<PAGE>
HOUSEHOLD AFFINITY CREDIT CARD MASTER TRUST I
SERIES 1997-1
$870,000,000 Floating Rate Class A Credit Card Participation Certificates
$47,500,000 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 1997-
1 (the "Class A Certificates") and the Floating Rate Class B Credit Card
Participation Certificates, Series 1997-1 (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 (collectively, the
"Pooling and Servicing Agreement") and as supplemented by a Supplement
to the Pooling and Servicing Agreement dated as of March 1, 1997 (the
"Series 1997-1 Supplement") among Household Affinity 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
(Continued on following page)
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES, SEE "RISK FACTORS" ON PAGE 31 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>
PROCEEDS TO
PRICE TO UNDERWRITING THE
PUBLIC DISCOUNT(1) SELLER(2)
------------ ------------ ------------
<S> <C> <C> <C>
Per Class A Certificate.................. 100.00% 0.25% 99.75%
Per Class B Certificate.................. 100.00% 0.25% 99.75%
Total.................................... $917,500,000 $2,293,750 $915,206,250
</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
$1,000,000.
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 March 27,
1997.
CREDIT SUISSE FIRST BOSTON
CITICORP SECURITIES, INC.
MORGAN STANLEY & CO.
INCORPORATED
UBS
SECURITIES
The date of this Prospectus is March 20, 1997.
<PAGE>
(Continued from previous page)
on the Class A Certificates from and including March 27, 1997 to and excluding
April 15, 1997 and with respect to each Interest Period (as defined herein)
thereafter at the rate of 0.10% 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 March 27,
1997 to and excluding April 15, 1997 and with respect to each Interest Period
thereafter at the rate of 0.28% per annum 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"). 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 $82,500,000 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 March 27, 1997 (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 April
1997 Distribution Date. Principal payments with respect to the Class A
Certificates and the Class B Certificates are scheduled to be made on the
March 2002 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.
Application will be made to list the Investor Certificates on the Luxembourg
Stock Exchange.
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
2
<PAGE>
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 1997-1 Supplement and to the Luxembourg
Paying Agent, if any. 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
Generally--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."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Reference is made
to the Index for the location herein of the definitions of certain capitalized
terms used herein.
Title of Securities...............
$870,000,000 Floating Rate Class A Credit
Card Participation Certificates, Series
1997-1 (the "Class A Certificates").
$47,500,000 Floating Rate Class B Credit
Card Participation Certificates, Series
1997-1 (the "Class B Certificates"; and to-
gether 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 ten series of
investor certificates (each, a "Series"),
two of which have been retired, and is ex-
pected to issue additional Series from time
to time. The Trust is expected to continue
as a trust after the Series 1997-1 Termina-
tion 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 re-
ceivables in accounts subject to the Trust
are charged-off or removed. See "The
Trust", "Risk Factors--Master Trust Consid-
erations" and "--Addition of Trust Assets",
"The Pooling and Servicing Agreement Gener-
ally--Additions of Accounts or Participa-
tion 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 0.10% (the "Class A
Certificate Rate").
Class B Certificate Rate..........
LIBOR plus 0.28% (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.
4
<PAGE>
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 As-
sets") include the Receivables arising un-
der the Accounts (as defined herein), in-
cluding the proceeds thereof, monies on de-
posit in certain accounts of the Trust for
the benefit of investor certificateholders,
including any funds deposited in any of
three account(s) (the "Cash Collateral Ac-
count," 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, 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 in-
vestor certificateholders will not be
available to the investor
certificateholders of any other Series or
class), certain rights of the Seller to re-
ceive Recoveries (as defined herein) and
Interchange (as defined herein) and the
preferred stock of the Seller issued to the
Trustee (the "Preferred Stock"). "Series
Enhancement" means, with respect to any Se-
ries 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 Se-
ries or class. The subordination of any Se-
ries or class of investor certificates to
another Series or class of investor certif-
icates shall be deemed to be a Series En-
hancement. "Participation Interests" means
participations representing undivided in-
terests in a pool of assets primarily con-
sisting of revolving credit card receiv-
ables, consumer loan receivables, charge
card receivables and other self-liquidating
financial assets.
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 Inter-
est are collectively referred to herein as
the "Certificateholders' Interest"), the
interests of the Seller (the "Seller's In-
terest"), and the investor
certificateholders of other
5
<PAGE>
Series and may be allocated to any Series
Enhancement all as described below. An un-
divided interest in the Trust Assets (the
"Collateral Invested Amount"), in the ini-
tial amount of $82,500,000 of Principal Re-
ceivables (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 "Collat-
eral Interest Holder". Trust Assets will be
allocated to the interests of the Collat-
eral Interest Holder (the "Collateral In-
terest") in an amount equal to the sum of
the Collateral Invested Amount and the
amount, if any, on deposit in the Cash Col-
lateral 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 Participa-
tion Interests conveyed to the Trust and
all collections received with respect
thereto may be allocated to one or more Se-
ries 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 Certifi-
cates are part of the first Series in a
group of Series ("Group Two"). To the ex-
tent described herein, Receivables, Partic-
ipation Interests and all collections re-
ceived with respect to the Investor Certif-
icates may be allocated to other Series in
Group Two. While other Series may be issued
in Group Two, there can be no assurance
that any other Series will actually be is-
sued in Group Two.
The Accounts...................... The Accounts generally consist of
nonpremium and premium, variable rate 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, met the criteria provided in the
Pooling and Servicing Agreement for an Eli-
gible Account (as defined herein), but will
not include any Removed Accounts (as de-
fined herein). The Accounts are not being
sold or transferred to the Trust and will
continue to be con-
- --------
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
6
<PAGE>
trolled 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.--Gen-
eral"; "--The Accounts"; "Description of
the Bank Purchase Agreement--Transfer of
Accounts".
Household Bank, f.s.b. and the Seller en-
tered into a receivables purchase agreement
dated as of April 30, 1993, as amended (to-
gether 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 Re-
ceivables arising in the Accounts whether
such Receivables are then existing or
thereafter created and Household Bank is
obligated to sell to the Seller the Receiv-
ables arising in Additional Accounts (as
defined herein) from time to time. In addi-
tion, Household Bank has assigned to the
Seller its rights to Recoveries and Inter-
change allocable to the Accounts. See "De-
scription 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 Ser-
vicing Agreement. The initial transfer of
Receivables occurred on May 5, 1993 (the
"Initial Issuance Date").
The Seller has conveyed to the Trust Re-
ceivables 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 thereaf-
ter until the termination of the Trust.
Since the Initial Cut-Off Date, the Seller
has conveyed to the Trust the Receivables
arising in certain Additional Accounts in-
cluded in Aggregate Additions (as defined
herein) in accordance with the provisions
of the Pooling and Servicing Agreement. In
addition, pursuant to the Pooling and Ser-
vicing Agreement, the Seller expects (sub-
ject to certain limitations and condi-
tions), and in
7
<PAGE>
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 ad-
dition 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 Ac-
counts, whether such Receivables are then
existing or thereafter created. The addi-
tion to the Trust of Receivables in Aggre-
gate Additions or Participation Interests
will be subject to certain conditions, in-
cluding, among others, that (a) unless such
addition is a required addition, such addi-
tion will not result in the failure to sat-
isfy the Rating Agency Condition and (b)
the Seller shall have delivered to the
Trustee a certificate of an authorized of-
ficer 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 circum-
stances, to remove from the Trust all Re-
ceivables of certain Accounts (the "Removed
Accounts"). See "The Pooling and Servicing
Agreement Generally--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 and the interest portion of
any Participation Interests as determined
pursuant to the applicable Supplement (the
"Finance Charge Receivables"), (b) all ad-
ministrative fees and late charges on
amounts charged for merchandise and servic-
es, credit insurance premiums and all other
fees or charges billed to cardholders on
the Accounts (the "Administrative Receiv-
ables"; and together with the Finance
Charge Receivables, the "Finance Charge and
Administrative Receivables") and (c) all
amounts charged by cardholders for merchan-
dise and services, amounts advanced to
cardholders as cash advances and the prin-
cipal portion of any Participation Inter-
ests as determined pursuant to the applica-
ble Supplement (the "Principal Receiv-
ables"). Recoveries attributed to charged-
off Receivables (the "Recoveries") will be
treated as collections of Finance Charge
and Administrative Receivables. In addi-
tion, certain Interchange attributed to
cardholder charges for merchandise and
services in the Accounts will be treated as
collections of Finance Charge and Adminis-
trative Receivables. See "The Credit Card
Business of Household Bank (SB), N.A.--In-
terchange".
8
<PAGE>
The aggregate amount of Receivables per-
taining to the Accounts as of the close of
business on December 31, 1996 was
$6,803,556,923, of which $6,714,768,079
were Principal Receivables and $88,788,844
were Finance Charge and Administrative Re-
ceivables (which amounts include past due
Receivables). All new Receivables arising
in the Accounts during the term of the
Trust will automatically be sold by House-
hold Bank to the Seller and then trans-
ferred by the Seller to the Trust. Accord-
ingly, the amount of Receivables will fluc-
tuate 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 assessed on Principal
Receivables. The annual percentage rate as-
sessed 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 Ac-
count 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 per-
centage 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 an-
nual percentage rate is 16.4% and for pre-
mium Accounts with an average daily balance
of $2,500 or greater the minimum annual
percentage rate is 13.4%. As of the close
of business on December 31, 1996, the Re-
ceivable balance of the nonpremium and pre-
mium Accounts as a percentage of the total
Receivable balance of the Accounts was ap-
proximately 77% and 23%, respectively. From
time to time, Household Bank has and may
offer special rates to customers for vari-
ous purposes and periods or may change
rates generally as permitted in the Receiv-
ables 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.
9
<PAGE>
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 $870,000,000 and
$47,500,000, respectively. During the Con-
trolled Accumulation Period (as defined
herein), for the purpose of allocating col-
lections of Finance Charge and Administra-
tive 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 re-
duced, 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 ex-
ceeds the Class A Invested Amount (as so
reduced, the "Class B Adjusted Invested
Amount" and, together with the Class A Ad-
justed Invested Amount and the Collateral
Invested Amount, the "Adjusted Invested
Amount"). The principal amount of the Sell-
er's Interest will fluctuate as the amount
of Receivables in the Trust changes from
time to time. The Seller's Interest will
represent the right to the Trust Assets not
allocated to the Certificateholders' Inter-
est, 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 House-
hold Bank has the right to assign and
transfer the Accounts and assign its obli-
gations under the Bank Purchase Agreement
at any time, in whole or in part, provided
certain conditions are satisfied. See "The
Pooling and Servicing Agreement Generally--
Transfer of Seller's Interest"; "Descrip-
tion of the Bank Purchase Agreement--Trans-
fer of Accounts".
The Class A Certificates will evidence un-
divided interests in the Trust Assets allo-
cated to the Class A Interest and will rep-
resent the right to receive from such as-
sets funds up to (but not in excess of) the
amounts required to make payments of inter-
est on the Class A Certificates on each
Distribution Date at the per annum rate
equal to the Class A Certificate Rate, cal-
culated on the basis of the actual number
of days in the related Interest Period (as
defined herein) and a 360-day year and pay-
ments of principal on each Distribution
Date during any Early Amortization Period
(as defined herein) or on the Series 1997-1
Expected Final Payment Date (as defined
herein) with respect to the
10
<PAGE>
Controlled Accumulation Period or any Early
Accumulation Period (as defined herein) 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 uncol-
lectible during a Due Period (the "De-
faulted 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 busi-
ness 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 pre-
ceding such Distribution Date. See "De-
scription of the Investor Certificates--In-
vestor Charge-Offs".
The Class B Certificates (which are subor-
dinated to the Class A Certificates to the
extent provided herein and, during any pe-
riod 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 de-
scribed 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 applica-
ble, the Servicing Fee is paid in full,
funds up to (but not in excess of) the
amounts required to make payments of inter-
est 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 Amortiza-
tion Period or on the Series 1997-1 Ex-
pected Final Payment Date with respect to
the Controlled Accumulation Period or any
Early Accumulation Period, to the extent
described under "Description of the In-
vestor Certificates--Principal" and "Prin-
cipal Payment Considerations" herein. The
Class B Invested Amount may be less than
the aggregate unpaid principal amount of
the Class B Certificates in certain circum-
stances as more fully described herein.
The certificateholders' interest of any Se-
ries, including the Class A Interest and
the Class B Interest, will
11
<PAGE>
each include the right to receive (but only
to the extent needed to make required pay-
ments under the Pooling and Servicing
Agreement and the related Supplement and
subject to any reallocation of such amounts
if the related Supplement so provides) va-
rying 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 in-
vestor certificates, the Trust Assets allo-
cable to the certificateholders' interest
of such Series will be further allocated
among each class within such Series. See
"Risk Factors", "Description of the In-
vestor Certificates--Allocation of Collec-
tions; Deposits in Collection Account" and
"--Reallocation of Cash Flows", and "--
Reallocations Among Investor Certificates
of Different Series".
The Investor Certificates represent benefi-
cial 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 affil-
iate thereof. None of the Investor Certifi-
cates, the investor certificates of any
other Series, the Accounts or the Receiv-
ables are insured or guaranteed by the Fed-
eral Deposit Insurance Corporation (the
"FDIC") or any other governmental agency or
instrumentality.
Issuance of Additional Series..... The Pooling and Servicing Agreement autho-
rizes the Trustee to issue three types of
certificates: (i) one or more Series of in-
vestor certificates, (ii) a certificate ev-
idencing 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 Inter-
est 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 Certif-
icate". 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 reduc-
tion in the Seller's 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 regis-
12
<PAGE>
tered under the Securities Act or exempt
from registration thereunder, directly or
through one or more underwriters or place-
ment 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 certif-
icates of each Series will have expected
final payment dates, revolving periods and
periods during which the principal amount
of such investor certificates is accumu-
lated in a principal funding account or
paid to holders of such investor certifi-
cates which differ from those for the In-
vestor Certificates, although it is ex-
pected 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 Se-
ries not included in Group Two may have en-
tirely different methods for calculating
the amount and timing of principal and in-
terest distributions to investor
certificateholders and the Series Enhance-
ments of such Series and may utilize other
methods for determining the portion of col-
lections of Receivables allocable to such
investor certificateholders and Series En-
hancements. See "Risk Factors--Master Trust
Considerations".
A new Series may only be issued upon satis-
faction 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 of-
ficer to the effect that, in the reasonable
belief of the Seller, such issuance will
not have an Adverse Effect. See "Risk Fac-
tors--Master Trust Considerations--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 Re-
ceivables and Finance Charge and Adminis-
trative Receivables and the Defaulted Re-
ceivables with respect to such Due Period
based on the initial amount of Principal
Receivables allocated to such Series less
unreimbursed investor charge-offs. See "De-
scription of the Investor Certificates--Al-
locations". 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.
13
<PAGE>
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 collec-
tions of Receivables and other amounts or
obligations among the Series in the Group.
Collections of Finance Charge and Adminis-
trative Receivables allocable to each Se-
ries in Group Two will be aggregated and
made available for required payments for
all Series in Group Two. Consequently, the
issuance of new Series in Group Two 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 Two. See also "Risk Factors--Mas-
ter Trust Considerations--Issuance of Addi-
tional Series".
Reallocation of Excess Principal To the extent that collections of Principal
Collections...................... Receivables and other amounts that are al-
located 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 collec-
tions 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 "Descrip-
tion of the Investor Certificates--Reallo-
cation of Trust Excess Principal Collec-
tions".
Previously Issued Series..........
Two Series of investor certificates in a
Group ("Group A") have previously been is-
sued, one of which has since been retired.
One Series of investor certificates in a
Group ("Group B") and one Series of in-
vestor certificates in a Group ("Group C")
have also previously been issued. In addi-
tion, six Series of investor certificates
have been previously issued in a Group
("Group One"), one of which has since been
retired. 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.
The Investor Certificates will not be part
of Group A, Group B, Group C or Group One
but will be a part of
14
<PAGE>
Group Two and will be the first Series to
be issued in Group Two.
Registration of Investor The Investor Certificates will initially be
Certificates..................... represented by one or more Investor Certif-
icates of each class registered in the name
of Cede, as the nominee of DTC. No person
acquiring an interest in the Investor Cer-
tificates 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 proce-
dures of the relevant system. Crossmarket
transfers between persons holding directly
or indirectly through DTC, on the one hand,
and counterparties holding directly or in-
directly 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 de-
positaries of CEDEL and Euroclear, respec-
tively. See "Description of the Investor
Certificates--Book-Entry Registration".
Interest..........................
Interest will accrue on the unpaid princi-
pal 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", respective-
ly), as the case may be, with respect to
such Interest Period and, except as other-
wise provided herein, be distributed to In-
vestor Certificateholders on the 15th day
of every month, or if such day is not a
business day, on the next succeeding busi-
ness day (each, a "Distribution Date") com-
mencing on the April 1997 Distribution
Date. Interest for any Distribution Date
will accrue from and including the preced-
ing Distribution Date to but excluding such
Distribution Date (an "Interest Period"),
and interest owing on the Investor Certifi-
cates 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 Peri-
od, inter -
15
<PAGE>
est will accrue from and including the Is-
suance Date to, but excluding, April 15,
1997. 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 to-
gether 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 "Col-
lateral Rate"). See "Description of the In-
vestor Certificates--General" and "--Dis-
tributions from the Collection Account; Al-
location of Funds".
Revolving Period..................
No principal will be paid to the Class A
Certificateholders until the earlier to oc-
cur of the Series 1997-1 Expected Final
Payment Date and the commencement of any
Early Amortization Period. Principal pay-
ments to the Class B Certificateholders
will not occur until the final principal
payment has been made to the Class A
Certificateholders. For each Due Period in
the period commencing at the close of busi-
ness on February 28, 1997 (the "Series
1997-1 Cut-Off Date") and ending on the
earlier of the commencement of the Con-
trolled Accumulation Period, any Early Ac-
cumulation 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 other-
wise 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 pur-
chase additional Receivables, or reallo-
cated for payment of principal to investors
in other Series. See "Principal Payment
Considerations" and "Description of the In-
vestor Certificates--Principal". The Due
Period for the Investor Certificates with
respect to the first Distribution Date will
commence on the Series 1997-1 Cut-Off Date
and will end at the close of business on
the last business day of the month immedi-
ately preceding the first Distribution
Date. See "Description of the Investor Cer-
tificates--Reallocation of Cash Flows" and
"--Amortization Event" for a discussion of
the events which might lead to the termina-
tion of the Revolving Period prior to its
scheduled ending date. Unless an Amortiza-
tion Event shall have occurred, the Revolv-
ing Period will end and the Controlled Ac-
cumulation Period will com -
16
<PAGE>
mence at the close of business on the last
business day of August 2001; provided,
that, subject to the conditions set forth
under "Description of the Investor Certifi-
cates--Principal" herein, the day on which
the Revolving Period ends and the Con-
trolled Accumulation Period begins may be
delayed to no later than the close of busi-
ness on the last business day of January
2002.
Principal Payments; Controlled
Accumulation Period.........
Unless an Amortization Event shall have oc-
curred and an Early Amortization Period
shall have commenced, the final payment
with respect to the Investor Certificates
is scheduled to be made on the March 2002
Distribution Date (the "Series 1997-1 Ex-
pected Final Payment Date"). Unless and un-
til an Amortization Event shall have oc-
curred and an Early Accumulation Period or
Early Amortization Period shall have com-
menced, 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 2001; provided,
that, subject to the conditions set forth
under "Description of the Investor Certifi-
cates--Principal" herein, the day on which
the Revolving Period ends and the Con-
trolled Accumulation Period begins may be
delayed to no later than the close of busi-
ness on the last business day of January
2002. The Controlled Accumulation Period
will end upon the earliest to occur of (x)
the commencement of any Early Accumulation
Period or any Early Amortization Period,
(y) the payment in full of the Class A In-
vested Amount, the Class B Invested Amount
and the Collateral Invested Amount (collec-
tively, the "Invested Amount") and (z) the
Series 1997-1 Termination Date (as defined
herein). During the Controlled Accumulation
Period, collections of Principal Receiv-
ables and certain other amounts allocable
to the Certificateholders' Interest will
generally be deposited on each Distribution
Date in a segregated trust account estab-
lished 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 Ac-
count will not be considered as principal
payments made to the Investor
Certificateholders. Unless an Early Amorti-
zation Period shall have commenced, the
amount on deposit in the Principal Funding
Account will be distributed to
17
<PAGE>
the Investor Certificateholders on the Se-
ries 1997-1 Expected Final Payment Date to
the extent described herein. The maximum
amount to be deposited in the Principal
Funding Account during the Controlled Accu-
mulation 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 Consider-
ations" herein. For each Distribution Date
with respect to a Due Period during the
Controlled Accumulation Period, the "Con-
trolled Accumulation Amount" shall mean
$152,916,667; except that, if the commence-
ment of the Controlled Accumulation Period
is delayed as described herein, the Con-
trolled Accumulation Amount for each Dis-
tribution Date with respect to a Due Period
during the Controlled Accumulation Period
will be determined as described under "De-
scription of the Investor Certificates--
Principal". If collections of Principal Re-
ceivables allocable to the Certificate-
holders' Interest are insufficient to make
the deposit of the Controlled Deposit
Amount, then such amount may be deposited
from Principal Collections reallocated from
other Series. If a reduction in the Re-
quired Collateral Amount has occurred dur-
ing the Controlled Accumulation Period,
collections in excess of the Controlled Ac-
cumulation Amount will be applied to reduce
the Collateral Amount to such Required Col-
lateral Amount. During the Controlled Accu-
mulation Period, until the final principal
payment is made to the Class B
Certificateholders, collections of Princi-
pal 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 Re-
quired Amount and collections used to make
payments with respect to reductions in the
Required Collateral Amount) will generally
be paid to the Seller to maintain the Col-
lateral Invested Amount at its required
level. See "Description of the Investor
Certificates--Principal" and "Principal
Payment Considerations."
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,
funds will be deposited in the Principal
Funding Account and that the amount on de-
posit therein will be available for distri-
bution to the Investor Certificateholders
on the Series 1997-1 Expected Final Payment
18
<PAGE>
Date, no assurance can be given that any
funds will be so deposited or that the
amount of funds so deposited will be suffi-
cient to make the anticipated distribution
in full to the Investor Certificateholders
on the Series 1997-1 Expected Final Payment
Date. See "Principal Payment Consider-
ations". See also "Description of the In-
vestor Certificates--Amortization Event"
for a description of the events which might
lead to the commencement of an Early Accu-
mulation Period or Early Amortization Peri-
od.
During the Controlled Accumulation Period
all funds on deposit in the Principal Fund-
ing Account will be invested in certain el-
igible 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 Investor
Certificates to the extent described here-
in. See "Description of the Investor Cer-
tificates--Principal Funding Account" and
"--Distributions from the Collection Ac-
count; Allocation of Funds." Such invest-
ment earnings will not be considered as
part of any amount on deposit in the Prin-
cipal Funding Account. No assurance can be
given, however, that any investment earn-
ings will be earned. See "Principal Payment
Considerations".
Early Accumulation Period.... During the period commencing on the close
of business on the business day immediately
preceding the day on which any Amortization
Event other than those Amortization Events
as described herein under paragraphs (c),
(e), (h) or (i) under "Description of the
Investor Certificates--Amortization Event"
has occurred, until the earlier of the com-
mencement of any Early Amortization Period
and the Series 1997-1 Expected Final Pay-
ment Date (the "Early Accumulation Peri-
od"), collections of Principal Receivables
and certain other amounts allocable to the
Certificateholders' Interest will generally
be deposited on each Distribution Date in
the Principal Funding Account until the
amount on deposit therein is equal to the
sum of the Class A Invested Amount and the
Class B Invested Amount. Amounts deposited
into the Principal Funding Account will not
be considered as principal payments made to
the Investor Certificateholders. Unless any
Early Amortization Period shall have com-
menced, the amount on deposit in the Prin-
cipal Funding Account will be distributed
to the Investor Certificateholders on the
Series 1997-1 Expected
19
<PAGE>
Final Payment Date to the extent described
herein. See "Description of the Investor
Certificates--Principal". The amount to be
deposited in the Principal Funding Account
during the Early Accumulation Period will
not be limited to any Controlled Deposit
Amount. Although it is anticipated that
during the Early Accumulation Period, prior
to the payment of the Class A Invested
Amount and the Class B Invested Amount in
full, funds will be deposited in the Prin-
cipal Funding Account and that the amount
on deposit therein will be available for
distribution to the Investor
Certificateholders on the Series 1997-1 Ex-
pected Final Payment Date, no assurance can
be given that any funds will be so depos-
ited or that the amount of funds so depos-
ited will be sufficient to make the antici-
pated distribution in full to the Investor
Certificateholders on the Series 1997-1 Ex-
pected Final Payment Date. See "Principal
Payment Considerations". See also "Descrip-
tion of the Investor Certificates--Amorti-
zation Event" for a description of the
events which might lead to the commencement
of an Early Amortization Period.
During the Early Accumulation Period all
funds on deposit in the Principal Funding
Account will be invested, in certain eligi-
ble 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 Investor
Certificates to the extent described here-
in. See "Description of the Investor Cer-
tificates--Principal Funding Account" and
"--Distributions from the Collection Ac-
count; Allocation of Funds". Such invest-
ment earnings will not be considered as
part of any amount on deposit in the Prin-
cipal Funding Account. No assurance can be
given, however, that any investment earn-
ings will be earned.
Early Amortization Period.........
During the period from the first day of the
Due Period in which any Amortization Event
as described herein under paragraphs (c),
(e), (h) or (i) under "Description of the
Investor Certificates--Amortization Event"
has occurred or, under certain limited cir-
cumstances, the day on which such an Amor-
tization 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 1997-1 Termination Date or
the date on which the Trust has otherwise
terminated (the "Early Amortization Peri-
od"), the Principal Allocation Per -
20
<PAGE>
centage (as defined herein) of collections
of Principal Receivables and certain other
amounts allocable to the Investor Certifi-
cates (other than any Subordinated Princi-
pal Collections that are used to pay the
Class A Required Amount or the Class B Re-
quired Amount) will no longer be paid to
the Seller, accumulated or otherwise real-
located 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 addi-
tion, 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 Distribu-
tion Date following the commencement of
such Early Amortization Period. During the
Early Amortization Period, collections of
Principal Receivables allocable to the Col-
lateral 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 Considera-
tions."
Subordination; Additional Amounts
Available to Investor
Certificateholders...............
The fractional undivided interest in the
Trust Assets allocable to the Class B Cer-
tificates (the "Class B Invested Amount")
and the Collateral Amount will be subordi-
nated to the extent necessary to fund cer-
tain payments with respect to the Class A
Certificates and the Servicing Fee during
any period in which Household Finance Cor-
poration 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 re-
spect to the Class B Certificates.
If collections of Finance Charge and Admin-
istrative Receivables allocable to the
Class A Interest for any Due Period are in-
sufficient 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 Servic-
ing Agreement and the Series 1997-1 Supple-
ment (with interest thereon), the Class A
Investor Default Amount (as defined here-
in), the Servicing Fee and any overdue Ser-
vicing Fee during any period in which
Household Finance Corporation or an affili-
ate is no longer the Servicer, on the re-
lated Distribution Date for such Due Period
(such
21
<PAGE>
insufficiency being the "Class A Required
Amount"), Excess Finance Charge and Admin-
istrative Collections (as defined herein)
will be applied to fund the Class A Re-
quired Amount. If Excess Finance Charge and
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 Re-
quired Amount and if the amount available
to be withdrawn is less than the Class A
Required Amount, Subordinated Principal
Collections allocable first to the Collat-
eral Invested Amount and then the Class B
Adjusted Invested Amount for such Due Pe-
riod will then be used to fund the remain-
ing Class A Required Amount. "Subordinated
Principal Collections" shall mean, with re-
spect to each Distribution Date, the prod-
uct 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 Certifi-
cates and the Collateral Invested Amount
for such Due Period and with respect to any
Due Period during the Controlled Accumula-
tion Period, any Early Accumulation Period
or any Early Amortization Period, the Prin-
cipal Allocation Percentage of Series Allo-
cable Principal Collections allocated to
the Investor Certificates and the Collat-
eral 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 Subor-
dinated Principal Collections are insuffi-
cient to fund the remaining Class A Re-
quired Amount for such Due Period, the Col-
lateral 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 insuffi-
ciency until such time as it has reached
zero and then the Class B Adjusted 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 Cer-
tificates.
To the extent the Class B Adjusted Invested
Amount is decreased, the percentage of col-
lections of Finance
22
<PAGE>
Charge and Administrative Receivables allo-
cated 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 Adjusted Invested
Amount is not reimbursed, the amount of
principal distributable to the Class B
Certificateholders from the Collection Ac-
count (as defined herein) will be reduced.
See "Description of the Investor Certifi-
cates--Allocations" and "--Subordination".
Reductions of the Class B Adjusted Invested
Amount will be reimbursed and the Class B
Adjusted Invested Amount increased on each
Distribution Date by the sum of the Series
Allocable Miscellaneous Payments (as de-
fined herein) to the extent not used to re-
imburse the Class A Adjusted Invested
Amount, and the amount, if any, of Excess
Finance Charge and Administrative Collec-
tions allocable and available for that pur-
pose. See "Description of the Investor Cer-
tificates--Subordination", "--Excess Fi-
nance Charge and Administrative Collec-
tions".
If the Class B Adjusted Invested Amount is
reduced to zero, the Class A Adjusted In-
vested Amount will be reduced if there is
any remaining unpaid Class A Required
Amount for any Due Period, but not in ex-
cess 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 Admin-
istrative Receivables allocable to the
Class B Interest for any Due Period, to-
gether with Excess Finance Charge and Ad-
ministrative Collections not required to
pay the Class A Required Amount, are insuf-
ficient to pay interest on the unpaid prin-
cipal 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 1997-1 Supplement (with in-
terest thereon), plus the Class B Investor
Default Amount (as defined herein), on the
related Distribution Date for such Due Pe-
riod (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 with-
drawn and applied to fund the Class B Re-
quired Amount. If such monies available
with respect to such Due Period are less
than the Class B Required Amount, Subordi-
nated Principal
23
<PAGE>
Collections allocable to the Collateral In-
vested Amount for such Due Period will then
be used to fund the remaining Class B Re-
quired Amount.
If any such amount available to be with-
drawn from the Cash Collateral Account and
Subordinated Principal Collections alloca-
ble 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 re-
duced (but not in excess of the Class B In-
vestor 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 Collec-
tions and Series Allocable Miscellaneous
Payments for such Distribution Date allo-
cated and available for that purpose.
The Class B Adjusted 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 Pe-
riod, and the Class B Certificateholders
will bear directly the credit and other
risks associated with their undivided in-
terest in the Trust. See "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 Ad-
justed Invested Amount or the Collateral
Amount, the amount available to fund pay-
ments with respect to the Class A Certifi-
cates 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 In-
terest 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 Princi-
pal Receivables to decrease the Collateral
Invested Amount, (ii) to the extent collec-
tions of Principal Receivables allo-
24
<PAGE>
cable 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 de-
scribed below. See "Description of the In-
vestor Certificates--Description of the
Cash Collateral Account".
To the extent set forth herein, withdrawals
will be made from the Cash Collateral Ac-
count 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 Enhance-
ment available to the Investor
Certificateholders (the "Available Collat-
eral 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) $82,500,000 initially and (ii) thereaf-
ter an amount equal to the greater of (a)
8.25% of the sum of the Class A Adjusted
Invested Amount, the Class B Adjusted In-
vested Amount and the Required Collateral
Amount in each case as of such Distribution
Date after taking into account distribu-
tions made on such date and (b)
$30,000,000; provided, however, (1) that if
certain withdrawals are made from the Cash
Collateral Account, certain reductions in
the Collateral Amount occur or if an Amor-
tization Event occurs, the Required Collat-
eral Amount for such Distribution Date
shall equal the Required Collateral Amount
for the Distribution Date immediately pre-
ceding 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 as of the last day of
the Due Period preceding 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 Collat-
eral Amount to a greater amount and (5) if
any 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 Re-
quired Collateral Amount will be zero.
25
<PAGE>
With respect to any Distribution Date, if
the Collateral Amount is less than the Re-
quired Collateral Amount, certain Excess
Finance Charge and Administrative Collec-
tions will be reallocated to increase the
Collateral Invested Amount or deposited
into the Cash Collateral Account to the ex-
tent 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 depos-
ited 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 Agree-
ment"). See "Description of the Investor
Certificates--Excess Finance Charge and Ad-
ministrative Collections".
If on any Distribution Date, the Collateral
Amount exceeds the Required Collateral
Amount, such excess will be applied in ac-
cordance 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 subsequent Dis-
tribution 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 Col-
lateral Amount, and increasing the Seller's
Interest.
Servicing......................... The Servicer, acting through Household
Credit Services, Inc., a Delaware corpora-
tion (the "Subservicer"), will be responsi-
ble for servicing, managing and making col-
lections on the Receivables. The Servicer
is required to deposit into the Collection
Account all collections of Receivables re-
ceived by it no later than the second busi-
ness day after the processing of any such
collections, unless Household Finance Cor-
poration 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 applica-
ble Rating Agency (as defined herein) in
which case the Servicer may make a single
deposit into the Collection Account on each
Distribution Date. Cur-
26
<PAGE>
rently, 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 process-
ing 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 Subservicer shall be solely re-
sponsible for all costs and expenses relat-
ing to this engagement.
On or about the earlier of the third busi-
ness day and the fifth calendar day preced-
ing the fifteenth day of each calendar
month (a "Determination Date"), the
Servicer will calculate the amount of col-
lections of Receivables received with re-
spect to the related Due Period to be allo-
cated 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 Collat-
eral Invested Amount, as described herein.
In certain limited circumstances Household
Finance Corporation may resign or be re-
moved 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 succes-
sor Servicer. References to the "Servicer"
include Household Finance Corporation or
any such successor Servicer. Household Fi-
nance 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 Ser-
vicing Fee, the servicing fee allocable to
the Seller's Interest and certain other
amounts as described herein as servicing
compensation from the Trust. See "Descrip-
tion of the Investor Certificates--Servic-
ing Compensation and Payment of Expenses".
Mandatory Reassignment and
Transfer of Certain Receivables..
The Seller will make certain representa-
tions and warranties in the Pooling and
Servicing Agreement with
27
<PAGE>
respect to the Accounts and the Receivables
and the Servicer will make certain repre-
sentations and warranties in the Pooling
and Servicing Agreement in its capacity as
Servicer. If the Seller or the Servicer
breaches certain representations and war-
ranties with respect to any Receivable and
such breach remains uncured for a specified
period after the Seller or the Servicer be-
comes 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 re-
spect to any Receivable and such noncompli-
ance 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 mate-
rial adverse effect on the
certificateholders' interest therein, such
certificateholders' interest may be reas-
signed 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, would be responsible for any
failure to comply with the Servicer's cove-
nants and warranties arising thereafter.
Tax Status........................
Special counsel to the Seller will deliver
its opinion that under existing law the In-
vestor Certificates will be characterized
as debt for federal income tax purposes.
Under the Pooling and Servicing Agreement
and the Series 1997-1 Supplement, the
Seller and the Investor Certificateholders
will agree to treat the Investor Certifi-
cates as debt for federal, state, local,
foreign and other tax purposes. See "Cer-
tain Federal Income Tax Consequences" and
"State and Local Tax Consequences".
ERISA Considerations.............. The purchase and holding of Class A Certif-
icates by most employee benefit plans is
subject to the fiduciary responsibility
rules of the Employee Retirement Income Se-
curity Act of 1974, as amended ("ERISA"),
including its "prohibited transaction"
rules. The application of ERISA's prohib-
ited 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
28
<PAGE>
"DOL"). If the Certificates are treated as
equity interests under ERISA, under regula-
tions issued by the DOL, the Trust's assets
would not be deemed "plan assets" (as de-
fined 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 Is-
suer and of one another at the conclusion
of the offering. The Underwriters (as de-
fined herein) expect, although no assur-
ances can be given, that the Class A Cer-
tificates will be held by at least 100 per-
sons, 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 be-
half of or with "plan assets" of any Bene-
fit Plan (as defined herein) should consult
their counsel before making a purchase. See
"ERISA Considerations".
The Class A Certificates may not be ac-
quired 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 re-
spective affiliates. See "ERISA Considera-
tions".
The Class B Certificates may not be pur-
chased 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 Receivables, the credit qual-
ity 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 "De-
scription of the Investor Certificates--Re-
allocation of Cash Flows" and "Risk Fac-
tors--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
29
<PAGE>
based primarily on the value of the Receiv-
ables, 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 im-
position 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 particu-
lar purpose.
Listing........................... Application will be made to list the In-
vestor Certificates on the Luxembourg Stock
Exchange.
30
<PAGE>
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; Bankruptcy Risks. 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".
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
31
<PAGE>
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. 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, 1994-2 and 1995-1 may instruct the Trustee not to sell
the Receivables. The credit enhancer for Series 1997-1 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.
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".
32
<PAGE>
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.
Such laws, as well as any new laws or rulings which may be adopted (including,
but not limited to, federal or state interest rate caps on credit cards), 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. 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 Generally--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 such
legislation could be to reduce the yield on the Accounts. If such yield is
reduced, an Amortization Event could occur, and an Early Accumulation Period
may commence. See "Description of the Investor Certificates--Amortization
Event". In addition, upon the occurrence of a Reserve Account Event (as
defined herein) during the Controlled Accumulation Period or any Early
Accumulation Period, an Early Amortization Period will commence.
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 Generally--
Representations and Warranties" and "--Servicer Covenants" and "Certain Legal
Aspects of the Receivables--Consumer Protection Laws".
Generation of Additional Receivables; Dependency on Cardholder Repayments.
The Receivables may be paid at any time and there is no assurance that there
will be additional Receivables created in the Accounts, that Receivables will
be added to the Trust from additional Accounts designated to the Trust, or
that any particular pattern of cardholder repayments will occur. 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 the Early Accumulation Period. In addition, the occurrence of
a Reserve Account Event would result in the occurrence of an Early
Amortization Period. Furthermore, there is no
33
<PAGE>
assurance that the repayment history of Receivables generated 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. 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 Accumulation Period. 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 Accumulation Period as well as result
in decreased protection to Investor Certificateholders against defaults under
the Accounts. The occurrence of any Reserve Account Event during the Controlled
Accumulation Period or any Early Accumulation Period will cause the
commencement of an Early Amortization Period.
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 Accumulation Period, or, if a Reserve Account
Event occurs, 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
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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; Decrease in
Finance Charges. 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 Accumulation Period, or would result in the occurrence of an Early
Amortization Period if a Reserve Account Event occurs. 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 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 the immediately preceding 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 as of the last day of such
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.
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
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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
Generally--Additions of Accounts or Participation Interests".
Basis Risk. The Accounts will 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 known as the "The GM CardSM". 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 and any Early Accumulation Period.
If the Collateral Invested Amount and any amount on deposit in the Cash
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 Adjusted Invested Amount may be reduced.
If the Class B Adjusted 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 1997-1 Expected Final Payment
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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 1997-1 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".
No Gross-Up for Withholding Tax. An Investor Certificateholder who complies
with the applicable identification or certification requirements of the IRS
should generally not be subject to United States withholding tax. If the law
were to change and, as a result thereof, United States withholding tax were
imposed on such payments even though the Investor Certificateholder complied
with the applicable identification or certification requirements, the Investor
Certificateholder would receive such payments net of such withholding tax, and
none of the Seller, Household Bank, the Trust, the Trustee, the Collateral
Interest Holder, the Servicer or any Subservicer would have any obligation to
gross up such payments to account for such withholding tax.
MASTER TRUST CONSIDERATIONS
Issuance of Additional Series. The Trust, as a master trust, previously has
issued ten Series, two of which have been retired, and is expected to issue
additional Series from time to time. While the terms of any Series will be
specified in a 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. 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"). There
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can be no assurance, however, that the issuance 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, in Group Two,
which provides for the reallocation of collections of Finance Charge and
Administrative Receivables allocable to a Series among all Series in such
Group, an additional Series which is issued with a larger claim with respect
to monthly interest than that of previously issued Series in Group Two (due to
a higher certificate rate) will receive a proportionately larger reallocation
of Group Two Investor Finance Charge and Administrative Receivables. Such
issuance will reduce the amount of Group Two Investor Finance Charge and
Administrative Receivables which are reallocated to the existing Series in
Group Two. 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.
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
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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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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 CardSM " program and originated by Household Bank or
its affiliate, Household Bank, f.s.b. The Accounts were issued by Household
Bank or such affiliate in accordance with the underwriting criteria as
explained below.
Household Bank's new account originations 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,
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
established credit quality standards. 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 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 offers 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--Master Trust Considerations--Addition of Trust Assets".
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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 CardSM" 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 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. 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 CardSM", excluding GM Card Accounts converted from other credit
card accounts, 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 December 31, 1996, the Accounts constitute substantially all of the
Portfolio. Origination of Accounts with respect to "The GM CardSM" program
commenced in September 1992. Information for the Portfolio presented below
reflects performance of
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all GM Card Accounts, excluding GM Card Accounts converted from other credit
card accounts, of Household Bank or an affiliate during the periods indicated
and excludes GM Card Accounts originated by Household Bank (Nevada), N.A. 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 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.
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>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Receivables
Outstanding(2)........... $6,431,033 $6,047,865 $5,444,143 $3,188,019
Total Net Charge-offs(3).. $ 342,922(4) $ 276,288(4) $ 167,214 $ 39,794
Total Net Charge-offs as a
Percentage of Average
Receivables Outstanding.. 5.33% 4.57% 3.07% 1.25%
</TABLE>
- --------
(1) Substantially all information for "The GM CardSM" Accounts 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 average monthly beginning and average
monthly ending receivables balance.
(3) Net charge-offs include charge-offs of principal and fees net of recoveries
during the periods.
(4) Recoveries for 1995 and 1996 relate only to the Accounts.
AVERAGE DELINQUENCIES AS A PERCENTAGE OF THE PORTFOLIO(1)(2)
IN THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
AVERAGE OF AVERAGE OF AVERAGE OF AVERAGE OF
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
NUMBER OF ------------------- ------------------- ------------------- -------------------
DAYS DELINQUENT PERCENT- DELINQUENT PERCENT- DELINQUENT PERCENT- DELINQUENT PERCENT-
DELINQUENT AMOUNT AGE(3) AMOUNT AGE(3) AMOUNT AGE(3) AMOUNT AGE(3)
- ------------------------ ---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5-29.................... $241,415 3.75% $218,297 3.61% $179,326 3.29% $ 95,374 2.99%
30-59................... 79,647 1.24% 65,048 1.08% 49,993 0.92% 22,586 0.71%
60-89................... 52,214 0.81% 42,406 0.70% 30,785 0.57% 13,166 0.41%
90-119.................. 40,443 0.63% 33,476 0.55% 24,452 0.45% 9,535 0.30%
120+.................... 61,002 0.95% 50,936 0.84% 39,507 0.73% 12,325 0.39%
-------- ----- -------- ----- -------- ----- -------- -----
Total $474,721 7.38% $410,163 6.78% $324,063 5.96% $152,986 4.80%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- --------
(1) Average delinquencies are the average of month end delinquent amounts.
(2) Substantially all information for "The GM CardSM" Accounts 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 average delinquent amounts
during the period by the average of the monthly average receivables
balance.
42
<PAGE>
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".
REVENUE EXPERIENCE FOR THE PORTFOLIO(1)
IN THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Receivables Outstanding
(2)............................... $6,431,033 $6,047,865 $5,444,143 $3,188,019
Total Finance Charges and Fees
Billed (3)........................ $ 977,360 $ 964,160 $ 816,264 $ 453,865
Total Finance Charges and Fees
Billed as a Percentage of Average
Receivables Outstanding........... 15.20% 15.94% 14.99% 14.24%
</TABLE>
- --------
(1) Substantially all information for "The GM CardSM" Accounts 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 average monthly beginning and average
monthly ending receivables balance.
(3) Excludes revenue attributable to Interchange and is net of finance charges
accrued on charged-off accounts.
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 by Household Bank 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. See "Certain
43
<PAGE>
Legal Aspects of the Receivables--Consumer Protection Laws" and "--Proposed
Legislation". Neither the Servicer or 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 CardSM" program which meet the eligibility criteria set forth in the
Pooling and Servicing Agreement.
Pursuant to the Bank Purchase Agreement and the Pooling and Servicing
Agreement, the Seller will have the right or be obligated (subject to certain
limitations and conditions) to require and Household Bank will be obligated 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 Seller for conveyance to the Trust all Receivables of such
Additional Accounts, whether such Receivables are then existing or thereafter
created. 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
Generally--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 Generally--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.
44
<PAGE>
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 December 31, 1996, the Receivables pertaining
to the Accounts had an average principal balance of $1,386, and the Accounts
had an average credit limit of $6,416 and a weighted average age of
approximately 44 months. The average total Receivable balance as a percentage
of the average credit limit with respect to such Accounts was 21.9% as of the
close of business on December 31, 1996. Approximately 13.7%, 7.2%, 7.1%, 6.8%
and 5.8% of the Receivables as of the close of business on December 31, 1996
relate to cardholders having billing addresses in California, New York, Texas,
Michigan and Florida, respectively. As of the close of business on December
31, 1996, the Receivable balance of the nonpremium and premium Accounts as a
percentage of the total Receivable balance of the Accounts was approximately
77.1% and 22.9%, respectively.
As of the close of business on December 31, 1996, 4,778,288 Accounts
representing $6,537,838,927.88 or 96.1% of the total Receivables outstanding
were current or less than 30 days delinquent, and 66,240 Accounts representing
$265,717,995.42 or 3.9% 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, 1993 and 1994. 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.
The following tables summarize the Accounts by various criteria as of the
close of business on December 31, 1996 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..................... 3,191,214 65.87% $ 478,179,938 7.03%
$1,000.01 to $2,000.00......... 495,389 10.23% 719,390,009 10.57%
$2,000.01 to $3,000.00......... 315,757 6.52% 788,506,091 11.59%
$3,000.01 to $4,000.00......... 231,560 4.78% 808,828,802 11.89%
$4,000.01 to $5,000.00......... 174,292 3.60% 784,620,794 11.53%
$5,000.01 to $6,000.00......... 122,321 2.52% 669,783,324 9.85%
$6,000.01 to $7,000.00......... 93,815 1.94% 610,438,428 8.97%
$7,000.01 to $8,000.00......... 72,584 1.50% 543,688,184 7.99%
$8,000.01 to $9,000.00......... 57,166 1.18% 486,347,859 7.15%
$9,000.01 to $10,000.00........ 53,382 1.10% 507,447,799 7.46%
Over $10,000.00................ 37,048 .76% 406,325,695 5.97%
--------- ------- -------------- -------
Total........................ 4,844,528 100.00% $6,803,556,923 100.00%
========= ======= ============== =======
</TABLE>
45
<PAGE>
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..................... 205,484 4.24% $ 55,840,154 0.82%
$1,000.01 to $2,000.00......... 135,421 2.80% 102,300,762 1.50%
$2,000.01 to $3,000.00......... 265,225 5.47% 250,667,143 3.68%
$3,000.01 to $4,000.00......... 235,660 4.86% 303,110,944 4.46%
$4,000.01 to $5,000.00......... 1,125,642 23.24% 638,731,481 9.39%
$5,000.01 to $6,000.00......... 731,383 15.10% 606,714,432 8.92%
$6,000.01 to $7,000.00......... 644,001 13.29% 776,713,224 11.41%
$7,000.01 to $8,000.00......... 381,191 7.87% 682,880,565 10.04%
$8,000.01 to $9,000.00......... 255,781 5.28% 696,011,755 10.23%
$9,000.01 to $10,000.00........ 442,442 9.13% 1,230,501,709 18.09%
Over $10,000.00................ 422,298 8.72% 1,460,084,754 21.46%
--------- ------- -------------- -------
Total........................ 4,844,528 100.00% $6,803,556,923 100.00%
========= ======= ============== =======
</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 24 months............ 0 0.00% $ 0 0.00%
Over 24 months to 48 months.... 3,000,577 61.94% 4,079,912,977 59.97%
Over 48 months................. 1,843,951 38.06% 2,723,643,946 40.03%
--------- ------- -------------- -------
Total........................ 4,844,528 100.00% $6,803,556,923 100.00%
========= ======= ============== =======
Weighted Average Age (Months).. 44
</TABLE>
BILLING AND PAYMENTS
General. The Accounts, which have 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 two 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.
46
<PAGE>
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
"sum of the balances" is multiplied by (ii) the Daily Periodic Rate. To obtain
the sum of the balances, 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, credit insurance charges, cash advances, annual fee, if applicable,
or administrative charges to the account generally on the day they were
incurred and (y) subtracting any payments or credits and any unpaid finance
charges applied to the Account. 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 daily balance under $2,500 is generally .045% (corresponding
to a 16.4% annual percentage rate) while those with an average daily balance
of $2,500 or greater generally have a minimum Daily Periodic Rate of .037%
(corresponding to a 13.4% annual percentage rate). Household Bank has and may
again offer special marketing rates.
If the previous balance has been paid in full, no purchase finance charges
will be assessed on purchases for merchandise or services made during a
billing cycle provided, however, payment is received for those purchases in
full by the due date (25 days after the close of the cycle) noted on the
billing statement. 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 2.5% of the cash advance, with a
minimum fee of $2.50 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 $20 if the required minimum payment on the account
is not received on its due date shown
47
<PAGE>
on the monthly billing statement, (b) returned payment charges of $20 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
$20 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 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 cash advance finance charges, (ii) to cash advance fees, (iii) to purchase
finance charges, (iv) to late fees, (v) to previously billed cash advances and
then cash advances in the current billing cycle, and (vi) to previously billed
purchases and other fees and then purchases and other fees in the current
billing cycle. Any excess is credited to the Account as an overpayment amount
to purchases.
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 transaction 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 secured by first and
second mortgages, automobile loans and unsecured credit advances to consumers
in the United States. The business also includes purchasing sales finance
receivables from retail merchants. Loans are made through branch lending
offices and direct marketing.
In conjunction with its consumer finance operations and where applicable
laws permit, the Servicer makes available to customers credit life, credit
accident and health, and household contents insurance.
48
<PAGE>
Credit life, credit accident and health insurance are generally directly
written by or reinsured with Household Life Insurance Company or its
affiliates.
As of December 31, 1996, the Servicer had approximately $21 billion in total
assets, approximately $18 billion in total liabilities and approximately $3
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 4,500 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 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 Agreement, its interests in all
49
<PAGE>
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 Generally--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 Generally--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 paid 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 1997-1 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 Accumulation Period or 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 1997-1
Expected Final Payment Date. Any amounts deposited into the Principal Funding
Account will not be considered as principal payments made to the Investor
Certificateholders.
If an Amortization Event, other than any of those specified in paragraphs
(c), (e), (h) or (i) under "Description of the Investor Certificates--
Amortization Event" herein, occurs during the Revolving Period or the
Controlled Accumulation Period, the Early Accumulation Period will commence
and on each Distribution Date with respect to the Early Accumulation Period,
an amount equal to the lesser of (a) the Available Investor Principal
Collections and (b) the sum of the Class A Adjusted Invested Amount and the
Class B Adjusted Invested Amount will generally be deposited in the Principal
Funding Account, until the amount on deposit therein equals the sum of the
Class A Invested Amount and the Class B Invested Amount. Such amounts
deposited in the Principal Funding Account during the Early Accumulation
Period will not be subject to any Controlled Deposit Amount.
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In the event of the occurrence of any Amortization Event as specified in any
of paragraphs (c), (e), (h) or (i) under "Description of the Investor
Certificates--Amortization Event" and the commencement of the Early
Amortization Period 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 1997-1 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 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 Accumulation Period or
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 1997-1 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 (as defined herein) 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 or any Early
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; 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 1997-1 Certificates during any Early Amortization Period or
the rate at which the Principal Funding Account could be
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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 1997-1 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 deposits
in the Principal Funding Account will be made on or prior to the Series 1997-1
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 1997-1 Expected Final Payment Date will equal the expected number of
months. See "Risk Factors--Generation of Additional Receivables; Dependency on
Cardholder Repayments".
CARDHOLDER MONTHLY PAYMENT RATES FOR THE PORTFOLIO(1)(2)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Lowest Month........................................ 21.64% 23.63% 24.80% 25.85%
Highest Month....................................... 27.22% 28.09% 34.00% 34.45%
Average Monthly Payment Rate (3).................... 24.48% 25.74% 27.64% 29.55%
</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 GM CardSM" Accounts 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.
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DESCRIPTION OF THE INVESTOR CERTIFICATES
GENERAL
The Investor Certificates will be issued pursuant to the Pooling and
Servicing Agreement and the Series 1997-1 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 1997-1 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
1997-1 Supplement and is qualified in its entirety by reference to the Pooling
and Servicing Agreement and the Series 1997-1 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 1/870,000 of the Class A
Interest and each $1,000 principal amount of Class B Certificates will
represent 1/47,500 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, 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 April
15, 1997 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
April 15, 1997.
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The Class A Certificate Rate from and including March 27, 1997 to and
excluding April 15, 1997 and with respect to each related Interest Period
thereafter will be at the rate of LIBOR plus 0.10% per annum. The Class B
Certificate Rate from and including March 27, 1997 to and excluding April 15,
1997 and with respect to each related Interest Period thereafter will be at
the rate of LIBOR plus 0.28% 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 1997-1 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. If 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 be
applied to reduce the Collateral Amount to the Required Collateral Amount.
During the Controlled Accumulation Period or any Early Accumulation Period
on or prior to the Series 1997-1 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 and on the Series 1997-1 Expected Final
Payment Date such collections will be distributed from the Principal Funding
Account 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.
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,
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<PAGE>
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 an Amortization Event, other than any Amortization Event described in
paragraphs (c), (e), (h) or (i) herein under "Description of the Investor
Certificates--Amortization Event", occurs during the Controlled Accumulation
Period, the Early Accumulation Period will commence and on each Distribution
Date with respect to the Early 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 lesser of (a) the Available Investor Principal
Collections on deposit in the Collection Account with respect to such
Distribution Date and (b) 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 an Early Amortization Period shall not have
commenced, amounts on deposit in the Principal Funding Account will be
distributed to the extent described above to the Investor Certificateholders
on the Series 1997-1 Expected Final Payment Date.
If any Amortization Event described in paragraphs (c), (e), (h) or (i)
herein under "Description of the Investor Certificates--Amortization Event"
shall have occurred during the Controlled Accumulation Period or any Early
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 2001; 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 six
months. Beginning on the Determination Date immediately preceding the August
2001 Distribution Date, and on each Determination Date thereafter until the
Controlled Accumulation 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 1997-1 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 six months, the Controlled Accumulation Period may commence later than
the close of business on the last business day of August 2001, 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 Controlled Accumulation Period may be delayed
to no later than the close of business on the last business day of January
2002. The Controlled Accumulation Period will end upon the earliest to occur
of (x) the commencement of any
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Early Accumulation Period or any Early Amortization Period, (y) the payment in
full of the Invested Amount and (z) the Series 1997-1 Termination Date.
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,
$152,916,667; provided, however, that if the Controlled Accumulation Period
Length is determined to be less than six 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 or any Early 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, or paid to the Seller as described under "--Reallocation of
Trust Excess Principal Collections". 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 or any Early 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, 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
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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 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 Adjusted 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 Adjusted 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 Adjusted 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 Adjusted 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'
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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"). 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 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.
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.
"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. With respect to the Series which includes the Investor
Certificates, such amount, when used to compute the Principal Allocation
Percentage, will be adjusted by subtracting from such amount the difference
between (i) the initial Collateral Invested Amount and (ii) the sum of the
Collateral Invested Amount as of the last day of the Revolving Period plus
the aggregate unreimbursed Collateral Charge-Offs (as defined herein) after
such last day.
"Series Required Seller Amount" means an amount equal to a designated
percentage of the initial invested amount for such Series; for Series 1997-
1 equal to 7% of the initial Invested Amount.
"Trust Adjusted Invested Amount" means, with respect to any Due Period,
the sum of the Series Adjusted Invested Amounts for all outstanding Series.
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Series 1997-1 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 the total amount of Principal
Receivables in the Trust 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"). During the
Controlled Accumulation Period and any Early Accumulation Period or 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 total amount of Principal Receivables in the Trust as
of the last day of the immediately preceding Due Period, 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.
"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", and 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
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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).
"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 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" and 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) 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 and any Early 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 Accumulation Period or 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
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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 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 or
any Early 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 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 (as defined
herein) does not exceed zero on such day (after giving effect to any Principal
Receivables transferred to the Trust on such day) (the "Unallocated Principal
Collections") shall be held in the Collection Account until distributable to
the Seller or, if an Early Amortization Period has commenced, on each
Distribution Date with respect to such Early Amortization Period and on the
Series 1997-1 Expected Final Payment Date with respect to the Controlled
Accumulation Period or any Early Accumulation Period 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 1997-1 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"). Any such allocation will, in the case of the
Investor Certificates, maintain the Adjusted Invested Amount. 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 zero. Any
amount not allocated to the Seller because its interest in Principal
Receivables is zero will be held unallocated as "Unallocated Principal
Collections" until the Seller's Interest in Principal Receivables is greater
than zero (at which time such amount will be allocated to the Seller) or until
an amortization event occurs or an accumulation period (or amortization period,
if applicable) commences for any Series (after which such amount will be
treated as a Series Allocable Miscellaneous Payment).
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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 and any Early Accumulation
Period, collections of Principal Receivables and 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 Amount 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
or any Early 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 and the
Class B Certificateholders to the extent described herein in items (a) and (b)
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 or the Class B
Certificate Rate, as applicable, 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 Investor
Certificateholders to the extent described herein in items (a) and (b) 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 or
any Early Accumulation Period, an amount equal to the sum of (a) 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)
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the amount deposited into the Principal Funding Account with respect to the
Class A Certificates during the Controlled Accumulation Period and any Early
Accumulation Period and (b) the product of (x) a fraction the numerator of
which is the actual number of days in the related Interest Period and the
denominator of which is 360, (y) the Class B Certificate Rate in effect with
respect to such Interest Period and (z) the amount deposited into the
Principal Funding Account with respect to the Class B Certificates during the
Controlled Accumulation Period and any Early 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
Investor Certificateholders, a segregated trust account (the "Reserve
Account"). On each Distribution Date prior to the date on which the Reserve
Account terminates, Excess Finance Charge and Administrative Collections
allocable to Series 1997-1 (in the order of priority described herein under
"--Excess Finance Charge and Administrative Collections") will be deposited in
the Reserve Account in an amount up to the Required Reserve Amount (as defined
below). 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 any
Early Accumulation Period or 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 will be equal to the product of (x) 0.30% of the sum of the Class A
Invested Amount and the Class B Invested Amount as of the preceding
Distribution Date (after giving effect to all changes therein on such date)
and (y) the number of Distribution Dates remaining from and excluding the
Distribution Date for which such calculation is being determined to and
including the Series 1997-1 Expected Final Payment Date divided by twelve or
any other greater amount designated by the Seller.
On each Distribution Date with respect to the Controlled Accumulation Period
or any Early Accumulation Period (on or before the payment in full of the sum
of the Class A Invested Amount and the Class B Invested Amount) 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 Investor Certificateholders in accordance with the
terms set forth herein under items (a) and (b) under "--Distributions from the
Collection Account; Allocation of Funds".
In the event that on any Determination Date with respect to the Controlled
Accumulation Period or any Early Accumulation Period, the amount required to
pay the Covered Amount, for the period from the next Distribution Date to the
second succeeding Distribution Date, exceeds the sum of (i) for the period
from the next Distribution Date to the second succeeding Distribution Date,
the projected Principal Funding Investment Proceeds plus the projected
reinvestment income on the funds on deposit in the Reserve Account and (ii)
the remaining balance in the Reserve Account after giving effect to
withdrawals to be made for the next Distribution Date (a "Reserve Account
Event"), then the Early Amortization Period will commence.
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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 1997-1 Expected Final Payment Date and (c) the first
Distribution Date following the commencement of any Early Amortization Period.
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 paid to the Seller.
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 the
following 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 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. 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 and the
amount, if any, of funds to be withdrawn from the Reserve Account as described
herein) 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 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 Adjusted 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 Adjusted Invested Amount shall thereafter be
reimbursed and the Class B Adjusted 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 "--Subordinated Principal
Collections". When such reductions of the Class B Adjusted 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
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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 Adjusted 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 Adjusted 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 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 or any
Early 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
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(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 any
Early 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 sum of (A) the product of the Class B 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 or any
Early Accumulation Period, the Class B Principal Funding Account Percentage
(as defined herein) 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 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.
"Class B 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 B Certificates during the Controlled Accumulation Period and any
Early Accumulation Period and the denominator of which is equal to the
balance of any principal amount on deposit in the Principal Funding
Account.
(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 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 Invested Amount as of such last day.
(d) For each Distribution Date with respect to the Controlled
Accumulation Period or any Early Accumulation Period, an amount equal to
Available Investor Principal Collections with respect to such Distribution
Date will be deposited in the following priority:
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(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;
(ii) for any Distribution Date with respect to any Early Accumulation
Period, an amount equal to 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
(iii) 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) and (d)(ii) 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 or any Early Accumulation Period, any Principal Funding
Investment Proceeds in an amount not to exceed the Covered Amount, together
with any available investment earnings on any funds on deposit in the
Reserve Account and any amount available to be withdrawn from the Reserve
Account, in each case as described in "--Reserve Account", will be
deposited into the subaccount of the Collection Account designated therefor
for distribution to the Investor Certificateholders as set forth in
paragraphs (a) and (b) 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, any Early 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
Accumulation Period or 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 the
Due Period immediately preceding 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 Due Period 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 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 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.
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REALLOCATIONS AMONG INVESTOR CERTIFICATES OF DIFFERENT SERIES
Group Two Investor Finance Charges. The Series offered hereby will be
included in Group Two. While Series 1997-1 will be the first Series issued in
Group Two, the Trust has previously issued other Series in other Groups.
Additional Series issued in the future may also be included in Group Two or
other Groups but there is no assurance that, for any Series in a Group
(including Group Two), 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 Two 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 Two in the following priority:
(i) Group Two Investor Monthly Interest;
(ii) Group Two Investor Default Amounts;
(iii) Group Two Investor Monthly Fees;
(iv) Group Two Investor Additional Amounts; and
(v) the balance pro rata among each Series in Group Two 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 Two
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 Two pro rata based on the claim that each Series has under
the applicable clause. This means, for example, that if the amount of Group Two
Investor Finance Charge and Administrative Collections is not sufficient to
cover Group Two Investor Monthly Interest, each Series in Group Two 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 Two 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 1997-1 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 Two 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 Two, (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 Two 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
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such Distribution Date and (b) with respect to any other Series in Group
Two, 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 Two 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 Two.
"Group Two 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 Two, 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 Two 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 Two 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 Two. For illustrative purposes, the chart assumes that the
Trust has issued three Series in Group Two (Series 97-1, 97-2 and 97-3), 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 Two, and there is no
limit to the number of Series which may be included in Group Two or in any
other Group, although there can be no assurance that any other Series will be
included in Group Two or in any other Group. The Trust, however, has eight
series outstanding, five of which are in Group One. See "Annex I--Prior
Issuance of Investor Certificates."
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CREDIT CARD MASTER TRUST
FINANCE CHARGE COLLECTIONS
-----------------------------------------------
Series 1997-2 Series 1997-3
Series 1997-1
Series
Allocable
Finance Series Series
Allocable Allocable
Charge and Finance Finance
Administrative Charge and Charge and
Collections Administrative Administrative
Step 1 Collections Collections
(based upon the
Series (based upon the (based upon the
Allocation Series Series
Percentage) Allocation Allocation
Percentage) Percentage)
------------- ------------- -------------
Investor Investor Investor
Finance Finance Finance
Charge and Charge and Charge and
Administrative Administrative Administrative
Collections Collections Collections
(based (based (based
upon the upon the upon the
Floating Floating Floating
Allocation Allocation Allocation
Percentage) Percentage) Percentage)
Step 2
Seller's Seller's Seller's
Finance Finance Finance
Charges Charges Charges
-------------------------------------------------
Step 3
Group Two
---- Investor Finance Charge and Administrative
Collections
----------------------------
---------------------------------
Step 4
Series 97-1 Series 97-2 Series 97-3
Investor Investor Investor
Monthly Monthly Monthly
Interest Interest Interest
----------------------------
---------------------------------
Series 97-1 Series 97-2 Series 97-3
Investor Investor Investor
Default Amounts Default Amounts Default Amounts
----------------------------
---------------------------------
Series 97-1 Series 97-2 Series 97-3
Investor Investor Investor
Monthly Fees Monthly Fees Monthly Fees
----------------------------
---------------------------------
Series 97-1 Series 97-2 Series 97-3
Investor Additional Amounts
Investor Additional Amounts
Investor Additional Amounts
----------------------------
---------------------------------
Series 97-1 Series 97-2 Series 97-3
Balance based Balance based Balance based
upon Invested upon Invested upon Invested
Amount Amount Amount
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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 1997-
1 Allocations" and see also "--Reallocations Among Investor Certificates of
Different Series--Group Two Investor Finance Charges".
Investor Finance Charge and Administrative Collections for all Series in the
Group (or Group Two 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 Two Investor Finance Charge and Administrative
Collections are reallocated to each Series in Group Two 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
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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 "--Allocation of
Collections", 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
1997-1 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) $82,500,000 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) $30,000,000; 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 as of
the last day of the Due Period preceding 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
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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.
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 Collection Account on the Distribution Date following such Due
Period. Any amount deposited into the Collection 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 the Due Period immediately preceding
such Distribution Date, the Collateral Invested Amount and, if necessary, the
Class B Adjusted 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 Adjusted Invested Amount to be a
negative number, the Collateral Invested Amount and the Class B Adjusted
Invested Amount will be reduced to zero, and the Class A Adjusted Invested
Amount will be reduced by the amount by which the Collateral Invested Amount
and the Class B Adjusted 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 Adjusted 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
and (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".
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
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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 Adjusted Invested Amount will be reduced
by the remainder of such reduction (a "Class B Investor Charge-Off"). The
Class B Adjusted 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 Adjusted 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) and (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".
OPTIONAL REPURCHASE
On the 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
$50,000,000 (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 and Series 1997-1
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 and Series 1997-1 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 and Series 1997-1 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 and such Supplement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Seller, any additional Seller or Household
Bank;
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(d) any reduction of the average Series Adjusted Portfolio Yield
(averaged over any three consecutive Due Periods) to a rate below the
average Base Rate for such period;
(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 so as to increase the Principal Receivables in the Trust to
the Required Minimum Principal Balance (as defined herein) 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 would have a material adverse
effect on the Investor Certificateholders or the Collateral Interest
Holder;
(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 1997-1 Expected Final Payment Date;
(i) the occurrence of a Reserve Account Event; or
(j) 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 the
immediately preceding Due Period calculated on a cash basis, after subtracting
therefrom the Investor Defaulted Amount with respect to such Due Period and
the denominator of which is the Adjusted 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
Adjusted Invested Amount, the Class B Adjusted 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 and
the Early Accumulation Period 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), (i) or (j) 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 and, in the
case of the Amortization Events specified under clauses (d), (f) or (j), an
Early Accumulation Period will commence. The Early Amortization Period will
commence as of the first day of the Due Period in which an Amortization Event
as specified in paragraphs (c), (e), (h) or (i) 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". If, because of the occurrence of
one of the Amortization Events which triggers
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the commencement of the Early Amortization Period, the Early Amortization
Period begins prior to the Series 1997-1 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 Amortization
Event other than those specified in paragraphs (c), (e), (h) or (i) above will
commence the Early Accumulation Period and will end the reinvestment of the
Certificateholders' Interest in new Receivables and apply available
collections of Principal Receivables to the purchase of certain eligible
investments as described herein. An Amortization Event that triggers the
commencement of an Early Accumulation Period includes 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 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, 1994-
2 and 1995-1 may object and prevent such sale (unless a receiver orders a sale
despite such objection). The credit enhancer for Series 1997-1 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.
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In the event that the Invested Amount for the Series offered hereby is
greater than zero on the August 2004 Distribution Date (the "Series 1997-1
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 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 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 Collection Account) as described under "--Distributions from the Collection
Account; Allocation of Funds" 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 and any Early 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
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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, 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 "Certain 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").
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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 settlement in
DTC. For information with respect to tax documentation procedures relating to
the Investor Certificates, see "Certain Federal Income Tax Consequences--Non-
U.S. Investor Certificateholders", "--Information Reporting and Backup
Withholding" and "Annex II: Global Clearance, Settlement and Tax Documentation
Procedures".
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
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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 1997-1 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 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
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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 "Certain Federal Income Tax Consequences--Non-U.S.
Investor Certificateholders", "--Information Reporting and Backup Withholding"
and "Annex II: Global Clearance, Settlement and Tax Documentation Procedures".
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 1997-1 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.
If the Investor Certificates are accepted for listing on the Luxembourg
Stock Exchange, a paying agent shall be maintained in respect of the Investor
Certificates in Luxembourg (the "Luxembourg Paying Agent") for so long as the
Investor Certificates are so listed. The Luxembourg Paying Agent shall act as
the transfer agent in Luxembourg should the Investor Certificates be exchanged
for Definitive Certificates.
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 1997-1 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 1997-1
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 GENERALLY
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
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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, 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".
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,
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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 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 Collection 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 Collection 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 total aggregate
amount of Principal Receivables in the Trust at such time minus 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
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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 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 make any such deposit 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
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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 sum of the initial
Invested Amount and the initial invested amounts for all outstanding Series
plus the sum of the Series Required Seller Amount and the series required
seller amounts for each such Series.
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 December 31, 1996, 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 December 31, 1996 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 December 31, 1996 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 December 31, 1996.
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.
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.
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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 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 as
ordered by a court of competent jurisdiction or other governmental authority;
(c) do nothing to impair
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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.
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
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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;
(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
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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 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
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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 relating to the ongoing sales is qualified in its entirety 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 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. 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 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
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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 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 Generally--
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 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 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. If the breach of any of the representations and
warranties described in this paragraph results in the
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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
In 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
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
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 generated under the MasterCard
program of Household Bank known as "The GM CardSM". Such agreement contemplates
and provides for securitization transactions of receivables generated by "The
GM CardSM".
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 and assigned its obligations under the Bank Purchase Agreement to
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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
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
Generally--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 not sell, pledge, assign, transfer or grant any lien on any
Receivable (or any interest therein) other than to the Seller.
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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, 1994-2
and 1995-1 may object and prevent such sale. The credit enhancer for Series
1997-1 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".
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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 receivables or
Participation Interests to such trusts and engaging in activities incident to,
or necessary or convenient to accomplish, the foregoing. The Seller has no
current intention of filing a voluntary petition under the Bankruptcy Code, or
any similar applicable state law.
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
Generally--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 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 Generally--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".
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 legislation could be to reduce the yield on the Accounts. If such yield is
reduced, an Amortization Event could occur, and the Early Accumulation Period
may commence, or if a Reserve Account Event were to occur, an Early
Amortization Period would 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
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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 Generally--
Representations and Warranties" and "--Servicer Covenants" and "Certain Legal
Aspects of the Receivables--Consumer Protection Laws".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of material federal income tax
consequences relating to the purchase, ownership and disposition of an Investor
Certificate offered hereunder. 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. 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 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
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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. Orrick, Herrington & Sutcliffe LLP,
counsel to the Seller ("Special Counsel"), will deliver its opinion generally
to the effect 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 will deliver
its opinion generally to the effect 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.
Possible Treatment of the Trust as an Association, a Publicly Traded
Partnership or a non-Publicly Traded Partnership. Although, as described above,
Special Counsel will deliver its 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 will 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 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 will deliver its 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
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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 or an association
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 in 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. Partnership characterization also
may have adverse state and local income or franchise tax consequences for an
Investor Certificateholder. From time to time, legislation has been introduced
in Congress that would affect the treatment of any "large partnership," defined
as any partnership in which there are at least 250 partners in a taxable year.
Under such legislative proposals, among other things, the availability of
certain deductions to partners may be limited, and certain computations (such
as those relating to
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the level of allowable miscellaneous itemized deductions and the netting of
capital gains and losses) would be made at the partnership rather than the
partner level. No prediction can be made regarding whether any such legislation
will be enacted or, if so, what its ultimate effective date will be.
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
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loss will be capital gain or loss if the interest in the 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, 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 is considering implementation of further
certification requirements aimed at determining whether the issuer of a debt
obligation is related to holders thereof.
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-
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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.
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.
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
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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.
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 an
association taxable as a corporation or 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, due to different Federal and California entity
classification rules the Trust could nonetheless be taxable as a corporation
pursuant to the California corporate franchise or income tax, possibly
resulting in reduced distributions to Investor Certificateholders. If the Trust
nevertheless were treated for California income or franchise tax purposes as a
partnership other than a publicly traded partnership taxable as a corporation,
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.
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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 partnerships and corporations 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 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.
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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) 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
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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 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
107
<PAGE>
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:
CLASS A CERTIFICATES
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ------------
<S> <C>
Credit Suisse First Boston Corporation...................... $217,500,000
Citicorp Securities, Inc. .................................. $217,500,000
Morgan Stanley & Co. Incorporated........................... $217,500,000
UBS Securities, LLC ....................................... $217,500,000
------------
Total................................................. $870,000,000
============
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all $870,000,000
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 0.175% 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 0.125% 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:
108
<PAGE>
CLASS B CERTIFICATES
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- -----------
<S> <C>
Credit Suisse First Boston Corporation....................... $11,875,000
Citicorp Securities, Inc..................................... $11,875,000
Morgan Stanley & Co. Incorporated............................ $11,875,000
UBS Securities, LLC.......................................... $11,875,000
-----------
Total.................................................. $47,500,000
===========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all $47,500,000
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 0.175% 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 0.125% of such principal amount. After the initial
public offering, the public offering price may be changed.
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
109
<PAGE>
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.
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.
ADDITIONAL INFORMATION
Application will be made to list the Investor Certificates on the Luxembourg
Stock Exchange. If the Investor Certificates are listed (i) the legal notice
relating to the issue of the Investor Certificates and copies of the
respective constitutional documents of the Trust and the Seller will be lodged
with the Chief Registrar of the District Court in Luxembourg ("Grettier en
Chef du Tribunal d'Arrondissement de et a Luxembourg"), where such documents
may be inspected and copies thereof obtained, and (ii) the Seller will
undertake to maintain a paying agent in Luxembourg so long as the Investor
Certificates are listed.
All consents, approvals, authorizations or other orders of all regulatory
authorities required by the Seller and the Trust under the laws of their
respective jurisdictions have been given for the issue of the Investor
Certificates and for the Trust and the Seller to undertake and perform their
respective obligations under the Pooling and Servicing Agreement and the
Investor Certificates.
The creation and issue of the Investor Certificates has been authorized by
resolutions of the Board of Directors of the Seller on April 29, 1993, July
23, 1993 and January 10, 1994.
The Trust and the Seller are not involved in any litigation, arbitration or
administrative proceedings relating to claims or amounts which are material in
the context of the issue of the Investor Certificates nor, so far as they are
aware, are any such litigation, arbitration or administration proceedings
pending or threatened.
Since December 31, 1996, there has been no material adverse change in the
financial position or prospects of the Seller.
The Investor Certificates have been accepted for clearance through Euroclear
and Cedel with a common code of 7518943 with respect to the Class A
Certificates and 7518978 with respect to the Class B Certificates. The ISIN
(International Securities Identification Number) for the Certificates is
US441798AN54 with respect to the Class A Certificates and US441798AP03 with
respect to the Class B Certificates.
Copies of the respective constitutional documents of the Seller and copies
of the Pooling and Servicing Agreement and the Series 1997-1 Supplement (which
sets out the terms and conditions of the Investor Certificates) and any
notices or reports prepared by the Servicer relating to the Trust may be
inspected at, or may be obtained from, so long as any of the Investor
Certificates are listed on the Luxembourg Stock Exchange, the Luxembourg
Paying Agent during the business hours of any business day.
110
<PAGE>
INDEX
<TABLE>
<CAPTION>
TERMS PAGE(S)
- ----- ---------
<S> <C>
Accounts............................................................. 2, 6, 44
Additional Accounts.................................................. 8, 39
Adjusted Invested Amount............................................. 10
Administrative Receivables........................................... 8
Adverse Effect....................................................... 37, 86
Aggregate Addition................................................... 39
Aggregate Addition Account(s)........................................ 38
Amortization Event................................................... 75
Available Collateral Amount.......................................... 25
Available Investor Principal Collections............................. 67
Average Rate......................................................... 35
Bank Purchase Agreement.............................................. 7
Bankruptcy Code...................................................... 32
Base Rate............................................................ 76
Benefit Plans........................................................ 105
Cash Collateral Account.............................................. 5
Cede................................................................. 3
CEDEL................................................................ 15
CEDEL Participants................................................... 81
Certificateholders' Interest......................................... 5
Chase................................................................ 15
Citibank............................................................. 15
Class A Adjusted Invested Amount..................................... 10, 59
Class A Certificate(s)............................................... 1, 4
Class A Certificate Rate............................................. 4
Class A Certificateholders........................................... 2
Class A Interest..................................................... 5
Class A Interest Payment............................................. 15
Class A Invested Amount.............................................. 59
Class A Invested Percentage.......................................... 66
Class A Investor Charge-Off.......................................... 74
Class A Investor Default Amount...................................... 74
Class A Pool Factor.................................................. 79
Class A Principal Funding Account Percentage......................... 66
Class A Required Amount.............................................. 22, 64
Class B Adjusted Invested Amount..................................... 10, 59
Class B Certificate(s)............................................... 1, 4, 11
Class B Certificate Rate............................................. 4
Class B Certificateholders........................................... 2
Class B Interest..................................................... 5
Class B Interest Payment............................................. 15
Class B Invested Amount.............................................. 21, 59
Class B Invested Percentage.......................................... 66
Class B Investor Charge-Off.......................................... 75
Class B Investor Default Amount...................................... 74
Class B Pool Factor.................................................. 79
Class B Principal Funding Account Percentage......................... 66
Class B Required Amount.............................................. 23, 64
Code................................................................. 29
Collateral Agreement................................................. 26
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE(S)
- ----- ---------
<S> <C>
Collateral Amount.................................................... 6
Collateral Charge-Off................................................ 79
Collateral Default Amount............................................ 78
Collateral Interest.................................................. 6
Collateral Interest Holder........................................... 6
Collateral Invested Amount........................................... 6, 60
Collateral Invested Percentage....................................... 66
Collateral Monthly Interest.......................................... 68
Collateral Rate...................................................... 16
Collection Account................................................... 57
Commission........................................................... 2
Controlled Accumulation Period....................................... 17
Controlled Accumulation Period Length................................ 55
Controlled Accumulation Amount....................................... 18, 56
Controlled Deposit Amount............................................ 18, 56
Cooperative.......................................................... 81
Covered Amount....................................................... 62
Daily Balance........................................................ 47
Defaulted Amount..................................................... 73
Defaulted Receivables................................................ 11
Definitive Certificate(s)............................................ 15
Depositaries......................................................... 79
Depository........................................................... 53
Determination Date................................................... 27
Distribution Date.................................................... 2, 15
Distribution Date Statement.......................................... 79
DOL.................................................................. 29
DTC.................................................................. 3
Due Period........................................................... 11
Early Accumulation Period............................................ 19
Early Amortization Period............................................ 20
EDS.................................................................. 27
Eligible Account..................................................... 39
Eligible Institution................................................. 57
Eligible Investments................................................. 58
Eligible Receivable.................................................. 84
ERISA................................................................ 28, 105
ERISA Plan........................................................... 105
Euroclear............................................................ 15
Euroclear Operator................................................... 81
Euroclear Participants............................................... 81
Excess Finance Charge and Administrative Collections................. 64
Exchange Act......................................................... 3
FDIA................................................................. 31
FDIC................................................................. 12
Finance Charge and Administrative Receivables........................ 8
Finance Charge Receivables........................................... 8
FIRREA............................................................... 31, 96
Floating Allocation Percentage....................................... 59
GM................................................................... 94
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE(S)
- ----- ---------
<S> <C>
Group................................................................ 6
Group A.............................................................. 14
Group B.............................................................. 14
Group C.............................................................. 14
Group One............................................................ 14
Group Two............................................................ 6
Group Two Investor Additional Amounts................................ 69
Group Two Investor Default Amount.................................... 69
Group Two Investor Finance Charge and Administrative Collections..... 70
Group Two Investor Monthly Fees...................................... 70
Group Two Investor Monthly Interest.................................. 70
Holders.............................................................. 83
Household Bank....................................................... 2, 4
Household International.............................................. 49
Indirect Participants................................................ 80
Ineligible Receivables............................................... 84
Initial Accounts..................................................... 7
Initial Cut-Off Date................................................. 2, 7
Initial Issuance Date................................................ 7
Insolvency Event..................................................... 32
Insolvency Proceeds.................................................. 77
Interchange.......................................................... 44
Interest Period...................................................... 15
Invested Amount...................................................... 17
Investor Certificate(s).............................................. 1, 4
Investor Certificateholders.......................................... 2
Investor Defaulted Amount............................................ 74
Investor Finance Charge and Administrative Collections............... 72
IRS.................................................................. 98
Issuance Date........................................................ 2
LIBOR................................................................ 54
Luxembourg Paying Agent.............................................. 82
MasterCard........................................................... 6
MasterCard International............................................. 6
NASD................................................................. 109
New Account.......................................................... 38
non-U.S. Investor Certificateholder.................................. 102
OID.................................................................. 101
Participants......................................................... 80
Participation Interests.............................................. 5
parties in interest.................................................. 106
Plan Asset Regulation................................................ 106
Pooling and Servicing Agreement...................................... 1
Portfolio............................................................ 41
Portfolio Yield...................................................... 35
Preferred Stock...................................................... 5
Prime Rate........................................................... 9
Principal Allocation Percentage...................................... 59
Principal Funding Account............................................ 5, 17, 62
Principal Funding Investment Proceeds................................ 62
Principal Receivables................................................ 8
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE(S)
- ----- ---------
<S> <C>
Principal Shortfalls................................................. 61
Publicly-Offered Securities Exemption................................ 106
Rating Agency........................................................ 32
Rating Agency Condition.............................................. 37
Reallocated Investor Finance Charge and Administrative Collections... 69
Receivables.......................................................... 1, 8
Record Date.......................................................... 53
Recoveries........................................................... 8
Regulations.......................................................... 100
Removal Notice....................................................... 87
Removed Accounts..................................................... 8
Required Collateral Amount........................................... 25, 73
Required Minimum Principal Balance................................... 87
Required Reserve Amount.............................................. 63
Reserve Account...................................................... 5, 63
Reserve Account Event................................................ 63
Revolving Period..................................................... 16
Securities Act....................................................... 2
Seller............................................................... 1, 4
Seller's Certificate................................................. 12
Seller's Interest.................................................... 5
Seller's Participation Amount........................................ 85
Seller's Percentage.................................................. 60
Series............................................................... 4
Series Adjusted Invested Amount...................................... 58
Series Adjusted Portfolio Yield...................................... 76
Series Allocable Defaulted Amount.................................... 58
Series Allocable Finance Charge and Administrative Collections....... 58
Series Allocable Miscellaneous Payments.............................. 58
Series Allocable Principal Collections............................... 58
Series Allocation Percentage......................................... 58
Series Enhancement................................................... 5
Series 1997-1 Cut-Off Date........................................... 16
Series 1997-1 Expected Final Payment Date............................ 17
Series 1997-1 Supplement............................................. 1
Series 1997-1 Termination Date....................................... 78
Series Required Seller Amount........................................ 58
Service Transfer..................................................... 89
Servicer............................................................. 1, 5
Servicer Default..................................................... 90
Servicer Report...................................................... 78
Servicing Fee........................................................ 78
Special Counsel...................................................... 99
Subordinated Principal Collections................................... 22
Subservicer.......................................................... 26
Supplement........................................................... 12
Supplemental Certificate............................................. 12
Termination Date..................................................... 77
Termination Notice................................................... 89
Terms and Conditions................................................. 82
The GM CardSM........................................................ 94
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE(S)
- ----- ---------
<S> <C>
Trust................................................................ 1, 4
Trust Adjusted Invested Amount....................................... 58
Trust Assets......................................................... 1, 5
Trust Excess Principal Collections................................... 56
Trustee.............................................................. 1, 5
UCC.................................................................. 31
Unallocated Principal Collections.................................... 61
Underwriters......................................................... 108
Underwriting Agreement............................................... 108
U.S. Investor Certificateholder...................................... 98
U.S. Person.......................................................... 98
VISA................................................................. 6
VISA USA, Inc. ...................................................... 6
Withholding Agent.................................................... 102
</TABLE>
115
<PAGE>
ANNEX I
PRIOR ISSUANCE OF INVESTOR CERTIFICATES
The Trust has previously issued ten series in four 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 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 has been retired. The table below sets
forth, by Group, the characteristics of the certificates currently
outstanding. For more specific information with respect to Series 1993-B,
Series 1993-1, Series 1993-2, Series 1994-1, Series 1994-2 and Series 1995-1,
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
(Maximum
Amount)... $1,150,000,000
Class B
Invested
Amount
(Maximum
Amount)... $100,000,000
Class A
Certificate
Rate...... Floating Rate
Class B
Certificate
Rate...... Floating Rate
Series
Issuance
Date...... December 17, 1993
GROUP B
CLASS A AND CLASS B VARIABLE FUNDING CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1996-A
Class A
Invested
Amount.... Up to a maximum of $1,000,000,000
Class B
Invested
Amount.... Up to a maximum of $98,902,000
Class A
Certificate
Rate...... Floating Rate
Class B
Certificate
Rate...... Floating Rate
Series
Issuance
Date...... March 15, 1996
GROUP C
CLASS A AND CLASS B VARIABLE FUNDING CREDIT CARD PARTICIPATION CERTIFICATES,
SERIES 1996-B
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>
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
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
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>
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
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 1994-2
Class A Invested Amount........................... $870,000,000
Class B Invested Amount........................... $40,000,000
Class A Certificate Rate.......................... 7.00% per annum
Class B Certificate Rate.......................... 7.20% per annum
Series Issuance Date.............................. September 28, 1994
</TABLE>
The above Series 1994-2 certificates were supported by a collateral interest
in the receivables which on the Series Issuance Date had an invested amount of
$90,000,000.
I-2
<PAGE>
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.
I-3
<PAGE>
ANNEX II
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Investor
Certificates, Series 1997-1 (the "Global Securities") will be available only
in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), CEDEL or
Euroclear. The Global Securities will be tradeable as conventional asset
backed instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and conventional asset backed securities.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investor Certificateholders' interests in the
Global Securities will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result, CEDEL
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional asset backed securities.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to conventional
asset backed securities.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of (i) the actual
number of days in such accrual period and a year assumed to consist of 360
days. For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear Participant's
account. The Global Securities credit will appear the next day (European time)
and the cash debit will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debit
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance the
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited
to their accounts. However, interest on the Global Securities would accrue
from the value date. Therefore, in many cases the investment income on the
Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participant a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct the respective Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment date to and excluding the settlement
date on the basis of (i) the actual number of days in such accrual period and
a year assumed to consist of 360 days. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. The payment will then be reflected in the account
of the CEDEL Participant or Euroclear Participant the following day, and
A-2
<PAGE>
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities who is not a U.S. Person (as defined
below) generally will be subject to U.S. withholding tax at the prevailing
rate (currently 30%) that applies to payments of interest (including original
issue discount) on registered debt issued by U.S. Persons, unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between such beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons without effectively connected income can
obtain a complete exemption from the withholding tax by filing a signed Form
W-8 (Certificate of Foreign Status). If the information shown on Form W-8
changes, a new Form W-8 must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are beneficial owners residing in a country
that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless
the filer alternatively files Form W-8. Form 1001 may be filed by the
beneficial owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from any applicable backup withholding tax by filing Form W-9
(Payer's Request for Taxpayer Identification Number and Certification).
A-3
<PAGE>
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" generally means (i) a citizen or resident of the
United States, (ii) a corporation or partnership organized in or under the
laws of the United States, any state thereof, or any political subdivision of
either (including the District of Columbia), or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes
regardless of its source.
Proposed Treasury Regulations were issued which, if adopted in final form,
could affect the tax documentation requirements described above. Prospective
investors are urged to consult their tax advisors with respect to the effect
the proposed regulations may have if adopted.
THIS SUMMARY DOES NOT DEAL WITH ALL ASPECTS OF UNITED STATES FEDERAL INCOME
TAX WITHHOLDING THAT MAY BE RELEVANT TO FOREIGN HOLDERS OF THE GLOBAL
SECURITIES. INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS FOR
SPECIFIC TAX ADVICE CONCERNING THEIR HOLDING AND DISPOSING OF THE GLOBAL
SECURITIES.
A-4
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION 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 AF-
FAIRS OF THE SELLER OR THE SERVICER OR ANY AFFILIATE THEREOF OR THE RECEIV-
ABLES OR THE ACCOUNTS SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTI-
TUTE 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 SO-
LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION 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...................................................... 2
Reports to Investor Certificateholders..................................... 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 31
The Credit Card Business of Household Bank (SB), N.A....................... 39
The Accounts............................................................... 44
The Seller................................................................. 48
Household Bank (SB), N.A. ................................................. 48
The Servicer............................................................... 48
The Subservicer............................................................ 49
The Trust.................................................................. 49
Use of Proceeds............................................................ 50
Principal Payment Considerations........................................... 50
Description of the Investor Certificates................................... 53
The Pooling and Servicing Agreement Generally.............................. 83
Description of the Bank Purchase Agreement................................. 92
Certain Legal Aspects of the Receivables................................... 95
Certain Federal Income Tax Consequences.................................... 98
State and Local Tax Consequences........................................... 103
ERISA Considerations....................................................... 105
Underwriting............................................................... 108
Legal Matters.............................................................. 110
Additional Information..................................................... 110
Index...................................................................... 111
Annex I.................................................................... 1-1
Annex II................................................................... A-1
</TABLE>
UNTIL JUNE 18, 1997 (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
SERIES 1997-1
$870,000,000
Floating Rate Class A
Credit Card
Participation Certificates
$47,500,000
Floating Rate Class B
Credit Card
Participation Certificates
HOUSEHOLD AFFINITY
FUNDING CORPORATION
SELLER
HOUSEHOLD FINANCE
CORPORATION
SERVICER
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
CITICORP SECURITIES, INC.
MORGAN STANLEY & CO.
INCORPORATED
UBS SECURITIES
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