided interests in certain assets of the Household Affinity
Credit Card Master Trust I (the "Trust") created pursuant to a Pooling and
Servicing Agreement dated as of April 30, 1993, as amended by the Amended and
Restated Pooling and Servicing Agreement dated as of August 1, 1993, as amended
as of April 12, 1995, October 20, 1997 and August 21, 1998 (collectively, the
"Pooling and Servicing Agreement") and as supplemented by a Supplement to the
Pooling and Servicing Agreement dated as of September 1, 1998 (the "Series
1998-1 Supplement") among Household Affinity
(Continued on following page)
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES, SEE "RISK FACTORS" ON PAGE 25 HEREIN.
-------------------------
THE INVESTOR CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE SELLER, HOUSEHOLD BANK (SB),
N.A., THE SERVICER OR HOUSEHOLD INTERNATIONAL, INC. OR ANY AFFILIATE THEREOF.
NEITHER THE INVESTOR CERTIFICATES NOR THE UNDERLYING ACCOUNTS OR RECEIVABLES ARE
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) THE SELLER(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A Certificate................ 100% .2% 99.8%
- ---------------------------------------------------------------------------------------------------------------
Per Class B Certificate................ 100% .2% 99.8%
- ---------------------------------------------------------------------------------------------------------------
Total.................................. $890,100,000 $1,780,200 $888,319,800
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Seller has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting expenses payable by the Seller, estimated to be $1,020,000.
-------------------------
The Investor Certificates are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify any order without
notice. It is expected that delivery of the Investor Certificates will be made
in book-entry form through the facilities of The Depository Trust Company, Cedel
Bank societe anonyme and the Euroclear System on or about September 29, 1998.
-------------------------
MERRILL LYNCH & CO.
FIRST CHICAGO CAPITAL MARKETS, INC.
J.P. MORGAN & CO.
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
-------------------------
The date of this Prospectus is September 21, 1998.
<PAGE> 2
(Continued from previous page)
Funding Corporation, as seller (the "Seller"), Household Finance Corporation, as
servicer (the "Servicer") and The Bank of New York, as trustee (the "Trustee").
Interest will accrue on the Class A Certificates from and including September
29, 1998 to and excluding October 15, 1998 and with respect to each Interest
Period (as defined herein) thereafter at the rate of .12% per annum above the
London interbank offered quotations rate for one month United States Dollar
Deposits ("LIBOR"). Interest will accrue on the Class B Certificates from and
including September 29, 1998 to and excluding October 15, 1998 and with respect
to each Interest Period thereafter at the rate of .32% above LIBOR. The assets
of the Trust (the "Trust Assets") include receivables, including the collections
thereon (the "Receivables"), that are generated from time to time in a portfolio
of consumer revolving credit card accounts (the "Accounts"). See "Prospectus
Summary -- Trust Assets". Receivables in the Accounts at the close of business
on April 1, 1993 (the "Initial Cut-Off Date") and generated thereafter through
November 30, 1993 have been sold by Household Bank, f.s.b. to the Seller and
Receivables generated thereafter have been and will be sold by Household Bank
(SB), N.A. ("Household Bank"), a wholly-owned operating subsidiary of Household
Bank, f.s.b., to the Seller and then, in each case, transferred by the Seller to
the Trust as more fully described herein. On December 1, 1993, Household Bank,
f.s.b. transferred its interest in the Accounts to Household Bank. The
fractional undivided interest in the Trust represented by the Class B
Certificates will be subordinated to the extent necessary to fund payments with
respect to the Class A Certificates to the extent described herein. In addition,
the Investor Certificates will have the benefit of the Collateral Invested
Amount (as defined herein) in the initial amount of $80,100,000 and the Cash
Collateral Account (as defined herein) which will have a beginning balance of
zero. See "Description of the Investor Certificates -- Subordination" and "--
Description of the Cash Collateral Account". Only the Class A Certificates and
the Class B Certificates and not the Collateral Interest (as defined herein) are
being offered hereby.
Interest with respect to each class of Investor Certificates will accrue
from September 29, 1998 (the "Issuance Date") and is payable monthly on the
fifteenth day of each month, or if such day is not a business day, the next
succeeding business day (each, a "Distribution Date"), commencing on the October
1998 Distribution Date. Principal payments with respect to the Class A
Certificates and the Class B Certificates are scheduled to be made on the
September 2001 Distribution Date, but may be paid earlier or later under certain
limited circumstances described herein. Principal payments will not be made to
holders of the Class B Certificates (the "Class B Certificateholders") earlier
than the Distribution Date on which the final principal payment has been made to
the holders of the Class A Certificates (the "Class A Certificateholders"). (The
Class A Certificateholders and the Class B Certificateholders are herein
collectively referred to as the "Investor Certificateholders".) See "Principal
Payment Considerations" and "Description of the Investor Certificates --
Principal."
No public market for the Investor Certificates currently exists and there
can be no assurance that one will develop. If no public market develops, Class A
Certificateholders and Class B Certificateholders may not be able to completely
liquidate their investment in Investor Certificates until termination of the
Trust. See "Risk Factors". Also, should an Amortization Event (as defined
herein) occur and the Early Amortization Period (as defined herein) commence,
the Investor Certificates may be repaid earlier than otherwise provided for
herein. See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the securities offered hereby.
2
<PAGE> 3
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed a Registration Statement
under the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission (the "Commission") with respect to the
Investor Certificates offered pursuant to this Prospectus. For further
information, reference is made to the Registration Statement and amendments
thereof and exhibits thereto, which are available for inspection without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549; Seven World Trade Center, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, or through the Web site maintained by the Commission at
(http://www.sec.gov). Copies of the Registration Statement and amendments
thereof and exhibits thereto may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Servicer, on behalf of the Trust, intends to register the
Class A Certificates under Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and will file with the Commission such periodic
reports, if any, with respect to the Trust as are required under the Exchange
Act, and the rules, regulations or orders of the Commission thereunder.
REPORTS TO INVESTOR CERTIFICATEHOLDERS
Unless and until Definitive Certificates (as defined herein) are issued,
monthly and annual unaudited reports, containing information concerning the
Trust and prepared by the Servicer, will be sent on behalf of the Trust to Cede
& Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Investor Certificates pursuant to the Pooling and
Servicing Agreement and the Series 1998-1 Supplement. Such reports will be made
available by DTC and its participants to the Investor Certificateholders in
accordance with the rules, regulations and procedures creating and affecting
DTC. See "Description of the Investor Certificates -- Reports" and "The Pooling
and Servicing Agreement -- Evidence as to Compliance". Such reports will not
constitute financial statements prepared in accordance with generally accepted
accounting principles. The Pooling and Servicing Agreement does not require the
sending of, and the Seller does not intend to send, any of its financial reports
to the Investor Certificateholders.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
DEFINED TERMS USED IN THIS PROSPECTUS
A listing of the pages where defined terms used herein are defined is found
in the "Index of Terms" which begins on page 100 hereof.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus.
TITLE OF SECURITIES........... $844,000,000 Floating Rate Class A Credit Card
Participation Certificates, Series 1998-1 (the
"Class A Certificates").
$46,100,000 Floating Rate Class B Credit Card
Participation Certificates, Series 1998-1 (the
"Class B Certificates"; and together with the
Class A Certificates, the "Investor
Certificates").
ISSUER........................ Household Affinity Credit Card Master Trust I
(the "Trust"). The Trust, as a master trust,
previously has issued fourteen series of
investor certificates (each, a "Series"), three
of which have been retired, and is expected to
issue additional Series from time to time. The
Trust is expected to continue as a trust after
the Series 1998-1 Termination Date (as defined
herein). The assets of the Trust are expected
to change over the life of the Trust as certain
interests and receivables in revolving credit
card accounts and related assets are included
in the Trust and as certain interests and
receivables in accounts subject to the Trust
are charged-off or removed. See "The Trust",
"Risk Factors -- Issuance of Additional Series"
and "-- Addition of Trust Assets", "The Pooling
and Servicing Agreement -- Additions of
Accounts or Participation Interests" and "--
Removal of Accounts".
CLASS A CERTIFICATE RATE...... The London interbank offered quotations rate
for United States Dollar deposits for a one
month period ("LIBOR") (determined as described
herein) plus .12% (the "Class A Certificate
Rate").
CLASS B CERTIFICATE RATE...... LIBOR plus .32% (the "Class B Certificate
Rate").
HOUSEHOLD BANK................ Household Bank (SB), N.A. ("Household Bank"), a
national banking association and an affiliate
of the Servicer, is the owner of the Accounts
from which the Receivables arise.
SELLER........................ Household Affinity Funding Corporation (the
"Seller"), a corporation organized under the
laws of the State of Delaware and a special
purpose subsidiary of Household Bank, is the
seller of the Receivables and originator of the
Trust.
SERVICER...................... Household Finance Corporation (the "Servicer"),
a Delaware corporation.
TRUSTEE....................... The Bank of New York (the "Trustee"), a New
York banking corporation.
TRUST ASSETS.................. The assets of the Trust (the "Trust Assets")
consist primarily of the Receivables arising
under the Accounts (as defined herein),
including the proceeds thereof, monies on
deposit in certain accounts of the Trust for
the benefit of investor certificateholders,
including the Special Funding Account (as
defined herein), and also including any funds
deposited in any of three account(s) (the "Cash
Collateral Account," the "Principal Funding
Account" and the "Reserve Account") each in the
name of the Trustee for the benefit of the
Investor Certificateholders, funds collected or
to be collected from Participation Interests
(as defined herein), if any,
4
<PAGE> 5
and any Series Enhancement (as defined herein)
issued with respect to a particular Series (the
drawing on or payment of any Series Enhancement
for the benefit of a Series or class of
investor certificateholders will not be
available to the investor certificateholders of
any other Series or class), certain rights of
the Seller to receive Recoveries (as defined
herein) and Interchange (as defined herein) and
the preferred stock of the Seller issued to the
Trustee (the "Preferred Stock") as described
herein in "Certain Legal Aspects of the
Receivables -- Certain Matters Relating to
Insolvency". "Series Enhancement" means, with
respect to any Series or class of investor
certificates, any letter of credit, surety
bond, subordinated interest in the Trust
Assets, collateral account, spread account,
guaranteed rate agreement, maturity liquidity
facility, tax protection agreement, interest
rate swap agreement, interest rate cap
agreement or other similar arrangement for the
benefit of investor certificateholders of such
Series or class. The subordination of any
Series or class of investor certificates to
another Series or class of investor
certificates shall be deemed to be a Series
Enhancement. "Participation Interests" means
participations representing undivided interests
in a pool of assets primarily consisting of
revolving credit card receivables, consumer
loan receivables and charge card receivables.
The Trust Assets will be allocated among the
Class A Certificateholders (the "Class A
Interest") and the Class B Certificateholders
(the "Class B Interest"; the Class A Interest
and the Class B Interest are collectively
referred to herein as the "Certificateholders'
Interest"), the interests of the Seller (the
"Seller's Interest"), and the investor
certificateholders of other Series and may be
allocated to any Series Enhancement all as
described below. An undivided interest in the
Trust Assets (the "Collateral Invested
Amount"), in the initial amount of $80,100,000
of Principal Receivables (such amount
represents 8.25% of the sum of the original
Class A Invested Amount (as defined herein),
the original Class B Invested Amount (as
defined herein) and the original Collateral
Invested Amount) constitutes the Series
Enhancement for the Investor Certificates. The
provider of such Series Enhancement is the
"Collateral Interest Holder". Trust Assets will
be allocated to the interests of the Collateral
Interest Holder (the "Collateral Interest") in
an amount equal to the sum of the Collateral
Invested Amount and the amount, if any, on
deposit in the Cash Collateral Account (the
"Collateral Amount").
To the extent provided in any Supplement (as
defined herein), or in an amendment to the
Pooling and Servicing Agreement, all or a
portion of the Receivables or Participation
Interests conveyed to the Trust and all
collections received with respect thereto may
be allocated to one or more Series or groups of
Series (each a "Group") as long as the Rating
Agency Condition (as defined herein) shall have
been satisfied with respect to such allocation
and the Servicer shall have delivered an
officer's certificate to the Trustee to the
effect that the Servicer reasonably believes
such allocation will not have an Adverse Effect
(as defined herein). The Investor Certificates
are part of the first Series in a group of
Series
5
<PAGE> 6
("Group Three"). To the extent described
herein, Receivables, Participation Interests
and all collections received with respect to
the Investor Certificates may be allocated to
other Series in Group Three. While other Series
may be issued in Group Three, there can be no
assurance that any other Series will actually
be issued in Group Three.
THE ACCOUNTS.................. The Accounts consist of selected nonpremium and
premium, VISA* and MasterCard* consumer
revolving credit card accounts originated or
purchased and designated from time to time by
Household Bank (or an affiliate thereof), that,
in each case, meet the criteria provided in the
Pooling and Servicing Agreement for an Eligible
Account (as defined herein), but do not include
any Removed Accounts (as defined herein). The
Accounts are not being sold or transferred to
the Trust and will continue to be controlled
and held by Household Bank (or an affiliate
thereof) unless transferred as described
herein. See "The Credit Card Business of
Household Bank (SB), N.A. -- General"; "-- The
Accounts"; "Description of the Bank Purchase
Agreement -- Transfer of Accounts".
Household Bank, f.s.b. and the Seller entered
into a receivables purchase agreement dated as
of April 30, 1993, as amended (together with
any supplements thereto, the "Bank Purchase
Agreement"). As of December 1, 1993, Household
Bank, f.s.b. assigned its interest in the Bank
Purchase Agreement to Household Bank in
accordance with the terms thereof and the
Pooling and Servicing Agreement. Pursuant to
the Bank Purchase Agreement, Household Bank has
sold and will from time to time sell to the
Seller all of its right, title and interest in
the Receivables arising in the Accounts whether
such Receivables are then existing or
thereafter created and Household Bank is
obligated to sell to the Seller the Receivables
arising in Additional Accounts (as defined
herein) from time to time. In addition,
Household Bank has assigned to the Seller its
rights to Recoveries and Interchange allocable
to the Accounts. See "Description of the Bank
Purchase Agreement". In addition, the Seller
may enter into a similar agreement with other
affiliates of Household Bank.
The Seller in turn has transferred and will,
from time to time, transfer, as the case may
be, such Receivables, including the right to
Recoveries and Interchange, to the Trust
pursuant to the Pooling and Servicing
Agreement. The initial transfer of Receivables
occurred on May 5, 1993 (the "Initial Issuance
Date").
The Seller has conveyed to the Trust
Receivables existing on April 1, 1993 (the
"Initial Cut-Off Date") in certain MasterCard
consumer revolving credit card accounts (the
"Initial Accounts") that met the criteria
provided in the Pooling and Servicing Agreement
for an Eligible Account and will convey
Receivables arising in the Initial Accounts
from time to time thereafter until the
termination of the Trust. Since the Initial
Cut-Off Date, the Seller
- ---------------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
6
<PAGE> 7
has conveyed to the Trust the Receivables
arising in certain Additional Accounts included
in Aggregate Additions (as defined herein) in
accordance with the provisions of the Pooling
and Servicing Agreement. In addition, pursuant
to the Pooling and Servicing Agreement, the
Seller expects (subject to certain limitations
and conditions), and in some circumstances will
be obligated, to have more Additional Accounts
designated, the Receivables of which will be
included in the Trust or, in lieu thereof or in
addition thereto, to include Participation
Interests in the Trust. Additional Accounts
include New Accounts (as defined herein) and
Aggregate Addition Accounts (as defined
herein). The Seller will convey to the Trust
all Receivables in Additional Accounts, whether
such Receivables are then existing or
thereafter created. The addition to the Trust
of Receivables in Aggregate Additions or
Participation Interests will be subject to
certain conditions, including, among others,
that (a) unless such addition is a required
addition, such addition will not result in the
failure to satisfy the Rating Agency Condition
and (b) the Seller shall have delivered to the
Trustee a certificate of an authorized officer
to the effect that, in the reasonable belief of
the Seller, such addition will not have an
Adverse Effect. The Seller will also have the
right, in certain circumstances, to remove from
the Trust all Receivables of certain Accounts
(the "Removed Accounts"). The Seller has
removed Receivables from certain Removed
Accounts in accordance with the provisions of
the Pooling and Servicing Agreement. See "The
Pooling and Servicing Agreement -- Additions of
Accounts or Participation Interests" and "--
Removal of Accounts".
THE RECEIVABLES............... The Receivables include (a) all periodic
finance charges, cash advance fees, annual
membership fees, the interest portion of any
Participation Interests as determined pursuant
to the applicable Supplement and all interest
or other investment earnings (net of losses and
investment expenses) on funds on deposit, if
any, in the Special Funding Account (the
"Finance Charge Receivables"), (b) all
administrative fees and late charges on amounts
charged for merchandise and services, credit
insurance premiums and all other fees or
charges billed to cardholders on the Accounts
(the "Administrative Receivables"; and together
with the Finance Charge Receivables, the
"Finance Charge and Administrative
Receivables") and (c) all amounts charged by
cardholders for merchandise and services,
amounts advanced to cardholders as cash
advances and the principal portion of any
Participation Interests as determined pursuant
to the applicable Supplement (the "Principal
Receivables"). Recoveries attributed to
charged-off Receivables (the "Recoveries") will
be treated as collections of Finance Charge and
Administrative Receivables. In addition,
certain Interchange attributed to cardholder
charges for merchandise and services in the
Accounts will be treated as collections of
Finance Charge and Administrative Receivables.
See "The Credit Card Business of Household Bank
(SB), N.A. -- Interchange".
The aggregate amount of Receivables pertaining
to the Accounts as of the close of business on
July 31, 1998 was $7,650,450,566, of which
$7,533,180,277 were Principal Receivables and
7
<PAGE> 8
$117,270,289 were Finance Charge and
Administrative Receivables (which amounts
include past due Receivables). All new
Receivables arising in the Accounts during the
term of the Trust will automatically be sold by
Household Bank to the Seller and then
transferred by the Seller to the Trust.
Accordingly, the amount of Receivables will
fluctuate from day to day as new Receivables
are generated and as existing Receivables are
collected, charged-off as uncollectible or
otherwise adjusted.
Finance charges are generally assessed on all
Receivables, except annual membership fees. The
annual percentage rate assessed on the Accounts
will generally be 10.4 percentage points over
the highest prime rate as published in The Wall
Street Journal on the fourth Thursday of the
month preceding that month in which the billing
period ends (the "Prime Rate"). The annual
percentage rate depends on whether the Account
is a nonpremium or premium Account and, in
certain circumstances, the amount of the
outstanding balance on the Account. For premium
Accounts with average daily balances of $2,500
or more, the annual percentage rate assessed on
such Accounts is generally 7.4 percentage
points over the Prime Rate. The minimum annual
percentage rate for nonpremium Accounts is
generally 16.9%. For premium Accounts with an
average daily balance under $2,500, the minimum
annual percentage rate is 16.9% and for premium
Accounts with an average daily balance of
$2,500 or greater the minimum annual percentage
rate is 13.9%. As of the close of business on
July 31, 1998, the Receivable balance of the
nonpremium and premium Accounts as a percentage
of the total Receivable balance of the Accounts
was approximately 80.6% and 19.4%,
respectively. From time to time, Household Bank
has and may offer special rates to customers
for various purposes and periods or may change
rates generally as permitted in the Receivables
Purchase Agreement.
THE INVESTOR CERTIFICATES..... The Investor Certificates will be available for
purchase in minimum denominations of $1,000 and
in integral multiples thereof. Except in
certain limited circumstances as described
herein under "Description of the Investor
Certificates -- Definitive Investor
Certificates", the Investor Certificates will
only be available in book-entry form.
The aggregate principal amount of the Class A
Invested Amount and the Class B Invested Amount
will, except as otherwise provided herein,
remain fixed at $844,000,000 and $46,100,000,
respectively. During the Controlled
Accumulation Period (as defined herein), for
the purpose of allocating collections of
Finance Charge and Administrative Receivables
and the Defaulted Amount (as defined herein)
with respect to each Due Period (as defined
herein), the Class A Interest will be reduced
(in an amount not to exceed the Class A
Invested Amount) by the principal amount, if
any, on deposit in the Principal Funding
Account (as so reduced, the "Class A Adjusted
Invested Amount") and the Class B Interest will
be reduced (in an amount not to exceed the
Class B Invested Amount) by the amount by which
the principal amount on deposit, if any, in the
Principal Funding Account exceeds the
8
<PAGE> 9
Class A Invested Amount (as so reduced, the
"Class B Adjusted Invested Amount" and,
together with the Class A Adjusted Invested
Amount and the Collateral Invested Amount, the
"Adjusted Invested Amount"). The principal
amount of the Seller's Interest will fluctuate
as certain amounts, such as the amount of
Receivables in the Trust and the amount, if
any, on deposit in the Special Funding Account
(other than the portion constituting Finance
Charge and Administrative Receivables), change
from time to time. The Seller's Interest will
represent the right to the Trust Assets not
allocated to the Certificateholders' Interest,
the Collateral Invested Amount, or to any
interest of any other Series. The Seller has
the right to sell, or borrow against, the
Seller's Interest and Household Bank has the
right to assign and transfer the Accounts and
assign its obligations under the Bank Purchase
Agreement at any time, in whole or in part,
provided certain conditions are satisfied. See
"The Pooling and Servicing Agreement --
Transfer of Seller's Interest"; "Description of
the Bank Purchase Agreement -- Transfer of
Accounts".
The Class A Certificates will evidence
undivided interests in the Trust Assets
allocated to the Class A Interest and will
represent the right to receive from such assets
funds up to (but not in excess of) the amounts
required to make payments of interest on the
Class A Certificates on each Distribution Date
at the per annum rate equal to the Class A
Certificate Rate, calculated on the basis of
the actual number of days in the related
Interest Period (as defined herein) and a
360-day year, and payments of principal on each
Distribution Date during any Early Amortization
Period (as defined herein) or on the Series
1998-1 Expected Final Payment Date (as defined
herein) with respect to the Controlled
Accumulation Period to the extent described
under "Description of the Investor Certificates
-- Principal" and "Principal Payment
Considerations" herein. The Class A Invested
Amount may be less than the aggregate unpaid
principal amount of the Class A Certificates,
in certain circumstances, if the amount of
Principal Receivables which are charged off as
uncollectible during a Due Period (the
"Defaulted Receivables") allocated to the Class
A Interest exceeds available cash, the
Collateral Invested Amount and the Class B
Invested Amount. "Due Period" means the period
beginning at the close of business on the last
business day of the second month preceding a
Distribution Date and ending at the close of
business on the last business day of the month
immediately preceding such Distribution Date.
See "Description of the Investor Certificates
-- Investor Charge-Offs".
The Class B Certificates (which are
subordinated to the Class A Certificates to the
extent provided herein and, during any period
in which Household Finance Corporation or an
affiliate thereof is no longer the Servicer,
the Servicing Fee, as defined herein, in each
case to the extent described herein), will
evidence undivided interests in the Trust
Assets allocated to the Class B Interest and
will represent the right to receive from such
assets, after distributions in full have been
made to the Class A Certificateholders and, if
applicable, the Servicing Fee is paid in full,
funds up to (but not
9
<PAGE> 10
in excess of) the amounts required to make
payments of interest on each Distribution Date
on the Class B Certificates at the per annum
rate equal to the Class B Certificate Rate
calculated on the basis of the actual number of
days in the related Interest Period and a
360-day year, and payments of principal on each
Distribution Date with respect to the Class B
Certificates during any Early Amortization
Period or on the Series 1998-1 Expected Final
Payment Date with respect to the Controlled
Accumulation Period, to the extent described
under "Description of the Investor Certificates
-- Principal" and "Principal Payment
Considerations" herein. The Class B Invested
Amount may be less than the aggregate unpaid
principal amount of the Class B Certificates in
certain circumstances as more fully described
herein.
The certificateholders' interest of any Series,
including the Class A Interest and the Class B
Interest, will each include the right to
receive (but only to the extent needed to make
required payments under the Pooling and
Servicing Agreement and the related Supplement
and subject to any reallocation of such amounts
if the related Supplement so provides) varying
percentages of collections of Finance Charge
and Administrative Receivables and Principal
Receivables and such interests will be
allocated a portion of Defaulted Receivables in
the Trust during each Due Period. If the
investor certificates of a Series include more
than one class of investor certificates, the
Trust Assets allocable to the
certificateholders' interest of such Series
will be further allocated among each class
within such Series. See "Risk Factors",
"Description of the Investor Certificates --
Allocation of Collections; Deposits in
Collection Account" and "-- Reallocation of
Cash Flows", and "-- Reallocations Among
Investor Certificates of Different Series".
The Investor Certificates represent beneficial
interests in the Trust only and do not
represent interests in or obligations of the
Seller, the Servicer, Household Bank, Household
International, Inc. or any affiliate thereof.
None of the Investor Certificates, the investor
certificates of any other Series, the Accounts
or the Receivables are insured or guaranteed by
the Federal Deposit Insurance Corporation (the
"FDIC") or any other governmental agency or
instrumentality.
ISSUANCE OF ADDITIONAL
SERIES........................ The Pooling and Servicing Agreement authorizes
the Trustee to issue three types of
certificates: (i) one or more Series of
investor certificates, (ii) a certificate
evidencing the Seller's Interest in the Trust,
which is to be held by the Seller and (iii)
supplemental certificates to be held by
transferees of a portion of the certificate
evidencing the Seller's Interest in the Trust
(each, a "Supplemental Certificate"). The
certificate evidencing the Seller's Interest in
the Trust and any Supplemental Certificates are
collectively referred to herein as the
"Seller's Certificate". The Pooling and
Servicing Agreement provides that, pursuant to
any one or more supplements to the Pooling and
Servicing Agreement (each a "Supplement"), the
Seller may cause the Trustee to issue one or
more new Series and accordingly cause a
reduction in the Seller's
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<PAGE> 11
Interest represented by the Seller's
Certificate. Under the Pooling and Servicing
Agreement, the Seller may define, with respect
to any Series, the principal terms of such
Series. The Seller may offer any Series to the
public or other investors in transactions
either registered under the Securities Act or
exempt from registration thereunder, directly
or through one or more underwriters or
placement agents, in fixed-price offerings or
in negotiated transactions or otherwise. The
Seller expects to offer, from time to time,
additional Series issued by the Trust.
It is anticipated that the investor
certificates of each Series will have expected
final payment dates, revolving periods and
periods during which the principal amount of
such investor certificates is accumulated in a
principal funding account or paid to holders of
such investor certificates which differ from
those for the Investor Certificates, although
it is expected that Series in a Group will have
substantially similar amortization events.
Accordingly, it is anticipated that some Series
will be in their revolving periods while others
are in accumulation periods or in amortization
periods. In addition, a Series not included in
Group Three may have entirely different methods
for calculating the amount and timing of
principal and interest distributions to
investor certificateholders and the Series
Enhancements of such Series and may utilize
other methods for determining the portion of
collections of Receivables allocable to such
investor certificateholders and Series
Enhancements. See "Risk Factors -- Issuance of
Additional Series".
A new Series may only be issued upon
satisfaction of certain conditions including,
among others, that (a) such issuance will
satisfy the Rating Agency Condition and (b) the
Seller shall have delivered to the Trustee a
certificate of an authorized officer to the
effect that, in the reasonable belief of the
Seller, such issuance will not have an Adverse
Effect. See "Risk Factors -- Issuance of
Additional Series".
ALLOCATIONS AMONG SERIES...... Pursuant to the Pooling and Servicing
Agreement, during each Due Period, the Servicer
is required to first allocate to each Series
collections of Principal Receivables and
Finance Charge and Administrative Receivables
and the Defaulted Receivables with respect to
such Due Period based on the initial amount of
Principal Receivables allocated to such Series
(or such lesser amount as may be specified in
the Supplement for any Series) less
unreimbursed investor charge-offs. See
"Description of the Investor Certificates --
Allocations". Subject to reallocation among
Series in a Group, such amounts allocated to
each Series are then further allocated within
each Series to the investor certificateholders,
any Series Enhancement and the Seller pursuant
to the terms of the related Supplement.
REALLOCATIONS AMONG SERIES IN
A GROUP....................... The investor certificates of a Series may be
included in a Group of Series. A Series
included in any Group issued by the Trust may
be subject to reallocations of collections of
Receivables and other amounts or obligations
among the Series in the Group. Collections of
Finance Charge and Administrative Receivables
allocable to
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<PAGE> 12
each Series in Group Three will be aggregated
and made available for required payments for
all Series in Group Three. Consequently, the
issuance of new Series in Group Three may have
the effect of reducing or increasing the amount
of collections of Finance Charge and
Administrative Receivables allocable to the
Investor Certificates. See "Description of the
Investor Certificates -- Reallocations Among
Investor Certificates of Different Series" to
determine the manner and extent of any
reallocation among Series included in Group
Three. See also "Risk Factors -- Issuance of
Additional Series".
REALLOCATION OF EXCESS
PRINCIPAL COLLECTIONS......... To the extent that collections of Principal
Receivables and other amounts that are
allocated to the Certificateholders' Interest
for the Series offered hereby are available to
be reinvested in the Trust, they may be applied
to cover principal payments due to or for the
benefit of investor certificateholders or
Series Enhancements of another Series. Any such
reallocation will not result in a reduction in
the Certificateholders' Interest. In addition,
collections of Principal Receivables and
certain other amounts otherwise allocable to
other Series, to the extent such collections
are available to be reinvested in the Trust,
may be applied to cover principal payments due
to or for the benefit of the Investor
Certificateholders. See "Description of the
Investor Certificates -- Reallocation of Trust
Excess Principal Collections".
PREVIOUSLY ISSUED SERIES...... Two Series of investor certificates in a Group
("Group A") have previously been issued, one of
which has since been retired. One Series of
investor certificates in a Group ("Group B"),
one Series of investor certificates in a Group
("Group C"), one Series of investor
certificates in a group ("Group D"), one Series
of investor certificates in a group ("Group E")
and one Series of investor certificates in a
group ("Group F") have also previously been
issued. In addition, six Series of investor
certificates have been previously issued in a
Group ("Group One"), two of which have since
been retired and one Series of investor
certificates have been issued in a Group
("Group Two"). See "Annex I: Prior Issuance of
Investor Certificates" for a summary of the
Series of investor certificates previously
issued by the Trust and still outstanding. As
Supplements relating to Series which are part
of a Group as described herein may provide that
collections of Receivables allocable to such
Series will be reallocated among all Series in
the Group, the issuance of a new Series in a
Group may have the effect of reducing the
amount of collections of Receivables which are
reallocated to the investor certificates of
existing Series in such Group. However, the
Investor Certificates will not be part of Group
A, Group B, Group C, Group D, Group E, Group F,
Group One or Group Two but will be a part of
Group Three and will be the first Series to be
issued in Group Three. There is no assurance
that the Trust will issue any other Series in
Group Three. See also "Risk Factors -- Issuance
of Additional Series", "-- Allocations" and
"Description of the Investor Certificates --
Reallocations Among Investor Certificates of
Different Series".
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<PAGE> 13
REGISTRATION OF INVESTOR
CERTIFICATES.................. The Investor Certificates will initially be
represented by one or more Investor
Certificates of each class registered in the
name of Cede, as the nominee of DTC. No person
acquiring an interest in the Investor
Certificates will be entitled to receive a
fully registered, certificated Investor
Certificate (a "Definitive Certificate")
representing such person's interest, except in
the event that Definitive Certificates are
issued under the limited circumstances
described herein. See "Description of the
Investor Certificates -- Definitive Investor
Certificates".
CLEARANCE AND SETTLEMENT...... Investor Certificateholders must elect to hold
their Investor Certificates through any of DTC
(in the United States) or Cedel Bank, societe
anonyme ("CEDEL") or Euroclear System
("Euroclear") (in Europe). Transfers within
DTC, CEDEL or Euroclear, as the case may be,
will be in accordance with the usual rules and
operating procedures of the relevant system.
Crossmarket transfers between persons holding
directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through CEDEL or Euroclear, on the
other, will be effected in DTC through
Citibank, N.A. ("Citibank") or The Chase
Manhattan Bank, ("Chase"), the relevant
depositaries of CEDEL and Euroclear,
respectively. See "Description of the Investor
Certificates -- Book-Entry Registration".
INTEREST...................... Interest will accrue on the unpaid principal
amount of the Investor Certificates during each
Interest Period at the Class A Certificate Rate
or the Class B Certificate Rate (the payment
thereof being referred to herein as the "Class
A Interest Payment" and "Class B Interest
Payment", respectively), as the case may be,
with respect to such Interest Period and,
except as otherwise provided herein, be
distributed to Investor Certificateholders on
the 15th day of every month, or if such day is
not a business day, on the next succeeding
business day (each, a "Distribution Date")
commencing on the October 1998 Distribution
Date. Interest for any Distribution Date will
accrue from and including the preceding
Distribution Date to but excluding such
Distribution Date (an "Interest Period"), and
interest owing on the Investor Certificates and
the Collateral Interest will be calculated on
the basis of actual number of days in the
related Interest Period and a 360-day year. For
the first Interest Period, interest will accrue
from and including the Issuance Date to, but
excluding, October 15, 1998. Interest on the
Investor Certificates for any Distribution Date
due but not paid on such Distribution Date will
be due on the next succeeding Distribution Date
together with additional interest on such
amount at the applicable Class A or Class B
Certificate Rate. In addition, interest will
accrue on the outstanding Collateral Invested
Amount at LIBOR plus 1% (the "Collateral
Rate"). See "Description of the Investor
Certificates -- General" and "-- Distributions
from the Collection Account; Allocation of
Funds".
REVOLVING PERIOD.............. No principal will be paid to the Class A
Certificateholders until the earlier to occur
of the Series 1998-1 Expected Final Payment
Date and the commencement of the Early
Amortization Period. Principal payments to the
Class B Certificateholders will not occur until
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<PAGE> 14
the final principal payment has been made to
the Class A Certificateholders. For each Due
Period in the period commencing at the close of
business on August 31, 1998 (the "Series 1998-1
Cut-Off Date") and ending on the earlier of the
commencement of the Controlled Accumulation
Period or any Early Amortization Period
("Revolving Period"), in order to maintain the
Certificateholders' Interest and the Collateral
Invested Amount, all collections of Principal
Receivables otherwise allocable to the Investor
Certificates and the Collateral Invested Amount
(other than any Subordinated Principal
Collections that are used to pay the Class A
Required Amount or the Class B Required Amount)
will, unless a reduction in the Required
Collateral Amount has occurred, generally be
allocated and paid to the Seller to purchase
additional Receivables, deposited in the
Special Funding Account or reallocated for
payment of principal to investors in other
Series. See "Principal Payment Considerations"
and "Description of the Investor Certificates
-- Principal". The Due Period for the Investor
Certificates with respect to the first
Distribution Date will commence on the Series
1998-1 Cut-Off Date and will end at the close
of business on the last business day of the
month immediately preceding the first
Distribution Date. See "Description of the
Investor Certificates -- Reallocation of Cash
Flows' and "--Amortization Event" for a
discussion of the events which might lead to
the termination of the Revolving Period prior
to its scheduled ending date. Unless an
Amortization Event shall have occurred, the
Revolving Period will end and the Controlled
Accumulation Period will commence at the close
of business on the last business day of August
2000; provided, that, subject to the conditions
set forth under "Description of the Investor
Certificates -- Principal" herein, the day on
which the Revolving Period ends and the
Controlled Accumulation Period begins may be
delayed to no later than the close of business
on the last business day of July 2001.
PRINCIPAL PAYMENTS;
CONTROLLED ACCUMULATION
PERIOD...................... Unless an Amortization Event shall have
occurred and an Early Amortization Period shall
have commenced, the final payment with respect
to the Investor Certificates is scheduled to be
made on the September 2001 Distribution Date
(the "Series 1998-1 Expected Final Payment
Date"). Unless and until an Amortization Event
shall have occurred and an Early Amortization
Period shall have commenced, the Controlled
Accumulation Period with respect to the
Investor Certificates (the "Controlled
Accumulation Period") will commence at the
close of business on the last business day of
August 2000; provided, that, subject to the
conditions set forth under "Description of the
Investor Certificates -- Principal" herein, the
day on which the Revolving Period ends and the
Controlled Accumulation Period begins may be
delayed to no later than the close of business
on the last business day of July 2001. The
Controlled Accumulation Period will end upon
the earliest to occur of (x) the commencement
of any Early Amortization Period, (y) the
payment in full of the Class A Invested
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<PAGE> 15
Amount, the Class B Invested Amount and the
Collateral Invested Amount (collectively, the
"Invested Amount") and (z) the Series 1998-1
Termination Date (as defined herein). During
the Controlled Accumulation Period, collections
of Principal Receivables and certain other
amounts allocable to the Certificateholders'
Interest will generally be deposited on each
Distribution Date in a segregated trust account
established for the benefit of the Investor
Certificateholders (the "Principal Funding
Account") until the amount on deposit in the
Principal Funding Account is equal to the sum
of the Class A Invested Amount and the Class B
Invested Amount. Any amounts deposited into the
Principal Funding Account will not be
considered as principal payments made to the
Investor Certificateholders. Unless an Early
Amortization Period shall have commenced, the
amount on deposit in the Principal Funding
Account will be distributed to the Investor
Certificateholders on the Series 1998-1
Expected Final Payment Date to the extent
described herein. The maximum amount to be
deposited in the Principal Funding Account
during the Controlled Accumulation Period (the
"Controlled Deposit Amount") will be limited to
an amount equal to the sum of the Controlled
Accumulation Amount (as defined below) plus any
existing deficit controlled accumulation amount
arising from prior Distribution Dates. See
"Description of the Investor Certificates --
Principal" and "Principal Payment
Considerations' herein. For each Distribution
Date with respect to a Due Period during the
Controlled Accumulation Period, the "Controlled
Accumulation Amount" shall mean $74,175,000;
except that, if the commencement of the
Controlled Accumulation Period is delayed as
described herein, the Controlled Accumulation
Amount for each Distribution Date with respect
to a Due Period during the Controlled
Accumulation Period will be determined as
described under "Description of the Investor
Certificates -- Principal. If collections of
Principal Receivables allocable to the
Certificateholders' Interest are insufficient
to make the deposit of the Controlled Deposit
Amount, then such amount may be deposited from
collections of Principal Receivables
reallocated from other Series and amounts, if
any, on deposit in the Special Funding Account
that are allocable to the Investor
Certificateholders. If a reduction in the
Required Collateral Amount has occurred during
the Controlled Accumulation Period, collections
in excess of the Controlled Accumulation Amount
will be applied to reduce the Collateral Amount
to such Required Collateral Amount. During the
Controlled Accumulation Period, until the final
principal payment is made to the Class B
Certificateholders, collections of Principal
Receivables allocable to the Collateral
Invested Amount (other than Subordinated
Principal Collections that are used to pay the
Class A Required Amount or Class B Required
Amount and collections used to make payments
with respect to reductions in the Required
Collateral Amount) will generally be paid to
the Seller or deposited, under certain
circumstances at the Seller's election, to the
Special Funding Account to maintain the
Collateral Invested Amount at its required
level. See "Description of the Investor
Certificates -- Principal" and "-- Special
Funding Account" and "Principal Payment
Considerations".
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<PAGE> 16
Although it is anticipated that during the
Controlled Accumulation Period, prior to the
payment of the Class A Invested Amount and the
Class B Invested Amount in full, collections of
Principal Receivables will be deposited in the
Principal Funding Account and that the amount
on deposit therein will be available for
distribution to the Investor Certificateholders
on the Series 1998-1 Expected Final Payment
Date, no assurance can be given that any of
such collections will be so deposited or that
the amount of such collections so deposited
will be sufficient to make the anticipated
distribution in full to the Investor
Certificateholders on the Series 1998-1
Expected Final Payment Date. See "Principal
Payment Considerations". See also "Description
of the Investor Certificates -- Amortization
Event" for a description of the events which
might lead to the commencement of an Early
Amortization Period.
During the Controlled Accumulation Period all
funds on deposit in the Principal Funding
Account will be invested in certain eligible
investments as described herein. The amount of
investment earnings, if any, on funds on
deposit in the Principal Funding Account (net
of investment expenses and losses) will be
available to be allocated as payments of
interest on the Class A Certificates to the
extent described herein. See "Description of
the Investor Certificates -- Principal Funding
Account" and "-- Distributions from the
Collection Account; Allocation of Funds." Such
investment earnings will not be considered as
part of any amount on deposit in the Principal
Funding Account. No assurance can be given,
however, that any investment earnings will be
earned. See "Principal Payment Considerations".
EARLY AMORTIZATION PERIOD..... During the period from the first day of the Due
Period in which an Amortization Event has
occurred or, under certain limited
circumstances, the day on which an Amortization
Event has occurred, to, in either such case,
the earliest of the date on which the Invested
Amount has been paid in full, the Series 1998-1
Termination Date or the date on which the Trust
has otherwise terminated (the "Early
Amortization Period"), the Principal Allocation
Percentage (as defined herein) of collections
of Principal Receivables and certain other
amounts allocable to the Investor Certificates
(other than any Subordinated Principal
Collections that are used to pay the Class A
Required Amount or the Class B Required Amount)
will no longer be paid to the Seller,
accumulated or otherwise reallocated to any
other Series, but instead will be distributed
monthly and will be paid to the Investor
Certificateholders on each Distribution Date as
follows: (a) to the Class A Certificateholders
until the Class A Invested Amount is paid in
full and (b) following the final principal
payment to the Class A Certificateholders, to
the Class B Certificateholders until the Class
B Invested Amount is paid in full. In addition,
upon any commencement of the Early Amortization
Period, any funds on deposit in the Principal
Funding Account will be distributed to the
Investor Certificateholders on the first
Distribution Date following the commencement of
such Early Amortization Period while any
amounts on deposit in the Special Funding
Account will be released and available for
distribution to the Investor Certificateholders
to the extent described
16
<PAGE> 17
herein under "Description of the Investor
Certificates -- Special Funding Account".
During the Early Amortization Period,
collections of Principal Receivables allocable
to the Collateral Invested Amount will be
deposited into the Cash Collateral Account and
held for the benefit of the Investor
Certificateholders to the extent set forth
herein. See "Principal Payment Considerations".
SPECIAL FUNDING ACCOUNT....... The Seller, at its election, may at any time
that the Seller's Participation Amount (as
defined herein) is greater than zero, deposit
Trust Excess Principal Collections (as defined
herein) which would otherwise be payable to the
Seller into the Special Funding Account.
Amounts deposited in the Special Funding
Account may be treated as Principal Receivables
for purposes of avoiding or delaying the
occurrence of an amortization event of any
Series then outstanding which would otherwise
occur if the Seller were required to designate
Additional Accounts and did not have sufficient
Eligible Accounts for such purpose. Amounts
deposited in the Special Funding Account may be
withdrawn and distributed to the Seller at any
time, so long as the Seller's Participation
Amount is greater than the Series Required
Seller Amount (as defined herein) after such
withdrawal; provided, that no Series is then in
any accumulation period or amortization period.
If any accumulation period or amortization
period commences with respect to any Series,
any funds in the Special Funding Account will
be released and treated as Trust Excess
Principal Collections to the extent needed to
cover principal payments due to or for the
benefit of such Series as described under
"Description of the Investor
Certificates -- Special Funding Account" and
"Principal Payment Considerations".
SUBORDINATION; ADDITIONAL
AMOUNTS AVAILABLE TO
INVESTOR
CERTIFICATEHOLDERS............ The fractional undivided interest in the Trust
Assets allocable to the Class B Certificates
(the "Class B Invested Amount) and the
Collateral Amount will be subordinated to the
extent necessary to fund certain payments with
respect to the Class A Certificates and the
Servicing Fee during any period in which
Household Finance Corporation or an affiliate
is no longer the Servicer. In addition, the
Collateral Amount will be subordinated to the
extent necessary to fund certain payments with
respect to the Class B Certificates.
If collections of Finance Charge and
Administrative Receivables allocable to the
Class A Interest for any Due Period are
insufficient to pay interest on the Class A
Certificates and any interest on amounts not
paid to the Class A Certificateholders in
accordance with the Pooling and Servicing
Agreement and the Series 1998-1 Supplement
(with interest thereon), the Class A Investor
Default Amount (as defined herein), the
Servicing Fee and any overdue Servicing Fee
during any period in which Household Finance
Corporation or an affiliate is no longer the
Servicer, on the related Distribution Date for
such Due Period (such insufficiency being the
"Class A Required Amount"), Excess Finance
Charge and Administrative Collections (as
defined herein) will be applied to fund the
Class A Required Amount. If Excess Finance
Charge and
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<PAGE> 18
Administrative Collections available with
respect to such Due Period are less than the
Class A Required Amount, any amounts on deposit
in the Cash Collateral Account shall be
withdrawn to pay the Class A Required Amount
and if the amount available to be withdrawn is
less than the Class A Required Amount,
Subordinated Principal Collections allocable
first to the Collateral Invested Amount and
then the Class B Adjusted Invested Amount for
such Due Period will then be used to fund the
remaining Class A Required Amount.
"Subordinated Principal Collections" shall
mean, with respect to each Distribution Date,
the product of (a) with respect to any Due
Period during the Revolving Period, the
Floating Allocation Percentage of Series
Allocable Principal Collections (each, as
defined herein) allocated to the Investor
Certificates and the Collateral Invested Amount
for such Due Period and with respect to any Due
Period during the Controlled Accumulation
Period or any Early Amortization Period, the
Principal Allocation Percentage of Series
Allocable Principal Collections allocated to
the Investor Certificates and the Collateral
Invested Amount for such Due Period multiplied
by (b) a fraction the numerator of which is
equal to the sum of the Class B Adjusted
Invested Amount and the Collateral Invested
Amount as of the close of business on the last
day of the second preceding Due Period and the
denominator of which is equal to the Adjusted
Invested Amount at the close of business on
such day.
If any amount available to be withdrawn from
the Cash Collateral Account and Subordinated
Principal Collections are insufficient to fund
the remaining Class A Required Amount for such
Due Period, the Collateral Invested Amount will
be reduced (but not in excess of the Class A
Investor Default Amount for such Distribution
Date) by the amount of such remaining
insufficiency until such time as it has reached
zero and then the Class B Invested Amount will
be reduced (but not in excess of the Class A
Investor Default Amount for such Distribution
Date) by the amount of such remaining
insufficiency to avoid a charge-off with
respect to the Class A Certificates.
To the extent the Class B Invested Amount is
decreased, the percentage of collections of
Finance Charge and Administrative Receivables
allocated to the Class B Certificateholders in
subsequent Due Periods will be reduced.
Moreover, to the extent the amount of such
decrease in the Class B Invested Amount is not
reimbursed, the amount of principal
distributable to the Class B Certificateholders
from the Collection Account (as defined herein)
will be reduced. See "Description of the
Investor Certificates -- Allocations" and "--
Subordination". Reductions of the Class B
Invested Amount will be reimbursed and the
Class B Invested Amount increased on each
Distribution Date by the sum of the amount, if
any, of Excess Finance Charge and
Administrative Collections allocable and
available for that purpose, the Series
Allocable Miscellaneous Payments (as defined
herein) to the extent not used to reimburse the
Class A Adjusted Invested Amount and
withdrawals from the Cash Collateral Account
available for such purpose. See "Description of
the Investor Certificates
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<PAGE> 19
-- Subordination", "-- Excess Finance Charge
and Administrative Collections" and "--
Description of the Cash Collateral Account."
If the Class B Invested Amount is reduced to
zero, the Class A Adjusted Invested Amount will
be reduced if there is any remaining unpaid
Class A Required Amount for any Due Period, but
not in excess of the Class A Investor Default
Amount for such Due Period, and the Class A
Certificateholders will bear directly the
credit and other risks associated with their
undivided interest in the Trust. See
"Description of the Investor Certificates --
Reallocation of Cash Flows" and "-- Investor
Charge-Offs".
If collections of Finance Charge and
Administrative Receivables allocable to the
Class B Interest for any Due Period, together
with Excess Finance Charge and Administrative
Collections not required to pay the Class A
Required Amount, are insufficient to pay
interest on the unpaid principal balance of the
Class B Certificates and any interest on
amounts not paid to the Class B
Certificateholders in accordance with the
Pooling and Servicing Agreement and the Series
1998-1 Supplement (with interest thereon), plus
the Class B Investor Default Amount (as defined
herein), on the related Distribution Date for
such Due Period (such insufficiency being the
"Class B Required Amount"), monies, if any, in
the Cash Collateral Account not required to pay
the Class A Required Amount will be withdrawn
and applied to fund the Class B Required
Amount. If such monies available with respect
to such Due Period are less than the Class B
Required Amount, Subordinated Principal
Collections allocable to the Collateral
Invested Amount for such Due Period will then
be used to fund the remaining Class B Required
Amount.
If any such amount available to be withdrawn
from the Cash Collateral Account and
Subordinated Principal Collections allocable to
the Collateral Invested Amount are insufficient
to fund the remaining Class B Required Amount
for such Due Period, then the Collateral
Invested Amount will be reduced (but not in
excess of the Class B Investor Default Amount
for such Distribution Date) by the amount of
such insufficiency to avoid a charge-off with
respect to the Class B Certificates.
Such reductions of the Collateral Invested
Amount shall thereafter be reimbursed and the
Collateral Invested Amount increased on each
Distribution Date by certain Excess Finance
Charge and Administrative Collections and
Series Allocable Miscellaneous Payments for
such Distribution Date allocated and available
for that purpose.
The Class B Invested Amount will also be
reduced if the Collateral Amount has been
reduced to zero and there remains any unpaid
Class B Required Amount for any Due Period, but
not in excess of the Class B Investor Default
Amount for such Due Period, and the Class B
Certificateholders will bear directly the
credit and other risks associated with their
undivided interest in the Trust. See
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<PAGE> 20
"Description of the Investor Certificates --
Reallocation of Cash Flows" and "-- Investor
Charge-Offs".
In the event of a reduction of the Class A
Adjusted Invested Amount, the Class B Invested
Amount or the Collateral Amount, the amount
available to fund payments with respect to the
Class A Certificates and the Class B
Certificates will be decreased. See
"Description of the Investor Certificates --
Allocations".
THE CASH COLLATERAL ACCOUNT... The Investor Certificateholders will have the
benefit of the Cash Collateral Account which
will be held in the name of the Trustee for the
benefit of the Investor Certificateholders and
the Collateral Interest Holder. The Cash
Collateral Account will have a beginning
balance of zero which will be increased (i) to
the extent the Seller elects, subject to the
Rating Agency Condition, to apply collections
of Principal Receivables to decrease the
Collateral Invested Amount, (ii) to the extent
collections of Principal Receivables allocable
to the Collateral Invested Amount are required
to be deposited therein and (iii) to the extent
collections of Excess Finance Charge and
Administrative Receivables are required to be
deposited therein as described below. See
"Description of the Investor Certificates --
Description of the Cash Collateral Account".
To the extent set forth herein, withdrawals
will be made from the Cash Collateral Account
to pay the Class A Required Amount first and
then, to pay the Class B Required Amount. See
"Description of the Investor Certificates --
Allocation of Collections", and "--
Reallocation of Cash Flows".
AVAILABLE COLLATERAL AMOUNT... On each Distribution Date for the Investor
Certificates, the amount of Series Enhancement
available to the Investor Certificateholders
(the "Available Collateral Amount") will equal
the lesser of (i) the Collateral Amount and
(ii) the Required Collateral Amount. The
"Required Collateral Amount" with respect to
any Distribution Date for the Investor
Certificates means (i) $80,100,000 initially
and (ii) thereafter an amount equal to the
greater of (a) 8.25% of the sum of the Class A
Adjusted Invested Amount, the Class B Adjusted
Invested Amount and the Required Collateral
Amount in each case as of such Distribution
Date after taking into account distributions
made on such date and (b) $29,106,000;
provided, however, (1) that if certain
withdrawals are made from the Cash Collateral
Account, certain reductions in the Collateral
Amount occur or if an Amortization Event
occurs, the Required Collateral Amount for such
Distribution Date shall equal the Required
Collateral Amount for the Distribution Date
immediately preceding the occurrence of such
withdrawal, reduction or Amortization Event;
(2) in no event shall the Required Collateral
Amount exceed the unpaid principal amount of
the Investor Certificates on any such
Distribution Date; (3) the Required Collateral
Amount may be reduced at any time to a lesser
amount if the Rating Agency Condition is
satisfied; (4) the Seller at its option may at
any time increase the Required Collateral
Amount to a greater amount and (5) if any
amount on deposit in
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the Principal Funding Account is equal to the
sum of the initial Class A Invested Amount and
the initial Class B Invested Amount, the
Required Collateral Amount will be zero.
With respect to any Distribution Date, if the
Collateral Amount is less than the Required
Collateral Amount, certain Excess Finance
Charge and Administrative Collections will be
reallocated to increase the Collateral Invested
Amount or deposited into the Cash Collateral
Account to the extent of such shortfall. See
"Description of the Investor Certificates --
Reallocation of Cash Flows". Any of such Excess
Finance Charge and Administrative Collections
not required to be so reallocated or deposited
into the Cash Collateral Account or deposited
into the Reserve Account (as defined herein)
with respect to any Distribution Date will be
applied in accordance with the Collateral
Agreement among the Seller, the Trustee, the
Servicer and the Collateral Interest Holder
(the "Collateral Agreement"). See "Description
of the Investor Certificates -- Excess Finance
Charge and Administrative Collections".
If on any Distribution Date, the Collateral
Amount exceeds the Required Collateral Amount,
such excess will be applied in accordance with
the Collateral Agreement and will not be
available to the Investor Certificateholders.
See "Description of the Investor Certificates
-- Description of the Cash Collateral Account".
SELLER EXCHANGES.............. From time to time, the Seller may purchase in
the open market from investors willing to sell,
Investor Certificates and, to the extent of
such purchases, become a Certificateholder. On
any Distribution Date during the Revolving
Period, the Seller may cancel Investor
Certificates it holds, subject to satisfaction
of the Rating Agency Condition, thereby
reducing the Invested Amount and the Required
Collateral Amount, and increasing the Seller's
Interest.
SERVICING..................... The Servicer, acting through Household Credit
Services, Inc., a Delaware corporation (the
"Subservicer"), will be responsible for
servicing, managing and making collections on
the Receivables. The Servicer is required to
deposit into the Collection Account all
collections of Receivables received by it no
later than the second business day after the
processing of any such collections, unless
Household Finance Corporation is acting as the
Servicer and has a short-term rating of not
less than A-1 and P-1 or the equivalent from
the applicable Rating Agency (as defined
herein) in which case the Servicer may make a
single deposit into the Collection Account on
each Distribution Date. Currently, Household
Finance Corporation meets such requirements and
will make deposits of collections received
during the preceding Due Period into the
Collection Account on each Distribution Date.
In addition, the Subservicer has retained
Electronic Data Systems, Inc. ("EDS") for
purposes of providing certain data processing
services and generating monthly billing
statements, including the application of
payments received by the Servicer or the
Subservicer in respect of the Receivables. The
Subservicer has on-line access to the customer
account information maintained by EDS. The
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Subservicer shall be solely responsible for all
costs and expenses relating to this engagement.
On or about the earlier of the third business
day and the fifth calendar day preceding the
fifteenth day of each calendar month (a
"Determination Date"), the Servicer will
calculate the amount of collections of
Receivables received with respect to the
related Due Period to be allocated among all
Series and to the investor certificateholders
(including the Class A Certificateholders and
the Class B Certificateholders), the Seller,
and any Series Enhancements, including the
Collateral Invested Amount, as described
herein.
In certain limited circumstances Household
Finance Corporation may resign or be removed as
Servicer under the Pooling and Servicing
Agreement, in which event either the Trustee
or, so long as it meets certain eligibility
standards set forth in the Pooling and
Servicing Agreement, a third-party servicer may
be appointed as successor Servicer. References
to the "Servicer" include Household Finance
Corporation or any such successor Servicer.
Household Finance Corporation is permitted to
delegate any of its duties as Servicer under
the Pooling and Servicing Agreement, but any
such delegation will not relieve the Servicer
of its obligations thereunder. Household
Finance Corporation has delegated its duties
under the Pooling and Servicing Agreement as
Servicer to the Subservicer and EDS. The
Servicer will receive the Servicing Fee, the
servicing fee allocable to the Seller's
Interest and certain other amounts as described
herein as servicing compensation from the
Trust. See "Description of the Investor
Certificates -- Servicing Compensation and
Payment of Expenses".
MANDATORY REASSIGNMENT AND
TRANSFER OF CERTAIN
RECEIVABLES................. The Seller will make certain representations
and warranties in the Pooling and Servicing
Agreement with respect to the Accounts and the
Receivables and the Servicer will make certain
representations and warranties in the Pooling
and Servicing Agreement in its capacity as
Servicer. If the Seller or the Servicer
breaches certain representations and warranties
with respect to any Receivable and such breach
remains uncured for a specified period after
the Seller or the Servicer becomes aware or
receives notice thereof from the Trustee and
such breach has a material adverse effect on
the certificateholders' interest therein, such
certificateholders' interest shall be
reassigned to the Seller or assigned to the
Servicer, as the case may be. If the Seller or
the Servicer fails to comply in all material
respects with certain covenants or warranties
with respect to any Receivable and such
noncompliance is not cured within a specified
period after the Seller or the Servicer becomes
aware or receives notice thereof from the
Trustee and such noncompliance has a material
adverse effect on the certificateholders'
interest therein, such certificateholders'
interest may be reassigned to the Seller or
assigned to the Servicer, as the case may be.
In the event of a transfer of servicing
obligations to a successor Servicer, such
successor Servicer, rather than Household
Finance Corporation,
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would be responsible for any failure to comply
with the Servicer's covenants and warranties
arising thereafter.
TAX STATUS.................... Orrick, Herrington & Sutcliffe LLP, special
counsel to the Seller ("Special Counsel"), is
of the opinion that under existing law the
Investor Certificates will be characterized as
debt for federal income tax purposes. Under the
Pooling and Servicing Agreement and the Series
1998-1 Supplement, the Seller and the Investor
Certificateholders will agree to treat the
Investor Certificates as debt for federal,
state, local, foreign and other tax purposes.
See "Federal Income Tax Consequences" and
"State and Local Tax Consequences".
ERISA CONSIDERATIONS.......... The purchase and holding of Class A
Certificates by most employee benefit plans is
subject to the fiduciary responsibility rules
of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), including its
"prohibited transaction" rules. The application
of ERISA's prohibited transaction rules to such
investment depends upon whether for ERISA
purposes the Class A Certificates are
considered debt of the Seller or equity
interests in the Trust and upon the
availability of prohibited transaction class
exemptions issued by the United States
Department of Labor (the "DOL"). If the
Certificates are treated as equity interests
under ERISA, under regulations issued by the
DOL, the Trust's assets would not be deemed
"plan assets" (as defined herein) of an
employee benefit plan holding the Class A
Certificates if certain conditions are met,
including that the Class A Certificates be held
by at least 100 persons who are independent of
the Issuer and of one another at the conclusion
of the offering. The Underwriters (as defined
herein) expect, although no assurances can be
given, that the Class A Certificates will be
held by at least 100 persons, and the Seller
anticipates that the other conditions of the
regulations will be met. In any event, persons
contemplating purchasing the Class A
Certificates on behalf of or with "plan assets"
of any Benefit Plan (as defined herein) should
consult their counsel before making a purchase.
See "ERISA Considerations".
The Class A Certificates may not be acquired by
or on behalf of any Benefit Plan, including an
individual retirement account or Keogh plan,
that is subject to ERISA or Section 4975 of the
Internal Revenue Code of 1986, as amended (the
"Code"), if such Benefit Plan has certain
relationships with Household Bank, the Seller,
the Servicer, the Trustee, an underwriter or
their respective affiliates. See "ERISA
Considerations".
The Class B Certificates may not be purchased
by any Benefit Plan, including any individual
retirement account. See "ERISA Considerations".
CLASS A CERTIFICATE RATING;
CLASS B CERTIFICATE RATING.... It is a condition to the issuance of the Class
A Certificates that they be rated in the
highest rating category by at least one
nationally recognized statistical rating
organization. The rating of the Class A
Certificates is based primarily on the value of
the
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Receivables, the credit quality of the
Servicer, the terms of the Class B Certificates
and the circumstances, as described herein, in
which the Collateral Amount may be available
for the benefit of the Class A
Certificateholders. See "Description of the
Investor Certificates -- Reallocation of Cash
Flows" and "Risk Factors -- Rating of the
Investor Certificates".
It is a condition to the issuance of the Class
B Certificates that they be rated at least "A"
or its equivalent by at least one nationally
recognized statistical rating organization. The
rating of the Class B Certificates is based
primarily on the value of the Receivables, the
credit quality of the Servicer, and the
circumstances, as described herein, in which
the Collateral Amount may be available for the
benefit of the Class B Certificateholders. See
"Description of the Investor Certificates" and
"Risk Factors -- Rating of the Investor
Certificates".
Any rating of the Investor Certificates does
not address the possibility of the imposition
of United States withholding taxes or that the
principal of, or interest on, the Investor
Certificates will be paid on a scheduled date.
The ratings assigned are not recommendations to
purchase, hold or sell the Investor
Certificates, inasmuch as such ratings do not
comment as to market price, the marketability
of the Investor Certificates or suitability for
a particular purpose. The ratings may be
subject to revision or withdrawal at any time
by the assigning Rating Agency. Each rating
should be evaluated independently of any other
rating. See "Risk Factors -- Rating of the
Investor Certificates".
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RISK FACTORS
LIMITED LIQUIDITY. There currently is no market for the Investor
Certificates. To the extent permitted, the Underwriters currently intend to make
a market in the Investor Certificates, but the Underwriters are not under any
obligation to do so. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will provide Class A
Certificateholders or Class B Certificateholders with liquidity of investment or
that it will continue for the life of the Investor Certificates.
CHARACTERISTICS AS A SALE. Household Bank has warranted in the Bank
Purchase Agreement that the transfer of all Receivables pursuant thereto to the
Seller is either a valid sale and assignment of such Receivables from Household
Bank to the Seller or the grant to the Seller of a security interest in such
Receivables. The Seller and Household Bank have filed and will file appropriate
Uniform Commercial Code ("UCC") financing statements to evidence this sale and
perfect the Seller's right, title and interest in such Receivables. The Seller
has warranted in the Pooling and Servicing Agreement that the transfer of the
Receivables by it to the Trust pursuant to such Agreement is either a valid sale
and assignment of such Receivables to the Trust or the grant to the Trust of a
security interest in such Receivables. The Seller has taken or will take certain
actions as are required to perfect the Trust's interest in such Receivables. The
Seller has warranted that if the transfer by it to the Trust is deemed to be a
grant to the Trust of a security interest in the Receivables, the Trust will
have a first priority perfected security interest therein. See "Certain Legal
Aspects of the Receivables -- Transfer of Receivables".
BANKRUPTCY RISKS. Household Bank and the Seller intend to treat the
transfer of the Receivables pursuant to the above referenced agreements as a
sale of the Receivables by Household Bank to the Seller. However, in the event
of an insolvency of Household Bank, it is possible that a receiver or
conservator could attempt to characterize the transaction between Household Bank
and the Seller as a pledge of the Receivables rather than a true sale, in which
event delays in payments on the Investor Certificates and possible reductions in
the amount of those payments could occur. If the transfer of the Receivables to
the Seller by Household Bank, or to the Trust by the Seller is deemed to create
a security interest therein, a tax lien, government lien or other lien created
by operation of law on the property of Household Bank or the Seller may have
priority over the Trust's interest in such Receivables.
The Federal Deposit Insurance Act ("FDIA"), as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, as amended
("FIRREA"), provides that such security interest should not be subject to
avoidance by the FDIC, as conservator or receiver for Household Bank. Positions
taken by the FDIC staff prior to the passage of FIRREA do not suggest that the
FDIC, as conservator or receiver for Household Bank, would interfere with the
timely transfer to the Seller (or by the Seller to the Trust) of payments
collected on the Receivables. If, however, the FDIC were to assert a contrary
position, such as by requiring the Trustee to establish its right to those
payments by submitting to and completing the administrative claims procedure
under the FDIA, or were the conservator or receiver to request a stay of
proceedings with respect to Household Bank as provided under the FDIA, delays in
payments on the Investor Certificates and possible reductions in the amount of
those payments could occur. In addition, the FDIC, if appointed as conservator
or receiver for Household Bank, has the power under the FDIA to repudiate
contracts, including secured contracts of Household Bank. The FDIA provides that
a claim for damages arising from the repudiation of a contract is limited to
"actual direct compensatory damages." In the event the FDIC were to be appointed
as conservator or receiver of Household Bank and were to repudiate the Pooling
and Servicing Agreement, then the amount payable out of available collections on
the Receivables to the Investor Certificateholders could be lower than the
outstanding principal and accrued interest on the Investor Certificates.
In the event of a Servicer Default relating to the bankruptcy or insolvency
of the Servicer, and no Servicer Default other than such bankruptcy or
insolvency-related Servicer Default exists, the bankruptcy trustee or receiver
may have the power to prevent either the Trustee or the majority of the Investor
Certificateholders from appointing a successor Servicer. If a conservator or
receiver were appointed for Household Bank or if certain other events occur
relating to the bankruptcy, receivership or insolvency of the Seller (an
"Insolvency Event"), new Principal Receivables would not be transferred by the
Seller to the Trust.
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In the event of an Insolvency Event, the Trustee would sell the Receivables
(unless Holders (as defined herein) of investor certificates evidencing
undivided interests aggregating more than 50% of the aggregate unpaid principal
amount of each Series or any person entitled pursuant to any Supplement instruct
otherwise and provided that a conservator or receiver for the Seller does not
order a sale despite such instructions not to sell), thereby causing early
termination of the Trust. As of this date, any one of the credit enhancers for
Series 1993-1, 1993-2, 1994-1, 1995-1 and 1997-1 may instruct the Trustee not to
sell the Receivables. The credit enhancer for Series 1998-1 may similarly object
and prevent such sale. The entire proceeds of such sale or liquidation will be
treated as collections of Receivables and allocated accordingly among Series. In
the case of the Investor Certificates, such proceeds allocable to the
Certificateholders' Interest will be applied first to pay the Class A
Certificates in full and then the Class B Certificates. If such proceeds are not
sufficient to pay the entire Class A Adjusted Invested Amount, the amount of
principal returned to the Class A Certificateholders will be reduced and the
Class A Certificateholders will incur a loss and no principal would be available
to pay the Class B Certificateholders. See "Description of the Investor
Certificates -- Amortization Event" for a discussion of other events which might
lead to the commencement of an Early Amortization Period. Upon the occurrence of
an Amortization Event, if a conservator or receiver is appointed for Household
Bank or a trustee is appointed for the Seller and no Amortization Event other
than such conservatorship or receivership or insolvency of Household Bank or
Seller exists, the conservator, receiver or trustee may have the power to
prevent the early sale, liquidation or disposition of the Receivables and the
commencement of the Early Amortization Period. See "Certain Legal Aspects of the
Receivables -- Certain Matters Relating to Insolvency".
While Household Finance Corporation is the Servicer, cash collections held
by Household Finance Corporation may, subject to certain conditions, be
commingled and used for the benefit of Household Finance Corporation prior to
each Distribution Date and, in the event of the insolvency or receivership of
Household Finance Corporation or, in certain circumstances, the lapse of certain
time periods, the Trust may not have a perfected interest in such collections.
Unless otherwise agreed to by each nationally recognized statistical rating
organization selected by the Seller to rate the investor certificates of any
Series or class, as specified in the applicable Supplement (each, a "Rating
Agency"), if the commercial paper rating of Household Finance Corporation is
reduced below A-1 or P-1 by the applicable Rating Agency, Household Finance
Corporation will, within five business days, commence the deposit of collections
directly into the Collection Account within two business days of the day of
processing.
The Seller will not engage in any activities except the transactions
described herein and as contemplated by the Pooling and Servicing Agreement and
any Supplement and similar transactions and activities incidental to, or
necessary or convenient to accomplish, the foregoing. The Seller does not have
any current intention to file a voluntary petition under the Bankruptcy Code of
1978, as amended (the "Bankruptcy Code"), or any similar applicable state law
even though such laws do not prohibit the Seller from filing a voluntary
petition thereunder.
Application of Federal and state bankruptcy and debtor relief laws would
affect the interests of investor certificateholders, including the Class A
Certificateholders, in the Receivables if such laws result in any Receivables
being written off as uncollectible and the total of the Defaulted Receivables
exceeds funds available in the Cash Collateral Account, the Collateral Invested
Amount and the Class B Invested Amount. Application of such laws would also
affect the interests of the Class B Certificateholders in the Receivables if
such laws result in any Receivables being written off as uncollectible when
there are insufficient amounts remaining in the Cash Collateral Account or to be
reallocated from the Collateral Invested Amount. See "Description of the
Investor Certificates -- Defaulted Receivables; Rebates and Fraudulent Charges".
CONSUMER PROTECTION LAWS. The Accounts and Receivables are subject to
numerous Federal and state consumer protection laws which impose requirements on
the solicitation, making, enforcement and collection of consumer loans. In
addition, Congress and the states could further regulate the credit card and
consumer credit industry by adopting new laws or rulings (including, but not
limited to, federal or state interest rate caps on credit cards), which may
adversely affect the Servicer's ability to collect on the Receivables or
maintain the required level of periodic finance charges, annual membership fees
and other fees. For example, if the finance charges and other fees constituting
a portion of the Receivables were required to be reduced resulting in a
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<PAGE> 27
corresponding decrease in the yield on the Accounts, an Amortization Event could
occur and an Early Amortization Period may commence. See "Description of the
Investor Certificates -- Amortization Event". The Federal Financial Institutions
Examination Council, on June 30, 1998, proposed a revised policy statement on
the classification of retail credit. If adopted, the revised policy statement
could, among other things, establish a uniform charge-off period of 150 days
delinquency for open-end and closed-end credit. In addition, failure by the
Servicer to comply with such requirements could adversely affect the Servicer's
ability to enforce the Accounts or Receivables.
Pursuant to the Pooling and Servicing Agreement, the Seller will make
certain representations and warranties relating to the validity and
enforceability of the Accounts and the Receivables. However, it is not
anticipated that the Trustee will make any examination of the Receivables or the
records relating thereto for the purpose of establishing the presence or absence
of defects, compliance with such representations and warranties, or for any
other purpose. The sole remedy if any such representation or warranty is not
complied with and such noncompliance continues beyond the applicable cure
period, is that the Receivables affected thereby will be reassigned to the
Seller or assigned to the Servicer, as the case may be. In addition, in the
event of the breach of certain representations and warranties, the Seller may be
obligated to accept the reassignment of the entire Trust portfolio. See "The
Pooling and Servicing Agreement -- Representations and Warranties" and "--
Servicer Covenants" and "Certain Legal Aspects of the Receivables -- Consumer
Protection Laws".
PROPOSED LEGISLATION -- LIMITATION ON FINANCE CHARGES. Congress and the
states may enact new laws and amendments to existing laws to regulate further
the credit card industry or to reduce finance charges or other fees or charges
applicable to credit card accounts. The potential effect of any further
regulation or legislation could be to reduce the yield on the Accounts or make
it more difficult for the Servicer to collect payments on the Receivables. If
such yield is reduced, an Amortization Event could occur, and an Early
Amortization Period may commence. See "Description of the Investor Certificates
- -- Amortization Event".
Pursuant to the Pooling and Servicing Agreement, if the interest of the
Class A Certificateholders and Class B Certificateholders in a Receivable is
materially adversely affected by the failure of the Receivable to comply in all
material respects with applicable requirements of law, the interest of such
Investor Certificateholders in all Receivables in the affected Account will be
reassigned to Household Bank or, in some circumstances, to the Servicer. On the
Issuance Date, Household Bank will make certain other representations and
warranties relating to the validity and enforceability of the Accounts and the
Receivables. The sole remedy, if any such representation or warranty is breached
and such breach has a material adverse effect on the interest of Investor
Certificateholders in any Receivable and continues beyond the applicable cure
period, is that the Receivables affected thereby will be reassigned to Household
Bank or assigned to the Servicer, as the case may be. In addition, in the event
of the breach of certain representations and warranties, Household Bank may be
obligated to accept the reassignment of the entire Trust portfolio. See "The
Pooling and Servicing Agreement -- Representations and Warranties" and "--
Servicer Covenants" and "Certain Legal Aspects of the Receivables -- Consumer
Protection Laws".
GENERATION OF ADDITIONAL RECEIVABLES. The Receivables may be paid at any
time and there is no assurance that there will be additional Receivables created
in the Accounts or that Receivables will be added to the Trust from additional
Accounts designated to the Trust. The commencement and continuation of a
Controlled Accumulation Period will be dependent, in part, upon the continued
generation of new Receivables to be conveyed to the Trust. A significant decline
in the amount of Receivables generated could result in the occurrence of an
Amortization Event and the commencement of an Early Amortization Period. The
Bank Purchase Agreement provides that the Seller will require, and Household
Bank will be obligated, to designate Additional Accounts, the receivables of
which will be added to the Trust in the event that the amount of the Principal
Receivables is not maintained at a certain minimum amount. If Additional
Accounts are not designated by Household Bank when required, an Amortization
Event may occur and result in the commencement of an Early Amortization Period.
DEPENDENCY ON CARDHOLDER REPAYMENTS. There is no assurance that any
particular pattern of cardholder payments will occur. Furthermore, there is no
assurance that the repayment history of Receivables generated
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under cardholder agreements which are part of a program where rebates on certain
purchases are offered to cardholders in connection with their usage of such
cards, will not be affected by any change in the amount or other terms of such
rebates that may be offered from time to time. The amount or other terms of any
such rebates may generally be changed at any time. While none of the Seller,
Household Bank, the Servicer or the Subservicer are able to determine, and have
no basis to predict, how cardholders may react to such changes, those changes
may affect the continuation of the generation of Receivables. See "-- Affinity
Programs". The full payment of the Class A Invested Amount and the Class B
Invested Amount is dependent on cardholder repayments and will not be made if
such repayment amounts are insufficient to pay the Class A Invested Amount in
full and, thereafter, the Class B Invested Amount. In addition, a decrease in
the effective yield on the Receivables due to, among other things, a change in
the annual percentage rates applicable to the Accounts, an increase in the level
of delinquencies or increased convenience use, where cardholders pay their
Receivables early and thus avoid all finance charges on purchases, could cause
the commencement of an Early Amortization Period as well as result in decreased
protection to Investor Certificateholders against defaults under the Accounts.
SOCIAL, LEGAL, ECONOMIC AND OTHER FACTORS. Changes in card use and payment
patterns by cardholders result from a variety of social, legal and economic
factors. Economic factors include the rate of inflation, unemployment levels,
tax law changes and relative interest rates. The use of incentive programs
(e.g., gift awards for card usage) may also affect card use. The Seller and
Household Bank are unable to determine and have no basis to predict whether or
to what extent tax law changes or other economic or social factors will affect
card use or repayment patterns. See "The Accounts".
COMPETITION IN THE CREDIT CARD INDUSTRY. The credit card industry is highly
competitive and operates in an environment increasingly focused on the cost of
services charged for credit cards. As new credit card issuers seek to enter the
market and issuers seek to expand their market share, there is increased use of
advertising, target marketing and pricing competition. Congress and the states
may enact new laws and amendments to existing laws to regulate further the
credit card industry or to reduce finance charges or other fees or charges
applicable to credit card accounts. In addition, certain credit card issuers
assess annual percentage rates or other fees or charges at rates lower than the
rate currently being assessed on most of the Accounts. If cardholders choose to
utilize competing sources of credit, the rate at which new Receivables are
generated in the Accounts may be reduced and certain purchase and payment
patterns with respect to Receivables may be affected. The Trust will be
dependent upon Household Bank's continued ability to generate new Receivables.
If the rate at which new Receivables are generated declines significantly and
Household Bank does not add Additional Accounts, an Amortization Event could
occur, in which event an Early Amortization Period would commence.
In September 1994, the United States Court of Appeals for the Tenth Circuit
reversed a 1992 Utah federal court decision that the VISA association violated
antitrust laws when it denied membership in VISA to a subsidiary of Sears
Roebuck & Co., on the basis that another Sears subsidiary is the issuer of the
Discover credit card, a competitor of the VISA credit card. In June 1995, the
United States Supreme Court declined to review such decision of the Tenth
Circuit. MasterCard has settled a similar lawsuit. This settlement by MasterCard
and/or a final decision against or a similar settlement by VISA could have
adverse consequences for members of the MasterCard or VISA associations, such as
Household Bank.
ABILITY OF HOUSEHOLD BANK TO CHANGE TERMS OF THE ACCOUNTS. Pursuant to the
Pooling and Servicing Agreement, the Seller will not be transferring to the
Trust the Accounts but only the Receivables arising in the Accounts. As holder
of the Accounts, Household Bank will have the right to determine the annual
percentage rates and the fees which will be applicable from time to time to the
Accounts, to alter the minimum monthly payment required under the Accounts and
to change various other terms with respect to the Accounts. A decrease in the
annual percentage rates or a reduction in fees would decrease the effective
yield on the Accounts and could result in the occurrence of an Amortization
Event and the commencement of an Early Amortization Period. An alteration of
payment terms may result in fewer payments on Receivables being made in any
month. Under the Bank Purchase Agreement, Household Bank agrees that, unless
required by law or unless, in its good faith judgment, it deems it necessary to
maintain on a competitive basis its credit card business or a program operated
by such credit card business and only if the change giving rise to such
28
<PAGE> 29
reduction with respect to a specific program is made applicable to substantially
all of the credit card accounts subject to such program, it will not take any
action which would have the effect of reducing the Portfolio Yield (as defined
herein) to a level that could reasonably be expected to cause any Series to
experience an amortization event based on the insufficiency of the Portfolio
Yield or any similar test or take any action that would have the effect of
reducing the Portfolio Yield to less than the highest Average Rate (as defined
herein) for any Group. "Portfolio Yield" means, with respect to the Trust as a
whole and, with respect to any Due Period, the annualized percentage equivalent
of a fraction (a) the numerator of which is the aggregate of the sum of the
Series Allocable Finance Charge and Administrative Collections (as defined
herein) for all Series during such Due Period calculated on a cash basis after
subtracting therefrom the Series Allocable Defaulted Amount (as defined herein)
for all Series for such Due Period and (b) the denominator of which is the total
amount of Principal Receivables conveyed to the Trust (subject to adjustment to
give effect to any designations of Additional Accounts and Removed Accounts),
plus the amount of any funds on deposit in the Special Funding Account (other
than the portion constituting Finance Charge and Administrative Receivables), in
each case, as of the last day of the immediately preceding Due Period. "Average
Rate" means, with respect to any Group (including, with respect to the Group
containing the Investor Certificates, the Collateral Invested Amount as if it
were a class of investor certificates), the percentage equivalent of a decimal
equal to the sum of the amounts for each outstanding Series (or each class
within a Series consisting of more than one class) within such Group obtained by
multiplying (a) the certificate rate for such Series or class (reduced to take
into account any payments made pursuant to any interest rate agreements) and (b)
a fraction, the numerator of which is the aggregate unpaid principal amount of
the investor certificates of such Series or class and the denominator of which
is the aggregate unpaid principal amount of all investor certificates within
such Group. In servicing the Accounts, each of the Servicer, the Subservicer and
any successor servicer will be required to exercise the same care and apply the
same policies that it exercises in handling similar matters for its own or other
comparable accounts. Household Bank will also agree not to change the terms of
the Accounts unless the change made with respect to a specific program is made
applicable to substantially all of the credit card accounts subject to such
program. Except as specified above, there are no restrictions specified in the
Pooling and Servicing Agreement on the ability of Household Bank to change the
terms of the Accounts.
DECREASE IN FINANCE CHARGES. There can be no assurances that changes in
applicable law, changes in the marketplace or prudent business practice might
not result in a determination by Household Bank to decrease customer finance
charges or otherwise take actions which would change other Account terms. Under
certain circumstances, the Seller will have the right and may be required from
time to time to require Household Bank to designate Receivables from time to
time existing in Additional Accounts or Participation Interests for inclusion in
the Trust. However, such Additional Accounts or Participation Interests may not
be of the same credit quality or have the same characteristics as the Accounts,
the Receivables of which have been conveyed to the Trust. See "The Pooling and
Servicing Agreement -- Additions of Accounts or Participation Interests".
BASIS RISK. The Accounts will generally have finance charges set at a
variable rate above the Prime Rate. The Investor Certificates bear interest at a
floating rate based on LIBOR. If there is a decline in the Prime Rate, the
amount of collections of Finance Charge Receivables on the Accounts may be
reduced, whereas the amounts payable as interest with respect to the Investor
Certificates and other amounts required to be funded out of collections of
Finance Charge Receivables may not be similarly reduced.
AFFINITY PROGRAMS. The Accounts, the Receivables of which currently have
been conveyed or will be conveyed to the Trust on the Issuance Date, were
originated under an affinity agreement between Household International and
General Motors Corporation and are generated under the MasterCard program of
Household Bank and certain of its affiliates known as the "The GM Card(SM)". See
"The Credit Card Business of Household Bank (SB), N.A. -- The Accounts". In the
future, Additional Accounts may also be designated to the Trust relating to
other affinity or non-affinity programs. Changes in the terms of such programs
may affect the rate at which new Receivables are generated in the Accounts.
CASH COLLATERAL ACCOUNT AND COLLATERAL INVESTED AMOUNT --
LIMITATIONS. Although credit enhancement with respect to the Investor
Certificates will be provided by the funds and securities held in the Cash
Collateral Account and the Collateral Invested Amount, such amounts are limited
and may decline during the Controlled Accumulation Period. If the Collateral
Invested Amount and any amount on deposit in the Cash
29
<PAGE> 30
Collateral Account is reduced to zero, the Class B Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust and the Class B Invested Amount may be reduced. If the Class B
Invested Amount is reduced to zero, Class A Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust. See "Description of the Investor Certificates -- Description of the
Cash Collateral Account".
RATING OF THE INVESTOR CERTIFICATES. It is a condition to issuance of the
Class A Certificates that they be rated in the highest rating category by at
least one Rating Agency. The rating of the Class A Certificates is based
primarily on the value of the Receivables, the credit quality of the Servicer,
and the circumstances as described herein, in which the Cash Collateral Account
and Collateral Invested Amount may be available for the benefit of the Class A
Certificates, and the terms of the Class B Certificates. See "Description of the
Investor Certificates -- Reallocation of Cash Flows". It is a condition to the
issuance of the Class B Certificates that they be rated at least "A" or its
equivalent by at least one Rating Agency. The rating of the Class B Certificates
is based primarily on the value of the Receivables and the credit quality of the
Servicer, and the circumstances, as described herein, in which the Cash
Collateral Account and the Collateral Invested Amount may be available for the
benefit of the Class B Certificates.
The ratings of the Investor Certificates are not a recommendation to
purchase, hold or sell such Investor Certificates, inasmuch as such ratings do
not comment as to market price or suitability for a particular investor. There
is no assurance that the ratings of the Investor Certificates will remain for
any given period of time or that such ratings will not be lowered or withdrawn
entirely by the Rating Agency if in its judgment circumstances in the future so
warrant. The ratings of the Class A Certificates and the Class B Certificates do
not address the possibility of the imposition of United States withholding tax.
Although the ratings of the Class A Certificates and the Class B Certificates
address the respective likelihood of the ultimate payment of principal and
interest on the Class A Certificates and the Class B Certificates, such ratings
do not address the likelihood that the outstanding principal amount of a class
of the Investor Certificates will be paid by the Series 1998-1 Expected Final
Payment Date. The ratings also do not address the possibility of the occurrence
of an Amortization Event which, under certain circumstances as described herein,
could result in the payment of the outstanding principal amount of the Class A
Certificates and the Class B Certificates prior to the Series 1998-1 Expected
Final Payment Date.
BOOK-ENTRY REGISTRATION. The Investor Certificates will be initially
represented by one or more Class A Certificates and one or more Class B
Certificates registered in the name of Cede, the nominee for DTC, and will not
be registered in the names of the Investor Certificateholders or their nominees.
Because of this, unless and until Definitive Certificates are issued, Investor
Certificateholders will not be recognized by the Trustee as "Investor
Certificateholders" (as that term is used in the Pooling and Servicing
Agreement). Hence, until Definitive Certificates are issued, holders of
beneficial interests in Investor Certificates will only be able to exercise the
rights of Investor Certificateholders indirectly through DTC. See "Description
of the Investor Certificates -- Book-Entry Registration" and "-- Definitive
Investor Certificates".
ERISA RESTRICTIONS APPLICABLE TO CLASS B CERTIFICATES. Registration of
transfer of any Class B Certificate shall be effected only if such transfer is
made to a person which is not a Benefit Plan. By purchasing and holding a Class
B Certificate, a Class B Certificateholder shall be deemed to have represented
and warranted that it is not a Benefit Plan. By acquiring any interest in a
Class B Certificate, the beneficial owner thereof shall be deemed to have
represented and warranted that it is not a Benefit Plan. See "ERISA
Considerations".
ISSUANCE OF ADDITIONAL SERIES. The Trust, as a master trust, previously has
issued fourteen Series, three of which have been retired. The Trust is expected
to issue additional Series from time to time. The terms of any Series will be
specified in a related Supplement. The provisions of a Supplement and,
therefore, the terms of any additional Series, will not be subject to the prior
review or consent of holders of the investor certificates of any previously
issued Series. Such terms may include methods for determining applicable
investor percentages and allocating collections, provisions creating different
or additional security or other Series Enhancements, provisions subordinating
such Series to other Series or subordinating other Series (if the Supplement
relating to such Series so permits) to such Series, and any other amendment or
supplement to the Pooling and Servicing Agreement which is made applicable only
to such Series.
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<PAGE> 31
The obligation of the Trustee to issue any new Series is subject to the
following conditions, among others: (a) such issuance will not result in any
Rating Agency reducing or withdrawing its then existing rating of the investor
certificates of any outstanding Series or class with respect to which it is a
Rating Agency (the notification in writing by each Rating Agency to the Seller,
the Servicer and the Trustee that any action will not result in such a reduction
or withdrawal is referred to herein as the "Rating Agency Condition") and (b)
the Seller shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, in the reasonable belief of the Seller, such
issuance will not (i) result in the occurrence of an Amortization Event or (ii)
materially adversely affect the timing or amount of payments to investor
certificateholders of any Series or class (any of the conditions referred to in
the preceding clauses (i) and (ii) are referred to herein as an "Adverse
Effect"). Despite the requirement that the Rating Agency Condition be satisfied
in connection with the issuance of a new Series, there can be no assurance that
the principal terms of any other Series (including any Series issued from time
to time hereafter) might not have an impact on the timing or amount of payments
received by an Investor Certificateholder.
In addition, the Supplements relating to Series which are part of a Group
as described herein may provide that collections of Receivables allocable to
such Series will be reallocated among all Series in the Group. Consequently, the
issuance of new Series in a Group may have the effect of reducing the amount of
collections of Receivables which are reallocated to the investor certificates of
existing Series in such Group. For example, Group Three provides for the
reallocation of collections of Finance Charge and Administrative Receivables
allocable to a Series among all Series in such Group. The issuance of an
additional Series in Group Three that has a larger claim with respect to monthly
interest than that of previously issued Series in Group Three (due to a higher
certificate rate) will receive a proportionately larger reallocation of Group
Three Investor Finance Charge and Administrative Receivables. Such issuance will
reduce the amount of Group Three Investor Finance Charge and Administrative
Receivables which are reallocated to the existing Series in Group Three.
Furthermore, there is no assurance that, for any Series in a Group, the Trust
will issue any other Series in such Group. Accordingly, any anticipated benefits
of sharing or reallocation of collections of Receivables may not be realized.
See "Description of the Investor Certificates -- Reallocations Among Investor
Certificates of Different Series".
ADDITION OF TRUST ASSETS. The Seller may from time to time designate
Participation Interests to be conveyed to the Trust or may designate Additional
Accounts, the Receivables in which are conveyed to the Trust. In addition, under
certain circumstances, the Seller will be obligated to designate Aggregate
Addition Accounts or, at the Seller's option, Participation Interests for
inclusion in the Trust. "Aggregate Addition Accounts" shall mean revolving
credit card accounts established pursuant to a credit card agreement between the
Bank or any additional seller and the person or persons obligated to make
payments thereunder, excluding any merchant, which is designated by the Seller
to be included as an Account. Aggregate Addition Accounts may be subject to
different eligibility criteria than the Accounts, the Receivables of which are
currently included in the Trust, and may include accounts or other consumer loan
receivables originated using criteria different from those which were applied to
the Accounts, the Receivables of which are currently included in the Trust,
because such accounts or other consumer loan receivables were originated at a
later date or were part of a portfolio of credit card accounts or other consumer
loan receivables which were not part of the Accounts or which were acquired from
another credit card issuer. Moreover, Aggregate Addition Accounts may not be
accounts or other consumer loan receivables of the same type previously included
in the Trust. Consequently, there can be no assurance that such Aggregate
Addition Accounts will be of the same credit quality as the Accounts, the
Receivables of which are currently included in the Trust. In addition, such
Aggregate Addition Accounts may consist of credit card accounts or other
consumer loan receivables which have different terms than the Accounts, the
Receivables of which are currently included in the Trust, including lower
periodic finance charges, which may have the effect of reducing the average
yield on the portfolio of Accounts. The designation of Aggregate Addition
Accounts will be subject to the satisfaction of certain conditions, including
that (a) such addition will satisfy the Rating Agency Condition and (b) the
Seller shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, in the reasonable belief of the Seller, such
addition will not have an Adverse Effect. The Seller has conveyed and expects to
continue to convey from time to time to the Trust the Receivables arising in
certain Aggregate Addition Accounts in accordance with the provisions of the
Pooling and Servicing Agreement.
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<PAGE> 32
The Seller may from time to time, at its sole discretion, designate newly
originated Eligible Accounts to be included as Accounts ("New Accounts") subject
to the limitations and conditions specified in this paragraph. For purposes of
the definition of New Accounts, Eligible Accounts shall be deemed to include
only types of revolving credit card accounts which are included as Initial
Accounts or which have previously been included in any Aggregate Addition if the
assignment related to such Aggregate Addition provides that such type of
revolving credit card account is permitted to be designated as a New Account.
Unless each applicable Rating Agency otherwise consents, the number of New
Accounts designated with respect to any of the three consecutive Due Periods
beginning 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 such Due Periods commence and the number of New Accounts designated
during any such calendar year shall not exceed 20% of the number of Accounts as
of the first day of such calendar year. The Seller shall deliver to the Trustee,
at least semi-annually, an opinion of counsel with respect to the New Accounts
included as Accounts confirming the validity and perfection of each transfer of
such New Accounts. If such opinion of counsel with respect to any New Accounts
is not so received, all Receivables arising in the New Accounts to which such
failure relates will be removed from the Trust. The Seller will designate New
Accounts subject to the following conditions, among others: (a) the New Accounts
shall all be Eligible Accounts; (b) such conveyance will not result in the
occurrence of an Amortization Event; and (c) such conveyance shall not have been
made in contemplation of an Insolvency Event with respect to the Seller or
Household Bank. New Accounts and Aggregate Addition Accounts are collectively
referred to herein as "Additional Accounts".
Any Participation Interests to be included as Trust Assets or any Eligible
Accounts, other than New Accounts, to be included as Accounts, are collectively
referred to herein as an "Aggregate Addition". "Eligible Account" means a
revolving credit card account owned by Household Bank and its successors and
assigns and/or any transferee of the Accounts from such bank or any other
originator of Accounts which enters into a receivables purchase agreement with
the Seller or any additional Seller which, as of the respective date of
designation, is in existence and maintained by Household Bank or such
successors, transferees or originator, is payable in United States dollars, has
a cardholder whose address is in the United States or its territories or
possessions, has a cardholder who has not been identified as being involved in
any voluntary or involuntary bankruptcy proceeding, has not been identified as
an account with respect to which the related card has been lost or stolen, has
not been sold or pledged to any other party except for any transferee referred
to above, does not have receivables which have been sold or pledged to any other
party; and with respect to Additional Accounts, certain other accounts which
shall have satisfied the Rating Agency Condition.
ALLOCATIONS. To the extent provided in any Supplement, or any amendment to the
Pooling and Servicing Agreement, portions of the Receivables or Participation
Interests conveyed to the Trust and all collections received with respect
thereto may be allocated to one or more Series or Groups as long as the Rating
Agency Condition shall have been satisfied with respect to such allocation and
the Servicer shall have delivered an officer's certificate to the Trustee to the
effect that the Servicer reasonably believes such allocation will not have an
Adverse Effect.
THE CREDIT CARD BUSINESS OF HOUSEHOLD BANK (SB), N.A.
GENERAL
Pursuant to the Bank Purchase Agreement, Household Bank (or Household Bank,
f.s.b., as its predecessor in interest under the Bank Purchase Agreement) has
transferred and Household Bank will transfer to the Seller, and the Seller in
turn has transferred and will transfer to the Trust pursuant to the Pooling and
Servicing Agreement, the Receivables which have or will be generated from
transactions made by holders of certain VISA and MasterCard credit card
accounts. Accounts are serviced by Household Credit Services, Inc. primarily
from its facilities in Salinas, California, Las Vegas, Nevada and Chesapeake,
Virginia.
All accounts are scored each month with a behavioral scoring system that
predicts the likelihood of serious future delinquency based on the account's
previous history. Household Bank uses behavioral scoring to manage credit lines,
authorizations, collections and card reissuance.
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<PAGE> 33
The VISA and MasterCard credit card accounts held or to be held by
Household Bank are or will be principally generated through: (i) the mailing of
preapproved applications directly to prospective cardholders by Household Bank;
(ii) the request for an application as the result of phone contact or the
availability of applications or brochures for prospective cardholders at various
merchant locations and (iii) magazine inserts.
THE ACCOUNTS
The Accounts currently consist solely of MasterCard credit card accounts
generated under "The GM Card(SM)" program and originated by Household Bank or
its affiliates, Household Bank, f.s.b. and Household Bank (Nevada), National
Association ("HBNV"). In May 1998, HBNV sold certain accounts it had generated
under "The GM Card(SM)" program to Household Bank. The Accounts were issued by
Household Bank or such affiliates in accordance with the underwriting criteria
as explained below.
New account originations under "The GM Card(SM)" program are primarily the
result of direct mail solicitations conducted on a nationwide basis, or in
certain cases targeted to particular states. The Subservicer, on behalf of
Household Bank and such affiliates, obtains the names and addresses of
creditworthy individuals from one or more of the independent national credit
bureaus. These individuals are then credit bureau scored to evaluate credit risk
in accordance with Household Bank's and such affiliates established credit
quality standards. The credit quality standards of HBNV pertaining to the
accounts it sold to Household Bank are substantially the same as those of
Household Bank. Credit bureau scoring is intended to provide a general
indication, based on the information available, of an individual's likelihood to
repay his or her obligations. Based on credit bureau scores, other credit
characteristics such as overall indebtedness levels of the applicant and the
ratio of income to such indebtedness and demographic information, certain
individuals are then selected for solicitation. This selection process attempts
to match these prospects with a product that would be acceptable to that
individual. Therefore, Household Bank and HBNV offer credit cards with different
annual percentage rates and annual fee combinations, enhanced special features
such as bonus points, discounts, extended warranties for products and travel
benefits.
Individuals qualifying for preapproved direct mail solicitation are offered
a credit card through the use of an acceptance certificate similar to
traditional preapproved coupons which are standard in the industry. The
prospective cardholder is required to provide certain information and return the
certificate to the Subservicer. Upon receipt, the Subservicer automatically
requests, in most cases, an updated credit report. The updated credit report
obtained upon response is also credit bureau scored, and the initial credit line
assigned may be adjusted based upon this updated credit bureau risk profile.
When Household Bank receives an application for a credit card that has been
obtained from a sourcing institution, or requested by phone, it reviews such
application for completeness and obtains a credit report and credit bureau score
from an independent national credit bureau on the applicant. The Subservicer, on
behalf of Household Bank, may verify certain 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 bureau score, income and other credit characteristics. The Receivables,
which have been conveyed to the Trust, generally have credit limits ranging from
$250 to $10,000, the majority of non premium accounts being in the $2,000 to
$6,000 range, with premium Accounts generally being assigned credit limits of
$5,000 or more, with the majority at $7,000.
ADDITIONAL ACCOUNTS
Receivables from Additional Accounts, if needed, will be added to the Trust
from accounts originated by Household Bank (or its affiliates) through
preapproved applications or agent bank relationships or affinity relationships.
In addition, Household Bank may purchase additional portfolios of VISA and
MasterCard credit card accounts from other financial institutions. See "Risk
Factors -- Issuance of Additional Series" and "-- Addition of Trust Assets".
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<PAGE> 34
COLLECTION OF DELINQUENT ACCOUNTS
Minimum scheduled payments under the Accounts are generally due 25 days
from the date of such billing statement, and an Account is considered delinquent
(or one payment past due) if the minimum payment required to be made is not
received by the Subservicer within five days after the due date reflected in
that monthly billing statement. In the case of Accounts generated under "The GM
Card(SM)" program, monthly billing statements are prepared by EDS. Late fees for
the Accounts, the Receivables of which have been conveyed to the Trust, are
generally assessed on such Accounts if the minimum monthly payment has not been
made by the due date set forth in the monthly billing statement.
The Subservicer, through its customer account review program, creates a
behavioral score for all accounts to predict the probability of an account
becoming 60 days or more delinquent. Based on the behavioral score and the
account balance, 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 at an early stage that
have a greater probability of experiencing a loss in order to reduce exposure
thereto.
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. Receivables in
any Account will generally be charged-off as uncollectible in accordance with
the credit card guidelines of Household Bank and the Subservicer's customary and
usual policies and procedures for servicing comparable credit card accounts.
Except in limited circumstances, the current policy of the Subservicer is to
charge-off an account at the end of the month in which that account becomes 180
days delinquent. 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, Household Bank will not extend credit to any account that is 30 days
or more delinquent. Additionally, extensions of credit to an account may be
suspended if that account exceeds its maximum established credit limit. The
amount by which an account may exceed its established credit limit is determined
by the behavioral score assigned by the Subservicer to the account. The
Subservicer, on behalf of Household Bank, may, in its sole discretion, enter
into arrangements with delinquent cardholders to extend or otherwise modify
payment schedules; provided, however, that in no event will any such extension
or modification result in negative amortization to the account. The risk
evaluation, servicing, charge-off policies and collection practices discussed
herein are constantly being reviewed and may change over time in accordance with
the business judgment of Household Bank, the Servicer and the Subservicer,
applicable law and guidelines established by governing regulatory authorities.
PORTFOLIO EXPERIENCE
The following tables and the table under "Principal Payment Considerations"
set forth certain experience for each of the periods shown for the Portfolio.
The "Portfolio" includes all credit card accounts, including the Accounts,
generated by Household Bank or Household Bank, f.s.b. under the program known as
"The GM Card(SM)", and includes the GM Card Accounts acquired by Household Bank
from HBNV, but excludes approximately $34 million of GM Card Accounts with
Receivables that were at least 30 days delinquent, which Receivables were sold
in August 1997 and approximately $99 million of GM Card Accounts with
Receivables that were at least 30 days delinquent, which Receivables were sold
in May 1998 during the periods shown in such tables. Not all such accounts have
been designated for inclusion in the Trust. As of the close of business on July
31, 1998, the Accounts constitute substantially all of the Portfolio.
Origination of Accounts with respect to "The GM Card(SM)" program commenced in
September 1992. Information presented below reflects performance of the
Portfolio during the periods indicated. The general increase in personal
bankruptcy filings in the United States has had an impact on the charge-off
experience in the Portfolio. Although the Servicer believes the information on
the Portfolio to be reliable, because various terms of the accounts in the
Portfolio and various policies (including, in certain cases, charge-off
policies) regarding the
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<PAGE> 35
Portfolio may have been modified during this period and because historical
performance may not be indicative of future performance, there can be no
assurance that the actual experience for the Receivables in the future will be
similar to the historical experience set forth below with respect to the
Portfolio. In addition, because the aforementioned Receivables that were at
least 30 days delinquent were sold, the results shown in the following tables
may not be indicative of future performance.
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth the loss and delinquency experience for the
Portfolio for each of the periods shown.
LOSS EXPERIENCE FOR THE PORTFOLIO(1)
IN THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED ----------------------------------------
JUNE 30, 1998(6) 1997(7) 1996 1995
---------------- ------- ---- ----
<S> <C> <C> <C> <C>
Average Receivables Outstanding(2).... $8,131,083 $8,292,107 $8,137,300 $7,034,337
Total Net Charge-offs(3).............. $ 258,684 $ 530,592 $ 408,720 $ 299,088
Total Net Charge-offs as a Percentage
of Average Receivables
Outstanding(4)...................... 6.36%(5) 6.40% 5.02% 4.25%
</TABLE>
- -------------------------
(1) Substantially all information for the Portfolio was derived from reports
prepared by a servicer that is not affiliated with Household Bank or the
Servicer.
(2) Calculated as the average of the monthly beginning and monthly ending
receivables balance.
(3) Net charge-offs include charge-offs of principal and fees net of recoveries
during the periods.
(4) Calculated by dividing the Net Charge-offs by the Average Receivables
Outstanding.
(5) Annualized.
(6) Excludes approximately $99 million of Receivables that were at least 30 days
delinquent sold in May 1998.
(7) Excludes approximately $34 million of Receivables that were at least 30 days
delinquent sold in August 1997.
AVERAGE DELINQUENCIES AS A PERCENTAGE OF THE PORTFOLIO(1)(2)
IN THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
AVERAGE OF AVERAGE OF AVERAGE OF AVERAGE OF
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1998(4) DECEMBER 31, 1997(5) DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------- ----------------------- -----------------------
NUMBER OF DAYS DELINQUENT PERCENTAGE DELINQUENT PERCENTAGE DELINQUENT PERCENTAGE DELINQUENT PERCENTAGE
DELINQUENT AMOUNT (3) AMOUNT (3) AMOUNT (3) AMOUNT (3)
- -------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-29................ $7,751,882 96.12% $7,942,736 95.92% $7,892,764 96.56% $6,874,081 97.01%
30-59............... 98,330 1.22% 106,517 1.29% 94,362 1.15% 72,336 1.02%
60-89............... 68,007 0.84% 75,166 0.91% 63,473 0.78% 46,937 0.66%
90-119.............. 54,349 0.67% 59,409 0.72% 49,276 0.60% 36,891 0.52%
120+................ 92,627 1.15% 96,887 1.17% 74,156 0.91% 55,894 0.79%
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total............... $8,065,195 100.00% $8,280,715 100.00% $8,174,031 100.00% $7,086,139 100.00%
========== ======= ========== ======= ========== ======= ========== =======
</TABLE>
- -------------------------
(1) Average delinquencies are the average of month end delinquent amounts.
(2) Substantially all information for the Portfolio was derived from reports
prepared by a servicer that is not affiliated with Household Bank or the
Servicer.
(3) The percentages are the result of dividing the average of the month end
delinquent amounts during the period by the average of the month end
receivables balances.
35
<PAGE> 36
(4) Excludes approximately $99 million of Receivables that were at least 30 days
delinquent sold in May 1998.
(5) Excludes approximately $34 million of Receivables that were at least 30 days
delinquent sold in August 1997.
REVENUE EXPERIENCE
The revenues for the Portfolio from finance charges and fees billed to
cardholders are set forth in the following table for each of the periods shown.
The historical revenue figures in the table includes 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".
With respect to interest payments, Household Bank is subject to the laws of
the state in which it is located, which is Nevada. In 1981 the Nevada
legislature generally repealed all usury laws. Under the Nevada interest law
pertaining to credit card receivables, parties may agree for the payment of any
rate of interest on money due or to become due on any contract including the
compounding of interest, and for other fees or charges. Prior to 1996, a number
of lawsuits and administrative actions had been filed in several states against
out-of-state banks (both federally-insured state-chartered banks and
federally-insured national banks) which issued credit cards. These actions
challenged various fees and charges (such as late fees, over-the-limit fees,
returned check charges and annual membership fees) assessed against residents of
the states in which such suits were filed, based on restrictions or prohibitions
under such states' laws alleged to be applicable to the out-of-state credit card
issuers. The Supreme Courts of California, Colorado and New Jersey had issued
decisions in such actions. The California and Colorado Supreme Courts opined
that federal law governed late fees and found for the respective defendant
banks, while the New Jersey Supreme Court found that late payment fees are not
interest and that, therefore, state law is not preempted by federal law with
respect to such late fees. On June 3, 1996, the United States Supreme Court
upheld the decision of the California Supreme Court, holding that the late
payment fees in question were "interest" and as such were governed by federal
law, which authorizes national banks to charge out-of-state customers an
interest rate allowed by the bank's home state.
REVENUE EXPERIENCE FOR THE PORTFOLIO(1)
IN THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED ------------------------------------
JUNE 30, 1998 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Average Receivables Outstanding(2)........... $8,131,083 $8,292,107 $8,137,300 $7,034,337
Total Finance Charges and Fees Billed(3)..... $ 630,342 $1,313,988 $1,222,608 $1,094,184
Total Finance Charges and Fees Billed as a
Percentage of Average Receivables
Outstanding(4)............................. 15.50%(5) 15.85% 15.02% 15.55%
</TABLE>
- -------------------------
(1) Substantially all information for the Portfolio was derived from reports
prepared by a servicer that is not affiliated with Household Bank or the
Servicer.
(2) Calculated as the average of the monthly beginning and monthly ending
receivables balance.
(3) Excludes revenue attributable to Interchange and is net of finance charges
accrued on charged-off accounts.
(4) Calculated by dividing the Finance Charges and Fees Billed by the Average
Receivables Outstanding.
(5) Annualized.
36
<PAGE> 37
The revenues for the Portfolio shown in the table above are related to
finance charges, together with fees, billed to holders of the accounts. The
finance charge assessed on most of the premium accounts for purchases of
merchandise and services in the Portfolio is lower than the finance charge
assessed on most of the nonpremium credit card accounts for such purchases,
although there is an annual membership fee on the premium credit card 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 on the accounts in the Portfolio and on whether such
accounts are nonpremium or premium credit card accounts. Accordingly, revenues
will be affected by future changes in the types of charges and fees assessed on
the accounts and on the respective percentages of the receivable balances of
nonpremium and premium credit card accounts. Revenues could be adversely
affected by future changes in the charges and fees assessed by Household Bank
and other factors. Under the Bank Purchase Agreement, Household Bank may change
the terms and provisions of cardmember agreements relating to the Accounts in
any respect (including, without limitation, the calculation of the amount, or
the timing, of charge-offs), so long as any such changes made with respect to a
specific program are made applicable to substantially all of the credit card
accounts subject to such program. Household Bank also covenants that, except as
required by law or as Household Bank shall deem necessary in order for Household
Bank to maintain its credit card business or a program operated by such credit
card business on a competitive basis based on a good faith assessment by
Household Bank of the nature of its competition with respect to its credit card
business or such program, Household Bank will not take any action which will
have the effect of reducing the Portfolio Yield to a level that could reasonably
be expected to cause any Series to experience an amortization event based on the
insufficiency of the Portfolio Yield and, except as required by law, take any
action that would have the effect of reducing the Portfolio Yield to less than
the highest Average Rate for any Group. See "Certain Legal Aspects of the
Receivables -- Consumer Protection Laws", "-- Proposed Legislation" and "The
Pooling and Servicing Agreement -- Collection and Other Servicing Procedures".
Neither the Servicer nor any of its affiliates has any basis to predict how any
future changes in the usage of the accounts by cardholders or in the terms of
accounts may affect the revenue for the Portfolio.
INTERCHANGE
Creditors participating in the VISA USA and MasterCard International
associations receive certain fees ("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. Interchange ranges from approximately 1%
to 2% of the transaction amount. Household Bank will be required, pursuant to
the terms of the Bank Purchase Agreement, and the Seller will be required,
pursuant to the terms of the Pooling and Servicing Agreement, to transfer to the
Trust Interchange attributed to cardholder charges for merchandise and services
in the 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.
THE ACCOUNTS
GENERAL
The Receivables to be conveyed to the Trust arise in the Accounts. The
Accounts currently consist of certain MasterCard accounts generated in
connection with the affinity program with General Motors Corporation under "The
GM Card(SM)" program which meet the eligibility criteria set forth in the
Pooling and Servicing Agreement.
37
<PAGE> 38
Pursuant to the Pooling and Servicing Agreement, the Seller has the right
(subject to certain limitations and conditions) to require Household Bank to
designate, from time to time, additional qualifying VISA and MasterCard consumer
revolving credit card accounts to be included as Accounts and to convey to the
Trust all Receivables of such Additional Accounts, whether such Receivables are
then existing or thereafter created. Household Bank is obligated pursuant to the
Bank Purchase Agreement to designate such qualifying accounts and to convey the
Receivables thereunder, whether such Receivables are then existing or thereafter
created, to the Seller for the Seller's conveyance thereof to the Trust pursuant
to the Pooling and Servicing Agreement. In addition, the Seller will be
obligated under certain circumstances to require Household Bank to designate
Additional Accounts the Receivables of which, whether then existing or
thereafter created, will be conveyed to the Trust. Those Accounts must meet the
eligibility criteria set forth in the Bank Purchase Agreement as of the date
Household Bank designates such Accounts as Additional Accounts. Household Bank
will convey its interest in the Receivables then existing or thereafter created
under such Additional Accounts to the Seller which in turn will convey such
Receivables to the Trust. Under the Pooling and Servicing Agreement, the Seller
also has the right to convey Participation Interests to the Trust subject to the
conditions described in the Pooling and Servicing Agreement. See "The Pooling
and Servicing Agreement -- Additions of Accounts or Participation Interests".
As of each date with respect to which Additional Accounts are designated,
Household Bank represents and warrants to the Seller that the Receivables
generated under the Additional Accounts meet the eligibility requirements set
forth in the Bank Purchase Agreement and the Seller represents and warrants to
the Trust that such Receivables or Participation Interests, if any, meet the
eligibility requirements set forth in the Pooling and Servicing Agreement. See
"The Pooling and Servicing Agreement -- Representations and Warranties" and
"Description of the Bank Purchase Agreement -- Representations and Warranties".
Because the Initial Accounts were designated as of the Initial Cut-Off Date and
subsequent Aggregate Addition Accounts have been and may continue to be
designated from time to time, there can be no assurance that all of such
Accounts will continue to meet the eligibility requirements as of any Series
issuance date, including the Issuance Date.
Subject to certain limitations and restrictions, the Seller may also
designate certain Accounts or Participation Interests, if any, for removal from
the Trust, in which case such Participation Interests or the Receivables of the
Removed Accounts will be reassigned to the Seller. Throughout the term of the
Trust, the Receivables in the Trust will consist of Receivables generated under
the Initial Accounts and include Participation Interests, if any, and the
Receivables generated under Additional Accounts but not the Receivables
generated under Removed Accounts or removed Participation Interests.
As of the close of business on July 31, 1998, the Receivables pertaining to
the Accounts had an average principal balance of $1,071, and the Accounts had an
average credit limit of $6,650 and a weighted average age of approximately 55
months. The average total Receivable balance as a percentage of the average
credit limit with respect to such Accounts was 16.4% as of the close of business
on July 31, 1998. Approximately 12.9%, 7.4%, 7.2%, 6.9% and 5.5% of the
Receivables as of the close of business on July 31, 1998 relate to cardholders
having billing addresses in California, New York, Michigan, Texas and Florida,
respectively, and no other state has more than 5% of the Receivables. As of the
close of business on July 31, 1998, the Receivable balance of the nonpremium and
premium Accounts as a percentage of the total Receivable balance of the Accounts
was approximately 80.6% and 19.4%, respectively.
As of the close of business on July 31, 1998, 6,974,784 Accounts
representing $7,381,587,811 or 96.5% of the total Receivables outstanding were
current or less than 30 days delinquent, and 59,853 Accounts representing
$268,862,755 or 3.5% of the total Receivables outstanding were greater than 29
days delinquent as reflected on the Subservicer's collection system. The
Receivables currently in the Trust were generated under Accounts that were
originated in 1992 through 1998. There can be no assurance that such Accounts
will maintain such level of performance or will perform in a manner similar to
the other VISA and MasterCard accounts serviced by the Servicer.
38
<PAGE> 39
The following tables summarize the Accounts by various criteria as of the
close of business on July 31, 1998 for such Accounts. References to Receivables
Outstanding in the following tables include Finance Charge and Administrative
Receivables and Principal Receivables in such Accounts. Because the composition
of the Accounts may change in the future, these tables are not necessarily
indicative of the future composition of the Accounts.
COMPOSITION OF ACCOUNTS
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT BALANCE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
--------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Less than or equal to $1,000.00............... 5,219,314 74.19% $ 658,647,701 8.61%
$1,000.01 to $2,000.00........................ 599,970 8.53% 869,020,007 11.36%
$2,000.01 to $3,000.00........................ 351,202 4.99% 876,405,028 11.46%
$3,000.01 to $4,000.00........................ 221,659 3.15% 773,069,204 10.10%
$4,000.01 to $5,000.00........................ 169,068 2.40% 762,679,047 9.97%
$5,000.01 to $6,000.00........................ 117,095 1.66% 641,508,167 8.39%
$6,000.01 to $7,000.00........................ 89,114 1.27% 580,285,852 7.58%
$7,000.01 to $8,000.00........................ 72,825 1.04% 545,752,204 7.13%
$8,000.01 to $9,000.00........................ 60,344 0.86% 513,786,264 6.72%
$9,000.01 to $10,000.00....................... 59,827 0.85% 569,240,823 7.44%
Over $10,000.00............................... 74,219 1.06% 860,056,269 11.24%
--------- ------- -------------- -------
Total.................................... 7,034,637 100.00% $7,650,450,566 100.00%
========= ======= ============== =======
</TABLE>
COMPOSITION OF ACCOUNTS BY CREDIT LIMIT
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
CREDIT LIMIT ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Less than or equal to $1,000.00............... 410,154 5.83% $ 73,918,063 0.97%
$1,000.01 to $2,000.00........................ 240,038 3.41% 149,973,500 1.96%
$2,000.01 to $3,000.00........................ 655,371 9.32% 388,147,947 5.07%
$3,000.01 to $4,000.00........................ 266,205 3.78% 290,095,925 3.79%
$4,000.01 to $5,000.00........................ 1,008,506 14.34% 616,171,676 8.05%
$5,000.01 to $6,000.00........................ 915,699 13.02% 616,817,485 8.06%
$6,000.01 to $7,000.00........................ 869,506 12.36% 726,823,960 9.50%
$7,000.01 to $8,000.00........................ 708,440 10.07% 742,993,694 9.71%
$8,000.01 to $9,000.00........................ 368,423 5.24% 599,294,882 7.83%
$9,000.01 to $10,000.00....................... 678,954 9.65% 1,048,918,785 13.71%
Over $10,000.00............................... 913,341 12.98% 2,397,294,649 31.34%
--------- ------- -------------- -------
Total.................................... 7,034,637 100.00% $7,650,450,566 100.00%
========= ======= ============== =======
</TABLE>
COMPOSITION OF ACCOUNTS BY AGE
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
AGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
--- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Less than or equal to 24 months............... 1,124,761 15.99% $ 721,736,478 9.43%
Over 24 months to 48 months................... 1,453,744 20.67% 1,338,060,700 17.49%
Over 48 months................................ 4,456,132 63.35% 5,590,653,387 73.08%
--------- ------- -------------- -------
Total.................................... 7,034,637 100.00% $7,650,450,566 100.00%
========= ======= ============== =======
Weighted Average Age (Months)................. 55
</TABLE>
39
<PAGE> 40
BILLING AND PAYMENTS
General. The Accounts, which have fixed and variable annual percentage
rates, are governed by various cardmember agreements and disclosure statements
and have different billing and payment structures, including varying fees,
depending on the type of account. Each cardmember agreement provides that,
subject to applicable law, Household 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, Household Bank will provide prior
written notice before implementation of any such change to the terms and
conditions of a cardmember's agreement. There can be no assurance that the
finance charges, fees and other charges discussed herein (including minimum
monthly periodic rates) will remain at current levels in the future.
Monthly billing statements for the Accounts are sent to the cardholder at
the end of each billing cycle generally within five business days after the
cycle date assigned to such Account by the Subservicer. Currently, the
Subservicer has cycle dates corresponding to twenty-three cycle days within each
calendar month. The monthly billing statement reflects all purchases, cash
advances, administrative charges, if applicable (such as currency conversion
charges, late charges, returned payment charges, and copying charges), annual
fees, if any, credit insurance charges and finance charges incurred by the
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
Household Bank, the holder of a nonpremium Account must, under most of the
cardmember agreements, make a minimum payment equal to $10 (or, if the new
balance is less than $10, the new balance) or 2.0% of the new balance as it
appears on the monthly statement, whichever is greater, plus the greater of (i)
any past due amounts, or (ii) the amount by which the new balance exceeds the
established credit limit for the account.
Each holder of a premium Account is required, under most of the cardmember
agreements, unless a payment holiday is granted by Household Bank, to make a
minimum payment each month equal to either 2.0% of the new balance reflected on
the monthly statement (depending on the cardmember agreement) or $15 (or the
amount of the new balance if less than $15), whichever is greater, plus the
greater of (i) any past due amounts, or (ii) the amount by which the new balance
exceeds the established credit limit for the account.
Household Bank may offer qualified holders of a premium or nonpremium VISA
or MasterCard account the option to enjoy a payment holiday (i.e., the
opportunity to withhold the remittance of any minimum payment on their account)
for a particular billing cycle. Monthly periodic finance charges in connection
with a payment holiday 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. The effect of a payment holiday is to
increase the yield on the Receivables on a billed basis and to decrease the rate
of payments of Finance Charge and Administrative Receivables and Principal
Receivables during the billing cycles for which the offer applies.
Finance Charges. Periodic finance charges are computed as follows: (i) the
"average daily balance" is multiplied by (ii) the Daily Periodic Rate. To obtain
the average daily balance, all Daily Balances (as described below) for the
billing cycle are aggregated. The daily balance for an Account (the "Daily
Balance") is computed as its beginning balance adjusted by (x) 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 (y) subtracting any
payments and credits. The Daily Periodic Rate is 1/365 of the sum of the Prime
Rate plus (a) 10.4 percent for a nonpremium account and (b) for a premium
account plus (i) 10.4 percentage points for accounts with an average daily
balance less than $2,500 and (ii) 7.4 percentage points for accounts with
average daily balances of $2,500 or greater. The minimum Daily Periodic Rate for
nonpremium Accounts is generally .046% (corresponding to a 16.9% annual
percentage rate). The minimum Daily Periodic Rate for premium Accounts with an
average
40
<PAGE> 41
daily balance under $2,500 is generally .046% (corresponding to a 16.9% annual
percentage rate) while those with an average daily balance of $2,500 or greater
generally have a minimum Daily Periodic Rate of .038% (corresponding to a 13.9%
annual percentage rate). Household Bank has and may again offer special
marketing rates.
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 purchases
for merchandise or services made during a billing cycle. Cash advances, however,
are not entitled to any grace period and are assessed finance charges from the
date of the transaction. Most Accounts provide that for each billing cycle in
which a finance charge is payable, the finance charge will be at least 50 cents.
Some Accounts have a cash advance fee finance charge equal to 3.0% of the cash
advance, with a minimum fee of $3 or, if obtained through a convenience check, a
cash advance fee finance charge equal to 1.0% of the cash advance, with a
minimum fee of $1; provided that there are generally no minimum fees charged for
cash advances obtained through balance transfer checks in addition to the cash
advance fee finance charges payable thereon.
Fees and Charges. Accounts may be assessed administrative charges which may
include (a) late charges of $29 if the required minimum payment on the account
is not received on its due date shown on the monthly billing statement, (b)
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, (c) overlimit charges of $29 if the cardholder exceeds the
credit limit and (d) reasonable copying fees if a request is made for duplicate
statements, checks or other documents. In addition, the premium Accounts
generally have a $39 non-refundable annual membership fee.
Payments. Payments to Household Bank by holders of the Accounts are
processed by the Subservicer and generally applied in the following order: (i)
to finance charges, (ii) to fees, (iii) to promotional cash advances, (iv) to
promotional purchase transactions, (v) to purchase transactions, and (vi) to
cash advances.
THE SELLER
The Seller, Household Affinity Funding Corporation, was incorporated under
the laws of the State of Delaware on April 27, 1993 and was a special purpose
subsidiary of Household Bank, f.s.b. Effective January 1995, the Seller became a
wholly owned subsidiary of Household Bank. The Seller 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 such
purposes. Neither Household Bank nor the Seller's board of directors intends to
change the business purpose of the Seller. The Seller has its principal office
located at 1111 Town Center Drive, Las Vegas, Nevada 89134 (telephone (702)
243-1240).
HOUSEHOLD BANK (SB), N.A.
Household Bank, located in Las Vegas, Nevada, was chartered as a
wholly-owned operating subsidiary of Household Bank, f.s.b. on December 1, 1993
and continues to be a wholly-owned operating subsidiary of Household Bank,
f.s.b. Household Bank is principally a nationwide credit card bank offering
MasterCard credit cards and is eligible to offer VISA credit cards. The
principal executive office of Household Bank is located at 1111 Town Center
Drive, Las Vegas, Nevada 89134 (telephone (702) 222-4001).
THE SERVICER
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. ("Household International").
The Servicer and its subsidiaries offer a diversified range of financial
services. The principal products of the Servicer's consumer financial business
is the making of cash loans, including home equity loans, auto
41
<PAGE> 42
finance loans and unsecured loans, including MasterCard, VISA and private label
credit cards to consumers in the United States. The business also includes
purchasing loans of a similar nature from other lenders. Loans are made through
branch lending offices, direct marketing and telemarketing as well as through
dealer networks and retail stores.
In conjunction with its consumer finance operations and where applicable
laws permit, the Servicer makes available to customers credit life, credit
accident, health and disability insurance. Such insurance is generally directly
written by or reinsured with its affiliates.
As of June 30, 1998, the Servicer had approximately $42 billion in total
assets, approximately $36 billion in total liabilities and approximately $6
billion in shareholder's equity.
THE SUBSERVICER
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 to provide origination, servicing and administrative
services to subsidiaries of Household International, principally subsidiaries
that offered or held private label, VISA and MasterCard credit card accounts.
Pursuant to an agreement with Household Bank, the Subservicer provides such
services for all credit card accounts owned by Household Bank. That agreement
establishes certain performance standards, including detailed underwriting
criteria, that are to be followed by the Subservicer on behalf of such entities.
In its capacity of providing certain services in connection with VISA and
MasterCard credit card accounts, the Subservicer has approximately 3,200
employees operating from its facilities primarily located in Salinas,
California, Chesapeake, Virginia, Las Vegas, Nevada, Wood Dale, Illinois and
Prospect Heights, Illinois. The principal executive office of the Subservicer is
located at 2700 Sanders Road, Prospect Heights, Illinois 60070 (telephone (847)
564-5000).
THE TRUST
The Trust was formed pursuant to the Pooling and Servicing Agreement and
prior to formation had no assets or obligations. The Trust will not engage in
any business activity other than acquiring and holding the Receivables and the
other assets of the Trust and proceeds therefrom, issuing investor certificates
and the certificate evidencing the Seller's Interest and any supplemental
certificate thereto and making payments thereon and on certain Series
Enhancements, including the Collateral Amount, and related activities. As a
consequence, the Trust is not expected to have any source of capital other than
the Trust Assets. The Trust will be administered in accordance with the laws of
the State of New York.
The Seller conveyed to the Trust, without recourse, its interests in all
Receivables existing in the Initial Accounts at the close of business on the
Initial Cut-Off Date, and all Receivables arising under such Accounts
thereafter, in exchange for the net cash proceeds from the sale of a Series of
investor certificates plus a certificate representing the Seller's Interest. In
addition, the Seller has conveyed and may convey from time to time to the Trust,
without recourse, its interests in all Receivables existing in certain
Additional Accounts and Participation Interests, if any, at the close of
business on each applicable date of designation thereof. The Trust Assets will
consist of the Receivables and any Participation Interests conveyed to the
Trust, all monies due or to become due thereunder, the proceeds of the
Receivables, all monies on deposit in certain accounts maintained for the
benefit of the investor certificateholders, including the Special Funding
Account, (and also including each of the Cash Collateral Account, the Principal
Funding Account and the Reserve Account for the benefit of the Investor
Certificateholders), the Preferred Stock and the right to receive Recoveries and
Interchange allocable to the Trust for the benefit of the Investor
Certificateholders. The Class A Certificates will have rights to the Principal
Funding Account, the Reserve Account and the Cash Collateral Account and certain
distributions with respect to the Collateral Invested Amount prior to the rights
of the Class B Certificateholders. Pursuant to the Bank Purchase Agreement, the
Seller will have the right (subject to certain limitations and conditions) and
in some circumstances under the Pooling and Servicing Agreement will be
obligated, to require Household Bank to designate from time to time Additional
Accounts to be included as Accounts and the Seller will convey to the Trust,
pursuant to the Pooling and Servicing
42
<PAGE> 43
Agreement, its interests in all Receivables of such Additional Accounts or
Participation Interests. Under the Pooling and Servicing Agreement, the Seller
may convey Participation Interests to the Trust. See "The Pooling and Servicing
Agreement -- Additions of Accounts or Participation Interests". In addition, the
Seller may, but is not obligated to designate, from time to time, Participation
Interests or Accounts, the Receivables of which are to be removed from the
Trust. See "The Pooling and Servicing Agreement -- Removal of Accounts".
Undivided interests in the Trust Assets will be allocated among the Class A
Interest, the Class B Interest, the Seller's Interest and the interests of
investor certificateholders of other Series and may be allocated to any Series
Enhancement, including the Collateral Amount.
USE OF PROCEEDS
Net proceeds from the sale of the Investor Certificates will be used by the
Trust to reduce the Seller's Interest. Such reduction, and the issuance of the
Investor Certificates, will result in a corresponding increase to the amount of
collections of Principal Receivables and Finance Charge and Administrative
Receivables allocable to Investor Certificateholders and a corresponding
decrease in the amount of such collections allocable to the Seller. The Seller
will use such proceeds for general corporate purposes, including the repayment
of intercompany loans from its affiliates.
PRINCIPAL PAYMENT CONSIDERATIONS
Unless an Amortization Event has occurred and the Early Amortization Period
has commenced (See "Description of the Investor Certificates -- Amortization
Event"), the Class A Certificateholders will not begin to receive payments of
principal until the Series 1998-1 Expected Final Payment Date. The Class B
Certificateholders will not begin to receive payments of principal until the
final principal payment, as described herein, on the Class A Certificates has
been made.
Unless an Early Amortization Period shall have commenced, on each
Distribution Date during the Controlled Accumulation Period, amounts equal to
the least of (a) Available Investor Principal Collections (as defined herein) on
deposit in the Collection Account with respect to such Distribution Date, (b)
the Controlled Deposit Amount, which is equal to the sum of the Controlled
Accumulation Amount for such Distribution Date and any deficit controlled
accumulation amount arising from prior Distribution Dates and (c) the sum of the
Class A Adjusted Invested Amount and the Class B Adjusted Invested Amount will
be deposited in the Principal Funding Account for the Investor
Certificateholders to be held by the Trustee until the aggregate amount on
deposit in the Principal Funding Account equals the sum of the Class A Invested
Amount and the Class B Invested Amount. See "Description of the Investor
Certificates -- Principal". Although it is anticipated that collections of
Principal Receivables will be available on each Distribution Date during the
Controlled Accumulation Period to make a deposit of the Controlled Deposit
Amount, no assurance can be given that this will actually occur or that there
will be a sufficient amount on deposit in the Principal Funding Account to pay
the Investor Certificateholders the Class A Invested Amount and the Class B
Invested Amount in full on the Series 1998-1 Expected Final Payment Date. Any
amounts deposited into the Principal Funding Account will not be considered as
principal payments made to the Investor Certificateholders.
In the event of the occurrence of any Amortization Event, the Early
Amortization Period will commence and any amount on deposit in the Principal
Funding Account will be distributed to the Investor Certificateholders on the
Distribution Date immediately following the commencement of the Early
Amortization Period and the Investor Certificateholders will be entitled to
receive Available Investor Principal Collections on each Distribution Date with
respect to such Early Amortization Period as described herein until the earlier
to occur of the Series 1998-1 Termination Date or the date on which the Class A
Invested Amount and the Class B Invested Amount have been paid in full. In
addition, principal will be distributed first to the Class A Certificateholders
and then to the Class B Certificateholders on the Distribution Date following a
sale, disposition or other liquidation of the Receivables as a result of an
Insolvency Event and the commencement
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<PAGE> 44
of the Early Amortization Period as described under "Description of the Investor
Certificates -- Amortization Event" or in connection with termination of the
Trust on the final Termination Date as described under "Description of the
Investor Certificates -- Termination". During the Controlled Accumulation Period
and any Early Amortization Period, payments of principal will also be made to
reduce the Collateral Invested Amount to the Required Collateral Amount. See
"Description of the Investor Certificates -- Principal".
The ability of the Investor Certificateholders to receive payments of
principal on the Series 1998-1 Expected Final Payment Date (i) depends upon
certain things, including the payment rates on the Receivables, the amount of
outstanding Receivables, delinquencies, charge-offs, new borrowings on the
Accounts, the potential issuance by the Trust of additional Series and the
availability of Trust Excess Principal Collections and (ii) may be adversely
affected by the issuance of additional Series with controlled amortization
periods or controlled accumulation periods which coincide in whole or in part
with the Controlled Accumulation Period or the occurrence of an amortization
event with respect to any Series scheduled to be in its revolving period during
the Controlled Accumulation Period. Monthly payment rates on the Receivables may
vary because, among other things, cardholders may fail to make a required
minimum payment, may only make payments as low as the minimum required payment
or may make payments as high as the entire outstanding balance. Monthly payment
rates on the Receivables may also vary due to seasonal purchasing and payment
habits of cardholders, the terms of the Accounts (which are subject to change by
Household Bank) and to changes in any terms of rebate programs in which
cardholders participate. The following table sets forth the highest and lowest
cardholder monthly payment rates for the Portfolio during any month in the
periods shown and the average of the cardholder monthly payment rates for all
months during the periods shown, in each case calculated as a percentage of the
total beginning account balances for such month. Monthly payment rates reflected
in the table include amounts which would be deemed payments of Principal
Receivables or Finance Charge and Administrative Receivables with respect to the
Accounts. In addition, the amount of outstanding Receivables and the rates of
payments, delinquencies, charge-offs and new borrowings on the Accounts depend
on a variety of factors including seasonal variations, the availability of other
sources of credit, general economic conditions, tax laws, consumer spending and
borrowing patterns, terms of rebate programs, and the terms of the Accounts
(which are subject to change by Household Bank). See "The Credit Card Business
of Household Bank (SB), N.A. -- Portfolio Experience". The Seller cannot
predict, and no assurance can be given, as to the cardholder monthly payment
rates that will actually occur in any future period, as to the actual rate of
payment of principal of the Investor Certificates or whether the terms of any
subsequently issued Series might have an impact on the amount or timing of any
such payment of principal. See "Risk Factors -- Generation of Additional
Receivables" and "-- Dependency on Cardholder Repayments" and "Description of
the Investor Certificates -- Reallocation of Trust Excess Principal
Collections". There can be no assurance that collections of Principal
Receivables with respect to the Trust portfolio, and thus the rate at which the
Investor Certificateholders could expect to receive payments of principal on
their Series 1998-1 Certificates during any Early Amortization Period or the
rate at which the Principal Funding Account could be funded during the
Controlled Accumulation Period or any Early Accumulation Period, will be similar
to the historical experience set forth in the following table. As described
under "Description of the Investor Certificates -- Principal", the Seller may
shorten the Controlled Accumulation Period and, in such event, there can be no
assurance that there will be sufficient time to accumulate all amounts necessary
to pay the Class A Invested Amount and the Class B Invested Amount on the Series
1998-1 Expected Final Payment Date. In addition, the Trust, as a master trust,
may issue additional Series from time to time, and there can be no assurance
that the terms of any such Series might not have an impact on the timing or
amount of payments received by the Investor Certificateholders. Further, if the
commencement of an Early Amortization Period occurs, the average life and
maturity of the Investor Certificates could be significantly reduced or
lengthened.
Due to the reasons set forth above, there can be no assurance that any
deposits will be made in the Special Funding Account, that deposits in the
Principal Funding Account will be made on or prior to the Series 1998-1 Expected
Final Payment Date in an amount equal to the sum of the Class A Invested Amount
and the Class B Invested Amount or that the actual number of months elapsed from
the date of issuance of the Investor Certificates to the Series 1998-1 Expected
Final Payment Date will equal the expected number of
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<PAGE> 45
months. See "Risk Factors -- Generation of Additional Receivables" and "--
Dependency on Cardholder Repayments".
CARDHOLDER MONTHLY PAYMENT RATES FOR THE PORTFOLIO(1)(2)
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED ------------------------------
JUNE 30, 1998 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Lowest Month......................................... 22.71% 21.99% 22.62% 24.29%
Highest Month........................................ 26.85% 27.12% 28.35% 29.08%
Average Monthly Payment Rate(3)...................... 25.24% 25.26% 25.57% 26.74%
</TABLE>
- -------------------------
(1) Payment rates are the percentages resulting from dividing total principal,
finance charges and fees collected in a month by the beginning receivables
balance for such month.
(2) All information for the Portfolio was derived from reports prepared by a
servicer that is not affiliated with Household Bank or the Servicer.
(3) Calculated as the average of the monthly payment rates for the period.
DESCRIPTION OF THE INVESTOR CERTIFICATES
GENERAL
The Investor Certificates will be issued pursuant to the Pooling and
Servicing Agreement and the Series 1998-1 Supplement substantially in the forms
filed as exhibits to the Registration Statement of which this Prospectus is a
part. The Trustee will provide a copy of the Pooling and Servicing Agreement and
the Series 1998-1 Supplement (without exhibits or schedules) to Investor
Certificateholders on written request. The following summary describes certain
terms of the Pooling and Servicing Agreement and the Series 1998-1 Supplement
and is qualified in its entirety by reference to the Pooling and Servicing
Agreement and the Series 1998-1 Supplement.
The Class A Certificates and the Class B Certificates will evidence
undivided beneficial interests in the Trust Assets allocated to the Class A
Interest and the Class B Interest, respectively, representing the right to
receive from such Trust Assets funds up to (but not in excess of) the amounts
required to make payments of interest and principal in the manner described
below.
The Investor Certificates will initially be represented by one or more
Class A Certificates and one or more Class B Certificates registered in the name
of the nominee of DTC (together with any successor depository selected by the
Seller, the "Depository"), except as set forth below. The Investor Certificates
will be available for purchase in minimum denominations of $1,000 and integral
multiples thereof in book-entry form. Each $1,000 principal amount of Class A
Certificates will represent 1/844,000 of the Class A Interest and each $1,000
principal amount of Class B Certificates will represent 1/46,100 of the Class B
Interest. The Seller has been informed by DTC that DTC's nominee will be Cede.
Accordingly, Cede is expected to be the holder of record of the Class A
Certificates and the Class B Certificates. No Investor Certificateholder will be
entitled to receive a Definitive Certificate representing such person's interest
in the Investor Certificates. Unless and until Definitive Certificates are
issued under the limited circumstances described herein, all references herein
to actions by Class A Certificateholders and/or Class B Certificateholders shall
refer to actions taken by DTC upon instructions from its Participants (as
defined herein), and all references herein to distributions, notices, reports
and statements to Class A or Class B Certificateholders shall refer to
distributions, notices, reports and statements to Cede, as the registered holder
of the Class A Certificates and/or Class B Certificates, for distribution to the
beneficial owners of the Class A Certificates and/or Class B Certificates in
accordance with DTC procedures. See "-- Book-Entry Registration" and "--
Definitive Investor Certificates".
Payments of interest and principal will be made on each related
Distribution Date to the Investor Certificateholders in whose names the Class A
Certificates and the Class B Certificates, as the case may be,
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<PAGE> 46
were registered on the last day of the calendar month preceding such
Distribution Date, unless otherwise specified in a Supplement (each, a "Record
Date").
INTEREST
Interest will accrue on the unpaid principal amount of the Class A
Certificates and the Class B Certificates during each Interest Period at the
Class A Certificate Rate and the Class B Certificate Rate, respectively. Except
as otherwise provided herein, interest will be distributed to the Investor
Certificateholders monthly on each Distribution Date commencing October 15, 1998
and on each Distribution Date thereafter in an amount equal to the product of
the applicable Class A or Class B Certificate Rate and with respect to the Class
A Certificates the applicable unpaid principal amount and with respect to the
Class B Certificates, the Class B Invested Amount. Interest for the Investor
Certificates will be calculated on the basis of the actual number of days in the
related Interest Period and a 360-day year, but for purposes of calculating the
interest payable with respect to the first Interest Period, interest will accrue
from and including the Issuance Date to but excluding October 15, 1998.
The Class A Certificate Rate from and including September 29, 1998 to and
excluding October 15, 1998 and with respect to each related Interest Period
thereafter will be at the rate of LIBOR plus .12% per annum. The Class B
Certificate Rate from and including September 29, 1998 to and excluding October
15, 1998 and with respect to each related Interest Period thereafter will be at
the rate of LIBOR plus .32% per annum. For the purpose of calculating the rate
for the Investor Certificates and for the Collateral Interest Payment, "LIBOR"
means the per annum rate for deposits in United States dollars for a period of
one month which appears on Telerate Page 3750 as of 11:00 a.m., London time, on
the second London business day prior to the commencement of an Interest Period
(or the second London business day prior to the Issuance Date in the case of the
first Interest Period). If such rate does not appear on Telerate Page 3750 on
such day, the rate will be determined on the basis of the rates at which
deposits in United States dollars are offered by four major reference banks in
the London interbank market selected by the Servicer at approximately 11:00
a.m., London time, on such day to prime banks in the London interbank market for
a period of one month commencing on that day. The Servicer will request the
principal London office of each of such reference banks to provide a quotation
of its rate. If at least two such quotations are provided, the rate for that day
will be the arithmetic mean of the quotations. If fewer than two quotations are
provided as requested, the rate for that day will be the arithmetic mean of the
rates quoted by two or more major banks in New York City, selected by the
Servicer in its sole discretion, 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 period of one month. The rate will be calculated on the basis of the
actual number of days in the period and a 360-day year.
PRINCIPAL
No principal payments will be made to the Class A Certificateholders until
the earlier to occur of the Series 1998-1 Expected Final Payment Date and the
commencement of an Early Amortization Period. No Principal Payments will be made
to the Class B Certificateholders until the final principal payment has been
made to the Class A Certificateholders. No principal payments will be made in
respect of the Collateral Invested Amount (other than deposits to the Cash
Collateral Account and payments with respect to reductions in the Required
Collateral Amount) until the final principal payment has been made to the Class
A Certificateholders and the Class B Certificateholders.
On each Distribution Date during the Revolving Period, unless an
Amortization Event shall have occurred or a reduction in the Required Collateral
Amount shall have occurred, collections of Principal Receivables allocable to
the Certificateholders' Interest and the Collateral Invested Amount will,
subject to certain limitations, including the reallocation of any Subordinated
Principal Collections with respect to the related Due Period to pay the Class A
Required Amount and the Class B Required Amount, be paid to the Seller to
purchase additional Receivables in order to maintain the Invested Amount or,
under certain circumstances at the Seller's option, be deposited in the Special
Funding Account as described under "-- Special Funding Account". If a reduction
in the Required Collateral Amount shall have occurred,
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<PAGE> 47
collections of Principal Receivables allocable to the Certificateholders'
Interest and the Collateral Invested Amount will be applied to reduce the
Collateral Amount to the Required Collateral Amount.
During the Controlled Accumulation Period on or prior to the Series 1998-1
Expected Final Payment Date, collections of Principal Receivables allocable to
the Certificateholders' Interest, plus certain other amounts will no longer be
paid to the Seller as described above but instead will, unless an Amortization
Event shall have occurred and the Early Amortization Period shall have
commenced, be deposited in the Principal Funding Account as described below. In
addition, the Seller may, under certain circumstances during the Controlled
Accumulation Period, deposit collections of Principal Receivables in an amount
equal to the excess, if any, of the amount of such collections deposited in the
Principal Funding Account in the Special Funding Account to the extent described
under "-- Special Funding Account". On the Series 1998-1 Expected Final Payment
Date any amounts on deposit in the Principal Funding Account will be distributed
first to the Class A Certificateholders in an amount not to exceed the Class A
Invested Amount and, if there is any remaining amount then on deposit in the
Principal Funding Account, then to the Class B Certificateholders in an amount
not to exceed the Class B Invested Amount. In addition, the Seller may, under
certain circumstances, deposit such collections in the Special Funding Account
as described under "-- Special Funding Account".
On each Distribution Date with respect to the Controlled Accumulation
Period, unless a reduction in the Required Collateral Amount shall have
occurred, the Trustee will, subject to certain limitations, including the
reallocation of any Subordinated Principal Collections with respect to the
related Due Period to pay the Class A Required Amount and the Class B Required
Amount, deposit collections of Principal Receivables allocable to the Invested
Amount in the Principal Funding Account in an amount equal to the least of (a)
Available Investor Principal Collections on deposit in the Collection Account
with respect to such Distribution Date, (b) the Controlled Deposit Amount for
such Distribution Date and (c) the sum of the Class A Adjusted Invested Amount
and the Class B Adjusted Invested Amount, until the amount on deposit in the
Principal Funding Account equals the sum of the Class A Invested Amount and the
Class B Invested Amount.
If any Amortization Event shall have occurred during the Controlled
Accumulation Period, the Early Amortization Period will commence and any amount
on deposit in the Principal Funding Account will be distributed on the first
Distribution Date with respect to such Early Amortization Period first to the
Class A Certificateholders in an amount not to exceed the Class A Invested
Amount and, if there is any remaining amount then on deposit in the Principal
Funding Account, to the Class B Certificateholders in an amount not to exceed
the Class B Invested Amount.
Unless an Amortization Event shall have occurred, the Controlled
Accumulation Period will commence at the close of business on the last business
day of August 2000; provided, however, that the date on which the Controlled
Accumulation Period actually commences may be delayed if the Controlled
Accumulation Period Length (as defined below) is less than 12 Due Periods.
Beginning on the Determination Date immediately preceding the August 2000
Distribution Date, and on each Determination Date thereafter until the
Controlled Accumulation Period or any Early Amortization Period actually
commences, the Servicer will determine the "Controlled Accumulation Period
Length", which will be at least the number of whole Due Periods expected to be
required to fund the Principal Funding Account in an amount at least equal to
the sum of the initial Class A Invested Amount and the initial Class B Invested
Amount by the Series 1998-1 Expected Final Payment Date, based on the amount of
collections of Principal Receivables expected to be available to the Investor
Certificateholders; provided, however, that the Controlled Accumulation Period
Length will not be less than one Due Period. If the Controlled Accumulation
Period Length is less than twelve months, the Controlled Accumulation Period may
commence later than the close of business on the last business day of August
2000, and the number of months in the Controlled Accumulation Period will be
equal to the Controlled Accumulation Period Length; provided that, subject to
the conditions set forth herein, the commencement of the Controlled Accumulation
Period may be delayed to no later than the close of business on the last
business day of July 2001. The Controlled Accumulation Period will end upon the
earliest to occur of (x) the commencement of any Early Amortization Period, (y)
the payment in full of the Invested Amount and (z) the Series 1998-1 Termination
Date.
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<PAGE> 48
The "Controlled Deposit Amount" shall mean, for any Distribution Date with
respect to the Controlled Accumulation Period, an amount equal to the sum of the
Controlled Accumulation Amount for such Distribution Date and any existing
deficit controlled accumulation amount arising from prior Distribution Dates.
The "Controlled Accumulation Amount" shall mean, for any Distribution Date with
respect to a Due Period during the Controlled Accumulation Period, $74,175,000;
provided, however, that if the Controlled Accumulation Period Length is
determined to be less than twelve months, the Controlled Accumulation Amount for
each Distribution Date with respect to the Controlled Accumulation Period will
be not greater than the product of (i) the excess of (a) the product of the
lowest monthly principal payment rate on the Accounts for the three Due Periods
preceding the date of such calculation (or such lower principal payment rate as
the Servicer may select) and the sum of the initial invested amounts of all
outstanding Series over (b) the sum of all amortizations or accumulations of
collections of Principal Receivables of all Series which have a fixed controlled
accumulation period or fixed controlled amortization period and which are not
scheduled to be in their revolving periods and all Series which are in any early
amortization periods and (ii) a fraction, the numerator of which is equal to the
Invested Amount as of the last day of the Revolving Period and the denominator
of which is equal to the sum of the invested amounts as of the last day of the
revolving periods of all outstanding Series that have controlled accumulation
periods or controlled amortization periods the length of which may be altered in
accordance with the terms of the related Series Supplement and which Series are
not scheduled to be in their revolving periods; provided, further, that the sum
of the Controlled Accumulation Amounts for the period equal to such Controlled
Accumulation Period Length will not be less than the sum of the Class A Invested
Amount and the Class B Invested Amount.
Any collections of Principal Receivables allocable to Investor
Certificateholders during the Revolving Period or the Controlled Accumulation
Period in excess of the amount, if any, required to be deposited in the
Principal Funding Account as described herein and the amount applied to reduce
the Collateral Amount to the Required Collateral Amount (such excess collections
are herein referred to as "Trust Excess Principal Collections") will be
allocated to other Series of investor certificates, paid to the Seller as
described under "-- Reallocation of Trust Excess Principal Collections" or,
under certain circumstances at the Seller's option, be deposited in the Special
Funding Account as described under "-- Special Funding Account". Similarly,
deposits of the Controlled Deposit Amount, to the extent collections of
Principal Receivables allocable to the Certificateholders' Interest are
insufficient to deposit such amount, may be made from such excess collections
from other Series, if any. During the Controlled Accumulation Period until the
final principal payment to the Class B Certificateholders, collections of
Principal Receivables allocable to the Collateral Invested Amount (other than
Subordinated Principal Collections that are used to pay the Class A Required
Amount or the Class B Required Amount and collections used to make payments with
respect to reductions in the Required Collateral Amount) but not deposited in
the Cash Collateral Account for distribution to the Collateral Interest Holder
will generally be paid to the Seller to purchase additional Receivables in order
to maintain the Collateral Invested Amount at its required level. See "Principal
Payment Considerations".
During the Early Amortization Period, Available Investor Principal
Collections, in addition to distributions from the Principal Funding Account as
described above or Special Funding Account as described below, will be
distributed monthly and will be paid to the Investor Certificateholders on each
Distribution Date as follows: (a) to the Class A Certificateholders until the
Class A Invested Amount is paid in full and (b) following the final principal
payment to the Class A Certificateholders, to the Class B Certificateholders
until the Class B Invested Amount is paid in full. During the Early Amortization
Period, collections of Principal Receivables allocable to the Collateral
Invested Amount will be deposited into the Cash Collateral Account. Amounts will
be retained in the Cash Collateral Account to the extent necessary to maintain
the Collateral Amount at its required level and be made available to cover
shortfalls with respect to the Class A Certificates and the Class B
Certificates. See "-- Description of the Cash Collateral Account".
In the event of a sale of the Receivables and an early termination of the
Trust due to an Insolvency Event with respect to the Seller, an optional
repurchase of the Receivables by the Seller, a purchase of the Receivables in
connection with a Servicer Default or a sale of the Receivables in connection
with the final Termination Date of the Trust (each as described under "--
Amortization Event", "-- Optional Repurchase", "-- Servicer Default", and "--
Termination" below), the proceeds of any such sale or repurchase will
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<PAGE> 49
be allocated first to pay amounts due with respect to the Class A Certificates,
then to pay amounts due with respect to the Class B Certificates and then to
reduce the Collateral Invested Amount.
SUBORDINATION
The Class B Invested Amount and the Collateral Amount will be subordinated
to the extent necessary to fund certain payments with respect to the Class A
Certificates and, during any period in which Household Finance Corporation or an
affiliate thereof is no longer the Servicer, the Servicing Fee. In addition, the
Collateral Amount will be subordinated to the extent necessary to fund certain
payments with respect to the Class B Certificates. Certain principal payments
otherwise allocable to the Class B Certificateholders may be reallocated to the
Class A Certificateholders and the Class B Invested Amount may be decreased.
Similarly, certain principal payments otherwise allocable to the Collateral
Invested Amount may be reallocated to the Class A Certificateholders and the
Class B Certificateholders and the Collateral Invested Amount may be decreased.
To the extent the Class B Invested Amount is decreased, the percentage of
collections of Finance Charge and Administrative Receivables allocated to the
Class B Certificateholders in subsequent Due Periods will be reduced. Moreover,
to the extent the amount of such decrease in the Class B Invested Amount is not
reimbursed, the amount of principal distributable to the Class B
Certificateholders from the Collection Account will be reduced. See "--
Allocations" and "-- Reallocation of Cash Flows".
COLLECTION ACCOUNT
The Servicer will establish and maintain, or cause to be established and
maintained for the benefit of investor certificateholders and Series
Enhancements in the name of the Trustee, on behalf of the Trust, an account (the
"Collection Account") with an Eligible Institution. "Eligible Institution" means
the Trustee or any other depository institution organized under the laws of the
United States or any one of the states thereof, which at all times has a
short-term unsecured debt rating of at least A-1+ and P-1 by the applicable
Rating Agency, except that no such rating will be required of an institution
which maintains a trust fund in a fully segregated trust account with the trust
department of such institution as long as such institution maintains the credit
rating of the Rating Agency in one of its generic credit rating categories which
signifies investment grade and is a member of the FDIC. Notwithstanding the
preceding sentence, any institution the appointment of which satisfies the
Rating Agency Condition will be an Eligible Institution. Funds in the Collection
Account generally will be invested in (i) obligations fully guaranteed by the
United States of America, (ii) demand deposits, time deposits or certificates of
deposit of depository institutions or trust companies incorporated under the
laws of the United States of America or any state thereof and subject to
supervision and examination by federal or state banking or depository
institution authorities; provided the short-term debt rating of such depository
institution or trust company shall be in the highest rating category of the
applicable Rating Agency, (iii) commercial paper having, at the time of the
Trust's investment or a contractual commitment to invest, a rating in the
highest rating category of the applicable Rating Agency, (iv) demand deposits,
time deposits and certificates of deposit which are fully insured by the FDIC
having, at the time of the Trust's investment therein, a rating in the highest
rating category of the applicable Rating Agency, (v) bankers' acceptances issued
by any depository institution or trust company described in (ii) above, (vi)
money market funds having, at the time of the Trust's investment therein, a
rating in the highest rating category of the applicable Rating Agency, (vii)
time deposits, other than as referred to in (iv) above (having maturities not
later than the succeeding Distribution Date), with an entity, the commercial
paper of such entity having a credit rating in the highest rating category of
the applicable Rating Agency, (viii) demand notes of Household Finance
Corporation for so long as Household Finance Corporation commercial paper has,
at the time of the Trust's investment therein, a rating in the highest rating
category of the applicable Rating Agency and (ix) any other investment if the
Rating Agency Condition has been satisfied (collectively, "Eligible
Investments"). The Seller does not intend to invest in any Eligible Investment
that would cause the Trust to become an "investment company" within the meaning
of the Investment Company Act of 1940. Any earnings (net of losses and
investment expenses) on funds in the Collection Account will be paid to the
Seller. The Servicer will have the revocable power to withdraw funds from the
Collection Account and to instruct the
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Trustee to make withdrawals and payments from the Collection Account for the
purpose of carrying out its duties under the Pooling and Servicing Agreement and
any Supplement.
SPECIAL FUNDING ACCOUNT
If, on any date the Seller's Participation Amount is greater than zero, the
Seller may elect to deposit any collections of Trust Excess Principal
Collections allocable to a Series or a Group that otherwise would have been
distributed to holders of the Seller's Certificate in an account with an
Eligible Institution established and maintained by the Servicer for the benefit
of the Certificateholders of each Series, in the name of the Trustee, on behalf
of the Trust, and bearing a designation clearly indicating that the funds
deposited therein are held for the benefit of the Certificateholders of each
Series (the "Special Funding Account"). In the event such collections are not
deposited in the Special Funding Account and the Required Minimum Principal
Balance (as defined herein) is not maintained, an Amortization Event may occur
and an Early Amortization Period may commence. In addition, certain deposits of
Trust Excess Principal Collections will, at the option of the Seller, be held in
the Collection Account or deposited in the Special Funding Account if the
Seller's Participation Amount is less than zero. Funds on deposit in the Special
Funding Account (other than the portion constituting Finance Charge and
Administrative Receivables) may be withdrawn and paid to the holders of the
Seller's Certificate at any time to the extent that, after giving effect to such
payment, the Seller's Participation Amount exceeds the Series Required Seller
Amount for all outstanding Series on such date; provided, however, that if any
accumulation period or amortization period commences with respect to any Series,
any funds on deposit in the Special Funding Account (other than the portion
constituting Finance Charge and Administrative Receivables) will be released
therefrom and deposited into the Collection Account and treated as Trust Excess
Principal Collections to the extent needed to make principal payments due to or
for the benefit of the Certificateholders of such Series in accordance with the
terms of each Supplement. See "-- Allocation of Collections; Deposits in
Collection Account" and "-- Reallocation of Trust Excess Principal Collections".
Funds on deposit in the Special Funding Account (other than the portion
constituting Finance Charge and Administrative Receivables) will be invested by
the Trustee, at the direction of the Servicer, in Eligible Investments. No
assurance can be given, however, that any funds will be deposited in the Special
Funding Account. Any earnings (net of losses and investment expenses) earned on
amounts on deposit in the Special Funding Account during any Due Period will be
withdrawn from the Special Funding Account and treated as collections of Finance
Charge and Administrative Receivables with respect to such Due Period. No
assurance can be given, however, that any investment earnings will be earned.
ALLOCATIONS
Allocations among Series. Pursuant to the Pooling and Servicing Agreement,
during each Due Period the Servicer will allocate to each outstanding Series its
Series Allocable Finance Charge and Administrative Collections, Series Allocable
Principal Collections, Series Allocable Defaulted Amount and Series Allocable
Miscellaneous Payments.
"Series Allocable Finance Charge and Administrative Collections",
"Series Allocable Principal Collections" and "Series Allocable Defaulted
Amount" mean, with respect to any Series and for any Due Period, the
product of (a) the Series Allocation Percentage and (b) the amount of
collections of Finance Charge and Administrative Receivables deposited in
the Collection Account, Principal Receivables deposited in the Collection
Account and the amount of all Defaulted Amounts with respect to such Due
Period, respectively.
"Series Allocation Percentage" means, with respect to any Series and
for any Due Period, the percentage equivalent of a fraction, the numerator
of which is the Series Adjusted Invested Amount plus, for purposes of
allocating collections of Principal Receivables to a Series, the Series
Required Seller Amount as of the last day of the immediately preceding Due
Period and the denominator of which is the Trust Adjusted Invested Amount,
plus, for purposes of allocating collections of Principal Receivables to a
Series, the sum of series required seller amounts for all Series as of such
last day.
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"Series Allocable Miscellaneous Payments" means, with respect to any
Series and for any Due Period, the product of (a) the Series Allocation
Percentage and (b) any Unallocated Principal Collections available to be
treated as such as described herein under "-- Reallocation of Trust Excess
Principal Collections".
"Series Adjusted Invested Amount" means, with respect to any Series
and for any Due Period, the initial invested amount of such Series less the
excess, if any, of the cumulative amount of charge-offs allocable to the
invested amount for such Series as of the last day of the immediately
preceding Due Period over the aggregate reimbursement of such charge-offs
as of such last day, or such lesser amount as may be provided in the
Supplement for such Series. With respect to the Series which includes the
Investor Certificates, such amount is the Series 1998-1 Adjusted Invested
Amount (as defined below).
"Series 1998-1 Adjusted Invested Amount" means, with respect to any
Due Period:
(a) during the Revolving Period, the Invested Amount as of the last
day of the immediately preceding Due Period;
(b) during the Controlled Accumulation Period, the amount specified
in clause (a) above as of the close of business on the last day of the
Revolving Period less investor charge-offs allocable to Series 1998-1
thereafter; provided, however, that on any date, at the option of the
Seller, such amount may be reduced below the amount specified for the
previous Due Period to an amount not less than the greater of (i) 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
(ii) an amount that, if used as the numerator of the Principal
Allocation Percentage for the remainder of the Controlled Accumulation
Period, would assure that Available Investor Principal Collections for
Series 1998-1 plus the product of the aggregate amount of the Trust
Excess Principal Collections for all Series during each such Due Period
multiplied by a fraction the numerator of which is the Invested Amount
and the denominator of which is the aggregate invested amounts of all
Series not scheduled to be in their revolving period during such Due
Period would equal at least 125% of the Controlled Accumulation Amount
for each Due Period for so long as the Invested Amount is greater than
zero, assuming for this purpose that (A) the payment rate with respect
to collections of Principal Receivables remains constant at the level of
the immediately preceding Due Period, (B) the total amount of Principal
Receivables and the outstanding principal amount of any Participation
Interests theretofore conveyed to and in the Trust (and the amount on
deposit in the Special Funding Account, if any, other than the portion
constituting Finance Charge and Administrative Receivables) remains
constant at the level existing on the date of such reduction, (C) no
amortization event with respect to any Series will subsequently occur
and (D) no additional Series (other than any Series being issued on the
date of such reduction) will be subsequently issued; and
(c) during any Early Amortization Period, the Invested Amount as of
the last day of the Revolving Period less such investor charge-offs
thereafter or, if less, the amount last determined pursuant to clause
(b) above during the Controlled Accumulation Period.
"Series Required Seller Amount" means an amount equal to 7% of the
Series Adjusted Invested Amount (or such other percentage as shall satisfy
the Rating Agency Condition and upon delivery to the Trustee by the Seller
of a tax opinion).
"Trust Adjusted Invested Amount" means, with respect to any Due
Period, the sum of the Series Adjusted Invested Amounts for all outstanding
Series.
Series 1998-1 Allocations. During each Due Period with respect to the
Revolving Period, the Servicer will allocate among the Class A Interest, the
Class B Interest, the Collateral Invested Amount and the Seller's Interest all
collections on Finance Charge and Administrative Receivables and all collections
on Principal Receivables and the amount of all Defaulted Receivables in
accordance with the Floating Allocation Percentage. The Floating Allocation
Percentage will equal a fraction the numerator of which is the Adjusted Invested
Amount on the last day of the preceding Due Period and the denominator of which
is the product of
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the total amount of Principal Receivables in the Trust (subject to adjustment to
give effect to any designations of Additional Accounts and Removed Accounts),
including any amounts on deposit in the Special Funding Account (other than the
portion constituting Finance Charge and Administrative Receivables) on the last
day of the preceding Due Period and the Series Allocation Percentage. During the
Revolving Period, all Principal Receivables collected which are allocable to the
Certificateholders Interest will be treated as Trust Excess Principal
Collections or distributed to the Seller (except for the portions of such
collections which are Subordinated Principal Collections used to pay the Class A
Required Amount or the Class B Required Amount as described under "--
Reallocation of Cash Flows") or, under certain circumstances at the Seller's
option, be deposited in the Special Funding Account as described under "--
Special Funding Account". During the Controlled Accumulation Period and any
Early Amortization Period, Series Allocable Principal Collections will be
allocated to the Certificateholders' Interest with respect to any Due Period,
based on the percentage equivalent of the product of (1) the ratio which the
Series Adjusted Invested Amount as of the last day of the Revolving Period bears
to the product of (a) the sum of (i) the total amount of Principal Receivables
in the Trust (subject to adjustment to give effect to any designations of
Additional Accounts and Removed Accounts) as of the last day of the immediately
preceding Due Period, plus (ii) the amount, if any, on deposit in the Special
Funding Account (other than the portion constituting Finance Charge and
Administrative Receivables) and (b) the Series Allocation Percentage, on the
last day of such immediately preceding Due Period (such ratio being the
"Principal Allocation Percentage") and (2) the sum of the Class A Invested
Percentage (as defined herein) and the Class B Invested Percentage with respect
to the first day of such accumulation or amortization period. Collections of
Principal Receivables allocated to the Certificateholders' Interest and the
Collateral Interest also include certain collections of Series Allocable
Miscellaneous Payments, Reallocated Investor Finance Charge and Administrative
Collections and Excess Finance Charge and Administrative Collections treated as
Available Investor Principal Collections as described herein (See "--
Distributions from the Collection Account; Allocation of Funds" and "-- Excess
Finance Charge and Administrative Collections").
"Class A Adjusted Invested Amount" for any date means an amount equal
to the Class A Invested Amount less an amount, not to exceed the Class A
Invested Amount, equal to the principal amount, if any, on deposit in the
Principal Funding Account.
"Class A Invested Amount" for any date means an amount equal to the
initial principal balance of the Class A Certificates, minus the amount of
principal payments made to Class A Certificateholders prior to such date
and minus the excess, if any, of the aggregate amount of Class A Investor
Charge-Offs for all Distribution Dates preceding such date over the
aggregate amount of any reimbursements of Class A Investor Charge-Offs for
all Distribution Dates preceding such date and minus the amount of any
reduction in the Class A Invested Amount resulting from any purchase by the
Seller of the Investor Certificates and cancellation thereof prior to such
date.
"Class B Adjusted Invested Amount" for any date means an amount equal
to the Class B Invested Amount less an amount, not to exceed the Class B
Invested Amount, equal to the principal amount, if any, on deposit in the
Principal Funding Account in excess of the Class A Invested Amount on such
date.
"Class B Invested Amount" for any date means an amount equal to (i)
the initial principal balance of the Class B Certificates, minus (ii) the
amount of principal payments made to Class B Certificateholders prior to
such date, minus (iii) the aggregate amount of Class B Investor Charge-Offs
for all prior Distribution Dates, minus (iv) the aggregate amount of
Subordinated Principal Collections other than those allocable to the
Collateral Invested Amount for all prior Distribution Dates which have been
used to fund the Class A Required Amount or the Class B Required Amount
with respect to such Distribution Dates, minus (v) an amount equal to the
aggregate amount by which the Class B Invested Amount has been reduced to
fund the Class A Investor Default Amount on all prior Distribution Dates as
described under "-- Investor Charge-Offs", plus (vi) the sum of (A) the
aggregate amount of Series Allocable Miscellaneous Payments allocated and
available on all prior Distribution Dates to fund the Class B Investor
Default Amount and (B) the aggregate amount of Excess Finance Charge and
Administrative Collections and certain other amounts allocated and
available on all prior Distribution Dates for the purpose of reimbursing
amounts deducted pursuant to the foregoing clauses (iii), (iv) and (v) and
minus
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(vii) the amount of any reduction in the Class B Invested Amount resulting
from any purchase by the Seller of the Investor Certificates and
cancellation thereof prior to such date.
"Collateral Invested Amount" means an amount equal to (i) the initial
Collateral Invested Amount, minus (ii) the aggregate amount of deposits
made to the Cash Collateral Account from Available Investor Principal
Collections, minus (iii) the aggregate amount of Collateral Charge-Offs (as
defined herein) for all prior Distribution Dates, minus (iv) the aggregate
amount of Subordinated Principal Collections allocable to the Collateral
Invested Amount for all prior Distribution Dates which have been used to
fund the Class A Required Amount or the Class B Required Amount, minus (v)
an amount equal to the aggregate amount by which the Collateral Invested
Amount has been reduced to fund the Class A Investor Default Amount and the
Class B Investor Default Amount on all prior Distribution Dates as
described under "-- Investor Charge-Offs", plus (vi) the sum of (A) the
aggregate amount of Series Allocable Miscellaneous Payments allocated and
available on all prior Distribution Dates to fund any Collateral
Charge-Offs and (B) the aggregate amount of Excess Finance Charge and
Administrative Collections and certain other amounts allocated and
available for purposes of reimbursing amounts deducted pursuant to the
foregoing clauses (iii), (iv) and (v) and minus (vii) the amount of any
reduction in the Collateral Invested Amount resulting from any purchase by
the Seller of the Investor Certificates and cancellation thereof prior to
such date; provided, however, that the Collateral Invested Amount may not
be reduced below zero.
"Seller's Percentage", with respect to the Investor Certificates,
means (i) when used with respect to Finance Charge and Administrative
Receivables and Defaulted Receivables and Principal Receivables during the
Revolving Period, 100% minus the Floating Allocation Percentage, and (ii)
when used with respect to Principal Receivables during the Controlled
Accumulation Period or any Early Amortization Period, 100% minus the
Principal Allocation Percentage.
As a result of the Floating Allocation Percentage, collections on Finance
Charge and Administrative Receivables and the portion of Defaulted Receivables
allocated to the Class A and Class B Certificateholders will change each Due
Period based on the relationship of the amount of the Class A Adjusted Invested
Amount, the Class B Adjusted Invested Amount and the Collateral Invested Amount
to the total amount of Principal Receivables on the last day of the immediately
preceding Due Period. Collections on Principal Receivables allocable to the
Class A Interest and Class B Interest each day during the Controlled
Accumulation Period or any Early Amortization Period, however, will generally
not decline as a result of deposits in the Principal Funding Account but will be
subject to the possible reallocation of all or a portion of the collections of
Principal Receivables allocable to the Class B Interest for the benefit of the
Class A Certificateholders as described under "-- Reallocation of Cash Flows".
ALLOCATION OF COLLECTIONS; DEPOSITS IN COLLECTION ACCOUNT
The Servicer, no later than two business days after the processing date,
will deposit all collections received with respect to the Receivables in each
Due Period into the Collection Account, and the Servicer will make the deposits
and payments to the accounts and parties shown below on the date of such
deposit. Notwithstanding the foregoing, for as long as Household Finance
Corporation remains the Servicer under the Pooling and Servicing Agreement and
maintains a rating of P-1 from Moody's Investors Service, Inc. and A-1 from
Standard & Poor's Ratings Group, which is currently the case, the Servicer need
not deposit collections into the Collection Account on the day indicated in the
preceding sentence but may use for its own benefit all such collections until
the related Distribution Date at which time the Servicer will make such deposits
in an amount equal to the net amount of such deposits and withdrawals which
would have been made had the conditions of this sentence not applied. With
respect to the Investor Certificates, if the net amount in respect of Finance
Charge and Administrative Receivables to be deposited into the Collection
Account on any Distribution Date pursuant to the preceding sentence exceeds the
sum of the Class A Interest Payment and Class B Interest Payment for such
Distribution Date, any overdue Class A Interest Payment and Class B Interest
Payment (plus any additional interest accrued on such overdue Class A Interest
Payment and Class B Interest Payment), the Class A Investor Default Amount and
the Class B Investor Default Amount for such Distribution Date, and the
Servicing Fee plus certain amounts payable with respect to the Collateral
Invested Amount, the Servicer may deduct the Servicing Fee and, during the
Revolving Period, the Class A Investor
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Default Amount and the Class B Investor Default Amount (which will be
distributed to the Seller, but not in an amount exceeding the Seller's Interest
in Principal Receivables on such day (after giving effect to any new Receivables
transferred to the Trust on such day)) from the net amount to be deposited into
the Collection Account. In addition, on each Distribution Date with respect to
the Controlled Accumulation Period, the Servicer may deduct the amount of any
Trust Excess Principal Collections not required to cover Principal Shortfalls
(which will be distributed to the Seller, but not in an amount exceeding the
Seller's Interest in Principal Receivables on such day (after giving effect to
any new Receivables transferred to the Trust on such day)) from the net amount
to be deposited into the Collection Account.
On the day any such deposit is made into the Collection Account, the
Servicer will generally withdraw from the Collection Account and pay to the
Seller to the extent not deducted from collections as described above, (i) an
amount equal to the excess, if any, of the aggregate amount of such deposits in
respect of Principal Receivables treated as Trust Excess Principal Collections
for all Series over the aggregate amount of Principal Shortfalls for all Series
and, without duplication, (ii) the aggregate amount of Series Allocable
Principal Collections for all outstanding Series to be paid to the Seller with
respect to such date. Any amounts in respect of Principal Receivables not
distributed to the Seller on any day because the Seller's Participation Amount
does not exceed zero on such day (after giving effect to any Principal
Receivables transferred to the Trust on such day) will, at the option of the
Seller, be held in the Collection Account (the "Unallocated Principal
Collections") or deposited in the Special Funding Account. Any Unallocated
Principal Collections on deposit in the Collection Account will be distributed
to the Seller if the Seller's Participation Amount exceeds zero; provided,
however, that if any accumulation period or amortization period commences with
respect to any Series, any Unallocated Principal Collections on deposit in the
Collection Account shall be treated as "Series Allocable Miscellaneous
Payments". The proceeds of any sale, disposition or liquidation of Receivables
following an Insolvency Event or in connection with the Series 1998-1
Termination Date will also be deposited into the Collection Account immediately
upon receipt.
REALLOCATION OF TRUST EXCESS PRINCIPAL COLLECTIONS
The Servicer will determine for any Due Period the amount of Trust Excess
Principal Collections for all Series. The Servicer will allocate the Trust
Excess Principal Collections from a particular Series and, at the option of the
Seller, certain collections of Principal Receivables allocated to Series
Enhancements (i) to the Seller in order to purchase additional Trust Assets, or
(ii) to cover any principal distributions to investor certificateholders and
Series Enhancements and deposits to principal accumulation accounts for any
Series which are either scheduled or permitted and which have not been covered
out of the investor principal collections and certain other amounts for such
Series ("Principal Shortfalls"). Trust Excess Principal Collections will
generally not be used to cover investor charge-offs for any Series. If Principal
Shortfalls exceed Trust Excess Principal Collections for any Due Period, Trust
Excess Principal Collections will be allocated pro rata among the applicable
Series based on the relative amounts of Principal Shortfalls. To the extent that
Trust Excess Principal Collections exceed Principal Shortfalls, the balance will
be allocated to the Seller, unless the Seller's Interest in Principal
Receivables at such time (after giving effect to any new Receivables transferred
to the Trust) is less than or equal to zero. Any amount not allocated to the
Seller because its interest in Principal Receivables is less than or equal to
zero will, at the option of the Seller, be held in the Collection Account
unallocated as "Unallocated Principal Collections" or deposited in the Special
Funding Account. Once the Seller's Interest in Principal Receivables is greater
than zero such "Unallocated Principal Collections" will be allocated to the
Seller unless an amortization event occurs or any accumulation period (or
amortization period, if applicable) commences for any Series (after which such
"Unallocated Principal Collections" will be treated as a Series Allocable
Miscellaneous Payment). Any amount on deposit in the Special Funding Account
(other than the portion constituting Finance Charge and Administrative
Receivables) will be allocated to the Seller as described under "-- Special
Funding Account".
PRINCIPAL FUNDING ACCOUNT
The Trustee will establish and maintain with an Eligible Institution, in
the name of the Trustee, on behalf of the Trust and for the benefit of the
Investor Certificateholders, a segregated trust account (the "Principal Funding
Account"). During the Controlled Accumulation Period, collections of Principal
Receivables and
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certain other amounts allocable to the Certificateholder's Interest will be
deposited in the Principal Funding Account as described under "-- Principal".
Any amounts deposited in the Principal Funding Account will not be considered as
principal payments made to the Investor Certificateholders.
Unless an Early Amortization Period shall have commenced, all amounts on
deposit in the Principal Funding Account on any Distribution Date (after giving
effect to any deposits to, or withdrawals from, the Principal Funding Account to
be made on such Distribution Date) generally will be invested in any of the
following eligible investments which will automatically mature on or before the
following Distribution Date: (a) direct obligations of, or obligations fully
guaranteed as to timely payment by, the United States of America; (b) demand
deposits, time deposits or certificates of deposit of depository institutions or
trust companies and subject to supervision and examination by federal or state
banking or depository institution authorities; provided that at the time of the
Trust's investment or contractual commitment to invest therein, the short-term
debt rating of such depository institution or trust company shall be in the
highest rating category of the applicable Rating Agency; (c) commercial paper
having, at the time of the Trust's investment or contractual commitment to
invest therein, a rating in the highest rating category of the applicable Rating
Agency; (d) demand deposits, time deposits and certificates of deposit which are
fully insured by the FDIC having, at the time of the Trust's Investment therein,
a rating in the highest rating category of the applicable Rating Agency; (e)
bankers' acceptances issued by any depository institution or trust company
referred to in (b) above; (f) time deposits other than as referred to in clause
(e) above, with an entity the commercial paper of which has a credit rating in
the highest rating category of the applicable Rating Agency or demand notes of
Household Finance Corporation, for as long as the commercial paper of Household
Finance Corporation has, at the time of the Trust's investment in such notes, a
rating in the highest rating category of the applicable Rating Agency; or (g)
any other investment of a type or rating that satisfies the Rating Agency
Condition and the definition of "eligible assets" as defined under Rule
3a-7(b)(1) of the Rules and Regulations promulgated under the Investment Company
Act of 1940. On each Distribution Date in the month following the commencement
of the Controlled Accumulation Period the interest and other investment income
(net of investment expenses and losses) earned on such investments (the
"Principal Funding Investment Proceeds") in an amount not to exceed the Covered
Amount (as defined herein) will be distributed to the Class A Certificateholders
to the extent described herein in item (a) under "-- Distributions from the
Collection Account; Allocation of Funds". Such investment earnings will not be
considered as part of any amount on deposit in the Principal Funding Account. If
such investments with respect to any such Distribution Date yield less than the
Class A Certificate Rate, the Principal Funding Investment Proceeds with respect
to such Distribution Date will be less than the Covered Amount for such
Distribution Date. Any such shortfall may be funded from other amounts on
deposit in the Collection Account and allocable to the Class A
Certificateholders to the extent described herein in item (a) under "--
Distributions from the Collection Account; Allocation of Funds" (including a
withdrawal from the Reserve Account, if necessary, as described below under "--
Reserve Account"). The amount of any deposit in the Reserve Account and
available to the Investor Certificateholders at any time will be limited and
there can be no assurance that sufficient funds will be available to fund any
such shortfall. Any surplus of Principal Funding Investment Proceeds will be
paid to the Seller on each Distribution Date. The "Covered Amount" shall mean
for any Distribution Date with respect to the Controlled Accumulation Period, an
amount equal to the product of (i) a fraction the numerator of which is the
actual number of days in the related Interest Period and the denominator of
which is 360, (ii) the Class A Certificate Rate in effect with respect to such
Interest Period and (iii) the amount deposited into the Principal Funding
Account with respect to the Class A Certificates during the Controlled
Accumulation Period.
RESERVE ACCOUNT
The Trustee shall establish and maintain with an Eligible Institution, in
the name of the Trustee, on behalf of the Trust and for the benefit of the Class
A Certificateholders, a segregated trust account (the "Reserve Account").
Commencing on the Reserve Account Funding Date (as defined below) and on each
Distribution Date prior to the date on which the Reserve Account terminates,
Excess Finance Charge and Administrative Collections allocable to Series 1998-1
(in the order of priority described herein under "-- Excess Finance Charge and
Administrative Collections") will be deposited in the Reserve Account in an
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amount up to the Required Reserve Amount (as defined below). The "Reserve
Account Funding Date" shall be the Distribution Date with respect to the Due
Period which commences three months prior to the Distribution Date with respect
to the first Due Period in the Controlled Accumulation Period or such earlier
date as the Seller may determine. Provided that the Reserve Account has not
terminated, any amount 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 such Distribution Date) will be invested to the following
Distribution Date in certain Eligible Investments, except that all references in
such definition to "rating satisfactory to the Rating Agency" will mean ratings
of not less than A-1 and P-1 for Reserve Account investments prior to the
commencement of the Controlled Accumulation Period and which Eligible
Investments will mature on or before such following Distribution Date. On each
Distribution Date, all interest and earnings (net of losses and investment
expenses) accrued since the preceding Distribution Date on amounts on deposit in
the Reserve Account shall be retained in the Reserve Account to the extent that
the amount on deposit therein is less than the Required Reserve Amount and the
balance of such interest and earnings, if any, will be distributed to the
Seller. The "Required Reserve Amount" for any Distribution Date on or after the
Reserve Account Funding Date will be equal to the product of (x) 0.5% of the
Class A Invested Amount as of the preceding Distribution Date (after giving
effect to all changes therein on such date) or any other amount designated by
the Seller; provided that if such amount is less than 0.5% of the Class A
Invested Amount (after giving effect to all changes therein on such date), the
Rating Agency Condition shall have been satisfied.
On each Distribution Date on or after the Reserve Account Funding Date with
respect to the Controlled Accumulation Period on which the Principal Funding
Investment Proceeds are less than the Covered Amount and prior to the first
Distribution Date with respect to any Early Amortization Period, a withdrawal
will be made from the Reserve Account in an amount equal to the lesser of the
amount on deposit in the Reserve Account and the amount by which the Covered
Amount exceeds the Principal Funding Investment Proceeds and distributed to the
Class A Certificateholders in accordance with the terms set forth herein under
item (a) under "-- Distributions from the Collection Account; Allocation of
Funds".
The Reserve Account will be terminated following the earlier to occur of
(a) the termination of the Trust pursuant to the Pooling and Servicing
Agreement, (b) the Series 1998-1 Expected Final Payment Date, (c) the first
Distribution Date following the commencement of any Early Amortization Period
and (d) the day on which the Invested Amount is paid in full. Upon the
termination of the Reserve Account, all amounts on deposit therein (after giving
effect to any withdrawal therefrom on such date as described above) will be
distributed to the Collateral Interest Holder for application in accordance with
the terms of the Collateral Agreement. Any amounts withdrawn and distributed to
the Collateral Interest Holder will not be available for distribution to the
Class A Certificateholders.
REALLOCATION OF CASH FLOWS
On each Determination Date with respect to the Investor Certificates, the
Servicer will determine the Class A Required Amount, which will be equal to the
amount, if any, by which (a) the sum of (i) Class A Interest Payment for such
Distribution Date, (ii) any Class A Interest Payment previously due but not
distributed to the Class A Certificateholders on a prior Distribution Date,
(iii) any additional interest with respect to interest amounts that were due to
the Class A Certificateholders but not paid on a prior Distribution Date, (iv)
the Class A Investor Default Amount, if any, for such Distribution Date and (v)
during any period in which Household Finance Corporation or an affiliate thereof
is no longer the Servicer, the Servicing Fee and overdue Servicing Fees, exceeds
(b) the sum of (A) the product of the Class A Invested Percentage for such
Distribution Date and the Reallocated Investor Finance Charge and Administrative
Collections (as defined herein) for such Distribution Date and (B) the Class A
Principal Funding Account Percentage of the Principal Funding Investment
Proceeds. If the Class A Required Amount is greater than zero, collections
designated as "Excess Finance Charge and Administrative Collections" in "--
Distributions from the Collection Account; Allocation of Funds" ("Excess Finance
Charge and Administrative Collections") (including any investment earnings
available to be treated as collections of Finance Charge and Administrative
Receivables) will be used to pay the Class A Required Amount with respect to
such Distribution Date. If such Excess Finance Charge and Administrative
Collections are insufficient to pay the Class A Required
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Amount, any amounts on deposit in the Cash Collateral Account will be withdrawn
down to zero to pay the Class A Required Amount and if such withdrawal is less
than the Class A Required Amount, Subordinated Principal Collections will be
used to fund the remaining Class A Required Amount.
If Subordinated Principal Collections and withdrawals from the Cash
Collateral Account with respect to any Due Period are insufficient to fund the
remaining Class A Required Amount for such Due Period, the Collateral Invested
Amount will be reduced (but not in excess of the Class A Investor Default
Amount) by the amount of such insufficiency until such time as it has reached
zero and then the Class B Invested Amount, if any, will be reduced (but not in
excess of the Class A Investor Default Amount) to avoid a charge-off with
respect to the Class A Certificates.
Such reductions of the Class B Invested Amount shall thereafter be
reimbursed and the Class B Invested Amount increased on each Distribution Date
by the amount, if any, of Excess Finance Charge and Administrative Collections
and Series Allocable Miscellaneous Payments for such Distribution Date allocated
and available for that purpose. See "-- Excess Finance Charge and Administrative
Collections" and "-- Subordination". When such reductions of the Class B
Invested Amount have been fully reimbursed, reductions of the Collateral Amount
shall be reimbursed and the Collateral Amount increased up to the Required
Collateral Amount in a similar manner.
If collections of Finance Charge and Administrative Receivables allocable
to the Class B Interest for any Due Period are insufficient to pay interest on
the Class B Certificates (including additional interest on unpaid interest) and
the Class B Investor Default Amount (as defined herein), on the related
Distribution Date for such Due Period (such insufficiency being the "Class B
Required Amount"), Excess Finance Charge and Administrative Collections not
required to fund the Class A Required Amount will be applied to fund the Class B
Required Amount. If Excess Finance Charge and Administrative Collections
available with respect to such Due Period and amounts on deposit in the Cash
Collateral Account are less than the Class B Required Amount, Subordinated
Principal Collections allocable to the Collateral Invested Amount for such Due
Period will then be used to fund the remaining Class B Required Amount.
If Subordinated Principal Collections allocable to the Collateral Invested
Amount with respect to any Due Period are insufficient to fund the remaining
Class B Required Amount for such Due Period, then the Collateral Invested Amount
will be reduced (but not in excess of the Class B Investor Default Amount for
such Due Period) by the amount of such insufficiency to avoid a charge-off with
respect to the Class B Certificates.
If the Cash Collateral Account and the Collateral Invested Amount are
reduced to zero, the Class B Invested Amount will be reduced if the Class B
Required Amount for any Due Period exceeds the sum of Excess Finance Charge and
Administrative Collections not required to fund the Class A Required Amount and
Subordinated Principal Collections, if any, allocable to the Collateral Invested
Amount for such Due Period, but not in excess of the Class B Investor Default
Amount for such Due Period, and the Class B Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust. See "Description of the Investor Certificates -- Reallocation of Cash
Flows" and "-- Investor Charge-Offs".
If the Class B Invested Amount is reduced to zero, the Class A Adjusted
Invested Amount will be reduced if the Class A Required Amount for any Due
Period exceeds the sum of Excess Finance Charge and Administrative Collections,
the amount on deposit in the Cash Collateral Account, if any, and Subordinated
Principal Collections, if any, for such Due Period, but not in excess of the
Class A Investor Default Amount for such Due Period, and the Class A
Certificateholders will bear directly the credit and other risks associated with
their undivided interest in the Trust. See "-- Investor Charge-Offs" below.
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT; ALLOCATION OF FUNDS
The Servicer shall apply or shall cause the Trustee to apply the funds
allocated to the Series offered hereby and on deposit in the Collection Account
and Principal Funding Account with respect to each
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Distribution Date to make the following distributions and deposits with respect
to the Investor Certificates for such Distribution Date:
(a) An amount equal to the sum of (A) the product of the Class A
Invested Percentage and Reallocated Investor Finance Charge and
Administrative Collections with respect to such Distribution Date and (B)
with respect to each Distribution Date during the Controlled Accumulation
Period, the Class A Principal Funding Account Percentage (as defined below)
of any amount deposited in a subaccount of the Collection Account
designated therefor will be distributed in the following priority:
(i) an amount equal to the Class A Interest Payment for such
Distribution Date, plus the amount of any Class A Interest Payment
previously due but not distributed to Class A Certificateholders on a
prior Distribution Date, plus any additional interest with respect to
interest amounts that were due but not paid on a prior Distribution
Date, will be held on deposit in the Collection Account for distribution
to the Class A Certificateholders;
(ii) an amount equal to the aggregate Class A Investor Default
Amount for such Distribution Date shall be treated as a portion of
Available Investor Principal Collections;
(iii) an amount equal to the Servicing Fee for such Distribution
Date plus the amount of any Servicing Fee that was due but not paid on a
prior Distribution Date will be distributed to the Servicer (unless such
amount(s) has been previously netted against deposits to the Collection
Account); and
(iv) the balance, if any, will constitute a portion of Excess
Finance Charge and Administrative Collections and will be allocated and
distributed as described below under "-- Excess Finance Charge and
Administrative Collections".
"Class A Invested Percentage" means, with respect to any Distribution
Date, the percentage equivalent of a fraction, the numerator of which is
the Class A Adjusted Invested Amount as of the last day of the second
preceding Due Period and the denominator of which is the Adjusted Invested
Amount as of such last day.
"Class A Principal Funding Account Percentage" means, with respect to
any Distribution Date, a fraction, the numerator of which is equal to the
amount deposited into the Principal Funding Account with respect to the
Class A Certificates during the Controlled Accumulation Period and the
denominator of which is equal to the balance of any principal amount on
deposit in the Principal Funding Account.
(b) An amount equal to the product of the Class B Invested Percentage
and Reallocated Investor Finance Charge and Administrative Collections with
respect to such Distribution Date will be distributed in the following
priority:
(i) an amount equal to the Class B Interest Payment (computed on
the Class B Invested Amount rather than the unpaid principal amount of
the Class B Certificates) for such Distribution Date, plus the amount of
any such Class B Interest Payment previously due but not distributed to
Class B Certificateholders on a prior Distribution Date, plus any
additional interest with respect to interest amounts that were due but
not paid on a prior Distribution Date, will be distributed to the Class
B Certificateholders; and
(ii) the balance, if any, will constitute a portion of Excess
Finance Charge and Administrative Collections and will be allocated and
distributed as described below under "-- Excess Finance Charge and
Administrative Collections".
The term "Class B Invested Percentage" means the percentage equivalent
of a fraction the numerator of which is the Class B Adjusted Invested
Amount as of the last day of the second preceding Due Period, and the
denominator of which is the Adjusted Invested Amount as of such last day.
(c) An amount equal to the product of the Collateral Invested
Percentage and Reallocated Investor Finance Charge and Administrative
Collections with respect to such Distribution Date will constitute a
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<PAGE> 59
portion of Excess Finance Charge and Administrative Collections and will be
allocated and distributed as described below under "-- Excess Finance
Charge and Administrative Collections".
"Collateral Invested Percentage" means the percentage equivalent of a
fraction the numerator of which is the Collateral Invested Amount as of the
last day of the second preceding Due Period, and the denominator of which
is the Adjusted Invested Amount as of such last day.
(d) For each Distribution Date with respect to the Controlled
Accumulation Period, an amount equal to Available Investor Principal
Collections with respect to such Distribution Date will be deposited in the
following priority:
(i) for each Distribution Date with respect to the Controlled
Accumulation Period, an amount equal to the lesser of (A) the Controlled
Deposit Amount and (B) the sum of the Class A Adjusted Invested Amount
and the Class B Adjusted Invested Amount will be deposited in the
Principal Funding Account; and
(ii) for each Distribution Date with respect to the Controlled
Accumulation Period on or prior to the Distribution Date on which the
Class A Invested Amount and Class B Invested Amount are each paid in
full, unless an Amortization Event has occurred, after giving effect to
the distributions in (d)(i) above, an amount equal to the balance of any
such remaining funds on deposit in the Collection Account in excess of
amounts applied to reduce the Collateral Amount to the Required
Collateral Amount shall be treated as Trust Excess Principal
Collections.
(e) For each Distribution Date with respect to any Early Amortization
Period, an amount equal to Available Investor Principal Collections with
respect to such Distribution Date will be distributed in the following
priority:
(i) an amount up to the Class A Adjusted Invested Amount shall be
distributed to the Class A Certificateholders; and
(ii) for each Distribution Date beginning on the Distribution Date
on which the Class A Adjusted Invested Amount is paid in full, an amount
up to the Class B Adjusted Invested Amount will be distributed to the
Class B Certificateholders.
(f) For each Distribution Date with respect to the Controlled
Accumulation Period, any Principal Funding Investment Proceeds in an amount
not to exceed the Covered Amount will be deposited into the subaccount of
the Collection Account designated therefor for distribution to the Class A
Certificateholders as set forth in paragraph (a) above.
"Available Investor Principal Collections" means the sum of (a) an
amount equal to (i) the Floating Allocation Percentage with respect to the
Revolving Period, or the Principal Allocation Percentage with respect to
the Controlled Accumulation Period or any Early Amortization Period, of
Series Allocable Principal Collections deposited into the Collection
Account for the related Due Period (or any partial Due Period which occurs
as the first Due Period during any Early Amortization Period) minus (ii)
the amount of Subordinated Principal Collections allocable to the Class B
Invested Amount and the Collateral Invested Amount required to fund any
deficiency as described above under "-- Reallocation of Cash Flows" plus
(b) Series Allocable Miscellaneous Payments allocated to the
Certificateholders' Interest on deposit in the Collection Account plus (c)
certain Excess Finance Charge and Administrative Collections and
Reallocated Investor Finance Charge and Administrative Collections as
described above under "-- Reallocation of Cash Flows" plus (d) Trust Excess
Principal Collections allocated from other Series to the Investor
Certificateholders as described above under "-- Reallocation of Trust
Excess Principal Collections" plus (e) subordinated principal collections
reallocated from other Series.
(g) For each Distribution Date with respect to the Revolving Period
and the Controlled Accumulation Period in which a reduction in the Required
Collateral Amount has occurred, Available Investor Principal Collections
not deposited into the Principal Funding Account for such Distribution Date
will be applied to reduce the Collateral Amount to the Required Collateral
Amount.
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EXCESS FINANCE CHARGE AND ADMINISTRATIVE COLLECTIONS
On each Distribution Date, the Servicer will apply or cause the Trustee to
apply Excess Finance Charge and Administrative Collections with respect to such
Distribution Date, to make the following distributions with respect to the
Investor Certificates in the following priority:
(a) an amount equal to the Class A Required Amount, if any, with
respect to such Distribution Date will be used to fund any deficiency for
such Distribution Date (i) in Class A Interest Payments, Class A Interest
Payments previously due but not distributed to Class A Certificateholders
and any interest thereon, (ii) the amount equal to the Class A Investor
Default Amount to be treated as a portion of Available Investor Principal
Collections and (iii) the Servicing Fee plus the amount of any Servicing
Fee that was due but not paid on a prior Distribution Date if Household
Finance Corporation or an affiliate is not acting as Servicer;
(b) an amount equal to the aggregate amount of Class A Investor
Charge-Offs which have not been previously reimbursed will be treated as a
portion of Available Investor Principal Collections;
(c) an amount equal to the amount of interest which has accrued with
respect to the outstanding aggregate principal amount of the Class B
Certificates at the Class B Certificate Rate but has not been distributed
to the Class B Certificateholders either on such Distribution Date or on a
prior Distribution Date and any interest thereon will be distributed to the
Class B Certificateholders;
(d) an amount equal to the aggregate Class B Investor Default Amount,
if any, for such Distribution Date will be treated as a portion of
Available Investor Principal Collections;
(e) an amount equal to the aggregate amount by which the Class B
Invested Amount has been reduced below the initial Class B Invested Amount
other than by payments of Class B Principal (but not in excess of the
aggregate amount of such reductions which have not been previously
reimbursed) will be treated as a portion of Available Investor Principal
Collections;
(f) an amount equal to Collateral Monthly Interest (defined below) for
such Distribution Date, plus the amount of any Collateral Monthly Interest
previously due but not distributed to the Collateral Interest Holder on a
prior Distribution Date, plus the amount of any Collateral Additional
Interest for such Distribution Date shall be paid to the Collateral
Interest Holder;
(g) an amount equal to the unpaid Servicing Fee will be paid to the
Servicer;
(h) an amount equal to the Collateral Default Amount (as defined
herein) for such Distribution Date will be treated as a portion of
Available Investor Principal Collections;
(i) during the Revolving Period and the Controlled Accumulation
Period, an amount equal to the aggregate amount by which the Collateral
Invested Amount has been reduced by Collateral Charge-Offs shall be treated
as a portion of Available Investor Principal Collections;
(j) an amount equal to the excess of the Required Collateral Amount
over the Collateral Amount shall be deposited in the Cash Collateral
Account;
(k) on each Distribution Date from and after the Reserve Account
Funding Date but prior to the date on which the Reserve Account terminates,
an amount up to the excess, if any, of the Required Reserve Amount over the
amount on deposit in the Reserve Account shall be deposited in the Reserve
Account; and
(l) the balance, if any, after giving effect to the payments made
pursuant to subparagraphs (a) through (k) above shall be applied in
accordance with the provisions of the Collateral Agreement.
"Collateral Monthly Interest," for each Distribution Date, means an
amount equal to monthly interest on the Collateral Invested Amount as of
the close of business on the preceding Distribution Date at a rate equal to
LIBOR plus 1.00% per annum.
REALLOCATIONS AMONG INVESTOR CERTIFICATES OF DIFFERENT SERIES
Group Three Investor Finance Charges. The Series offered hereby will be
included in Group Three. While Series 1998-1 will be the first Series issued in
Group Three, the Trust has previously issued other Series
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<PAGE> 61
in other Groups. Additional Series issued in the future may also be included in
Group Three or other Groups but there is no assurance that, for any Series in a
Group (including Group Three), the Trust will issue any other Series in such
Group. Accordingly, any anticipated benefits of sharing or reallocation of
collections of Receivables may not be realized. See "Annex I -- Prior Issuance
of Investor Certificates."
The Servicer will calculate for each Due Period Group Three Investor
Finance Charge and Administrative Collections and on the following Distribution
Date shall allocate such amount among the Certificateholders' Interest
(including the Collateral Interest) and the certificateholders' interest for all
other Series in Group Three in the following priority:
(i) Group Three Investor Monthly Interest;
(ii) Group Three Investor Default Amounts;
(iii) Group Three Investor Monthly Fees;
(iv) Group Three Investor Additional Amounts; and
(v) the balance pro rata among each Series in Group Three based on
the current invested amount of each such Series.
In the case of clauses (i), (ii), (iii) and (iv), if the amount of Group
Three Investor Finance Charge and Administrative Collections is not sufficient
to cover each such amount in full, the amount available will be allocated among
the Series in Group Three pro rata based on the claim that each Series has under
the applicable clause. This means, for example, that if the amount of Group
Three Investor Finance Charge and Administrative Collections is not sufficient
to cover Group Three Investor Monthly Interest, each Series in Group Three will
share such amount pro rata and any Series with a claim with respect to monthly
interest, overdue monthly interest and interest on such overdue monthly
interest, if applicable, which is larger than the claim for such amounts for the
Series offered hereby (due to a higher certificate rate) will receive a
proportionately larger allocation.
The amount of Group Three Investor Finance Charge and Administrative
Collections allocated to the Certificateholders' Interest and Collateral
Interest for the Series offered hereby as described above, plus any collections
of Principal Receivables reallocated to this Series from a subordinated Series
to the extent that the Series 1998-1 Supplement provides for such collections to
be deemed collections of Investor Finance Charge and Administrative Collections
is referred to herein as "Reallocated Investor Finance Charge and Administrative
Collections".
"Group Three Investor Additional Amounts" means for any Distribution
Date the sum of (a) with respect to the Investor Certificates and the
Collateral Invested Amount, generally the amounts set forth in clauses (b),
(c), (e) and (i) under "-- Excess Finance Charge and Administrative
Collections" and (b) with respect to any other Series in Group Three, (i)
an amount equal to the amount by which the invested amount of any class of
investor certificates or certain Series Enhancement interests has been
reduced as a result of investor charge-offs, subordination of principal
collections and funding the investor default amount for any other class of
investor certificates or certain Series Enhancement interests of such
Series and (ii) if the related Supplement so provides, the amount of
interest at the applicable certificate rate that has accrued on the amount
described in the preceding clause (i).
"Group Three Investor Default Amount" means for any Distribution Date
the sum of (a) with respect to the Investor Certificates and the Collateral
Invested Amount, the product of Series Allocable Defaulted Amount for such
Distribution Date and the Floating Allocation Percentage for such
Distribution Date and (b) with respect to any other Series in Group Three,
the product of (i) series allocable defaulted amounts for each such Series
for such Distribution Date and (ii) the floating allocation percentage of
each such Series for such Distribution Date.
"Group Three Investor Finance Charge and Administrative Collections"
means for any Distribution Date the sum of (a) the aggregate amount of
Investor Finance Charge and Administrative Collections for such
Distribution Date and (b) the aggregate amount of investor finance charge
and administrative collections for such Distribution Date for all other
Series in Group Three.
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<PAGE> 62
"Group Three Investor Monthly Fees" means for any Distribution Date
the sum of (a) the Servicing Fee and (b) the portion of the servicing fee
allocable to the investor certificates or Series Enhancement investor
interest of each other Series in Group Three, any Series Enhancement fees
and any other similar fees which are paid out of reallocated investor
finance charge and administrative collections for such Series pursuant to
the applicable Supplement.
"Group Three Investor Monthly Interest" means for any Distribution
Date the sum of (a) interest payable on the Class A Certificates for such
Distribution Date, plus the amount of any interest previously due but not
paid to the Class A Certificateholders on a prior Distribution Date, plus
any additional interest with respect to interest amounts that were due but
not paid on a prior Distribution Date, plus interest payable on the Class B
Certificates for such Distribution Date, plus the amount of any interest
previously due but not paid to the Class B Certificateholders on a prior
Distribution Date, plus any additional interest with respect to interest
amounts that were due but not paid on a prior Distribution Date plus all
interest payable to the Collateral Interest Holder at the Collateral Rate
and (b) the aggregate amount of monthly interest, including overdue monthly
interest and interest on such overdue monthly interest, if applicable, for
all other Series in Group Three for such Distribution Date.
The chart below demonstrates the manner in which collections of Finance
Charge and Administrative Collections are allocated and reallocated among Series
in Group Three. For illustrative purposes, the chart assumes that the Trust has
issued three Series in Group Three (Series 98-1, 98-2 and 98-3), which it has
not done, and that each such Series is in its Revolving Period. The Investor
Certificates will be the first Series in Group Three, and there is no limit to
the number of Series which may be included in Group Three or in any other Group,
although there can be no assurance that any other Series will be included in
Group Three or in any other Group. The Trust, however, has eleven series
outstanding, four of which are in Group One and one of which is in Group Two.
See "Annex I -- Prior Issuance of Investor Certificates."
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<TABLE>
<S><C>
Credit Card Master Trust
Finance Charge Collections
|
---------------------------------------------------------------------------
| | |
Series 1998-1 Series 1998-2 Series 1998-3
Series Allocable Finance Series Allocable Finance Series Allocable Finance
Step 1 Charge and Administrative Charge and Administrative Charge and Administrative
Collections Collections Collections
(based upon the Series (based upon the Series (based upon the Series
Allocation Percentage) Allocation Percentage) Allocation Percentage)
| | |
------------- ------------- -------------
| | | | | |
Seller's Finance Investor Finance Seller's Finance Investor Finance Seller's Finance Investor Finance
Step 2 Charges Charge and Charges Charge and Charges Charge and
Administrative Administrative Administrative
Collections (based Collections (based Collections (based
upon the Floating upon the Floating upon the Floating
Allocation Allocation Allocation
Percentage) Percentage) Percentage)
| | |
-----------------------------------------------------------------------------
|
|
Step 3 Group Three
--------- Investor Finance Charge and Administrative Collections
|
|
---------------------------------------------------
| |
| --------------------------------------------------------------------
| | | |
Step 4 | Series 98-1 Series 98-2 Series 98-3
| Investor Monthly Interest Investor Monthly Interest Investor Monthly Interest
|
---------------------------------------------------
| |
| --------------------------------------------------------------------
| | | |
|
| Series 98-1 Series 98-2 Series 98-3
| Investor Default Amounts Investor Default Amounts Investor Default Amounts
|
---------------------------------------------------
| |
| --------------------------------------------------------------------
| | | |
| Series 98-1 Series 98-2 Series 98-3
| Investor Monthly Fees Investor Monthly Fees Investor Monthly Fees
|
---------------------------------------------------
| |
| --------------------------------------------------------------------
| | | |
| Series 98-1 Series 98-2 Series 98-3
| Investor Additional Amounts Investor Additional Amounts Investor Additional Amounts
|
|
---------------------------------------------------
|
--------------------------------------------------------------------
| | |
Series 98-1 Series 98-2 Series 98-3
Balance based upon Balance based upon Balance based upon
Invested Amount Invested Amount Invested Amount
</TABLE>
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<PAGE> 64
In Step 1, total Finance Charge and Administrative Collections are
allocated among the three Series based on the Series Allocation Percentage for
each Series. The amount allocated to each Series pursuant to Step 1 is referred
to as "Series Allocable Finance Charge and Administrative Collections". See
"Description of the Investor Certificates -- Allocations -- Allocations among
Series".
In Step 2, the amount of Finance Charge and Administrative Collections
allocable to the investor certificates or Series Enhancement invested interest
of a Series (the "Investor Finance Charge and Administrative Collections") is
determined by multiplying Series Allocable Finance Charge Collections for each
Series by the Floating Allocation Percentage. See "-- Allocations -- Series
1998-1 Allocations" and see also "-- Reallocations Among Investor Certificates
of Different Series -- Group Three Investor Finance Charges".
Investor Finance Charge and Administrative Collections for all Series in
the Group (or Group Three Investor Finance Charge and Administrative
Collections) are pooled as shown in Step 3 for reallocation to each such Series
as shown in Step 4. In Step 4, Group Three Investor Finance Charge and
Administrative Collections are reallocated to each Series in Group Three as
described above based on the Series' respective claim with respect to interest
payable on the investor certificates or Series Enhancement invested interest of
such Series, the investor default amounts and the servicing fee and certain
other amounts in respect of such Series. The excess is allocated pro rata among
the Series based on their respective invested amounts.
ALLOCATION OF RECEIVABLES OR PARTICIPATION INTERESTS
To the extent provided in any Supplement, or any amendment to the Pooling
and Servicing Agreement, portions of the Receivables or Participation Interests
conveyed to the Trust and all collections received with respect thereto may be
allocated to one or more Series or Groups as long as the Rating Agency Condition
shall have been satisfied with respect to such allocation and the Servicer shall
have delivered an officer's certificate to the Trustee to the effect that the
Servicer reasonably believes such allocation will not have an Adverse Effect.
DISCOUNT AND PREMIUM OPTION
The Pooling and Servicing Agreement provides that the Seller may at any
time designate a fixed percentage of the amount of Receivables arising in the
Accounts on and after the date of such designation (a) that otherwise would be
treated as Principal Receivables to be treated as Finance Charge and
Administrative Receivables or (b) that otherwise would be treated as Finance
Charge and Administrative Receivables to be treated as Principal Receivables.
The Seller must provide 30 days' prior written notice to the Servicer, the
Trustee, and each Rating Agency of any such designation, and such designation
will become effective on the date specified therein only if (i) an officer's
certificate is delivered to the effect that in the reasonable belief of the
Seller such designation would not have an Adverse Effect and (ii) the Rating
Agency Condition is satisfied.
DESCRIPTION OF THE CASH COLLATERAL ACCOUNT
The Trust will have the benefit of the Cash Collateral Account which will
be held in the name of the Trustee for the benefit of the Investor
Certificateholders and the Collateral Interest Holder and will be invested in
certain obligations (which may include obligations of Household Finance
Corporation) meeting the requirements for "Eligible Investments".
The initial amount on deposit in the Cash Collateral Account will be zero
and will increase as the Collateral Invested Amount is reduced to the extent the
Seller elects, subject to the Rating Agency Condition, to deposit collections of
Principal Receivables in the Cash Collateral Account and through payments of
principal with respect to the Collateral Invested Amount which are required to
be deposited in the Cash Collateral Account. Amounts on deposit in the Cash
Collateral Account will also increase by the deposit of Excess Finance Charge
and Administrative Receivables to increase the Available Collateral Amount up to
the Required Collateral Amount. For a discussion of the extent to which
withdrawals will be made from the Cash Collateral Account to pay the Class A
Required Amount and the Class B Required Amount, see
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<PAGE> 65
"-- Allocation of Collections; Deposits in Collection Account", and "--
Reallocation of Cash Flows". The Cash Collateral Account will be terminated
following the earlier to occur of (a) the date on which the Class A Certificates
and Class B Certificates are paid in full, (b) the Series 1998-1 Termination
Date and (c) the final Termination Date of the Trust.
The "Required Collateral Amount" with respect to any Distribution Date for
the Investor Certificates means (i) $80,100,000 initially and (ii) thereafter an
amount equal to the greater of (a) 8.25% of the sum of the Class A Adjusted
Invested Amount, the Class B Adjusted Invested Amount and the Required
Collateral Amount in each case as of such Distribution Date after taking into
account distributions made on such date and (b) $29,106,000; provided, however,
(1) that if certain withdrawals are made from the Cash Collateral Account,
certain reductions in the Collateral Invested Amount are made or if an
Amortization Event occurs, the Required Collateral Amount for such Distribution
Date shall equal the Required Collateral Amount for the Distribution Date
immediately preceding the occurrence of such withdrawal, reduction or
Amortization Event, (2) in no event shall the Required Collateral Amount exceed
the unpaid principal amount of the Investor Certificates on such Distribution
Date, (3) the Required Collateral Amount may be reduced at any time to a lesser
amount if the Rating Agency Condition is satisfied, (4) the Seller at its option
may at any time increase the Required Collateral Amount to a greater amount and
(5) if the amount on deposit in the Principal Funding Account is equal to the
sum of the initial Class A Invested Amount and the initial Class B Invested
Amount, the Required Collateral Amount will be zero.
With respect to any Distribution Date, if the Collateral Amount is less
than the Required Collateral Amount, certain Excess Finance Charge and
Administrative Collections and Series Allocable Miscellaneous Payments will be
reallocated to increase the Collateral Invested Amount or deposited into the
Cash Collateral Account to the extent of such shortfall. Any of such Excess
Finance Charge and Administrative Collections not required to be reallocated or
deposited into the Cash Collateral Account or the Reserve Account with respect
to any Distribution Date will be applied in accordance with the Collateral
Agreement. See "-- Excess Finance Charge and Administrative Collections".
If on any Distribution Date, the amount on deposit in the Cash Collateral
Account plus the Collateral Invested Amount exceeds the Required Collateral
Amount, such excess in the Cash Collateral Account will be applied in accordance
with the Collateral Agreement and will not be available to the Investor
Certificateholders.
DEFAULTED RECEIVABLES; REBATES AND FRAUDULENT CHARGES
The "Defaulted Amount" for any Due Period will be an amount (not less than
zero) equal to (a) the amount of Defaulted Receivables less (b) the sum of (i)
the full amount of any Defaulted Receivables of which the Seller or the Servicer
becomes obligated to accept reassignment for such Due Period unless certain
events of bankruptcy, insolvency or receivership have occurred with respect to
the Seller or the Servicer, in which event the amount of Defaulted Receivables
will not be reduced for those Defaulted Receivables, and (ii) the excess, if
any, for the immediately preceding Due Period of the sum computed pursuant to
this clause (b) for such Due Period over the amount of Principal Receivables
which became Defaulted Receivables in such Due Period. Receivables in any
Account will be charged-off as uncollectible in accordance with the credit card
guidelines of the Servicer of the Account and the Subservicer's customary and
usual policies and procedures for servicing comparable credit card accounts.
Except in limited circumstances, the current policy of the Subservicer is to
charge-off an account at the end of the month in which that account becomes 180
days delinquent. Household Bank retains the right to change these policies. A
portion of the Defaulted Amount (the "Class A Investor Default Amount") will be
allocated to Class A Certificateholders for each Distribution Date in an amount
equal to the product of the Class A Invested Percentage applicable during the
immediately preceding Due Period and an amount equal to the product of the
Series Allocation Percentage with respect to such Due Period, the Floating
Allocation Percentage with respect to such Due Period and the Defaulted Amount
for such Due Period (the "Investor Defaulted Amount"). A portion of the
Defaulted Amount (the "Class B Investor Default Amount") will be allocated to
the Class B Certificateholders for each Distribution Date in an amount equal to
the product of the Class B Invested Percentage applicable during the immediately
preceding Due Period and the Investor Defaulted Amount.
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<PAGE> 66
If the Servicer adjusts the amount of any Receivable because of a rebate,
refund, unauthorized charge, billing error or certain other noncash items to a
cardholder, or because such Receivable was created in respect of merchandise
which was refused or returned by a cardholder, or if the Servicer charges-off as
uncollectible certain small balances, the amount of Principal Receivables used
to calculate the Seller's Interest and the Seller's Participation Amount will be
reduced by the amount of the adjustment or charge-off. In addition, the
principal amount of the Seller's Interest in Principal Receivables will be
reduced by the amount of any Receivable which was discovered as having been
created through a fraudulent or counterfeit charge or which was subject to
certain liens specified in the Pooling and Servicing Agreement. Furthermore, to
the extent that the reduction in the Seller's Participation Amount would reduce
such amount below zero, the Seller will deposit an offsetting amount of cash
into the Special Funding Account on the Distribution Date following such Due
Period. Any amount deposited into the Special Funding Account in connection with
the adjustment of a Receivable will be considered collections of Principal
Receivables and will be allocated and distributed accordingly. See "--
Principal".
INVESTOR CHARGE-OFFS
On each Distribution Date, if the Class A Required Amount for such
Distribution Date exceeds the sum of Excess Finance Charge and Administrative
Collections, funds available in the Cash Collateral Account and Subordinated
Principal Collections with respect to such Distribution Date, the Collateral
Invested Amount and, if necessary, the Class B Invested Amount, will be reduced
by the amount of such excess, but not more than the Class A Investor Default
Amount for such Distribution Date. In the event that such reduction would cause
the sum of the Collateral Invested Amount and the Class B Invested Amount to be
a negative number, the Collateral Invested Amount and the Class B Invested
Amount will be reduced to zero, and the Class A Invested Amount will be reduced
by the amount by which the Collateral Invested Amount and the Class B Invested
Amount would have been reduced below zero, but not more than the Class A
Investor Default Amount for such Distribution Date (a "Class A Investor
Charge-Off"), which will have the effect of slowing or reducing the return of
principal to the Class A Certificateholders. If the Class A Invested Amount has
been reduced by the amount of any Class A Investor Charge-Offs, it will be
increased on any Distribution Date (but not by an amount in excess of the
aggregate Class A Investor Charge-Offs) by the sum of (i) the amount of any
Series Allocable Miscellaneous Payments allocable to the Investor
Certificateholders then on deposit in the Collection Account, (ii) the amount of
Excess Finance Charge and Administrative Collections allocated and available for
such purpose as described under "-- Excess Finance Charge and Administrative
Collections" and (iii) withdrawals from the Cash Collateral Account available
for such purpose.
If on any Distribution Date, the Class B Required Amount, if any, for such
Distribution Date exceeds the amount of Excess Finance Charge and Administrative
Collections which are allocated and available to fund such amount as described
under "-- Excess Finance Charge and Administrative Collections", funds available
in the Cash Collateral Account and Subordinated Principal Collections allocable
to the Collateral Invested Amount (to the extent not used to pay the Class A
Required Amount), then the Collateral Invested Amount shall be reduced by the
aggregate amount of such excess but not more than the Class B Investor Default
Amount for such Distribution Date. In the event that such reduction would cause
the Collateral Invested Amount to be a negative number, the Collateral Invested
Amount will be reduced to zero, and the Class B Invested Amount will be reduced
by the remainder of such reduction (a "Class B Investor Charge-Off"). The Class
B Invested Amount will also be reduced if Subordinated Principal Collections
allocable to the Class B Certificates are used to fund the Class A Required
Amount. The Class B Invested Amount will thereafter be increased (but not in
excess of the aggregate Class B Investor Charge-Offs) on any Distribution Date
by the sum of (i) the amount of any Series Allocable Miscellaneous Payments then
on deposit in the Collection Account (but only to the extent such deposits are
not required to reimburse Class A Investor Charge-Offs as described above), (ii)
the amount of Excess Finance Charge and Administrative Collections allocated and
available for that purpose as described under "-- Excess Finance Charge and
Administrative Collections" and (iii) withdrawals from the Cash Collateral
Account available for such purpose.
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OPTIONAL REPURCHASE
On any Distribution Date occurring on or after the date that the sum of the
Class A Invested Amount and the Class B Invested Amount is reduced to
$48,510,000 (5% of the initial outstanding aggregate principal amount of the
Class A Certificates, the Class B Certificates and the Collateral Interest) or
less, the Seller will have the option to repurchase the Certificateholders'
Interest. The purchase price will be equal to the sum of the Class A Invested
Amount and the Class B Invested Amount plus accrued and unpaid interest on the
unpaid principal amount of the Class A Certificates and the Class B Certificates
(and accrued and unpaid interest with respect to interest amounts that were due
but not paid on such Distribution Date or any prior Distribution Date) through
the day preceding such Distribution Date at the Class A Certificate Rate and the
Class B Certificate Rate, respectively. Such proceeds will be allocated first to
pay amounts due to the Class A Certificateholders and secondly, to pay amounts
due to the Class B Certificateholders. Following any such repurchase, the
Receivables will be assigned to the Seller and the Class A Certificateholders
and the Class B Certificateholders will have no further rights with respect
thereto. In the event that the Seller fails for any reason to deposit the
aggregate purchase price for such Receivables, the Trust will continue to hold
the Receivables and payments will continue to be made to the Class A and Class B
Certificateholders as described herein.
AMORTIZATION EVENT
An "Amortization Event" refers to any of the following events:
(a) failure on the part of the Seller (i) to make any payment or
deposit required under the Pooling and Servicing Agreement or Series 1998-1
Supplement within five business days after the date such payment or deposit
is required to be made; or (ii) to observe or perform any other covenants
or agreements of the Seller set forth in the Pooling and Servicing
Agreement or Series 1998-1 Supplement, which failure has a material adverse
effect on the Investor Certificateholders and which continues unremedied
for a period of 60 days after written notice;
(b) any representation or warranty made by the Seller in the Pooling
and Servicing Agreement or Series 1998-1 Supplement or any information
required to be given by the Seller to the Trustee to identify the Accounts
proves to have been incorrect in any material respect when made and which
continues to be incorrect in any material respect for a period of 60 days
after written notice and as a result of which the interests of the Investor
Certificateholders are materially and adversely affected, provided,
however, that an Amortization Event shall not be deemed to occur thereunder
if the Seller has repurchased the related Receivables or all such
Receivables, if applicable, during such period in accordance with the
provisions of the Pooling and Servicing Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Seller, any additional Seller or Household
Bank;
(d) any reduction of the Series Adjusted Portfolio Yield (averaged
over any three consecutive Due Periods) to a rate below the Base Rate
(averaged for such Due Periods);
(e) the Trust becomes subject to regulation by the Commission as an
investment company within the meaning of the Investment Company Act of
1940, as amended;
(f) a failure by the Seller to convey Receivables in Additional
Accounts to the Trust or make deposits to the Special Funding Account so as
to increase the Principal Receivables in the Trust or increase the deposits
in the Special Funding Account so as to maintain the Required Minimum
Principal Balance within five business days after the day on which such
required balance is no longer satisfied under the Pooling and Servicing
Agreement;
(g) any Servicer Default occurs which has a material adverse effect on
the Investor Certificateholders;
(h) failure to distribute an amount equal to the full Class A Invested
Amount and Class B Invested Amount, and all interest accrued thereon, on or
before the Series 1998-1 Expected Final Payment Date; or
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(i) the Seller is unable for any reason to transfer Receivables to the
Trust in accordance with the Pooling and Servicing Agreement.
"Series Adjusted Portfolio Yield" as used in paragraph (d) above means with
respect to the Series offered hereby and any Due Period, the annualized
percentage equivalent of a fraction the numerator of which is the amount of
Reallocated Investor Finance Charge and Administrative Collections during such
Due Period calculated on a cash basis, plus the amount of Principal Funding
Investment Proceeds and the amount of funds withdrawn from the Reserve Account
for the related Distribution Date, minus the Investor Defaulted Amount for the
Distribution Date with respect to such Due Period and the denominator of which
is the Invested Amount as of the last day of the immediately preceding Due
Period. "Base Rate" as used in paragraph (d) above means the weighted average of
the Class A Certificate Rate, the Class B Certificate Rate and the Collateral
Rate (weighted based on the Class A Invested Amount, the Class B Invested Amount
and the Collateral Invested Amount as of the last day of the preceding Due
Period) plus 2.00% per annum.
If any event described in (a), (b) or (g) occurs, an Amortization Event
will be deemed to have occurred only if, after the applicable grace period
described in such clauses, if any, either the Trustee or Investor
Certificateholders holding Investor Certificates evidencing more than 50% of the
aggregate unpaid principal amount of the Investor Certificates by written notice
to the Seller and the Servicer (and to the Trustee, if given by the Investor
Certificateholders) declare that an Amortization Event has occurred as of the
date of such notice. If any event described in clauses (c), (d), (e), (f), (h)
or (i) occurs, subject to applicable law and after the applicable grace period
described in such clauses, if any, an Amortization Event will be deemed to have
occurred without any notice or other action on the part of the Trustee or the
Investor Certificateholders immediately upon the occurrence of such event. The
Early Amortization Period will commence as of the first day of the Due Period in
which an Amortization Event has occurred unless at the time of such event the
Servicer is required to make daily deposits of collections into the Collection
Account, in which case the Early Amortization Period will commence as of the day
on which any such Amortization Event occurs. Principal payments with respect to
the Class B Certificates will not be made until the final principal payment has
been paid to the Holders of the Class A Certificates. Any amounts on deposit in
either of the Principal Funding Account or the Reserve Account at the
commencement of the Early Amortization Period will be distributed to the
Investor Certificateholders or the Seller, as applicable, on the first
Distribution Date following such commencement to the extent described herein
under "Description of the Investor Certificates -- Principal", "-- Distributions
from the Collection Account; Allocation of Funds" and "-- Reserve Account". Any
amounts on deposit in the Special Funding Account at the commencement of the
Early Amortization Period allocable to the Investor Certificateholders will be
withdrawn from the Special Funding Account and made available for distribution
to the Investor Certificateholders to the extent described under "Description of
the Investor Certificates -- Special Funding Account." If, because of the
occurrence of one of the Amortization Events which triggers the commencement of
the Early Amortization Period, the Early Amortization Period begins prior to the
Series 1998-1 Expected Final Payment Date, Investor Certificateholders will
begin receiving distributions of principal earlier than they otherwise would
have and such distributions will not be subject to the Controlled Deposit
Amount. As a result, the average life of the Investor Certificates may be
reduced or increased. The occurrence of an early amortization period or early
accumulation period for any other Series may end the reinvestment of the
Certificateholders' Interest in new Receivables to the extent described under
"Description of the Investor Certificates -- Principal" and "-- Special Funding
Account." Certain Amortization Events include some of the events that constitute
amortization events for other Series.
For purposes of the foregoing discussion pertaining to the Amortization
Events, references to the Investor Certificates will include the Collateral
Interest.
In addition to the consequences of an Amortization Event discussed above,
if an Insolvency Event with respect to the Seller occurs, pursuant to the
Pooling and Servicing Agreement, on the day of such Insolvency Event, the Seller
will (subject to the actions of the investor certificateholders and the
Collateral Interest Holder) immediately cease to transfer Principal Receivables
to the Trust and promptly give notice to the Trustee of such Insolvency Event.
Under the terms of the Pooling and Servicing Agreement, within fifteen days the
Trustee will publish a notice of Insolvency Event stating that the Trustee
intends to sell, dispose of or
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otherwise liquidate the Receivables in a commercially reasonable manner and on
commercially reasonable terms unless within a specified period of time the
holders of investor certificates evidencing more than 50% of the aggregate
unpaid principal amount of each Series or any person granted such right in any
Supplement may instruct the Trustee not to dispose of or liquidate the
Receivables and to continue transferring Principal Receivables as before such
Insolvency Event. As of this date, any one of the credit enhancers for Series
1993-1, 1993-2, 1994-1, 1995-1 and 1997-1 may object and prevent such sale
(unless a receiver orders a sale despite such objection). The credit enhancer
for Series 1998-1 may similarly object and prevent such sale. The proceeds from
such sale, disposition or liquidation of the Receivables ("Insolvency Proceeds")
will be treated as collections on the Receivables and deposited in the
Collection Account. If the portion of such proceeds allocated first to the Class
A Interest and then to the Class B Interest and the proceeds of any collections
on the Receivables in the Collection Account allocated to the Class A Interest
and the Class B Interest, respectively, are not sufficient to pay first the
Class A Adjusted Invested Amount and then the Class B Adjusted Invested Amount
in full, the amount of principal returned to the Class B Certificateholders and
Class A Certificateholders, respectively, will be reduced and the Class B
Certificateholders and Class A Certificateholders, respectively, will incur a
loss.
Upon the occurrence of an Amortization Event, if a conservator or receiver
is appointed for Household Bank and no Amortization Event other than such
conservatorship or receivership or insolvency of Household Bank exists, the
conservator or receiver may have the power to prevent the early sale,
liquidation or disposition of the Receivables and the commencement of the Early
Amortization Period.
TERMINATION
The Trust will terminate on the earlier to occur of (a) April 30, 2014, (b)
at the option of the Seller, the day following the Distribution Date on which
the invested amount for each Series is zero and (c) the day following the
Distribution Date that Insolvency Proceeds have been distributed to investor
certificateholders and in respect of any Series Enhancement (the "Termination
Date"). Upon the Termination Date, all right, title and interest in the
Receivables and other funds of the Trust (other than amounts in the accounts
maintained by the Trust for the final payment of principal and interest to
investor certificateholders) will, unless the Receivables have been sold as
provided above, be conveyed and transferred to the Seller.
In the event that the Invested Amount for the Series offered hereby is
greater than zero on the earlier of the February 2004 Distribution Date and the
Termination Date (the "Series 1998-1 Termination Date") (after giving effect to
deposits and distributions otherwise to be made on such date), the Trustee will
sell or cause to be sold an amount of Principal Receivables (or interests
therein) equal to 100% of the Adjusted Invested Amount on such date plus related
Finance Charge and Administrative Receivables but not in excess of the Series
Allocation Percentage for the Series offered hereby of Receivables on such date.
The proceeds from the sale of the Receivables will be treated as collections on
the Receivables and deposited into the Collection Account.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's compensation in connection with the Investor Certificates
for its servicing activities and reimbursement for its expenses will be a
servicing fee, payable monthly in arrears on each Distribution Date, in an
amount equal to one-twelfth of the product of 2.00% and the amount of Principal
Receivables as of the last day of the second preceding Due Period and the Series
Allocation Percentage for the Series offered hereby. The servicing fee will be
allocated between the Seller's Interest, the Certificateholders' Interest and
the Collateral Interest. The portion of the servicing fee allocable to the
Certificateholders' Interest and the Collateral Interest on each Distribution
Date (the "Servicing Fee") will be equal to one-twelfth of the product of (a)
(i) 2.00% less (ii) the amount by which the product of 12 and Interchange
received during the preceding Due Period as a percentage of the total amount of
Principal Receivables at the end of such Due Period is less than 1.25% per annum
and (b) the Adjusted Invested Amount on the last day of the second preceding Due
Period or, in the case of the first Distribution Date, the initial Invested
Amount. The remaining portion of the servicing fee will be allocable to the
Seller's Interest. The Servicing Fee will be paid with respect to each Due
Period from the Collection Account (unless such amount has been netted against
deposits to the
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Collection Account) as described under "-- Distributions from the Collection
Account; Allocation of Funds" and "-- Excess Finance Charge and Administrative
Collections" above.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with servicing the Accounts and the Receivables
including, without limitation, expenses related to enforcement of the
Receivables, payment of fees and disbursements of the Trustee and independent
accountants and all other fees and expenses which are not expressly stated in
the Pooling and Servicing Agreement to be payable by the Trust or the Seller or
allocated as an expense to the Investor Certificateholders other than Federal,
state and local income and franchise taxes, if any, of the Trust.
REPORTS
No later than the second business day prior to each Distribution Date, the
Servicer will forward to the Trustee a statement (the "Servicer Report")
prepared by the Servicer setting forth certain information with respect to the
Trust and the Investor Certificates, including: (a) the aggregate amount of
collections, the aggregate amount of collections in respect of Finance Charge
and Administrative Receivables and the aggregate amount of collections in
respect of Principal Receivables processed during the immediately preceding Due
Period; (b) the Floating Allocation Percentage for such Due Period and, during
the Controlled Accumulation Period or Early Amortization Period, the Principal
Allocation Percentage; (c) the aggregate outstanding balance of the Accounts
which were delinquent by one monthly payment, two monthly payments and three or
more monthly payments as of the close of business at the end of the calendar
month immediately preceding such Date; (d) the Class A Investor Default Amount,
the Class B Investor Default Amount and the product of the Investor Defaulted
Amount for the prior Due Period and the Collateral Invested Percentage (the
"Collateral Default Amount") for such Distribution Date; (e) the amount of Class
A Investor Charge-Offs, Class B Investor Charge-Offs and the amounts by which
the Collateral Invested Amount has been reduced, due to the Collateral Default
Amount with respect to any Due Period being in excess of the Excess Finance
Charge and Administrative Collections available therefor for such Due Period, as
described under "-- Excess Finance Charge and Administrative Collections" (a
"Collateral Charge-Off") and the amount of reimbursements of each for such
Distribution Date; (f) the amount of the Servicing Fee for such Distribution
Date; (g) the aggregate amount of Principal Receivables and Finance Charge and
Administrative Receivables in the Trust at the close of business on the last day
of the Due Period preceding such Distribution Date; (h) the Class A Invested
Amount, the Class A Adjusted Invested Amount, the Class B Invested Amount, the
Class B Adjusted Invested Amount and the Collateral Invested Amount at the close
of business on the last day of the Due Period immediately preceding such
Distribution Date; and (i) the amount of Subordinated Principal Collections for
such Distribution Date and the respective amounts of such Collections allocable
to the Class B Certificates and the Collateral Invested Amount. The Trustee will
make such statement available to the Investor Certificateholders upon request.
On each Distribution Date the Trustee will forward to the registered holder
of each Investor Certificate (which initially will be Cede) a statement (the
"Distribution Date Statement") prepared by the Servicer setting forth the
information with respect to the Class A Certificates or Class B Certificates, as
the case may be, set forth in the Servicer Report supplied to the Trustee as
described in the preceding paragraph since the immediately preceding
Distribution Date, as the case may be, and the following additional information
(which, in the case of (a), (b) and (c) below, will be stated on the basis of an
original principal amount of $1,000 per Class A Certificate or Class B
Certificate, as the case may be): (a) the total amount distributed to Investor
Certificateholders; (b) the amount of such distribution allocable to principal
on the Class A Certificates or Class B Certificates, as the case may be; (c) the
amount of such distribution allocable to interest on the Class A Certificates or
Class B Certificates, as the case may be; (d) the amount, if any, by which the
principal balance of the Class A Certificates or Class B Certificates exceeds
the Class A Invested Amount or Class B Invested Amount, respectively, as of the
Record Date with respect to such Distribution Date; and (e) the "Class A Pool
Factor" or "Class B Pool Factor", as the case may be, as of the end of the
Record Date with respect to such Distribution Date (consisting of an eight-digit
decimal expressing the Class A Invested Amount or Class B Invested Amount as of
such Record Date (determined after taking into account any increase or decrease
in the Class A Invested Amount or Class B Invested Amount, respectively,
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which will occur on the following Distribution Date) as a proportion of the
initial Class A Invested Amount or Class B Invested Amount, respectively, on the
Issuance Date).
The Trustee will furnish (or cause to be furnished) to each person who at
any time during the preceding calendar year was an investor certificateholder of
record a statement containing the information required to be provided by an
issuer of indebtedness under the Code for such preceding calendar year or the
applicable portion thereof during which such person was an investor
certificateholder, together with such other customary information as is
necessary to enable the investor certificateholders to prepare their tax
returns. See "Federal Income Tax Consequences".
BOOK-ENTRY REGISTRATION
Investor Certificateholders may hold their Investor Certificates through
DTC (in the United States) or CEDEL or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems.
Cede, as nominee for DTC, will hold the global Class A Certificate or
Certificates and the global Class B Certificate or Certificates. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective Depositaries (as defined herein) which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC. Citibank will act as depositary for CEDEL and Chase will act as
depositary for Euroclear (in such capacities, the "Depositaries").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the settlement of securities transactions between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
the Underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants (as defined herein) and Euroclear
Participants (as defined herein) will occur in accordance with their respective
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing systems by its Depositary. Cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or a Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following
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settlement in DTC. For information with respect to tax documentation procedures
relating to the Investor Certificates, see "Federal Income Tax Consequences --
Non-U.S. Investor Certificateholders" and "--Information Reporting and Backup
Withholding".
Investor Certificateholders that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Investor Certificates may do so only through Participants
and Indirect Participants. In addition, Investor Certificateholders will receive
all distributions of principal and interest on the Investor Certificates from
the Trustee through DTC and its Participants. Under a book-entry format,
Investor Certificateholders will receive payments after the related Distribution
Date, as the case may be, because, while payments are required to be forwarded
to Cede, as nominee for DTC, on each such date, DTC will forward such payments
to its Participants which thereafter will be required to forward them to
Indirect Participants or holders of beneficial interests in the Investor
Certificates. It is anticipated that the only "Class A Certificateholder" and
"Class B Certificateholder" will be Cede, as nominee of DTC, and that holders of
beneficial interests in the Class A Certificates or the Class B Certificates
will not be recognized by the Trustee as Class A Certificateholders or Class B
Certificateholders, respectively, under the Pooling and Servicing Agreement.
Holders of beneficial interests in the Class A Certificates and Class B
Certificates will only be permitted to exercise the rights of Class A
Certificateholders or Class B Certificateholders, respectively, under the
Pooling and Servicing Agreement indirectly through DTC and its Participants who
in turn will exercise their rights 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 Investor Certificates and is
required to receive and transmit distributions of principal of and interest on
the Investor Certificates. Participants and Indirect Participants with which
holders of beneficial interests in the Investor Certificates have accounts
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of these respective holders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of holders of
beneficial interests in the Investor Certificates to pledge Investor
Certificates to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such Investor Certificates, may be
limited due to the lack of a Definitive Certificate for such Investor
Certificates.
DTC has advised the Seller that it will take any action permitted to be
taken by a Class A Certificateholder or Class B Certificateholder under the
Pooling and Servicing Agreement and the Series 1998-1 Supplement only at the
direction of one or more Participants to whose account with DTC the Class A
Certificates or Class B Certificates are credited. Additionally, DTC has advised
the Seller that it may take actions with respect to the Class A Interest, the
Class B Interest, or Certificateholders' Interest that conflict with other of
its actions with respect thereto.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriters. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic
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book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 32 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euro-clear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include the Underwriters. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Investor Certificates held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences -- Non-U.S. Investor
Certificateholders" and "-- Information Reporting and Backup Withholding". CEDEL
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by an Investor Certificateholder under the Pooling and
Servicing Agreement and the Series 1998-1 Supplement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Investor Certificates among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE INVESTOR CERTIFICATES
Definitive Certificates will be issued to Class A Certificateholders or
Class B Certificateholders, as the case may be, rather than to DTC or its
nominee, only if (i) the Seller advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as Depository
with respect to the Class A Certificates or Class B Certificates, as the case
may be, and the Trustee or the Seller is unable to locate a qualified successor,
(ii) the Seller, at its option, elects to terminate the book-entry system
through DTC or (iii) after the occurrence of a Servicer Default, certificate
owners evidencing not less than 50% of the aggregate unpaid principal amount of
the Investor Certificates, advise the 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 certificate owners with respect
to the Investor Certificates, as the case may be.
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Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the definitive certificates representing the Investor Certificates and
instructions for reregistration, the Trustee will issue the Investor
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as Class A
Certificateholders or Class B Certificateholders, as the case may be, under the
Pooling and Servicing Agreement and the Series 1998-1 Supplement ("Holders").
Distribution of principal and interest on the Investor Certificates will be
made by the Trustee directly to Holders in accordance with the procedures set
forth herein and in the Pooling and Servicing Agreement and the Series 1998-1
Supplement. Interest payments and principal payments will be made to Holders in
whose names the Definitive Certificates were registered at the close of business
on the related Record Date. Distributions will be made by check mailed to the
address of such Holder as it appears on the register maintained by the Trustee.
The final payment on any Investor Certificate (whether Definitive Certificates
or Certificates registered in the name of Cede), however, will be made only upon
presentation and surrender of such Investor Certificate on the final payment
date at such office or agency as is specified in the notice of final
distribution to Investor Certificateholders. The Trustee will provide such
notice to registered Investor Certificateholders not later than the fifth day of
the month of the final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the Transfer Agent and Registrar, which shall initially be the
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
therewith.
THE POOLING AND SERVICING AGREEMENT
CONVEYANCE OF RECEIVABLES
On the Initial Issuance Date, the Seller sold and assigned to the Trust its
interest in all Receivables in the Accounts existing as of the Initial Cut-Off
Date, all Receivables thereafter created under the Accounts, all Recoveries and
Interchange allocable to the Trust, and the proceeds of all of the foregoing.
The Seller has also sold and assigned to the Trust and may hereafter sell and
assign to the Trust from time to time Receivables in designated Aggregate
Addition Accounts and may from time to time sell and assign to the Trust its
interest in Participation Interests or the Receivables in Additional Accounts as
of the applicable date of designation, all Recoveries and Interchange allocable
to the Trust and the proceeds of all of the foregoing.
On each issuance date for any Series, including the Issuance Date, the
Trustee will authenticate and deliver one or more certificates representing the
Series or class of investor certificates, in each case against payment to the
Seller of the net proceeds of the sale of the investor certificates. In the case
of the Initial Issuance Date, the Trustee also delivered a certificate
representing the Seller's Interest to the Seller, which may be supplemented from
time to time.
In connection with the transfer of the Receivables to the Trust, Household
Bank will indicate in its computer records that the Receivables have been
conveyed to the Seller and from the Seller to the Trust. In addition, the Seller
will provide to the Trustee a computer file or a microfiche list from Household
Bank containing a true and complete list showing for each Account, as of the
applicable date of designation (i) its account number, (ii) the aggregate amount
outstanding in such Account and (iii) except in the case of New Accounts, the
aggregate amount of Principal Receivables in such Account. The Subservicer will
retain and will not deliver to the Trustee any other records or agreements
relating to the Accounts or the Receivables. Except as set forth above, the
records and agreements relating to the Accounts and the Receivables will not be
segregated from those relating to other credit card accounts and receivables,
and the physical documentation relating to the Accounts or Receivables will not
be stamped or marked to reflect the transfer of Receivables to the Seller or to
the Trust. Household Bank and the Seller will file UCC financing statements with
respect to the sale of the Receivables from Household Bank to the Seller and
from the Seller to the Trust, respectively,
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meeting the requirements of applicable state law. See "Risk Factors" and
"Certain Legal Aspects of the Receivables".
As described below under "-- Additions of Accounts or Participation
Interests", the Seller will have the right (subject to certain limitations and
conditions) and, in some circumstances will be obligated, to require Household
Bank to designate from time to time Additional Accounts to be included as
Accounts and to convey to the Seller (for conveyance by the Seller to the Trust)
all Receivables in such Additional Accounts, whether such Receivables are then
existing or thereafter created. Each such Additional Account must be an Eligible
Account. In respect of any designation of Additional Accounts, the Seller will
follow the procedures set forth in the preceding paragraph, except the list will
show information for such Additional Accounts as of the date such Additional
Accounts are identified and selected. Aggregate Addition Accounts will be
selected by Household Bank in a manner which it reasonably believes will not be
materially adverse to the certificateholders' interest. The Seller has the right
(subject to certain conditions described under "--Additions of Accounts or
Participation Interests") to convey Participation Interests to the Trust. In
addition, the Seller may (under certain circumstances and subject to certain
limitations and conditions) remove the Participation Interests and the
Receivables in certain Accounts as described under "-- Removal of Accounts". The
Seller has removed Receivables from certain Accounts in accordance with the
provisions of the Pooling and Servicing Agreement.
REPRESENTATIONS AND WARRANTIES
The Seller makes representations and warranties to the Trust in the Pooling
and Servicing Agreement, relating to the Accounts and the Receivables as of each
Closing Date for a Series (or as of the related Addition Date with respect to
Additional Accounts) to the effect, among other things, that as of each
applicable date of designation, (a) each Account was an Eligible Account, (b)
each of the Receivables then existing in the Accounts or in the Additional
Accounts is an Eligible Receivable and (c) thereafter, on the date of creation
of any new Receivable, such Receivable is an Eligible Receivable. If the Seller
breaches any representation and warranty described in this paragraph in any
material respect and such breach remains uncured for 60 days, or such longer
period as may be agreed to by the Trustee and the Servicer after the earlier to
occur of the discovery of such breach by the Seller or receipt of written notice
of such breach by the Seller and such breach has a material adverse effect on
the certificateholders' interest in such Receivable, all Receivables with
respect to the Account affected ("Ineligible Receivables") will be reassigned to
the Seller on the terms and conditions set forth below and such Account shall no
longer be included as an Account.
"Eligible Receivable" means each receivable (a) which has arisen under an
Eligible Account, (b) which was created in compliance in all material respects
with all requirements of law and pursuant to a credit card agreement which
complies in all material respects with all requirements of law applicable to
Household Bank, (c) with respect to which all material consents, licenses,
approvals or authorizations of, or registrations or declarations with, any
governmental authority required to be obtained, effected or given in connection
with the creation of such Receivable or the execution, delivery, creation and
performance by Household Bank or by the original credit card issuer, if not
Household Bank, of the related credit card agreements pursuant to which such
Receivable was created have been duly obtained or given and are in full force
and effect, (d) as to which at the time of its transfer to the Trust, the Seller
or the Trust will have good and marketable title, free and clear of all liens,
encumbrances, charges and security interests, (e) which has been the subject of
either a valid transfer and assignment from the Seller to the Trust of all the
Seller's right, title and interest therein (and in the proceeds thereof), or the
grant of a first priority perfected security interest therein (and in the
proceeds thereof), effective until the termination of the Trust, (f) which will
at all times be the legal, valid and binding payment obligation of the
cardholder thereof enforceable against such cardholder in accordance with its
terms, subject to certain bankruptcy or insolvency related exceptions, (g) which
at the time of its transfer to the Trust, has not been waived or modified except
as permitted under the Pooling and Servicing Agreement, (h) which is not at the
time of its transfer to the Trust subject to any right of rescission, setoff,
counterclaim or defense (including the defense of usury), other than certain
bankruptcy and insolvency related defenses, (i) as to which Household Bank and
the Seller have satisfied all obligations to be fulfilled at the time it is
transferred to the Trust, (j) as to which, at the time of its transfer to the
Trust, neither Household Bank nor the Seller has
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taken any action which would impair or failed to take any action the result of
which would impair the rights of the Trust or the Investor Certificateholders
therein and (k) which constitutes either an "account" or a "general intangible"
under the applicable UCC as then in effect.
An Ineligible Receivable shall be reassigned to the Seller on or before the
end of the Due Period in which such reassignment obligation arises by the Seller
directing the Servicer to deduct the portion of such Ineligible Receivable which
is a Principal Receivable from the aggregate amount of the Principal Receivables
used to calculate the Seller's Participation Amount. In the event that the
exclusion of the principal portion of an Ineligible Receivable from the
calculation of the Seller's Participation Amount would cause the Seller's
Participation Amount to be a negative number, on the Distribution Date following
the Due Period in which such reassignment obligation arises the Seller will make
a deposit into the Special Funding Account in immediately available funds in an
amount equal to the amount by which the Seller's Participation Amount would be
reduced below zero. The reassignment of any Ineligible Receivable to the Seller,
and the obligation of the Seller to make any deposits into the Special Funding
Account as described in this paragraph, is the sole remedy respecting any breach
of the representations and warranties described in the preceding paragraph with
respect to such Receivable available to the investor certificateholders or the
Trustee on behalf of investor certificateholders. Household Bank has agreed, in
the Bank Purchase Agreement, to repurchase from the Seller any Ineligible
Receivables reassigned to the Seller and to provide the Seller any amounts
necessary to enable the Seller to make the deposit referred to above. The term
"Seller's Participation Amount" means at any time of determination, an amount
equal to the difference between (a) the sum of (i) the total aggregate amount of
Principal Receivables in the Trust at such time and (ii) the amount, if any, on
deposit in the Special Funding Account (other than the portion constituting
Finance Charge and Administrative Receivables) (the "Special Funding Amount") at
such time and (b) the aggregate invested amounts (including the Invested Amount)
for all outstanding Series at such time.
The Seller will also make representations and warranties to the Trust to
the effect, among other things, that as of each closing date for a Series it is
a corporation validly existing under the laws of the State of Delaware, it has
the authority to consummate the transactions contemplated by the Pooling and
Servicing Agreement and each Supplement and further represents to the Trust on
each closing date for a Series and, with respect to the Additional Accounts, as
of each addition date (a) the Pooling and Servicing Agreement and each
Supplement constitutes a valid, binding and enforceable agreement of the Seller
and (b) the Pooling and Servicing Agreement and each Supplement constitutes
either a valid sale, transfer and assignment to the Trust of all right, title
and interest of the Seller in the Receivables, whether then existing or
thereafter created and the proceeds thereof (including proceeds in any of the
accounts established for the benefit of the investor certificateholders) and in
Recoveries and Interchange or the grant of a first priority perfected security
interest under the applicable UCC in such Receivables and the proceeds thereof
(including proceeds in any of the accounts established for the benefit of the
investor certificateholders) and in Recoveries and Interchange, which is
effective as to each Receivable then existing on such date. In the event of a
material breach of any of the representations and warranties described in this
paragraph that has a material adverse effect on the certificateholders' interest
in the Receivables or the availability of the proceeds thereof to the Trust
(which determination will be made without regard to whether funds are then
available pursuant to any Series Enhancement), either the Trustee or investor
certificateholders (including the Collateral Interest Holder) holding investor
certificates (and a portion of the Collateral Amount) evidencing not less than
50% of the aggregate unpaid principal amount of all outstanding investor
certificates (and interests in the Collateral Amount), by written notice to the
Seller and the Servicer (and to the Trustee if given by the investor
certificateholders), may direct the Seller to accept the reassignment of the
Receivables in the Trust within 60 days of such notice, or within such longer
period specified in such notice. The Seller will be obligated to accept the
reassignment of such Receivables on the Distribution Date following the Due
Period in which such reassignment obligation arises. Such reassignment will not
be required to be made, however, if at the end of such applicable period, the
representations and warranties shall then be true and correct in all material
respects and any material adverse effect caused by such breach shall have been
cured. The price for such reassignment with respect to the Investor Certificates
will be equal to the Invested Amount on such Distribution Date on which the
purchase is scheduled to be made plus accrued and unpaid interest on the unpaid
principal amount of the Class A Certificates and the Class B Certificates and
certain interest amounts
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that were due but not paid on a prior Distribution Date at the Class A
Certificate Rate or the Class B Certificate Rate, as the case may be, through
the day preceding such Distribution Date. The payment of such reassignment price
in immediately available funds, will be considered a payment in full of the
Class A Interest and Class B Interest and such funds will be distributed upon
presentation and surrender of the Class A Certificates and Class B Certificates.
If the Trustee or investor certificateholders give a notice as provided above,
the obligation of the Seller to pay any such reassignment price will constitute
the sole remedy respecting a breach of the representations and warranties
available to investor certificateholders or the Trustee on behalf of investor
certificateholders. Under the Bank Purchase Agreement, Household Bank will
repurchase from the Seller Receivables purchased by the Seller in accordance
with this paragraph.
It is not required or anticipated that the Trustee will make any initial or
periodic general examination of the Receivables or any records relating to the
Receivables for the purpose of establishing the presence or absence of defects,
compliance with Household Bank's and the Seller's representations and warranties
or for any other purpose. In addition, it is not anticipated or required that
the Trustee will make any initial or periodic general examination of the
Servicer or Subservicer for the purpose of establishing the compliance by the
Servicer with its representations or warranties or the performance by the
Servicer of its obligations under the Pooling and Servicing Agreement, any
Supplement or for any other purpose. The Servicer, however, will deliver to the
Trustee on or before March 31 of each calendar year an opinion of counsel with
respect to the validity of the interest of the Trust in and to the Receivables
and certain other components of the Trust.
TRANSFER OF SELLER'S INTEREST
Except as set forth in the Pooling and Servicing Agreement, the Seller may
not transfer the Seller's Interest or its obligations under the Pooling and
Servicing Agreement and any Supplement, unless the Rating Agency has advised the
Seller and the Trustee that the Rating Agency Condition has been satisfied.
ADDITIONS OF ACCOUNTS OR PARTICIPATION INTERESTS
The Seller will have the right to require Household Bank to designate from
time to time Additional Accounts to be included as Accounts. Household Bank will
in each case convey to the Seller, which in turn will convey to the Trust, its
interest in all Receivables arising from such Additional Accounts, whether such
Receivables are then existing or thereafter created, subject to the following
conditions, among others: (i) each such Additional Account must be an Eligible
Account; and (ii) except for the addition of New Accounts (a) the selection of
the Aggregate Addition Accounts is done in a manner which it reasonably believes
will not result in an Adverse Effect; and (b) the Rating Agency Condition shall
have been satisfied. "Adverse Effect" means any action that will result in the
occurrence of an Amortization Event or materially adversely affect the amount or
timing of distributions to the Investor Certificateholders; for purposes of this
definition the Collateral Interest Holder will be treated as an Investor
Certificateholder. The Seller will be obligated to require Household Bank to add
Additional Accounts (to the extent available) if the aggregate amount of
Principal Receivables in the Trust on the last business day of any calendar
month is less than the Required Minimum Principal Balance as of such last day.
In lieu of adding Additional Accounts, the Seller may convey Participation
Interests to the Trust. "Required Minimum Principal Balance" means the amount
equal to (a) the sum of the Series Adjusted Invested Amounts for all outstanding
Series plus the sum of the series required seller amount for all outstanding
Series minus (b) the Special Funding Amount.
Each Additional Account must be an Eligible Account at the time of its
designation. However, since Additional Accounts or Participation Interests which
may be created after the Issuance Date may not have been a part of the Portfolio
as of the close of business on July 31, 1998, they may not be of the same credit
quality as the Initial Accounts or the Aggregate Addition Accounts existing as
of the close of business on July 31, 1998 because such Additional Accounts or
Participation Interests may have been originated at a later date using credit
criteria different from those which were applied to the Initial Accounts or the
Aggregate Addition Accounts existing as of the close of business on July 31,
1998 or may have been acquired from another credit card issuer or entity who had
different credit criteria. Consequently, the performance of such Additional
Accounts or Participation Interests may be better or worse than the performance
of the Accounts in the Portfolio as of the close of business on July 31, 1998.
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REMOVAL OF ACCOUNTS
Subject to the conditions set forth in the next succeeding sentence, the
Seller may on any day of any Due Period, but shall not be obligated to, acquire
all Receivables and proceeds thereof with respect to Removed Accounts and
Participation Interests. The Seller is permitted to designate and require
reassignment to it of the Receivables from Removed Accounts and Participation
Interests only upon satisfaction of the following conditions: (i) the Seller
shall have delivered to the Trustee a computer file or microfiche list
containing a true and complete list of all Removed Accounts, such Accounts to be
identified by, among other things, account number and their aggregate amount of
Principal Receivables; (ii) the Seller shall have delivered an officer's
certificate to the trustee to the effect that (a) no selection procedure
reasonably believed by the Seller to be materially adverse to the interests of
the investor certificateholders was utilized in removing the Removed Accounts
from among any pool of Accounts of a similar type; (b) in the reasonable belief
of the Seller, such removal will not result in the occurrence of an Amortization
Event and (c) in the reasonable belief of Seller such removal will not have an
Adverse Effect and (iii) the Seller shall have delivered prior written notice
(the "Removal Notice") of the removal to each Rating Agency, the Trustee and the
Servicer and prior to the date on which such Receivables are to be removed the
Rating Agency Condition shall have been satisfied with respect to such removal.
The Seller has removed Receivables from certain Removed Accounts in accordance
with the terms and provisions of the Pooling and Servicing Agreement.
INDEMNIFICATION
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Trust and the Trustee from and against any loss, liability,
expense, damage or injury suffered or sustained arising out of certain of the
Servicer's actions or omissions with respect to the Trust pursuant to the
Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that neither the Seller nor
the Servicer or any of their directors, officers, employees or agents will be
under any other liability to the Trust, the Trustee, the investor
certificateholders or any other person for any action taken, or for refraining
from taking any action, in good faith pursuant to the Pooling and Servicing
Agreement. However, neither the Seller nor the Servicer will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence of the Seller, the Servicer or any
such person in the performance of their duties or by reason of reckless
disregard of their obligations and duties thereunder.
In addition, the Pooling 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 Pooling and
Servicing Agreement. The Servicer may, in its sole discretion, undertake any
such legal action which it may deem necessary or desirable for the benefit of
Investor Certificateholders with respect to the Pooling and Servicing Agreement
and the rights and duties of the parties thereto and the interests of the
Investor Certificateholders thereunder.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Pooling and Servicing Agreement, the Servicer will be
responsible for servicing, collecting, enforcing and administering the
Receivables in accordance with customary and usual procedures for servicing
credit card receivables, but in any event at least comparable with the policies
and procedures and the degree of skill and care applied or exercised with
respect to any other credit card receivables it, or its affiliates, service.
Pursuant to the Bank Purchase Agreement, except as otherwise required by
any requirement of law or as is deemed by Household Bank (or any successor to
Household Bank under such agreement) to be necessary in order for it to maintain
its credit card business or a program operated by such credit card business on a
competitive basis based on a good faith assessment by it of the nature of the
competition in the credit card business or such program and only if the change
giving rise to such reduction with respect to a specific program is made
applicable to substantially all of the credit card accounts subject to such
program, Household Bank will not take any action that will have the effect of
reducing the Portfolio Yield to a level that could reasonably be expected to
cause any Series to experience an amortization event based on the insufficiency
of
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the Portfolio Yield or take any action that would have the effect of reducing
the Portfolio Yield to less than the highest Average Rate for any Group.
Household Bank also will covenant that it may only change the terms relating to
the Accounts if the change made with respect to a specific program is made
applicable to substantially all of the Accounts subject to such program.
Servicing activities to be performed by the Servicer include collecting and
recording payments, communicating with cardholders, investigating payment
delinquencies, evaluating the increase of credit limits and the issuance of
credit cards, providing billing and tax records to cardholders and maintaining
internal records with respect to each Account. Managerial and custodial services
performed by the Servicer on behalf of the Trust include providing assistance in
any inspections of the documents and records relating to the Accounts and
Receivables by the Trustee pursuant to the Pooling and Servicing Agreement,
maintaining the agreements, documents and files relating to the Accounts and
Receivables as custodian for the Trust and providing related data processing and
reporting services for Investor Certificateholders and on behalf of the Trustee.
The Pooling and Servicing Agreement provides that the Servicer may delegate
its duties under that agreement to any entity that agrees to conduct such duties
in accordance with the Pooling and Servicing Agreement and the credit card
guidelines set forth therein. The Servicer has delegated its duties to Household
Credit Services, Inc., an affiliate of the Servicer and to EDS. Notwithstanding
the delegation to Household Credit Services, Inc., or any other such delegation,
the Servicer will continue to be liable for all of its obligations under the
Pooling and Servicing Agreement.
SERVICER COVENANTS
In the Pooling and Servicing Agreement, the Servicer has agreed as to each
Receivable and related Account that it will: (a) duly fulfill all obligations on
its part to be fulfilled under or in connection with the Receivables or the
related Accounts, and will maintain in effect all qualifications required and
comply in all material respects with all requirements of law in order to service
the Receivables and Accounts the failure to maintain or comply with which would
have a material adverse effect on the investor certificateholders; (b) not
permit any rescission or cancellation of the Receivables except in accordance
with the policies and procedures of Household Bank relating to the operations of
its credit card business or as ordered by a court of competent jurisdiction or
other governmental authority; (c) do nothing to impair the rights of the
investor certificateholders in the Receivables or the related Accounts; and (d)
not reschedule, revise or defer payments due on the Receivables except in
accordance with its guidelines for servicing receivables.
Under the terms of the Pooling and Servicing Agreement, all Receivables in
an Account will be assigned and transferred to the Servicer and such Account
will no longer be included as an Account if the Servicer discovers, or receives
written notice from the Trustee, that any covenant of the Servicer set forth
above has not been complied with in all material respects and such noncompliance
has not been cured within 60 days (or such longer period as may be agreed to by
the Trustee and the Seller) thereafter and has a material adverse effect on the
certificateholders' interest in such Receivable. Such assignment and transfer
will be made when the Servicer deposits an amount equal to the amount of such
Receivable in the Collection Account on the business day preceding the
Distribution Date following the Due Period during which such obligation arises.
This transfer and assignment to the Servicer constitutes the sole remedy
available to the investor certificateholders if such covenant or warranty of the
Servicer is not satisfied and the Trust's interest in any such assigned
Receivables will be automatically assigned to the Servicer.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement except (i) upon determination that the
performance of such duties is no longer permissible under applicable law or (ii)
if such obligations and duties are assumed by any affiliate of the Servicer that
is a wholly owned subsidiary of Household International or by any other entity
that has satisfied the Rating Agency Condition. No such resignation will become
effective until the Trustee or a successor to the Servicer has assumed the
Servicer's responsibilities and obligations under the Pooling and Servicing
Agreement.
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Any person into which, in accordance with the Pooling and Servicing
Agreement, the Seller or the Servicer may be merged or consolidated or any
person resulting from any merger or consolidation to which the Seller or the
Servicer is a party, or any person succeeding to the business of the Seller or
the Servicer, will be the successor to the Seller or the Servicer, as the case
may be, under the Pooling and Servicing Agreement.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the Trustee
or investor certificateholders holding investor certificates evidencing more
than 50% of the aggregate unpaid principal amount of the investor certificates,
by written notice to the Servicer (and to the Trustee if given by the investor
certificateholders) (a "Termination Notice"), may terminate all of the rights
and obligations of the Servicer, as Servicer, under the Pooling and Servicing
Agreement and in and to the Receivables and the proceeds thereof and the Trustee
will appoint a new Servicer (a "Service Transfer"). For purposes of this
section, references to investor certificates will include the Collateral Amount
and any other similar collateral amounts under Series Enhancements of other
Series similar to the Series Enhancement provided to the Investor Certificates.
The rights and interest of the Seller under the Pooling and Servicing Agreement
in the Seller's Interest will not be affected by any Termination Notice or
Service Transfer. If within 60 days of receipt of a Termination Notice the
Trustee does not receive any bids from eligible Servicers to act as successor
Servicer and receives an officer's certificate from the Seller to the effect
that the Servicer cannot in good faith cure the Servicer Default which gave rise
to the Termination Notice, the Trustee shall grant a right of first refusal to
the Seller which would permit the Seller at its option to purchase the
certificateholders' interest on the Distribution Date in the next calendar
month. The purchase price for the certificateholders' interest shall be equal to
the sum of the amounts specified therefor with respect to each outstanding
Series in the related Supplement, and, for purposes of the Investor
Certificateholders, shall be equal to the higher of (i) the Invested Amount on
the Distribution Date of such purchase, plus accrued and unpaid interest on the
unpaid principal amount of the Class A Certificates and the Class B Certificates
and certain interest amounts that were due but not paid on a prior Distribution
Date at the Class A Certificate Rate or the Class B Certificate Rate, as the
case may be, through the day preceding such Distribution Date, and (ii) the
average bid price quoted by two recognized dealers for each of two securities,
one of which is similar to the Class A Certificates and rated in the highest
investment category by the Rating Agency with a remaining maturity approximately
equal to the remaining maturity of the Class A Certificates, and the other of
which is similar to the Class B Certificates and rated in the same rating
category as the initial rating of the Class B Certificates with a remaining
maturity approximately equal to the remaining maturity of the Class B
Certificates.
The Trustee will as promptly as possible, after the giving of a Termination
Notice, appoint a successor Servicer and if no successor Servicer has been
appointed by the Trustee and has accepted such appointment by the time the
Servicer ceases to act as Servicer, all rights, authority, power and obligations
of the Servicer under the Pooling and Servicing Agreement will be vested in the
Trustee. Prior to any Service Transfer, the Trustee will seek to obtain bids
from potential Servicers meeting certain eligibility requirements set forth in
the Pooling and Servicing Agreement to serve as a successor Servicer for
servicing compensation not in excess of the Servicing Fee plus any amounts
payable to the Seller pursuant to the Pooling and Servicing Agreement.
A "Servicer Default" refers to any of the following events:
(a) failure by the Servicer to make any payment, transfer or deposit,
or to give instructions to the Trustee to make any payment, transfer or
deposit, on the date the Servicer is required to do so under the Pooling
and Servicing Agreement or any Supplement, which is not cured within a five
business day grace period;
(b) failure on the part of the Servicer duly to observe or perform in
any material respect any other covenants or agreements of the Servicer in
the Pooling and Servicing Agreement or any Supplement which has an Adverse
Effect and which continues unremedied for a period of 60 days after written
notice, or the Servicer assigns its duties under the Pooling and Servicing
Agreement, except as specifically permitted thereunder;
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(c) any representation, warranty or certification made by the Servicer
in the Pooling and Servicing Agreement, any Supplement or in any
certificate delivered pursuant to the Pooling and Servicing Agreement or
any Supplement proves to have been incorrect in any material respect when
made, which has an Adverse Effect on the rights of the investor
certificateholders of any Series, and which material adverse effect
continues for a period of 60 days after written notice; or
(d) the occurrence of certain events of bankruptcy, insolvency or
receivership with respect to the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (a) above for a period of ten business days after the
applicable grace period or referred to under clauses (b) or (c) for a period of
60 business days after the applicable grace period, will not constitute a
Servicer Default if such delay or failure could not be prevented by the exercise
of reasonable diligence by the Servicer and such delay or failure was caused by
an act of God or other similar occurrence. Upon the occurrence of any such event
the Servicer will not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the Pooling and
Servicing Agreement and the Servicer must provide the Trustee, the Seller and
any Series Enhancer prompt notice of such failure or delay by it, together with
a description of its efforts to so perform its obligations.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides that on or before March 31 of
each calendar year, the Servicer will cause a firm of nationally recognized
independent public accountants (who may also render other services to the
Servicer, the Seller or Household Bank and any affiliates thereof) to furnish a
report to the effect that such firm has examined certain documents and records
relating to the servicing of the Accounts, compared the information contained in
the Servicer's certificates delivered during the period covered by the report
with such documents and records and that, on the basis of such examination, such
firm is of the opinion that such servicing was conducted in compliance with the
Pooling and Servicing Agreement and applicable provisions of each Supplement
except for such exceptions or errors as such firm shall believe to be immaterial
and such other exceptions as shall be set forth in such statement.
The Pooling and Servicing Agreement provides for delivery to the Trustee on
or before March 31, of each calendar year of a statement signed by an officer of
the Servicer to the effect that the Servicer has, or has caused to be, fully
performed its obligations in all material respects under the Pooling and
Servicing Agreement throughout the preceding year or, if there has been a
default in the performance of any such obligation, specifying the nature and
status of the default.
Copies of all statements, certificates and reports furnished to the Trustee
may be obtained by a request in writing delivered to the Trustee.
AMENDMENTS
The Pooling and Servicing Agreement and any Supplement may be amended by
the Seller, the Servicer and the Trustee, without investor certificateholder
consent, except to the extent provided below. No such amendment, however, may
have an Adverse Effect.
The Pooling and Servicing Agreement or any Supplement may be amended by the
Seller, the Servicer and the Trustee with the consent of the holders of investor
certificates (including the Collateral Interest Holder) evidencing not less than
66 2/3% of the aggregate unpaid principal amount of the investor certificates
(and interests in the Collateral Amount) of all affected Series for which the
Seller has not delivered an officer's certificate stating that there is no
Adverse Effect, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or any Supplement or of modifying in any manner the rights of investor
certificateholders. No such amendment, however, may (a) reduce in any manner the
amount of, or delay the timing of, deposits or distributions on any Class A
Certificate without the consent of each Class A Certificateholder, (b) reduce in
any manner the amount of, or delay the timing of, deposits or distributions on
any Class B Certificate, (c) (i) change the
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definition or the manner of calculating the Certificateholders' Interest, the
Class A Interest or the Class B Interest or (ii) reduce the aforesaid percentage
of the aggregate unpaid principal amount of the Investor Certificates the
holders of which are required to consent to any such amendment, in each case
without the consent of each Investor Certificateholder or (d) adversely affect
the rating of the Class A Certificates or the Class B Certificates by the Rating
Agency without the consent of the holders of Class A Certificates or Class B
Certificates evidencing not less than 66 2/3% of the aggregate unpaid principal
amount of the Class A Certificates or the Class B Certificates, respectively.
Promptly following the execution of any amendment to the Pooling and Servicing
Agreement (other than an amendment described in the preceding paragraph), the
Trustee will furnish written notice of the substance of such amendment to each
investor certificateholder. For purposes of this paragraph, references to the
Investor Certificates will include the Collateral Interest. Notwithstanding the
foregoing, any Supplement executed in connection with the issuance of one or
more new Series of investor certificates will not be considered an amendment to
the Pooling and Servicing Agreement. Any designation of additional Sellers in
accordance with the terms of the Pooling and Servicing Agreement will also not
be considered an amendment of the Pooling and Servicing Agreement unless the
Supplement designating such additional Seller expressly amends the Pooling and
Servicing Agreement.
LIST OF INVESTOR CERTIFICATEHOLDERS
At such time, if any, as Definitive Certificates have been issued, upon
written request of any Holder or Holders of investor certificates of any Series
or of all outstanding Series of record holding investor certificates evidencing
not less than 10% of the aggregate unpaid principal amount of the investor
certificates, the Trustee will afford such Holder or Holders of investor
certificates access during business hours to the current list of investor
certificateholders of such Series or of all outstanding Series, as the case may
be, for purposes of communicating with other Holders of investor certificates
with respect to their rights under the Pooling and Servicing Agreement. See
"Description of the Investor Certificates -- Book-Entry Registration" and "--
Definitive Investor Certificates".
The Pooling and Servicing Agreement will not provide for any annual or
other meetings of investor certificateholders.
THE TRUSTEE
The Bank of New York will act as trustee under the Pooling and Servicing
Agreement. The Corporate Trust Department of The Bank of New York is located at
101 Barclay Street, Floor 21W, New York, New York 10286. The Seller, Household
Bank, the Servicer and their respective affiliates may from time to time enter
into normal banking and trustee relationships with the Trustee and its
affiliates. The Trustee, the Seller, Household Bank, the Servicer and any of
their respective affiliates may hold investor certificates in their own names;
however, any investor certificates so held shall not be entitled to participate
in any decisions made or instructions given to the Trustee by the investor
certificateholders as a group. In addition, for purposes of meeting the legal
requirements of certain local jurisdictions, the Trustee shall have the power to
appoint a co-trustee or separate trustees of all or any part of the Trust. In
the event of such appointment, all rights, powers, duties and obligations shall
be conferred or imposed upon the Trustee and such separate trustee or co-trustee
jointly, or, in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee, who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
DESCRIPTION OF THE BANK PURCHASE AGREEMENT
The Receivables transferred to the Trust by the Seller were originally
acquired by the Seller from Household Bank f.s.b. pursuant to the Bank Purchase
Agreement entered into between the Seller, as purchaser of the Receivables, and
Household Bank, f.s.b., as seller. Household Bank, f.s.b. assigned its interest
in the Bank Purchase Agreement to Household Bank as of December 1, 1993. As
such, Receivables arising on and after December 1, 1993 were acquired by the
Seller from Household Bank. Pursuant to the Pooling and Servicing Agreement, all
such Receivables are transferred by the Seller to the Trust. The following
summary
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relating to the ongoing sales is qualified by reference to the Bank Purchase
Agreement, a form of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part and which is incorporated by reference
herein.
SALE OF RECEIVABLES
Pursuant to sections 2.1, 2.2 and 2.3 of the Bank Purchase Agreement,
Household Bank has sold to the Seller all its right, title and interest in and
to (i) all of the Receivables in the Accounts and all of the Receivables
thereafter created in such Accounts and (ii) the Receivables in each Additional
Account added from time to time to the Accounts as of the date of such addition,
whether such Receivables shall then be existing or shall thereafter be created.
Pursuant to section 3.1 of the Bank Purchase Agreement, the purchase price of
the Purchased Receivables will not be less than the principal amount thereof as
of the time of sale plus the present value of anticipated excess spread.
In connection with such sale of the Receivables to the Seller, Household
Bank has or will, pursuant to section 2.1 of the Bank Purchase Agreement,
indicate in its computer files that the Receivables have been sold to the Seller
by Household Bank and that such Receivables have been sold or transferred by the
Seller to the Trust. In addition, Household Bank has or will provide to the
Seller a computer file or a microfiche list containing a true and complete list
showing each Account, identified by account number and by total outstanding
balance on the applicable Series date of designation or addition date for
Additional Accounts, as the case may be. The records and agreements relating to
the Accounts and Receivables are not segregated by Household Bank from other
documents and agreements relating to other credit card accounts and receivables
and are not stamped or marked to reflect the sale or transfer of the Receivables
to the Seller, but the computer records of Household Bank are or will be marked
to evidence such sale or transfer. Household Bank, as debtor/seller has filed a
UCC financing statement meeting the requirements of applicable state law and in
each of the jurisdictions in which the books and records relating to the
Accounts are maintained with respect to the Receivables in the Initial Accounts
and Household Bank has filed and will similarly file with respect to the
Receivables in Additional Accounts. See "Risk Factors -- Characteristics as a
Sale" "-- Bankruptcy Risks" and "Certain Legal Aspects of the Receivables".
Pursuant to sections 2.2 and 2.3 of the Bank Purchase Agreement, Household
Bank will, if the Seller is required to cause Household Bank to designate
Additional Accounts under the Pooling and Servicing Agreement, designate
Additional Accounts to be included as Accounts under the Bank Purchase
Agreement. Household Bank and the Seller may also agree from time to time to
designate Additional Accounts under the Bank Purchase Agreement. See "The
Pooling and Servicing Agreement -- Additions of Accounts or Participation
Interests". The purchase price for accounts so designated will not be less than
an amount equal to the Principal Receivables conveyed by Household Bank to the
Seller plus estimated collections of Finance Charge and Administrative
Receivables.
REPRESENTATIONS AND WARRANTIES
In sections 4.1 and 4.2 of the Bank Purchase Agreement, Household Bank
represents and warrants to the Seller to the effect that, among other things,
(a) as of each date of designation from and after December 1, 1993 with respect
to Additional Accounts, it is duly organized and in good standing and that it
has the authority to consummate the transactions contemplated by the Bank
Purchase Agreement, (b) as of each date of designation from and after December
1, 1993 with respect to Additional Accounts, each Additional Account will be an
Eligible Account and (c) as of each date of designation from and after December
1, 1993 with respect to Additional Accounts, each Receivable generated
thereunder is, on the applicable date of designation, an Eligible Receivable.
Household Bank has also confirmed the representations made by Household Bank,
f.s.b. under the Bank Purchase Agreement prior to December 1, 1993 (x) that as
of the Initial Issuance Date and as of each date of designation prior to
December 1, 1993 with respect to Additional Accounts, Household Bank, f.s.b. was
duly organized and in good standing and had the authority to consummate the
transactions contemplated by the Bank Purchase Agreement and (y) that each
Account as of the Initial Cut-Off Date and as of each date of designation prior
to December 1, 1993 with respect to Additional Accounts was an Eligible Account
and each Receivable as of the Initial Cut-Off Date and as of
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each date of designation prior to December 1, 1993 with respect to Additional
Accounts was a Receivable eligible to be included in the Trust. In the event of
a breach of any representation and warranty set forth in the Pooling and
Servicing Agreement which results in the requirement that the Seller accept
retransfer of each Ineligible Receivable, then Household Bank shall repurchase
such Ineligible Receivable from the Seller on the date of such retransfer. The
purchase price for such Ineligible Receivables shall be the principal amount
thereof plus applicable finance charges.
Household Bank also represents and warrants to the Seller that, among other
things, as of the Issuance Date (a) the Bank Purchase Agreement constitutes a
valid and binding obligation of Household Bank and (b) the Bank Purchase
Agreement constitutes either a valid sale to the Seller of all right, title and
interest of Household Bank in and to the Receivables, thereafter created in the
Accounts and in the proceeds thereof or constitutes a grant of a security
interest in the Receivables. Pursuant to article 6 of the Bank Purchase
Agreement, if the breach of any of the representations and warranties described
in this paragraph results in the obligation of the Seller under the Pooling and
Servicing Agreement to accept retransfer of the Receivables, Household Bank will
repurchase the Receivables retransferred to the Seller for an amount of cash
equal to the amount of cash the Seller is required to deposit under the Pooling
and Servicing Agreement in connection with such retransfer.
CERTAIN COVENANTS
Pursuant to section 5.1 of the Bank Purchase Agreement, Household Bank may
change the terms and provisions of cardmember agreements relating to the
Accounts in any respect (including, without limitation, the calculation of the
amount, or the timing, of charge-offs), so long as any such changes made with
respect to a specific program are made applicable to substantially all of the
credit card accounts subject to such program.
Household Bank also covenants that, except as required by law or as
Household Bank shall deem necessary in order for Household Bank to maintain its
credit card business or a program operated by such credit card business on a
competitive basis based on a good faith assessment by Household Bank of the
nature of its competition with respect to its credit card business or such
program, Household Bank will not take any action which will have the effect of
reducing the Portfolio Yield to a level that could reasonably be expected to
cause any Series to experience an amortization event based on the insufficiency
of the Portfolio Yield and, except as required by law, take any action that
would have the effect of reducing the Portfolio Yield to less than the highest
Average Rate for any Group.
Household Bank also agrees, for the benefit of the Trust, that any amounts
payable by Household Bank to the Seller pursuant to the Bank Purchase Agreement
that are to be paid by the Seller to the Trustee for the benefit of the Investor
Certificateholders will be paid by Household Bank, on behalf of the Seller,
directly to the Trustee. The Seller has agreed in the Pooling and Servicing
Agreement to enforce the covenants and agreements of Household Bank in the Bank
Purchase Agreement.
AMENDMENTS
Pursuant to section 9.1 thereof, the Bank Purchase Agreement may be amended
by the Seller and Household Bank without the consent of the investor
certificateholders. No such amendment, however, may have an Adverse Effect.
TRANSFER OF ACCOUNTS
Pursuant to section 9.5 of the Bank Purchase Agreement, Household Bank has
the right to transfer all or a portion of the Accounts to (i) any successor by
merger assuming the Bank Purchase Agreement, (ii) any affiliate owned by
Household International or (iii) to any entity provided that the Rating Agency
Condition has been satisfied. After a transfer of Accounts, the credit rating of
the transferee will be a factor in the rating of the investor certificates
thereafter.
The Accounts, the Receivables of which have been conveyed to the Trust,
were originated under an affinity agreement between Household International and
General Motors Corporation ("GM") and are
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generated under the MasterCard program of Household Bank (or an affiliate
thereof) known as "The GM Card(SM)". Such agreement contemplates and provides
for securitization transactions of receivables generated by "The GM Card(SM)".
The Office of Thrift Supervision has approved the establishment of
Household Bank as a wholly-owned operating subsidiary of Household Bank, f.s.b.,
and on December 1, 1993 the Comptroller of the Currency granted Household Bank's
charter. In connection therewith, Household Bank, f.s.b. transferred the
Accounts existing as of such date and assigned its obligations under the Bank
Purchase Agreement to Household Bank without the approval of any Rating Agency
in accordance with the terms of the Bank Purchase Agreement and Pooling and
Servicing Agreement.
TERMINATION
The Bank Purchase Agreement will terminate immediately after the Trust
terminates. In addition, if a conservator or receiver is appointed for Household
Bank or certain other liquidation events occur, Household Bank will, pursuant to
section 8.2 of the Bank Purchase Agreement, immediately cease to sell or
transfer Receivables to the Seller and promptly give notice of such event to the
Seller and to the Trustee.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
Household Bank will sell the Receivables to the Seller and the Seller, in
turn, will transfer all Receivables to the Trust. Household Bank and the Seller
will represent and warrant that its respective transfers constitute valid sales
and assignments of all of its respective right, title and interest in and to the
Receivables, except for the interest of the Seller as holder of the Seller's
Interest, and if the assignment by the Seller to the Trust does not constitute a
sale of the Receivables, it constitutes a grant of a security interest to the
Trust in and to the Receivables. The Seller will also represent and warrant
that, if the transfer of Receivables by the Seller to the Trust is deemed to
create a security interest under the UCC, there will exist a valid, subsisting
and enforceable first priority perfected security interest in the Receivables,
in existence at the time of the formation of the Trust or at the date of
addition of any Additional Accounts, as the case may be, in favor of the Trust
and a valid, subsisting and enforceable first priority perfected security
interest in the Receivables created thereafter in favor of 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 "The Pooling and Servicing Agreement --
Representations and Warranties".
Household Bank and the Seller 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 treated
under the UCC as creating a security interest therein and are subject to its
provisions and the filing of an appropriate financing statement or statements is
required to perfect the interest of the Trust in the Receivables. If a transfer
of general intangibles is deemed to create a security interest, the UCC applies
and filing an appropriate financing statement or statements is also required in
order to perfect the Trust's security interest. Financing statements covering
the Receivables have been and will be filed under the UCC to protect the Seller
and the Trust if any of the transfers by Household Bank or the Seller is deemed
to be subject to the UCC. If a transfer of general intangibles is deemed to be a
sale, then the UCC is not applicable and no further action under the UCC is
required to protect the Trust's interest from third parties.
There are certain limited circumstances under the UCC in which prior or
subsequent transferees of Receivables coming into existence after the Issuance
Date could have an interest in such Receivables with priority over the Trust's
interest. A tax or other government lien on property of the Seller or Household
Bank arising prior to the time a Receivable comes into existence may also have
priority over the interest of the Trust in such Receivable. Furthermore, if the
FDIC were appointed as a receiver of Household Bank, the receiver's
administrative expenses may also have priority over the interest of the Trust in
such Receivables. Under the Bank Purchase Agreement, however, Household Bank
will warrant that it has transferred the Receivables to the Seller free and
clear of the lien of any third party. In addition, Household Bank will covenant
that it will
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not sell, pledge, assign, transfer or grant any lien on any Receivable (or any
interest therein) other than to the Seller.
CERTAIN MATTERS RELATING TO INSOLVENCY
Household Bank and the Seller have arranged for the transfer of Receivables
pursuant to the Bank Purchase Agreement to be a sale of the Receivables by
Household Bank to the Seller. However, in the event of an insolvency of
Household Bank it is possible that a receiver or conservator could attempt to
characterize the transaction between Household Bank and the Seller as a pledge
of the Receivables rather than a true sale. The Financial Institutions Reform,
Recovery and Enforcement Act ("FIRREA") sets forth certain powers that a
conservator or receiver for Household Bank could exercise. Positions taken by
the FDIC before the passage of FIRREA do not suggest that a conservator or
receiver for Household Bank would interfere with the timely transfer to the
Seller (or by the Seller to the Trust) of payments collected on the Receivables.
If the security interest granted by Household Bank in the Receivables to the
Seller was validly perfected before Household Bank's insolvency and was not
taken in contemplation of insolvency, such security interests should not be
subject to avoidance, and payments to the Seller with respect to the Receivables
should not be subject to recovery by a conservator or receiver for Household
Bank. If, however, a conservator or receiver for Household Bank were to assert a
contrary position, or were to require the Seller to establish its right to those
payments by submitting to and completing the administrative claims procedure
established under FIRREA, or the conservator or receiver were to request a stay
of proceedings with respect to Household Bank as provided under FIRREA, delays
in payments on the Investor Certificates and possible reductions in the amount
of those payments could occur.
Upon the appointment of a conservator or receiver or upon a voluntary
liquidation with respect to Household Bank, Household Bank will promptly give
notice thereof to the Trustee and the Seller and an Amortization Event will
occur. Pursuant to the Bank Purchase Agreement and the Pooling and Servicing
Agreement, newly created Receivables will not be transferred to the Trust on and
after any such appointment or voluntary liquidation, and, in the event of an
Insolvency Event with respect to the Seller, the Trustee will proceed to sell,
dispose of or otherwise liquidate the Receivables in a commercially reasonable
manner and on commercially reasonable terms, unless within a specified period of
time investor certificateholders representing undivided interests aggregating
more than 50% of each Series or any person granted such right in any Supplement
instructs otherwise (assuming that the conservator or receiver does not order
such a sale despite such instructions). As of this date, any one of the credit
enhancers for Series 1993-1, 1993-2, 1994-1, 1995-1 and 1997-1 may object and
prevent such sale. The credit enhancer for Series 1998-1 may similarly object
and prevent such sale. The proceeds from the sale of the Receivables would be
treated as collections of the Receivables and deposited into the Collection
Account. This procedure could be delayed, as described above. In addition, upon
the occurrence of an Amortization Event, if a trustee in bankruptcy, a
conservator or receiver is appointed for Household Bank or the Seller, as
applicable, and no Amortization Event other than such conservatorship or
receivership or insolvency of Household Bank or the Seller, as applicable,
exists, the conservator or receiver may have the power to prevent the early
sale, liquidation or disposition of the Receivables and the commencement of the
Early Amortization Period. See "Description of the Investor Certificates --
Amortization Event".
While Household Finance Corporation is the Servicer, cash collections held
by Household Finance Corporation may, subject to certain conditions, be
commingled and used for the benefit of Household Finance Corporation prior to
each Distribution Date and, in the event of the insolvency or receivership of
Household Finance Corporation or, in certain circumstances, the lapse of certain
time periods, the Trust may not have a perfected interest in such collections.
Unless otherwise agreed to by the applicable Rating Agency, if the commercial
paper rating of Household Finance Corporation is reduced below A-1 or P-1 by the
applicable Rating Agency, Household Finance Corporation will, within five
business days, commence the deposit of collections directly into the Collection
Account within two business days of the day of processing. See "Description of
the Investor Certificates -- Allocation of Collections; Deposits in Collection
Account".
The Seller will not engage in any activities except purchasing receivables
or Participation Interests from Household Bank or other originators of Accounts,
forming the Trust or trusts similar thereto, transferring
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receivables or Participation Interests to such trusts and engaging in activities
incident to, or necessary or convenient to accomplish, the foregoing. In
addition, the Preferred Stock (which is a Trust Asset) was issued directly to
the Trustee on April 29, 1993. The Preferred Stock has a par value of $1.00 and
is the only issued and outstanding share of the Seller's Preferred Stock.
Pursuant to the Seller's articles of incorporation, which are incorporated by
reference as an exhibit to the Registration Statement of which this prospectus
forms a part, the sole rights of the Trustee as holder of the Preferred Stock
are to (a) vote in the event the Seller desires to institute proceedings to be
adjudicated insolvent, consent to the institution of any bankruptcy or
insolvency case or proceedings against it, file or consent to a petition under
any applicable federal or state law seeking the Seller's liquidation or any
other relief for the Seller as debtor, consent to the appointment of a receiver,
liquidator, assignee, custodian, sequestrator or other similar official of the
Seller or a substantial part of its property, make an assignment for the benefit
of creditors, or admit in writing its inability to pay its debts as they become
due (collectively, the "Seller's Bankruptcy Initiatives"), and (b) receive $1.00
upon liquidation of the Seller. The unanimous affirmative vote of the holders of
the Preferred Stock is required to approve any of the Seller's Bankruptcy
Initiatives. Holders of the Preferred Stock have no other rights, including the
right to receive dividends or to vote on any other matter. The Seller has no
current intention of filing a voluntary petition under the Bankruptcy Code, or
any similar applicable state law even though such laws do not prohibit the
Seller from filing a voluntary petition thereunder.
In the event of a Servicer Default relating to the bankruptcy or insolvency
of the Servicer, and no Servicer Default other than such bankruptcy or
insolvency related Servicer Default exists, the trustee in bankruptcy may have
the power to prevent either the Trustee or the investor certificateholders from
appointing a successor Servicer. See "The Pooling and Servicing Agreement --
Servicer Default".
CONSUMER PROTECTION LAWS
The relationship of the cardholder and credit card issuer is extensively
regulated by Federal and state consumer protection laws. With respect to credit
cards issued by Household 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 cardholder liability for
unauthorized use, prohibit certain discriminatory practices in extending credit,
and regulate practices followed in collections. In addition, cardholders are
entitled under these laws to have payments and credits applied to the credit
card 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 credit card industry. The Federal Financial Institutions
Examination Council, on June 30, 1998, proposed a revised policy statement on
the classification of retail credit. If adopted, the revised policy statement
could, among other things, establish a uniform charge off period of 150 days
delinquency for open-end and closed-end credit. The Trust may be liable for
certain violations of consumer protection laws that apply to the Receivables,
either as assignee from the Seller (as Household Bank's assignee) 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, a cardholder may be entitled to assert such 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 such laws (if such noncompliance has a material adverse
effect on the certificateholders' interest therein) will be reassigned to the
Seller. The Servicer has also agreed in the Pooling and Servicing Agreement to
indemnify the Trust, among other things, for any liability arising from such
violations. For a discussion of the Trust's rights if the Receivables were not
created in compliance in all material respects with applicable laws, see "The
Pooling and Servicing Agreement -- Representations and Warranties".
Application of Federal and state bankruptcy and debtor relief laws would
affect the interests of the investor certificateholders if such laws result in
any Receivables being charged off as uncollectible. See "Description of the
Investor Certificates -- Defaulted Receivables; Rebates and Fraudulent Charges"
and "-- Investor Charge-Offs".
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PROPOSED LEGISLATION
Congress and the states may enact new laws and amendments to existing laws
to regulate further the credit card industry or to reduce finance charges or
other fees or charges applicable to credit card accounts. The potential effect
of any such or further regulation or legislation could be to reduce the yield on
the Accounts or to make it more difficult for the Servicer to collect payments
on the Receivables. If such yield is reduced, an Amortization Event could occur,
and the Early Amortization Period may commence. See "Risk Factors -- Competition
in the Credit Card Industry" and "Description of the Investor Certificates --
Amortization Event".
Pursuant to the Pooling and Servicing Agreement, if the interest of the
Class A Certificateholders and Class B Certificateholders in a Receivable is
materially adversely affected by the failure of the Receivable to comply in all
material respects with applicable requirements of law, the interest of such
Investor Certificateholders in all Receivables in the affected Account will be
reassigned to Household Bank or, in some circumstances, to the Servicer. On the
closing dates for each Series, Household Bank will make certain other
representations and warranties relating to the validity and enforceability of
the Accounts and the Receivables. The sole remedy, if any such representation or
warranty is breached and such breach has a material adverse effect on the
interest of Investor Certificateholders in any Receivable and continues beyond
the applicable cure period, is that the interest of the Investor
Certificateholders in the Receivables affected thereby will be reassigned to
Household Bank or assigned to the Servicer, as the case may be. In addition, in
the event of the breach of certain representations and warranties, Household
Bank may be obligated to accept the reassignment of the entire Trust portfolio.
See "The Pooling and Servicing Agreement -- Representations and Warranties" and
"-- Servicer Covenants" and "Certain Legal Aspects of the Receivables --
Consumer Protection Laws".
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a discussion of the material federal income tax
consequences relating to the purchase, ownership and disposition of an Investor
Certificate offered hereunder, which has been prepared by Orrick, Herrington &
Sutcliffe LLP, special tax counsel to the Seller ("Special Counsel"). Special
Counsel is of the opinion that, as to statements of law or legal conclusions
with respect thereto, this discussion is correct in all material respects. As
more fully described below, Special Counsel is also of the opinion that the
Investor Certificates offered hereunder will be characterized as debt for
federal income tax purposes and that the Trust will not be treated as an
association or publicly traded partnership taxable as a corporation for such
purposes. Special Counsel will render no other opinions to the Seller with
respect to the Investor Certificates offered hereunder or the Trust. This
discussion is based on current law, which is subject to changes that could
prospectively or retroactively modify or adversely affect the tax consequences
summarized below. The discussion does not address all of the tax consequences
relevant to a particular Investor Certificateholder in light of that Investor
Certificateholder's circumstances, and some Investor Certificateholders may be
subject to special tax rules and limitations not discussed below (such as
insurance companies, tax-exempt organizations, banks, dealers in securities or
currencies, and persons holding an Investor Certificate as part of a "straddle"
or "conversion transaction" or otherwise as part of an "integrated transaction"
or whose functional currency is other than the United States dollar).
Additionally, this discussion deals only with Investor Certificates held as
"capital assets" as defined in the Code. Each prospective Investor
Certificateholder is urged to consult its own tax adviser in determining the
federal, state, local and foreign income and any other tax consequences of the
purchase, ownership and disposition of an Investor Certificate.
For purposes of this discussion, "U.S. Person" means a citizen or resident
of the United States, a corporation or partnership organized in or under the
laws of the United States, any state thereof, or any political subdivision of
either (including the District of Columbia), or an estate or trust the income of
which is includible in gross income for U.S. federal income tax purposes
regardless of its source. The term "U.S. Investor Certificateholder" means any
U.S. Person and any other person providing appropriate
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documentation reflecting their exempt status, to the extent that the income
attributable to its interest in an Investor Certificate is effectively connected
with that person's conduct of a U.S. trade or business.
TREATMENT OF THE INVESTOR CERTIFICATES AS DEBT
The Seller expresses in the Pooling and Servicing Agreement the intent that
for essentially all tax purposes, the Investor Certificates will be treated as
debt of the Seller secured by the Receivables. The Seller, by entering into the
Pooling and Servicing Agreement, and each Investor Certificateholder, by the
acceptance of an interest in an Investor Certificate, agree to treat the
Investor Certificates as debt of the Seller for such tax purposes. However, the
Pooling and Servicing Agreement generally refers to the transfer of Receivables
as a "sale," and because different criteria are used in determining the non-tax
accounting treatment of the transaction, the Seller will treat the Pooling and
Servicing Agreement for certain non-tax accounting purposes as causing a
transfer of an ownership interest in the Receivables and not as creating a debt
obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines its tax consequences. The form of a
transaction, while a relevant factor, is not conclusive evidence of its economic
substance. In appropriate circumstances, the courts have allowed taxpayers as
well as the Internal Revenue Service (the "IRS") to treat a transaction in
accordance with its economic substance as determined under federal income tax
law, even though the participants in the transaction have characterized it
differently for non-tax purposes.
The determination of whether the economic substance of a purchase of an
interest in property is instead a loan secured by the transferred property has
been made by the IRS and the courts on the basis of numerous factors designed to
determine whether the seller has relinquished (and the purchaser has obtained)
substantial incidents of ownership in the property. Among those factors, the
primary ones examined are whether the purchaser has the opportunity to gain if
the property increases in value, and has the risk of loss if the property
decreases in value. Special Counsel is of the opinion that, under current law as
in effect on the Issuance Date, although no transaction closely comparable to
that contemplated herein has been the subject of any Treasury regulation,
revenue ruling or judicial decision, for federal income tax purposes the
Investor Certificates offered hereunder will not constitute an ownership
interest in the Receivables but will properly be characterized as debt. Except
where indicated to the contrary, the following discussion assumes that the
Investor Certificates offered hereunder are debt for federal income tax
purposes.
TREATMENT OF THE TRUST
General. The Pooling and Servicing Agreement permits the issuance of
Investor Certificates and certain other interests (including the Collateral
Interest) in the Trust, each of which may be treated for federal income tax
purposes either as debt or as equity interests in the Trust. If all of the
Investor Certificates and other interests (other than the Seller's Certificate)
in the Trust were characterized as debt, the Trust might be characterized as a
security arrangement for debt collateralized by the Receivables and issued
directly by the Seller (or other holder of the Seller's Certificate). Under such
a view, the Trust would be disregarded for federal income tax purposes.
Alternatively, if some of the Investor Certificates, or other interests (other
than the remaining interest in the Seller's Certificate) in the Trust were
characterized as equity, the Trust might be characterized as a separate entity
owning the Receivables, issuing its own debt, and jointly owned by the Seller
(or other holder of such interest in the Seller Certificate) and the other
holders of equity interests in the Trust. However, Special Counsel is of the
opinion that, under current law as in effect on the Issuance Date, any such
entity constituted by the Trust will not be an association or publicly traded
partnership taxable as a corporation, and accordingly, the Trust will not be
subject to federal income tax.
Possible Treatment of the Trust as an Association, a Publicly Traded
Partnership or a non-Publicly Traded Partnership. Although, as described above,
Special Counsel is of the opinion that the Investor Certificates will properly
be treated as debt for federal income tax purposes and that the Trust will not
be treated as an association or publicly traded partnership taxable as a
corporation, such opinion does not bind the IRS and thus no assurance can be
given that such treatment will prevail. If the IRS were to contend successfully
that some or all of the Investor Certificates or any other interest in the Trust
(other than the
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Seller's interest in the Seller's Certificate), including the Collateral
Interest or any similar interest, were not debt obligations for federal income
tax purposes, all or a portion of the Trust could be classified for federal
income tax purposes as either an association or publicly traded partnership
taxable as a corporation, or possibly as a partnership not taxable as a
corporation. Because Special Counsel is of the opinion that the Investor
Certificates will be characterized as debt for federal income tax purposes and
because any holder of an interest in the Collateral Interest and any similar
interest will agree to treat that interest as debt for such purposes, no attempt
will be made to comply with any tax reporting requirements that would apply as a
result of such alternative characterizations.
If the Trust were treated in whole or in part as a partnership in which
some or all holders of interests in the publicly offered Investor Certificates
were partners, that partnership could be classified as a publicly traded
partnership, and so could be taxable as a corporation. Further, regulations
published by the Treasury Department on December 4, 1995 (the "Regulations")
could cause the Trust to constitute a publicly traded partnership even if all
holders of interests in publicly offered Investor Certificates are treated as
holding debt. The Regulations generally apply to taxable years beginning after
December 31, 1995, and thus could affect the classification of presently
existing entities and the ongoing tax treatment of already completed
transactions. Although the Regulations provide for a 10-year grandfather period
for a partnership actively engaged in an activity before December 4, 1995, it is
not clear whether the Trust would qualify for this grandfather period. If the
Trust were classified as a publicly traded partnership, whether by reason of the
treatment of publicly offered Investor Certificates as equity or by reason of
the Regulations, it would avoid taxation as a corporation if its income was not
derived in the conduct of a "financial business"; however, whether the income of
the Trust would be so classified is unclear.
Under the Code and the Regulations, a partnership will be classified as a
publicly traded partnership if equity interests therein are traded on an
"established securities market," or are "readily tradable" on a "secondary
market" or its "substantial equivalent." The Seller intends to take measures
designed to reduce the risk that the Trust could be classified as a publicly
traded partnership by reason of interests in the Trust other than the publicly
traded Investor Certificates. However, certain of the actions that may be
necessary for avoiding the treatment of such interests as "readily tradable" on
a "secondary market" or its "substantial equivalent" are not fully within the
control of the Seller, and certain Series predating the Regulations may not
conform to the requirements of the Regulations. As a result, there can be no
assurance that the measures the Seller intends to take will in all circumstances
be sufficient to prevent the Trust from being classified as a publicly traded
partnership under the Regulations.
If the arrangement created by the Pooling and Servicing Agreement were
treated in whole or in part as a publicly traded partnership taxable as a
corporation, that entity would be subject to federal income tax at corporate tax
rates on its taxable income generated by ownership of the related Receivables.
That tax could result in reduced distributions to Investor Certificateholders.
No distributions from the Trust would be deductible in computing the taxable
income of the corporation, except to the extent that any Investor Certificates
were treated as debt of the corporation and distributions to the related
Investor Certificateholders were treated as payments of interest thereon. In
addition, distributions to Investor Certificateholders not treated as holding
debt would be dividend income to the extent of the current and accumulated
earnings and profits of the corporation (and Investor Certificateholders may not
be entitled to any dividends received deduction in respect of such income).
If the Trust were, however, treated in whole or in part as a partnership
other than a publicly traded partnership taxable as a corporation, that
partnership would not be subject to federal income tax. Rather, each item of
income, gain, loss and deduction of the partnership generated through the
ownership of the related Receivables would be taken into account directly in
computing taxable income of the Seller (or the holder of the Seller's
Certificate) and any Investor Certificateholders and others treated as partners
in accordance with their respective partnership interests therein. The amounts
and timing of income reportable by any Investor Certificateholders treated as
partners would likely differ from that reportable by such Investor
Certificateholders had they been treated as owning debt. In addition, if the
Trust were treated in whole or n part as a partnership other than a publicly
traded partnership, income derived from the partnership by any Investor
Certificateholder that is a pension fund or other tax-exempt entity may be
treated as unrelated business taxable income.
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Partnership characterization also may have adverse state and local income or
franchise tax consequences for an Investor Certificateholder. Further, if the
Trust were treated in whole or in part as a partnership and the number of
holders of interests in the publicly offered Investor Certificates and other
interests in the Trust treated as partners equaled or exceeded 100, the Seller
may cause the Trust to elect to be an "electing large partnership." The
consequence of such election to investors could include the determination of
certain tax items at the partnership level and the disallowance of otherwise
allowable deductions. No representation is made as to whether any such election
will be made.
TAXATION OF INTEREST INCOME OF U.S. INVESTOR CERTIFICATEHOLDERS
General. Stated interest on a beneficial interest in an Investor
Certificate will be includible in gross income in accordance with a U.S.
Investor Certificateholder's method of accounting.
Original Issue Discount. It is anticipated that neither the Class A
Certificates nor the Class B Certificates will have any original issue discount
("OID") other than possibly OID within a "de minimis" exception. If the Investor
Certificates were issued with original issue discount, the provisions of
sections 1271 through 1273 and 1275 of the Code would apply to the Investor
Certificates. Under those provisions, a U.S. Investor Certificateholder
(including a cash basis holder) generally would be required to accrue the OID on
its interest in an Investor Certificate in income for federal income tax
purposes on a constant yield basis, resulting in the inclusion of OID in income
somewhat in advance of the receipt of cash attributable to that income. In
general, an Investor Certificate will be treated as having OID to the extent
that its "stated redemption price" exceeds its "issue price," if such excess is
more than a "de minimus" amount equal to 0.25 percent multiplied by the weighted
average life of the Investor Certificate (determined by taking into account only
the number of complete years following issuance until payment is made for any
partial principal payments). 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 Investor Certificates is unclear.
Additionally, the IRS could take the position based on Treasury regulations that
none of the interest payable on an Investor Certificate is "unconditionally
payable" and hence that all of such interest should be included in the Investor
Certificate's stated redemption price at maturity. If sustained, such treatment
should not significantly affect the tax liability of most Investor
Certificateholders, but prospective U.S. Investor Certificateholders should
consult their own tax advisers concerning the impact to them in their particular
circumstances.
Market Discount. A U.S. Investor Certificateholder who subsequently
purchases an interest in an Investor Certificate after the initial distribution
thereof at a discount that exceeds any unamortized OID 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 an Investor
Certificate and partial principal payments on an Investor Certificate 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 an Investor Certificate that has market
discount.
Market Premium. A U.S. Investor Certificateholder who purchases an interest
in an Investor Certificate at a premium may elect to offset the premium against
interest income over the remaining term of the Investor Certificate in
accordance with the provisions of section 171 of the Code.
SALE OR EXCHANGE OF INVESTOR CERTIFICATES
Upon a disposition of an interest in an Investor Certificate, a U.S.
Investor Certificateholder generally will recognize gain or loss equal to the
difference between the amount realized on the disposition and the U.S. Investor
Certificateholder's adjusted basis in its interest in the Investor Certificate.
The adjusted basis in the interest in the Investor Certificate will equal its
cost, increased by any OID or market discount includible in income with respect
to the interest in the Investor Certificate prior to its sale and reduced by any
principal payments previously received with respect to the interest in the
Investor Certificate and any amortized premium. Subject to the market discount
rules, gain or loss will be capital gain or loss if the interest in the
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Investor Certificate was held as a capital asset. Capital losses generally may
be used only to offset capital gains.
NON-U.S. INVESTOR CERTIFICATEHOLDERS
In general, a non-U.S. Investor Certificateholder (an Investor
Certificateholder who is not a U.S. Person, and whose income attributable to its
interest in an Investor Certificate is not effectively connected with that
person's conduct of a United States trade or business) will not be subject to
United States federal income tax on interest (including OID) on a beneficial
interest in an Investor Certificate unless (i) the non-U.S. Investor
Certificateholder actually or constructively owns 10 percent or more of the
total combined voting power of all classes of stock of the Seller entitled to
vote (or of a profits or capital interest of the Trust if characterized as a
partnership or of stock in the Trust if treated as a corporation), (ii) the
non-U.S. Investor Certificateholder is a controlled foreign corporation that is
related to the Seller (or the Trust treated as a partnership) through stock
ownership, (iii) the non-U.S. Investor Certificateholder is a bank described in
Code Section 881(c)(3)(A), (iv) such interest is contingent interest described
in Code Section 871(h)(4), or (v) the non-U.S. Investor Certificateholder bears
certain relationships to any holder of either the Seller's Certificate other
than the Seller or any other interest in the Trust not properly characterized as
debt. To qualify for the exemption from taxation, under currently applicable
procedures the last U.S. Person in the chain of payment prior to payment to a
non-U.S. Investor Certificateholder (the "Withholding Agent") must have received
(in the year in which a payment of interest or principal occurs or in either of
the two preceding years) a statement that (i) is signed by the non-U.S. Investor
Certificateholder under penalties of perjury, (ii) certifies that the non-U.S.
Investor Certificateholder is not a U.S. Person and (iii) provides the name and
address of the non-U.S. Investor Certificateholder. The statement may be made on
a Form W-8 or substantially similar substitute form, and the non-U.S. Investor
Certificateholder must inform the Withholding Agent of any change in the
information on the statement within 30 days of the change. If an Investor
Certificate is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the Withholding Agent. However, in that case, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the non-U.S.
Investor Certificateholder to the organization or institution holding the
Investor Certificate on behalf of the non-U.S. Investor Certificateholder. The
United States Treasury Department recently issued final Treasury regulations
which will revise some of the foregoing procedures whereby a non-U.S. Investor
Certificateholder may establish an exemption from withholding generally
beginning January 1, 2000; non-U.S. Certificateholders should consult their tax
advisers concerning the impact to them, if any, of such revised procedures.
Generally, any gain or income realized by a non-U.S. Investor
Certificateholder upon retirement or disposition of an interest in an Investor
Certificate will not be subject to United States federal income tax, provided
that (i) in the case of an Investor Certificateholder that is an individual,
such Investor Certificateholder is not present in the United States for 183 days
or more during the taxable year in which such retirement or disposition occurs
and (ii) in the case of gain representing accrued interest (or OID), the
conditions described in the preceding paragraph for exemption from withholding
are satisfied. Certain exceptions may be applicable, and an individual non-U.S.
Investor Certificateholder should consult a tax adviser.
If an Investor Certificate were treated as an interest in a partnership,
the recharacterization could cause a non-U.S. Investor Certificateholder to be
treated as engaged in a trade or business in the United States. In that event,
the non-U.S. Investor Certificateholder would be required to file a federal
income tax return and, in general, would be subject to United States federal
income tax (including the branch profits tax) on its net income from the
partnership. Further, certain withholding obligations apply with respect to
income allocable or distributions made to a foreign partner. That withholding
may be at a rate as high as 39.6 percent under current United States federal
income tax law. If some or all of the Investor Certificates were treated as
stock in a corporation, any related dividend distributions to a non-U.S.
Investor Certificateholder generally would be subject to withholding tax at the
prevailing rate (currently 30 percent), unless that rate were reduced by an
applicable tax treaty.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding of United States federal income tax at the prevailing
rate (currently 31 percent) may apply to payments made in respect of an Investor
Certificate to a registered owner who is not an "exempt recipient" and who fails
to provide certain identifying information (such as the registered owner's
taxpayer identification number) in the manner required. Generally, individuals
are not exempt recipients whereas corporations and certain other entities are
exempt recipients. Payments made in respect of a U.S. Investor Certificateholder
must be reported to the IRS, unless the U.S. Investor Certificateholder is an
exempt recipient or otherwise establishes an exemption. Compliance with the
identification procedures (described in the preceding section) would establish
an exemption from backup withholding for a non-U.S. Investor Certificateholder
who is not an exempt recipient.
In addition, upon the sale of an Investor Certificate to (or through) a
"broker," the broker must withhold 31 percent of the entire purchase price,
unless either (i) the broker determines that the seller is a corporation or
other exempt recipient or (ii) the seller provides certain identifying
information in the required manner, and in the case of a non-U.S. Investor
Certificateholder certifies that the seller is a non-U.S. Investor
Certificateholder (and certain other conditions are met). Such a sale must also
be reported by the broker to the IRS, unless either (i) the broker determines
that the seller is an exempt recipient or (ii) the seller certifies its
non-United States status (and certain other conditions are met). Certification
of the registered owner's non-United States status normally would be made on
Form W-8 under penalties of perjury, although in certain cases it may be
possible to submit other documentary evidence. As defined by Treasury
regulations, the term "broker" includes all persons who stand ready to effect
sales made by others in the ordinary course of a trade or business, as well as
brokers and dealers registered as such under the laws of the United States or a
state. These requirements generally will apply to a United States office of a
broker, and the information reporting requirements generally will apply to a
foreign office of a United States broker as well as to a foreign office of a
foreign broker (i) that is a controlled foreign corporation within the meaning
of section 957(a) of the Code or (ii) 50 percent or more of whose gross income
from all sources for the three year period ending with the close of its taxable
year preceding the payment (or for such part of the period that the foreign
broker has been in existence) was effectively connected with the conduct of a
trade or business within the United States.
Any amounts withheld under the backup withholding rules from a payment to
an Investor Certificateholder would be allowed as a refund or a credit against
such Investor Certificateholder's United States federal income tax, provided
that the required information is furnished to the IRS.
Recently issued final Treasury regulations will revise some of the
foregoing information reporting and backup withholding procedures generally
beginning January 1, 2000; Investor Certificateholders should consult their tax
advisers concerning the impact to them, if any, of such revised procedures.
STATE AND LOCAL TAX CONSEQUENCES
General. State and local tax consequences to each Investor
Certificateholder will depend upon the provisions of the state and local tax
laws to which the Investor Certificateholder is subject. In general, an Investor
Certificateholder would be subject to the tax laws of a state or locality in
which it is a resident or doing business, or under whose laws it is organized;
additionally, some states' tax laws may purport to apply to an Investor
Certificateholder whose sole contact with the state arises from the purchase of
an Investor Certificate. Most states modify or adjust the taxpayer's Federal
taxable income to arrive at the amount of income potentially subject to state
tax. Resident individuals generally pay state tax on 100% of such state-
modified income, while corporations and other taxpayers generally pay state tax
only on that portion of state-modified income assigned to the taxing state under
the state's own apportionment and allocation rules. Because each state's tax law
varies, it is impossible to predict the tax consequences to the Investor
Certificateholders in all of the state taxing jurisdictions in which they are
already or may become subject to tax. Investor Certificateholders are urged to
consult their own tax advisors with respect to state and local taxes.
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California. Some of the activities to be undertaken by the Subservicer in
servicing and collecting the Receivables will take place in California. The
California Bank and Corporation Tax Law imposes a franchise tax on banks and
financial corporations doing business in the State of California measured by
their net income allocated and apportioned to California. This discussion is
based upon present provisions of California law and regulations, and applicable
judicial or ruling authority, all of which are subject to change, which change
may be retroactive. No ruling on any of the issues discussed below will be
sought from the California Franchise Tax Board.
Assuming the Investor Certificates are treated as indebtedness for Federal
income tax purposes, this treatment will also apply for California tax purposes.
Pursuant to this treatment, Investor Certificateholders not otherwise subject to
California tax would not become subject to such tax solely because of their
ownership of the Investor Certificates. Investor Certificateholders already
subject to taxation in California, however, could be required to pay tax on the
income generated from ownership of these Investor Certificates.
If the Investor Certificates are treated as ownership interests in a
"publicly traded partnership" taxable as a corporation for federal income tax
purposes, then the entity could be subject to California franchise or income
tax. Such taxes could result in reduced distributions to Investor
Certificateholders. An Investor Certificateholder not otherwise subject to tax
in California would not become subject to direct California taxes as a result of
its mere ownership of such an interest.
If the Investor Certificates are instead treated for federal income tax
purposes as interests in a partnership other than a publicly traded partnership
taxable as a corporation, the Trust would not be taxable as a corporation
pursuant to the California corporate franchise or income tax laws. If the Trust
were treated as a partnership (other than a publicly traded partnership taxable
as a corporation) for California income or franchise tax purposes, an Investor
Certificateholder not otherwise subject to taxation in California could become
subject to income, franchise or withholding taxes as a result of its mere
ownership of Investor Certificates.
Nevada. Some of the activities to be undertaken by the Subservicer in
servicing and collecting the Receivables will also take place in Nevada.
Currently, the State of Nevada does not impose an income tax on individuals,
partnerships or corporations doing business in Nevada; however, Nevada does
impose property and other taxes on businesses in Nevada. The following
discussion is based upon present provisions of Nevada law and regulations, and
applicable judicial or ruling authority, all of which are subject to change,
which change may be retroactive. No ruling on any of the issues will be sought
from the Nevada Department of Taxation.
Assuming the Investor Certificates are treated as indebtedness for Federal
income tax purposes, this treatment will apply for Nevada tax purposes. Pursuant
to this treatment, Investor Certificateholders not otherwise subject to Nevada
tax would not become subject to tax in Nevada because of their ownership of the
Investor Certificates.
If the Investor Certificates are instead treated as ownership interests in
an association taxable as a corporation or a "publicly traded partnership"
taxable as a corporation or other entity having property or personnel in Nevada,
then such entity may be subject to Nevada taxes. Such taxes could result in
reduced distributions to Investor Certificateholders. An Investor
Certificateholder, however, not otherwise subject to tax in Nevada would not
become subject to Nevada taxes as a result of its mere ownership of such an
interest.
Virginia. Some of the activities to be undertaken by the Subservicer in
servicing and collecting the Receivables will also take place in Virginia. The
Virginia Income Tax Act imposes a tax on corporations and partners of
partnerships doing business in Virginia measured by their net income allocated
and apportioned to Virginia. This discussion is based upon present provisions of
Virginia law and regulations, and applicable judicial or ruling authority, all
of which are subject to change, which change may be retroactive. No ruling on
any of the issues discussed below will be sought from the Virginia Department of
Taxation.
Assuming the Investor Certificates are treated as indebtedness for Federal
income tax purposes, this treatment will also apply for Virginia tax purposes.
Pursuant to this treatment, Investor Certificateholders not otherwise subject to
Virginia tax would not become subject to such tax solely because of their
ownership of the
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Investor Certificates. Investor Certificateholders already subject to taxation
in Virginia, however, could be required to pay tax on the income generated from
ownership of these Investor Certificates.
If the Investor Certificates are treated as interests in a partnership (not
taxable as a corporation) for Federal income tax purposes, the same treatment
should also apply for Virginia tax purposes. In such case, Virginia could view
the partnership as doing business in Virginia, and an Investor Certificateholder
not otherwise subject to taxation in Virginia could become subject to Virginia
taxes as a result of its mere ownership of Investor Certificates.
If the Investor Certificates are instead treated as ownership interests in
an association taxable as a corporation or a "publicly traded partnership"
taxable as a corporation, then the entity could be subject to Virginia income
tax. Such taxes could result in reduced distributions to Investor
Certificateholders. An Investor Certificateholder not otherwise subject to tax
in Virginia would not become subject to direct Virginia taxes as a result of its
mere ownership of such an interest.
Finally, even if the Class A Certificates are properly classified as debt
obligations for Federal income tax purposes, they might be treated as debt
obligations of an entity owned by the Seller and the Class B Certificateholders.
If that entity were itself characterized as an association taxable as a
corporation or a "publicly traded partnership" taxable as a corporation, then
the hypothetical entity could be subject to Virginia income taxes. Such taxes
could result in reduced distributions to Investor Certificateholders. An
Investor Certificateholder not otherwise subject to tax in Virginia would not
become subject to Virginia taxes as a result of its mere ownership of such an
interest. If the hypothetical entity were instead characterized as a partnership
for Federal income tax purposes, this treatment will also apply for Virginia tax
purposes. In such case, Virginia could view the hypothetical entity as doing
business in Virginia and a Class B Certificateholder not otherwise subject to
taxation in Virginia could become subject to Virginia taxes as a result of its
mere ownership of such an interest.
Other States. There can be no assurance that other states will not claim
that the Subservicer has undertaken activities in such states or that an
Investor Certificateholder is otherwise taxable therein. If any such claims were
made, no assurances can be given as to whether the Investor Certificates would
be treated as indebtedness by any particular state or whether the Trust or any
Investor Certificateholder would be subject to tax by such state.
ERISA CONSIDERATIONS
Class A Certificates may be purchased by an employee benefit or other plan,
including an individual retirement account or Keogh plan, which is subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code, or a person utilizing the assets of any such plan
(collectively, "Benefit Plans"). A fiduciary of a Benefit Plan must determine
that the purchase of an Investor Certificate is made in accordance with the
governing plan documents, does not result in a non-exempt prohibited transaction
under Section 406 of ERISA or Section 4975 of the Code and, with respect to a
Benefit Plan subject to ERISA (an "ERISA Plan"), satisfies the general fiduciary
requirements of ERISA including the requirements of investment prudence and
diversification.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under Section 410(d) of the Code), are not subject
to the restrictions of ERISA, and assets of such plans may be invested in the
Class A Certificates without regard to the ERISA considerations described below,
subject to other applicable Federal and state law. However, any such
governmental or church plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
CLASS A CERTIFICATES
Prohibited Transactions. Section 406 of ERISA prohibits parties in interest
with respect to a Benefit Plan from engaging in certain transactions involving
its assets unless a statutory or administrative exemption applies to the
transaction, and Section 4975 of the Code (or, in some cases, Section 502(i) of
ERISA)
95
<PAGE> 96
imposes excise taxes (or civil fines) on disqualified persons or parties in
interest (collectively, "parties in interest") with respect to any Benefit Plans
which engage in non-exempt prohibited transactions. The application of the
prohibited transaction rules to the purchase and holding of Class A Certificates
by a Benefit Plan differs depending upon whether for ERISA purposes such Class A
Certificates are considered debt of the Seller or equity interests in the Trust.
The fact that the Class A Certificates are to be treated as debt for Federal
income tax purposes, as discussed above, is not determinative of the status of
the Class A Certificates under ERISA and it is expected that the Class A
Certificates will be considered to represent equity interests for ERISA purposes
(although no assurances can be given).
In the event that the Class A Certificates were determined to be debt of
the Seller, a prohibited transaction could arise if the Seller, Household Bank
or any of their respective affiliates is or becomes a party in interest of a
Benefit Plan that acquires or holds Class A Certificates. An exemption might,
however, be available under such circumstances. See discussion below.
Assuming, however, that the Class A Certificates were determined to be
equity interests in the Trust, other prohibited transactions could arise. The
DOL has issued a final regulation (the "Plan Asset Regulation") concerning the
definition of what constitutes "plan assets" of a Benefit Plan. Under the Plan
Asset Regulation, the assets and properties of corporations, partnerships,
trusts, insurance company general or separate accounts and certain other
entities in which a Benefit Plan makes an equity investment are deemed to be
assets of the Benefit Plan unless an exception under the Plan Asset Regulation
is applicable. Accordingly, if a Benefit Plan (or other entities whose assets
include plan assets) purchases Class A Certificates, the Trust could be deemed
to hold plan assets of the investing Benefit Plan, unless an exception is
available.
The Plan Asset Regulation contains an exception (the "Publicly-Offered
Securities Exemption") that provides that if a Benefit Plan (or other entities
whose assets include plan assets) acquires a "publicly offered security", the
issuer of the security is not deemed to hold plan assets. A publicly-offered
security is a security that is (a) freely transferable, (b) part of a class of
securities that is owned immediately subsequent to the initial offering by 100
or more investors independent of the issuer and of one another and (c) either is
(i) part of a class of securities registered under Section 12(b) or 12(g) of the
Exchange Act, or (ii) sold to the plan as part of an offering of securities to
the public pursuant to an effective registration statement under the Securities
Act and the class of securities of which such security is a part is registered
under the Exchange Act within 120 days (or such later time as may be allowed by
the Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred.
It is anticipated that the Class A Certificates will meet the criteria of
the Publicly-Offered Securities Exemption as set forth above. The Underwriters
expect (although no assurances can be given) that the Class A Certificates will
be held by at least 100 persons independent of the issuer and of one another at
the conclusion of the offering; there are no restrictions imposed on the
transfer of the Class A Certificates; and the Class A Certificates will be sold
as part of an offering pursuant to an effective registration statement under the
Securities Act, and then will be timely registered under the Exchange Act. The
Underwriters will notify the Trustee as to whether the Class A Certificates will
be held by 100 separately named persons at the conclusion of the offering and
that the Underwriters reasonably believe that such persons are independent of
one another and the Seller. The Seller will not, however, determine whether the
100-investor requirement of the Publicly-Offered Securities Exemption is
satisfied with respect to the Class A Certificates.
If the Class A Certificates fail to meet the criteria of the
Publicly-Offered Securities Exemption and the Trust's Assets are deemed to
include assets of Benefit Plans that are Class A Certificateholders,
transactions involving the Trust and parties in interest with respect to such
Benefit Plans might be prohibited under Section 406 of ERISA and Section 4975 of
the Code unless an exemption is applicable. In addition, the persons providing
services with respect to the assets of the Trust could become parties in
interest and would, in certain cases, be subject to the fiduciary rules of
ERISA. As an example, if a participant in any Benefit Plan is a cardholder of
one of the Accounts, the purchase of Class A Certificates by such Benefit Plan
could constitute a prohibited transaction.
In the event that the purchase of the Class A Certificates by Benefit Plans
would result in a prohibited transaction, there are five class exemptions issued
by the DOL that could apply: DOL Prohibited Transaction
96
<PAGE> 97
Exemptions 84-14 (Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers), 91-38 (Class Exemption for
Certain Transactions Involving Bank Collective Investment Funds), 90-1 (Class
Exemption for Certain Transactions involving Insurance Company Pooled Separate
Accounts), 95-60 (Class Exemption for Certain Transactions Involving Insurance
Company General Accounts), and 96-23 (Class Exemption for Plan Asset
Transactions Determined by In-House Asset Managers). There is, however, no
assurance that these exemptions, even if all of the conditions specified therein
are satisfied, will apply to all transactions involving the Trust Assets.
The Class A Certificates may not be purchased with the assets of a Benefit
Plan if Household Bank, the Seller, the Servicer, the Trustee, an underwriter,
agent or dealer involved with the distribution of the Class A Certificates or
any of their respective affiliates, either: (a) has investment or administrative
discretion with respect to such plan assets; (b) has authority or responsibility
to give or regularly gives investment advice with respect to such plan assets,
for a fee, and pursuant to an agreement or understanding that such advice will
serve as a primary basis for investment decisions with respect to such plan
assets and that such advice will be based on the particular investment needs of
such plan; or (c) is an employer maintaining or contributing to such plan.
Unrelated Business Income Tax. As discussed above, while Special Counsel
has given its opinion that the Class A Certificates will properly be treated as
debt of the Seller for Federal income tax purposes, the Class A Certificates may
be treated as interests in an entity classified as a partnership for federal
income tax purposes. If so treated, a Benefit Plan investor's share of income
from the partnership will be treated as "unrelated business taxable income" to
the extent that the partnership is treated as engaged in a trade or business
that is an unrelated trade or business with respect to that investor.
Review By Plan Fiduciaries and Insurance Companies. In light of the
foregoing, fiduciaries of a Benefit Plan (or other entities whose assets include
plan assets) considering the purchase of Class A Certificates should consult
their own counsel as to the applicability of the fiduciary duty and prohibited
transaction provisions of ERISA and Section 4975 of the Code to such investments
including (but not limited to) such matters as whether the Trust Assets which
are represented by the Class A Certificates would be considered plan assets, the
consequences that would apply if the Trust Assets were considered plan assets,
the applicability of exemptive relief from the prohibited transaction rules and
the applicability of the unrelated business income and unrelated debt-financed
income tax. Insurance companies considering the purchase of Investor
Certificates should also consult their own counsel as to the application of the
decision by the United States Supreme Court in John Hancock Mutual Life
Insurance Co. v. Harris Trust and Savings Bank, 510 U.S. 86 (1993), to such a
purchase. Under that decision, assets held in an insurance company's general
account may be deemed assets of Benefit Plans under certain circumstances and
under such decision a purchase of Investor Certificates with assets of an
insurance company's general account may be subject to the prohibited transaction
rules described above. Insurance company general account investors should also
consider the effect of the recent enactment of Section 401(c) of ERISA.
CLASS B CERTIFICATES
The Class B Certificates may not be acquired by or on behalf of a Benefit
Plan including any purchase using assets of a Benefit Plan held in an insurance
company's general account. By purchasing, holding or acquiring any interest in a
Class B Certificate, the Class B Certificateholder, or the beneficial owner
thereof, shall be deemed to have represented and warranted that it is not a
Benefit Plan and is not purchasing the Class B Certificate, or the interest
therein, on behalf of a Benefit Plan.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
relating to the Certificates (the "Underwriting Agreement"), among the Seller,
as originator of the Trust, Household Bank, Household Finance Corporation and
each of the underwriters named below (the "Underwriters"), the Seller has agreed
to cause the Trust to sell, and each of the Underwriters have severally agreed
to purchase, the principal amount of Class A Certificates set forth opposite its
name:
97
<PAGE> 98
CLASS A CERTIFICATES
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... $140,666,670
First Chicago Capital Markets, Inc. ........................ 140,666,666
J.P. Morgan Securities Inc. ................................ 140,666,666
Lehman Brothers Inc. ....................................... 140,666,666
Morgan Stanley & Co. Incorporated........................... 140,666,666
Salomon Smith Barney Inc. .................................. 140,666,666
------------
Total.................................................. $844,000,000
============
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all
$844,000,000 aggregate principal amount of the Class A Certificates offered
hereby if any Class A Certificates are purchased. In the event of default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
purchase commitment of all of the Underwriters may be terminated. The Seller has
been advised by the Underwriters that the several Underwriters propose initially
to offer the Investor Certificates to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of .12% of the principal amount of the
Class A Certificates. The Underwriters may allow and such dealers may reallow to
other dealers a concession not in excess of .09% of such principal amount. After
the initial public offering, the public offering price may be changed.
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Seller has agreed to cause the Trust to sell, and each of the
Underwriters have severally agreed to purchase, the principal amount of Class B
Certificates set forth opposite its name:
CLASS B CERTIFICATES
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... $ 7,683,335
First Chicago Capital Markets, Inc. ........................ 7,683,333
J.P. Morgan Securities Inc. ................................ 7,683,333
Lehman Brothers Inc. ....................................... 7,683,333
Morgan Stanley & Co. Incorporated........................... 7,683,333
Salomon Smith Barney Inc. .................................. 7,683,333
-----------
Total.................................................. $46,100,000
===========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all
$46,100,000 aggregate principal amount of the Class B Certificates offered
hereby if any Class B Certificates are purchased. In the event of default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
purchase commitment of all of the Underwriters may be terminated. The Seller has
been advised by the Underwriters that the several Underwriters propose initially
to offer the Investor Certificates to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of .12% of the principal amount of the
Class B Certificates. The Underwriters may allow and such dealers may reallow to
other dealers a concession not in excess of .09% of such principal amount. After
the initial public offering, the public offering price may be changed.
98
<PAGE> 99
Each Underwriter that is not a member of the National Association of
Securities Dealers, Inc. (the "NASD") is a foreign broker or dealer not eligible
for membership in the NASD which has agreed not to make any sales within the
United States, its territories or possessions or to persons who are citizens
thereof or residents therein (other than certain sales made by the Underwriters
as a group) except that each such Underwriter shall be permitted to make sales
to the other Underwriters or to their United States affiliates provided that
such sales are made in compliance with applicable rules under the Exchange Act
and in conformity with the Rules of Fair Practice of the NASD.
Each Underwriter has represented and agreed that: (a) 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 Investor Certificates in,
from or otherwise involving the United Kingdom; (b) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the Investor
Certificates if that person is of a kind described in Article 9(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988
(as amended); (c) if it is an authorized person under Chapter III of the
Financial Services Act 1986, it has only promoted and will only promote (as that
term is defined in Regulation 1.02 of the Financial Services (Promotion of
Unregulated Collective Investment Schemes) Regulations 1991) to any person in
the United Kingdom the scheme described in this Prospectus if that person is of
a kind described either in Section 76(2) of the Financial Services Act 1986 or
if the circumstances are such that promotion would be permitted under paragraph
1.04 of the Financial Services (Promotion of Unregulated Collective Investment
Schemes) Regulations 1991; and (d) it is a person of a kind described in Article
9(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1988 (as amended).
The Underwriting Agreement provides that the Seller will indemnify the
several Underwriters against certain liabilities, including liabilities under
applicable securities laws, or contribute to payments the several Underwriters
may be required to make in respect thereof.
The closing of the sale of the Class A Certificates is conditioned upon the
closing of the sale of the Class B Certificates.
Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities 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 securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. Neither the Seller, HBNV, the
Servicer, Household International or any of their affiliates nor the
Underwriters represents that the Underwriters will engage in any such
transactions or that such transactions, once commenced, will not be discontinued
without notice at anytime.
In the ordinary course of their respective businesses, the Underwriters and
their respective affiliates have engaged and may in the future engage in
investment banking or commercial banking transactions with Household Bank and
its affiliates.
LEGAL MATTERS
Certain legal matters relating to the Investor Certificates will be passed
upon for the Seller, Household Bank and the Trust by John W. Blenke, Vice
President -- Corporate Law and Assistant Secretary of Household International,
Inc., the parent company of the Seller and Household Bank and by Orrick,
Herrington & Sutcliffe LLP, New York, New York. Certain legal matters will be
passed upon for the Underwriters by Orrick, Herrington & Sutcliffe LLP, New
York, New York. As of the date of this Prospectus, Mr. Blenke is a full-time
employee and an officer of Household International, Inc. and owns, and holds
options to purchase, shares of common stock of Household International, Inc.
99
<PAGE> 100
INDEX OF TERMS
<TABLE>
<CAPTION>
TERMS PAGE(S)
----- -------
<S> <C>
Accounts.................................................... 2, 6, 37
Additional Accounts......................................... 7, 32
Adjusted Invested Amount.................................... 9
Administrative Receivables.................................. 7
Adverse Effect.............................................. 31, 77
Aggregate Addition.......................................... 32
Aggregate Addition Account(s)............................... 31
Amortization Event.......................................... 67
Available Collateral Amount................................. 20
Available Investor Principal Collections.................... 59
Average Rate................................................ 29
Bank Purchase Agreement..................................... 6
Bankruptcy Code............................................. 26
Base Rate................................................... 68
Benefit Plans............................................... 95
Cash Collateral Account..................................... 4
Cede........................................................ 3
CEDEL....................................................... 13
CEDEL Participants.......................................... 72
Certificateholders' Interest................................ 5
Chase....................................................... 13
Citibank.................................................... 13
Class A Adjusted Invested Amount............................ 8, 52
Class A Certificate(s)...................................... 1, 4
Class A Certificate Rate.................................... 4
Class A Certificateholders.................................. 2
Class A Interest............................................ 5
Class A Interest Payment.................................... 13
Class A Invested Amount..................................... 52
Class A Invested Percentage................................. 58
Class A Investor Charge-Off................................. 66
Class A Investor Default Amount............................. 65
Class A Pool Factor......................................... 70
Class A Principal Funding Account Percentage................ 58
Class A Required Amount..................................... 17, 56
Class B Adjusted Invested Amount............................ 9, 52
Class B Certificate(s)...................................... 1, 4, 9
Class B Certificate Rate.................................... 4
Class B Certificateholders.................................. 2
Class B Interest............................................ 5
Class B Interest Payment.................................... 13
Class B Invested Amount..................................... 17, 52
Class B Invested Percentage................................. 59
Class B Investor Charge-Off................................. 66
Class B Investor Default Amount............................. 65
Class B Pool Factor......................................... 70
Class B Required Amount..................................... 19, 57
Code........................................................ 23
Collateral Agreement........................................ 21
Collateral Amount........................................... 5
Collateral Charge-Off....................................... 70
Collateral Default Amount................................... 70
</TABLE>
100
<PAGE> 101
<TABLE>
<CAPTION>
TERMS PAGE(S)
----- -------
<S> <C>
Collateral Interest......................................... 5
Collateral Interest Holder.................................. 5
Collateral Invested Amount.................................. 5, 53
Collateral Invested Percentage.............................. 59
Collateral Monthly Interest................................. 60
Collateral Rate............................................. 13
Collection Account.......................................... 49
Commission.................................................. 3
Controlled Accumulation Period.............................. 14
Controlled Accumulation Period Length....................... 47
Controlled Accumulation Amount.............................. 15, 48
Controlled Deposit Amount................................... 15, 48
Cooperative................................................. 73
Covered Amount.............................................. 55
Daily Balance............................................... 40
Defaulted Amount............................................ 65
Defaulted Receivables....................................... 9
Definitive Certificate(s)................................... 13
Depositaries................................................ 71
Depository.................................................. 45
Determination Date.......................................... 22
Distribution Date........................................... 2, 13
Distribution Date Statement................................. 70
DOL......................................................... 23
DTC......................................................... 3
Due Period.................................................. 9
Early Amortization Period................................... 17
EDS......................................................... 21
Eligible Account............................................ 32
Eligible Institution........................................ 49
Eligible Investments........................................ 49
Eligible Receivable......................................... 75
ERISA....................................................... 23, 95
ERISA Plan.................................................. 95
Euroclear................................................... 13
Euroclear Operator.......................................... 73
Euroclear Participants...................................... 72
Excess Finance Charge and Administrative Collections........ 56
Exchange Act................................................ 3
FDIA........................................................ 25
FDIC........................................................ 10
Finance Charge and Administrative Receivables............... 7
Finance Charge Receivables.................................. 7
FIRREA...................................................... 25, 86
Floating Allocation Percentage.............................. 51
GM.......................................................... 84
Group....................................................... 5
Group A..................................................... 12
Group B..................................................... 12
Group C..................................................... 12
Group D..................................................... 12
Group E..................................................... 12
Group F..................................................... 12
Group One................................................... 12
</TABLE>
101
<PAGE> 102
<TABLE>
<CAPTION>
TERMS PAGE(S)
----- -------
<S> <C>
Group Two................................................... 12
Group Three................................................. 6
Group Three Investor Additional Amounts..................... 61
Group Three Investor Default Amount......................... 61
Group Three Investor Finance Charge and Administrative
Collections............................................... 61
Group Three Investor Monthly Fees........................... 62
Group Three Investor Monthly Interest....................... 62
HBNV........................................................ 33
Holders..................................................... 74
Household Bank.............................................. 2, 4
Household International..................................... 41
Indirect Participants....................................... 71
Ineligible Receivables...................................... 75
Initial Accounts............................................ 6
Initial Cut-Off Date........................................ 2, 6
Initial Issuance Date....................................... 6
Insolvency Event............................................ 25
Insolvency Proceeds......................................... 69
Interchange................................................. 37
Interest Period............................................. 13
Invested Amount............................................. 15
Investor Certificate(s)..................................... 1, 4
Investor Certificateholders................................. 2
Investor Defaulted Amount................................... 65
Investor Finance Charge and Administrative Collections...... 64
IRS......................................................... 89
Issuance Date............................................... 2
LIBOR....................................................... 46
MasterCard.................................................. 6
MasterCard International.................................... 6
NASD........................................................ 99
New Account................................................. 32
non-U.S. Investor Certificateholder......................... 92
OID......................................................... 91
Participants................................................ 71
Participation Interests..................................... 5
parties in interest......................................... 96
Plan Asset Regulation....................................... 96
Pooling and Servicing Agreement............................. 1
Portfolio................................................... 34
Portfolio Yield............................................. 28
Preferred Stock............................................. 5
Prime Rate.................................................. 8
Principal Allocation Percentage............................. 52
Principal Funding Account................................... 4, 15, 54
Principal Funding Investment Proceeds....................... 55
Principal Receivables....................................... 7
Principal Shortfalls........................................ 54
Publicly-Offered Securities Exemption....................... 96
Rating Agency............................................... 26
Rating Agency Condition..................................... 31
Reallocated Investor Finance Charge and Administrative
Collections............................................... 61
Receivables................................................. 2, 7
Record Date................................................. 46
</TABLE>
102
<PAGE> 103
<TABLE>
<CAPTION>
TERMS PAGE(S)
----- -------
<S> <C>
Recoveries.................................................. 7
Regulations................................................. 90
Removal Notice.............................................. 78
Removed Accounts............................................ 7
Required Collateral Amount.................................. 20, 65
Required Minimum Principal Balance.......................... 77
Required Reserve Amount..................................... 56
Reserve Account............................................. 4, 55
Reserve Account Funding Date................................ 56
Revolving Period............................................ 14
Securities Act.............................................. 3
Seller...................................................... 2, 4
Seller's Bankruptcy Initiatives............................. 87
Seller's Certificate........................................ 10
Seller's Interest........................................... 5
Seller's Participation Amount............................... 76
Seller's Percentage......................................... 53
Series...................................................... 4
Series Adjusted Invested Amount............................. 51
Series Adjusted Portfolio Yield............................. 68
Series Allocable Defaulted Amount........................... 50
Series Allocable Finance Charge and Administrative
Collections............................................... 50
Series Allocable Miscellaneous Payments..................... 51
Series Allocable Principal Collections...................... 50
Series Allocation Percentage................................ 50
Series Enhancement.......................................... 5
Series 1998-1 Adjusted Invested Amount...................... 51
Series 1998-1 Cut-Off Date.................................. 14
Series 1998-1 Expected Final Payment Date................... 14
Series 1998-1 Supplement.................................... 1
Series 1998-1 Termination Date.............................. 69
Series Required Seller Amount............................... 51
Service Transfer............................................ 80
Servicer.................................................... 2, 4
Servicer Default............................................ 80
Servicer Report............................................. 70
Servicing Fee............................................... 69
Special Counsel............................................. 23, 88
Special Funding Account..................................... 50
Special Funding Amount...................................... 76
Subordinated Principal Collections.......................... 18
Subservicer................................................. 21
Supplement.................................................. 10
Supplemental Certificate.................................... 10
Termination Date............................................ 69
Termination Notice.......................................... 80
Terms and Conditions........................................ 73
The GM Card(SM)............................................. 85
Trust....................................................... 1, 4
Trust Adjusted Invested Amount.............................. 51
Trust Assets................................................ 2, 4
</TABLE>
103
<PAGE> 104
<TABLE>
<CAPTION>
TERMS PAGE(S)
----- -------
<S> <C>
Trust Excess Principal Collections.......................... 48
Trustee..................................................... 2, 4
UCC......................................................... 25
Unallocated Principal Collections........................... 55
Underwriters................................................ 97
Underwriting Agreement...................................... 97
U.S. Investor Certificateholder............................. 88
U.S. Person................................................. 88
VISA........................................................ 6
VISA USA, Inc............................................... 6
Withholding Agent........................................... 92
</TABLE>
104
<PAGE> 105
ANNEX I
PRIOR ISSUANCE OF INVESTOR CERTIFICATES
The Trust has previously issued fourteen series in eight Groups. Class A
and Class B Credit Card Participation Certificates, Series 1993-A and Series
1993-B were issued in Group A. Of these, Series 1993-A has been retired. Class A
and Class B Variable Funding Credit Card Participation Certificates, Series
1996-A were issued in Group B. Class A and Class B Variable Funding Credit Card
Participation Certificates, Series 1996-B were issued in Group C. Class A and
Class B Variable Funding Credit Card Participation Certificates, Series 1997-A
were issued in Group D. Class A and Class B Variable Funding Credit Card
Participation Certificates, Series 1997-B were issued in Group E. Class A and
Class B Variable Funding Credit Card Participation Certificates, Series 1998-A
were issued in Group F. Class A and Class B Credit Card Participation
Certificates, Series 1993-1, Class A and Class B Credit Card Participation
Certificates, Series 1993-2, Class A and Class B Credit Card Participating
Certificates, Series 1993-3, Class A and Class B Credit Card Participation
Certificates, Series 1994-1, Class A and Class B Credit Card Participation
Certificates, Series 1994-2 and Class A and Class B Credit Card Participation
Certificates, Series 1995-1, were issued in Group One. Of these, Series 1993-3
and Series 1994-2 have been retired. Class A and Class B Credit Card
Participation Certificates, Series 1997-1 were issued in Group Two. The table
below sets forth, by Group, the characteristics of the certificates currently
outstanding. For more specific information with respect to Series 1993-1, Series
1993-2, Series 1994-1, Series 1995-1 and Series 1997-1, any prospective investor
should contact the Servicer.
GROUP A
CLASS A AND CLASS B CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1993-B
<TABLE>
<S> <C>
Class A Invested Amount.................................... Up to a maximum of $1,400,000,000
Class B Invested Amount.................................... Up to a maximum of $121,740,000
Class A Certificate Rate................................... Floating Rate
Class B Certificate Rate................................... Floating Rate
Series Issuance Date....................................... December 17, 1993
</TABLE>
GROUP B
CLASS A AND CLASS B VARIABLE FUNDING CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1996-A
<TABLE>
<S> <C>
Class A Invested Amount.................................... Up to a maximum of $1,700,000,000
Class B Invested Amount.................................... Up to a maximum of $168,200,000
Class A Certificate Rate................................... Floating Rate
Class B Certificate Rate................................... Floating Rate
Series Issuance Date....................................... March 15, 1996
</TABLE>
GROUP C
CLASS A AND CLASS B VARIABLE FUNDING CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1996-B
<TABLE>
<S> <C>
Class A Invested Amount.................................... Up to a maximum of $1,000,000,000
Class B Invested Amount.................................... Up to a maximum of $86,957,000
Class A Certificate Rate................................... Floating Rate
Class B Certificate Rate................................... Floating Rate
Series Issuance Date....................................... June 17, 1996
</TABLE>
I-1
<PAGE> 106
GROUP D
CLASS A AND CLASS B VARIABLE FUNDING CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1997-A
<TABLE>
<S> <C>
Class A Invested Amount.................................... Up to a maximum of $1,000,000,000
Class B Invested Amount.................................... Up to a maximum of $89,919,000
Class A Certificate Rate................................... Floating Rate
Class B Certificate Rate................................... Floating Rate
Series Issuance Date....................................... June 25, 1997
</TABLE>
GROUP E
CLASS A AND CLASS B VARIABLE FUNDING CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1997-B
<TABLE>
<S> <C>
Class A Invested Amount.................................... Up to a maximum of $1,000,000,000
Class B Invested Amount.................................... Up to a maximum of $89,919,000
Class A Certificate Rate................................... Floating Rate
Class B Certificate Rate................................... Floating Rate
Series Issuance Date....................................... December 5, 1997
</TABLE>
GROUP F
CLASS A AND CLASS B VARIABLE FUNDING CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1998-A
<TABLE>
<S> <C>
Class A Invested Amount.................................... Up to a maximum of $500,000,000
Class B Invested Amount.................................... Up to a maximum of $44,960,000
Class A Certificate Rate................................... Floating Rate
Class B Certificate Rate................................... Floating Rate
Series Issuance Date....................................... March 25, 1998
</TABLE>
GROUP ONE
CLASS A AND CLASS B CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1993-1
<TABLE>
<S> <C>
Class A Invested Amount................................... $900,000,000
Class B Invested Amount................................... $52,945,000
Class A Certificate Rate.................................. One-month LIBOR plus 0.20%
Class B Certificate Rate.................................. 5.30% per annum
Series Issuance Date...................................... September 16, 1993
</TABLE>
The above Series 1993-1 certificates were supported by a collateral
interest in the receivables which on the Series Issuance Date had an invested
amount of $105,883,000.
CLASS A AND CLASS B CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1993-2
<TABLE>
<S> <C>
Class A Invested Amount................................... $500,000,000
Class B Invested Amount................................... $29,412,000
Class A Certificate Rate.................................. 5.60% per annum
Class B Certificate Rate.................................. 5.90% per annum
Series Issuance Date...................................... November 16, 1993
</TABLE>
I-2
<PAGE> 107
The above Series 1993-2 certificates were supported by a collateral
interest in the receivables which on the Series Issuance Date had an invested
amount of $58,824,000.
CLASS A AND CLASS B CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1994-1
<TABLE>
<S> <C>
Class A Invested Amount................................... $850,000,000
Class B Invested Amount................................... $50,000,000
Class A Certificate Rate.................................. One-month LIBOR plus 0.15%
Class B Certificate Rate.................................. 6.05% per annum
Series Issuance Date...................................... March 3, 1994
</TABLE>
The above Series 1994-1 certificates were supported by a collateral
interest in the receivables which on the Series Issuance Date had an invested
amount of $100,000,000.
CLASS A AND CLASS B CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1995-1
<TABLE>
<S> <C>
Class A Invested Amount................................... $522,000,000
Class B Invested Amount................................... $24,000,000
Class A Certificate Rate.................................. One-month LIBOR plus 0.15%
Class B Certificate Rate.................................. 7.70% per annum
Series Issuance Date...................................... March 15, 1995
</TABLE>
The above Series 1995-1 certificates were supported by a collateral
interest in the receivables which on the Series Issuance Date had an invested
amount of $54,000,000.
GROUP TWO
CLASS A AND CLASS B CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1997-1
<TABLE>
<S> <C>
Class A Invested Amount................................... $870,000,000
Class B Invested Amount................................... $47,500,000
Class A Certificate Rate.................................. One-month LIBOR plus 0.10%
Class B Certificate Rate.................................. One-month LIBOR plus 0.28%
Series Issuance Date...................................... March 27, 1997
</TABLE>
The above Series 1997-1 certificates were supported by a collateral
interest in the receivables which on the Series Issuance Date had an invested
amount of $82,500,000.
I-3
<PAGE> 108
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE SELLER OR THE SERVICER OR ANY AFFILIATE THEREOF OR THE RECEIVABLES OR THE
ACCOUNTS SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 3
Reports to Investor
Certificateholders.................... 3
Defined Terms Used in this Prospectus... 3
Prospectus Summary...................... 4
Risk Factors............................ 25
The Credit Card Business of Household
Bank (SB), N.A. ...................... 32
The Accounts............................ 37
The Seller.............................. 41
Household Bank (SB), N.A. .............. 41
The Servicer............................ 41
The Subservicer......................... 42
The Trust............................... 42
Use of Proceeds......................... 43
Principal Payment Considerations........ 43
Description of the Investor
Certificates.......................... 45
The Pooling and Servicing Agreement..... 74
Description of the Bank Purchase
Agreement............................. 82
Certain Legal Aspects of the
Receivables........................... 85
Federal Income Tax Consequences......... 88
State and Local Tax Consequences........ 93
ERISA Considerations.................... 95
Underwriting............................ 97
Legal Matters........................... 99
Index of Terms.......................... 100
Annex I................................. I-1
</TABLE>
-------------------------
UNTIL DECEMBER 20, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A OR CLASS B CERTIFICATES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
HOUSEHOLD AFFINITY
CREDIT CARD MASTER
TRUST I
ISSUER
SERIES 1998-1
$844,000,000
FLOATING RATE CLASS A
CREDIT CARD
PARTICIPATION CERTIFICATES
$46,100,000
FLOATING RATE CLASS B
CREDIT CARD
PARTICIPATION CERTIFICATES
HOUSEHOLD AFFINITY
FUNDING CORPORATION
SELLER
HOUSEHOLD FINANCE
CORPORATION
SERVICER
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
FIRST CHICAGO CAPITAL MARKETS, INC.
J.P. MORGAN & CO.
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
SEPTEMBER 21, 1998
- ------------------------------------------------------
- ------------------------------------------------------
