<PAGE> 1
Global Prospectus Supplement
To prospectus supplement dated December 21, 2000
and prospectus dated December 21, 2000
DISCOVER(R) CARD MASTER TRUST I, SERIES 2001-1
$1,200,000,000 Floating Rate Class A Certificates
$63,158,000 Floating Rate Class B Certificates
DISCOVER CARD MASTER TRUST I
Issuer
DISCOVER BANK
Master Servicer, Servicer and Seller
-------------
The Series 2001-1 Class A Certificates and Class B Certificates represent
interests in the Discover Card Master Trust I. The certificates are not
obligations of Discover Bank or any of its affiliates, and neither the
certificates nor the underlying credit card receivables are insured or
guaranteed by any governmental agency. INVESTING IN THE CERTIFICATES INVOLVES
RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE S-13 OF THE PROSPECTUS SUPPLEMENT.
-----------------
<TABLE>
<CAPTION>
Class A Certificates Class B Certificates
-------------------- --------------------
<S> <C> <C>
Principal amount $1,200,000,000 $63,158,000
Interest rate LIBOR plus 0.22% LIBOR plus 0.55%
Expected interest payment dates Monthly, beginning Monthly, beginning
February 15, 2001 February 15, 2001
Closing date - date of issue January 4, 2001 January 4, 2001
Expected maturity date January 15, 2008 February 15, 2008
Initial credit enhancement $157,894,750 - 12.5% of series $94,736,850 - 7.5% of series
Form of credit enhancement Subordination of Class B Certificates Cash collateral account
Expected ratings - Aaa/AAA/AAA A2/A/A+
Moody's/S&P/Fitch IBCA
Price to public 100.000% 100.000%
Underwriting discounts and
commissions 0.300% 0.325%
Proceeds to Discover Bank $1,196,400,000 $62,952,736.50
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved the certificates or determined if this global prospectus
supplement or the accompanying prospectus supplement or prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the certificates to purchasers on January 4,
2001 through the facilities of The Depository Trust Company, the Euroclear
System and Clearstream Banking.
Discover Bank, through its listing agent, has applied to list the certificates
on the Luxembourg Stock Exchange, in accordance with the rules of the Luxembourg
Stock Exchange, to facilitate trading in non-U.S. markets.
------------
UNDERWRITERS OF THE CLASS A CERTIFICATES
MORGAN STANLEY DEAN WITTER
BANC OF AMERICA SECURITIES LLC
BARCLAYS CAPITAL
DRESDNER KLEINWORT BENSON
UNDERWRITER OF THE CLASS B CERTIFICATES
MORGAN STANLEY DEAN WITTER
JANUARY 3, 2001
<PAGE> 2
IMPORTANT NOTICE ABOUT INFORMATION
PRESENTED IN THIS GLOBAL PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT AND PROSPECTUS
We provide information to you about the certificates in this
global prospectus supplement that is relevant to non-U.S. investors. In
addition, we provide more detailed information to you about the certificates in
two other documents:
- the prospectus supplement, which describes the specific terms
of your certificates, and
- the prospectus, which provides detailed information about the
trust and the certificates issued by the trust, some of which
may not apply to your certificates.
We include cross-references in this global prospectus
supplement to sections in the accompanying prospectus supplement and prospectus
where you can find further related discussions.
IT IS IMPORTANT FOR YOU TO READ AND CONSIDER ALL INFORMATION
CONTAINED IN THIS GLOBAL PROSPECTUS SUPPLEMENT, AS WELL AS IN THE ACCOMPANYING
PROSPECTUS SUPPLEMENT AND PROSPECTUS, IN MAKING YOUR INVESTMENT DECISION.
You should rely only on the information contained or
incorporated by reference in this global prospectus supplement and the
accompanying prospectus supplement and prospectus. We have not authorized anyone
to provide you with different information.
We are not offering to sell or soliciting offers to buy any
securities other than the certificates to which this global prospectus
supplement and the accompanying prospectus supplement and prospectus relate, nor
are we offering to sell or soliciting offers to buy certificates in any
jurisdiction where the offer is not permitted.
We do not claim that the information contained in the
prospectus, prospectus supplement and global prospectus supplement is accurate
as of any date other than the dates on their respective covers.
In certain jurisdictions, the law may restrict the
distribution of this global prospectus supplement, the prospectus supplement and
the prospectus and the offering of the certificates. You are required by the
underwriters to inform yourself about and observe any of these restrictions.
Discover Bank has taken all reasonable care to ensure that, in
relation to Discover Bank and the certificates:
- the information contained in this global prospectus
supplement, the prospectus supplement and the
prospectus is true and accurate in all material
respects; and
- this global prospectus supplement, the prospectus
supplement and the prospectus do not omit any
material facts, the omission of which would make any
statement - whether fact or opinion - misleading.
Discover Bank accepts responsibility for the information
contained in this global prospectus supplement, the prospectus supplement and
the prospectus.
When we refer to "dollars" and "$" in this global prospectus
supplement, the prospectus supplement and the prospectus, we are referring to
United States dollars.
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<PAGE> 3
For United Kingdom investors: The certificates may not be
offered or sold in the United Kingdom other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments, whether as principal or agent, for the purpose of their businesses
or otherwise in circumstances that will not result in an offer to the public
within the meaning of the Public Offers of Securities Regulations 1995 or the
Financial Services Act 1986. This global prospectus supplement, the prospectus
supplement and the prospectus may only be issued or passed on to any person in
the United Kingdom if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996.
THE CERTIFICATES
You should refer to the accompanying prospectus supplement and
prospectus for a detailed summary of the provisions of the certificates. We
define some of the terms used in this global prospectus supplement in the
glossary of the prospectus supplement beginning on page S-49.
DENOMINATIONS
The certificates will be issued in a minimum denomination of
$1,000 and in integral multiples of $1,000.
DISTRIBUTIONS ON THE CERTIFICATES
Interest will accrue from January 4, 2001 at the rate of LIBOR
plus 0.22% per year on the Class A Certificates and at the rate of LIBOR plus
0.55% per year on the Class B Certificates. The trust will pay you interest on
the 15th day of each month, or the next business day, beginning in February,
2001. LIBOR will mean the London interbank offered rate for one-month United
States dollar deposits, determined as described in the prospectus supplement.
If you hold a Class A Certificate, the trust is scheduled to
pay you principal on January 15, 2008, or the next business day. If you hold a
Class B Certificate, the trust is scheduled to pay you principal on February 15,
2008, or the next business day. If an Amortization Event occurs, the trust will
pay principal monthly and the final principal payment may be made before or
after these expected payment dates. The trust must generally pay all Class A
principal before it pays any Class B principal. See "The Certificates--Principal
Payments" and "--Clean-up Call; Termination of Series" in the prospectus
supplement and "The Certificates--Principal Payments" and "--Final Payment of
Principal; Termination of Series" in the prospectus. For a description of the
circumstances under which the trust will distribute interest and principal on a
monthly basis, see "The Certificates--Amortization Events" in the prospectus
supplement.
The trustee will maintain a paying agent in Luxembourg for so
long as the certificates are outstanding. We have set forth the name and address
of the paying agent at the end of this global prospectus supplement. If the
trust issues definitive certificates, this paying agent will also act as
co-transfer agent and co-registrar for the definitive certificates. In addition,
upon maturity or final payment, you may present the definitive certificates for
payment at the offices of the paying agent in Luxembourg for up to two years
after maturity or final payment. Thereafter, you must look to Discover Bank for
payment as a general creditor, unless an applicable abandoned property law
designates another person.
G-3
<PAGE> 4
You will not be entitled to receive any additional payments if
the United States, or any applicable taxing authority, deducts or withholds any
amounts from payments made to you by the trust, or imposes any present or future
tax, assessment or other governmental charge upon any payments made to you.
REPLACEMENT CERTIFICATES
If the trust issues definitive certificates, you may exchange
or replace a certificate that is mutilated, destroyed, lost or stolen at the
offices of the co-transfer agent and co-registrar in Luxembourg by presenting
the certificate, or satisfactory evidence of the destruction, loss or theft of
the certificate, to the co-transfer agent and co-registrar. You may be required
to provide the co-transfer agent, co-registrar and the trustee with an indemnity
satisfactory to them, at your own expense, before they will issue a replacement
certificate. You will be required to pay any tax or other governmental charge
imposed in connection with any exchange or replacement of your certificates, as
well as any other related expense, including the fees and expenses of the
trustee, the co-transfer agent and the co-registrar.
GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
Except in certain limited circumstances, you may only hold
your certificates in book-entry form through any of DTC, Clearstream Banking or
Euroclear. You will be able to trade the certificates as home market instruments
in both the European and U.S. domestic markets. Initial and secondary trades of
the certificates will settle in same-day funds.
Secondary market trading between investors holding
certificates through Clearstream Banking 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., three business day
settlement. Secondary market trading between investors holding certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations. Secondary cross-market trading between
Clearstream Banking or Euroclear and DTC participants holding certificates will
be effected on a delivery-against-payment basis through the respective
depositaries of Clearstream Banking and Euroclear, in such capacity, and as DTC
Participants.
REPORTS; NOTICES
To the extent required by the rules of the Luxembourg Stock
Exchange, Discover Bank or the trustee will publish notices to investors in a
daily newspaper in Luxembourg, which we expect to be the Luxemburger Wort. If
the trust issues definitive certificates, Discover Bank or the trustee will also
mail any required notices to you at your address as set forth in the certificate
register.
STATUS OF THE CERTIFICATES
The certificates represent interests in the trust. The Class B
Certificates are subordinated to the Class A Certificates to the extent
described in the prospectus supplement. See "The Certificates--Subordination of
the Class B Certificates--Class A Credit Enhancement" in the prospectus
supplement. The certificates of Series 2001-1 are not subordinated and will not
be subordinated to any other series of certificates issued by the trust.
G-4
<PAGE> 5
AMORTIZATION EVENTS
We describe your rights if an Amortization Event occurs under
"The Certificates--Amortization Events" in the prospectus supplement.
DISCOVER BANK
Discover Bank, formerly Greenwood Trust Company, is a wholly
owned subsidiary of NOVUS Credit Services Inc., or NOVUS, and an indirect
subsidiary of Morgan Stanley Dean Witter & Co. NOVUS acquired Discover Bank in
January 1985. Discover Bank was chartered as a banking corporation under the
laws of the state of Delaware in 1911, and its deposits are insured by the FDIC.
Discover Bank is not a member of the Federal Reserve System. The executive
office of Discover Bank is located at 12 Read's Way, New Castle, Delaware 19720,
telephone number (302) 323-7434.
LISTING AND GENERAL INFORMATION
Discover Bank has applied to list the certificates on the
Luxembourg Stock Exchange, in accordance with the rules of the Luxembourg Stock
Exchange, to facilitate trading in non-U.S. markets. In connection with the
listing application, Discover Bank will deposit the certificate of incorporation
and by-laws of Discover Bank, as well as the legal notice relating to the
issuance of the certificates, with the Chief Registrar of the District Court of
Luxembourg prior to listing. You may obtain copies of these documents from the
Chief Registrar of the District Court of Luxembourg.
The certificates have been accepted for clearance through the
facilities of DTC, Clearstream Banking and the Euroclear System. The following
table sets forth the ISIN and Common Code numbers assigned to the certificates
for purposes of trading through these facilities.
<TABLE>
<CAPTION>
Class A Certificates Class B Certificates
-------------------- --------------------
<S> <C> <C>
ISIN Number US25466KDJ51 US25466KDK25
Common Code Number 012272707 012272731
</TABLE>
Discover Bank authorized the transactions contemplated in this global prospectus
supplement, the prospectus supplement and the prospectus by resolutions adopted
by Discover Bank on November 21, 2000.
The trust was formed as of October 1, 1993 pursuant to the
Pooling and Servicing Agreement. The trust has no assets other than those
described in the prospectus supplement and the prospectus.
Copies of the Pooling and Servicing Agreement, the Series
2001-1 Series Supplement, the annual report of independent public accountants,
the documents listed under "Where You Can Find More Information" in the
prospectus and "Reports to Investors" in the prospectus supplement and the
prospectus, will be available free of charge at the office of Banque
Internationale a Luxembourg, S.A., the listing agent of the issuer in
Luxembourg, whose address is 69 route d'Esch, L-1470 Luxembourg. You may also
obtain financial information about Discover Bank from Discover Bank's annual
report for the fiscal year ended November 30, 1999, which is also available at
the office of the listing agent in Luxembourg.
Promptly after the trustee has determined LIBOR for each
interest accrual period, and no later than the first day of such interest
accrual period, the trustee will advise the Luxembourg Stock Exchange of:
G-5
<PAGE> 6
- the interest rates for the Class A Certificates and
the Class B Certificates for that interest accrual
period, determined as described under "The
Certificates--Interest Payments" in the prospectus
supplement;
- the amount of interest that will accrue on the Class
A Certificates and the Class B Certificates during
that interest accrual period; and
- the dates on which that interest accrual period will
begin and end.
Also, to the extent required by the rules of the Luxembourg Stock Exchange, the
trustee will promptly publish a notice in a daily newspaper in Luxembourg,
expected to be the Luxemburger Wort, specifying the information described above
in this paragraph.
The laws of the state of New York govern the certificates, the
Pooling and Servicing Agreement and the Series 2001-1 Supplement.
G-6
<PAGE> 7
PRINCIPAL OFFICE OF
DISCOVER BANK
12 Read's Way
New Castle, Delaware 19720
TRUSTEE
U.S. Bank National Association
One Illinois Center
111 East Wacker Drive, Suite 3000
Chicago, Illinois 60601
PAYING AGENTS
U.S. Bank National Association Banque Internationale a Luxembourg, S.A.
One Illinois Center 69 route d'Esch
111 East Wacker Drive, Suite 3000 L-1470 Luxembourg
Chicago, Illinois 60601
LISTING AGENT
Banque Internationale a Luxembourg, S.A.
69 route d'Esch
L-1470 Luxembourg
LEGAL ADVISORS TO DISCOVER BANK LEGAL ADVISOR TO THE UNDERWRITERS
as to the United States as to the United States
Latham & Watkins Cadwalader, Wickersham & Taft
Sears Tower, Suite 5800 100 Maiden Lane
Chicago, Illinois 60606 New York, New York 10038
and
Young Conaway Stargatt & Taylor, LLP
Rodney Square North, Floor 11
1100 North Market Street
P.O. Box 391
Wilmington, Delaware 19899-0391
ACCOUNTANTS TO DISCOVER BANK
Deloitte & Touche LLP
180 North Stetson Avenue
Chicago, Illinois 60601
G-7
<PAGE> 8
Prospectus supplement
to prospectus dated December 21, 2000
Discover(R) Card Master Trust I, Series 2001-1
$1,200,000,000 Floating Rate Class A Certificates
$63,158,000 Floating Rate Class B Certificates
Discover Card Master Trust I
Issuer
Discover Bank
Master Servicer, Servicer and Seller
-------------------------
The Series 2001-1 Class A Certificates and Class B Certificates represent
interests in the Discover Card Master Trust I. The certificates are not
obligations of Discover Bank or any of its affiliates, and neither the
certificates nor the underlying credit card receivables are insured or
guaranteed by any governmental agency.
-------------------------
Investing in the certificates involves risks. See "Risk Factors" beginning on
page S-13 of this prospectus supplement.
-------------------------
<TABLE>
<CAPTION>
Class A Certificates Class B Certificates
-------------------- --------------------
<S> <C> <C>
Interest rate LIBOR + 0.22% LIBOR + 0.55%
Expected interest payment dates Monthly, beginning Monthly, beginning
February 15, 2001 February 15, 2001
Expected maturity date January 15, 2008 February 15, 2008
Initial credit enhancement $157,894,750 -- 12.5% of $94,736,850 -- 7.5% of
series series
Form of credit enhancement Subordination of Class B Cash collateral account
Certificates
Expected ratings -- Moody's/S&P/ Aaa/AAA/AAA A2/A/A+
Fitch
Price to public 100% 100%
Underwriting discounts and commissions 0.300% 0.325%
Proceeds to Discover Bank $1,196,400,000 $62,952,736.50
</TABLE>
-------------------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved the certificates or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the certificates to purchasers on January 4,
2001 through the facilities of The Depository Trust Company, the Euroclear
System and Clearstream Banking.
Discover Bank will apply to list the certificates on the Luxembourg Stock
Exchange, in accordance with the rules of the Luxembourg Stock Exchange, to
facilitate trading in non-U.S. markets.
-------------------------
Underwriters of the Class A Certificates
MORGAN STANLEY DEAN WITTER
BANC OF AMERICA SECURITIES LLC
BARCLAYS CAPITAL
DRESDNER KLEINWORT BENSON
Underwriter of the Class B Certificates
MORGAN STANLEY DEAN WITTER
December 21, 2000
<PAGE> 9
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Series Summary........................ S-5
Risk Factors.......................... S-13
Investor Risk of Loss............... S-13
Limited Credit Enhancement.......... S-13
Subordination of Class B
Certificates..................... S-13
Rating of the Certificates.......... S-13
Deteriorations in Trust Performance
or Receivables Balance Could
Cause an Amortization Event...... S-13
Discover Bank May Change Terms of
the Accounts..................... S-14
Interest on the Receivables and
Interest on the Certificates
Accrue at Different Rates........ S-14
Payments, Generation of Receivables
and Maturity..................... S-15
Competition in the Credit Card
Industry......................... S-15
Consumer Protection Laws and
Regulations...................... S-16
Effects of an Amortization Event.... S-16
Limited Ability to Resell
Certificates..................... S-16
Security Interests and Insolvency
Related Matters.................. S-17
Litigation.......................... S-17
Legislation......................... S-17
Issuance of Additional Series....... S-18
Addition of Accounts................ S-18
Historical Information.............. S-19
The Discover Card Business............ S-20
General............................. S-20
Credit-Granting Procedures.......... S-21
Collection Efforts and Charged-Off
Accounts......................... S-23
The Accounts.......................... S-23
General............................. S-23
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Billing and Payments................ S-24
Effects of the Selection Process.... S-25
Composition of the Accounts......... S-25
Composition and Historical Performance
of the Discover Card Portfolio...... S-27
General............................. S-27
Composition of the Discover Card
Portfolio........................ S-27
Timing of Principal Payments........ S-29
The Certificates...................... S-31
Invested Amounts.................... S-31
Investor Interests.................. S-31
Interest Payments................... S-32
Principal Payments.................. S-32
Investor Accounts................... S-34
Class Finance Charge Collections.... S-35
Other Income -- Yield Collections,
Additional Funds and Investment
Income........................... S-35
Class Principal Collections......... S-36
Class Charge-Offs and Investor
Losses........................... S-37
Subordination of the Class B
Certificates -- Class A Credit
Enhancement...................... S-37
The Credit Enhancement Account...... S-38
Reallocations....................... S-41
Cash Flows.......................... S-41
Amortization Events................. S-43
Clean-up Call; Termination of
Series........................... S-44
Reports to Investors.................. S-45
Underwriting.......................... S-47
Legal Matters......................... S-48
Glossary of Terms..................... S-49
Annex A -- Cash Flows................. S-65
Annex B -- Other Series............... S-73
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to Investors.................. 3
Where You Can Find More Information... 3
Prospectus Summary.................... 5
The Trust............................. 13
The Trustee......................... 14
Indemnification of the Trust and the
Trustee.......................... 14
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Sale and Assignment of Receivables
to the Trust..................... 15
Addition of Accounts................ 15
Removal of Accounts................. 17
Termination of the Trust............ 17
The Certificates...................... 17
</TABLE>
S-2
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General............................. 17
Interest Payments................... 18
Principal Payments.................. 18
Issuance of Additional Series....... 19
Collections......................... 20
Class Percentages and Seller
Percentage....................... 21
Subordination....................... 22
Adjustments to Receivables.......... 22
Additional Funds.................... 22
Final Payment of Principal;
Termination of Series............ 23
Credit Enhancement.................. 23
Repurchase of Trust Portfolio....... 24
Repurchase of Specified
Receivables...................... 25
Repurchase of a Series.............. 26
Repurchase of Certificates.......... 26
Sale of Seller Interest............. 26
Reallocation of Series Among
Groups........................... 27
Amendments.......................... 27
List of Certificateholders.......... 28
Meetings............................ 28
Book-Entry Registration............. 28
Definitive Certificates............. 32
Servicing............................. 32
Master Servicer and Servicer........ 32
Servicing Compensation and Payment
of Expenses...................... 33
Certain Matters Regarding the Master
Servicer and the Servicers....... 34
Master Servicer Termination
Events........................... 34
Servicer Termination Events......... 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Evidence as to Compliance........... 36
The Seller............................ 37
Discover Bank....................... 37
Insolvency-Related Matters.......... 37
Certain Legal Matters Relating to the
Receivables......................... 38
Transfer of Receivables............. 38
Certain UCC Matters................. 39
Consumer Protection Laws and Debtor
Relief Laws Applicable to the
Receivables...................... 40
Claims and Defenses of Cardmembers
Against the Trust................ 40
Use of Proceeds....................... 40
Federal Income Tax Consequences....... 41
General............................. 41
Tax Treatment of the Certificates as
Debt............................. 41
United States Investors............. 42
Foreign Investors................... 45
Backup Withholding and Information
Reporting........................ 46
Possible Characterization of the
Certificates..................... 47
State Tax Consequences................ 48
ERISA Considerations.................. 49
Discover Bank's Prohibited
Transaction Exemption............ 49
The DOL Regulation.................. 51
Plan of Distribution.................. 52
Legal Matters......................... 54
Glossary of Terms..................... 55
</TABLE>
S-3
<PAGE> 11
IMPORTANT NOTICE ABOUT INFORMATION
PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates in two separate
documents:
- this prospectus supplement, which describes the specific terms of your
certificates, and
- the prospectus, which provides detailed information, some of which may
not apply to your certificates, about the trust and the certificates
issued by the trust.
We include cross-references in this prospectus supplement and the
accompanying prospectus to sections in these materials where you can find
related discussions. You can locate the pages on which these sections begin by
using the table of contents on page S-2.
We have included glossaries of the capitalized terms used in this
prospectus supplement or the prospectus.
IT IS IMPORTANT FOR YOU TO READ AND CONSIDER ALL INFORMATION CONTAINED IN
BOTH THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN MAKING YOUR
INVESTMENT DECISION.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering to sell or soliciting offers to buy any securities
other than the certificates to which this prospectus supplement and the
accompanying prospectus relate, nor are we offering to sell or soliciting offers
to buy certificates in any jurisdiction where the offer is not permitted.
S-4
<PAGE> 12
SERIES SUMMARY
The following summary describes the terms of the certificates and certain
aspects of the trust generally. The remainder of this prospectus supplement and
the prospectus provide much more detailed information about the certificates and
the trust. You should review the entire prospectus and prospectus supplement
before you decide to invest.
THE CERTIFICATES AND THE
SERIES................... Discover Card Master Trust I, Series 2001-1
Floating Rate Class A Credit Card Pass-Through
Certificates and Series 2001-1 Floating Rate Class
B Credit Card Pass-Through Certificates.
Together, the Class A Certificates and the Class B
Certificates make up this series.
SELLER..................... Discover Bank. Discover Bank's executive office is
located at 12 Read's Way, New Castle, Delaware
19720. Discover Bank was formerly known as
Greenwood Trust Company.
MASTER SERVICER AND
SERVICER................... Discover Bank.
TRUSTEE.................... U.S. Bank National Association.
PRINCIPAL.................. Class A Certificates: $1,200,000,000.
Class B Certificates: $63,158,000.
INTEREST RATE.............. Class A Certificates: LIBOR + 0.22% per year.
Class B Certificates: LIBOR + 0.55% per year.
LIBOR is the London interbank offered rate for
one-month United States dollar deposits, determined
as described in the glossary of terms in this
prospectus supplement.
The trustee will calculate interest on the
certificates monthly, on the basis of the actual
number of days elapsed and a 360-day year.
INTEREST PAYMENT DATES..... The 15th day of each month, or the next business
day, beginning February 2001.
The trust will pay your interest on each interest
payment date from the funds deposited into the
series interest funding account on that date.
EXPECTED MATURITY DATES.... Class A Certificates: January 15, 2008, or the next
business day. If an amortization event occurs, the
trust will pay principal monthly and the final
principal payment may be made before or after
January 15, 2008.
Class B Certificates: February 15, 2008, or the
next business day. If an amortization event occurs,
the trust will pay principal monthly and the final
principal payment may be made before or after
February 15, 2008. The trust must generally pay all
Class A principal before it pays any Class B
principal.
Amortization events are designed to protect
investors from certain events that may adversely
affect the trust and your investment in the
certificates. These may include: Discover
S-5
<PAGE> 13
Bank's or an additional seller's inability to
continue to transfer receivables to the trust;
certain breaches of representations, warranties or
covenants by Discover Bank or an additional seller;
receivables performance that might impair the
long-term ability of the trust to make all required
payments with respect to a series; or certain
events of insolvency with respect to Discover Bank
or an additional seller. For some of these events
to become amortization events, the trustee or a
specified percentage of certificateholders must
declare them to be amortization events; others
become amortization events automatically when they
occur. If an amortization event occurs with respect
to this series, the trust becomes obligated to
apply principal collections allocated to this
series on a monthly basis to repay the remaining
principal amount of the certificates.
SERIES CLOSING DATE........ January 4, 2001. The series closing date is the
date on which the trust issues the certificates.
REVOLVING PERIOD........... The revolving period will begin on January 1, 2001.
The revolving period is the period from the first
day of the calendar month in which the trust issues
a series until it begins using principal
collections to make principal payments to investors
or to accumulate the cash to be used to make later
principal payments. In general, during the
revolving period, the trust pays principal
collections to Discover Bank in exchange for new
receivables that cardmembers have generated on the
accounts designated as part of the trust.
The trust may also use principal collections to pay
the principal of other series. The revolving period
for this series ends when the accumulation period
begins, or when an amortization event occurs.
ACCUMULATION PERIOD........ The trust will begin to accumulate cash in the
series principal funding account on February 15,
2007, or the next business day, using collections
it receives on or after January 1, 2007, to pay
principal at maturity, unless Discover Bank elects
to delay this process or an amortization event has
occurred. The trust is scheduled to accumulate
principal collections in the series principal
funding account over several months, so that it
will have collections available to make the final
payment.
Discover Bank may elect to shorten the accumulation
period if:
- it determines that enough principal collections
from other series will be available to make
larger deposits into the series principal funding
account, and
- the required rating agencies have approved the
election to shorten the accumulation period.
AMORTIZATION PERIOD........ The amortization period begins when an amortization
event occurs and continues until the trust has
fully paid the principal of this series or until
the series termination date.
S-6
<PAGE> 14
SERIES TERMINATION DATE.... The first business day following July 15, 2010, or
the second business day following July 15, 2010, if
July 15, 2010 is not a business day. The series
termination date is the last day on which the trust
will pay principal to investors in this series. If
the trust owes principal in the month before the
series termination date, the trustee will sell
receivables, proportionate to this series'
remaining interest in the trust, to repay the
principal. After the series termination date, the
trust will not allocate collections to this series.
CLASSES, ALLOCATIONS AND
REALLOCATIONS.......... This series has two classes; the Class B
Certificates rank junior to the Class A
Certificates.
The trust allocates collections among the series
based on each series' investor interest in
receivables. The trust also allocates receivables
that Discover Bank has charged off as uncollectible
to series based on the investor interest in
receivables. The series supplement to the pooling
and servicing agreement specifies the percentages
of these collections and charged-off receivables
that are allocated to each class of this series at
each point in time. These percentages vary based on
a number of factors, including whether the trust
has started to pay principal to investors in this
series and whether Discover Bank has made certain
choices regarding credit enhancement. The class
percentages differ for finance charge collections,
principal collections and charged-off amounts. The
pooling and servicing agreement determines whether
collections are finance charge collections or
principal collections. Once this determination is
made, finance charge collections and principal
collections are generally not interchangeable; each
can only be used to fund certain payments, deposits
and reimbursements. When Discover Bank charges off
a receivable as uncollectible, it reduces the
amount of principal receivables in the trust, and
allocates a portion of the amount charged off
against your interest in principal receivables
based on your class percentage. However, the trust
typically uses finance charge collections to pay
interest and to reimburse you for charged-off
receivables that have been allocated to you,
reinstating your interest in principal receivables.
The trust typically uses principal collections to
repay your principal.
In general, the trust will use this series' share
of collections to make required payments, to pay
its share of servicing fees and to reimburse its
share of charged-off amounts. If this series has
more collections than it needs in any month, the
trust may make the excess collections available to
other series so those series may make their
payments and reimbursements. You will not be
entitled to receive these excess collections. If
this series does not have enough collections in any
month, the trust may use excess collections from
other series to make payments and reimbursements
for this series.
S-7
<PAGE> 15
INVESTOR INTEREST AND
INVESTED AMOUNT............ The trust generally allocates collections and
charged-off amounts to you based on your investor
interest, which is your interest in the
receivables. The trust makes payments to you based
on your invested amount, which generally is the
principal balance of your certificates. Your
investor interest in receivables may decrease over
time as principal is paid to you or as principal
collections are deposited into the series principal
funding account to be paid to you at a later time.
Although your investor interest in receivables and
your invested amount are related, they diverge
under certain circumstances; for instance, as the
trustee accumulates principal in the series
principal funding account, your investor interest
in receivables will decline but your invested
amount will not be affected. Your invested amount
will shift from an interest entirely in the
receivables to an interest in the cash in the
series principal funding account and a smaller
interest in the receivables.
DISTRIBUTION DATES......... The distribution date is the date in each month,
typically the 15th, on which the trust allocates
collections from the preceding calendar month to
investors and the trustee deposits them into
appropriate accounts.
SUBORDINATION OF CLASS B
CERTIFICATES -- CLASS A
CREDIT ENHANCEMENT....... The Class B Certificates are subordinated to the
Class A Certificates up to a specified dollar
amount that is the available subordinated amount.
This means that the trust may reallocate
collections and other assets that it initially
allocated to the Class B Certificates to instead
make payments, deposits and reimbursements for the
Class A Certificates. The available subordinated
amount decreases to the extent that the trust
reallocates subordinated amounts such as Class B
collections and the Class B investor interest in
receivables in the trust to the Class A
Certificates. As long as the available subordinated
amount is greater than zero, the trust will
generally make payments, deposits and
reimbursements for the Class B Certificates only
after it has satisfied the requirements of the
Class A Certificates.
The initial available subordinated amount is
$157,894,750. If the trust uses part of the
available subordinated amount in any month, it may
increase the available subordinated amount up to
its initial level, to the extent that this series
has excess finance charge collections and other
income in any subsequent month. Discover Bank may
also cause the available subordinated amount to
increase if it elects to change the way in which
the trust allocates finance charge collections
during an amortization period. The available
subordinated amount may increase if Standard &
Poor's withdraws or significantly downgrades Dis-
S-8
<PAGE> 16
cover Bank's long-term debt or deposit rating. You
should review the information under "The
Certificates -- Subordination of Class B
Certificates" for more information about this
amount. If the available subordinated amount
declines to zero, the Class A Certificates will
lack credit enhancement and will have to rely
solely on their own allocations of collections.
CASH COLLATERAL ACCOUNT --
CLASS B CREDIT
ENHANCEMENT.............. Discover Bank will arrange to have a cash
collateral account funded with $94,736,850. The
trustee may withdraw funds from this account
- to pay interest or servicing fees for the Class B
Certificates, and
- to reimburse the Class B investors for amounts
that would otherwise reduce the Class B investor
interest in receivables.
The trustee may not withdraw funds from this
account to pay any amounts on the Class A
Certificates, but the Class A investors benefit
indirectly from this account because the trustee
can withdraw funds to protect the Class B investor
interest in receivables, and the Class A investors
can then use the Class B investor interest in
receivables in subsequent months as part of the
available subordinated amount.
The maximum amount that will be on deposit in this
account on any distribution date will initially be
$94,736,850, but it may increase under certain
circumstances. It will generally decrease during
the accumulation period as the series investor
interest in receivables declines. If an
amortization event occurs, the maximum amount of
the account will be the maximum amount immediately
before the amortization event occurred. If the
trustee withdraws funds from the account, then
until those funds have been replaced, the maximum
amount of the account will be the maximum amount at
the time of the withdrawal. You should review the
"Maximum Class B Credit Enhancement Amount" table
on pages S-39 and S-40 of this prospectus
supplement for more information about this amount.
FORMATION OF THE TRUST;
TRUST ASSETS............... Discover Bank and the trustee formed the trust in
October 1993. Discover Bank has transferred to the
trust the credit card receivables generated under
certain designated Discover(R) Card accounts. Those
receivables included principal receivables --
amounts owed by cardmembers representing the
principal balances of cash advances, purchases that
cardmembers have made with their Discover Cards and
balances transferred by cardmembers to their
Discover Card accounts from other credit card
accounts. They also included finance charge
receivables -- amounts owed by cardmembers
representing finance charges
S-9
<PAGE> 17
accrued on unpaid principal balances, late fees and
other service charges. As cardmembers make
additional charges and incur additional finance
charges and other fees in accounts designated for
the trust, Discover Bank also transfers these
additional receivables to the trust on an ongoing
basis. Discover Bank also may designate additional
accounts as trust accounts, and transfer
receivables in those accounts to the trust. Even
though Discover Bank transfers receivables to the
trust, Discover Bank continues to own and service
the related accounts.
The trust's assets include, or may include, the
following:
- credit card receivables;
- cash payments by cardmembers;
- cash recoveries on receivables in the trust that
have been charged off as uncollectible and
proceeds from the trust's sales of those
receivables;
- investment income on funds on deposit in investor
accounts, if any;
- interests in other credit card receivables pools;
- credit support or enhancement for each series;
- additional funds that Discover Bank may elect to
add to the trust;
- currency swaps for series denominated in foreign
currencies; and
- interest rate protection agreements.
The trust has issued many series of certificates,
and Discover Bank expects that the trust will issue
additional series. The pooling and servicing
agreement that created the trust and applies to all
series permits the trust to issue additional series
without the consent of certificateholders of any
outstanding series. Discover Bank and the trust
will not request your consent to issue new series.
The Class A Certificates and the Class B
Certificates represent an interest in the aggregate
pool of receivables in the trust, not an interest
in any specific receivable or subset of the
receivables. That interest reflects your right to
receive a portion of the collections paid on the
receivables, your share of receivables that
Discover Bank has charged off as uncollectible,
your share of investment income on funds on deposit
in investor accounts, if any, and your right to the
benefit of the credit enhancement for this series.
Your right to receive any of these amounts is
limited to the amount of interest accrued on your
certificates and the principal amount of your
certificates. Discover Bank
S-10
<PAGE> 18
and the investors in other series currently
outstanding own the remaining interest in the
trust.
- Discover Bank's interest varies based on the size
of the interests of the trust's investors and the
total amount of the trust's receivables.
- Assuming the aggregate investor interest in
receivables stays the same, if in any month the
principal collections and charge-offs exceed the
amount of new principal receivables created,
Discover Bank's interest in the trust declines.
- Assuming the aggregate investor interest in
receivables stays the same, if in any month the
principal collections and charge-offs are less
than the amount of new principal receivables
created, Discover Bank's interest in the trust
increases.
CURRENTLY OUTSTANDING
SERIES..................... Each series belongs to a group of series for
purposes of reallocating collections among series.
The trust currently has outstanding thirty-four
series of certificates in Group One. Annex B to
this prospectus supplement summarizes the terms of
these series.
NO SUBORDINATION OF
SERIES..................... The collections for this series will not be
available to other series in any month until the
trust has made all payments, deposits and
reimbursements for this series.
THE RECEIVABLES............ The receivables in the trust as of December 1, 2000
totaled $33,817,556,119.54.
RATINGS.................... The trust will only issue the certificates if
Standard & Poor's has rated the Class A
Certificates "AAA" and the Class B Certificates at
least "A" and Moody's Investors Service, Inc. has
rated the Class A Certificates "Aaa" and has rated
the Class B Certificates at least "A2." These
ratings reflect the rating agencies' views as to
how likely it is that the trust will pay interest
on a timely basis and will ultimately repay
principal.
TAX CONSEQUENCES........... Discover Bank will receive an opinion of counsel
that, although the matter is not free from doubt,
the certificates will be treated as debt for
federal income tax purposes. By accepting a
certificate, you will agree with Discover Bank to
treat the certificate as debt for federal, state
and local income and franchise tax purposes.
If you are a beneficial owner of a certificate, you
should:
- include in your gross income all stated interest
paid or accrued on your certificate in accordance
with your method of tax accounting; and
S-11
<PAGE> 19
- include in your gross income the portion of any
principal payments on your certificate that
exceeds your allocable tax basis in your
certificate.
If you are a United States person, payments on your
certificates will generally be exempt from federal
backup withholding, provided that you satisfy
certain certification requirements. If you are a
foreign person, payments on your certificates will
generally be exempt from federal income tax and
withholding, provided that you satisfy certain
certification requirements. See "Federal Income Tax
Consequences" and "State Tax Consequences" in the
prospectus for information concerning the
application of tax laws.
ERISA CONSIDERATIONS....... In light of an exemption obtained by Discover Bank
from the U.S. Department of Labor, Discover Bank
believes that many employee benefit plans subject
to ERISA may acquire Class A Certificates. The
Class B Certificates will not meet the requirements
of the exemption, nor will they be considered
"publicly offered securities" and therefore
employee benefit plans subject to ERISA may not
acquire Class B Certificates. See "ERISA
Considerations" in the prospectus. Advisors to
employee benefit plans should consult their own
counsel.
LISTING.................... To facilitate trading in non-U.S. markets, Discover
Bank expects to list the certificates on the
Luxembourg Stock Exchange, in accordance with the
rules of the Luxembourg Stock Exchange.
CLEARANCE AND SETTLEMENT... You may elect to hold the certificates only through
the following clearing organizations:
- The Depository Trust Company, or DTC, in the
United States;
- Clearstream Banking, in Europe; and
- Euroclear, in Europe.
These organizations permit transfers of securities
or interests in securities by computer entries
instead of paper transfers. Certificates will not
be available in paper form. You may transfer your
interests within DTC, Clearstream Banking or
Euroclear in accordance with the usual rules and
operating procedures of the relevant system.
Persons holding directly or indirectly through DTC,
on the one hand, and counterparties holding
directly or indirectly through Clearstream Banking
or Euroclear, on the other hand, may effect
cross-market transfers through the relevant
depositaries of Clearstream Banking and Euroclear.
S-12
<PAGE> 20
RISK FACTORS
INVESTOR RISK OF LOSS
You will only receive payments of interest and principal on your
certificates to the extent that the trust has funds available to make these
payments. The trust will allocate charged-off receivables to your certificates
each month, and will reimburse you for those charge-offs, only to the extent
that the trust has funds available to make those reimbursements. You should
review the cash flow provisions described in "The Certificates -- Cash Flows" to
understand the priority in which the trust allocates its assets to pay interest
and principal and to reimburse charge-offs on this series and other series. To
the extent the trust cannot fully reimburse your charge-offs, the aggregate
amount of principal you ultimately receive will be less than the face amount of
your certificates, and the amount of collections allocated to you and interest
paid to you in any month may also be reduced.
LIMITED CREDIT ENHANCEMENT
The credit enhancement for the Class A Certificates is limited by the
available subordinated amount. The credit enhancement for the Class B
Certificates is limited by the amount on deposit in the cash collateral account
and the maximum amount that can be on deposit in that account. If you own a
certificate and all of your credit enhancement has been used, you will bear
directly the credit and other risks associated with your investment in the
trust.
SUBORDINATION OF CLASS B CERTIFICATES
The Class B Certificates will be subordinated to the Class A Certificates.
The trust will generally pay interest on the Class A Certificates before it pays
interest on the Class B Certificates, and will not pay Class B principal until
it has paid Class A principal in full. The Class B investors will generally
absorb losses relating to charged-off receivables and shortfalls in finance
charge collections before the Class A investors. If receivables had to be sold,
the net proceeds of that sale available to pay principal on the certificates
would be paid first to the Class A investors before any remaining net proceeds
would be available for payments due to the Class B investors. Accordingly, if
you own a Class B Certificate, you are less likely to receive all payments of
interest and principal than an investor in the Class A Certificates. For more
information about the subordination provisions, see "The Certificates -- Cash
Flows" and "Annex A -- Cash Flows."
RATING OF THE CERTIFICATES
Ratings assigned by a rating agency to the certificates of this series are
not a recommendation for you to purchase, hold or sell the certificates. The
ratings do not reflect market price or whether the certificates are suitable for
your investment. The ratings address timely payment of interest and ultimate
payment of principal, but do not address timely payment of principal. The
ratings may not remain in effect and the rating agencies may lower or entirely
withdraw their ratings at any time if they determine that a reduction or
withdrawal of their ratings is appropriate.
DETERIORATIONS IN TRUST PERFORMANCE OR RECEIVABLES BALANCE COULD CAUSE AN
AMORTIZATION EVENT
If the trust's finance charge collections for your series and your group
are less than the interest expense, servicing fees, charge-offs and credit
enhancement fees for your series and your
S-13
<PAGE> 21
group, averaged over a three-month period, an amortization event for your series
will occur. If the level of receivables in the trust declines because
cardmembers generate fewer new receivables on their accounts, and Discover Bank
cannot add enough receivables from other accounts or interests in other pools of
credit card receivables to maintain the required minimum level of receivables in
the trust, an amortization event will also occur. The following five factors
could cause trust performance to deteriorate or could cause the receivables
balance in the trust to decline:
(1) DISCOVER BANK MAY CHANGE TERMS OF THE ACCOUNTS
Discover Bank transfers receivables, but not accounts, to the trust. As
owner of any account, Discover Bank has the right to determine the rate for
periodic finance charges, to alter the account's minimum required monthly
payment, to change the account's credit limit and to change various other
account terms. If periodic finance charges or other fees decrease, the trust's
finance charge collections and the effective yield on the receivables could also
decrease. In addition, if Discover Bank increases credit limits on accounts,
charged-off amounts might increase and the levels of receivables in the trust
and in the Discover Card portfolio might decrease. The Discover Platinum Card,
introduced in late December 1998, offers cardmembers credit limits that may be
substantially higher, and imposes periodic finance charges that in some cases
are lower, than those available with a classic Discover Card. Although the
Discover Platinum Card has had a positive impact on the number of Discover Card
accounts and the size of revolving balances, Discover Bank cannot assure you
that the higher credit limits and lower periodic finance charges of the Discover
Platinum Card could not have the effects set forth above in this paragraph.
Except as described in this paragraph, the pooling and servicing agreement
does not restrict Discover Bank's ability to change the terms of accounts or
receivables. Discover Bank may decide, because of changes in the market place or
applicable laws, or as a prudent business practice, to change the terms of some
or all of its Discover Card accounts. Discover Bank may not change the terms
governing an account designated for the trust unless it changes the terms of its
other accounts of the same general type and as to which the cardmembers reside
in a particular affected state or similar jurisdiction. Changes to account terms
may not, however, affect the accounts designated for the trust to the same
degree as they affect Discover Bank's other accounts. Sellers other than
Discover Bank will be able to change account terms in the same circumstances and
subject to the same limitations as Discover Bank.
(2) INTEREST ON THE RECEIVABLES AND INTEREST ON THE CERTIFICATES ACCRUE AT
DIFFERENT RATES
Some of the receivables in the trust will accrue periodic finance charges
at the prevailing prime rate plus a margin, while the certificates of this
series accrue interest at rates that float against LIBOR. Changes in LIBOR might
not be reflected in the prime rate, resulting in a higher or lower spread
between the amount of finance charge collections on the receivables and the
amounts of interest payable on your certificates and other amounts required to
be funded out of finance charge collections.
Similarly, some of the receivables in the trust will accrue periodic
finance charges at fixed rates, while the certificates of this series accrue
interest at rates that float against LIBOR. If LIBOR increases, the interest
payments on the certificates and other amounts required to be funded out of
finance charge collections will increase, while the amount of finance charge
collections on these receivables will remain the same unless and until Discover
Bank resets the fixed rates on the accounts.
S-14
<PAGE> 22
(3) PAYMENTS, GENERATION OF RECEIVABLES AND MATURITY
Cardmembers may pay the receivables at any time and in any pattern, and
they may decide not to create additional receivables in their accounts.
Cardmembers' credit use and payment patterns may change because of many social,
legal and economic factors, including the rate of inflation and relative
interest rates offered for various types of loans, and legislative change.
Discover Bank's ability to compete in the credit card industry at any point in
time will affect how cardmembers pay existing receivables and how they generate
new receivables that Discover Bank can convey to the trust. In addition, if
convenience use increases -- more cardmembers pay their receivables within the
grace period to avoid all finance charges on purchases of merchandise and
services -- then the effective yield on the receivables in the trust might
decrease. Conversely, the terms governing the accounts require only a minimum
monthly payment, and if cardmembers repay a smaller percentage of their balances
than they currently repay each month, the trust may not be able to make
scheduled principal payments to you on a timely basis. Heightened levels of
consumer debt, large numbers of personal bankruptcies and a weakened national
economy may cause increases in delinquencies in, and charge-offs of, the
receivables in the trust. Any delay in the trust's payment of principal with
respect to any series will extend the period during which charged-off
receivables may be allocated to your certificates.
(4) COMPETITION IN THE CREDIT CARD INDUSTRY
The credit card industry in which the Discover Card competes is highly
competitive. Competition in the credit card industry affects Discover Bank's
ability to obtain applicants for Discover Card accounts, to encourage
cardmembers to use accounts and, through its arrangements with Discover
Financial Services, Inc., to persuade service establishments to accept the
Discover Card. If Discover Bank does not compete successfully in these areas,
the level of receivables in the trust and in the Discover Card portfolio may
decline.
The competition in the credit card industry focuses on features and
financial incentives of credit cards such as annual fees, finance charges,
rebates and other enhancement features. The market includes:
- bank-issued credit cards, including co-branded cards issued by banks in
cooperation with industrial, retail or other companies, and affinity
cards issued by banks in cooperation with organizations such as
universities and professional groups, and
- charge cards issued by travel and entertainment companies.
Many bank credit card issuers have instituted balance transfer programs that
offer a favorable annual percentage rate or other financial incentives for a
specified length of time on any portion of account balances transferred from
outstanding account balances maintained on another credit card. The vast
majority of the bank-issued credit cards bear the Visa or MasterCard service
mark and are issued by the many banks that participate in one or both of the
national bank card networks operated by Visa U.S.A., Inc. and MasterCard
International Incorporated. The Visa and MasterCard associations have been in
existence for approximately 30 years. Cards bearing their service marks have
worldwide acceptance by merchants of goods and services and recognition by
consumers and the general public. Co-branded credit cards, which offer the
cardholder certain benefits relating to the industrial, retail or other business
of the bank's co-branding partner, such as credits towards purchases of airline
tickets or rebates for the purchase of an automobile, and affinity cards, which
give cardholders the opportunity to support and affiliate with the affinity
partner's organization and often provide other benefits, both currently
represent a large segment of the bank-issued credit card market. American
Express Company,
S-15
<PAGE> 23
which has been issuing cards since 1958, issues the majority of travel and
entertainment cards. Travel and entertainment cards differ in many cases from
bank cards in that they generally have no pre-established credit limits and have
limited provisions for repayment in installments. The Discover Card, which
Discover Bank introduced nationwide in 1986, competes with general purpose
credit cards issued by other banks and with travel and entertainment cards. In
late December 1998, Discover Bank introduced the Discover Platinum Card to
compete with gold, platinum and other premium credit, travel and entertainment
cards of other issuers.
(5) CONSUMER PROTECTION LAWS AND REGULATIONS
Discover Bank must comply with federal and state consumer protection laws
and regulations in connection with making and enforcing consumer loans such as
credit card loans, including the loans in the trust. These laws and regulations,
including any changes to these laws and regulations, could adversely affect
Discover Bank's ability to collect on the receivables in the trust or to
maintain previous levels of monthly periodic finance charges. If Discover Bank
does not comply with these laws and regulations, it may not be able to collect
the receivables. These laws and regulations will also apply to any other
servicer of the receivables, with the same possible effects. Discover Bank has
agreed that, if:
- it has not complied in all material respects with the legal requirements
that applied to its creation of a receivable included in the trust,
- it does not cure its noncompliance in a specified period of time, and
- the noncompliance has a material adverse effect on the trust's interest
in all of the receivables in the trust,
Discover Bank will purchase all receivables in the affected accounts. Discover
Bank does not anticipate that the trustee will examine the receivables or the
records relating to the receivables to determine whether they have legal defects
or for any other purpose.
EFFECTS OF AN AMORTIZATION EVENT
If an amortization event occurs with respect to this series:
- you may receive payments of principal earlier than you expected;
- you may not receive all principal payments by the expected maturity date
for your certificates;
- we cannot predict how much principal the trust will pay you in any month
or how long it will take to pay your invested amount in full; and
- the risk that you will not receive full interest payments or that you
will not receive an aggregate amount of principal equal to the face
amount of your certificates will increase.
LIMITED ABILITY TO RESELL CERTIFICATES
We anticipate that the underwriters will make a market in the certificates.
A secondary market, however, may not develop. If a secondary market does
develop, it might not continue until your certificates mature, or it might not
be sufficiently liquid to allow you to resell any of your certificates.
S-16
<PAGE> 24
SECURITY INTERESTS AND INSOLVENCY RELATED MATTERS
The trust's interest in the receivables may be impaired if:
- the transfer of the receivables by Discover Bank to the trust is neither
a sale of the receivables to the trust nor a grant to the trust of a
security interest in the receivables; or
- the transfer of the receivables to the trust is a grant of a security
interest, but the trustee does not have a perfected security interest in
the receivables pursuant to the Uniform Commercial Code in effect in
Delaware.
Discover Bank has taken certain actions to perfect the trust's interest in the
receivables, including filing notices of the trust's interest with the Secretary
of State of Delaware. In general, a security interest in receivables is
perfected against Discover Bank if it can be enforced not only against Discover
Bank but also against creditors of Discover Bank that might want to claim those
receivables. Typically, a security interest in receivables is perfected by
notice such as through a filing. Unless the trustee files continuation
statements within the time specified in the UCC to continue the perfection of
the security interest of the trust in the receivables, the perfection of the
security interest will lapse. More than one person can have a perfected security
interest in the same receivables, and the person with the higher priority, which
is determined by statute, will have the first claim to the property. Because
priority is determined by statute, a tax or statutory lien on Discover Bank's
property may have priority over the trust's interest in the receivables.
Discover Bank, as servicer, will receive cash collections each month for
the account of the trust and may use those cash collections until it distributes
them on the distribution date in the following month. The trust may not have a
perfected security interest in any collections that Discover Bank has not
deposited in the collections account for the trust.
Discover Bank may add to the trust receivables in credit accounts other
than accounts originated by Discover Bank, in which case the trust may have
additional sellers and servicers. The trustee must take certain actions to
perfect the trust's interest in these receivables as well, and they will be
subject to the same risks as the Discover Bank receivables, namely that the
perfection of the security interest will lapse, or that a tax or statutory lien
on the seller's property may have priority over the trust's interest. Similarly,
the servicers of these receivables may use the cash collections they receive
each month in the same manner and subject to the same conditions as Discover
Bank. The trust may not have a perfected security interest in any collections
that the servicers have not deposited in the collections account for the trust.
LITIGATION
Discover Bank is involved in various legal proceedings in the ordinary
course of its business. Discover Bank does not believe that any of these
proceedings will have a material adverse effect on Discover Bank's financial
condition or on the receivables in the trust. Discover Bank cannot assure you,
however, about the effect of these proceedings.
LEGISLATION
The Competitive Equality Banking Act of 1987, or CEBA, as amended by the
Gramm-Leach-Bliley Financial Modernization Act of 1999, limits the ability of
nonbanking companies, such as Morgan Stanley Dean Witter & Co. and NOVUS Credit
Services Inc., to own banks. However, CEBA permits any nonbanking company that
owned a bank on March 5, 1987 to retain control of the bank. MSDW and NOVUS are
permitted to retain control of Discover Bank under CEBA, as amended. CEBA, as
amended, provides that if MSDW, NOVUS or
S-17
<PAGE> 25
Discover Bank fails to comply with certain statutory restrictions, MSDW and
NOVUS will be required to divest control of Discover Bank or to become a bank
holding company subject to regulation by the Federal Reserve Board. MSDW and
NOVUS may avoid divestiture of Discover Bank or becoming a bank holding company
by curing the CEBA violation within 180 days of notice from the Federal Reserve
Board of the violation or by submitting a plan to the Federal Reserve Board
within 180 days of the notice to cure the CEBA violation in a timely manner, not
to exceed one year. Discover Bank believes, however, that in light of the
programs it has in place, the limitations of CEBA will not have a material
impact on Discover Bank's ability to service, or maintain the level of, the
receivables in the trust. In addition, future federal or state legislation,
regulation or interpretation of federal or state legislation or regulation could
adversely affect the business of Discover Bank or the relationship of MSDW or
NOVUS with Discover Bank.
ISSUANCE OF ADDITIONAL SERIES
The trust may issue additional series of certificates or, if permitted by
the series supplements for those series, increase existing series without your
consent, and Discover Bank and the trust will not request your consent to issue
new series or increase existing series. The trustee will authenticate and
deliver a new series of certificates or additional certificates in an existing
series only if Standard & Poor's and Moody's have confirmed that they will not
reduce or withdraw the rating of any class of any series outstanding at the time
of the new issuance because of the new issuance. If the trust does issue one or
more additional series or additional certificates in an existing series, those
series or certificates may impact the timing and amount of payments you receive
on this series.
ADDITION OF ACCOUNTS
Discover Bank may designate additional accounts, the receivables in which
will be transferred to the trust. It may also designate interests in other pools
of credit card receivables for inclusion in the trust. The additional accounts
may be Discover Card accounts originated by Discover Bank or an affiliate of
Discover Bank, and they may be newly originated accounts. If the accounts are
not originated by Discover Bank, they may be serviced by their originator, and
the risks discussed above under the headings "-- Security Interests and
Insolvency Related Matters" and "-- Consumer Protection Laws and Regulations"
will apply to the new originator and servicer to the same extent that they apply
to Discover Bank. Because any additional accounts or accounts underlying
interests in other pools of receivables may not be accounts of the same type as
the accounts already included in the trust, the additional accounts:
- may contain a higher proportion of newly originated accounts,
- may include accounts originated using criteria different from the
criteria Discover Bank used in the accounts already in the trust,
- may not be of the same credit quality as the accounts already included in
the trust,
- may have different terms than the accounts already included in the trust,
including lower periodic finance charges, which may reduce the average
yield on the receivables in the trust, and
- may include accounts for which the cardmembers pay receivables at a
slower rate, which could delay principal payments to you.
S-18
<PAGE> 26
HISTORICAL INFORMATION
All of the information describing the composition and historical
performance of the Discover Card accounts in this prospectus supplement reflects
the composition and historical performance of the Discover Card portfolio and
not that of the trust accounts, except as presented under "The
Accounts -- Composition of the Accounts" and where otherwise noted. The
historical performance of the Discover Card portfolio may not be representative
of its future performance in all material respects.
The remainder of this prospectus supplement uses some capitalized terms. We
have defined these terms in a glossary beginning on page S-49.
S-19
<PAGE> 27
THE DISCOVER CARD BUSINESS
GENERAL
Discover Bank has conveyed Receivables to the trust pursuant to the Pooling
and Servicing Agreement. These Receivables were generated from transactions made
by holders of the Discover(R) Card, a general purpose credit and financial
services card. The Receivables conveyed to the trust before the date of this
prospectus supplement include only receivables arising under accounts in the
Discover Card portfolio, although at a later date Discover Bank may add other
receivables to the trust that do not arise under accounts in the Discover Card
portfolio. See "The Trust -- Addition of Accounts" in the prospectus. In this
prospectus supplement, we present information about both (1) the Discover Card
portfolio generally, in which case we refer to "receivables" and the "accounts"
in which they arise, and (2) the pool of Receivables that Discover Bank has
conveyed to the trust, in which case we refer to "Receivables" and the
"Accounts" in which they arise. When we refer to the Discover Card in this
section entitled "The Discover Card Business," we are referring to the classic
Discover Card and the Discover Platinum Card, both of which are issued by
Discover Bank. In addition, except where we specifically refer to classic
Discover Card accounts or Discover Platinum Card accounts, references to
Discover Card accounts include both of these types of accounts. With the
exception of the small number of Discover Card Corporate Cards issued by an
affiliate of Discover Bank, Discover Bank is the sole issuer of credit cards
bearing the DISCOVER service mark. Discover Bank has also issued, and may from
time to time introduce, additional general purpose credit cards.
Discover Bank first issued the classic Discover Card in regional pilot
markets in September 1985, and began distributing the Discover Card nationally
in March 1986. In late December 1998, Discover Bank began issuing the Discover
Platinum Card, a Discover Card with additional features and benefits. The
Discover Card gives cardmembers access to a revolving line of credit. Each
cardmember can use his or her Discover Card to purchase merchandise and services
from participating service establishments. Holders of the Discover Card can also
obtain cash advances at automated teller machines and at certain other locations
throughout the United States. Cardmembers can also obtain cash advances by
writing checks against their accounts. The number of service establishments that
accept the Discover Card has continued to increase. There are currently over 3.8
million merchants and cash advance locations that accept the Discover Card. As
of November 30, 2000, there were 38.4 million Discover Card accounts with 48.0
million cardmembers.
Cardmembers are generally subject to account terms and conditions that are
uniform from state to state. See "The Accounts -- Billing and Payments." In all
cases, the cardmember agreement governing the terms and conditions of the
account permits Discover Bank to change the credit terms, including the rate of
the periodic finance charge and the fees imposed on accounts, upon 15 days'
prior notice to cardmembers. Discover Bank assigns each Discover Card account a
credit limit when it opens the account. After the account is opened, Discover
Bank may increase or decrease the credit limit on the account, at Discover
Bank's discretion, at any time. The credit limits on classic Discover Card
accounts generally range from $1,000 to $10,000, although on a case-by-case
basis Discover Bank will consider authorizing higher or lower limits. The credit
limits on Discover Platinum Card accounts are a minimum of $5,000 and can range
up to $100,000. Currently, Discover Bank will not grant cash advances that
exceed, in the aggregate, an amount equal to 50% of the cardmember's credit
limit.
Discover Bank offers various features and services with the Discover Card
accounts. One feature is the Cashback Bonus(R), in which Discover Bank annually
pays cardmembers a percentage of their purchase amounts, ranging up to one
percent, based on their annual purchases. Discover Bank remits this amount to
cardmembers in the form of a check or a credit to the cardmember's account, or
by giving the cardmember an option to exchange the Cashback Bonus amount for
merchandise. No such amounts will be paid from the property of the trust.
Discover Bank offers cardmembers holding the Discover Platinum Card additional
features and services. These include the ability of cardmembers to double their
Cashback Bonus if the bonus is redeemed for merchandise or services with
selected merchants, and to obtain car rental insurance coverage and higher
travel accident insurance coverage. We also describe certain other
S-20
<PAGE> 28
features of the Discover Platinum Card elsewhere in "The Discover Card Business"
section and in "The Accounts" section below.
Discover Bank applies variable rates of finance charges to account balances
arising from purchases of merchandise and services in some Discover Card
accounts, which rates are based on the prevailing prime rate plus a margin, and
applies fixed rates to account balances arising from the purchase of merchandise
and services in the remainder of the Discover Card accounts. Discover Bank
generally applies fixed rates to account balances arising from cash advances for
all Discover Card accounts. See "The Accounts -- Billing and Payments." Discover
Bank also offers cardmembers money market deposit accounts, called Discover
Saver's Accounts, and time deposits, called Discover Card CDs. These deposit
products offer competitive rates of interest and are insured by the FDIC. To
differentiate the Discover Card in the marketplace, and to increase accounts,
balances and cardmember loyalty, Discover Bank from time to time tests and
implements new offers, promotions and features of the Discover Card.
Discover Bank, either through processing arrangements with its affiliate,
Discover Financial Services, Inc., or DFS, or through processing agreements with
credit card processing facilities of unaffiliated third parties, performs all
the functions required to service and operate the Discover Card accounts. These
functions include soliciting new accounts, processing applications, issuing new
accounts, authorizing and processing transactions, billing cardmembers,
processing payments, providing cardmember service and collecting delinquent
accounts. Discover Bank and DFS maintain multiple operations centers across the
country for servicing cardmembers. DFS also maintains an additional operations
center to process accounts that Discover Bank has charged off as uncollectible.
DFS has made recent enhancements in its customer services. Cardmembers may
register their account on-line with the Discover Card Account Center which
offers a menu of free e-mail notifications or reminders to regularly inform
cardmembers about the status of their accounts through the Discover Inter@ctive
feature. Types of notifications include reminders that a cardmember's credit
limit is being approached or that a minimum payment is due. In addition,
cardmembers may view detailed account information on-line, such as recent
transactions and account payments. Cardmembers may pay their Discover Card bills
on-line via the SmartCheck(SM) payment option at no cost and receive exclusive
discounts and special Cashback Bonus(R) awards by shopping on-line at the
Internet ShopCenter(SM). Cardmembers may also use the Discover Desk$hop(SM)
virtual credit card to simplify shopping on-line and to access the Discover Card
Account Center.
DFS has established arrangements with service establishments to accept the
Discover Card for cash advances and as the means of payment for merchandise and
services. Discover Bank contracts with DFS to have cards issued by Discover
Bank, including the Discover Card, accepted at those establishments. Discover
Bank's ability to generate new receivables requires locations where cardmembers
can use their Discover Cards. DFS employs a national sales and service force to
maintain and increase the size of its service establishment base. DFS also
maintains additional operations centers that are devoted primarily to providing
customer service to service establishments. The service establishments that
accept the Discover Card encompass a wide variety of businesses, including local
and national retail establishments and specialty stores of all types, quick
service food establishments, governments, restaurants, medical providers and
warehouse clubs, and many leading airlines, car rental companies, hotels,
petroleum companies and mail order companies, as well as Internet merchandise
and service providers.
Discover Bank may change its credit granting, servicing and charge-off
policies and collection practices over time in accordance with Discover Bank's
business judgment and applicable law.
CREDIT-GRANTING PROCEDURES
Discover Bank solicits accounts for the Discover Card portfolio by various
techniques, including (a) by "preselected" direct mail or telemarketing, (b) by
"take-one" applications distributed in many service establishments that accept
the Discover Card and (c) with various other programs targeting specific
segments of the population.
S-21
<PAGE> 29
Discover Bank also uses general broadcast and print media advertising to
support these solicitations. All accounts undergo credit review to establish
that the cardmembers meet standards of stability and ability and willingness to
pay. Discover Bank implements the same credit review process for applications to
open both classic Discover Card accounts and Discover Platinum Card accounts.
Potential applicants who are sent preselected solicitations have met certain
credit criteria relating to their previous payment patterns and longevity of
account relationships with other credit grantors. Since September 1987, Discover
Bank has prescreened all lists through credit bureaus before mailing.
Prescreening is a process by which an independent credit reporting agency
evaluates the list of names supplied by Discover Bank against credit-worthiness
criteria supplied by Discover Bank that are intended to provide a general
indication, based on available information, of the stability and the willingness
and ability of these persons to repay their obligations. The credit bureaus
return to Discover Bank only the names of those persons meeting these criteria.
Discover Bank also subsequently screens the applicants who respond to these
preselected solicitations when it receives their completed applications, to
ensure that these individuals continue to meet selection and credit criteria.
Discover Bank evaluates applications that are not preselected by using a
credit-scoring system, which is a statistical evaluation model that assigns
point values to credit information regarding applicants. The credit-scoring
system used by Discover Bank is based on information reported by cardmembers on
their applications and by the credit bureaus. Discover Bank uses information
from both of these sources to establish credit-worthiness. Certain applications
not approved under the credit-scoring system are reviewed by credit analysts. If
a credit analyst recommends that any of these applications be approved, senior
bank review analysts in Discover Bank's main office in New Castle, Delaware,
review and may approve them.
As the owner of the Discover Card accounts, Discover Bank has the right to
change its credit-scoring criteria and credit-worthiness criteria. Discover Bank
regularly reviews and modifies its application procedures and its credit-scoring
system to reflect Discover Bank's actual credit experience with Discover Card
account applicants and cardmembers as that historical information becomes
available. Discover Bank believes that refinements of these procedures and
system since the inception of the Discover Card program have helped its analysis
and management of credit losses. However, Discover Bank cannot assure you that
these refinements will prevent increases in credit losses in the future.
Relaxation of credit standards typically results in increases in charged-off
amounts, which, under certain circumstances, may result in a decrease in the
levels of the receivables in the Discover Card portfolio and the Receivables in
the trust. If there is a decrease in the level of Receivables in the trust, and
if Discover Bank does not add additional accounts, or interests in other pools
of credit card receivables, to the trust, an Amortization Event could result,
causing the trust to begin to repay the principal of this series sooner than
expected. An increase in the amount of Receivables charged off as uncollectible,
without an offsetting increase in Finance Charge Receivables, could also cause
an Amortization Event and cause the trust to begin to repay the principal of
this series sooner than expected.
S-22
<PAGE> 30
COLLECTION EFFORTS AND CHARGED-OFF ACCOUNTS
Efforts to collect past-due Discover Card accounts receivable are made
primarily by collections personnel of DFS or Discover Bank. Under current
practice, Discover Bank includes a request for payment of past-due amounts on
the monthly billing statements of all accounts with these amounts. Cardmembers
owing past-due amounts also receive a written notice of late fee charges on
their monthly statements, and then receive an additional request for payment
after any monthly statement that includes a past-due amount. Collection
personnel generally initiate telephone contact with cardmembers within 30 days
after any portion of their balance becomes past due. If initial telephone
contacts fail to elicit a payment, Discover Bank continues to contact the
cardmember by telephone and by mail. Discover Bank also may enter into
arrangements with cardmembers to waive finance charges, late fees and principal
due, or extend or otherwise change payment schedules. Discover Bank's current
policy is to recognize losses and to charge off an account at the end of the
sixth full calendar month after a payment amount is first due, if payment of any
portion of that amount has not been received by that time. In certain cases,
such as bankruptcy, an uncollectible balance may be charged off earlier. In
general, after Discover Bank has charged off an account, collections personnel
of DFS or Discover Bank attempt to collect all or a portion of the charged-off
account for a period of approximately four months. If those attempts do not
succeed, Discover Bank generally places the charged-off account with one or more
collection agencies for a period of approximately a year or, alternatively,
Discover Bank may commence legal action against the cardmember, including legal
action to attach the cardmember's property or bank accounts or to garnish the
cardmember's wages. Discover Bank and the trust may also sell their respective
interests in charged-off accounts and the related receivables to third parties,
either before or after collection efforts have been attempted. In addition, at
times a limited number of charged-off accounts may, subject to Rating Agency
consent, be removed from the trust. Proceeds from sales of any of these removed
accounts and the related receivables will not be included in the assets of the
trust.
Under the terms of the Pooling and Servicing Agreement, the trust's assets
include any recoveries received on charged-off Accounts, including the proceeds
of the trust's sales of any charged-off receivables. These recoveries are
treated as Finance Charge Collections. The level of charged-off Accounts in the
trust, and accordingly, the level of recoveries on charged-off Accounts in the
trust, were initially lower than the levels of charged-off Accounts and
recoveries for the Discover Card portfolio as a whole, because Discover Bank did
not select charged-off accounts to include in the trust when it was formed or
for account additions. The levels of charged-off Accounts and recoveries, each
as a percentage of the Receivables in the trust, have increased over time to
approximate more closely, and during periods of high portfolio growth to exceed,
the levels of charged-off Accounts and recoveries in the Discover Card portfolio
as a whole. Discover Bank cannot assure you that these levels for the trust will
consistently approximate these levels for the Discover Card portfolio as a
whole. Any addition of accounts to the trust will temporarily reduce both the
levels of charged-off Accounts and recoveries, each as a percentage of the
Receivables in the trust, because no added accounts will be charged-off accounts
at the time they are added to the trust.
THE ACCOUNTS
GENERAL
Discover Bank selected the Accounts in a random manner intended to produce
a representative sample of all Discover Card accounts not previously segregated
from the Discover Card portfolio. A limited number of accounts that were opened
pursuant to credit scoring criteria materially different from the credit scoring
criteria generally used for Discover Card accounts were not included in the
selection process. See "The Accounts -- Effects of the Selection Process."
The Receivables in the Accounts as of December 1, 2000 totaled
$33,817,556,119.54. The Accounts had an average balance of $1,124 and an average
credit limit of $7,569 as of December 1, 2000. For additional information on the
composition of the Accounts, see "-- Composition of the Accounts." Discover Bank
has no reason to believe that the amount of Receivables in the Accounts, the
average
S-23
<PAGE> 31
balance or the average credit limit as of January 1, 2001, which may be
different because of Account activity after December 1, 2000, will be materially
different from these amounts.
BILLING AND PAYMENTS
Discover Card accounts generally have the same billing and payment
structure. Discover Bank sends a monthly billing statement to each cardmember
who has an outstanding debit or credit balance of one dollar or more. Discover
Card accounts are grouped into multiple billing cycles for operational purposes.
Each billing cycle has a separate billing date, on which Discover Bank processes
and bills to cardmembers all activity that occurred in the related accounts
during the period of approximately 28 to 34 days that ends on that date. The
Accounts include accounts in all billing cycles.
Each cardmember with an outstanding debit balance in his or her Discover
Card account must generally make a minimum payment equal to the greater of $10
or 1/50th of the new balance on the account at the end of the billing cycle for
the account, rounded to the next higher whole dollar amount. If the cardmember's
new balance is less than $10, the minimum payment will be the new balance. If a
cardmember exceeds his or her credit limit, Discover Bank may require the
cardmember to immediately pay the amount that is above the credit limit. From
time to time, Discover Bank has offered and may continue to offer cardmembers
with accounts in good standing the opportunity to skip the minimum monthly
payment, while continuing to accrue periodic finance charges, without being
considered to be past due. A cardmember may pay the total amount due at any
time. Discover Bank also may enter into arrangements with delinquent cardmembers
to extend or otherwise change payment schedules, and to waive finance charges,
late fees and/or principal due. Although Discover Bank does not expect these
practices to have a material adverse effect on investors, collections may be
reduced during any period in which Discover Bank offers cardmembers the
opportunity to skip the minimum monthly payment or to extend or change payment
schedules.
Discover Bank applies various rates of finance charges to account balances,
as described under "The Discover Card Business -- General." Neither cash
advances nor balance transfers are subject to a grace period. Periodic finance
charges on purchases are calculated on a daily basis, subject to a grace period
that essentially provides that periodic finance charges are not imposed if the
cardmember pays his or her entire balance each month. In connection with balance
transfers and for other promotional purposes, certain account balances may
accrue periodic finance charges at lower fixed rates for varying periods of
time.
In addition to periodic finance charges, Discover Bank may impose other
charges and fees on Discover Card accounts. Discover Bank currently charges a
cash advance transaction fee equal to 3.0% of each new cash advance, with a
minimum fee of $5.00 per transaction. Discover Bank also currently charges a
$29.00 late fee each time a cardmember has not made a payment by the required
due date, a $29.00 fee for balances exceeding a cardmember's credit limit as of
the close of the cardmember's monthly billing cycle, a $29.00 fee for any
payment check returned unpaid and a $29.00 fee for Discover Card cash advance,
balance transfer or other promotional checks that are returned by Discover Bank
due to insufficient credit availability. See "Risk Factors -- Consumer
Protection Laws and Regulations," "-- Payments, Generation of Receivables and
Maturity" and "-- Discover Bank May Change Terms of the Accounts."
The yield on the Accounts in the trust -- which consists of the finance
charges and fees -- depends on various factors, including changes in interest
rates over time, cardmember account usage and payment performance, none of which
can be predicted, as well as the extent to which balance transfer offers and
special promotion offers are made and accepted, and the extent to which Discover
Bank changes the terms of its cardmember agreement. Reductions in the yield
could, if large enough, cause the commencement of the Amortization Period or
result in insufficient collections to pay interest and principal to investors.
Discover Bank cannot assure you about any of these effects. See "Risk
Factors -- Deteriorations in Trust Performance or Receivables Balance Could
Cause an Amortization Event," "-- Effect of an Amortization Event" and
"-- Investor Risk of Loss."
S-24
<PAGE> 32
EFFECTS OF THE SELECTION PROCESS
Discover Bank selected the Accounts from accounts serviced at all Discover
Bank and DFS operations centers and from accounts of residents of the 50 states,
the District of Columbia and the United States' territories and possessions. A
limited number of accounts that were opened pursuant to credit scoring criteria
materially different from the credit scoring criteria generally used for
Discover Card accounts were not included in the selection process. Discover Bank
cannot assure you that the use and payment performance of cardmembers on the
Accounts will be representative of Discover cardmembers as a whole in all
material respects.
COMPOSITION OF THE ACCOUNTS
We have set forth information below about the Accounts that are part of the
trust. We provide additional information about accounts in the Discover Card
portfolio as a whole under "Composition and Historical Performance of the
Discover Card Portfolio."
Geographic Distribution. As of December 1, 2000, the following five states
had the largest Receivables balances:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL RECEIVABLES
STATE BALANCE IN THE ACCOUNTS
----- -------------------------------
<S> <C>
California................................................. 10.9%
Texas...................................................... 9.1%
New York................................................... 7.0%
Florida.................................................... 6.0%
Illinois................................................... 5.2%
</TABLE>
Credit Limit Information. As of December 1, 2000, the Accounts had the
following credit limits:
<TABLE>
<CAPTION>
PERCENTAGE
RECEIVABLES OF TOTAL
OUTSTANDING RECEIVABLES
CREDIT LIMIT (000'S) OUTSTANDING
------------ ----------- -----------
<S> <C> <C>
Less than or equal to $1,000.00............................. $ 410,720 1.2%
$1,000.01 to $2,000.00...................................... $ 1,691,856 5.0%
$2,000.01 to $3,000.00...................................... $ 2,014,869 6.0%
Over $3,000.00.............................................. $29,700,111 87.8%
----------- ------
Total............................................. $33,817,556 100.0%
=========== ======
</TABLE>
Seasoning. As of December 1, 2000, 87.9% of the Accounts were at least 24
months old. The ages of Accounts as of December 1, 2000 were distributed as
follows:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
AGE OF ACCOUNTS OF ACCOUNTS OF BALANCES
--------------- ----------- -----------
<S> <C> <C>
Less than 12 Months......................................... 4.6% 5.7%
12 to 23 Months............................................. 7.5% 7.9%
24 to 35 Months............................................. 4.5% 2.8%
36 Months and Greater....................................... 83.4% 83.6%
------ ------
100.0% 100.0%
====== ======
</TABLE>
S-25
<PAGE> 33
Summary Current Delinquency Information. As of December 1, 2000, the
Accounts had the following delinquency statuses:
<TABLE>
<CAPTION>
AGGREGATE
BALANCES PERCENTAGE
PAYMENT STATUS (000'S) OF BALANCES
-------------- ----------- -----------
<S> <C> <C>
Current..................................................... $29,426,683 87.1%
1 to 29 Days................................................ $ 2,134,340 6.3%
30 to 59 Days............................................... $ 784,060 2.3%
60 to 89 Days............................................... $ 540,743 1.6%
90 to 119 Days.............................................. $ 382,037 1.1%
120 to 149 Days............................................. $ 300,479 0.9%
150 to 179 Days............................................. $ 249,214 0.7%
----------- ------
$33,817,556 100.0%
=========== ======
</TABLE>
S-26
<PAGE> 34
COMPOSITION AND HISTORICAL PERFORMANCE
OF THE DISCOVER CARD PORTFOLIO
GENERAL
Except to the extent we specifically identify information as relating to
the Accounts in the trust, all of the information describing the composition and
historical performance of Discover Card accounts in this prospectus supplement
reflects the composition and historical performance of the Discover Card
portfolio as a whole, and not only that of the Accounts in the trust. Discover
Bank opened a limited number of Discover Card accounts using credit scoring
criteria materially different from the credit scoring criteria generally used
for Discover Card accounts. These accounts were historically segregated from the
rest of the Discover Card portfolio. Because these accounts now perform
similarly to other Discover Card accounts, they are no longer segregated and, as
of December 1, 1999, are reflected in the information contained in this
prospectus supplement. None of these accounts is included in the trust. Discover
Bank has no statistical or other basis for determining the effects, if any, of
the selection process, although Discover Bank believes that the Accounts in the
trust are representative of the Discover Card portfolio in all material
respects. Discover Bank cannot assure you, however, that the Accounts have
performed or will perform similarly to the Discover Card portfolio. Discover
Bank also cannot assure you that the historical performance of the Discover Card
portfolio will be representative of its performance in the future. See "The
Accounts -- Billing and Payments," "Risk Factors -- Basis Risk" and "Risk
Factors -- Payments, Generation of Receivables and Maturity."
COMPOSITION OF THE DISCOVER CARD PORTFOLIO
Geographic Distribution. The Discover Card portfolio is not highly
concentrated geographically. As of November 30, 2000, the following five states
had the largest receivables balances:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL RECEIVABLES
BALANCE OF DISCOVER CARD PORTFOLIO
STATE AS OF NOVEMBER 30, 2000
----- ----------------------------------
<S> <C>
California............................................... 11.4%
Texas.................................................... 8.9%
New York................................................. 7.2%
Florida.................................................. 6.0%
Illinois................................................. 5.2%
</TABLE>
No other state accounted for more than 5% of the total receivables balance of
the Discover Card portfolio as of November 30, 2000.
Credit Limit Information. As of November 30, 2000, the accounts in the
Discover Card portfolio had the following credit limits:
<TABLE>
<CAPTION>
PERCENTAGE
RECEIVABLES OF TOTAL
OUTSTANDING RECEIVABLES
CREDIT LIMIT (000'S) OUTSTANDING
------------ ----------- -----------
<S> <C> <C>
Less than or equal to $1,000.00............................. $ 633,824 1.5%
$1,000.01 to $2,000.00...................................... $ 2,125,994 4.8%
$2,000.01 to $3,000.00...................................... $ 2,439,934 5.5%
Over $3,000.00.............................................. $38,985,010 88.2%
----------- ------
Total............................................. $44,184,762 100.0%
=========== ======
</TABLE>
S-27
<PAGE> 35
Seasoning. As of November 30, 2000, 73.0% of the accounts in the Discover
Card portfolio were at least 24 months old. The ages of accounts in the Discover
Card portfolio as of November 30, 2000 were distributed as follows:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
AGE OF ACCOUNTS OF ACCOUNTS OF BALANCES
--------------- ----------- -----------
<S> <C> <C>
Less than 12 Months......................................... 14.2% 16.8%
12 to 23 Months............................................. 12.8% 13.2%
24 to 35 Months............................................. 3.9% 2.4%
36 Months and Greater....................................... 69.1% 67.6%
------ ------
100.0% 100.0%
====== ======
</TABLE>
Summary Yield Information. Discover Bank calculates the monthly yield for
the Discover Card portfolio by dividing the monthly finance charges billed by
beginning monthly balance. Monthly finance charges include periodic finance
charges, cash advance item charges, late fees, and overlimit fees. The aggregate
monthly yield is the average of monthly yields annualized for each period shown.
The annualized aggregate monthly yield for the Discover Card portfolio is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Aggregate Monthly Yields
Excluding Recoveries...................................... 16.34% 17.48% 18.02%
Including Recoveries...................................... 16.97% 18.26% 18.76%
</TABLE>
Recoveries received with respect to Receivables in the trust that have been
charged off as uncollectible, including the proceeds of the trust's sales of
these Receivables, but excluding proceeds of Discover Bank's sales of
charged-off receivables that Discover Bank has removed from the trust, are
included in the trust and are treated as Finance Charge Collections. The level
of recoveries on accounts that Discover Bank adds to the trust from time to time
will initially be lower than the level of recoveries for the Discover Card
portfolio because Discover Bank will not include charged-off accounts in the
accounts it selects to include in the trust. Discover Bank believes that, over
time, the level of recoveries on these added Accounts, as a percentage of the
Receivables in the trust, will increase to approximate more closely, and during
periods of high portfolio growth to exceed, the level of recoveries on accounts
in the Discover Card portfolio as a whole. However, Discover Bank cannot predict
the extent of this increase and cannot assure you that the level of recoveries
for the trust will consistently approximate the level of recoveries for the
Discover Card portfolio as a whole.
Summary Current Delinquency Information. As of November 30, 2000, the
accounts in the Discover Card portfolio had the following delinquency statuses:
<TABLE>
<CAPTION>
AGGREGATE
BALANCES PERCENTAGE
PAYMENT STATUS (000'S) OF BALANCES
-------------- ----------- -----------
<S> <C> <C>
Current..................................................... $38,944,275 88.1%
1 to 29 Days................................................ $ 2,593,104 5.9%
30 to 59 Days............................................... $ 925,343 2.1%
60 to 89 Days............................................... $ 634,550 1.4%
90 to 119 Days.............................................. $ 446,540 1.0%
120 to 149 Days............................................. $ 350,347 0.8%
150 to 179 Days............................................. $ 290,603 0.7%
----------- ------
$44,184,762 100.0%
=========== ======
</TABLE>
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<PAGE> 36
Summary Historical Delinquency Information. The accounts in the Discover
Card portfolio had the following historical delinquency rates:
<TABLE>
<CAPTION>
AVERAGE OF TWELVE MONTHS ENDED NOVEMBER 30,
------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
DELINQUENT DELINQUENT DELINQUENT
AMOUNT AMOUNT AMOUNT
(000'S) PERCENTAGE (000'S) PERCENTAGE (000'S) PERCENTAGE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
30-59 Days.............. $ 831,836 2.0% $ 791,325 2.6% $ 759,521 2.6%
60-89 Days.............. $ 547,193 1.3% $ 471,838 1.5% $ 456,059 1.5%
90-179 Days............. $ 930,066 2.3% $ 815,619 2.6% $ 853,961 2.9%
---------- ---- ---------- ---- ---------- ----
Total.............. $2,309,095 5.6% $2,078,782 6.7% $2,069,541 7.0%
========== ==== ========== ==== ========== ====
</TABLE>
Discover Bank calculates the percentages in the preceding table by dividing
the delinquent amount by the average receivables outstanding for each period.
The delinquent amount is the average of the monthly ending balances of
delinquent accounts during the periods indicated. The average receivables
outstanding is the average of the monthly average amount of receivables
outstanding during the periods indicated.
WE DISCUSS THE ECONOMIC FACTORS THAT AFFECT THE PERFORMANCE OF THE DISCOVER
CARD PORTFOLIO, INCLUDING DELINQUENCIES, IN "RISK FACTORS -- PAYMENTS,
GENERATION OF RECEIVABLES AND MATURITY."
Summary Charge-Off Information. The accounts in the Discover Card
portfolio have had the following historical charge-offs:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Receivables Outstanding....................... $41,064,509 $31,554,086 $29,749,158
Gross Charge-offs..................................... $ 2,059,933 $ 1,955,514 $ 2,215,002
Gross Charge-offs as an Annualized Percentage of
Average Receivables Outstanding..................... 5.02% 6.20% 7.45%
</TABLE>
Average receivables outstanding in the preceding table is the average of
the monthly average amount of receivables outstanding during the periods
indicated.
WE DISCUSS THE ECONOMIC FACTORS THAT AFFECT THE PERFORMANCE OF THE DISCOVER
CARD PORTFOLIO, INCLUDING CHARGE-OFFS, IN "RISK FACTORS -- PAYMENTS, GENERATION
OF RECEIVABLES AND MATURITY."
Summary Payment Rate Information. Discover Bank calculates the monthly
payment rate by dividing monthly cardmember remittances by the cardmember
receivable balance outstanding as of the beginning of the month. Discover Bank
calculates the average monthly payment rate for a period by dividing the sum of
individual monthly payment rates for the period by the number of months in the
period. The accounts in the Discover Card portfolio have had the following
historical monthly payment rates:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Average Monthly Payment Rate................................ 16.24% 16.73% 15.42%
Highest Monthly Payment Rate................................ 17.25% 17.83% 17.01%
Lowest Monthly Payment Rate................................. 14.75% 15.19% 13.90%
</TABLE>
TIMING OF PRINCIPAL PAYMENTS
Minimum Monthly Payment Rates. Whether the trust can repay your principal
in full at the expected maturity of your certificates will depend on the yield,
the charge-off rate and the monthly payment rate for the Receivables in the
trust, and certain other factors. The trust will need a minimum
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<PAGE> 37
monthly payment rate of 9.17% to pay Class A principal in full on January 15,
2008, or the next business day, and a minimum payment rate of 6.33% in January
2008 to pay Class B principal in full on February 15, 2008, or the next business
day, assuming:
- a yield of 16.97% per year, including recoveries;
- a charge-off rate of 5.02% per year;
- that the level of Principal Receivables in the trust remains above the
minimum levels required by the Pooling and Servicing Agreement;
- that this series is not receiving collections that were originally
allocated to another series;
- that no Amortization Event occurs; and
- that the master servicer does not elect to defer the start of the
Accumulation Period.
The Accounts' actual yield, charge-off rate and monthly payment rate, and
the amount of outstanding Principal Receivables in the trust, will depend on a
variety of factors, including, without limitation, seasonal variations,
extensions and other modifications of payment terms, availability of other
sources of credit, general economic conditions and consumer spending and
borrowing patterns. Accordingly, Discover Bank cannot assure you that the trust
will be able to pay Class A principal in full at maturity or that it will be
able to pay Class B principal in full at maturity.
Economic Early Amortization Events. The Series Supplement provides that an
Amortization Event will occur on any distribution date on which:
- the three-month rolling average Series Excess Spread is less than zero;
and
- the three-month rolling average Group Excess Spread is less than zero.
Series Excess Spread means, generally, for any distribution date with
respect to this series:
- the Class A and Class B Finance Charge Collections and other Class A and
Class B income, minus
- the sum of --
- Class A and Class B monthly interest;
- Class A and Class B monthly servicing fees;
- Class A and Class B monthly charge-offs; and
- the Credit Enhancement Fee,
in each case for the distribution date. Group Excess Spread for any distribution
date is the sum of the Series Excess Spreads for each series in the group. You
should review the more precise definition of "Series Excess Spread" in the
glossary of terms in this prospectus supplement.
The three-month rolling average Group Excess Spread Percentage for Group
One was 4.60% for the distribution date in December 2000, without giving effect
to the issuance of this series. The Group Excess Spread Percentage equals:
- the Group Excess Spread, multiplied by twelve, divided by
- the sum of the Series Investor Interests for all series in Group One.
If this series had been issued and outstanding from September 1, 2000
through November 30, 2000, its three-month rolling average Series Excess Spread
for the distribution date in December 2000 as a percentage of the Series
Investor Interest would have been lower than the Group Excess Spread Percentage
because the interest rates for this series would have been higher than the
average interest rates for all series in Group One.
If an Amortization Event occurs because of declines in Group Excess Spread
and in Series Excess Spread, or otherwise, the trust will begin to repay
principal on the following distribution date. For a
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<PAGE> 38
description of other Amortization Events, see "The Certificates -- Amortization
Events." Discover Bank cannot predict how much principal the trust will pay to
you on any distribution date after an Amortization Event, or when you will
receive your final principal payment. If deficiencies in Series Excess Spread
cause the Available Subordinated Amount or the Available Class B Credit
Enhancement Amount to be reduced to zero, you may not receive all of your
interest, or you may lose a portion of your principal.
THE CERTIFICATES
This summary is not a complete description of the terms of the
certificates. You should refer to the Pooling and Servicing Agreement and the
Series Supplement for a more complete description.
INVESTED AMOUNTS
Your certificate will initially have an invested amount equal to its face
principal amount. Your invested amount will decrease by:
- the amount of principal the trust pays you,
- the amount of any investor loss you suffer if the trust cannot fully
reimburse the charge-offs allocated to your certificate, including, if
you own a Class B Certificate, increased charge-offs because of the way
the trust applies the subordination provisions of this series,
- the amount of any investor loss you suffer if the trust sells Receivables
to make its final payment to you and the proceeds from that sale are not
sufficient to pay your outstanding principal and interest in full, and
- the amount of losses of principal on investments of funds on deposit in
the Series Principal Funding Account for the benefit of your certificate.
The Class A Invested Amount will initially be $1,200,000,000, and the Class
B Invested Amount will initially be $63,158,000. These Class Invested Amounts
will equal the face principal amounts of all certificates in the class. Like the
invested amount of your certificate, the Class Invested Amounts will decrease by
the amount of principal the trust pays to all investors in the class, by the
class's share of investor losses due to unreimbursed charge-offs -- including,
for Class B, charge-offs arising by application of the subordination provisions
for this series -- or insufficient proceeds from a sale of Receivables, and by
the class's share of losses of principal on investments of funds on deposit in
the Series Principal Funding Account. The Series Invested Amount equals the sum
of the Class A Invested Amount and Class B Invested Amount.
INVESTOR INTERESTS
Your investor interest is your interest in Principal Receivables in the
trust. During the Revolving Period, your investor interest will equal your
invested amount. During the Accumulation Period and any Amortization Period,
your investor interest will equal your invested amount minus funds on deposit in
the Series Principal Funding Account to pay your principal. Accordingly,
- the Class A Investor Interest equals the Class A Invested Amount minus
funds on deposit in the Series Principal Funding Account to pay Class A
principal;
- the Class B Investor Interest equals the Class B Invested Amount minus
funds on deposit in the Series Principal Funding Account to pay Class B
principal, and
- the Series Investor Interest equals the sum of the Class A Investor
Interest and the Class B Investor Interest.
S-31
<PAGE> 39
INTEREST PAYMENTS
The trust will pay you interest on the 15th day of each month, or the next
business day, beginning in February 2001.
Your interest payment for the February 2001 interest payment date will
include accrued interest from and including January 4, 2001 to but excluding
February 15, 2001. Interest for each other interest payment date will accrue
from and including the previous interest payment date to but excluding the
current interest payment date. The month-long period before each interest
payment date is the interest accrual period for that interest payment date. If
any interest payment date is not a business day, the trust will pay interest to
you on the following business day. The trust will pay you interest on each
interest payment date only to the extent that it has allocated funds for this
payment in accordance with the cash flows for this series. See "The
Certificates -- Cash Flows" and "Annex A -- Cash Flows."
The trust will generally pay you interest on your invested amount at the
interest rate for your class for the related interest accrual period. The
interest rate for your class will be based on one-month LIBOR. The trustee will
determine the new interest rate for your certificates two business days before
each interest accrual period begins. The new interest rate will apply as of the
first day of each interest accrual period. The Glossary of Terms in this
prospectus supplement sets out with greater specificity the procedure used by
the trustee to determine LIBOR. The trust calculates the monthly interest
deposit for each class by multiplying:
- the Class Invested Amount, by
- the interest rate for the class -- LIBOR plus 0.22% for Class A and LIBOR
plus 0.55% for Class B -- for the related interest accrual period and
dividing this amount by
- 360 divided by the actual number of days in the related interest accrual
period.
The trust will pay your interest on each interest payment date from the
funds deposited into the Series Interest Funding Account since the previous
interest payment date, or for the first interest payment date, since January 4,
2001.
In very limited circumstances, your interest payment may include amounts in
addition to the amounts described above. You will only receive these additional
amounts:
- if the trust could not make your full interest payment on the prior
interest payment date, or
- if you suffered an investor loss that caused the trust to pay interest to
you based on an invested amount that was reduced by the amount of that
loss, and the trust subsequently reimbursed that loss.
These additional amounts, which the trust will pay, to the extent they are
available, in the same priority and from the same funds that it pays interest
generally, may include penalties and other payments intended to compensate you
for the previous interest payment shortfalls.
PRINCIPAL PAYMENTS
The trust will pay you principal in one payment on the Class A expected
maturity date or the Class B expected maturity date, as applicable, subject to
the conditions and exceptions set forth below. The trust will not pay principal
to Class B investors until it has made the final principal payment to Class A
investors. The trust will not pay you principal that exceeds your invested
amount.
Revolving Period. The trust will not pay principal to you during the
Revolving Period.
S-32
<PAGE> 40
Accumulation Period. The trustee will deposit funds into the Series
Principal Funding Account on each distribution date of the Accumulation Period
as set forth in steps (30), (31), (33) and (34) of the cash flows for this
series. These funds will generally include:
- Series Principal Collections, minus
- Series Yield Collections, which we describe below under "The
Certificates -- Other Income -- Yield Collections, Additional Funds
and Investment Income"
- Class B Principal Collections used to pay Class A interest and
servicing fees in step (6) of the cash flows for this series, and
- Class B Principal Collections used to reimburse Class A charge-offs in
step (7) of the cash flows for this series;
- all amounts the trust uses to reimburse Class A and Class B charge-offs
in steps (4), (5), (7), (12), (13), (15), (18), (22) and (24) of the cash
flows for this series;
- similar funds from other series; and
- any similar funds retained in the Collections Account on the previous
distribution date in step (38) of the cash flows for this series.
The trust will pay Class A principal in a lump sum on the Class A expected
maturity date using funds from the Series Principal Funding Account. If that
account does not have sufficient funds to pay the Class A Invested Amount in
full on that date, an Amortization Event will occur. If the trust does pay all
Class A principal on the Class A expected maturity date, it will pay Class B
principal in a lump sum on the Class B expected maturity date using funds from
the Series Principal Funding Account. If that account does not have sufficient
funds to pay the Class B Invested Amount in full on that date, an Amortization
Event will occur. If the expected maturity date for your certificate is not a
business day, the trust will pay your principal on the following business day
and you will not receive any additional interest because of this delay.
Amortization Period. The trustee will deposit funds into the Series
Principal Funding Account on each distribution date of the Amortization Period
as set forth in steps (30), (31) and (33) of the cash flows for this series.
These funds will generally include:
- Series Principal Collections, minus
- Series Yield Collections, which we describe below under "The
Certificates -- Other Income -- Yield Collections, Additional Funds
and Investment Income,"
- Class B Principal Collections used to pay Class A interest and
servicing fees in step (6) of the cash flows for this series, and
- Class B Principal Collections used to reimburse Class A charge-offs in
step (7) of the cash flows for this series;
- all amounts the trust uses to reimburse Class A and Class B charge-offs
in steps (4), (5), (7), (12), (13), (15), (18), (22) and (24) of the cash
flows for this series; and
- any similar funds retained in the Collections Account on the previous
distribution date in step (38) of the cash flows for this series.
The trust will pay Class A principal on each distribution date of the
Amortization Period using funds from the Series Principal Funding Account, until
the Class A Invested Amount has been reduced to zero, and will then use funds
from the Series Principal Funding Account to pay Class B principal on each
distribution date until the Class B Invested Amount has been reduced to zero.
S-33
<PAGE> 41
Variable Accumulation Period. Discover Bank, as master servicer, may elect
to delay the start of the Accumulation Period, and extend the length of the
Revolving Period, if:
- the master servicer has delivered to the trustee a certificate to the
effect that the master servicer reasonably believes that delaying the
start of the Accumulation Period will not delay payments of Class A
principal and Class B principal to investors;
- Standard & Poor's and Moody's have advised the master servicer that they
will not lower or withdraw their ratings on the trust's outstanding
certificates because of the delay;
- the master servicer increases the amount of principal that the trustee
will deposit into the Series Principal Funding Account each month, so
that the sum of all deposits made during the shortened Accumulation
Period will equal the principal amount due to Class A investors on the
distribution date in January 2008;
- the Accumulation Period will start no later than December 1, 2007; and
- the master servicer makes this election no later than the first day of
the last month of the Revolving Period, including extensions of the
Revolving Period.
The master servicer may elect to delay the start of the Accumulation Period
because it believes that the trust will be able to reallocate principal from
other series to this series to make larger monthly principal deposits into the
Series Principal Funding Account. However, if an Amortization Event occurs, this
series will not be entitled to receive principal reallocated from other series.
Accordingly, if the master servicer elects to delay the start of the
Accumulation Period and an Amortization Event occurs, you may receive some of
your principal later than you would have received it if the start of the
Accumulation Period had not been delayed. For an example of other possible
consequences of an Amortization Event, see "Composition and Historical
Performance of the Discover Card Portfolio -- Timing of Principal
Payments -- Economic Early Amortization Events."
INVESTOR ACCOUNTS
The trustee has established or will establish the following accounts in the
name of the trust:
- the Collections Account;
- the Group One Collections Account;
- the Group One Principal Collections Reallocation Account;
- the Group One Finance Charge Collections Reallocation Account;
- the Series Collections Account;
- the Series Principal Collections Account;
- the Series Distribution Account;
- the Series Interest Funding Account; and
- the Series Principal Funding Account.
Each of these accounts will be a segregated trust account established with
the trustee or a Qualified Institution -- i.e., a bank satisfying certain rating
agency criteria, as described in the glossary of terms. The master servicer has
the revocable power to instruct the trustee to make withdrawals from any
investor account -- with the exception of the Series Principal Funding Account,
which will be under the sole dominion and control of the trustee for the benefit
of the investors -- to carry out its duties under the Pooling and Servicing
Agreement and the Series Supplement. The paying agent, which will initially be
the trustee, will have the revocable power to withdraw funds from the Series
Distribution Account, the Series Interest Funding Account and the Series
Principal Funding Account to make distributions to the investors. A successor
paying agent may be appointed in the future.
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<PAGE> 42
The trustee may only invest funds on deposit in any investor account in
Permitted Investments. We describe these Permitted Investments in the glossary
of terms.
CLASS FINANCE CHARGE COLLECTIONS
The trust allocates Finance Charge Collections to each class of this series
on each distribution date by multiplying the Finance Charge Collections received
in the prior calendar month by the Class Percentage for that class:
Class Finance Charge Collections = Class Percentage X Finance Charge Collections
The Class Percentage for any distribution date will be based on either:
- in the Revolving Period, in the Accumulation Period and, if Discover Bank
has made an Effective Alternative Credit Support Election, in the
Amortization Period, the Class Investor Interest as of the first day of
the prior calendar month; or
- in the Amortization Period, if Discover Bank has not made an Effective
Alternative Credit Support Election, the Class Investor Interest as of
the end of the last business day in the calendar month preceding the
month in which an Amortization Event occurred,
and will also be affected by either (1) the total amount of Principal
Receivables in the trust or (2) the aggregate size of the Class Investor
Interests for all outstanding series -- in each case, as of the first day of the
prior calendar month -- whichever amount is greater.
As the trust deposits principal into the Series Principal Funding Account,
we expect this series to receive fewer Finance Charge Collections in each month
to reflect:
- its declining interest in the Receivables in the trust,
- its correspondingly smaller allocation of charge-offs, and
- the availability of investment income from the Series Principal Funding
Account, which the trust will use to pay interest on this series.
However, if an Amortization Event occurs, unless Discover Bank has made an
Effective Alternative Credit Support Election and has increased the credit
enhancement for this series, the size of the Class Investor Interest for each
class in this series will be deemed to be fixed at the size each was at before
the Amortization Event occurred, for purposes of calculating the amount of
Finance Charge Collections the trust allocates to each class of this series each
month. You should review clauses (iv) and (v) of the definition of "Class
Percentage" in the glossary of terms in this prospectus supplement, which
describe in more detail how the trust calculates these pro rata shares.
OTHER INCOME -- YIELD COLLECTIONS, ADDITIONAL FUNDS AND INVESTMENT INCOME
The Series Supplement permits the trust to use funds from other sources in
the same way it uses Series Finance Charge Collections. These amounts are:
Series Yield Collections. The master servicer may recharacterize a
percentage of Series Principal Collections as Series Yield Collections. This
recharacterization will cause the trust to allocate those collections to pay
interest and servicing fees, reimburse charge-offs and increase available credit
enhancement, instead of applying them only to pay principal. If the master
servicer makes this designation, it may have fewer funds available to deposit
scheduled principal or to pay the Series Invested Amount.
The percentage of Series Principal Collections that the master servicer
will recharacterize on each distribution date is the Series Yield Factor. The
Series Yield Factor is initially zero. The master servicer may change the Series
Yield Factor, subject to the following conditions:
- the master servicer may not reduce the Series Yield Factor below zero,
nor increase it above five percent;
S-35
<PAGE> 43
- the master servicer shall have delivered to the trustee a certificate to
the effect that the master servicer reasonably believes that the change
will not:
- delay any principal payments on any series outstanding at the time of
the change, or
- cause an amortization event to occur with respect to any series
outstanding at the time of the change; and
- Standard & Poor's shall have advised the master servicer that it will
not, as a result of the change, lower or withdraw the rating of any class
of any series outstanding at the time of the change.
Series Additional Funds. Under limited circumstances, as described in the
prospectus, Discover Bank may elect to add funds to the trust on a monthly
basis. This series' share of those funds is Series Additional Funds.
Investment Income. During the Accumulation Period, Discover Bank expects
the trust to earn investment income on the funds in the Series Principal Funding
Account. The trust will allocate these funds to this series, up to the amount of
interest that the trust will pay to investors. The trust will pay any excess
investment income to Discover Bank.
CLASS PRINCIPAL COLLECTIONS
The trust allocates Principal Collections to each class of this series on
each distribution date by multiplying the Principal Collections received in the
prior calendar month by the Class Percentage for that class:
Class Principal Collections = Principal Collections X Class Percentage
The Class Percentage of Principal Collections will generally be based on:
- the Class Investor Interest on the first day of the calendar month
preceding the distribution date, during the Revolving Period and, before
a Fixed Principal Allocation Event occurs, during the Accumulation
Period; or
- if a Fixed Principal Allocation Event has occurred, the Class Investor
Interest as of the end of the last business day in the calendar month
before the Fixed Principal Allocation Event occurred, during the
Accumulation Period and the Amortization Period.
In general, Discover Bank expects this series to receive a smaller
allocation of Principal Collections in each month of the Accumulation Period to
reflect its declining interest in Principal Receivables in the trust. However,
if a Fixed Principal Allocation Event occurs, the size of the Class Investor
Interest for each class in this series will be deemed to be fixed at the size
each was at before this event occurred, for purposes of calculating the amount
of Principal Collections the trust allocates to each class of this series each
month. In general, a Fixed Principal Allocation Event may occur:
- if this series would not be able to make its principal deposits on time
even using the amounts from other series that would be available to it;
- if the master servicer elects to cause a Fixed Principal Allocation Event
to occur; or
- if an Amortization Event occurs.
You should review clauses (ii) and (iii) of the definition of "Class
Percentage" and the definition of "Fixed Principal Allocation Event" in the
glossary of terms in this prospectus supplement, which describe in more detail
how the trust calculates this series' share of Principal Collections and when a
Fixed Principal Allocation Event will occur.
S-36
<PAGE> 44
CLASS CHARGE-OFFS AND INVESTOR LOSSES
The trust allocates charge-offs to each class of this series on each
distribution date by multiplying
- the amount of Receivables in the trust that the servicer charged off as
uncollectible during the previous calendar month, minus
- the cumulative, uncollected amount of these Receivables that related
to finance charges, cash advance fees, annual membership fees,
overlimit fees and late payment charges, and
- the amount of these Receivables repurchased by Discover Bank during
that month because they were in accounts that contained Receivables
that were not Eligible Receivables, by
- the Class Percentage with respect to the Charged-Off Amount for that
class.
These class charge-offs will equal a pro rata share of the Charged-Off
Amount for the trust, based on the Class Investor Interest on the first day of
the calendar month preceding the distribution date. You should review clause (i)
of the definition of "Class Percentage" in the glossary of terms in this
prospectus supplement, which describes in more detail how the trust calculates
this pro rata share.
The Class B charge-offs will also increase by
- the amount of Class B Principal Collections that the trust uses to pay
Class A interest and reimburse Class A charge-offs in steps (6) and (7)
of the cash flows for this series, and
- the amount of the Class B Investor Interest used to reimburse Class A
charge-offs in step (13) of the cash flows for this series.
If the trust cannot reimburse all of the class charge-offs for either class
in any month, it will carry forward the amount of unreimbursed charge-offs and
will try to reimburse them in the following month. The unreimbursed charge-offs
on any distribution date are an investor loss, and the trust reduces the Class
Investor Interest and the Class Invested Amount for each class by the amount of
its investor loss. To the extent that the trust subsequently reimburses these
charge-offs, it will reinstate the Class Investor Interest and the Class
Invested Amount. The trust will not reinstate the Class Investor Interest and
the Class Invested Amount to exceed the initial Class Investor Interest minus
- the aggregate amount of principal paid to investors in that class before
the distribution date,
- in the case of the Class Investor Interest, the amount on deposit in the
Series Principal Funding Account for that class, and
- the aggregate amount of losses on investments of principal funds on
deposit in the Series Principal Funding Account for that class.
If the trust reimburses all investor losses, it will also pay interest on
those investor losses for the periods in which the interest payments to
investors were reduced because of those investor losses. This additional
interest will be paid as part of Class A interest in steps (2), (3), (6), (11)
and (22) of the cash flows for this series, and as part of Class B interest in
steps (8), (9), (14), (17) and (24) of the cash flows for this series. If the
Class Investor Interest is reduced to zero on any distribution date, it will not
be reinstated.
SUBORDINATION OF THE CLASS B CERTIFICATES -- CLASS A CREDIT ENHANCEMENT
The Class B Certificates are subordinated to the Class A Certificates up to
a specified dollar amount, known as the Available Subordinated Amount. The
initial Available Subordinated Amount is
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<PAGE> 45
$157,894,750, which is 12.5% of $1,263,158,000. The Available Subordinated
Amount will decrease to the extent that:
- the trust uses Class B Finance Charge Collections, other Class B income
and Class B Principal Collections to pay Class A interest and servicing
fees in steps (6) and (11) and to reimburse Class A charge-offs in steps
(7) and (12) of the cash flows for this series; and
- the trust reallocates Class B Investor Interest to reimburse Class A
charge-offs in step (13) of the cash flows for this series.
The Available Subordinated Amount will increase by:
- the amount by which
- Class A Finance Charge Collections and other Class A income exceed
Class A interest and servicing fees, and
- Class B Finance Charge Collections and other Class B income exceed
Class B interest and servicing fees;
- the amount of funds from the Group One Finance Charge Collections
Reallocation Account that the trust uses
- to pay Class B interest in step (23) of the cash flows for this
series,
- to reimburse Class B charge-offs in step (24) of the cash flows for
this series, and
- to increase the Available Class B Credit Enhancement Amount in step
(27) of the cash flows for this series;
- $6,315,790 after a Supplemental Credit Enhancement Event, if Discover
Bank has not made an Effective Alternative Credit Support Election;
- $56,842,110 after an Effective Alternative Credit Support Election, if a
Supplemental Credit Enhancement Event has occurred; and
- $63,157,900 after an Effective Alternative Credit Support Election, if a
Supplemental Credit Enhancement Event has not occurred.
However, the Available Subordinated Amount will never exceed:
- $157,894,750 before Discover Bank has made an Effective Alternative
Credit Support Election and before a Supplemental Credit Enhancement
Event occurs;
- $164,210,540 after a Supplemental Credit Enhancement Event occurs but
before Discover Bank has made an Effective Alternative Credit Support
Election; or
- $221,052,650 after Discover Bank has made an Effective Alternative Credit
Support Election.
A Supplemental Credit Enhancement Event will occur if Standard & Poor's
withdraws or reduces below BBB- the long-term debt or deposit rating of Discover
Bank.
THE CREDIT ENHANCEMENT ACCOUNT
Discover Bank, the trustee and one or more lenders, which we refer to
collectively as the Credit Enhancement Provider, will enter into a Credit
Enhancement Agreement on the series closing date. The Credit Enhancement
Provider will deposit $94,736,850 into a cash collateral account, which we refer
to as the Credit Enhancement Account, which the trustee will initially hold in
accordance with the Credit Enhancement Agreement. The Credit Enhancement Account
may also be moved to a Qualified Institution. The funds on deposit in the Credit
Enhancement Account will be held for the direct benefit of the Class B investors
of this series and for the benefit of the Credit Enhancement Provider; their
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<PAGE> 46
respective interests will be set out in the Series Supplement and the Credit
Enhancement Agreement. The trustee will act as administrator of the Credit
Enhancement Account and will release funds for deposit into the investor
accounts pursuant to instructions from the master servicer. The Credit
Enhancement Provider will have only those liabilities and obligations expressly
imposed on it by the Credit Enhancement Agreement.
The trustee will invest the amounts on deposit in the Credit Enhancement
Account in Permitted Investments selected by Discover Bank that mature on or
before the immediately following distribution date. The trustee will pay all
earnings on these investments, less investment losses and expenses, in
accordance with the Credit Enhancement Agreement.
On each distribution date, the trustee may withdraw funds from or deposit
funds into the Credit Enhancement Account pursuant to the Series Supplement and
the Credit Enhancement Agreement. The trustee will make credit enhancement
drawings solely as set forth in steps (17) and (18) of the cash flows for this
series. The trustee will make these drawings solely from amounts on deposit in
the Credit Enhancement Account, and will not use any other assets of the Credit
Enhancement Provider. The trustee will deposit funds into the Credit Enhancement
Account as set forth in steps (16) and (27) of the cash flows for this series,
but only to the extent the Available Class B Credit Enhancement Amount -- i.e.,
the amount available in the Credit Enhancement Account after giving effect to
all deposits and withdrawals -- is less than the Maximum Class B Credit
Enhancement Amount.
The Maximum Class B Credit Enhancement Amount -- i.e., the maximum amount
that the trustee may hold in the Credit Enhancement Account for the benefit of
the Class B investors and the Credit Enhancement Provider -- may increase if:
- Discover Bank makes an Effective Alternative Credit Support Election; or
- a Supplemental Credit Enhancement Event occurs.
The Maximum Class B Credit Enhancement Amount may also decrease during the
Accumulation Period as the Series Investor Interest declines. The following
table illustrates the maximum amount that will be available in the Credit
Enhancement Account as of any distribution date:
MAXIMUM CLASS B CREDIT ENHANCEMENT AMOUNT
<TABLE>
<S> <C>
Series Closing Date $94,736,850
Revolving Period --
Before an Effective Alternative Credit $94,736,850, which is 7.5% of
Support Election or a Supplemental $1,263,158,000
Credit Enhancement Event
After a Supplemental Credit $101,052,640 which is 8.0% of
Enhancement Event but before an $1,263,158,000
Effective Alternative Credit Support
Election
After an Effective Alternative Credit $157,894,750 which is 12.5% of
Support Election $1,263,158,000
Accumulation Period --
Before an Effective Alternative Credit 7.5% of the Series Investor Interest as
Support Election or a Supplemental of the end of the preceding month, but
Credit Enhancement Event not less than $12,631,580
</TABLE>
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<PAGE> 47
<TABLE>
<S> <C>
After a Supplemental Credit 8.0% of the Series Investor Interest as
Enhancement Event but before an of the end of the preceding month, but
Effective Alternative Credit Support not less than $12,631,580
Election
After an Effective Alternative Credit 12.5% of the Series Investor Interest as
Support Election of the end of the preceding month, but
not less than $12,631,580
Amortization Period The Maximum Class B Credit Enhancement
Amount for the distribution date
immediately preceding the Amortization
Event
</TABLE>
An Alternative Credit Support Election is an election by Discover Bank to
change the way the trust allocates Finance Charge Collections to the series
during an Amortization Period. An Effective Alternative Credit Support Election
is such an election that has become effective under the Series Supplement. If
Discover Bank has not made an Effective Alternative Credit Support Election, the
trust will allocate Finance Charge Collections to this series based on the
Series Investor Interest at the end of the month before the Amortization Event.
Following an Effective Alternative Credit Support Election, the trust will
allocate Finance Charge Collections to this series on each distribution date
during the Amortization Period based on the Series Investor Interest as of the
first day of the month before each distribution date.
To make an Effective Alternative Credit Support Election, Discover Bank
must cause the Additional Credit Support Amount to be paid to the trustee for
deposit in the Credit Enhancement Account. If the Alternative Credit Support
Election does not become effective in accordance with the requirements of the
Series Supplement, the trustee will return some or all of the Additional Credit
Support Amount to the entity that funded the deposit, which will be either the
holder of the Seller Certificate or the Credit Enhancement Provider.
Discover Bank as servicer will, within 60 days of notice from Standard &
Poor's of a Supplemental Credit Enhancement Event, or a longer period that
Standard & Poor's agrees to, arrange to increase the amount on deposit in the
Credit Enhancement Account by the Supplemental Credit Enhancement Amount to be
paid by a person other than Discover Bank to the trustee as administrator of the
Credit Enhancement Account. Discover Bank may also use Series Finance Charge
Collections and other income that the trust does not need to pay interest and
servicing and to reimburse charge-offs for this series to pay this amount. The
trustee will apply the Supplemental Credit Enhancement Amount as provided in the
Credit Enhancement Agreement. Discover Bank may determine the form and the
provider of the Supplemental Credit Enhancement Amount at the time it is to be
paid, provided that Standard & Poor's confirms that it will not withdraw or
lower the rating of the certificates because of these arrangements.
The trustee may terminate the Credit Enhancement Account and the Credit
Enhancement Agreement without penalty if
- the master servicer elects to replace this credit enhancement, and
- the Rating Agencies agree that they will not lower or withdraw the
ratings on the certificates if the master servicer replaces the credit
enhancement.
The replacement credit enhancement may consist of any type of credit
enhancement, including without limitation, an irrevocable standby letter of
credit, a cash collateral account, a reserve account, a combination of a letter
of credit and a reserve account, or a surety.
If on the business day immediately preceding the distribution date, the
Credit Enhancement Provider is unable to pay its debts as they become due, the
trustee may not pay to or deposit for the Credit Enhancement Provider any
amounts that are measured by reference to --
- Class Finance Charge Collections and other income that exceed the
required payments and reimbursements for that class,
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<PAGE> 48
- Series Finance Charge Collections and other income that exceed the
required payments and reimbursements for this series, or
- the amount on deposit at any time in the Group One Finance Charge
Collections Reallocation Account.
However, if the replacement credit enhancement is funded credit
enhancement -- for example, a reserve account or cash collateral account -- then
the trustee may pay such amounts regardless of the financial condition of the
Credit Enhancement Provider.
REALLOCATIONS
The series supplements relating to the other outstanding series in Group
One provide that, under certain circumstances, collections originally allocated
to one series in Group One may be reallocated to other series in Group One.
Discover Bank cannot assure you, however, that any funds will be available to be
reallocated to this series. Discover Bank also cannot assure you that it will
not move any series from its original group to another group.
Although the series supplements do permit reallocations among series, the
trust will use the Finance Charge Collections, other income and Principal
Collections allocated to any series to make all payments, deposits and
reimbursements for that series before it reallocates them to other series.
Accordingly, Series Finance Charge Collections and other income for this series
will not be reallocated unless the trust has deposited all Class A and Class B
interest and servicing fees, reimbursed all Class A and Class B charge-offs and
increased the Available Class B Credit Enhancement Amount to the Maximum Class B
Credit Enhancement Amount. Similarly, the trust will not reallocate to other
series any Series Principal Collections or amounts used to reimburse Class A and
Class B charge-offs until the trust has made the scheduled principal deposit for
this series, during the Accumulation Period, or until the trust has paid the
Series Invested Amount in full, during the Amortization Period.
We describe the reallocation priorities in "-- Cash Flows" below, and you
should review those priorities.
CASH FLOWS
In this section, we describe the manner in which the trust prioritizes the
allocation of its funds. We have also included descriptions of the numbered
steps of the cash flows for this series in Annex A to this prospectus
supplement, and you should review those descriptions.
Series Finance Charge Collections and other income. In general, the trust
uses Series Finance Charge Collections and other income for this
series -- including Series Additional Funds, interest on the Series Principal
Funding Account and Series Yield Collections -- in the following order of
priority on each distribution date, to the extent funds are available:
- First, to pay Class A interest and servicing fees;
- Second, to reimburse Class A charge-offs, including any unreimbursed
charge-offs carried forward from prior months;
- Third, to pay Class B interest and servicing fees;
- Fourth, to reimburse Class B charge-offs, including any unreimbursed
charge-offs carried forward from prior months;
- Fifth, to increase the Available Class B Credit Enhancement Amount to the
Maximum Class B Credit Enhancement Amount;
- Sixth, to pay fees and interest to the Credit Enhancement Provider;
- Seventh, to pay interest and monthly servicing fees and to reimburse
charge-offs for other series in Group One; and
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<PAGE> 49
- Eighth, to pay the Credit Enhancement Provider and then Discover Bank, as
the holder of the Seller Certificate, in accordance with the terms of the
Credit Enhancement Agreement.
Series Principal Collections and amounts used to reimburse charge-offs. In
general, the trust uses Series Principal Collections and amounts used to
reimburse charge-offs, minus Series Yield Collections, in the following order of
priority on each Distribution Date:
- First, to pay shortfalls in Class A interest and servicing fees after
Series Finance Charge Collections and other income have been used. In
this step, the trust uses Class B Principal Collections only;
- Second, to reimburse Class A charge-offs after Series Finance Charge
Collections and other income have been used. In this step, the trust uses
Class B Principal Collections only;
- Third, to make the scheduled principal deposit into the Series Principal
Funding Account, during the Accumulation Period, or to pay the Series
Investor Interest, during the Amortization Period;
- Fourth, to pay the scheduled principal payments or make the scheduled
principal deposits for other series in Group One;
- Fifth, to pay unscheduled principal payments or make unscheduled
principal deposits for other series in Group One, except for series in
their amortization periods; and
- Sixth, to pay Discover Bank, up to the amount of the Seller Interest,
with remaining amounts to be allocated as Principal Collections in the
following month.
Reallocations of Finance Charge Collections and other income from other
series. In general, if the trust cannot make all payments, deposits and
reimbursements for this series -- other than principal payments and deposits,
which are reallocated as discussed below -- using Series Finance Charge
Collections, other income and credit enhancement, it will use similar funds
reallocated from other series, to the extent funds are available, in the
following order of priority:
- First, to pay Class A interest and servicing fees;
- Second, to reimburse Class A charge-offs, including any unreimbursed
charge-offs carried forward from prior months;
- Third, to pay Class B interest and servicing fees;
- Fourth, to reimburse Class B charge-offs, including any unreimbursed
charge-offs carried forward from prior months;
- Fifth, to increase the available credit enhancement for series that have
Class A cash collateral credit enhancement or shared credit enhancement;
- Sixth, to increase the Available Class B Credit Enhancement Amount to the
Maximum Class B Credit Enhancement Amount;
- Seventh, to fund certain other amounts for Series 1993-3; and
- Eighth, to pay the Credit Enhancement Provider and then Discover Bank, as
the holder of the Seller Certificate, in accordance with the terms of the
Credit Enhancement Agreement.
The amount allocated to this series will generally be determined by
dividing the shortfall in the amount the trust is trying to fund for this series
by the sum of the shortfalls in the amounts the trust is trying to fund for each
other series in Group One.
Reallocations of Principal Collections and amounts used to reimburse
charge-offs from other series. In general, if the trust cannot make the
scheduled principal deposit using Series Principal Collections and amounts used
to reimburse charge-offs for this series, it will use similar funds reallocated
from other series. The amount allocated to this series will generally be
determined by dividing the shortfall in the amount the trust is trying to fund
for this series by the sum of the shortfalls in the amounts the trust is trying
to fund for each other series in Group One. However, if the trust is trying to
make a scheduled
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<PAGE> 50
principal deposit for the Class B Certificates, it will only use those funds
remaining after principal has been paid or deposited for the Class A
certificates of all other series in Group One. During the Amortization Period,
if any, the trust will not use any funds reallocated from other series to pay
principal for this series.
Credit Enhancement for each Class. In addition to the payment priorities
described above, the trust may use the credit enhancement for this series to
make payments, deposits or reimbursements for this series. The trust may:
- reallocate the Class B Investor Interest to reimburse Class A
charge-offs;
- use the Available Class B Credit Enhancement Amount to pay Class B
interest and servicing fees; or
- use the Available Class B Credit Enhancement Amount to reimburse Class B
charge-offs, including any unreimbursed charge-offs carried forward from
prior months and any increases in Class B charge-offs from allocations of
Class B Principal Collections and the Class B Investor Interest to
benefit the Class A Certificates.
AMORTIZATION EVENTS
An Amortization Period commences only if an Amortization Event occurs.
Subject to the notice provisions described in the following paragraphs, an
Amortization Event is any of the following:
(a) any seller fails to make any payment or deposit on the date required under
the Pooling and Servicing Agreement or the Series Supplement, or within
five business days after that date;
(b) any seller fails to perform in any material respect any other material
covenant of that seller under the Pooling and Servicing Agreement or the
Series Supplement, and does not remedy that failure for 60 days after:
- written notice to that seller by the trustee; or
- written notice to that seller and the trustee by holders of certificates
that represent at least 25% of the Class Invested Amount of any class
materially adversely affected by that seller's failure;
(c) any representation or warranty made by any seller under the Pooling and
Servicing Agreement or the Series Supplement, or any information required
to be given to the trustee for identifying the Accounts, proves to have
been materially inaccurate when made and remains inaccurate for 60 days
after written notice of its inaccuracy to that seller by the trustee or to
that seller and the trustee by holders of certificates that represent at
least 25% of the Class Invested Amount of any class materially adversely
affected by the inaccuracy;
(d) certain events of bankruptcy, insolvency or receivership relating to any
seller;
(e) Discover Bank as seller becomes unable to transfer Receivables to the trust
in accordance with the Pooling and Servicing Agreement and that inability
continues for five business days;
(f) any seller other than Discover Bank becomes unable to transfer Receivables
to the trust in accordance with the Pooling and Servicing Agreement and
that inability continues for five business days;
(g) the trust becomes an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(h) any Master Servicer Termination Event or any Servicer Termination Event
occurs;
(i) the amount of Principal Receivables in the trust at the end of any month or
on any distribution date is less than the Minimum Principal Receivables
Balance, and Discover Bank fails to assign Receivables in additional
Accounts or interests in other credit card receivables pools to the trust
in at least the amount of the deficiency within ten days;
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(j) on any distribution date, the three-month rolling average Series Excess
Spread is less than zero and the three-month rolling average Group Excess
Spread is less than zero;
(k) the trust does not pay all Class A principal on the Class A expected
maturity date or all Class B principal on the Class B expected maturity
date; or
(l) if a Supplemental Credit Enhancement Event occurs, Discover Bank as
servicer fails to arrange for the Supplemental Credit Enhancement Amount as
required by the Series Supplement.
If any event described in clauses (a), (b), (c), (f) or (h) occurs, it will
only be an Amortization Event if:
- the event has a material adverse effect on the certificateholders; and
- after the applicable grace period described in those clauses, either
- the trustee declares by written notice to Discover Bank and the master
servicer that an Amortization Event has occurred; or
- certificateholders holding certificates that represent at least 51% of
the Class Invested Amount for either class, declare by written notice
to Discover Bank, the master servicer and the trustee that an
Amortization Event has occurred as of the date of the notice.
Any event described in clauses (d), (e), (g), (i), (j), (k) or (l) will
immediately be an Amortization Event without any notice or other action from the
trustee or the certificateholders. The Amortization Period will commence on the
date on which an Amortization Event is deemed to have occurred.
Beginning on the distribution date in the month after an Amortization Event
has occurred, the trust will pay Class A principal on each distribution date
until the Class A Invested Amount has been reduced to zero and will then pay
Class B principal on each distribution date until the Class B Invested Amount
has been reduced to zero.
CLEAN-UP CALL; TERMINATION OF SERIES
Discover Bank may purchase the remaining Series Investor Interest from the
trust on any distribution date during the Accumulation Period or the
Amortization Period if the Series Investor Interest is less than or equal to
$63,157,900 -- which is 5.0% of the initial Series Investor Interest -- after
giving effect to required payments, deposits and reimbursements on that
distribution date.
If Discover Bank elects to purchase the Series Investor Interest, on the
next distribution date it will deposit an amount equal to the Series Investor
Interest as of the last day of the month before the deposit into the Series
Principal Funding Account, during the Accumulation Period, or into the Series
Distribution Account, during the Amortization Period.
In any event, the trust will not pay you principal after the first business
day following the distribution date in July 2010. If the trust owes you
principal after the distribution date in June 2010, the trustee will sell
Receivables proportionate to the remaining Series Investor Interest in the trust
to repay the principal. If proceeds of that sale are not sufficient to pay the
outstanding principal and interest in full, Class B investors will suffer an
investor loss and Class A investors may also suffer an investor loss. After the
Series Termination Date, the trust will not allocate collections to this series.
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<PAGE> 52
REPORTS TO INVESTORS
For each distribution date, the master servicer will prepare a statement
for you setting forth:
- the amount of interest and principal paid to holders of each class of
this series on that date per $1,000 of initial Class Investor Interest,
the number of days in the interest accrual period and the applicable
interest rate;
- the Series Investor Interest and the Class Investor Interest for each
class of this series, as of the end of the prior calendar month;
- the Aggregate Investor Interest, the Seller Interest and the sum of the
Series Investor Interests for each series in the same group as this
series, as of the end of the prior calendar month;
- the amount of Finance Charge Collections, Principal Collections,
Additional Funds, if any, and Yield Collections, if any, from the prior
calendar month allocated to this series, to each class of this series, to
the group of which this series is a member, and to the seller;
- the amount of Principal Collections, Finance Charge Collections and total
collections from the prior calendar month, each as a monthly percentage
of Receivables in the trust at the beginning of that month;
- Series Investment Income since the prior distribution date;
- the amount deposited into the Series Principal Funding Account on that
date, the amount of any shortfall in the scheduled principal deposit, and
the total amount on deposit in the Series Principal Funding Account;
- the amount of charge-offs allocated to each class of this series, to the
series, and to the group of which this series is a member for the prior
calendar month, and the total amount of unreimbursed charge-offs for each
class of this series, for this series, and for the group of which this
series is a member, including increases in Class B charge-offs relating
to the Class B subordination;
- the total amount of investor losses for the prior calendar month and the
amount of these losses per $1,000 of initial Class Investor Interest, the
amount of reimbursements of investor losses for the prior calendar month
of the aggregate amount of unreimbursed investor losses as of the end of
the prior calendar month, and the amount of these losses per $1,000 of
initial Class Investor Interest, in each case for each class of this
series, and the sum of those amounts for this series and for the group of
which this series is a member;
- the monthly servicing fee for each class of this series and the sum of
those fees for this series and for the group of which this series is a
member for the prior calendar month;
- the Available Subordinated Amount as of the end of the distribution date,
and the Available Subordinated Amount as a percentage of the Class A
Invested Amount;
- the amounts of any credit enhancement drawings and the amount of the
Credit Enhancement Fee payable on the distribution date and the Maximum
Class B Credit Enhancement Amount and Available Class B Credit
Enhancement Amount, in each case as of the end of the distribution date;
- total delinquency information with respect to the Receivables, and
delinquency information as a percentage of outstanding Receivables;
- the Series Excess Spread Percentage for this series and the Group Excess
Spread Percentage for the group of which this series is a member; and
- the total amount of charge-offs and the amount of charge-offs net of
recoveries in the prior calendar month, each as an annualized percentage
of Principal Receivables at the beginning of that month.
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You may obtain a copy of the statement free of charge by calling
302-323-7434. On or about January 31 of each calendar year, you may also obtain
in the same manner a statement prepared by the master servicer aggregating the
amount of interest and principal for each class of this series for the preceding
calendar year or the applicable portion of that year, together with such other
customary information as the trustee or the master servicer deems necessary or
desirable to enable you to prepare your tax returns.
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<PAGE> 54
UNDERWRITING
The underwriters named below have severally agreed, subject to the terms
and conditions of the underwriting agreement, dated June 9, 2000, and the terms
agreement, dated December 21, 2000, to purchase from Discover Bank the
respective principal amounts of certificates set forth opposite their names
below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF CLASS A OF CLASS B
UNDERWRITERS CERTIFICATES CERTIFICATES
------------ ---------------- ----------------
<S> <C> <C>
Morgan Stanley & Co. Incorporated........................... $1,162,500,000 $ 63,158,000
Banc of America Securities LLC.............................. $ 12,500,000
Barclays Capital Inc. ...................................... $ 12,500,000
Dresdner Kleinwort Benson North America LLC................. $ 12,500,000
-------------- --------------
Total............................................. $1,200,000,000 $ 63,158,000
============== ==============
</TABLE>
The underwriting agreement provides that the underwriters will only be
obligated to purchase the certificates if their legal counsel approves of
certain legal matters and if various other conditions are met. The underwriters
must purchase all of the certificates if they purchase any.
The underwriters and Discover Bank have agreed that the closing of the sale
of the certificates to the underwriters will occur eight business days after the
date of this prospectus supplement or on a later date if they mutually agree.
Each underwriter of the Class A Certificates has advised Discover Bank that
it proposes to offer the Class A Certificates:
- to the public, initially at the offering price and on the terms set forth
on the cover page of this prospectus supplement; and
- to certain dealers, at the initial public offering price less a
concession of up to 0.1800% of the aggregate principal amount of the
Class A Certificates.
The underwriters of the Class A Certificates may allow, and these dealers
may reallow, a concession of up to 0.0900% of the aggregate principal amount of
the Class A Certificates to certain other dealers.
The underwriter of the Class B Certificates has advised Discover Bank that
it proposes to offer the Class B Certificates:
- to the public, initially at the offering price and on the terms set forth
on the cover page of this prospectus supplement; and
- to certain dealers, at the initial public offering price less a
concession of up to 0.1950% of the aggregate principal amount of the
Class B Certificates.
The underwriter of the Class B Certificates may allow, and these dealers
may reallow, a concession of up to .0975% of the aggregate principal amount of
the Class B Certificates to certain other dealers.
After the initial offering of the certificates to the public, the
underwriters may vary the offering price and other selling terms of the
certificates.
There currently is no secondary market for the certificates. Although
Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Barclays
Capital Inc. and Dresdner Kleinwort Benson North America LLC intend to make a
market in the certificates, Discover Bank cannot assure you that a secondary
market will develop or, if a secondary market does develop, that it will
continue until the termination of this series.
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<PAGE> 55
Each underwriter has represented and agreed that:
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 and the Public Offers of Securities
Regulations 1995 with respect to anything done by it in relation to the
certificates in, from or otherwise involving the United Kingdom;
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue
of the certificates to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or who is a person to whom the document may
otherwise lawfully be issued or passed on;
- if it is an authorized person under Chapter III of Part I of the
Financial Services Act 1986, it has only promoted and will only promote
(as that term is defined in Regulation 1.02 of the Financial Services
(Promotion of Unregulated Schemes) Regulations 1991) to any person in the
United Kingdom the scheme described in this prospectus supplement if that
person is of a kind described either in Section 76(2) of the Financial
Services Act 1986 or in Regulation 1.04 of the Financial Services
(Promotion of Unregulated Schemes) Regulations 1991; and
- it is a person of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996.
Morgan Stanley & Co. Incorporated is an affiliate of Discover Bank.
Alexander C. Frank is a director of Discover Bank, an officer of Morgan Stanley
& Co. Incorporated and an officer of Morgan Stanley Dean Witter & Co., parent of
both Morgan Stanley & Co. Incorporated and Discover Bank.
Discover Bank's proceeds, as set out on the cover of this prospectus
supplement, will be reduced by the amount of its expenses to issue the
certificates, which it estimates at $925,000.
Discover Bank has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
To facilitate the offering of the certificates, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the price of the
certificates, including the following:
- the underwriters may overallot in connection with any offering of
certificates, creating a short position in the certificates for their own
accounts;
- the underwriters may bid for, and purchase, the certificates in the open
market to cover overallotments or to stabilize the price of the
certificates; and
- in any offering of the certificates through a syndicate of underwriters,
the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the certificates in the offering
if the syndicate repurchases previously distributed certificates in
transactions to cover syndicate short positions, in stabilization
transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
certificates above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
LEGAL MATTERS
Latham & Watkins will give opinions on the legality of the certificates,
the tax consequences of issuance of the certificates and certain creditors'
rights matters for Discover Bank. Young Conaway Stargatt & Taylor, LLP will also
give opinions on certain creditors' rights matters for Discover Bank.
Cadwalader, Wickersham & Taft will also give opinions on the legality of
the certificates for the underwriters.
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GLOSSARY OF TERMS
The certificates will be issued pursuant to the Pooling and Servicing
Agreement and the Series Supplement. The following glossary of terms is not
complete. You should also refer to the prospectus, the Pooling and Servicing
Agreement and the Series Supplement for additional definitions. If you send a
written request to the trustee at its corporate trust office, the trustee will
provide to you without charge a copy of the Pooling and Servicing Agreement,
without exhibits and schedules, and the Series Supplement, without exhibits.
Unless the context requires otherwise, the definitions contained in this
glossary of terms apply only to this series of certificates and will not
necessarily apply to any other series of certificates the trust may issue. For
terms that apply to both Class A and Class B, we have only included a single
definition; for example, we define "Class Additional Funds" instead of both
"Class A Additional Funds" and "Class B Additional Funds."
"ACCOUNT" will mean:
- a Discover Card account established pursuant to a credit agreement
between Discover Bank and any person, receivables under which are
transferred to the trust by Discover Bank pursuant to either the Pooling
and Servicing Agreement or an Assignment of Additional Accounts;
- a Discover Card account established pursuant to a credit agreement
between an Additional Seller and any person, receivables under which are
transferred to the trust by the Additional Seller pursuant to an
Assignment of Additional Accounts; and
- a credit account that is not a Discover Card account, established
pursuant to a credit agreement between Discover Bank or an Additional
Seller and any person, receivables under which are transferred to the
trust by Discover Bank or the Additional Seller pursuant to an Assignment
of Additional Accounts.
No Account will be a Charged-Off Account as of the date the Account is selected
to be added to the trust. The definition of an Account will include the
surviving credit account of a combination of credit accounts if:
- an Account or another credit account is combined with an Account pursuant
to the credit guidelines for the Account; and
- the surviving credit account was an Account before the accounts were
combined.
The term "Account" will be deemed to refer to an additional Account only from
and after the addition date for that additional Account. The definition of
Account will not include any Account removed from the trust after it has been
reassigned to the holder of the Seller Certificate.
"ACCUMULATION PERIOD" will mean the period beginning on January 1, 2007 and
ending on the earlier to occur of:
- February 15, 2008, or the next business day, and
- the date on which an Amortization Period begins,
unless Discover Bank elects to delay the start of the Accumulation Period. The
first distribution date of the Accumulation Period is scheduled to be February
15, 2007, or the next business day.
"ADDITIONAL CREDIT SUPPORT AMOUNT" will mean the amount by which the
Available Class B Credit Enhancement Amount will be increased as the result of
an Effective Alternative Credit Support Election, which amount will equal the
lesser of:
- $63,157,900, before a Supplemental Credit Enhancement Event occurs;
- $56,842,110, after a Supplemental Credit Enhancement Event occurs; and
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- the difference between the Maximum Class B Credit Enhancement Amount,
after giving effect to the Alternative Credit Support Election, and the
Available Class B Credit Enhancement Amount, immediately before giving
effect to the Alternative Credit Support Election.
"ADDITIONAL FUNDS" will mean additional funds that the master servicer
elects to add to the trust. The initial amount of Additional Funds will be zero.
"ADDITIONAL SELLER" will mean an affiliate of Discover Bank that is
included in the same "affiliated group" as Discover Bank for United States
federal income tax purposes and that transfers Receivables in additional
Accounts to the trust.
"AGGREGATE INVESTED AMOUNT" will mean at any time the sum of the series
invested amounts of all series of certificates then issued and outstanding.
"AGGREGATE INVESTOR INTEREST" will mean at any time the sum of the series
investor interests of all series of certificates then issued and outstanding.
"AGGREGATE INVESTOR PERCENTAGE" will mean at any time the sum of the
allocation percentages for all series of certificates then issued and
outstanding.
"ALTERNATIVE CREDIT SUPPORT ELECTION" will mean an election made by
Discover Bank to change the way Finance Charge Collections are allocated to this
series during the Amortization Period. The election will become effective after
- Discover Bank has notified the Rating Agencies, the trustee and the
Credit Enhancement Provider of its election,
- Discover Bank has arranged for payment of the Additional Credit Support
Amount to the trustee as administrator of the credit enhancement, and
- upon satisfaction of certain other requirements.
"AMORTIZATION EVENT" will mean an event that may adversely affect the trust
and your investment in the certificates, and that may cause the trust to begin
to repay the certificates. We describe these events in more detail in "The
Certificates -- Amortization Events."
"AMORTIZATION PERIOD" will mean the period beginning when an Amortization
Event occurs and continuing until the trust has fully paid the principal of this
series or until the Series Termination Date. The first distribution date of the
Amortization Period will be the distribution date in the calendar month
following the date on which the Amortization Event occurred.
"ASSIGNMENT OF ADDITIONAL ACCOUNTS" will mean an assignment entered into
between Discover Bank, the trustee, and if applicable an Additional Seller,
pursuant to which additional accounts are designated as Accounts for the trust.
"AVAILABLE CLASS B CREDIT ENHANCEMENT AMOUNT" will mean, with respect to
the first distribution date, $94,736,850, and, after the first distribution
date, the amount available to be drawn under the credit enhancement for the
benefit of the Class B investors from time to time, which on any date of
determination will be equal to
- the Available Class B Credit Enhancement Amount for the immediately
preceding distribution date, minus
- the amount of all credit enhancement drawings with respect to the
Available Class B Credit Enhancement Amount on or since that immediately
preceding distribution date, plus
- the amount of all payments made to the trustee as administrator of the
credit enhancement with respect to the Available Class B Credit
Enhancement Amount pursuant to the Series Supplement, plus
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- following an Effective Alternative Credit Support Election, the
Additional Credit Support Amount, plus
- following a Supplemental Credit Enhancement Event, the Supplemental
Credit Enhancement Amount.
"AVAILABLE SUBORDINATED AMOUNT" will mean, on a distribution date, the sum
of:
- with respect to the first distribution date, $157,894,750, or with
respect to any other distribution date, the Available Subordinated Amount
after giving effect to all adjustments on the prior distribution date;
and
- the amount of Series Finance Charge Collections, Series Yield
Collections, Series Additional Funds and Series Investment Income, as
this amount may be:
- reduced pursuant to the provisions of the Series Supplement to take
into account:
- the amount of these funds used to deposit interest and servicing
fees and to reimburse the Class A charge-offs;
- the amount of the Class B Principal Collections used to deposit
Class A interest and servicing fees and to reimburse Class A
charge-offs; and
- the amount of any reduction in the Class B Investor Interest
resulting from reimbursement of the Class A charge-offs,
in each case on that distribution date; and
- increased pursuant to the provisions of the Series Supplement to take
into account the application of amounts on deposit in the Group One
Finance Charge Collections Reallocation Account:
- to deposit Class B interest and servicing fees;
- to reimburse Class B charge-offs; and
- to increase the Available Class B Credit Enhancement Amount,
in each case for that distribution date.
If a Supplemental Credit Enhancement Event occurs before Discover Bank has made
an Effective Alternative Credit Support Election, the Available Subordinated
Amount will be increased by $6,315,790. If a Supplemental Credit Enhancement
Event occurs after Discover Bank has made an Effective Alternative Credit
Support Election, the event will have no impact on the Available Subordinated
Amount. In addition, on the first distribution date after an Effective
Alternative Credit Support Election, the Available Subordinated Amount will be
increased by (a) $63,157,900 if a Supplemental Credit Enhancement Event has not
occurred, or (b) $56,842,110 if a Supplemental Credit Enhancement Event has
occurred. In no event, however, will the Available Subordinated Amount exceed:
- through the last distribution date before an Effective Alternative Credit
Support Election, $157,894,750, if a Supplemental Credit Enhancement
Event has not occurred;
- through the last distribution date before an Effective Alternative Credit
Support Election, $164,210,540 if a Supplemental Credit Enhancement Event
has occurred; and
- after the distribution date immediately after an Effective Alternative
Credit Support Election, $221,052,650.
"CEBA" will mean the Competitive Equality Banking Act of 1987.
"CHARGED-OFF ACCOUNT" will mean each Account with respect to which the
servicer has charged off the Receivables in the Account as uncollectible.
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"CHARGED-OFF AMOUNT" will mean, for any distribution date or Trust
Distribution Date, the total amount of Receivables in Accounts that became
Charged-Off Accounts in the previous calendar month minus:
- the cumulative, uncollected amount previously billed by the servicers to
Accounts that became Charged-Off Accounts during the prior calendar month
with respect to finance charges, cash advance fees, annual membership
fees, if any, fees for transactions that exceed the credit limit on the
Account, late payment charges, and any other type of charges that the
servicer has designated as "Finance Charge Receivables" for Accounts that
are not Charged-Off Accounts, and
- the full amount of any Receivables in these Charged-Off Accounts that
Discover Bank repurchased.
"CLASS ADDITIONAL FUNDS," if applicable, will mean, for any distribution
date, an amount equal to:
- the Class Investor Interest, divided by
- the Series Investor Interest, multiplied by
- the amount of Series Additional Funds, in each case for that distribution
date.
"CLASS FINANCE CHARGE COLLECTIONS" will mean, with respect to any day or
any distribution date or Trust Distribution Date, as applicable, an amount equal
to the product of:
- the Class Percentage with respect to Finance Charge Collections for the
related distribution date; and
- the amount of Finance Charge Collections for such day or for the prior
calendar month, as applicable;
provided, however, that Class Finance Charge Collections for each class will be
increased by the lesser of:
- the amount of Class Investment Shortfall for that class; and
- an amount equal to the product of the total amount of Finance Charge
Collections otherwise allocable to Discover Bank for the prior calendar
month and a fraction the numerator of which is the Class Invested Amount
for that class and the denominator of which is the Aggregate Invested
Amount;
and provided, further, that notwithstanding the foregoing, Class Finance Charge
Collections for each class will not, with respect to any such day, distribution
date or Trust Distribution Date during the Accumulation Period, as applicable,
exceed the amount that would be available if the Class Percentage with respect
to Finance Charge Collections for that class were the percentage equivalent of a
fraction the numerator of which is the amount of the Class Investor Interest as
of the end of the last business day in the calendar month before the start of
the Accumulation Period, and the denominator of which is the greater of:
- the amount of Principal Receivables in the trust on the first day of the
prior calendar month; and
- the sum of the numerators used in calculating the components of the
Series Percentage with respect to Finance Charge Collections for each
series then outstanding, including this series, as of that day,
distribution date or Trust Distribution Date, as applicable.
"CLASS INVESTED AMOUNT" will mean, for any distribution date, an amount
equal to the initial principal amount of the certificates of a class minus the
sum of:
- the aggregate amount of principal paid to investors in that class before
that distribution date;
- the aggregate amount of investor losses of that class not reimbursed
before that distribution date; and
- the aggregate amount of losses of principal on investments of funds on
deposit for the benefit of that class in the Series Principal Funding
Account, if applicable.
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"CLASS INVESTMENT INCOME" will mean, with respect to any class, income from
the investment of funds on deposit in the Series Principal Funding Account for
the benefit of that class, up to the amount of interest on those funds the trust
is required to pay for that class.
"CLASS INVESTMENT SHORTFALL" will mean, with respect to each class with
respect to any distribution date during the Accumulation Period, an amount equal
to the positive difference, if any, between:
- one-twelfth of the product of:
- the interest rate for the class; and
- the amount on deposit in the Series Principal Funding Account for the
benefit of that class as of the end of the previous distribution date;
and
- Class Investment Income for the prior calendar month.
"CLASS INVESTOR INTEREST" will mean, on any distribution date, an amount
equal to the Class Invested Amount for the class, minus the aggregate amount on
deposit in the Series Principal Funding Account for the benefit of the class,
other than investment income.
"CLASS PERCENTAGE" will mean, with respect to any distribution date or any
Trust Distribution Date, as applicable:
(i) when used with respect to the Charged-Off Amount, the percentage
equivalent of a fraction the numerator of which will be the amount of
the Class Investor Interest on the first day of the prior calendar
month and the denominator of which will be the greater of:
- the amount of Principal Receivables in the trust; and
- the Aggregate Investor Interest,
in each case on the first day of the prior calendar month; or
(ii) when used with respect to Principal Collections before a Fixed
Principal Allocation Event has occurred, the percentage equivalent of
a fraction the numerator of which will be the amount of the Class
Investor Interest on the first day of the prior calendar month and the
denominator of which will be the greater of:
- the amount of Principal Receivables in the trust on the first day of
the prior calendar month; and
- the sum of the numerators used in calculating the components of the
Series Percentage with respect to Principal Collections for each
series then outstanding as of such distribution date or Trust
Distribution Date, as applicable; or
(iii) when used with respect to Principal Collections on and after the date
a Fixed Principal Allocation Event has occurred, the percentage
equivalent of a fraction, the numerator of which will be the amount
of the Class Investor Interest on the last day of the calendar month
before the Fixed Principal Allocation Event occurred, and the
denominator of which will be the greater of:
- the amount of Principal Receivables in the trust on the first day of
the calendar month preceding the distribution date, and
- the sum of the numerators used in calculating the components of the
Series Percentage with respect to Principal Collections for each
series then outstanding as of such distribution date or Trust
Distribution Date, as applicable; or
(iv) when used with respect to Finance Charge Collections during the
Revolving Period, the Accumulation Period and, provided that an
Effective Alternative Credit Support Election has been made, the
Amortization Period, the percentage equivalent of a fraction the
numerator of
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which will be the amount of the Class Investor Interest on the first
day of the prior calendar month and the denominator of which will be
the greater of:
- the amount of Principal Receivables in the trust on the first day of
the prior calendar month; and
- the sum of the numerators used in calculating the components of the
Series Percentage with respect to Finance Charge Collections for each
series then outstanding as of such distribution date or Trust
Distribution Date, as applicable; or
(v) when used with respect to Finance Charge Collections during the
Amortization Period, provided that an Effective Alternative Credit
Support Election has not been made, the percentage equivalent of a
fraction the numerator of which will be the amount of the Class
Investor Interest on the last day of the calendar month before the
Amortization Event occurred, and the denominator of which will be the
greater of:
- the amount of Principal Receivables in the trust on the first day of
the calendar month preceding the distribution date; and
- the sum of the numerators used in calculating the components of the
Series Percentage with respect to Finance Charge Collections for each
series then outstanding as of such distribution date or Trust
Distribution Date, as applicable.
"CLASS PRINCIPAL COLLECTIONS" will mean, with respect to any day or any
distribution date or Trust Distribution Date, as applicable, an amount equal to
the product of:
- the Class Percentage with respect to Principal Collections for the
related distribution date; and
- the amount of Principal Collections for that day or for the prior
calendar month, as applicable.
"CLASS YIELD COLLECTIONS" will mean, with respect to any day or any
distribution date, as applicable, an amount equal to the product of the Class
Yield Percentage and the amount of Series Yield Collections for that day or for
the prior calendar month, as applicable.
"CLASS YIELD PERCENTAGE" will mean, on any distribution date:
- during the Revolving Period, the Accumulation Period and, if an Effective
Alternative Credit Support Election has been made, the Amortization
Period, the Class Investor Interest divided by the Series Investor
Interest, in each case as of the first day of the prior calendar month;
or
- if an Effective Alternative Credit Support Election has not been made,
during the Amortization Period, the amount of the Class Investor Interest
on the last day of the calendar month before the Amortization Event
occurred divided by the Series Investor Interest on the last day of the
calendar month before the Amortization Event occurred.
"COLLECTIONS ACCOUNT" will mean the non-interest bearing segregated trust
account established and maintained by the trustee with an office or branch of
the trustee or a Qualified Institution for the benefit of the investors in the
trust.
"CREDIT ENHANCEMENT ACCOUNT" will mean the non-interest bearing segregated
trust account established and maintained by the trustee with an office or branch
of the trustee or a Qualified Institution with respect to the credit
enhancement.
"CREDIT ENHANCEMENT AGREEMENT" will mean the agreement among the sellers,
the master servicer, the trustee and a Credit Enhancement Provider with respect
to the credit enhancement.
"CREDIT ENHANCEMENT FEE" will mean on any distribution date, the sum of all
fees and interest payable to the Credit Enhancement Provider or the trustee as
administrator of the Credit Enhancement Account for the prior calendar month
pursuant to the Credit Enhancement Agreement.
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"CREDIT ENHANCEMENT PROVIDER" will mean, collectively, the one or more
lenders that will make a loan to provide the initial funds on deposit in the
Credit Enhancement Account.
"DFS" will mean Discover Financial Services, Inc.
"EFFECTIVE ALTERNATIVE CREDIT SUPPORT ELECTION" will mean an Alternative
Credit Support Election that has become effective in accordance with the Series
Supplement.
"ELIGIBLE RECEIVABLE" will mean each Receivable:
- which is payable in United States dollars;
- which was created in compliance, in all material respects, with all
requirements of law applicable to the seller and the servicer with
respect to that Receivable, and pursuant to a credit agreement that
complies, in all material respects, with all requirements of law
applicable to that seller and servicer;
- as to which, if the Receivable was created before October 27, 1993, or
the relevant addition date if the Account was added to the trust after
October 27, 1993,
- at the time the Receivable was created, the seller of the Receivable
had good and marketable title to the Receivable free and clear of all
liens arising under or through the seller, and
- at the time the Seller conveyed the Receivable to the trust, the
seller had, or the trust will have, good and marketable title to the
Receivable free and clear of all liens arising under or through the
seller;
- as to which, if the Receivable was created on or after October 27, 1993
or the relevant addition date if the Account was added to the trust after
October 27, 1993, at the time the Receivable was created, the trust will
have good and marketable title to the Receivable free and clear of all
liens arising under or through the seller with respect to the Receivable;
and
- which constitutes an "account" or "general intangible" under and as
defined in Article 9 of the UCC as then in effect in the state in which
the chief executive office of the seller of that Receivable is located.
"ESTIMATED INVESTMENT SHORTFALL" will mean, on any date of determination,
the positive difference between:
- the interest rate for the class for whose benefit the amounts on deposit
in the Series Principal Funding Account are held as of the date of
determination; and
- the weighted average yield, expressed as a Money Market Yield, on the
investments in the Series Principal Funding Account as of the date of
determination.
"ESTIMATED YIELD" will mean, on any date of determination, the Portfolio
Yield for the immediately preceding calendar month, less 2.00%.
"FINANCE CHARGE COLLECTIONS" for any calendar month will mean the sum of:
(a) the lesser of:
- the aggregate amount of Finance Charge Receivables for the preceding
calendar month and
- collections actually received in the applicable calendar month; and
(b) all amounts received during the calendar month with respect to
Receivables in the trust that have previously been charged-off as uncollectible,
including all proceeds from sales of those receivables by the trust to third
parties pursuant to the Pooling and Servicing Agreement.
"FINANCE CHARGE RECEIVABLES" will mean, for any Account for any calendar
month,
- the net amount billed by the servicer during that month as periodic
finance charges on the Account and cash advance fees, annual membership
fees, if any, fees for transactions that exceed the credit
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limit on the Account, late payment charges billed during that month to
the Account and any other charges that the servicer may designate as
"Finance Charge Receivables" from time to time, provided that the
servicer will not designate amounts owing for the payment of goods and
services or cash advances as "Finance Charge Receivables," minus
- if the Account becomes a Charged-Off Account during that month, the
cumulative, uncollected amount previously billed by the servicer to the
Account as periodic finance charges, cash advance fees, annual membership
fees, if any, fees for transactions that exceed the credit limit on the
Account, late payment charges and any other type of charges that the
servicer has designated as "Finance Charge Receivables" with respect to
Accounts that are not Charged-Off Accounts.
"FIXED PRINCIPAL ALLOCATION EVENT" will mean the earliest of:
- if the Series Available Principal Amount is less than zero on any
distribution date during the Accumulation Period, the first day of the
month in which that distribution date occurred;
- the date on which an Amortization Event occurs; and
- a date selected by the master servicer, if any.
If the master servicer establishes a date for a Fixed Principal Allocation
Event, the master servicer will provide notification of that date to Discover
Bank, the trustee, the Credit Enhancement Provider and the Rating Agencies no
later than two business days before that date.
"GROUP AVAILABLE PRINCIPAL AMOUNT" will mean, with respect to each
distribution date, the amount remaining on deposit in the Group One Principal
Collections Reallocation Account on that distribution date after all withdrawals
have been made from that account for the benefit of any series in Group One, but
before that amount is withdrawn from the Group One Principal Collections
Reallocation Account and deposited into the Collections Account pursuant to the
Series Supplement.
"GROUP EXCESS SPREAD" will mean, for any distribution date, the sum of the
Series Excess Spreads for each series that is a member of the same group as this
series, in each case for that distribution date.
"GROUP EXCESS SPREAD PERCENTAGE" will mean, for any distribution date:
- the Group Excess Spread, multiplied by twelve, divided by
- the sum of the series investor interests for all series in Group One as
of the first day of the prior calendar month.
"GROUP ONE COLLECTIONS ACCOUNT" will mean the non-interest bearing
segregated trust account for collections allocated to Group One established and
maintained by the trustee with an office or branch of the trustee or a Qualified
Institution for the benefit of the certificateholders in each series that is a
member of Group One.
"GROUP ONE FINANCE CHARGE COLLECTIONS REALLOCATION ACCOUNT" will mean the
non-interest bearing segregated trust account for reallocated Finance Charge
Collections and other income for Group One established and maintained by the
trustee with an office or branch of the trustee or a Qualified Institution for
the benefit of the certificateholders of each series that is a member of Group
One.
"GROUP ONE PRINCIPAL COLLECTIONS REALLOCATION ACCOUNT" will mean the
non-interest bearing segregated trust account for reallocated Principal
Collections for Group One established and maintained by the trustee with an
office or branch of the trustee or a Qualified Institution for the benefit of
the certificateholders of each series that is a member of Group One.
"GROUP PRINCIPAL ALLOCATION EVENT" will mean the first distribution date,
if any, on which:
- the sum of the amount of Series Principal Collections less the amount of
Series Yield Collections for each series that is a member of Group One
that is not in its amortization period or its early accumulation period,
if applicable, is less than
- the Group Required Principal Amount for that distribution date.
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"GROUP REQUIRED PRINCIPAL AMOUNT" will mean, with respect to Group One, for
any distribution date, the sum of the Series Required Principal Amounts for that
distribution date for each series that is a member of Group One that is in its
controlled liquidation period or accumulation period, as applicable.
"HIGHEST RATING" will mean, for purposes of the definition of Permitted
Investments, with respect to Moody's, P-1 or Aaa, and, with respect to Standard
& Poor's, A-1+ or AAA, or with respect to either Standard & Poor's or Moody's,
any rating category that will not cause the Rating Agency to reduce or withdraw
its rating on any class of any series then outstanding, as confirmed in writing
by the applicable Rating Agency.
"LIBOR" will mean, for any interest accrual period, the rate determined by
the trustee two business days before the beginning of the interest accrual
period as follows:
- If a rate for one-month deposits in United States dollars appears on
Telerate Page 3750 as of 11:00 a.m., London time, on that day, then LIBOR
will be the applicable rate that appears on that page.
- If no rate appears on Telerate Page 3750 as described above on that day,
the trustee will request the principal London office of four major banks
in the London interbank market to provide a quotation of the rate, at
approximately 11:00 a.m., London time, on that day, at which it would
offer one-month dollar deposits in U.S. dollars to prime banks in the
London interbank market.
- If at least two banks provide the requested quotations, then LIBOR will
be the arithmetic mean of the quotations.
- If fewer than two banks provide the requested quotations as described
above, the trustee will request four major banks in New York City to
provide a quotation of the rate, at approximately 11:00 a.m., New York
City time, on that day, at which it would offer one-month loans in U.S.
dollars to leading European banks, and LIBOR will be the arithmetic mean
of those quotations.
"MASTER SERVICER TERMINATION EVENT" will mean an event that will give
either the trustee or investors holding certificates representing at least 51%
of the class invested amount for any class of any series then outstanding that
is materially adversely affected by the event the right to:
- terminate the master servicer's rights and obligations under the Pooling
and Servicing Agreement and any series supplement then outstanding, and
- cause the trustee to appoint a successor master servicer.
These events include certain breaches of representations, warranties or
covenants, or certain events of insolvency with respect to the master servicer.
We describe these events in more detail in the prospectus under
"Servicing -- Master Servicer Termination Events."
"MAXIMUM CLASS B CREDIT ENHANCEMENT AMOUNT" will mean:
- on any distribution date before the master servicer makes an Effective
Alternative Credit Support Election, the greater of:
- $12,631,580;
- if a Supplemental Credit Enhancement Event has not occurred, an
amount equal to 7.5% of the Series Investor Interest as of the last
day of the prior calendar month; and
- if a Supplemental Credit Enhancement Event has occurred, an amount
equal to 8.0% of the Series Investor Interest as of the last day of
the prior calendar month; or
- on any distribution date after the master servicer has made an Effective
Alternative Credit Support Election, the greater of:
- $12,631,580; and
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- an amount equal to 12.5% of the Series Investor Interest as of the
last day of the prior calendar month;
provided, however, that if an Amortization Event occurs with respect to this
series, the Maximum Class B Credit Enhancement Amount for each distribution date
after the Amortization Event will equal the Maximum Class B Credit Enhancement
Amount for the distribution date immediately before the Amortization Event; and
provided, further, that if a credit enhancement drawing has been made, until
such time as the Available Class B Credit Enhancement Amount has been reinstated
in an amount at least equal to the amount of that credit enhancement drawing,
the Maximum Class B Credit Enhancement Amount will be the Maximum Class B Credit
Enhancement Amount as of the date of that credit enhancement drawing.
"MINIMUM PRINCIPAL RECEIVABLES BALANCE" will mean, on any date of
determination, an amount equal to the sum of the series minimum principal
receivables balances for each series then outstanding.
"MONEY MARKET YIELD" will mean a yield -- expressed as a percentage rounded
to the nearest one-hundredth of a percent, with five hundred one-thousandths of
a percent rounded upwards -- calculated in accordance with the following
formula:
<TABLE>
<S> <C> <C>
D x 360 x 100
Money Market Yield = -------------
360 - (D x M)
</TABLE>
where "D" refers to the per annum rate for commercial paper quoted on a bank
discount basis and expressed as a decimal and "M" refers to the actual number of
days in the related interest accrual period.
"PERMITTED INVESTMENTS" will mean:
(i) negotiable instruments or securities represented by instruments in
bearer or registered form which evidence:
(a) obligations issued or fully guaranteed, as to timely payment, by the
United States of America or any instrumentality or agency of the
United States of America, when those obligations are backed by the
full faith and credit of the United States of America;
(b) time deposits in, or bankers' acceptances issued by, any depository
institution or trust company:
- incorporated under the laws of the United States of America or any
state of the United States, or which is a domestic branch of a
foreign bank,
- subject to supervision and examination by federal or state banking
or depository institution authorities; and
- that has, at the time the trust invests or contractually commits to
invest in its time deposits or bankers' acceptances, the Highest
Rating on its short-term deposits or commercial paper or, if its
short-term deposits or commercial paper are unrated, the Highest
Rating on its long-term unsecured debt obligations;
(c) commercial paper or other short-term obligations having the Highest
Rating at the time the trust invests or contractually commits to
invest in that commercial paper or other short-term obligations; or
(d) investments in money market funds having the Highest Rating;
(ii) demand deposits in the name of the trust or the trustee in any
depository institution or trust company referred to in clause (i)(b)
above;
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(iii) shares of an open end diversified investment company that is
registered under the Investment Company Act of 1940, as amended, and
that:
(a) invests its assets exclusively in obligations of or guaranteed by
the United States of America or any instrumentality or agency of the
United States of America, having in each instance a final maturity
date of less than one year from their date of purchase, or other
Permitted Investments;
(b) seeks to maintain a constant net asset value per share; and
(c) has aggregate net assets of not less than $100,000,000 on the date
the trust purchases those shares.
These securities will not be represented by an instrument, will be
registered in the name of the trustee upon books maintained for that
purpose by or on behalf of the issuer of these securities and will be
identified on books maintained for that purpose by the trustee as held
for the benefit of the trust or the investors. The trust may only invest
in these securities if they will not result in a reduction or withdrawal
of the rating of any class of any series then outstanding, as confirmed
in writing by the Rating Agencies;
(iv) a guaranteed investment contract -- guaranteed as to timely
payment -- the terms of which meet the criteria of the Rating Agencies
and with an entity whose credit standards meet the criteria of the
Rating Agencies necessary to preserve the rating of each class of each
series then outstanding; and
(v) repurchase agreements transacted with either
(a) an entity subject to the United States federal bankruptcy code,
provided that:
(1) the term of the repurchase agreement is consistent with the
requirements set forth in Section 4.02(c) of the Pooling and
Servicing Agreement with regard to the maturity of Permitted
Investments or is due on demand,
(2) the trustee or a third party acting solely as agent for the
trustee has possession of the collateral,
(3) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the trustee, the trustee on behalf
of the trust has a perfected first priority security interest in
the collateral,
(4) the market value of the collateral is maintained at the requisite
collateral percentage of the obligation in accordance with the
standards of the Rating Agencies,
(5) the failure to maintain the requisite collateral level will
obligate the trustee to liquidate the collateral immediately,
(6) the securities subject to the repurchase agreement are
certificates of deposit, bankers acceptances or obligations of,
or fully guaranteed as to principal and interest by, the United
States of America or an agency of the United States of America,
(7) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the Trustee, the securities subject
to the repurchase agreement are free and clear of any third party
lien or claim; or
(b) a financial institution insured by the FDIC, or any broker-dealer
with "retail customers" that is under the jurisdiction of the
Securities Investors Protection Corp., or SIPC, provided that:
(1) the market value of the collateral is maintained at the requisite
collateral percentage of the obligation in accordance with the
standards of the Rating Agencies,
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(2) the trustee or a third party acting solely as agent for the
trustee has possession of the collateral,
(3) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the trustee, the trustee on behalf
of the trust has a perfected first priority security interest in
the collateral,
(4) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the trustee, the collateral is free
and clear of third party liens; and, in the case of an SIPC
broker, was not acquired pursuant to a repurchase or reverse
repurchase agreement and
(5) failure to maintain the requisite collateral percentage will
obligate the trustee to liquidate the collateral.
At the time the trust invests or contractually commits to invest in any
repurchase agreement, the entity or institution must have the Highest
Rating on its short-term deposits or commercial paper or, if its
short-term deposits or commercial paper are unrated, the Highest Rating
on its long-term unsecured debt obligations. Permitted Investments will
include, without limitation, securities of Discover Bank or any of its
affiliates which otherwise qualify as a Permitted Investment under
clause (i), (ii), (iii), (iv) or (v) above.
"POOLING AND SERVICING AGREEMENT" will mean the Pooling and Servicing
Agreement dated as of October 1, 1993, by and between Discover Bank, formerly
Greenwood Trust Company, as master servicer, servicer and seller, and U.S. Bank
National Association, formerly First Bank National Association, successor
trustee to Bank of America Illinois, formerly Continental Bank, National
Association, as trustee, as that agreement may be amended or supplemented from
time to time.
"PORTFOLIO YIELD" will mean, with respect to any calendar month, the
annualized percentage equivalent of a fraction, the numerator of which will be
the sum of:
- the amount of Finance Charge Collections received during that month;
- the amount of Series Yield Collections for each series then outstanding,
including this series, for that month; and
- the amount of Series Additional Funds for each series then outstanding,
including this series, for that month;
and the denominator of which will be the total amount of Principal Receivables
in the trust as of the first day of that month.
"PRINCIPAL COLLECTIONS" will mean, for any calendar month, all collections
other than Finance Charge Collections.
"PRINCIPAL RECEIVABLE" will mean each Receivable other than Finance Charge
Receivables.
"QUALIFIED INSTITUTION" will mean a depository institution organized under
the laws of the United States of America or any one of the states of the United
States of America that at all times has a short-term certificate of deposit
rating of A-1 or better by Standard & Poor's and P-1 or better by Moody's, and
whose deposits are insured by the FDIC.
"RATING AGENCY" will mean Moody's or Standard & Poor's, and "Rating
Agencies" will mean Moody's and Standard & Poor's.
"RECEIVABLE" will mean any amounts owing by the obligor under an Account
from time to time, including, without limitation, amounts owing for the payment
of goods and services, cash advances, finance charges and other charges, if any.
A Receivable will be deemed to have been created at the end of the day on the
date the servicer first records the transaction on the cardmember master file of
the accounts maintained by the servicer or on the servicer's behalf, without
regard to the effective date of recordation. A Receivable will not include any
amount owing under a Charged-Off Account or an Account the
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Receivables in which have been repurchased pursuant to the Pooling and Servicing
Agreement. Reference to a "receivable" will include any amount owing by an
Obligor under a Charged-Off Account or an Account in which the Receivables have
been repurchased pursuant to the Pooling and Servicing Agreement.
"REQUIRED DAILY DEPOSIT" will mean, for any servicer that is required
during any month to deposit collections into the Collections Account on a daily
basis pursuant to the Pooling and Servicing Agreement, amounts that will be
available to pay interest and principal, as applicable, under the cash flows for
this series, up to that servicer's proportionate share of the interest and
principal expected to be paid to investors in this series on the related
distribution date, as more fully specified in the Series Supplement.
"REVOLVING PERIOD" will mean the period from January 1, 2001 to, but not
including, the earliest to occur of:
- the beginning of the Accumulation Period; or
- the date an Amortization Event occurs.
"SELLER CERTIFICATE" will mean:
- if a seller elects to evidence its interest in the trust in certificated
form pursuant to the Pooling and Servicing Agreement, the certificate
executed by Discover Bank and authenticated by the trustee, or
- an uncertificated interest in the trust as evidenced by a recording in
the books and records of the trustee,
in each case representing a residual interest in the assets of the trust not
represented by the certificates of any series.
"SELLER CERTIFICATE OWNERSHIP AGREEMENT" will mean, if applicable, the
agreement entered into by Discover Bank, as seller, and any Additional Seller,
as that agreement may be amended or supplemented from time to time.
"SELLER INTEREST" will mean, for any Trust Distribution Date or
distribution date, the aggregate amount of Principal Receivables in the Trust at
the end of the previous calendar month minus the Aggregate Investor Interest at
the end of that day; provided, however, that the Seller Interest will not be
less than zero.
"SELLER PERCENTAGE" will mean, on any date of determination, for any
specified category, an amount equal to 100% minus the applicable Aggregate
Investor Percentage for that category.
"SERIES ADDITIONAL FUNDS" will mean this series' share of any Additional
Funds in the trust.
"SERIES AVAILABLE PRINCIPAL AMOUNT" will mean, for any distribution date,
if a Group Principal Allocation Event has occurred, for each series that is a
member of Group One that is in its controlled liquidation period or accumulation
period, as applicable, an amount calculated as follows: for each such series,
seriatim, beginning with the series with the largest Series Investor Interest
for that distribution date -- and if more than one series has the same Series
Investor Interest on that distribution date, beginning with whichever of those
series has the longest time remaining in its controlled liquidation period or
accumulation period, as applicable, assuming that no amortization event or early
accumulation event occurs with respect to that series -- an amount equal to:
- the Group Available Principal Amount; less
- the Series Required Principal Amount less the amount of such series'
scheduled principal payment or deposit, plus prior shortfalls, as
applicable, that was funded on that distribution date, including any
portion of that amount that was funded by amounts withdrawn from the
Group One Principal Collections Reallocation Account pursuant to the
Series Supplement for that series.
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For purposes of calculating the Series Available Principal Amount for each other
such series, the Group Available Principal Amount will be reduced by the Series
Available Principal Amount for the prior series for which the Series Available
Principal Amount was calculated.
"SERIES CLOSING DATE" will mean January 4, 2001.
"SERIES COLLECTIONS ACCOUNT" will mean the non-interest bearing segregated
trust account for collections allocated to this series, established and
maintained by the trustee with an office or branch of the trustee or a Qualified
Institution for the benefit of the investors in this series.
"SERIES DISTRIBUTION ACCOUNT" will mean a non-interest bearing segregated
trust account established and maintained by the trustee with an office or branch
of the trustee or a Qualified Institution for the benefit of the investors of
this series.
"SERIES EXCESS SPREAD" will mean, for any distribution date, an amount
equal to:
- the sum of Series Finance Charge Collections, Series Yield Collections,
Series Additional Funds and any Class Investment Income for any class of
this series; minus
- the sum of:
- the monthly interest for each class of this series;
- the monthly servicing fee for each class of this series;
- the product of the Series Percentage with respect to the Charged-Off
Amount and the Charged-Off Amount; and
- the Credit Enhancement Fee,
in each case for the distribution date.
"SERIES EXCESS SPREAD PERCENTAGE" will mean, for any distribution date:
- the Series Excess Spread, multiplied by twelve, divided by
- the Series Investor Interest as of the first day of the prior calendar
month.
"SERIES FINANCE CHARGE COLLECTIONS" will mean the sum of the amount of
Class Finance Charge Collections for each class for any day or, with respect to
any distribution date or Trust Distribution Date, for the prior calendar month.
"SERIES INTEREST FUNDING ACCOUNT" will mean the non-interest bearing
segregated trust account for interest to be paid to the investors in this
series, established and maintained by the trustee with an office or branch of
the trustee or a Qualified Institution for the benefit of the investors in this
series.
"SERIES INVESTED AMOUNT" will mean, with respect to any distribution date,
the sum of the Class A Invested Amount and the Class B Invested Amount on that
distribution date.
"SERIES INVESTMENT INCOME" will mean the Class A Investment Income plus the
Class B Investment Income.
"SERIES INVESTOR INTEREST" will mean, with respect to any distribution
date, the sum of the Class A Investor Interest and the Class B Investor Interest
on that distribution date. On the Series Closing Date, the Series Investor
Interest will be $1,263,158,000.
"SERIES MINIMUM PRINCIPAL RECEIVABLES BALANCE" will mean, on any date of
determination, the sum of:
- if a Fixed Principal Allocation Event has not occurred, the Series
Investor Interest on such date of determination, divided by 0.93; or
- if a Fixed Principal Allocation Event has occurred, the Series Investor
Interest as of the date of the Fixed Principal Allocation Event, divided
by 0.93; and
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- the product of:
- the sum of (1) the amount on deposit in the Series Principal Funding
Account on the date of determination and (2) for any date of
determination during the Accumulation Period, the scheduled principal
deposit, and any shortfalls from prior months, for the next
distribution date; and
- a fraction the numerator of which is the Estimated Investment
Shortfall and the denominator of which is the Estimated Yield, in each
case on such date of determination, divided by 0.93;
provided, however, that Discover Bank may, upon 30 days' prior notice to the
trustee, the Rating Agencies and the Credit Enhancement Provider, reduce the
Series Minimum Principal Receivables Balance by increasing the divisor set forth
above -- 0.93 -- subject to the condition that Discover Bank shall have been
notified by the Rating Agencies that the Rating Agencies would not lower or
withdraw their ratings on any class of any series then outstanding because of
the reduction, and provided, further, that Discover Bank may not increase the
divisor set forth above to more than 0.98.
"SERIES PERCENTAGE" will mean, with respect to any specified category
described in clauses (i)-(v) of the definition of "Class Percentage," with
respect to any distribution date or Trust Distribution Date, as applicable, the
sum of the Class A Percentage and the Class B Percentage with respect to that
category on that distribution date or Trust Distribution Date, as applicable.
"SERIES PRINCIPAL COLLECTIONS" will mean the sum of the amount of Class
Principal Collections for each class for any day or, with respect to any
distribution date or Trust Distribution Date, for the prior calendar month.
"SERIES PRINCIPAL COLLECTIONS ACCOUNT" will mean a non-interest bearing
segregated trust account for this series established and maintained by the
trustee with an office or branch of the trustee or a Qualified Institution for
the benefit of the investors in this series.
"SERIES PRINCIPAL FUNDING ACCOUNT" will mean the non-interest bearing
segregated trust account for principal to be paid to the investors in this
series, established and maintained by the trustee with an office or branch of
the trustee or a Qualified Institution for the benefit of the investors in this
series.
"SERIES REQUIRED PRINCIPAL AMOUNT" will mean, with respect to each
distribution date, with respect to each series that is a member of Group One
that is in its controlled liquidation period or accumulation period, as
applicable:
- if the distribution date is not in March, 125%; or
- if the distribution date is in March, 105%,
of the scheduled principal payment or deposit, plus prior shortfalls, as
applicable, for the series for that distribution date.
"SERIES SUPPLEMENT" will mean the Series 2001-1 Supplement to the Pooling
and Servicing Agreement, dated as of January 4, 2001 between Discover Bank and
the trustee, that establishes each series of certificates.
"SERIES TERMINATION DATE" will mean the first business day following July
15, 2010 or, if July 15, 2010 is not a business day, the second business day
following July 15, 2010.
"SERIES YIELD COLLECTIONS" will mean those Series Principal Collections
that the master servicer has elected to recharacterize as Finance Charge
Collections, and will be an amount equal to the product of the Series Yield
Factor and the amount of Series Principal Collections for any day or, with
respect to any distribution date, for the prior calendar month.
"SERIES YIELD FACTOR" will initially be zero, but may be increased by the
master servicer pursuant to the terms of the Series Supplement for this series.
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"SERVICER TERMINATION EVENT" will mean an event that will give either the
trustee or investors holding certificates representing at least 51% of the class
invested amount for any class of any series then outstanding that is materially
adversely affected by the event the right to:
- terminate the servicer's rights and obligations under the Pooling and
Servicing Agreement and any series supplement then outstanding, and
- cause the trustee to appoint a successor servicer.
These events include certain breaches of representations, warranties or
covenants, or certain events of insolvency with respect to the servicer. We
describe these events in more detail in the prospectus under
"Servicing -- Servicer Termination Events."
"SUPPLEMENTAL CREDIT ENHANCEMENT AMOUNT" will mean the lesser of:
- $6,315,790 before an Effective Alternative Credit Support Election; or
- zero after an Effective Alternative Credit Support Election; and
- the difference between the Maximum Class B Credit Enhancement Amount,
after giving effect to the occurrence of a Supplemental Credit
Enhancement Event, and the Available Class B Credit Enhancement Amount,
immediately before giving effect to the occurrence of a Supplemental
Credit Enhancement Event.
"SUPPLEMENTAL CREDIT ENHANCEMENT EVENT" will occur the first time the
long-term debt or deposit rating of Discover Bank or any Additional Seller is
withdrawn or reduced below BBB- by Standard & Poor's.
"SUPPLEMENTAL SUBORDINATED AMOUNT" will mean:
- $6,315,790 before an Effective Alternative Credit Support Election; or
- zero after an Effective Alternative Credit Support Election.
"TELERATE PAGE 3750" will mean the display page so designated on Bridge
Telerate Inc., or any other page that may replace that page on that service or a
successor service for the purpose of displaying comparable rates or prices.
"TRUST DISTRIBUTION DATE" will mean November 10, 1993 and the tenth day of
each calendar month thereafter, or, if that tenth day is not a business day, the
next succeeding business day.
"YIELD COLLECTIONS" will mean the sum of the series yield collections for
each series in the trust.
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ANNEX A
CASH FLOWS
We have summarized the cash flow provisions for this series and we have
used familiar terms in this summary instead of the more complex defined terms
that the Series Supplement uses. You should review the complete cash flows in
the form of Series Supplement that we filed with the registration statement for
these securities. References to interest, servicing fees and charged-off amounts
can include amounts that the trust did not fully pay, deposit or reimburse in
prior months, and are therefore carried forward. Although the cash flows account
for subordinate series, no subordinate series are currently outstanding.
FUNDS DISTRIBUTED TO THIS SERIES. On or before each distribution date,
Discover Bank as master servicer will direct the trustee to deposit into the
Series Collections Account an amount equal to:
- Series Finance Charge Collections for the preceding month; and
- Series Principal Collections for the preceding month.
The trustee will also deposit into the Series Collections Account:
- Class A Additional Funds, if any; and
- Class B Additional Funds, if any.
The trustee will deposit funds into and distribute funds from the Series
Collections Account as described below.
DISTRIBUTION AND APPLICATION OF FUNDS. On or before each distribution
date, the master servicer will direct the trustee to allocate funds in the order
set forth below, to the extent funds are available:
(1) INTEREST DEPOSIT. If the trust has earned interest on the Series
Principal Funding Account in the prior month, the trustee will deposit the
investors' share of this interest into the Series Collections Account.
(2) CLASS A INTEREST AND SERVICING FEES. The trust will use
- Class A Finance Charge Collections and
- other Class A income, if any, including Class A Additional Funds,
interest on the Series Principal Funding Account and Class A Yield
Collections
to deposit Class A interest and servicing fees. (To the Series Distribution
Account.)
(3) CLASS A INTEREST AND SERVICING FEES. If the trust cannot deposit Class
A interest and servicing fees in full in step (2), it will also use
- funds available from a subordinate series, if any, to pay the
shortfall
to deposit Class A interest and servicing fees. (To the Series Distribution
Account.)
(4) CLASS A CHARGE-OFFS. The trust will use
- Class A Finance Charge Collections remaining after step (2), and
- other Class A income, if any, remaining after step (2)
to reimburse Class A charge-offs. (To the Series Principal Collections
Account.)
(5) CLASS A CHARGE-OFFS. If the trust cannot reimburse Class A charge-offs
in full in step (4), it also will use
- funds available to reimburse the shortfall from a subordinate series,
if any,
to reimburse Class A charge-offs. (To the Series Principal Collections
Account.)
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(6) CLASS A INTEREST AND SERVICING FEES. If the trust cannot deposit Class
A interest and servicing fees in full in steps (2) and (3), it will also
use
- Class B Finance Charge Collections,
- other Class B income, including Class B Additional Funds and Class B
Yield Collections, if any, and
- Class B Principal Collections
to deposit Class A interest and servicing fees. In this step, the trust
will only use Class B Finance Charge Collections and other Class B income
up to the amount of monthly Class B interest and servicing fees, and the
trust will only use these Class B amounts, including Class B Principal
Collections, up to the Available Subordinated Amount. The Available
Subordinated Amount will decline by the amount used in this step. (To the
Series Distribution Account.)
(7) CLASS A CHARGE-OFFS. If the trust cannot reimburse Class A charge-offs
in full in steps (4) and (5), it will also use
- Class B Finance Charge Collections remaining after step (6),
- other Class B income remaining after step (6), and
- Class B Principal Collections remaining after step (6)
to reimburse Class A charge-offs. In this step, the trust will only use
Class B Finance Charge Collections and other Class B income up to the
amount of monthly Class B interest and servicing fees minus the amount used
in step (6), and the trust will only use Class B amounts, including Class B
Principal Collections, up to the Available Subordinated Amount. The
Available Subordinated Amount will decline by the amount used in this step.
(To the Series Principal Collections Account.)
(8) CLASS B INTEREST AND SERVICING FEES. The trust will use
- Class B Finance Charge Collections remaining after steps (6) and (7),
and
- other Class B income remaining after steps (6) and (7)
to deposit Class B interest and servicing fees. In this step, the trust
will only use Class B Finance Charge Collections and other Class B income
up to the amount equal to:
- the Class B interest and servicing fees, minus
- the amount used in steps (6) and (7).
(To the Series Distribution Account.)
(9) CLASS B INTEREST AND SERVICING FEES. If the trust cannot deposit Class
B interest and servicing fees in full in step (8), it will also use
- funds remaining available after steps (3) and (5) to pay the shortfall
from a subordinate series, if any
to deposit Class B interest and servicing fees. (To the Series Distribution
Account.)
(10) CLASS B CHARGE-OFFS. The trust will use
- funds remaining available to reimburse charge-offs after steps (3),
(5) and (9) from a subordinate series, if any,
to reimburse Class B charge-offs. (To the Series Principal Collections
Account.)
(11) CLASS A INTEREST AND SERVICING FEES. If the trust cannot deposit
Class A interest and servicing fees in full in steps (2), (3), and (6), it
will also use
- Class B Finance Charge Collections remaining after step (8), and
- other Class B income remaining after step (8)
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to deposit Class A interest and servicing fees. The trust will only use
these Class B amounts up to the Available Subordinated Amount; the
Available Subordinated Amount will decline by the amount used in this step.
(To the Series Distribution Account.)
(12) CLASS A CHARGE-OFFS. If the trust cannot reimburse Class A
charge-offs in full in steps (4), (5) and (7), it will also use
- Class B Finance Charge Collections remaining after step (11), and
- other Class B income remaining after step (11)
to reimburse Class A charge-offs. The trust will only use these Class B
amounts up to the Available Subordinated Amount; the Available Subordinated
Amount will decline by the amount used in this step. (To the Series
Principal Collections Account.)
(13) CLASS A CHARGE-OFFS. If the trust cannot reimburse Class A
charge-offs in full in steps (4), (5), (7) and (12), it will reallocate
- the Class B Investor Interest
to reimburse Class A charge-offs. The trust will only reallocate the Class
B Investor Interest up to the Available Subordinated Amount; the Available
Subordinated Amount will decline by the amount used in this step. (To the
Series Principal Collections Account.)
(14) CLASS B INTEREST AND SERVICING FEES. If the trust cannot deposit
Class B interest and servicing fees in full in steps (8) and (9), it will
also use
- Class A Finance Charge Collections remaining after step (4),
- other Class A income remaining after step (4),
- Class B Finance Charge collections remaining after step (12), and
- other Class B income remaining after step (12)
to deposit Class B interest and servicing fees. (To the Series Distribution
Account.)
(15) CLASS B CHARGE-OFFS. If the trust cannot reimburse Class B
charge-offs in full in step (10), it will also use
- Class A Finance Charge Collections remaining after step (14),
- other Class A income remaining after step (14),
- Class B Finance Charge Collections remaining after step (14), and
- other Class B income remaining after step (14)
to reimburse Class B charge-offs. (To the Series Principal Collections
Account.)
(16) CREDIT ENHANCEMENT. The trust will use
- Class A Finance Charge Collections remaining after step (15),
- other Class A income remaining after step (15),
- Class B Finance Charge Collections remaining after step (15), and
- other Class B income remaining after step (15)
to increase the Available Class B Credit Enhancement Amount to the Maximum
Class B Credit Enhancement Amount. The Available Subordinated Amount will
increase by the amount deposited in this step. (To the Credit Enhancement
Account.)
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(17) CLASS B INTEREST AND SERVICING FEES. If the trust cannot deposit
Class B interest and servicing fees in full in steps (8), (9) and (14), it
will also use
- the Available Class B Credit Enhancement Amount
to deposit Class B interest and servicing fees. (To the Series Distribution
Account.)
(18) CLASS B CHARGE-OFFS. If the trust cannot reimburse Class B
charge-offs in full in steps (10) and (15), it will also use
- the Available Class B Credit Enhancement Amount remaining after step
(17)
to reimburse Class B charge-offs. (To the Series Principal Collections
Account.)
(19) CREDIT ENHANCEMENT FEE. The trust will use
- Class A Finance Charge Collections remaining after step (16),
- other Class A income remaining after step (16),
- Class B Finance Charge Collections remaining after step (16), and
- other Class B income remaining after step (16)
to pay fees and interest to the Credit Enhancement Provider. (To the
trustee; to be applied in accordance with the Credit Enhancement
Agreement.)
(20) REALLOCATION TO OTHER SERIES. The trust will reallocate
- Class A Finance Charge Collections remaining after step (19),
- other Class A income remaining after step (19),
- Class B Finance Charge Collections remaining after step (19), and
- other Class B income remaining after step (19)
to pay or deposit interest and servicing fees and to reimburse charge-offs
for other series in Group One. (To the Group One Finance Charge Collections
Reallocation Account.)
(21) CLASS A INTEREST AND SERVICING FEES. If the trust cannot deposit
Class A interest and servicing fees in full in steps (2), (3), (6) and
(11), it will also use
- a pro rata share of funds from other series in the Group One Finance
Charge Collections Reallocation Account
to deposit Class A interest and servicing fees. (To the Series Distribution
Account.) The pro rata share equals:
- the amount of Class A interest and servicing fees not deposited after
step (11), divided by
- the amount of Class A interest and servicing fees not deposited for
all series in Group One after step (11) of the cash flows for each
series, or an equivalent step.
(22) CLASS A CHARGE-OFFS. If the trust cannot reimburse Class A charge-offs
in full in steps (4), (5), (7), (12) and (13), it will also use
- a pro rata share of funds from other series remaining in the Group One
Finance Charge Collections Reallocation Account after step (21) for
each series, or an equivalent step,
to reimburse Class A charge-offs. (To the Series Principal Collections
Account.) The pro rata share equals:
- the amount of Class A charge-offs unreimbursed after step (13),
divided by
- the amount of Class A charge-offs unreimbursed for all series in Group
One after step (13) of the cash flows for each series, or an
equivalent step.
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(23) CLASS B INTEREST AND SERVICING FEES. If the trust cannot deposit
Class B interest and servicing fees in full in steps (8), (9), (14) and
(17), it will also use:
- a pro rata share of funds from other series remaining in the Group One
Finance Charge Collections Reallocation Account after step (22) of the
cash flows for each series, or an equivalent step,
to deposit Class B interest and servicing fees. (To the Series Distribution
Account.) The pro rata share equals:
- the amount of Class B interest and servicing fees not deposited after
step (17), divided by
- the amount of Class B interest and servicing fees not deposited for
all series in Group One after step (17) of the cash flows for each
series, or an equivalent step.
The Available Subordinated Amount will be increased by the amount deposited
in this step.
(24) CLASS B CHARGE-OFFS. If the trust cannot reimburse Class B
charge-offs in full in steps (10), (15), and (18), it will also use
- a pro rata share of funds from other series remaining in the Group One
Finance Charge Collections Reallocation Account after step (23) of the
cash flows for each series, or an equivalent step,
to reimburse Class B charge-offs. (To the Series Principal Collections
Account.) The pro rata share equals:
- the amount of Class B charge-offs unreimbursed after step (18),
divided by
- the amount of Class B charge-offs unreimbursed for all series in Group
One after step (18) of the cash flows for each series, or an
equivalent step.
The Available Subordinated Amount will be increased by the amount deposited
in this step.
(25) INTEREST, SERVICING FEES AND CHARGE-OFFS FOR OTHER SERIES. If the
trust cannot deposit the interest and servicing fees, or reimburse the
charge-offs, for junior classes -- such as Class C, if any -- of all other
series in Group One in accordance with earlier cash flows steps for those
series, the trust will use
- funds remaining in the Group One Finance Charge Collections
Reallocation Account after step (24) of the cash flows for each
series, or an equivalent step,
to deposit the interest and servicing fees, and reimburse the charge-offs,
for those junior classes in accordance with the cash flow provisions for
those series.
(26) CREDIT ENHANCEMENT FOR OTHER SERIES. If the available Class A credit
enhancement amount is less than the maximum Class A credit enhancement
amount, or the available shared credit enhancement amount is less than
maximum shared credit enhancement amount for any other series in Group One,
the trust will use funds remaining in the Group One Finance Charge
Collections Reallocation Account after step (25) of the cash flows for each
series, or an equivalent step, to increase the available Class A credit
enhancement amount or the available shared credit enhancement amount, as
applicable, to the maximum Class A credit enhancement or the maximum shared
credit enhancement amount, as applicable, for each such series.
(27) CREDIT ENHANCEMENT. If the Available Class B Credit Enhancement
Amount is less than the Maximum Class B Credit Enhancement Amount after
steps (16), (17) and (18), the trust will use
- a pro rata share of funds from other series remaining in the Group One
Finance Charge Collections Reallocation Account after step (26) of the
cash flows for each series, or an equivalent step,
S-69
<PAGE> 77
to increase the Available Class B Credit Enhancement Amount to the Maximum
Class B Credit Enhancement Amount. (To the Credit Enhancement Account.) The
pro rata share equals:
- the difference between the Maximum Class B Credit Enhancement Amount
and the Available Class B Credit Enhancement Amount after step (18),
divided by
- the sum of this difference for all series in Group One after step (18)
of the cash flows for each series, or an equivalent step.
The Available Subordinated Amount will increase by the amount deposited in
this step.
(28) PAYMENTS TO DISCOVER BANK AND THE CREDIT ENHANCEMENT PROVIDER. The
trust will use
- a pro rata share of funds from this series and other series remaining
in the Group One Finance Charge Collections Reallocation Account after
step (27) for each series, or an equivalent step,
to pay Discover Bank and the Credit Enhancement Provider in accordance with
the Credit Enhancement Agreement. (To the trustee; to be applied in
accordance with the Credit Enhancement Agreement.) The pro rata share
equals:
- the Series Investor Interest, divided by
- the series investor interests for all series in Group One.
(29) PRINCIPAL COLLECTIONS. The trustee will deposit
- funds remaining in the Series Collections Account after step (20)
into the Series Principal Collections Account. (To the Series Principal
Collections Account.)
(30) PRINCIPAL. The trust will use
- funds in the Series Principal Collections Account
to make the scheduled principal deposit during the Accumulation Period or,
in the Amortization Period, to pay the Series Investor Interest. (To the
Series Principal Funding Account.)
(31) PRINCIPAL. If the trust cannot make the scheduled principal deposit
during the Accumulation Period or, in the Amortization Period, pay the
Series Investor Interest in full in step (30), it will also use
- funds available to pay the shortfall from a subordinate series, if any
to make the scheduled principal deposit or pay the Series Investor
Interest. (To the Series Principal Funding Account.)
(32) REALLOCATION TO OTHER SERIES. The trust will reallocate
- funds remaining in the Series Principal Collections Account
to pay the scheduled principal payment or make the scheduled principal
deposit for other series in Group One. (To the Group One Principal
Collections Reallocation Account.)
(33) CLASS A PRINCIPAL. During the Accumulation Period only, if the trust
cannot make the scheduled principal deposit for Class A in full in steps
(30) and (31), it will also use
- a pro rata share of funds from other series in the Group One Principal
Collections Reallocation Account
to make the scheduled principal deposit for Class A. (To the Series
Principal Funding Account.) The pro rata share equals:
- the amount of the scheduled principal deposit for Class A that the
trust did not deposit in steps (30) and (31), divided by
S-70
<PAGE> 78
- the amount of the scheduled principal deposits or payments for Class A
of all series in Group One in their accumulation periods or controlled
liquidation periods, or in any period treated as an accumulation
period or controlled liquidation period for purposes of an equivalent
step of the cash flow provisions of the applicable other series, that
the trust did not pay or deposit in steps (30) and (31) of the cash
flows for each series in Group One, or equivalent steps.
(34) CLASS B PRINCIPAL. During the Accumulation Period only, if the trust
cannot make the scheduled principal deposit for Class B in full in steps
(30) and (31), it will also use
- a pro rata share of funds from other series remaining in the Group One
Principal Collections Reallocation Account after step (33) for each
series in Group One, or an equivalent step,
to make the scheduled principal deposit for Class B. (To the Series
Principal Funding Account.) The pro rata share equals
- the amount of the scheduled principal deposit for Class B that the
trust did not deposit in steps (30) and (31), divided by
- the amount of the scheduled principal deposits or payments for Class B
of all series in Group One in their accumulation periods or controlled
liquidation periods, or in any period treated as an accumulation
period or controlled liquidation period for purposes of an equivalent
step of the cash flow provisions of the applicable other series, that
the trust did not pay or deposit in steps (30) and (31) of the cash
flows for each series in Group One, or equivalent steps.
(35) PRINCIPAL FOR OTHER SERIES. If the trust cannot pay or deposit the
scheduled principal payment or deposit for junior classes -- such as Class
C, if any -- of all other series in Group One in their accumulation periods
or controlled liquidation periods in accordance with earlier cash flow
steps for those series, the trust will use
- funds remaining in the Group One Principal Collections Reallocation
Account after step (34), or an equivalent step,
to pay or deposit the scheduled principal payment or deposit for those
junior classes in accordance with the cash flow provisions for those
series.
(36) PRINCIPAL FOR OTHER SERIES. If the cash flow provisions for any other
series in Group One permit those series to use funds in the Group One
Principal Collections Reallocation Account to make unscheduled principal
payments or deposits, the trust will use funds remaining in the Group One
Principal Collections Reallocation Account after step (35), or an
equivalent step, to pay or deposit the unscheduled principal payment or
deposit for each of those series in accordance with the cash flow
provisions of those series.
(37) DEPOSIT TO THE COLLECTIONS ACCOUNT. The trustee will deposit
- funds remaining in the Group One Principal Collections Reallocation
Account after step (36) of the cash flows for each series in Group
One, or the steps described in step (36), or an equivalent step, into
the Collections Account. (To the Collections Account.)
(38) PAYMENT TO THE HOLDER OF THE SELLER CERTIFICATE. After the trust has
made all allocations for all of its series, it will use
- funds on deposit in the Collections Account to pay Discover Bank, as
the holder of the Seller Certificate, the amount of the Seller
Interest.
Any funds that remain in the Collections Account after this payment will
remain there until the next Trust Distribution Date, when the trust will
allocate them as Principal Collections.
S-71
<PAGE> 79
PAYMENTS
Interest and Servicing Fees. On or before each distribution date, after the
trustee applies the funds as described in "Cash Flows," the trustee, acting on
the master servicer's directions, will make the following deposits and payments
in the order set forth below, to the extent funds are available:
(1) CLASS A INTEREST. The trust will use:
- funds deposited into the Series Distribution Account for Class A
to deposit Class A interest. (To the Series Interest Funding Account.)
(2) CLASS A SERVICING FEES. The trust will use:
- funds remaining in the Series Distribution Account for Class A after
step (1)
to pay Class A servicing fees. (To the master servicer.)
(3) CLASS B INTEREST. The trust will use:
- funds deposited into the Series Distribution Account for Class B
to deposit Class B interest. (To the Series Interest Funding Account.)
(4) CLASS B SERVICING FEES. The trust will use:
- funds remaining in the Series Distribution Account for Class B after
step (3)
to pay Class B servicing fees. (To the master servicer.)
On each interest payment date the trustee will pay to Class A investors the
Class A interest deposited into the Series Interest Funding Account since the
last interest payment date, or, on the first interest payment date, since the
date the trust issued the certificates. On each interest payment date, the
trustee will also pay to Class B investors the Class B interest deposited into
the Series Interest Funding Account since the last interest payment date, or, on
the first interest payment date, since the date the trust issued the
certificates.
Principal. Unless an Amortization Event has occurred:
- on January 15, 2008, or, if not a business day, the next business day,
the trustee will withdraw all amounts on deposit in the Series
Principal Funding Account, up to the Class A Invested Amount, and pay
them to the Class A investors; and
- on February 15, 2008, or, if not a business day, the next business
day, the trustee will withdraw all funds remaining on deposit in the
Series Principal Funding Account, up to the Class B Invested Amount,
and pay them to the Class B investors.
If an Amortization Event has occurred, on each distribution date the
trustee will withdraw all funds from the Series Principal Funding Account and
pay them:
- first, to the Class A investors until the Class A Invested Amount is
reduced to zero; and then
- to the Class B investors until the Class B Invested Amount is reduced
to zero.
The trustee will not pay more than the Class A Invested Amount to the Class
A investors or more than the Class B Invested Amount to the Class B investors
from the funds in the account. The trustee will not pay any principal to the
Class B investors until it has paid the Class A investors the full amount of
their principal investment.
S-72
<PAGE> 80
ANNEX B
OTHER SERIES
The table below sets forth the principal characteristics of the Class A and
Class B certificates of all of the series the trust has issued that are
currently outstanding. All series are in Group One. For more specific
information with respect to any series, you should contact the master servicer
at (302) 323-7434. The master servicer will provide you, without charge, a copy
of the prospectus, prospectus supplement, if applicable, and Series Supplement,
without exhibits, for any publicly issued series.
<TABLE>
<CAPTION>
SERIES 1993-3 1994-2 1995-1 1995-3 1996-1
--------------------------- ------------------ ----------------- --------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Initial Investor Interest
Class A................... $350,000,000 $850,000,000 $600,000,000 $500,000,000 $1,000,000,000
Class B................... $16,493,000 $44,737,000 $31,579,000 $26,316,000 $52,632,000
Interest Rate
Class A................... 6.20% LIBOR + 0.35% LIBOR + 0.28% LIBOR + 0.21% LIBOR + 0.17%
Class B................... 6.45% 8.05% LIBOR + 0.45% LIBOR + 0.33% LIBOR + 0.30%
Initial Credit
Enhancement(1)
Class A................... 6.50% 10.00% 11.00% 11.00% 10.00%
Class B................... 4.00% 5.00% 6.00% 6.00% 5.50%
Closing Date............... November 23, 1993 October 14, 1994 April 19, 1995 September 28, 1995 January 18, 1996
Expected Maturity Date
Class A................... November 17, 2003 April 15, 2002 August 16, 2004 September 16, 2002 January 15, 2001
Class B................... December 15, 2003 May 15, 2002 September 15, 2004 October 15, 2002 February 15, 2001
Type of Principal
Payment(2)
Class A................... Bullet Cont Liq(3) Bullet Bullet Bullet
Class B................... Bullet Bullet Bullet Bullet Bullet
Series Termination Date.... May 16, 2006 October 16, 2004 February 16, 2007 March 16, 2005 July 16, 2003
</TABLE>
<TABLE>
<CAPTION>
SERIES 1996-2 1996-3 1996-4 1997-1 1997-2
------------------------------- ------------------ ----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Initial Investor Interest
Class A....................... $900,000,000 $600,000,000 $1,000,000,000 $750,000,000 $500,000,000
Class B....................... $47,369,000 $31,579,000 $52,632,000 $39,474,000 $26,316,000
Interest Rate
Class A....................... LIBOR + 0.22% 6.05% LIBOR + 0.375% LIBOR + 0.09% 6.792%
Class B....................... LIBOR + 0.36% 6.25% LIBOR + 0.55% LIBOR + 0.27% LIBOR + 0.40%
Initial Credit Enhancement(1)
Class A....................... 11.00% 6.00% 11.00% 12.50% 9.00%
Class B....................... 6.00% 3.00% 6.00% 7.50% 4.00%
Closing Date................... January 29, 1996 February 21, 1996 April 30, 1996 August 26, 1997 October 15, 1997
Expected Maturity Date
Class A....................... January 15, 2003 February 15, 2006 April 15, 2011 August 15, 2002 October 15, 2007
Class B....................... February 17, 2003 March 15, 2006 May 16, 2011 September 16, 2002 November 15, 2007
Type of Principal Payment(2)
Class A....................... Bullet Bullet Bullet Bullet Cont Liq(4)
Class B....................... Bullet Bullet Bullet Bullet Bullet
Series Termination Date........ July 18, 2005 August 18, 2008 October 16, 2013 February 16, 2005 April 16, 2010
</TABLE>
-------------------------
(1) Expressed as a percentage of the initial Series Investor Interest.
(2) "Cont Liq" means that the trust is scheduled to repay principal in monthly
payments. "Bullet" means that the trust is scheduled to repay principal in
one payment.
(3) The trust is scheduled to repay principal in 12 equal monthly payments.
(4) The controlled liquidation period for Series 1997-2 has a variable length of
up to 90 months. The amount of principal repaid each month is based on an
index.
S-73
<PAGE> 81
<TABLE>
<CAPTION>
SERIES 1997-3 1998-1 1998-2 1998-3 1998-4
----------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Initial Investor Interest
Class A..................... $650,000,000 $350,000,000 $500,000,000 $750,000,000 $500,000,000
Class B..................... $34,211,000 $18,422,000 $26,316,000 $39,474,000 $26,316,000
Interest Rate
Class A..................... LIBOR + 0.13% LIBOR + 0.09% 5.80% LIBOR + 0.125% 5.75%
Class B..................... LIBOR + 0.31% LIBOR + 0.27% 5.95% LIBOR + 0.29% 5.90%
Initial Credit Enhancement(1)
Class A..................... 12.50% 12.50% 8.50% 12.50% 8.50%
Class B..................... 7.50% 7.50% 4.00% 7.50% 4.00%
Closing Date................. October 23, 1997 January 14, 1998 March 4, 1998 March 25, 1998 April 9, 1998
Expected Maturity Date
Class A..................... October 15, 2004 February 15, 2001 March 15, 2001 March 17, 2003 April 16, 2001
Class B..................... November 15, 2004 March 15, 2001 April 16, 2001 April 15, 2003 May 15, 2001
Type of Principal Payment(2)
Class A..................... Bullet Bullet Bullet Bullet Bullet
Class B..................... Bullet Bullet Bullet Bullet Bullet
Series Termination Date...... April 17, 2007 August 18, 2003 September 16, 2003 September 16, 2005 October 16, 2003
</TABLE>
<TABLE>
<CAPTION>
SERIES 1998-5 1998-6 1998-7 1999-1 1999-2
----------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Initial Investor Interest
Class A..................... $671,980,000 $500,000,000 $1,000,000,000 $500,000,000 $500,000,000
Class B..................... $35,368,000 $26,316,000 $52,632,000 $26,316,000 $26,316,000
Interest Rate
Class A..................... LIBOR - 0.125% 5.85% 5.60% 5.30% 5.90%
Class B..................... LIBOR + 0.33% 6.05% 5.90% 5.55% 6.10%
Initial Credit Enhancement(1)
Class A..................... 12.50% 8.50% 8.50% 8.50% 8.50%
Class B..................... 7.50% 4.00% 4.00% 4.00% 4.00%
Closing Date................. June 12, 1998 July 30, 1998 November 12, 1998 February 9, 1999 March 10, 1999
Expected Maturity Date
Class A..................... June 16, 2008 July 15, 2003 November 17, 2003 February 15, 2002 April 15, 2002
Class B..................... July 15, 2008 August 15, 2003 December 15, 2003 March 15, 2002 May 15, 2002
Type of Principal Payment(2)
Class A..................... Bullet Bullet Bullet Bullet Bullet
Class B..................... Bullet Bullet Bullet Bullet Bullet
Series Termination Date...... December 16, 2010 January 18, 2006 May 16, 2006 August 16, 2004 October 18, 2004
</TABLE>
S-74
<PAGE> 82
<TABLE>
<CAPTION>
SERIES 1999-3 1999-4 1999-5 1999-6 2000-1
----------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Initial Investor Interest
Class A..................... $500,000,000 $850,000,000 $500,000,000 $750,000,000 $500,000,000
Class B..................... $26,316,000 $44,737,000 $26,316,000 $39,474,000 $26,316,000
Interest Rate
Class A..................... LIBOR + 0.11% 5.65% LIBOR + 0.18% 6.85% LIBOR + 0.17%
Class B..................... LIBOR + 0.31% 5.85% LIBOR + 0.41% 7.10% LIBOR + 0.37%
Initial Credit Enhancement(1)
Class A..................... 12.50% 8.50% 12.50% 8.50% 12.50%
Class B..................... 7.50% 4.00% 7.50% 4.00% 7.50%
Closing Date................. April 6, 1999 April 27, 1999 June 15, 1999 December 14, 1999 January 27, 2000
Expected Maturity Date
Class A..................... March 15, 2002 May 15, 2002 June 15, 2004 January 18, 2005 February 15, 2005
Class B..................... April 15, 2002 June 17, 2002 July 15, 2004 February 15, 2005 March 15, 2005
Type of Principal Payment(2)
Class A..................... Bullet Bullet Bullet Bullet Bullet
Class B..................... Bullet Bullet Bullet Bullet Bullet
Series Termination Date...... September 16, 2004 November 16, 2004 December 18, 2006 July 17, 2007 August 16, 2007
</TABLE>
<TABLE>
<CAPTION>
SERIES 2000-2 2000-3 2000-4 2000-A 2000-5
-------------------------------- ----------------- ----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Initial Investor Interest
Class A........................ $750,000,000 $500,000,000 $650,000,000 $4,000,000,000 $1,200,000,000
Class B........................ $39,474,000 $26,316,000 $34,211,000 N/A $63,158,000
Interest Rate
Class A........................ LIBOR + 0.18% LIBOR + 0.12% LIBOR + 0.21% Variable(5) LIBOR + 0.18%
Class B........................ LIBOR + 0.37% LIBOR + 0.30% LIBOR + 0.45% N/A LIBOR + 0.41%
Initial Credit Enhancement(1)
Class A........................ 12.50% 12.50% 12.50% 8.00% 12.50%
Class B........................ 7.50% 7.50% 7.50% N/A 7.50%
Closing Date.................... March 14, 2000 April 4, 2000 May 10, 2000 May 22, 2000 June 6, 2000
Expected Maturity Date
Class A........................ March 15, 2005 March 17, 2003 May 15, 2007 Variable(5) May 16, 2005
Class B........................ April 15, 2005 April 15, 2003 June 15, 2007 N/A June 15, 2005
Type of Principal Payment(2)
Class A........................ Bullet Bullet Bullet Bullet/Amort.(5) Bullet
Class B........................ Bullet Bullet Bullet N/A Bullet
September 18, September 16,
Series Termination Date......... 2007 2005 November 17, 2009 May 18, 2010(5) November 16, 2007
</TABLE>
<TABLE>
<CAPTION>
SERIES 2000-6 2000-7 2000-8 2000-9
-------------------------------- ----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Initial Investor Interest
Class A........................ $700,000,000 $850,000,000 $1,000,000,000 $500,000,000
Class B........................ $36,843,000 $44,737,000 $52,632,000 $26,316,000
Interest Rate
Class A........................ LIBOR + 0.13% LIBOR + 0.1725% LIBOR + 0.10% 6.35%
Class B........................ LIBOR + 0.36% LIBOR + 0.4125% LIBOR + 0.34% LIBOR + 0.42%
Initial Credit Enhancement(1)
Class A........................ 12.50% 12.50% 12.50% 9.00%
Class B........................ 7.50% 7.50% 7.50% 5.50%
Closing Date.................... June 19, 2000 June 20, 2000 October 24, 2000 December 19, 2000
Expected Maturity Date
Class A........................ July 15, 2005 June 15, 2007 October 15, 2003 January 17, 2006
Class B........................ July 15, 2005 June 15, 2007 October 15, 2003 February 15, 2006
Type of Principal Payment(2)
Class A........................ Bullet Bullet Bullet Bullet
Class B........................ Bullet Bullet Bullet Bullet
Series Termination Date......... January 16, 2008 December 16, 2009 April 18, 2006 July 16, 2008
</TABLE>
-------------------------
(5) Series 2000-A consists of discount certificates with expected maturities of
1 to 94 days, which may become amortizing, interest-bearing extended
certificates with final maturities of 397 days, and may include amortizing,
interest-bearing maturity certificates. The series termination date may vary
depending on the type of certificates then outstanding in Series 2000-A, and
may be extended. Series 2000-A certificates were issued only to qualified
institutional buyers and are not publicly available.
S-75
<PAGE> 83
Prospectus
Discover(R) Card Master Trust I
Issuer
Credit Card Pass-Through Certificates
Discover Bank
Master Servicer, Servicer and Seller
-------------------
Discover Bank intends to sell up to $10,026,319,000 aggregate principal amount
of certificates in one or more series from time to time, representing interests
in the Discover Card Master Trust I. The trust's assets consist primarily of
credit card receivables arising under selected Discover Card accounts and the
cash payments of those receivables. The certificates are not obligations of
Discover Bank or any of its affiliates, and neither the certificates nor the
underlying credit card receivables are insured or guaranteed by any governmental
agency.
The trust will pay interest and principal on each series of certificates as
specified in the prospectus supplement for the series.
-------------------
Investing in the certificates involves risks. See "Risk Factors" beginning on
page S-13 in the prospectus supplement.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED IF THIS PROSPECTUS OR THE
ACCOMPANYING PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS AND A PROSPECTUS SUPPLEMENT FOR A PARTICULAR SERIES MUST BE USED
TO CONFIRM SALES OF CERTIFICATES OF THAT SERIES.
THE PROSPECTUS SUPPLEMENT FOR ANY SERIES USING UNDERWRITERS OR AGENTS WILL
DISCLOSE THE NAME OF THE MANAGING UNDERWRITER OR UNDERWRITERS OR THE AGENTS AND
ANY DISCOUNTS OR COMMISSIONS.
MORGAN STANLEY DEAN WITTER
December 21, 2000
<PAGE> 84
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to Investors.................. 3
Where You Can Find More Information... 3
Prospectus Summary.................... 5
The Trust............................. 13
The Trustee......................... 14
Indemnification of the Trust and the
Trustee.......................... 14
Sale and Assignment of Receivables
to the Trust..................... 15
Addition of Accounts................ 15
Removal of Accounts................. 17
Termination of the Trust............ 17
The Certificates...................... 17
General............................. 17
Interest Payments................... 18
Principal Payments.................. 18
Issuance of Additional Series....... 19
Collections......................... 20
Class Percentages and Seller
Percentage....................... 21
Subordination....................... 22
Adjustments to Receivables.......... 22
Additional Funds.................... 22
Final Payment of Principal;
Termination of Series............ 23
Credit Enhancement.................. 23
Repurchase of Trust Portfolio....... 24
Repurchase of Specified
Receivables...................... 25
Repurchase of a Series.............. 26
Repurchase of Certificates.......... 26
Sale of Seller Interest............. 26
Reallocation of Series Among
Groups........................... 27
Amendments.......................... 27
List of Certificateholders.......... 28
Meetings............................ 28
Book-Entry Registration............. 28
Definitive Certificates............. 32
Servicing............................. 32
Master Servicer and Servicer........ 32
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Servicing Compensation and Payment
of Expenses...................... 33
Certain Matters Regarding the Master
Servicer and the Servicers....... 34
Master Servicer Termination
Events........................... 34
Servicer Termination Events......... 35
Evidence as to Compliance........... 36
The Seller............................ 37
Discover Bank....................... 37
Insolvency-Related Matters.......... 37
Certain Legal Matters Relating to the
Receivables......................... 38
Transfer of Receivables............. 38
Certain UCC Matters................. 39
Consumer Protection Laws and Debtor
Relief Laws Applicable to the
Receivables...................... 40
Claims and Defenses of Cardmembers
Against the Trust................ 40
Use of Proceeds....................... 40
Federal Income Tax Consequences....... 41
General............................. 41
Tax Treatment of the Certificates as
Debt............................. 41
United States Investors............. 42
Foreign Investors................... 45
Backup Withholding and Information
Reporting........................ 46
Possible Characterization of the
Certificates..................... 47
State Tax Consequences................ 48
ERISA Considerations.................. 49
Discover Bank's Prohibited
Transaction Exemption............ 49
The DOL Regulation.................. 51
Plan of Distribution.................. 52
Legal Matters......................... 54
Glossary of Terms..................... 55
</TABLE>
2
<PAGE> 85
IMPORTANT NOTICE ABOUT INFORMATION
PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the certificates in two separate
documents:
- this prospectus, which provides detailed information, some of which may
not apply to your certificates, about the trust and the certificates
issued by the trust, and
- the prospectus supplement, which describes the specific terms of your
certificates.
We include cross-references in this prospectus and the accompanying
prospectus supplement to sections in these materials where you can find related
discussions. You can locate the pages on which these sections begin by using the
table of contents on page 2.
We have included glossaries of the capitalized terms used in this
prospectus or the prospectus supplement.
IT IS IMPORTANT FOR YOU TO READ AND CONSIDER ALL INFORMATION CONTAINED IN
BOTH THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT IN MAKING YOUR
INVESTMENT DECISION.
The SEC allows us to incorporate by reference information we file with it,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus. Information that we file later with the SEC will
automatically update the information in this prospectus. In all cases, you
should rely on the later information over different information included in this
prospectus or the prospectus supplement for any series. We incorporate by
reference any future annual, monthly and special reports and proxy materials
filed by or on behalf of the trust with the SEC until we terminate our offering
of the certificates.
You should rely on the information contained or incorporated by reference
in this prospectus and the accompanying prospectus supplement. We have not
authorized anyone to provide you with different information.
We are not offering to sell or soliciting offers to buy any securities
other than the certificates to which this prospectus and the accompanying
prospectus supplement relate, nor are we offering to sell or soliciting offers
to buy certificates in any jurisdiction where the offer is not permitted.
REPORTS TO INVESTORS
Discover Bank, as master servicer, will prepare monthly and annual reports
for each outstanding series of certificates containing information about the
trust and that series. You may obtain a copy of each report free of charge by
calling 302-323-7434. See "Reports to Investors" in the related prospectus
supplement. The annual reports will not contain financial information that has
been examined and reported on by independent public accountants. Discover Bank
does not intend to send you any of its financial reports.
WHERE YOU CAN FIND MORE INFORMATION
Discover Bank, as originator of the trust, and the trust have filed a
registration statement with the SEC on behalf of the trust relating to the
certificates offered by this prospectus and any prospectus supplement
accompanying this prospectus. Discover Bank was formerly known as Greenwood
Trust Company.
You may read and copy any reports, statements or other information that
Discover Bank or the trust files at the SEC's public reference rooms at:
- 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549;
- 7 World Trade Center, Suite 1300, New York, New York 10048; and
3
<PAGE> 86
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511.
You can request copies of these documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at (800) SEC-0330 for further
information on the operation of the public reference rooms. SEC filings relating
to the trust are also available to the public on the SEC Internet site
(http://www.sec.gov). The trust is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and in accordance with that
act, Discover Bank, on behalf of the trust, files reports and other information
with the SEC.
We incorporated by reference the following reports and documents filed by
Discover Bank on behalf of the trust pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended:
(1) the trust's Annual Reports on Form 10-K for the years ended December
31, 1995, December 31, 1996 and December 31, 1997, the trust's
Transition Report on Form 10-K for the transition period from January
1, 1998 through November 30, 1998, and the trust's Annual Report on
Form 10-K for the year ended November 30, 1999; and
(2) Current Reports on Form 8-K filed since January 1, 1995.
All reports and other documents filed by Discover Bank on behalf of the
trust pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended, after the date of this prospectus and before the
termination of the offering of the certificates will be deemed to be
incorporated by reference into this prospectus and to be a part of it.
As a recipient of this prospectus, you may request a copy of any document
we incorporate by reference, except exhibits to the documents, unless the
exhibits are specifically incorporated by reference, at no cost, by calling
Discover Bank, as master servicer at (302) 323-7434.
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PROSPECTUS SUMMARY
The following summary describes certain aspects of the trust generally,
including the typical provisions of each series of certificates. The remainder
of this prospectus and the accompanying prospectus supplement provide much more
detailed information about the certificates and the trust. You should review the
entire prospectus and prospectus supplement before you decide to invest.
SELLER............................... Discover Bank. Discover Bank's
executive office is located at 12
Read's Way, New Castle, Delaware
19720.
MASTER SERVICER AND SERVICER......... Discover Bank.
TRUSTEE.............................. U.S. Bank National Association.
FORMATION OF THE TRUST; TRUST
ASSETS............................... Discover Bank and the trustee formed
the trust in October 1993. Discover
Bank has transferred to the trust the
credit card receivables generated
under certain designated Discover(R)
Card accounts. Those receivables
included principal
receivables--amounts owed by
cardmembers representing the
principal balances of cash advances,
purchases that cardmembers have made
with their Discover Cards and
balances transferred by cardmembers
to their Discover Card accounts from
other credit card accounts. They also
included finance charge
receivables--amounts owed by
cardmembers representing finance
charges accrued on unpaid principal
balances, late fees and other service
charges. As cardmembers make
additional charges and incur
additional finance charges and other
fees in accounts designated for the
trust, Discover Bank also transfers
these additional receivables to the
trust on an ongoing basis. Discover
Bank also may designate additional
accounts as trust accounts, and
transfer receivables in those
accounts to the trust. Even though
Discover Bank transfers receivables
to the trust, Discover Bank continues
to own and service the related
accounts.
The trust's assets include, or may
include, the following:
- credit card receivables;
- cash payments by cardmembers;
- cash recoveries on receivables in
the trust that have been charged
off as uncollectible and proceeds
from the trust's sales of those
receivables;
- investment income on funds on
deposit in investor accounts, if
any;
- interests in other credit card
receivables pools;
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- credit support or enhancement for
each series;
- additional funds that Discover Bank
may elect to add to the trust;
- currency swaps for series
denominated in foreign currencies;
and
- interest rate protection
agreements.
The trust has issued many series of
certificates, and Discover Bank
expects that the trust will issue
additional series. The pooling and
servicing agreement that created the
trust and applies to all series
permits the trust to issue additional
series without the consent of
certificateholders of any outstanding
series. Discover Bank and the trust
will not request your consent to
issue new series.
The certificates of each series
represent an interest in the
aggregate pool of receivables in the
trust, not an interest in any
specific receivable or subset of the
receivables. That interest reflects
your right to receive a portion of
the collections paid on the
receivables, your share of
receivables that Discover Bank has
charged off as uncollectible, your
share of investment income on funds
on deposit in investor accounts, if
any, your right to the benefit of the
credit enhancement established for
the series and your right to the
benefit of any currency swap or
interest rate protection agreements
for the series. Your right to receive
any of these amounts will be limited
to the amount of interest accrued on
your certificates and the principal
amount of your certificates. Discover
Bank and the investors in other
series currently outstanding own the
remaining interest in the trust.
- Discover Bank's interest varies
based on the size of the interests
of the trust's investors and the
total amount of the trust's
receivables.
- Assuming the aggregate investor
interest in receivables stays the
same, if in any month the principal
collections and charge-offs exceed
the amount of new principal
receivables created, Discover
Bank's interest in the trust
declines.
- Assuming the aggregate investor
interest in receivables stays the
same, if in any month the principal
collections and charge-offs are
less than the amount of new
principal receiv-
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<PAGE> 89
ables created, Discover Bank's
interest in the trust increases.
Each series has a particular set of
terms that we will describe in a
series supplement to the pooling and
servicing agreement. The series
supplement for each series will
specify, among other things, the
classes in the series, its size and
payment terms, the group to which the
series belongs, the methods for
allocating collections and
charged-off receivables to it, the
kind and size of credit enhancement
for the series and any applicable
amendments to the pooling and
servicing agreement.
CLASSES, ALLOCATIONS AND
REALLOCATIONS........................ Each series will have one or more
classes; typically Class B
certificates rank junior to Class A
certificates.
The trust allocates collections among
the series based on each series'
investor interest in receivables. The
trust also allocates receivables that
Discover Bank has charged off as
uncollectible to series based on the
investor interest in receivables.
Each series supplement to the pooling
and servicing agreement specifies the
percentages of these collections and
charged-off receivables that are
allocated to each class of the series
at each point in time. These
percentages vary based on a number of
factors, including whether the trust
has started to pay principal to
investors in the series and whether
Discover Bank has made certain
choices regarding credit enhancement.
The class percentages may differ for
finance charge collections, principal
collections and charged-off amounts.
The pooling and servicing agreement
determines whether collections are
finance charge collections or
principal collections. Once this
determination is made, finance charge
and principal collections are
generally not interchangeable; each
can only be used to fund certain
payments, deposits and
reimbursements. When Discover Bank
charges off a receivable as
uncollectible, it reduces the amount
of principal receivables in the
trust, and allocates a portion of the
amount charged off against your
interest in principal receivables
based on your class percentage.
However, the trust typically uses
finance charge collections to pay
interest and to reimburse you for
charged-off receivables that have
been allocated to you, reinstating
your interest in principal
receivables. The trust typically uses
principal collections to repay your
principal.
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<PAGE> 90
In general, the trust will use each
series' share of collections to make
required payments, to pay its share
of servicing fees and to reimburse
its share of charged-off amounts. If
a series has more collections than it
needs in any month, the trust may
make the excess collections available
to other series so those series may
make their payments and
reimbursements. You will not be
entitled to receive these excess
collections. If a series does not
have enough collections in any month,
the trust may use excess collections
from other series to make payments
and reimbursements for that series.
Each prospectus supplement describes
how the trust uses collections to
make payments, deposits and
reimbursements for a particular
series.
INVESTOR INTEREST AND INVESTED
AMOUNT............................... The trust generally allocates
collections and charged-off amounts
to you based on your investor
interest, which is your interest in
the receivables. The trust makes
payments to you based on your
invested amount, which generally is
the principal balance of your
certificates. Your investor interest
in receivables may decrease over time
as principal is paid to you or as
principal collections are deposited
into the series principal funding
account to be paid to you at a later
time.
Although your investor interest in
receivables and your invested amount
are related, they diverge under
certain circumstances. For instance,
if your series has an accumulation
period, as the trustee accumulates
principal in the series principal
funding account, your investor
interest in receivables will decline
but your invested amount will not be
affected. Your invested amount will
shift from an interest entirely in
the receivables to an interest in the
cash in the series principal funding
account and a smaller interest in the
receivables.
DISTRIBUTION DATES................... The distribution date is the date in
each month, typically the 15th, on
which the trust allocates collections
from the preceding calendar month to
investors and the trustee deposits
them into appropriate accounts. A
distribution date may also be a date
the trust pays principal or interest
to investors, but it will not always
be a payment date. For example, a
series that pays interest
semiannually will have twelve
distribution dates each year but only
two interest payment dates; the trust
will set aside funds on each
distribution date to make the next
interest payment.
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<PAGE> 91
INTEREST............................. The certificates accrue interest at
the rates specified in or determined
in accordance with the prospectus
supplement.
PRINCIPAL............................ The trust will be scheduled to pay
principal on each class of a series
in a single payment on a specified
date or in monthly payments beginning
on a specified date, as set forth in
the prospectus supplement. Under
certain circumstances, the trust may
be unable to meet the schedule.
Amortization events are designed to
protect investors from certain events
that may adversely affect the trust
and your investment in the
certificates. These may include:
Discover Bank's or an additional
seller's inability to continue to
transfer receivables to the trust;
certain breaches of representations,
warranties or covenants by Discover
Bank or an additional seller;
receivables performance that might
impair the long-term ability of the
trust to make all required payments
with respect to a series; or certain
events of insolvency with respect to
Discover Bank or an additional
seller. For some of these events to
become amortization events, the
trustee or a specified percentage of
certificateholders must declare them
to be amortization events; others
become amortization events
automatically when they occur. If an
amortization event occurs with
respect to a series, the trust
becomes obligated to apply principal
collections allocated to that series
on a monthly basis to repay the
remaining principal amount of the
certificates of that series.
Each series of certificates will have
two types of maturity dates, an
expected maturity date, which may be
different for different classes, and
a series termination date. The
expected maturity date is the date
Discover Bank believes the trust will
make the final principal payment to
investors in that class of
certificates unless an amortization
event occurs. The series termination
date is always later than the
expected maturity date, and is the
last day on which the trust will pay
principal to investors in a series.
If the trust owes principal in the
month before the series termination
date, the trustee will sell
receivables, proportionate to the
series' remaining interest in the
trust, to repay the principal. After
the series termination date, the
trustee will not allocate collections
to the series.
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<PAGE> 92
REVOLVING PERIOD..................... The revolving period is the period
from the first day of the calendar
month in which the trust issues a
series until the trust begins using
principal collections to make
principal payments to investors or to
accumulate the cash to be used to
make later principal payments. In
general, during the revolving period,
the trust pays principal collections
to Discover Bank in exchange for new
receivables that cardmembers have
generated on the accounts designated
as part of the trust.
The trust may also use principal
collections to pay the principal of
other series. The revolving period
for a series ends when the controlled
liquidation period or the
accumulation period begins, or when
an amortization event or an early
accumulation event occurs.
CONTROLLED LIQUIDATION PERIOD........ If a series provides that the
principal on its certificates will be
repaid in scheduled monthly payments,
the series will have a controlled
liquidation period. During the
controlled liquidation period, the
trust will apply principal
collections allocated to the series
to pay principal on the certificates,
up to the amount of the scheduled
monthly principal payment. The
controlled liquidation period will
begin on the first day of the month
immediately preceding the month in
which the trust will make the first
principal payment for the series and
continue until the principal of the
series has been repaid in full, until
an amortization event or an early
accumulation event has occurred or
until the series termination date.
ACCUMULATION PERIOD.................. If a series provides that its
principal will be repaid in a single
payment, it will have an accumulation
period. During the accumulation
period, the trust will accumulate
cash in the series principal funding
account using collections it
receives, to pay principal at
maturity, unless Discover Bank elects
to delay this process or an
amortization event or an early
accumulation event has occurred. The
trust generally is scheduled to
accumulate principal collections in
the series principal funding account
over several months, so that it will
have collections available to make
the final payment.
Discover Bank may elect to shorten
the accumulation period if:
- it determines that enough principal
collections from other series will
be available to
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<PAGE> 93
make larger deposits into the series
principal funding account, and
- the required rating agencies have
approved the election to shorten
the accumulation period.
Typically, the accumulation period
will begin on a date specified in the
prospectus supplement, or on a later
date if Discover Bank elects to
shorten the accumulation period, and
will continue until the principal of
the series has been repaid in full,
until an amortization event or an
early accumulation event has occurred
or until the series termination date.
AMORTIZATION PERIOD.................. The amortization period begins when
an amortization event occurs and
continues until the trust has fully
paid the principal of the series or
until the series termination date.
EARLY ACCUMULATION EVENTS............ Certain events that the series
supplement would typically designate
as amortization events may instead be
designated as early accumulation
events for a particular series. If an
early accumulation event occurs with
respect to a series, the trust
becomes obligated to accumulate
principal collections allocated to
the series on a monthly basis in the
series principal funding account. In
general, the trust would make
principal payments to investors after
an early accumulation event in
accordance with its original
schedule, to the extent it has funds
available, unless an amortization
event subsequently occurs.
CREDIT ENHANCEMENT................... A series may have credit enhancement
that provides the trust with an
additional source of funds if the
trust does not receive sufficient
collections on receivables to make
all required payments, deposits and
reimbursements with respect to that
series in any month. The credit
enhancement may include:
- cash collateral accounts or reserve
funds,
- letters of credit,
- surety bonds, or
- insurance policies
The prospectus supplement may also
identify other forms of credit
enhancement. Series or classes of
series may have credit enhancement
that is also provided by
subordination provisions in other
classes or series. These
subordination provisions may require
the trust to reallocate collections
and other assets that it initially
allocated to a junior class or a
junior series to
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instead make payments, deposits and
reimbursements for a senior class or
a senior series. The trust would
generally make payments, deposits and
reimbursements for a junior class or
a junior series only after it had
satisfied the requirements of each
applicable senior class or senior
series.
CLEARANCE AND SETTLEMENT............. You may elect to hold the
certificates only through the
following clearing organizations:
- The Depository Trust Company, or
DTC, in the United States;
- Clearstream Banking, in Europe; and
- Euroclear, in Europe
These organizations permit transfers
of securities or interests in
securities by computer entries
instead of paper transfers.
Certificates will not be available in
paper form.
You may transfer your interests
within DTC, Clearstream Banking or
Euroclear in accordance with the
usual rules and operating procedures
of the relevant system. Persons
holding directly or indirectly
through DTC, on the one hand, and
counterparties holding directly or
indirectly through Clearstream
Banking or Euroclear, on the other
hand, may effect cross-market
transfers through the relevant
depositaries of Clearstream Banking
and Euroclear.
The remainder of this prospectus uses some capitalized terms. We have
defined these terms in a glossary beginning on page 55.
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<PAGE> 95
THE TRUST
Discover Bank and the trustee formed the trust in October 1993 pursuant to
the Pooling and Servicing Agreement. Discover Bank has transferred Discover Card
receivables existing as of specified dates in designated accounts to the trust.
As cardmembers make additional charges and incur additional finance charges and
other fees with respect to these accounts, Discover Bank is also obligated to
transfer these additional Receivables to the trust on a daily basis until the
trust terminates. If we refer to the pool of receivables in the trust, we refer
to "Receivables" and the "Accounts" in which they arise. If we refer to the
Discover Card portfolio generally, we refer to "receivables" and the "accounts"
in which they arise.
In exchange for the transfer of Receivables, Discover Bank received the
Seller Certificate. As Discover Bank transfers additional Receivables, the
Seller Interest increases. Discover Bank also receives the net cash proceeds
from each sale of certificates of a series.
The trust's assets include, or may include, the following:
- the Receivables;
- all monies due or to become due under the Receivables;
- all proceeds of the Receivables, including collections that Discover Bank
or any other servicer may use for its own benefit before each
distribution date;
- all monies on deposit in the investor accounts;
- cash recoveries on Receivables charged off as uncollectible and proceeds
from the trust's sale of those Receivables;
- investment income on funds on deposit in investor accounts, if any;
- interests in other credit card receivables pools;
- credit support or enhancement for each series;
- additional funds that Discover Bank may elect to add to the trust;
- currency swaps for series denominated in foreign currencies; and
- interest rate protection agreements.
Discover Bank has the right, and in some circumstances the obligation, to
designate additional Accounts, which may be Discover Card accounts or other
credit accounts originated by Discover Bank or an affiliate of Discover Bank, to
be included as Accounts, or to add interests in other credit card receivables
pools to the trust, subject to conditions that we describe in "--Addition of
Accounts." In addition, Discover Bank has the right to designate Accounts for
removal from the trust, subject to conditions that we describe in "--Removal of
Accounts."
Discover Bank formed the trust to issue certificates of various series
pursuant to the Pooling and Servicing Agreement and a Series Supplement for each
series. The trust has issued many series of certificates, and Discover Bank
expects that the trust will issue additional series from time to time and will
continue as a trust after the Series Termination Date of any particular series.
The trust will not engage in any business activity other than:
- acquiring and holding the Receivables and the proceeds from the
Receivables;
- issuing certificates and the Seller Certificate;
- making payments on certificates and the Seller Certificate;
- selling receivables in Charged-Off Accounts;
- investing funds on deposit in the investor accounts;
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<PAGE> 96
- entering into interest rate swap, currency swap or interest rate cap or
other rate protection agreements; and
- entering into other agreements with third parties for the benefit of the
investors of one or more series.
As a consequence, Discover Bank does not expect the trust to need additional
capital resources except for the Receivables in additional Accounts or interests
in other credit card receivables pools, if applicable.
THE TRUSTEE
U.S. Bank National Association is the trustee. Discover Bank and its
affiliates may enter into normal banking and trustee relationships with the
trustee from time to time. The trustee and its affiliates may own certificates
in their own names. In addition, the trustee may appoint a co-trustee or
separate trustees of all or any part of the trust to meet the legal requirements
of a local jurisdiction. If the trustee does appoint a co-trustee or separate
trustee, that separate trustee or co-trustee will be jointly subject, with the
trustee, to all rights, powers, duties and obligations conferred on the trustee
by the Pooling and Servicing Agreement or any Series Supplement. In any
jurisdiction in which the trustee is incompetent or unqualified to perform
certain acts, the separate trustee or co-trustee will be singly subject to all
of these rights, powers, duties and obligations. Any separate trustee or
co-trustee will exercise and perform those rights, powers, duties and
obligations solely at the direction of the trustee.
The trustee may resign at any time, in which event the master servicer will
be obligated to appoint a successor trustee. The master servicer may also remove
the trustee if the trustee is no longer eligible to continue as trustee under
the Pooling and Servicing Agreement or if the trustee becomes insolvent. In
those circumstances, the master servicer may be obligated to appoint a successor
trustee. Until the successor trustee accepts its appointment, the resignation or
removal of the trustee will not become effective.
INDEMNIFICATION OF THE TRUST AND THE TRUSTEE
Discover Bank as seller, and any Additional Sellers, generally will
indemnify the trust and the trustee against losses arising out of the sellers'
activities in connection with the trust or the trustee. However, the sellers
will not indemnify:
- the trustee for liabilities resulting from fraud, negligence, breach of
fiduciary duty or misconduct by the trustee in performing its duties as
trustee;
- the trust or the investors for liabilities arising from actions taken by
the trustee at the investors' request; or
- the trust or the investors for any taxes, or any related interest or
penalties, required to be paid by the trust or the investors.
This indemnification will be only from the assets of the related seller and will
be subordinate to the trust's security interest in the Receivables. This
indemnification will not constitute a claim against any seller in an amount that
exceeds the lesser of:
- that seller's available assets; or
- the full amount of the claim multiplied by the percentage of the
Principal Receivables in the trust that have been transferred to the
trust by that seller.
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<PAGE> 97
SALE AND ASSIGNMENT OF RECEIVABLES TO THE TRUST
On October 27, 1993 and on various subsequent dates, Discover Bank sold and
transferred to the trust all of its right, title and interest in and to:
- all Receivables existing in the accounts designated as Accounts on each
such date, and
- all Receivables created in those Accounts after each such date, on a
daily basis as they arise, until the trust terminates.
In exchange for these transfers, Discover Bank has received the Seller
Certificate, the right to direct the issuance of new series of certificates, and
the proceeds from the sale of each new series. See "--Formation of the Trust."
Discover Bank has indicated in its computer files that it has transferred
the Receivables to the trust. In addition, Discover Bank has provided to the
trustee a computer file containing a complete list of each Account identified by
account number, and will provide a similar computer file each time it designates
additional Accounts. Discover Bank will not:
- deliver to the trustee any other records or agreements relating to the
Accounts and the Receivables;
- segregate the records and agreements that it maintains relating to the
Accounts and the Receivables from records and agreements relating to
other credit accounts and receivables; or
- otherwise mark these records or agreements to reflect the sale of the
Receivables to the trust, except for any electronic or other indicators
necessary to service the Accounts in accordance with the Pooling and
Servicing Agreement and any Series Supplement.
The trustee will have reasonable access to these records and agreements as
required by applicable law and to enforce the rights of investors. The trustee
filed a UCC-1 financing statement in accordance with applicable state law to
perfect the trust's interest in the Receivables, and will file continuation
statements as needed to maintain that perfection. See "Certain Legal Matters
Relating to the Receivables."
ADDITION OF ACCOUNTS
Discover Bank may, in its sole discretion:
- designate credit accounts originated by Discover Bank or its affiliates
as additional Accounts, and cause the receivables in those accounts to be
transferred to the trust; or
- convey interests in other credit card receivables pools to the trust.
In addition, Discover Bank will be required to designate additional Accounts or
convey interests in other credit card receivables pools to the trust if the
aggregate amount of Principal Receivables in the trust on the last day of any
month is less than the Minimum Principal Receivables Balance.
Additional Accounts may consist of additional Discover Card accounts
originated by Discover Bank or other credit accounts originated by Discover Bank
or an affiliate of Discover Bank. These Accounts may include newly originated
accounts.
Discover Bank may only assign additional Accounts to the trust if:
- Discover Bank and the trustee execute and deliver a written assignment;
- Discover Bank causes its legal counsel to deliver an opinion to the
trustee relating to the trust's security interest in the Receivables in
the additional Accounts and insolvency and related matters;
- an authorized officer of the servicer delivers a certificate regarding
the selection criteria used to select the additional Accounts; and
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<PAGE> 98
- either
- each of the Rating Agencies confirms that the proposed assignment will
not cause it to lower or withdraw its ratings on any outstanding class
of any series of certificates, or
- the proposed assignment complies with any limitations established by the
Rating Agencies on Discover Bank's ability to designate additional
Accounts.
An assignment will comply with current Rating Agency limits, and Discover Bank
may designate additional Accounts without Rating Agency approval, if:
- in any calendar year, Discover Bank assigns not more than 20% of the
number of Accounts or the amount of Principal Receivables in the trust as
of the first day of the calendar year, and
- in any period of three calendar months, Discover Bank assigns not more
than 15% of the number of Accounts or the amount of Principal Receivables
in the trust as of the first day of the three-month period.
The servicer for any additional Accounts must select those Accounts on the
basis of selection criteria that the servicer does not believe to be materially
adverse to the interests of investors in any outstanding class of any series of
certificates or any credit enhancement provider.
The trust will receive all collections of Receivables in additional
Accounts in the same manner as it receives other collections. The servicer may,
however, estimate the amount of Finance Charge Receivables billed on the
Receivables in the additional Accounts for the month in which the Accounts were
added to the trust.
Although the Pooling and Servicing Agreement must be amended to add
interests in other pools of credit card receivables to the trust, this amendment
will not require investor consent. Discover Bank may only add interests in other
pools of credit card receivables to the trust if:
- Discover Bank delivers a certificate to the trustee stating that Discover
Bank reasonably believes that the addition will not be materially adverse
to the interests of investors in any outstanding class of any series or
any credit enhancement provider;
- Discover Bank causes its legal counsel to deliver an opinion to the
trustee relating to the trust's security interest in these added
interests and insolvency and related matters; and
- each of the Rating Agencies confirms that the proposed assignment will
not cause it to lower or withdraw its ratings on any outstanding class of
any series of certificates.
Additional Accounts or accounts underlying interests in pools of credit
card receivables:
- need not be Discover Card accounts or accounts originated by Discover
Bank;
- may have different terms than the terms governing the Accounts initially
included in the trust, including the possibility of lower periodic
finance charges or fees;
- may be composed entirely of newly originated accounts;
- may contain a higher percentage of newly originated accounts than the
Accounts currently included in the trust; and
- may contain accounts originated using criteria different from those
applied to the Accounts currently included in the trust.
Accordingly, we cannot assure you that any additional Accounts or accounts
underlying the added interests in pools of credit card receivables will be of
the same credit quality as the Accounts currently included in the trust or that
inclusion of these Accounts or the interests in pools of credit card receivables
will not reduce the percentage of Finance Charge Collections relative to
Principal Collections.
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REMOVAL OF ACCOUNTS
Discover Bank may, but is not obligated to, designate Accounts for removal
from the trust. Any removal will be effective on the last day of the calendar
month during which Discover Bank designated the Accounts to be removed.
For Discover Bank to remove Accounts, it must deliver an officer's
certificate confirming that:
- the aggregate amount of Principal Receivables in the trust minus the
aggregate amount of Principal Receivables in the removed Accounts is not
less than the Minimum Principal Receivables Balance;
- Discover Bank reasonably believes that removing the Accounts will not
cause an Amortization Event to occur for any outstanding series;
- Discover Bank reasonably believes that removing the Accounts will not
prevent the trust from making any scheduled principal payment or deposit
for any series in full;
- Discover Bank did not select the Accounts to be removed using procedures
that it believed to be materially adverse to the investors; and
- the Rating Agencies have advised Discover Bank that the removal will not
cause them to lower or withdraw their ratings on any class of any
outstanding series of certificates.
TERMINATION OF THE TRUST
The trust is scheduled to terminate twenty-one years after the death of the
last survivor of Queen Elizabeth II of the United Kingdom of Great Britain and
her descendants living on October 1, 1993. In addition, the sellers may elect to
terminate the trust on the day after the distribution date on which the trust
has deposited funds into the appropriate investor accounts sufficient to pay in
full the Aggregate Investor Interest plus all accrued and unpaid interest on all
series then outstanding.
THE CERTIFICATES
This summary is not a complete description of the terms of the certificates
of a series. You should refer to the applicable prospectus supplement, the
Pooling and Servicing Agreement and the applicable Series Supplement for a more
complete description. If you write to the trustee at its principal corporate
trust office, the trustee will provide you a free copy of the Pooling and
Servicing Agreement, without exhibits or schedules, and the applicable Series
Supplement, without exhibits.
GENERAL
Each series will be issued pursuant to the Pooling and Servicing Agreement
and a Series Supplement. The Series Supplement will consist of two parts, a
series term sheet and an annex. The series term sheet will set forth the basic
terms of a series. The annex will constitute the bulk of the Series Supplement
and will contain the detailed provisions regarding allocations of collections
and payments to the investors of the series. The annex is designed to be used
for a variety of different types of series, and, accordingly, contains some
provisions that will not apply to all series. The series term sheet, in
conjunction with the annex, will set forth all of the specific terms of the
series.
Each series will consist of one or more classes of certificates. Each
certificate will represent a fractional undivided interest in the trust,
including the right to a percentage of all collections on the Receivables in the
trust. See "--Class Percentages and Seller Percentage." Each certificate of a
series will represent the right to receive interest payments on interest payment
dates, at the applicable interest rate, on the invested amount of the
certificate. If a series has a controlled liquidation period, each certificate
of that series will represent the right to receive monthly payments of principal
on scheduled principal payment dates and during the Amortization Period, if any,
for that series. If a series has an accumulation period, each certificate of
that series will represent the right to receive repayment of principal on an
applicable expected maturity date and monthly payments of principal during the
Amortization Period, if
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any, for that series. See "The Certificates--Interest Payments" and "--Principal
Payments" in this prospectus and in the related prospectus supplement.
If a series has one or more classes of subordinated certificates, the
rights of investors in each junior class to receive payments will be
subordinated to the rights of the investors in each senior class of that series
to the extent described in the related prospectus supplement. See "The
Certificates--Cash Flows--Subordination of Class B Certificates" in this
prospectus and "The Certificates--Subordination of the Class B
Certificates--Class A Credit Enhancement" in the related prospectus supplement.
Discover Bank owns the interest in the Principal Receivables in the trust
that is not represented by outstanding certificates of any series at any given
time. This interest is an undivided interest in the Principal Receivables,
including the right to a varying percentage, the Seller Percentage, of all
collections on the Receivables in the trust. See "--Class Percentages and Seller
Percentage."
Discover Bank's interest varies based on the size of the interests of the
trust's investors and the total amount of the trust's Principal Receivables. The
amount of Principal Receivables in the trust will vary each day as cardmembers
create new Principal Receivables and pay others.
- If in any month the amount of collections of Principal Receivables and
the Charged-Off Amount exceed the amount of new Principal Receivables
created, Discover Bank's interest in the trust declines.
- If in any month the amount of collections of Principal Receivables and
the Charged-Off Amount are less than the amount of new Principal
Receivables created, Discover Bank's interest in the trust increases.
Discover Bank's interest also declines when the trust issues additional series,
and when Discover Bank causes the Receivables in designated Accounts to be
removed from the trust. Discover Bank's interest also increases when the
investor interest in receivables for any series declines as principal is paid to
investors or deposited in the series principal funding account for the benefit
of investors, and when Discover Bank causes the Receivables in additional
Accounts to be added to the trust.
INTEREST PAYMENTS
The trust will pay interest on the certificates of a class or series as
specified in the applicable prospectus supplement. The trust will only pay this
interest to the extent that it has allocated funds for this payment in
accordance with the cash flows for the series, as described in the applicable
prospectus supplement. In general, the trust will only use Finance Charge
Collections and certain other amounts allocated to investors in a series--and if
the cash flow provisions permit reallocations, similar funds from other series
to the extent available to the applicable series under those cash flow
provisions--to make these interest payments. If necessary, the trust may also
use credit enhancement to make these interest payments. If the interest payment
dates for a series or class occur less frequently than monthly, the trust will
allocate funds for the next interest payment on each distribution date and will
deposit these funds into the applicable series interest funding account to be
used to pay interest on the next interest payment date. If a series has more
than one class of certificates, each class may have a separate interest funding
account. The trustee will invest funds on deposit in a series interest funding
account in Permitted Investments. Except as otherwise specified in the
applicable prospectus supplement, the trustee will pay any earnings on these
investments, net of losses and investment expenses, to Discover Bank or at
Discover Bank's direction.
PRINCIPAL PAYMENTS
The trust will pay principal on a series on the dates and in the amounts
set forth in or determined in accordance with the applicable prospectus
supplement, and may make monthly deposits into a series principal funding
account before these principal payments begin, as described in the prospectus
supplement, in each case subject to any conditions and exceptions set forth in
the prospectus supplement. The trust will only pay or deposit this principal to
the extent that it has allocated funds for this payment or deposit in accordance
with the cash flow provisions for the series, as described in the applicable
prospectus
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supplement. In general, the trust will only use Principal Collections and
amounts used to reimburse charge-offs allocated to investors in a series--and if
the cash flow provisions permit reallocation, similar amounts reallocated from
other series to the applicable series to the extent available to the applicable
series under those cash flow provisions--to make these principal payments or
deposits. Unless the prospectus supplement for a series specifies otherwise, the
trust will not reallocate funds to make a principal payment or deposit for any
series during the Amortization Period or Early Accumulation Period for that
series.
The following section describes generally how the trust pays principal
during the different periods of the series. Each series will not have all of
these periods. If an Amortization Event or an Early Accumulation Event occurs
during the revolving period, accumulation period or controlled liquidation
period for a series, that period will end and an Amortization Period or Early
Accumulation Period will begin.
Revolving Period. Unless otherwise specified in the related prospectus
supplement, the trust will not pay any principal on the certificates of a series
during the revolving period for that series.
Accumulation Period. If a series has an accumulation period, the trustee
will deposit funds into the series principal funding account for that series on
each distribution date of the accumulation period in accordance with the cash
flow provisions of that series. The trust will pay principal in a lump sum on
the expected maturity date for each class of the series, using funds from the
series principal funding account. If that account does not have sufficient funds
to pay principal of a class on the expected maturity date for that class, an
Amortization Event will occur.
Controlled Liquidation Period. If a series has a controlled liquidation
period, the trust will pay principal on certificates of that series on the dates
and in the amounts set forth in or determined in accordance with the applicable
prospectus supplement, using funds available for those principal payments in
accordance with the cash flow provisions of that series. Unless otherwise
specified in the prospectus supplement, if the trust has not fully paid the
principal on a class of certificates in a series by the expected final payment
date for that class, an Amortization Event will occur.
Early Accumulation Period. If an Early Accumulation Event occurs for a
series, the trust will deposit funds into the Series Principal Funding Account
for that series on each distribution date of the Early Accumulation Period until
the series investor interest in receivables is zero or until the Series
Termination Date. To the extent funds are available, the trust will pay
principal on the date or dates and in the amounts it otherwise would have paid
principal had the Early Accumulation Event not occurred. Under certain
circumstances, an Amortization Event may occur after an Early Accumulation
Event, in which case an Amortization Period will begin.
Amortization Period. If an Amortization Event occurs for a series, the
trust will pay principal on certificates of that series on each distribution
date of the Amortization Period, using funds available to pay that principal,
until the series invested amount has been reduced to zero or until the Series
Termination Date.
Other Periods. The trust may issue series that pay or deposit principal in
different ways than those described above, including series that require the
trust to pay or deposit principal for some period of time, after which the
series may re-enter a revolving period in which the trust does not make
principal payments or deposits. If your series has any of these additional
periods, we will describe them in the applicable prospectus supplement.
ISSUANCE OF ADDITIONAL SERIES
Discover Bank may from time to time direct the trustee to issue additional
series of certificates. Each new issuance will be pursuant to the Pooling and
Servicing Agreement and a Series Supplement. Unless otherwise specified in the
related prospectus supplement, each new issuance will reduce the amount of the
Seller Interest by an amount equal to the initial investor interest in
Receivables for the new series.
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Discover Bank will designate the terms of any new issuance including, but
not limited to:
- the initial series investor interest in Receivables,
- the number of classes,
- the initial investor interest in Receivables for each class,
- the interest rate for each class,
- the payment dates for each class,
- the Series Termination Date, and
- the group to which the series will belong.
The Pooling and Servicing Agreement does not require the consent of
investors of any series to issue a new series. Discover Bank, any Additional
Sellers, the master servicer, the servicer and the trustee do not intend to seek
the consent of investors of any series to issue a new series.
Discover Bank and any Additional Seller may offer any series for sale under
a prospectus or other disclosure document for transactions either registered
under the Securities Act of 1933, as amended, or exempt from registration. These
offerings may be direct, through one or more underwriters or placement agents,
in fixed price offerings, in negotiated transactions or otherwise.
Any series may be issued in fully registered form, in book-entry form, or
if offered outside the United States, in bearer form, in minimum denominations
determined by the sellers. Discover Bank intends to offer additional series
periodically, but it is under no obligation to do so. See "Plan of
Distribution."
COLLECTIONS
The trustee has established and maintains, in the name of the trust a
Collections Account and, for each group of series, a Group Collections Account.
Each of the Collections Account and each Group Collections Account is a
segregated trust account established with the trustee or a Qualified
Institution. A Qualified Institution is a depository institution:
- organized under the laws of the United States or any individual state;
- that at all times has a short-term certificate of deposit rating of
A-1/P-1 or better from the Rating Agencies; and
- whose deposits are insured by the FDIC.
The trustee invests funds on deposit in the Collections Account or any Group
Collections Account in Permitted Investments pursuant to the Pooling and
Servicing Agreement. The master servicer has the revocable power to instruct the
trustee to make withdrawals from the Collections Account and each Group
Collections Account to carry out its duties under the Pooling and Servicing
Agreement and any Series Supplement.
Discover Bank generally uses for its own benefit any collections with
respect to its Discover Card Accounts until the distribution date on which those
collections are to be allocated to investors. However, if Discover Bank's
short-term debt rating falls below a specified level, Discover Bank, as
servicer, will be required to deposit from collections for any day directly into
the Collections Account an amount equal to the sum of the Required Daily
Deposits for each series then outstanding. Discover Bank will deposit these
collections within two business days after the date Discover Bank records its
receipt of those collections on its cardmember master file. The Rating Agencies
may from time to time change the specified levels below which Discover Bank will
be required to make these daily deposits.
If there are additional servicers, each additional servicer will also be
required to deposit from collections for any day directly into the Collections
Account an amount equal to the sum of its Required Daily Deposits for each
series then outstanding unless its short-term debt rating equals or exceeds the
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specified level. Each additional servicer will deposit these collections within
two business days after the date it records its receipt of those collections on
its cardmember master file. The Rating Agencies may from time to time change the
specified levels below which an additional servicer will have to make these
daily deposits.
Net Payments. Discover Bank may aggregate all payments made pursuant to the
Pooling and Servicing Agreement or any Series Supplement on any Trust
Distribution Date or distribution date on which Discover Bank is the master
servicer, between the master servicer or the holder of the Seller Certificate
and the investor accounts. Therefore, Discover Bank, acting as master servicer
and as agent of the holder of the Seller Certificate, may make only one payment
to each account to satisfy all payments of the master servicer pursuant to the
Pooling and Servicing Agreement or any Series Supplement. Discover Bank will
only make a payment to each account on each Trust Distribution Date or
distribution date to the extent that the amount of its payment obligation
exceeds the amount to be paid out of that account to the master servicer and the
holder of the Seller Certificate on that Trust Distribution Date or distribution
date.
If the master servicer delivers the monthly master servicer statement and
the information required to be included in the monthly investors' statement for
each outstanding series to the trustee before the distribution date, then
allocations to investor accounts may be deemed made, and the trustee may pay the
holder of the Seller Certificate or the master servicer, on the date of
delivery.
Allocations Among Groups. On or before each distribution date for each
group, Discover Bank as master servicer will direct the trustee:
- to withdraw from the Collections Account that portion of collections
allocable to the Seller Interest on that distribution date;
- to pay the amount of that withdrawal to the holder of the Seller
Certificate; and
- to withdraw all remaining collections from the Collections Account and
deposit those collections in each Group Collections Account, on or before
the distribution date for that group, in an amount equal to
- the sum of the Finance Charge Collections allocated to each series in
the group, and
- the sum of the Principal Collections allocated to each series in the
group.
Allocations Among Series. The trust will allocate collections among the
series within each group as set forth in the Series Supplements for each series
within that group. The trustee will then apply the collections for each series
in accordance with the cash flow provisions for that series.
Earnings. The trustee will pay any earnings, net of losses and investment
expenses, on funds on deposit in the Collections Account or any Group
Collections Account to the holder of the Seller Certificate.
CLASS PERCENTAGES AND SELLER PERCENTAGE
The master servicer will allocate all Finance Charge Collections, all
Principal Collections and the Charged-Off Amount among the investor interests in
Receivables for each class of each series then outstanding, the Seller Interest,
and any other interests in Receivables, such as the CCA Investor Interest for
Series 1993-3. The master servicer will make each allocation by multiplying the
amount of Finance Charge Collections, Principal Collections and the Charged-Off
Amount by the applicable Class Percentage, Seller Percentage or other
percentage.
For convenience, this prospectus refers to the Class Percentage for each
class, and certain other percentages for outstanding series, with respect to
Finance Charge Collections, Principal Collections and the Charged-Off Amount as
if those percentages will not in each case vary. The Class Percentages and other
percentages, however, may vary. The method of calculating Class Percentages and
other percentages for each series of certificates will be set forth in the
applicable prospectus supplement. The Seller
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Percentage will always equal 100% minus the sum of the Class Percentages for
each class of each series then outstanding.
SUBORDINATION
Subordinate Series. The trust may issue series of certificates that are
subordinated in right of payment, in whole or in part, to other series. Unless
otherwise specified in the related prospectus supplement, a series will not be
subordinate to any other series. Unless otherwise specified in the related
prospectus supplement, the Series Supplement for each series will provide for
the possibility that a future series may, however, be subordinate to that
existing series. The seller is under no obligation to cause the trust to issue a
subordinate series. The extent to which a subordinate series will be subordinate
to one or more series will be set forth in the Series Supplement for that
subordinate series.
Subordination of Class B Certificates. Unless otherwise specified in the
related prospectus supplement, if the trust issues a series with two classes,
the Class B certificates will be subordinate to the Class A certificates. To the
extent necessary, certain amounts originally allocable to the Class B
certificates may be reallocated to fund certain amounts for the Class A
certificates. If the Trust cannot reimburse these reallocations, the investor
interest in Receivables for the Class B certificates will be reduced. If
applicable, see "The Certificates--Subordination of the Class B
Certificates--Class A Credit Enhancement" in the related prospectus supplement.
ADJUSTMENTS TO RECEIVABLES
The aggregate amount of Receivables will increase or decrease, as
applicable, to the extent the applicable servicer adjusts any Receivable without
payment by or on behalf of a cardmember. Each servicer may adjust any Receivable
that was created as a result of a fraudulent or counterfeit charge or any
Receivable that was created in respect of merchandise returned by the
cardmember, and may otherwise adjust, increase, reduce, modify or cancel a
Receivable in accordance with its credit guidelines.
If excluding the amount of an adjustment from the calculation of the Seller
Interest would cause the Seller Interest to be an amount less than zero,
Discover Bank is obligated to deposit into the Collections Account an amount
equal to the amount by which the adjustment exceeds the Seller Interest.
Discover Bank must make this deposit, in immediately available funds, no later
than the business day following the last day of the calendar month during which
the adjustment is made.
In addition, under certain limited circumstances, a credit account that is
not an Account may be combined with an Account. That combination may increase or
decrease the amount of Receivables, depending on whether the Account is the
account surviving the combination. Discover Bank has no reason to believe these
account combinations will have a material effect on the aggregate amount of
Receivables in the trust.
ADDITIONAL FUNDS
Discover Bank may, from time to time, elect to add funds to the trust by
delivering a written notice of the election to the trustee, the master servicer
and the Rating Agencies. The written notice must specify the method of
calculating the amount of the funds to be added to the trust as of any
distribution date and the source of those funds. No election will become
effective until Standard & Poor's has advised the master servicer and Discover
Bank that the election will not cause Standard & Poor's to lower or withdraw its
rating on any class of any outstanding series. During any time that additional
funds are being added to the trust, the master servicer will cause these funds
to be allocated among each outstanding series on a pro rata basis.
The trust will further allocate the amount of additional funds allocated to
each series in accordance with the provisions of each Series Supplement. Unless
otherwise specified in the related prospectus supplement, the Series Supplement
for each series specifies that any additional funds allocated to that series
will be further allocated between the classes of that series based on the
investor interest in
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Receivables of each class as of the relevant distribution date. Unless otherwise
specified in the related prospectus supplement, no additional funds have been
added to the trust as of the date the trust issues any series, and Discover Bank
is under no obligation to add additional funds to the trust at any time in the
future.
FINAL PAYMENT OF PRINCIPAL; TERMINATION OF SERIES
The final payment of principal and interest on certificates of a series
will be due and payable no later than the Series Termination Date specified in
the related prospectus supplement.
The final payment of principal and interest on any certificate will be made
only upon presentation and surrender of the certificate at the office or agency
specified in the notice from the trustee to the certificateholders regarding the
final distribution. The trustee will provide that notice to the
certificateholders not later than the tenth day of the month of the final
distribution.
Each series will terminate on the earlier of:
- the Series Termination Date for that series; and
- the day after the distribution date on which the trust makes the final
payment of principal to the investors in that series.
If, as of the distribution date in the month before the Series Termination
Date for a series, after giving effect to all transfers, withdrawals and
deposits to occur on that distribution date, the investor interest in
Receivables for the series would be greater than zero, then the trustee will
sell Receivables or interests in Receivables in an amount sufficient to yield
proceeds equal to the series investor interest in Receivables plus any accrued
but unpaid interest. However, the amount of Receivables to be sold will not
exceed:
- the aggregate amount of Receivables in the trust; multiplied by
- the series investor interest in Receivables, divided by
- the Aggregate Investor Interest,
in each case as of the distribution date in the month preceding the Series
Termination Date.
The Receivables selected to be sold will not differ materially from the
Receivables remaining in the trust as of that distribution date. The trustee
will deposit the proceeds from this sale into the applicable investor account
and pay them to the investors in the series on the distribution date immediately
following the deposit. That payment will be the final distribution for the
certificates of the series. If the proceeds of the sale are not sufficient to
pay the outstanding principal and interest on the series, the investors in that
series will suffer an investor loss, which will be borne first by investors in
the most junior class, and then by investors in each more senior class, in
reverse order of seniority.
CREDIT ENHANCEMENT
The credit enhancement for a series may include a cash collateral account,
a letter of credit, a surety bond, an insurance policy, or any other form of
credit enhancement described in the related prospectus supplement. Credit
enhancement may also be provided to a series or a class of a series by
subordination provisions that require the trust to distribute principal and/or
interest for the certificates of that series or class before it makes
distributions to one or more other series or other classes of that series.
The related prospectus supplement will describe any credit enhancement
provided for a series. The description will include such information as:
- the amount payable under the credit enhancement;
- any conditions to that payment;
- the circumstances under which the credit enhancement will be available;
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- the class or classes of the series that will receive the direct benefit
of the credit enhancement;
- the conditions, if any, under which the amount payable under the credit
enhancement may be terminated, reduced or replaced; and
- other material provisions of the related credit enhancement agreement.
REPURCHASE OF TRUST PORTFOLIO
A Trust Portfolio Repurchase Event will occur upon discovery that as of
October 27, 1993 or, for any additional Accounts, as of the date on which the
applicable seller assigned the Receivables in those additional Accounts to the
trust:
- the Pooling and Servicing Agreement or appropriate assignment, as the
case may be, does not constitute a valid and binding obligation of each
seller, subject to usual and customary exceptions relating to bankruptcy,
insolvency and general equity principles;
- the Pooling and Servicing Agreement or appropriate assignment, as the
case may be, does not constitute:
- a valid transfer and assignment to the trust of all right, title and
interest of each seller in and to the Receivables, whether then existing
or thereafter created, and the proceeds of those Receivables; or
- the grant of a perfected security interest of first priority under the
UCC as in effect in the state in which the chief executive office of the
applicable seller is located, in those Receivables and the proceeds of
those Receivables, effective as to each Receivable at the time it was or
is created;
- any seller or a person claiming through or under any seller has any claim
to or interest in any investor account, other than the interests of the
investors or the interest of any seller as a debtor for purposes of the
UCC as in effect in the state in which the chief executive office of the
applicable seller is located; or
- certain representations and warranties of any seller regarding:
- its corporate status and authority to assign Receivables and perform its
obligations under the Pooling and Servicing Agreement and any Series
Supplement; and
- the accuracy of information furnished by that seller to the trustee,
are not true and the applicable seller does not cure the breach within a
specified time period.
If a Trust Portfolio Repurchase Event occurs, either the trustee or
investors holding certificates that represent at least 51% of the Aggregate
Invested Amount, may direct Discover Bank to purchase Receivables transferred to
the trust on or before the distribution date for each series then outstanding
within 60 days of that notice. However, if an assignment of additional Accounts
results in a Trust Portfolio Repurchase Event, Discover Bank will repurchase
only the Receivables in those additional Accounts. Discover Bank will not be
required to make such a purchase, however, if, on any day during the applicable
period, the Trust Portfolio Repurchase Event does not adversely affect in any
material respect the interests of the investors as a whole. The determination of
materiality referred to above will be made by an officer of the master servicer
in his or her sole reasonable judgment.
The purchase price for each series then outstanding will equal the investor
interest in Receivables plus all accrued but unpaid interest for the series.
However, if an assignment of additional Accounts results in a Trust Portfolio
Repurchase Event, only the Receivables in those additional Accounts will be
repurchased at a price for each series equal to:
- the sum of the Class Percentages for each class of the series for
Principal Collections for the next following distribution date for the
series; multiplied by
- the amount of Receivables attributable to the additional Accounts,
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and the trustee will apply the purchase price as collections of those
Receivables in accordance with each applicable Series Supplement. The trustee
will deposit the purchase price in the Group Collections Account relating to
that series. If Discover Bank's obligation to repurchase the trust portfolio is
at any time the subject of concurrent obligations of one or more other parties
to the Seller Certificate Ownership Agreement, then Discover Bank's obligation
to repurchase the trust portfolio will be conditioned on Discover Bank's ability
to enforce those concurrent obligations against the other parties to that
agreement.
REPURCHASE OF SPECIFIED RECEIVABLES
A Receivable Repurchase Event will occur if each Receivable that is
transferred to the trust is not, as of the time of transfer, an Eligible
Receivable, and
- this has a material adverse effect on the investors' interest in the
Receivables as a whole; and
- it is not cured within 60 days of the earlier of:
- actual knowledge of the breach by the relevant seller; or
- receipt by that seller of written notice of the breach given by the
trustee.
The determination of materiality referred to above will be made by an
officer of the master servicer in his or her sole reasonable judgment. "Eligible
Receivable" means each Receivable:
- which is payable in United States dollars;
- which was created in compliance, in all material respects, with all
requirements of law applicable to the seller and the servicer with
respect to that Receivable, and pursuant to a credit agreement that
complies, in all material respects, with all requirements of law
applicable to that seller and servicer;
- as to which, if the Receivable was created before October 27, 1993, or
the relevant addition date if the Account was added to the trust after
October 27, 1993,
- at the time the Receivable was created, the seller of the Receivable had
good and marketable title to the Receivable free and clear of all liens
arising under or through the seller, and
- at the time the seller conveyed the Receivable to the trust, the seller
had, or the trust will have, good and marketable title to the Receivable
free and clear of all liens arising under or through the seller;
- as to which, if the Receivable was created on or after October 27, 1993
or the relevant addition date if the Account was added to the trust after
October 27, 1993, at the time the Receivable was created, the trust will
have good and marketable title to the Receivable free and clear of all
liens arising under or through the seller with respect to the Receivable;
and
- which constitutes an "account" or "general intangible" under and as
defined in Article 9 of the UCC as then in effect in the state in which
the chief executive office of the seller of that Receivable is located.
Discover Bank will purchase all the Receivables in each Account in which there
is any Receivable to which the Receivable Repurchase Event relates on the terms
and conditions set forth below.
Discover Bank will purchase the Receivables in those Accounts by directing
the master servicer to deduct the amount of those Receivables that are Principal
Receivables from the aggregate amount of Principal Receivables in the trust. If,
however, excluding those Receivables from the calculation of the Seller Interest
would cause the Seller Interest to be an amount less than zero, then on the
following Trust Distribution Date, Discover Bank will deposit into the
Collections Account in immediately available funds an amount equal to the amount
by which the Seller Interest would be reduced below zero. The deposit will be
considered a repayment in full of the Receivables, and will be treated as
collections of Principal Receivables in the preceding calendar month. If
Discover Bank's obligation to repurchase Receivables is at any time the subject
of concurrent obligations of one or more other parties to the Seller Certificate
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Ownership Agreement, then Discover Bank's obligation to repurchase Receivables
will be conditioned on Discover Bank's ability to enforce those concurrent
obligations against the other parties to that agreement.
REPURCHASE OF A SERIES
A Series Repurchase Event for a series will occur upon discovery that, as
of the date the trust issues the series, the applicable Series Supplement does
not constitute a legal, valid and binding obligation of each seller enforceable
against each seller in accordance with its terms, subject to usual and customary
exceptions relating to bankruptcy, insolvency and general equity principles.
If a Series Repurchase Event for a series occurs, either the trustee or
investors holding certificates of that series that represent at least 51% of the
invested amount of that series, may direct Discover Bank to purchase the
certificates of that series within 60 days after Discover Bank receives that
direction. Discover Bank will not be required to make the purchase, however, if,
on any day during the 60-day period, the Series Repurchase Event does not
adversely affect in any material respect the interests of the investors in the
series as a whole.
On the distribution date set for the purchase, Discover Bank will deposit
into the applicable investor account for that series an amount equal to the sum
of the series investor interest in Receivables and all accrued but unpaid
interest. The amount on deposit in the applicable investor account will be paid
to the investors in the series when they present and surrender their
certificates.
REPURCHASE OF CERTIFICATES
Sellers may become holders of certificates, and Discover Bank may cancel
any certificates owned by a seller by providing notice of cancellation to the
trustee. However, Discover Bank may not cancel any Class B certificates of any
series unless Discover Bank has been advised by the Rating Agencies that
cancellation will not cause the Rating Agencies to lower or withdraw their
ratings of any certificates then outstanding. Simultaneously with any
cancellation of certificates of a series, the invested amount of the applicable
class of the series will be reduced, the invested amount for the series will be
reduced, and the Seller Interest will be increased by the invested amount
represented by the canceled certificates of the series. No reduction of a class
invested amount as described in the preceding sentence will result in a decrease
in any Class Percentage for the affected class if a Fixed Principal Allocation
Event for that series has previously occurred.
SALE OF SELLER INTEREST
The Seller Certificate was issued to Discover Bank. Any Additional Sellers
will also become holders or owners of the Seller Certificate, as
tenants-in-common with Discover Bank, and will enter into a Seller Certificate
Ownership Agreement with Discover Bank. If there are Additional Sellers, all
references to actions taken by Discover Bank as holder of the Seller Certificate
will be deemed to be taken by Discover Bank on behalf of the holders of the
Seller Certificate. Under the Pooling and Servicing Agreement, neither Discover
Bank nor any Additional Seller may transfer, assign, sell or otherwise convey,
pledge or hypothecate or otherwise grant a security interest in any portion of
the Seller Interest represented by the Seller Certificate except that:
- any seller may transfer all or part of its interest in the Seller
Certificate to an affiliate of Discover Bank that is included in the same
"affiliated group" as Discover Bank for United States federal income tax
purposes; and
- any seller may transfer a portion of the Seller Interest on terms
substantially similar to the terms of the Pooling and Servicing
Agreement, so long as
- the agreements and other related documentation are consistent with, and
subject to, the terms of the Pooling and Servicing Agreement and any
Series Supplement and do not require any action prohibited or prohibit
any action that is required on the part of the master servicer, any
seller,
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the trustee or any servicer by the Pooling and Servicing Agreement or
any Series Supplement or necessary to protect the interests of the
investors; and
- the Rating Agencies advise the seller that they will not lower or
withdraw the rating of any class of any outstanding series as a result
of the transfer.
Notwithstanding the above, the Rating Agencies' advice is not required if the
transfer is made to comply with certain regulatory requirements.
REALLOCATION OF SERIES AMONG GROUPS
The master servicer may elect, at any time, subject to certain conditions,
to move any series from the group of which it is then a member to any other
group, including without limitation to a new group established at that time, of
which the series to be moved is the only series. The master servicer may move a
series from one group to another group only if the following conditions are
satisfied:
- the group from which the series is moved and the group to which the
series is moved have the same distribution date;
- the master servicer has certified to the trustee that the master servicer
reasonably believes that moving the series would not delay any payment of
principal to the investors in any series then outstanding;
- the master servicer has certified to the trustee that the master servicer
reasonably believes that moving the series would not cause an
Amortization Event to occur with respect to any series then outstanding;
and
- the Rating Agencies have advised the master servicer and Discover Bank
that moving the series would not cause them to lower or withdraw their
ratings of any class of any series then outstanding.
AMENDMENTS
The master servicer, the sellers, the trustee and the servicers may amend
the Pooling and Servicing Agreement and any Series Supplement from time to time
without the consent of the investors in any outstanding series, for any of the
following purposes:
- to add to the covenants and agreements contained in the Pooling and
Servicing Agreement or the Series Supplement or to surrender any right or
power in those agreements reserved to or conferred upon the sellers, the
master servicer or any servicer, provided that the amendment will not
adversely affect in any material respect the interests of the investors
in any class of any series then outstanding;
- to add provisions to or change or eliminate any of the provisions of the
Pooling and Servicing Agreement or any Series Supplement, provided that
the amendment will not adversely affect in any material respect the
interests of the investors in any class of any series then outstanding;
- to add provisions to or change any of the provisions of the Pooling and
Servicing Agreement or any Series Supplement to accommodate the addition
of interests in other pools of credit card receivables to the trust; or
- to cure any ambiguity or to correct or supplement any defective or
inconsistent provision contained in the Pooling and Servicing Agreement,
in any Series Supplement or in any amendment to the Pooling and Servicing
Agreement or any Series Supplement.
The master servicer, the sellers, the trustee and the servicers may also
amend the Pooling and Servicing Agreement and any Series Supplement for any
series from time to time with the consent of investors holding certificates that
represent at least 66 2/3% of the invested amount for each class adversely
affected by the amendment. Each amendment may add any provisions to, or change
in any manner or
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eliminate any of the provisions of the Pooling and Servicing Agreement and the
applicable Series Supplement, or modify in any manner the rights of the
investors of the series, provided that:
- the trustee will have been advised by each Rating Agency that the Rating
Agency will not lower or withdraw its ratings assigned to the
certificates of the series as a result of the amendment; and
- the amendment will not materially and adversely affect the interests of
the certificateholders of any class of the series by reducing in any
manner the amount of, or delaying the timing of, distributions that are
required to be made to them without the consent of the affected
certificateholders, or by reducing the percentage required to consent to
any such amendment, without the consent of each certificateholder of each
affected class.
For purposes of calculating whether a 66 2/3% consent has been achieved,
the trustee will calculate the applicable class invested amount or series
invested amount without taking into account the invested amount represented by
any certificates beneficially owned by any seller or any affiliate of any
seller. No seller or affiliate of a seller will be entitled to vote on any
amendment described in this paragraph. If any amendment to the Pooling and
Servicing Agreement would adversely affect the interests of any class of any
other series of certificates then outstanding, the certificateholders of each
class adversely affected by the proposed amendment will also have to consent to
the amendment. Promptly after the execution of any amendment or consent
described in this paragraph, the trustee will notify the certificateholders of
the substance of the amendment.
If the following actions are completed in accordance with the Pooling and
Servicing Agreement and/or any Series Supplement, they will not constitute an
amendment to the Pooling and Servicing Agreement or any Series Supplement for
the purposes of the preceding two paragraphs:
- the execution and delivery of any Series Supplement;
- the addition of Receivables to the trust;
- the removal of Receivables from the trust;
- the addition or removal of any seller or servicer in connection with an
addition to or removal from the trust of Receivables; or
- the replacement of any servicer, master servicer or trustee.
LIST OF CERTIFICATEHOLDERS
If the Trust has issued Definitive Certificates with respect to the
certificates of any series, then three or more certificateholders of record of
any class of that series, holding certificates that represent at least 5% of the
invested amount of that class, may request in writing access to the list of
certificateholders of that series. After the requesting certificateholders have
adequately indemnified the trustee for its costs and expenses, the trustee will
afford those certificateholders access during business hours to the current list
of certificateholders of that series to communicate with those
certificateholders about their rights under the Pooling and Servicing Agreement
and the applicable Series Supplement. See "--Definitive Certificates."
MEETINGS
The Pooling and Servicing Agreement does not provide for any annual or
other meetings of certificateholders of any series.
BOOK-ENTRY REGISTRATION
Discover Bank has obtained the information in this section concerning DTC,
Clearstream Banking, and Euroclear and their book-entry systems and procedures
from sources that Discover Bank and the trust believe to be reliable, but
Discover Bank and the trust take no responsibility for the accuracy of the
information in this section.
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Unless otherwise provided in the applicable prospectus supplement, you may
hold your certificates through DTC, in the United States, or Clearstream Banking
or Euroclear, in Europe. The certificates will be registered in the name of the
nominee of DTC. Clearstream Banking and Euroclear will hold omnibus positions on
behalf of Clearstream Banking's customers and Euroclear's participants,
respectively, through customers' securities accounts in Clearstream Banking's
and Euroclear's names on the books of their respective depositories, which in
turn will hold those positions in customers' securities accounts in the
depositories' names on the books of DTC. Discover Bank has been informed by DTC
that DTC's nominee will be Cede & Co. Accordingly, Cede is expected to be the
holder of record of the certificates. Unless otherwise provided in the
applicable prospectus supplement, you may purchase certificates in book-entry
form in minimum denominations of $1,000 and integral multiples of $1,000. You
will not be entitled to receive a certificate representing your interest in the
certificates. Unless and until the trust issues Definitive Certificates under
the limited circumstances described in this prospectus, when we refer to actions
by investors or certificateholders, we refer to actions taken by DTC upon
instructions from its participants, and when we refer to distributions and
notices to investors or certificateholders, we refer to distributions and
notices to DTC or Cede, as the registered holder of the certificates, for
distribution to investors in accordance with DTC procedures. See "--Definitive
Certificates."
DTC is:
- a limited-purpose trust company organized under the laws of the State of
New York,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the New York UCC, and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the Securities Exchange Act of 1934.
DTC was created to hold securities for its participating organizations, or
participants, and to facilitate the clearance and settlement of securities
transactions between its participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movements of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations, and may include other
organizations. Indirect access to the DTC system also is available to indirect
participants such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly.
Transfers between DTC participants will occur in accordance with DTC rules.
Transfers between Clearstream Banking's customers and Euroclear's participants
will occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Banking's customers or Euroclear's participants, on the other hand, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its depository. However, cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, which will
be on European time. The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions to
its depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Clearstream Banking's customers and Euroclear's participants may not
deliver instructions directly to the depositories.
Because of time zone differences, credits of securities in Clearstream
Banking or Euroclear resulting from a transaction with a DTC participant will be
made during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and those credits or any transactions in
those securities settled during that processing will be reported to the relevant
Clearstream Banking customer or Euroclear participant on that business day. Cash
received in Clearstream Banking or
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Euroclear as a result of sales of securities by or through a Clearstream Banking
customer or a Euroclear participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant
Clearstream Banking or Euroclear cash account only as of the business day
following settlement in DTC. For additional information on tax documentation
procedures for the certificates, see "Federal Income Tax Consequences--Foreign
Investors."
If you are not a participant or an indirect participant in DTC, you may
purchase, sell or otherwise transfer ownership of, or other interests in, the
certificates only through DTC participants and indirect participants. In
addition, you will receive all distributions of principal and interest from the
trustee through the participants. Under a book-entry format, you may experience
some delay in your receipt of payments, since the trustee will forward the
payments to Cede, as nominee for DTC. DTC will forward the payments to its
participants, which then will forward them to indirect participants or
beneficial owners. Discover Bank anticipates that the only "certificateholder"
will be Cede, as nominee of DTC. You will not be recognized by the trustee as a
certificateholder, as that term is used in the Pooling and Servicing Agreement,
and you will only be permitted to exercise the rights of certificateholders
indirectly through the DTC participants.
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 certificates; and
- to receive and transmit distributions of the principal of and interest on
the certificates.
Participants and indirect participants with which you have accounts with respect
to the certificates similarly are required to make book-entry transfers and
receive and transmit these payments on your behalf.
Because DTC can only act on behalf of its participants, who in turn act on
behalf of indirect participants and certain banks, your ability to pledge
certificates to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of those certificates, may be limited due
to the lack of a physical certificate for those certificates.
DTC has advised Discover Bank that it will take any action permitted to be
taken by a certificateholder under the Pooling and Servicing Agreement or any
applicable Series Supplement only at the direction of one or more participants
to whose account with DTC the certificates are credited. DTC may take
conflicting action with respect to other undivided interests in the certificates
to the extent that those actions are taken on behalf of participants whose
holdings include those undivided interests.
Clearstream Banking holds securities for its customers and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream Banking provides various services,
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream Banking also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream Banking has established an electronic bridge with Morgan Guaranty
Trust Company of New York, as the Operator of the Euroclear System in Brussels,
to facilitate settlement of trades between Clearstream Banking and Euroclear.
Clearstream Banking currently accepts over 110,000 securities issues on its
books.
Clearstream Banking's customers are worldwide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. In the U.S., Clearstream Banking's customers are
limited to securities brokers and dealers. Indirect access to Clearstream
Banking is available to other institutions that clear through or maintain a
custodial relationship with a Clearstream Banking customer.
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Clearstream Banking is registered as a bank in Luxembourg, and as such is
subject to regulation by the Luxembourg Commission for the Supervision of the
Financial Sector, which supervises Luxembourg banks.
The Euroclear System was created in 1968 to hold securities for its
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 risk from lack of
simultaneous transfers of securities and cash. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office, the "Euroclear Operator," under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation. The Euroclear
Operator conducts all operations, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Euroclear cooperative corporation. The Euroclear cooperative corporation
establishes policy for the Euroclear System on behalf of Euroclear participants.
Euroclear participants include banks--including central banks--securities
brokers and dealers and other professional financial intermediaries, and may
include the underwriters of the certificates. Other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly, also have indirect access to the Euroclear System.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that 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.
These terms, conditions and operating procedures govern:
- transfers of securities and cash within the Euroclear System;
- withdrawal of securities and cash from the Euroclear System; and
- receipts of payments with respect to securities in the Euroclear System.
All securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under its terms, conditions and operating procedures
only on behalf of Euroclear participants and has no record of or relationship
with persons holding through Euroclear participants.
Clearstream Banking or Euroclear will credit distributions on the
certificates held through them to the cash accounts of Clearstream Banking's
customers or Euroclear's participants in accordance with the relevant system's
rules and procedures, to the extent received by its depository. These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Federal Income Tax Consequences."
Clearstream Banking or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a certificateholder under the Pooling and
Servicing Agreement or any applicable Series Supplement on behalf of a
Clearstream Banking customer or Euroclear participant only in accordance with
its relevant rules and procedures and subject to its depository's ability to
effect those actions on its behalf through DTC.
Although DTC, Clearstream Banking and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of certificates among
participants of DTC, Clearstream Banking and Euroclear, they are under no
obligation to perform or continue to perform those procedures and they may
discontinue those procedures at any time.
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DEFINITIVE CERTIFICATES
Unless otherwise provided in the applicable prospectus supplement, the
trust will issue a class of certificates in fully registered, certificated form
to you or your nominees--"Definitive Certificates"--rather than to DTC or its
nominees, only if:
- the master servicer advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository
for that class, and the trustee or the master servicer is unable to
locate a qualified successor;
- the master servicer, at its option, elects to terminate the book-entry
system through DTC; or
- after a Master Servicer Termination Event occurs, beneficial owners
representing in the aggregate at least 51% of the respective class
invested amount advise the trustee and DTC through DTC participants in
writing that continuing a book-entry system through DTC, or a successor
to DTC, is no longer in the best interest of the beneficial owners of
that class.
If any of the events described in the immediately preceding paragraph
occurs, DTC is required to notify all DTC participants that Definitive
Certificates of the class affected by the event will be available through DTC.
When DTC surrenders the applicable certificates held by it and the trustee
receives instructions for re-registration, the trustee will issue the applicable
certificates as Definitive Certificates. Thereafter the trustee will recognize
the registered holders of the Definitive Certificates as certificateholders
under the Pooling and Servicing Agreement and the applicable Series Supplement.
The trustee will distribute principal and interest on the certificates
directly to holders of Definitive Certificates in accordance with the procedures
set forth in the Pooling and Servicing Agreement and the applicable Series
Supplement. On each distribution date, the trustee will mail a check to holders
in whose names the Definitive Certificates were registered at the close of
business on the last day of the preceding calendar month, to the address of that
holder as it appears on the register maintained by the trustee. The final
payment on any certificate, whether a Definitive Certificate or one of the
certificates registered in the name of Cede representing the certificates,
however, will be made only upon presentation and surrender of the certificate at
the office or agency specified in the notice of final distribution to
certificateholders. The trustee will provide that notice to registered
certificateholders not later than the tenth day of the month of that final
payment.
You may transfer and exchange Definitive Certificates at the offices of the
trustee, or at another office that Discover Bank designates. The transfer agent
will not impose a service charge to register any transfer or exchange, but the
transfer agent may require you to pay a sum sufficient to cover any tax or other
governmental charge imposed in connection with a transfer or exchange.
SERVICING
MASTER SERVICER AND SERVICER
Discover Bank acts as master servicer for the trust. In addition to the
master servicer, there also may be one or more servicers of the Accounts.
Discover Bank is currently the only servicer. Additional servicers may be added
to the trust at a later date if receivables in accounts other than credit
accounts originated by Discover Bank are added to the trust. Each servicer will
perform servicing functions with respect to the Accounts for which it is the
servicer. The master servicer will coordinate the activities of the various
servicers for the trust. The duties of the master servicer include:
- aggregating collections from the servicers and distributing those
collections to the various investor accounts;
- directing the investment of funds on deposit in the investor accounts and
the credit enhancement accounts in Permitted Investments;
- receiving the monthly servicing fee and allocating it among the
servicers;
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- preparing reports for investors; and
- making any filings on behalf of the trust with the Securities and
Exchange Commission or other governmental agencies.
The master servicer has no duty to pay an amount in lieu of collections
from its own funds if any servicer fails to transfer collections to the master
servicer or to the trust, at the direction of the master servicer. Upon
appointment of any additional servicer, Discover Bank as master servicer and
servicer and the additional servicer will enter into a master servicing
agreement, which will govern the relationship among the master servicer and the
servicers.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The master servicer is paid a monthly servicing fee, on behalf of the
certificateholders of each outstanding series and the sellers, for each calendar
month in an amount equal to no less than 2% per annum, calculated on the basis
of a 360-day year of twelve 30-day months, of the amount of Principal
Receivables in the trust on the first day of that calendar month. The monthly
servicing fee compensates the master servicer for its activities and reimburses
it for its expenses. If there is more than one servicer, the master servicer's
expenses will include the payment of a servicing fee to each servicer, pursuant
to the terms of a master servicing agreement to be entered into by Discover Bank
as master servicer and servicer and any other servicer. The monthly servicing
fee is allocated among the Seller Interest and each outstanding series. The
share of each monthly servicing fee allocable to the holder of the Seller
Certificate on any Trust Distribution Date equals:
- the investor servicing fee percentage of 2% per year, divided by twelve,
unless otherwise specified in the related prospectus supplement;
multiplied by
- the amount of Principal Receivables in the trust as of the first day of
the calendar month preceding that Trust Distribution Date; multiplied by
- the amount of the Seller Interest, divided by
- the greater of
- the amount of Principal Receivables in the trust and
- the Aggregate Investor Interest.
The holder of the Seller Certificate pays this share of each monthly
servicing fee to the master servicer on or before each Trust Distribution Date.
Unless otherwise specified in the related prospectus supplement, the portion of
the fee allocated to the investor interest for each class of each series equals:
- the amount of the servicing fee for a given calendar month, multiplied by
- the class investor interest on the first day of the calendar month
divided by
- the series investor interest on the first day of the calendar month.
The servicing fee for any given calendar month for each series will be
equal to the investor servicing fee percentage divided by twelve multiplied by
the series investor interest on the first day of the calendar month, or in the
case of the first distribution date, as of the first day of the calendar month
in which the trust issued the series. The class monthly servicing fee for each
class will be funded from Finance Charge Collections allocated to that class and
may be funded from certain other sources as described in "The Certificates--Cash
Flows" and "Annex A--Cash Flows" in the related prospectus supplement. The
remainder of the monthly servicing fee will be allocated to each other
outstanding series. Neither the trustee nor the certificateholders of any series
will have any obligation to pay that portion of the monthly servicing fee that
is payable by any class of any other series issued by the trust or that is
payable by the sellers.
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The master servicer pays from its servicing compensation the servicing fees
for each servicer and certain other expenses incurred in connection with
servicing the Receivables. These include, without limitation, payment of the
fees and disbursements of the trustee and independent accountants and other fees
and expenses of the trust not expressly stated in the Pooling and Servicing
Agreement or any Series Supplement to be for the account of the
certificateholders. However, neither the master servicer nor any servicer will
be liable for any federal, state or local income or franchise tax, or any
interest or penalties with respect to any tax, assessed on the trust, the
trustee or the investors.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SERVICERS
Neither the master servicer nor any servicer may resign from its
obligations and duties as master servicer or servicer under the Pooling and
Servicing Agreement or any Series Supplement unless it determines that it is no
longer permitted to perform its duties under applicable law or unless certain
other limited circumstances apply. The master servicer or any servicer may not
effectively resign until the trustee or a successor to the master servicer or
servicer, as applicable, has assumed the master servicer's or servicer's
responsibilities and obligations under the Pooling and Servicing Agreement and
the Series Supplements.
The master servicer or any servicer may delegate any of its duties under
the Pooling and Servicing Agreement or any Series Supplement. However, the
master servicer or the servicer will continue to be responsible and liable for
the performance of delegated duties, and will not be deemed to have resigned
under the Pooling and Servicing Agreement.
Any of the following entities will become a successor to the master
servicer or the servicer, as applicable, under the Pooling and Servicing
Agreement and the Series Supplements if it executes a supplement to the Pooling
and Servicing Agreement and each Series Supplement then outstanding:
- any corporation into which the master servicer or the servicer is merged
or consolidated in accordance with the Pooling and Servicing Agreement;
- any corporation resulting from any merger or consolidation to which the
master servicer or any servicer is a party; or
- any corporation succeeding to the business of the master servicer or any
servicer.
MASTER SERVICER TERMINATION EVENTS
If any Master Servicer Termination Event occurs, either the trustee or
holders of certificates that represent at least 51% of the invested amount for
any class of any series that is materially adversely affected by the Master
Servicer Termination Event, may terminate all of the rights and obligations of
Discover Bank as master servicer under the Pooling and Servicing Agreement and
any outstanding Series Supplement. The trustee may terminate these rights and
obligations by giving written notice to Discover Bank as master servicer; the
holders of the requisite amount of certificates may terminate these rights and
obligations by giving written notice to Discover Bank as master servicer and to
the trustee. The trustee will appoint a successor master servicer as promptly as
possible. If the trustee has not appointed a successor master servicer who has
accepted the appointment by the time Discover Bank ceases to act as master
servicer, all authority, power and obligations of Discover Bank as master
servicer under the Pooling and Servicing Agreement and any Series Supplement
then outstanding will pass to and be vested in the trustee.
A Master Servicer Termination Event refers to any of the following events:
- the master servicer fails to make any payment, transfer or deposit, or to
give instructions to the trustee to make any withdrawal, on the date it
is required to do so under the Pooling and Servicing Agreement, any
Series Supplement or any master servicing agreement, or within five
business days after the date it was required to do so;
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- the master servicer fails duly to observe or perform in any material
respect any of its other covenants or agreements set forth in the Pooling
and Servicing Agreement, any Series Supplement or any master servicing
agreement, and does not cure that failure for 60 days after it receives
notice that it has failed to perform from the trustee, or for 60 days
after it and the trustee receive notice that it has failed to perform
from holders of certificates that represent at least 25% of the invested
amount for any class of any series materially adversely affected by the
failure;
- any representation, warranty or certification made by the master servicer
in the Pooling and Servicing Agreement, any Series Supplement, any master
servicing agreement or in any certificate delivered pursuant to any of
these agreements proves to have been incorrect when made, which:
- has a material adverse effect on the rights of the investors of any
class of any series then outstanding, and
- continues to be incorrect in any material respect for 60 days after
written notice of its incorrectness has been given to the master
servicer by the trustee, or to the master servicer and the trustee by
holders of certificates that represent at least 25% of the invested
amount for any class of any series materially adversely affected by the
incorrect representation, warranty or certification; or
- certain events of bankruptcy, insolvency or receivership of the master
servicer occur. However, the FDIC may have the power to prevent the
trustee or investors from effecting a transfer of servicing if the Master
Servicer Termination Event relates only to the appointment of a
conservator or receiver or the insolvency of Discover Bank, or any other
FDIC-insured depository institution, as master servicer. Similarly, if a
Master Servicer Termination Event occurs with respect to a master
servicer subject to Title 11 of the United States Code, and no Master
Servicer Termination Event exists other than the filing of a bankruptcy
petition by or against the master servicer, the trustee or investors may
be prevented from effecting a transfer of servicing.
SERVICER TERMINATION EVENTS
If any Servicer Termination Event occurs with respect to any servicer,
either the trustee or holders of certificates that represent at least 51% of the
invested amount for any class of any series that is materially adversely
affected by the Servicer Termination Event, may terminate all of the rights and
obligations of that servicer under the Pooling and Servicing Agreement, any
Series Supplement and any master servicing agreement. The trustee may terminate
these rights and obligations by giving written notice to Discover Bank as master
servicer and to the servicer to which the Servicer Termination Event relates;
the holders of the requisite amount of certificates may terminate these rights
and obligations by giving written notice to Discover Bank as master servicer, to
the servicer to which the Servicer Termination Event relates, and to the
trustee. If the trustee has not appointed a successor servicer who has accepted
the appointment by the time the servicer ceases to act as a servicer, all
authority, power and obligations of the servicer under the Pooling and Servicing
Agreement, any Series Supplement then outstanding and any master servicing
agreement will pass to and be vested in the trustee.
A Servicer Termination Event, for any servicer, refers to any of the
following events:
- the servicer fails to make any payment, transfer or deposit on the date
it is required to do so under the Pooling and Servicing Agreement, any
Series Supplement, or any master servicing agreement, or within five
business days after the date it was required to do so;
- the servicer fails duly to observe or perform in any material respect any
of its other covenants or agreements set forth in the Pooling and
Servicing Agreement, any Series Supplement or any master servicing
agreement, and does not cure that failure for 60 days after it receives
notice that it has failed to perform from the trustee, or for 60 days
after it and the trustee receive notice that it has failed to perform
from holders of certificates that represent at least 25% of the invested
amount for any class of any series materially adversely affected by the
failure;
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- any representation, warranty or certification made by the servicer in the
Pooling and Servicing Agreement, any Series Supplement, any master
servicing agreement or in any certificate delivered pursuant to any of
these agreements proves to have been incorrect when made, which:
- has a material adverse effect on the rights of the investors of any
class of any series then outstanding, and
- continues to be incorrect in any material respect for 60 days after
written notice of its incorrectness has been given to the servicer by
the trustee, or to the servicer and the trustee by holders of
certificates that represent at least 25% of the invested amount for any
class of any series materially adversely affected by the incorrect
representation, warranty or certification; or
- certain events of bankruptcy, insolvency or receivership of the servicer
occur. However, the FDIC may have the power to prevent the trustee or
investors from effecting a transfer of servicing if the Servicer
Termination Event relates only to the appointment of a conservator or
receiver or the insolvency of Discover Bank, or any other FDIC-insured
depository institution, as servicer. Similarly, if a Servicer Termination
Event occurs with respect to a servicer subject to Title 11 of the United
States Code, and no Servicer Termination Event exists other than the
filing of a bankruptcy petition by or against the servicer, the trustee
or investors may be prevented from effecting a transfer of servicing.
EVIDENCE AS TO COMPLIANCE
On or before March 15 of each calendar year, the master servicer will cause
a firm of nationally recognized independent public accountants to furnish a
report to the trustee, the master servicer and each servicer to the effect that:
- in the opinion of those accountants, each of the master servicer and each
servicer had in effect on the date of their report a system of internal
accounting controls relating to its servicing procedures that was
sufficient to prevent errors and irregularities that would be material to
the assets of the trust;
- nothing has come to the accountants' attention that would cause them to
believe that the master servicer or any servicer has failed to conduct
its servicing in compliance with the Pooling and Servicing Agreement and
any Series Supplement, except for such exceptions that the accountants
believe to be immaterial and such other exceptions as will be set forth
in their report; and
- the accountants have compared the mathematical calculations of the
amounts set forth in the master servicer's monthly certificates delivered
during the preceding fiscal year with the computer reports of the master
servicer and each servicer that generated those amounts, and confirmed
that those amounts agree, except for such exceptions that the accountants
believe to be immaterial and such other exceptions as will be set forth
in their report.
The accountants will not follow procedures that constitute an audit conducted in
accordance with generally accepted auditing standards.
The master servicer will deliver to the trustee, Discover Bank on behalf of
the holder of the Seller Certificate and the Rating Agencies, on or before March
15 of each calendar year, an annual statement signed by an officer of the master
servicer stating:
- that in the course of the officer's duties as an officer of the master
servicer, the officer would normally obtain knowledge of any Master
Servicer Termination Event, and
- whether or not the officer has obtained knowledge of any Master Servicer
Termination Event during the preceding fiscal year ended November 30, and
if so, specifying each Master Servicer Termination Event of which the
signing officer has knowledge and the nature of that event.
Each servicer will deliver a similar annual statement covering the applicable
period with respect to Servicer Termination Events.
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THE SELLER
DISCOVER BANK
Discover Bank is a wholly owned subsidiary of NOVUS Credit Services Inc.
and an indirect subsidiary of Morgan Stanley Dean Witter & Co., or MSDW. NOVUS
acquired Discover Bank in January 1985. Discover Bank was chartered as a banking
corporation under the laws of the State of Delaware in 1911, and its deposits
are insured by the FDIC. Discover Bank is not a member of the Federal Reserve
System. The executive office of Discover Bank is located at 12 Read's Way, New
Castle, Delaware 19720. In addition to the experience obtained by Discover Bank
in the bank card business since 1985, a majority of the senior management of the
credit, operations and data processing functions for the Discover Card at
Discover Bank and Discover Financial Services, Inc., or DFS, has had extensive
experience in the credit operations of other credit card issuers. DFS performs
sales and marketing activities, provides operational support for the Discover
Card program and maintains merchant relationships.
The Competitive Equality Banking Act of 1987, or CEBA, as amended by the
Gramm-Leach-Bliley Financial Modernization Act of 1999, places certain
limitations on Discover Bank. See "Risk Factors--Legislation," in the prospectus
supplement. Discover Bank believes that in light of the programs it has in
place, the limitations of CEBA, as amended, will not have a material impact on
the level of the Receivables or on Discover Bank's ability to service the
Receivables.
Discover Bank and its affiliates may own certificates in their own names.
INSOLVENCY-RELATED MATTERS
It is possible that a receiver or conservator of Discover Bank may argue
that Discover Bank's transfer to the trust of all of Discover Bank's right,
title and interest in and to the Receivables, is a pledge of the Receivables
rather than an absolute transfer. Accordingly, Discover Bank has granted to the
trustee, on behalf of the trust, a security interest in the Receivables. To the
extent that this security interest is validly perfected prior to an insolvency
of Discover Bank and not taken in contemplation of that insolvency or with the
intent to hinder, delay or defraud Discover Bank or its creditors, a receiver or
conservator of Discover Bank should not be able to invalidate this security
interest or recover payments made in respect of the Receivables, other than
payments made to Discover Bank by the trust related to Discover Bank's interest
in the Seller Certificate. If, however, a receiver or conservator of Discover
Bank were to assert a contrary position or were to submit a claim and complete
the administrative claims procedure established under the Federal Deposit
Insurance Act, as amended, requiring the trust to establish its right to cash
collections that Discover Bank possesses as servicer or in any other capacity,
the trust may be required to delay or possibly reduce payments to you on the
certificates. In addition, if the FDIC is appointed as conservator or receiver
for Discover Bank, it has the power under the Federal Deposit Insurance Act, as
amended, to repudiate contracts, including contracts of Discover Bank such as
the Pooling and Servicing Agreement. The Federal Deposit Insurance Act, as
amended, provides that a claim for damages arising from the repudiation of a
contract is limited to "actual direct compensatory damages." If the FDIC were to
be appointed as conservator or receiver of Discover Bank and were to repudiate
the Pooling and Servicing Agreement, then the trust may not have adequate
collateral to pay you the outstanding principal and accrued interest on your
certificates. For example, the Resolution Trust Corporation, which ceased to
exist as of December 31, 1995--the FDIC has taken over its
responsibilities--repudiated certain secured zero-coupon bonds issued by a
savings association. In a 1993 case involving that repudiation, a United States
federal district court decided that "actual direct compensatory damages" in the
case of a marketable security meant the market value of the repudiated bonds as
of the date of repudiation.
On August 11, 2000, the FDIC adopted a final rule effective September 11,
2000 regarding the treatment by the FDIC, as receiver or conservator of an
insured depository institution, such as Discover Bank, of financial assets
transferred by an institution in connection with a securitization. Subject to
the conditions described in the rule, the FDIC will not seek to recover or
reclaim such financial assets in
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exercising its statutory authority to repudiate contracts described above.
However, we cannot assure you that the rule will apply in the event of a
receivership or conservatorship involving Discover Bank.
Unless otherwise specified in the related prospectus supplement, Discover
Bank will receive on the date it issues each series, an opinion of Latham &
Watkins, Discover Bank's counsel, concluding on a reasoned basis--although there
is no precedent based on directly similar facts--that subject to certain facts,
assumptions and qualifications specified in the opinion, including matters set
forth under "Certain Legal Matters Relating to the Receivables--Transfer of
Receivables" and "--Certain UCC Matters":
- under New York law, the law of the jurisdiction in which the debtor--in
this case, Discover Bank--is located governs the perfection and the
effect of perfection or nonperfection of a security interest in the
Receivables;
- if Discover Bank's transfer of the Receivables to the trust constitutes
an absolute transfer, then the transfer is a transfer of all right, title
and interest of Discover Bank in and to those Receivables to the trust;
and
- if the transfer is deemed not to be an absolute transfer, it would be
treated as a security interest created by the Pooling and Servicing
Agreement in favor of the trust in Discover Bank's right, title and
interest in and to the Receivables.
Unless otherwise specified in the related prospectus supplement, Discover
Bank also will receive on the date it issues each series, an opinion of Young
Conaway Stargatt & Taylor, LLP, Discover Bank's Delaware counsel, concluding on
a reasoned basis that, subject to certain facts, assumptions and qualifications
specified in the opinion, including matters set forth under "Certain Legal
Matters Relating to the Receivables--Transfer of Receivables" and "--Certain UCC
Matters":
- to the extent Delaware law applies, the security interest created by the
Pooling and Servicing Agreement in favor of the trust is a valid security
interest in all right, title and interest of Discover Bank in and to the
Receivables;
- the security interest is a perfected security interest; and
- the security interest is a first priority security interest.
The above descriptions are qualified in their entirety by reference to the
forms of opinions filed as exhibits to the registration statement of which this
prospectus is a part.
CERTAIN LEGAL MATTERS RELATING TO THE RECEIVABLES
TRANSFER OF RECEIVABLES
When the trust was formed, Discover Bank transferred to the trust without
recourse, all Receivables existing under the Accounts as of October 1, 1993. In
addition, Discover Bank transferred to the trust all Receivables existing under
additional Accounts as of the date specified in the applicable assignment, and
may do so again in the future. Discover Bank also transfers additional
Receivables generated in the Accounts to the trust on an ongoing basis. In
exchange, Discover Bank received the Seller Certificate, the right to direct the
trust to issue new series and the right to receive the proceeds from the sale of
new series of certificates. Discover Bank has agreed to repurchase Receivables
if either the sale of the Receivables is not a valid transfer of all right,
title and interest of Discover Bank or any Additional Seller in and to the
Receivables or, if the transfer of Receivables by Discover Bank or any
Additional Seller to the trust is deemed to be a pledge of Receivables, the
trust does not have a first priority perfected security interest in the
Receivables. If Discover Bank's obligation to repurchase Receivables is at any
time the subject of concurrent obligations of one or more other parties to the
Seller Certificate Ownership Agreement, then Discover Bank will not be obligated
to repurchase Receivables unless Discover Bank is able to enforce those
concurrent obligations. A tax or statutory lien on Discover Bank's property that
existed before Receivables were created may have priority over the trust's
interest in those Receivables. In
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addition, subject to conditions that we describe in "The Trust--Collections,"
each servicer may use all or a portion of the cash collections received by it
during any given month until the applicable distribution date for those
collections. However, if any servicer becomes bankrupt or goes into receivership
or custodianship, the trust may not have a perfected interest in the collections
held by that servicer. See "The Certificates--Repurchase of the Trust
Portfolio."
The Receivables are "accounts" or "general intangibles" as defined in
Article 9 of the UCC as in effect in the state in which the chief executive
office of the seller of that Receivable is located. To the extent the
Receivables constitute accounts, Article 9 of the UCC treats both the absolute
transfer of those Receivables and the transfer of those Receivables to secure an
obligation as creating a security interest in those Receivables. The trustee
must file financing statements to perfect the trust's security interest in those
Receivables. To the extent Receivables constitute general intangibles and the
transfer of those Receivables is deemed to be a transfer to secure an
obligation, Article 9 of the UCC applies to the same extent as it applies to
Receivables constituting accounts. The trustee has filed a financing statement,
and the trustee will file continuation statements covering the Receivables,
under the UCC as in effect in Delaware to protect the trust in the event that
Article 9 of the UCC applies to Discover Bank's transfer of Receivables to the
trust. If a transfer of Receivables constituting general intangibles is deemed
to be an absolute transfer, then the UCC does not apply, and no further action
is required to perfect the trust's interest in those Receivables from
third-party claims. However, if the FDIC were appointed as receiver of Discover
Bank, certain administrative expenses of the receiver might have priority over
the interest of the trust in Receivables originated by Discover Bank, whether
those Receivables are accounts or general intangibles.
CERTAIN UCC MATTERS
Unless the trustee files continuation statements within the time specified
in the UCC in respect of the trust's security interest in the Receivables, the
perfection of its security interest will lapse. In addition, some sellers may
acquire the Receivables they transfer to the trust from third parties. Unless
those sellers file continuation statements within the time specified in the UCC
in respect of their security interests in the Receivables, the perfection of
their security interests will lapse.
There are also certain limited circumstances under the UCC under which
Receivables could be subject to an interest that has priority over the interest
of the sellers or the trust. Under the Pooling and Servicing Agreement, however,
Discover Bank has agreed to repurchase the Receivables in any Account containing
a Receivable that has been transferred to the trust and that is not free and
clear of the lien of any third party, if the existence of those liens has a
material adverse effect on the certificateholders' interest in the Receivables
as a whole. If Discover Bank's obligation to repurchase Receivables is at any
time the subject of concurrent obligations of one or more other parties to the
Seller Certificate Ownership Agreement, then Discover Bank will not be obligated
to repurchase Receivables unless Discover Bank is able to enforce those
concurrent obligations. See "The Certificates--Repurchase of Specified
Receivables." Each seller also will covenant that it will not sell, pledge,
assign, transfer or grant any lien on any of the Receivables transferred by it,
or any interest in those Receivables, other than to the trust. A tax or other
statutory lien on property of a transferor also may have priority over the
interest of the sellers or the trust in the Receivables.
Because the trust's interest in the Receivables is dependent upon the
relevant seller's interest in the Receivables, any adverse change in the
priority or perfection of a seller's security interest would correspondingly
affect the trust's interest in the affected Receivables.
As set forth under "Risk Factors--Certain Legal Aspects" in the prospectus
supplement, under certain circumstances all or a portion of the cash collections
of Receivables received by each servicer may be used by that servicer before
those collections are distributed on each distribution date. If that servicer
becomes insolvent or goes into receivership or, in certain circumstances, if
certain time periods lapse, the trust may not have a perfected interest in those
cash collections.
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CONSUMER PROTECTION LAWS AND DEBTOR RELIEF LAWS APPLICABLE TO THE RECEIVABLES
Federal and state consumer protection laws and regulations regulate the
relationships among credit cardmembers, credit card issuers and sellers of
merchandise and services in transactions financed by the extension of credit
under credit accounts. These laws and regulations include the Federal
Truth-in-Lending Act and Fair Credit Billing Act, and the provisions of the
Federal Reserve Board's Regulation Z issued under each of them, the Equal Credit
Opportunity Act and the provisions of the Federal Reserve Board's Regulation B
issued under it, the Fair Credit Reporting Act and the Fair Debt Collection
Practices Act. These statutes and regulations require credit disclosures on
credit card applications and solicitations, on an initial disclosure statement
required to be provided when a credit card account is first opened, and with
each monthly billing statement. They also prohibit certain discriminatory
practices in extending credit, impose certain limitations on the charges that
may be imposed and regulate collection practices. In addition, these laws and
regulations entitle cardmembers to have payments and credits promptly applied on
credit accounts and to require billing errors to be promptly resolved. A
cardmember may be entitled to assert violations of certain of these consumer
protection laws and, in certain cases, claims against the lender or seller, by
way of set-off against his or her obligation to pay amounts owing on his
account. For example, under the Federal Truth-in-Lending Act, a credit card
issuer is subject to all claims, other than tort claims, and all defenses
arising out of transactions in which a credit card is used to purchase
merchandise or services, if certain conditions are met. These conditions include
requirements that the cardmember make a good faith attempt to obtain
satisfactory resolution of the dispute from the person honoring the credit card
and meet certain jurisdictional requirements. These jurisdictional requirements
do not apply where the seller of the goods or services is the same party as the
card issuer, or controls or is controlled by the card issuer directly or
indirectly. These laws also provide that in certain cases a cardmember's
liability may not exceed $50 with respect to charges to the credit card account
that resulted from unauthorized use of the credit card. The application of
federal and state consumer protection, bankruptcy and debtor relief laws would
affect the interests of the investors if those laws result in any Receivables
being charged off as uncollectible. Discover Bank has agreed to repurchase all
Receivables in the Accounts containing a Receivable that did not comply in all
material respects with all applicable requirements of law when it was created,
if that noncompliance continues beyond a specified cure period and has a
material adverse effect on the interest of the trust in all the Receivables.
Discover Bank has also agreed to indemnify the trust, among other things, for
any liability arising from these violations. For a discussion of the trust's
rights arising from the breach of these warranties, see "The
Trust--Indemnification of Trust and Trustee." See also "Risk Factors--Consumer
Protection Laws and Regulations; Litigation," in the prospectus supplement.
CLAIMS AND DEFENSES OF CARDMEMBERS AGAINST THE TRUST
The UCC provides that unless an obligor has made an enforceable agreement
not to assert defenses or claims arising out of a sale, the rights of the trust,
as assignee, are subject to all the terms of the contract between Discover Bank
and the obligor and any defense or claim arising from that contract, and to any
other defense or claim of the obligor against Discover Bank that accrues before
the obligor receives notification of the assignment. The UCC also states that
any obligor is authorized to continue to pay Discover Bank until:
- the obligor receives notification, reasonably identifying the rights
assigned, that the amount due or to become due has been assigned and that
payment is to be made to the trustee, and
- if requested by the obligor, the trustee has furnished reasonable proof
of the assignment.
USE OF PROCEEDS
Discover Bank receives the net proceeds from the sale of each series of
certificates. Unless otherwise specified in the related prospectus supplement,
Discover Bank will add these proceeds to its general funds.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This summary of the material federal income tax consequences to investors
in certificates of any series is based on the opinion of Latham & Watkins as tax
counsel to Discover Bank. This summary is based on the Internal Revenue Code of
1986, as amended, or the "Code," Treasury Regulations and judicial and
administrative rulings and decisions as of the date of this prospectus. We
cannot assure you that the Internal Revenue Service will agree with the
conclusions in this summary, and we have not sought and will not seek a ruling
from the IRS on the expected federal tax consequences described in this summary.
Subsequent legislative, judicial or administrative changes--which may or may not
be applied retroactively--could change these tax consequences.
Although we provide certain limited discussions of particular topics, in
general we have not considered your particular tax consequences in this summary
if you are subject to special treatment under the federal income tax laws
because, for example, you are:
- a life insurance company;
- a tax-exempt organization;
- a financial institution;
- a broker-dealer;
- an investor that has a functional currency other than the United States
dollar; or
- an investor that holds certificates as part of a hedge, straddle or
conversion transaction.
We also do not deal with all aspects of federal income taxation that may affect
you in light of your individual circumstances. WE RECOMMEND THAT YOU CONSULT
YOUR OWN TAX ADVISORS ABOUT THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX
CONSEQUENCES TO YOU OF PURCHASING, OWNING AND DISPOSING OF CERTIFICATES.
This summary assumes that your certificate:
- is issued in registered form;
- has all payments denominated in United States dollars and not determined
by reference to the value of any other currency;
- has a term that exceeds one year;
- has an interest formula that meets the requirements for "qualified stated
interest" under Treasury Regulations relating to original issue
discount--"OID"--unless Section 1272(a)(6) of the Code applies to the
certificate; and
- does not have any OID arising from any excess of its stated redemption
price at maturity--generally, its principal amount--over its issue price,
or has only a de minimis amount of OID. OID generally is de minimis if it
is less than 1/4% of the certificate's principal amount multiplied by
the number of full years until the certificate's maturity date.
If we issue certificates that do not satisfy these conditions, we will describe
additional tax considerations in the applicable prospectus supplement. This
summary assumes that you are an initial purchaser of a certificate and hold it
as a capital asset--generally property held for investment--within the meaning
of Section 1221 of the Code.
TAX TREATMENT OF THE CERTIFICATES AS DEBT
Discover Bank will treat the certificates of each series as debt for
federal, state and local income and franchise tax purposes. By accepting a
certificate, you also will commit to treat your certificates as debt of Discover
Bank for federal, state and local income and franchise tax purposes. However,
the Pooling and
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Servicing Agreement and each Series Supplement generally refer to the transfer
of the Receivables as a "sale," and Discover Bank has informed its tax counsel
that:
- Discover Bank uses different criteria to determine the nontax accounting
treatment of the transaction, and
- for regulatory and financial accounting purposes, Discover Bank will
treat the transfer of the Receivables under the Pooling and Servicing
Agreement and each Series Supplement as a transfer of an ownership
interest in the Receivables and not as the creation of a debt obligation.
In general, whether for federal income tax purposes a transaction
constitutes a sale and purchase or a loan secured by the transferred property is
a question of fact. This question is generally resolved based on the economic
substance of the transaction, rather than its form. In the case of the
certificates, the issue is whether the investors have loaned money to Discover
Bank or have purchased Receivables from Discover Bank through ownership of the
certificates. In some cases, courts have held that a taxpayer is bound by the
form of the transaction even if the substance does not comport with its form.
Although the matter is not free from doubt, Discover Bank's tax counsel believes
that the rationale of those cases will not apply to this transaction, based, in
part, upon:
- Discover Bank's expressed intent to treat the certificates for federal,
state and local income and franchise tax purposes as debt secured by the
Receivables and other assets held in the trust, and
- each investor's commitment, by accepting a certificate, similarly to
treat the certificate for federal, state and local income and franchise
tax purposes as debt.
Although the IRS and the courts have established several factors to be
considered in determining whether, for federal income tax purposes, a
transaction in substance constitutes a purchase and sale of property or a loan
secured by the transferred property, including the form of the transaction, it
is the opinion of Discover Bank's tax counsel that the primary factor in this
case is whether the investors, through ownership of the certificates, have
assumed the benefits and burdens of ownership of the Receivables. Unless we
indicate otherwise in the applicable prospectus supplement, Discover Bank's tax
counsel has concluded for federal income tax purposes that, although the matter
is not free from doubt, the benefits and burdens of ownership of the Receivables
have not been transferred to the investors through ownership of the
certificates.
Unless we indicate otherwise in the applicable prospectus supplement, for
the reasons described above, Discover Bank's tax counsel will advise Discover
Bank that, in their opinion, under applicable law, the certificates of a series
will be treated as debt of Discover Bank for federal income tax purposes,
although the matter is not free from doubt as the IRS or the courts may not
agree. See "--Possible Characterization of the Certificates" for a discussion of
your federal income tax consequences if your certificates are not treated as
debt of Discover Bank for federal income tax purposes. Except for that
discussion, the following discussion assumes that your certificates will be
treated as debt of Discover Bank for federal income tax purposes.
UNITED STATES INVESTORS
The rules set forth below apply to you only if you are a "United States
Person." Generally, a "United States Person" is a beneficial owner of a
certificate that is:
- a citizen or resident of the United States,
- a corporation or partnership, including an entity treated as a
corporation or partnership for federal income tax purposes, created or
organized in the United States or under the laws of the United States or
of any state,
- an estate the income of which is subject to United States federal income
taxation regardless of the source of that income, or
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- a trust if a court within the United States is able to exercise primary
supervision over the trust's administration, and one or more United
States persons have the authority to control all substantial decisions of
the trust, and certain other trusts in existence on August 20, 1996 that
have validly elected to be treated as United States Persons.
Stated Interest on Certificates. Subject to the discussion below:
- if you use the cash method of accounting for tax purposes, you generally
will be taxed on the interest on your certificate at the time it is paid
to you; or
- if you use the accrual method of accounting for tax purposes, you
generally will be taxed on the interest on your certificate at the time
it accrues.
The interest on your certificate will be treated as ordinary income and
generally will constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense.
Original Issue Discount. The certificates of a series will be issued with
OID to the extent that a certificate's stated redemption price at
maturity--generally, the certificate's principal amount--exceeds its issue price
by an amount that is equal to or greater than the product of 1/4% of your
certificate's principal amount multiplied by the number of full years until the
certificate's expected maturity date. The issue price of a certificate will be
the first price at which a substantial amount of the certificates are sold for
money, excluding sales to bond houses or brokers acting in the capacity of
underwriters, placement agents or wholesalers. If your certificates are issued
with OID, you generally will be required to include OID in income for each
accrual period before you receive the cash representing the OID. You will be
required to recognize as ordinary income the amount of OID on your certificates
as the discount accrues, in accordance with a constant yield method. If your
certificate's stated redemption price at maturity -- generally, its principal
amount -- exceeds the issue price by an amount that is less than the product
described above, then the excess will generally be includible in your gross
income when the trust pays principal on your certificate at maturity and will be
treated as gain on disposition of a certificate, subject to tax in accordance
with the rules described below in "--Dispositions of Certificates."
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 or, to the extent provided in
Treasury Regulations, by reason of other events. If Section 1272(a)(6) applies,
you must compute any OID and market discount by taking into account both the
prepayment assumptions used in pricing your certificates and the actual
prepayment events. See "--Market Discount." As a result, the amount of OID on
your certificate that will accrue in any given accrual period may either
increase or decrease depending on the actual prepayment rate. Because no
Treasury Regulations have been issued interpreting Section 1272(a)(6), you
should consult your own tax advisors about the possible impact of Section
1272(a)(6) if your certificates are issued with OID.
Market Discount. In general, subject to a statutorily-defined de minimis
exception, you will acquire a certificate at a market discount if you acquire it
at a price that is less than its stated redemption price at maturity--generally,
the certificate's principal amount--and
- you acquire your certificate upon its original issue at a price that is
less than the certificate's issue price; or
- you acquire a certificate that is issued with OID at a price that is less
than the certificate's revised issue price. A certificate's revised issue
price should generally be its issue price plus the amount of OID
previously includible in income by all prior holders of the certificate.
The market discount rules generally provide that if you acquire a
certificate at a market discount and you later recognize gain upon a disposition
of the certificate, you must treat as ordinary interest income at the time of
disposition the lesser of your gain or the portion of the market discount that
accrued while you held the certificate. Similarly, if you dispose of the
certificate in certain nonrecognition transactions, such as a gift, you will be
treated for purposes of the market discount rules as realizing an amount equal
to the
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fair market value of the certificate and you must treat as ordinary interest
income at the time of disposition the lesser of your deemed gain or the portion
of the market discount that accrued while you held the certificate. If you
acquire a certificate with a market discount, you should contact your own tax
advisors as to the possible application of Section 1272(a)(6) of the Code and
its effect on your accrual of market discount. See the discussion of Section
1272(a)(6) in "--Original Issue Discount." In addition, you may also be required
to defer a portion of any interest expense that you might otherwise be able to
deduct on any debt you incurred or maintained to purchase or carry the
certificate until you dispose of the certificate in a taxable transaction.
If you acquire a certificate at a market discount, you will generally be
required to treat as ordinary interest income the portion of any principal
payment, including a payment on maturity, attributable to accrued market
discount on your certificate. If you acquire a certificate with a market
discount that is less than a statutorily-defined de minimis amount--which amount
is generally equal to the product of 1/4% of your certificate's principal
amount multiplied by the number of full years until the certificate's maturity
date--the rules described above will not apply to you and the discount will
generally be includible in your gross income when the principal is paid on your
certificate at maturity.
If you acquire your certificate at a market discount, you may elect to
include market discount in income as the discount accrues, either on a ratable
basis or, if you elect, on a constant interest rate basis. Once you make this
election, it applies to all market discount obligations that you acquire on or
after the first day of the first taxable year to which your election applies,
and you may not revoke the election without the consent of the IRS. If you make
this election, you will not recognize ordinary income on sales, principal
payments and certain other dispositions of the certificates and you will not
have to defer interest deductions on debt related to the certificates.
Amortizable Bond Premium. Generally, if the price you pay for your
certificate or your tax basis in your certificate exceeds the sum of all amounts
payable on the certificate after your acquisition date other than payments of
qualified stated interest -- generally, the principal amount of the
certificate -- the excess may constitute amortizable bond premium that you may
elect to amortize under the constant interest rate method over the period from
your acquisition date to the certificate's maturity date. If your certificates
are subject to Section 1272(a)(6) of the Code, the application of the
amortizable bond premium rules is unclear, as the amortizable bond premium
Treasury Regulations specifically exclude from their application instruments
subject to Section 1272(a)(6). Because no Treasury Regulations have been issued
interpreting Section 1272(a)(6), you should consult your own tax advisors about
the possible application of these rules. See the discussion of Section
1272(a)(6) in "--Original Issue Discount." You may generally treat amortizable
bond premium as an offset to interest income on the certificate, rather than as
a separate interest deduction item subject to the investment interest
limitations of the Code. If you elect to amortize bond premium, you must
generally reduce your tax basis in the related certificate by the amount of bond
premium used to offset interest income.
Dispositions of Certificates. In general, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of your
certificate measured by the difference between:
- the amount of cash and the fair market value of any property received for
the certificate, other than the amount attributable to, and taxable as,
accrued but unpaid interest, and
- your tax basis in the certificate, as increased by any OID or market
discount, including de minimis amounts, that you previously included in
income, and decreased by any deductions previously allowed to you for
amortizable bond premium and by any payments reflecting principal or OID
that you received with respect to the certificate.
Subject to the OID and market discount rules discussed above, if you hold
your certificate for more than one year before its taxable disposition, any gain
or loss generally will be long-term capital gain or loss. The deductibility of
capital losses may be subject to limitation. The excess of net long-term capital
gains over net short-term capital losses may be taxed at a lower rate than
ordinary income for individuals, estates and trusts.
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FOREIGN INVESTORS
The following summary of the United States federal income and estate tax
consequences of the purchase, ownership, sale or other disposition of a
certificate applies to you only if you are a "Non-U.S. Holder." You are
generally a "Non-U.S. Holder" if, for United States federal income tax purposes,
you are a beneficial owner of a certificate and you are:
- a nonresident alien individual,
- a foreign corporation,
- a foreign partnership, or
- a foreign estate or trust,
as each term is defined in the Code. Some Non-U.S. Holders, including certain
residents of certain United States possessions or territories, may be subject to
special rules not discussed in this summary.
Interest, including OID, if any, paid to you on your certificate will not
be subject to withholding of United States federal income tax, provided that:
- you are not a "10 percent shareholder" of Discover Bank or a "controlled
foreign corporation" with respect to which Discover Bank is a "related
person" within the meaning of the Code, and either
- you represent that you are not a United States Person and provide your
name and address to Discover Bank or its paying agent on a properly
executed IRS Form W-8BEN, signed under penalties of perjury; or
- a securities clearing organization, bank, or other financial institution
that holds customers' securities in the ordinary course of its business
holds your certificate on your behalf, certifies to Discover Bank or its
paying agent under penalties of perjury that it has received the
appropriate certification form from you or from another qualifying
financial institution intermediary, and provides a copy to Discover Bank
or its paying agent; or
- these interest payments are effectively connected with your conduct of a
trade or business within the United States and you provide a properly
executed IRS Form W-8ECI.
Special rules apply to foreign partnerships, estates and trusts, and in certain
circumstances certifications as to foreign status of partners, trust owners or
beneficiaries may have to be provided to Discover Bank or its paying agent. In
addition, special rules apply to qualified intermediaries that enter into
withholding agreements with the IRS, and such intermediaries generally are not
required to forward any certification forms received from you. If the exemptions
from withholding do not apply to you, interest, including OID, if any, paid to
you generally will be subject to withholding of United States federal income tax
at a 30% rate, unless reduced by an applicable tax treaty.
You generally will not be subject to United States federal income tax on
gain realized on the disposition of your certificate, including gain
attributable to accrued interest or OID, as addressed in the preceding
paragraph, provided that
- the gain is not effectively connected with your conduct of a trade or
business within the United States, and
- if you are an individual,
- you have not been present in the United States for 183 days or more in
the taxable year of the disposition, or
- you do not have a "tax home" in the United States and the gain is not
attributable to an office or other fixed place of business that you
maintain in the United States.
If the interest or gain on your certificate is effectively connected with
your conduct of a trade or business within the United States, then although you
will be exempt from the withholding of tax
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previously discussed if you provide an appropriate certification form, you
generally will be subject to United States federal income tax on the interest,
including OID, if any, or gain at regular federal income tax rates in a similar
fashion to a United States Person. See "--United States Investors." In addition,
if you are a foreign corporation, you may be subject to a branch profits tax
equal to 30% of your "effectively connected earnings and profits" within the
meaning of the Code for the taxable year, as adjusted for certain items, unless
you qualify for a lower rate under an applicable tax treaty.
If you are an individual and are not a citizen or resident of the United
States at the time of your death, your certificates will generally not be
subject to United States federal estate tax as a result of your death if,
immediately before death,
- you were not a "10 percent shareholder" of Discover Bank, and
- your interest on the certificate was not effectively connected with your
conduct of a trade or business within the United States.
THE ABOVE DESCRIPTION OF THE POTENTIAL UNITED STATES FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS IS NECESSARILY INCOMPLETE. WE URGE
YOU TO CONSULT YOUR OWN TAX ADVISORS ABOUT THESE MATTERS.
BACKUP WITHHOLDING AND INFORMATION REPORTING
If you are a United States Person but not a corporation, financial
institution or certain other type of entity, information reporting requirements
will apply to certain payments of principal and interest, including accrued OID,
if any, on a certificate and to proceeds of certain sales before maturity. In
addition, if you do not provide a correct taxpayer identification number and
other information, or do not comply with certain other requirements or otherwise
establish an exemption, Discover Bank, a paying agent, or a broker, as the case
may be, will be required to withhold from such payments to you a tax equal to
31% of each payment.
If you are a Non-United States Holder, backup withholding and information
reporting generally will not apply to payments to you of principal and interest,
including accrued OID, if any, on a certificate if you properly certify under
penalties of perjury that you are not a United States Person or otherwise
establish an exemption. Certain information reporting requirements and backup
withholding generally will apply to payments of the proceeds of your sale of a
certificate to or through a foreign office of a United States broker or foreign
brokers with certain types of relationships to the United States, unless:
- the broker has evidence in its records that you are not a United States
Person and certain other conditions are met; or
- you otherwise establish an exemption.
Information reporting and backup withholding generally will apply to payments of
the proceeds of your sale of a certificate to or through the United States
office of a broker unless:
- you properly certify under penalties of perjury that you are not a United
States Person and certain other conditions are met, or
- you otherwise establish an exemption.
If you provide the IRS with the information it requires, you will receive a
refund or a credit against your United States federal income tax liability for
any amounts withheld from your payments under the backup withholding rules.
THESE WITHHOLDING AND REPORTING RULES ARE COMPLEX AND THE DISCUSSION ABOVE
IS NECESSARILY INCOMPLETE. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS ABOUT
THESE MATTERS.
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POSSIBLE CHARACTERIZATION OF THE CERTIFICATES
The above discussion assumes that the certificates of a series will be
treated as debt of Discover Bank for federal income tax purposes. However,
although Discover Bank's tax counsel will render an opinion to that effect with
respect to each series of certificates, the matter is not free from doubt, and
we cannot assure you that the IRS or the courts will agree with the opinion of
Discover Bank's tax counsel. If the IRS were to contend successfully that the
certificates of a series are not debt of Discover Bank for federal income tax
purposes, it could find that the arrangement created by the Pooling and
Servicing Agreement and the related Series Supplement should be classified as a
"publicly traded partnership" taxable as a corporation or as a partnership that
is not taxable as a corporation.
If your certificates were treated as interests in a partnership, the
partnership in all likelihood would be treated as a "publicly-traded
partnership" taxable as a corporation, in which case the income from the assets
of the trust would be subject to federal income tax and tax imposed by certain
states where the entity would be considered to have operations at corporate
rates, which would reduce the amounts available for distribution to you. See
"State Tax Consequences." Under these circumstances, your certificates may be
treated as debt of an entity taxable as a corporation or, alternatively, as
equity of such an entity, in which latter case interest payments to you could be
treated as dividends and, if you are a Non-U.S. Holder, could be subject to
United States federal income tax and withholding at a rate of 30%, unless
reduced by an applicable tax treaty.
Alternatively, if the partnership were nevertheless not taxable as a
corporation--for example, because of an exception for a "publicly traded
partnership" whose income is interest that is not derived in the conduct of a
financial business--the partnership would not be subject to federal income tax.
Rather, you would be required to include in income your share of the income and
deductions generated by the assets of the trust, as determined under partnership
tax accounting rules. In that event, the amount, timing and character of the
income required to be included in your income could differ materially from the
amount, timing and character of income if your certificates were characterized
as debt of Discover Bank. It also is possible that such a partnership could be
subject to tax in certain states where the partnership is considered to be
engaged in business, and that you, as a partner in such a partnership, could be
taxed on your share of the partnership's income in those states.
In addition, if such a partnership is considered to be engaged in a trade
or business within the United States, the partnership would be subject to a
withholding tax on distributions to Non-U.S. Holders or, at its election, income
allocable to Non-U.S. Holders, and each Non-U.S. Holder would be credited for
the Non-U.S. Holder's share of the withholding tax paid by the partnership.
Moreover, the Non-U.S. Holder generally would be subject to United States
federal income tax at regular federal income tax rates, and possibly a branch
profits tax, in the case of a corporate Non-U.S. Holder, as previously
described. See "--Foreign Investors." Further, even if the partnership is not
considered to be engaged in a trade or business within the United States, it
appears that partnership withholding would be required in the case of any
Non-U.S. Holder that is engaged in a trade or business within the United States
to which the certificate income is effectively connected. Although there may be
arguments to the contrary, it appears that if such a partnership is not
considered to be engaged in a trade or business within the United States and if
income with respect to a certificate is not otherwise effectively connected with
the conduct of a trade or business within the United States by a Non-U.S.
Holder, the Non-U.S. Holder would be subject to United States federal income tax
and withholding at a rate of 30%, unless reduced by an applicable treaty, on the
Non-U.S. Holder's distributive share of the partnership's interest income.
Finally, with respect to a series having a class of subordinated
certificates, the IRS might contend that even though the Class A certificates
are properly classified as debt for federal income tax purposes, the Class B
certificates are not properly classified as debt. Under this approach, the Class
B certificates might be viewed as equity interests in an entity--such as
Discover Bank or a joint venture consisting of Discover Bank and the Class B
investors--with the Class A certificates treated as debt obligations of that
entity. If that entity were characterized as a partnership not taxable as a
corporation, the entity would not be subject to federal income tax, although the
Class B investors would be subject to the tax consequences previously
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described with respect to interests in a partnership that is not taxable as a
corporation. Alternatively, if such an entity were characterized as a "publicly
traded partnership" taxable as a corporation, the tax liability on the income of
the entity might, in certain circumstances, reduce distributions on both the
Class A certificates and the Class B certificates, and the Class B investors
would be subject to the tax consequences previously described with respect to
interests in a "publicly traded partnership" taxable as a corporation. In
addition, any Non-U.S. Holder of a Class A certificate who is the actual or
constructive owner of 10% or more of the outstanding principal amount of the
Class B certificates may be treated as a "10 percent shareholder." See
"--Foreign Investors."
Based on the advice of Discover Bank's tax counsel as to the likely
treatment of the certificates for federal income tax purposes, Discover Bank and
the trust will not attempt to cause the arrangement created by the Pooling and
Servicing Agreement and the Series Supplement for a series to comply with the
federal or state income tax reporting requirements applicable to partnerships or
corporations. If this arrangement were later held to constitute a partnership or
corporation for tax purposes, it is not clear how the arrangement would comply
with applicable reporting requirements.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS AS TO THE RISK THAT THE
CERTIFICATES WILL NOT BE TREATED AS DEBT OF DISCOVER BANK, AND THE POSSIBLE TAX
CONSEQUENCES OF POTENTIAL ALTERNATIVE TREATMENTS.
STATE TAX CONSEQUENCES
This summary of the material state tax consequences to investors in
certificates of any series is based on the opinion of Discover Bank's tax
counsel. The summary is based upon currently applicable tax laws of certain
states as of the date of this prospectus. We cannot assure you that the taxing
authorities of any state will agree with the conclusions in this summary, and we
have not sought and will not seek a ruling from the taxing authorities of those
states on the expected state tax consequences described in this summary.
Subsequent legislative, judicial or administrative changes--which may or may not
be applied retroactively--could change these tax consequences. Except as
discussed below, this discussion of state tax consequences assumes that the
certificates of a series will be treated as debt of Discover Bank for federal
tax purposes.
Your state tax consequences will depend upon the provisions of the state
tax laws to which you are subject. 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 usually pay state tax on 100% of the 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
laws vary, it is impossible to predict the tax consequences to investors in all
of the state taxing jurisdictions in which they are already subject to tax.
Discover Bank's headquarters are located in Delaware and that is where
Discover Bank originates and owns the Accounts and services the Receivables
pursuant to the Pooling and Servicing Agreement. Unless otherwise specified in
the related prospectus supplement, Discover Bank's tax counsel will advise
Discover Bank with respect to a series, that, in their opinion, although the
matter is not free from doubt, the certificates of the series will be treated as
debt of Discover Bank for purposes of the Delaware income tax. Accordingly,
although the matter is not free from doubt, if the certificates of a series are
treated as debt of Discover Bank in Delaware and if you are not otherwise
subject to taxation in Delaware, you will not become subject to the Delaware
income tax solely because you own certificates.
Generally, you are required to pay, in states in which you are already
subject to state tax, additional state tax as a result of interest earned on
your investment in certificates. Moreover, a state could claim that the trust
has undertaken activities within that state and therefore the trust is subject
to taxation by that state. Were any state to make and sustain that claim, the
treatment of the certificates would be determined under that state's tax laws,
and it is possible that the certificates would not be treated as debt of
Discover Bank for purposes of that state taxation.
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If your certificates were treated as interests in a partnership or a
corporation, your state tax consequences could be materially different,
especially in states that may be considered to have a business connection with
the Receivables. See "Federal Income Tax Consequences--Possible Characterization
of the Certificates."
THE ABOVE DESCRIPTION OF THE POTENTIAL STATE TAX CONSEQUENCES IS NECESSARILY
INCOMPLETE. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS ABOUT THESE MATTERS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, or ERISA,
and the Code impose certain requirements on employee benefit plans, including
Individual Retirement Accounts and Individual Retirement Annuities--collectively
"IRAs"--to which they apply and on fiduciaries of those plans. In accordance
with ERISA's general fiduciary standards, before investing in certificates, a
plan fiduciary should determine whether the governing plan instruments permit
the investment. Additionally, the plan fiduciary should determine if the
certificates are appropriate for the plan in view of the risks associated with
the investment, the plan's overall investment policy and the composition and
diversification of its portfolio. ERISA and the Code prohibit certain
transactions involving the assets of a plan and persons who have certain
specified relationships to the plan--"parties in interest" within the meaning of
ERISA or "disqualified persons" within the meaning of the Code. Prohibited
transactions may generate excise taxes and other liabilities. Prohibited
transactions involving IRAs may result in the disqualification of the IRAs.
Thus, a plan fiduciary considering an investment in certificates should also
consider whether the investment might constitute or give rise to a prohibited
transaction under ERISA or the Code.
Certain transactions involved in operating the trust might be deemed to
constitute prohibited transactions under ERISA and the Code, if assets of the
trust were deemed to be assets of an investing plan. ERISA and the Code do not
define "plan assets." The U.S. Department of Labor, or the DOL, has published a
regulation that defines when a plan's investment in an entity will be deemed to
include an interest in the underlying assets of that entity, such as the trust,
for purposes of the provisions of ERISA and the Code. Unless the plan's
investment is an "equity interest," the underlying assets of the entity will not
be considered assets of the plan under the DOL regulation. Under the DOL
regulation, a beneficial ownership in a trust is deemed to be an equity
interest. The DOL has ruled in an opinion letter, which is not binding upon
Discover Bank, the trustee or any underwriter, that similar "pass through"
certificates in a trust constituted equity interests.
Discover Bank has received an administrative exemption from the DOL, which
we discuss below under "--Discover Bank's Prohibited Transaction Exemption,"
that, if applicable, would exempt certain transactions from the prohibited
transaction rules in connection with a plan's acquisition of Class A
certificates. In addition, certain transactions concerning plans holding either
Class A certificates or Class B certificates would not be prohibited
transactions, if, under the DOL regulation, assets of the trust were not
considered assets of plans holding certificates.
DISCOVER BANK'S PROHIBITED TRANSACTION EXEMPTION
The DOL has granted to Discover Bank an administrative exemption that, if
applicable, excludes certain transactions relating to the trust and the Class A
certificates from the prohibited transaction rules. See approval of individual
prohibited transaction relief for Greenwood Trust Company, Final Authorization
Number (FAN) 2000-05E (February 12, 2000) pursuant to Prohibited Transaction
Exemption No. 96-62 (the "Exemption"). If the conditions of the Exemption are
satisfied, the Exemption applies to the acquisition, holding and disposition of
Class A certificates by a plan, as well as to transactions relating to Class A
certificates in connection with servicing, managing and operating the trust. We
cannot assure you, however, that even if the conditions of the Exemption are
satisfied, the Exemption will exclude all transactions involving the trust and
the Class A certificates from the prohibited transaction rules. Moreover, the
Exemption applies in only a limited fashion to a plan sponsored by any member of
the "Restricted Group," which includes Discover Bank, the trustee, the master
servicer or any servicer, or,
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with respect to any particular series, an underwriter, a party providing credit
support, or the counterparty on an interest rate swap or cap with respect to the
series, or any of their affiliates.
A number of the requirements of the Exemption relate to the general
structure and operation of the trust, such as the trustee, the assets of the
trust, Discover Bank's interest in the trust, transfers of Receivables into and
out of the trust, and the operation of the trust in accordance with the Pooling
and Servicing Agreement. Discover Bank believes that the trust satisfies these
conditions.
Other requirements of the Exemption relate to the terms and conditions of
the particular Class A certificates to be acquired by plans. These requirements
include the requirements that:
- the Class A certificates cannot be subordinated to any other similar
interests in the trust,
- the Class A certificates must be rated, at the time a plan acquires them,
in one of the two highest rating categories by at least one rating
agency, or, if they have a maturity of one year or less, they must have
the highest short-term rating,
- the Class A certificates must have specified levels of credit support,
- certain other rating agency conditions must be satisfied,
- the certificates must be subject to early amortization or cash
accumulation under certain circumstances,
- any interest rate swaps and caps must meet certain conditions,
- the Class A certificates must be sold initially in an underwriting or
private placement, including a placement by underwriters or dealers on
behalf of the trust,
- the initial sale must be by an entity that received an individual
"Underwriter Exemption" from the DOL, an affiliate of such an entity, or
a member of a selling group of which such an entity or affiliate is a
manager or co-manager, and
- the trustee cannot be affiliated with any underwriter or member of the
selling group for the Class A certificates, any provider of credit
support for the Class A certificates, or any swap counterparty for the
Class A certificates.
If Discover Bank believes that the conditions of the Exemption relating to
the terms and conditions of the Class A certificates of a series will be
satisfied at the time of initial issuance of the certificates of that series,
the prospectus supplement will state that plans are generally permitted to
purchase Class A certificates of that series.
However, even if the terms and conditions of the Class A certificates of a
particular series satisfy the requirements of the Exemption, the purchase of the
Class A certificates by a particular plan will be eligible for the benefits of
the Exemption only if certain other conditions are satisfied. The fiduciary of
the plan must itself determine whether these conditions are satisfied. These
conditions include but are not limited to the following:
- The acquisition of Class A certificates must be on terms, including
price, that are at least as favorable to the plan as those terms would be
in an arm's-length transaction with an unrelated party.
- Amounts retained by underwriters or selling agents for selling or placing
the Class A certificates must be reasonable in amount, the servicing fee
must be reasonable in amount, and the amounts received by Discover Bank
upon the sale of Receivables to the trust cannot exceed the fair market
value of the Receivables.
- The plan must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D under the Securities Act of 1933, as amended.
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- If the particular Class A certificates are supported by one or more
interest rate swaps or caps, the decision to acquire the Class A
certificates must be made by an independent fiduciary that is qualified
to analyze and understand the terms of the swaps or caps and any
resulting effect on the credit rating of the Class A certificates.
Moreover, the fiduciary must be either a "QPAM" or "INHAM" as described
in the applicable DOL Prohibited Transaction Exemptions, or a plan
fiduciary with at least $100 million of total assets under management.
- In order for an acquisition of Class A certificates by a plan to be
exempt from certain of the prohibited transaction rules concerning
"self-dealing"--i.e., Section 406(b)(1) and (2) of ERISA and Section
4975(c)(1)(E) of the Code--the Exemption imposes additional requirements
relating to the particular plan. See Section I.B. of the Exemption. Plans
investing in Class A certificates should carefully consider whether or
not they need to rely on these particular provisions of the Exemption
and, if so, whether they satisfy these requirements of Section I.B.
More generally, before investing in Class A certificates in reliance on the
Exemption, a fiduciary of a plan should carefully consider the terms of the
Exemption, the terms of the Class A certificates, the eligibility of the Class A
certificates for the Exemption in light of, among other factors, the identity of
the particular plan, and whether the Exemption will protect against all
potential prohibited transactions.
THE DOL REGULATION
The DOL Regulation contains an exception that provides that if a plan
acquires a publicly-offered security, then the assets of the issuer of the
security will not be deemed to be plan assets. A publicly-offered security is a
security that is
- freely transferable,
- part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another by the conclusion of the
offering and
- either is
- part of a class of securities registered under section 12(b) or 12(g) of
the Securities Exchange Act of 1934, or
- sold to the plan as part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act
of 1933 and the class of securities of which such security is a part is
registered under the Securities Exchange Act of 1934 within 120 days, or
such later time as may be allowed by the Securities and Exchange
Commission, after the end of the fiscal year of the issuer during which
the offering of the securities to the public occurred.
If Discover Bank expects the certificates of a series to meet the criteria
of publicly-offered securities, that information will be set forth in the
related prospectus supplement. If the certificates of a series do meet the
criteria of publicly-offered securities, certain prohibited transactions would
not arise even if the Exemption did not apply.
If the certificates are deemed to be debt and not equity interests for
ERISA purposes, the purchase of the certificates by a plan with respect to which
Discover Bank or one of its affiliates is a "party in interest" or "disqualified
person" might be considered a prohibited transaction under Section 406 of ERISA
and Section 4975 of the Code, unless an exemption applies. There are at least
five prohibited transaction class exemptions issued by the DOL that might apply,
depending in part on who decided to acquire the certificates for the plan:
- DOL Prohibited Transaction Exemption ("PTE") 84-14 (Class Exemption for
Plan Asset Transactions determined by Independent Qualified Professional
Asset Managers);
- PTE 91-38 (Class Exemption for Certain Transactions Involving Bank
Collective Investment Funds);
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- PTE 90-1 (Class Exemption for Certain Transactions Involving Insurance
Company Pooled Separate Accounts);
- PTE 95-60 (Class Exemption for Certain Transactions Involving Insurance
Company General Accounts); and
- PTE 96-23 (Class Exemption for Plan Asset Transactions Determined by
In-House Asset Managers).
Moreover, whether the certificates are debt or equity for ERISA purposes, a
possible violation of the prohibited transaction rules could occur if a
fiduciary purchased certificates during the offering with assets of a plan and
Discover Bank, the trustee, any underwriter or any of their affiliates was a
fiduciary for that plan. Under ERISA and the Code, a person is a fiduciary for a
plan to the extent
- that person exercises any discretionary authority or discretionary
control respecting management of the plan or exercises any authority or
control respecting management or disposition of its assets,
- that person renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of the
plan, or has any authority or responsibility to do so, or
- that person has any discretionary authority or discretionary
responsibility in the administration of the plan.
Accordingly, the fiduciaries of any plan should not purchase the certificates
during the offering with assets of any plan if Discover Bank, the trustee, the
underwriters or any of their affiliates is a fiduciary for the plan.
IN LIGHT OF THE FOREGOING, FIDUCIARIES OF PLANS CONSIDERING THE PURCHASE OF
CERTIFICATES SHOULD CONSULT THEIR OWN BENEFITS COUNSEL OR OTHER APPROPRIATE
COUNSEL ABOUT HOW ERISA AND THE CODE WILL APPLY TO THEIR PURCHASE OF
CERTIFICATES.
In addition, based on the reasoning of the United States Supreme Court's
decision in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S.
86 (1993), under certain circumstances assets in the general account of an
insurance company may be deemed to be plan assets for certain purposes, and
under that reasoning a purchase of certificates with assets of an insurance
company's general account might be subject to the prohibited transaction rules
described above. Insurance companies investing assets of their general accounts
should also consider the potential effects of the enactment of section 401(c) of
ERISA, Prohibited Transaction Exemption 95-60, Labor Department Regulation 29
CFR sec. 2550.401c-1, and the fact that the Exemption has been designated by the
Department of Labor as an "Underwriter Exemption" for purposes of Section V(h)
of Prohibited Transaction Exemption 95-60.
PLAN OF DISTRIBUTION
Discover Bank may sell certificates:
- through underwriters or dealers;
- directly to one or more purchasers; or
- through agents.
These underwriters, dealers or agents in the United States may include
Morgan Stanley & Co. Incorporated, Morgan Stanley International Limited or Dean
Witter Reynolds Inc. The related prospectus supplement will set forth the terms
of the offering of certificates, including
- the name or names of any underwriters,
- the purchase price of the certificates,
- the proceeds to Discover Bank from the sale,
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- any underwriting discounts and other items constituting underwriters'
compensation,
- any initial offering price,
- any discounts or concessions allowed or reallowed or paid to dealers and
- any securities exchanges on which the certificates may be listed.
Only underwriters so named in the related prospectus supplement will be deemed
to be underwriters in connection with the certificates offered pursuant to that
prospectus supplement.
Morgan Stanley & Co. Incorporated, Morgan Stanley International Limited and
Dean Witter Reynolds Inc. are affiliates of Discover Bank. Following the initial
distribution of a series of certificates, they and other affiliates of Discover
Bank may offer and sell previously issued certificates in the course of their
businesses as broker-dealers. Morgan Stanley & Co. Incorporated, Morgan Stanley
International Limited, Dean Witter Reynolds Inc. and those other affiliates may
act as a principal or agent in those transactions, and they may use this
prospectus and the accompanying prospectus supplement in connection with those
transactions. Those sales, if any, will be made at varying prices relating to
market prices prevailing at the time of sale.
If Discover Bank uses underwriters to sell the certificates, the
underwriters will acquire the certificates for their own account and may resell
them from time to time in one or more transactions, including negotiated
transactions, at a fixed price or at varying prices determined at the time of
sale or at negotiated prices. These underwriters may offer the certificates to
the public without a syndicate, or they may offer them to the public through
underwriting syndicates represented by managing underwriters. The underwriters
will only be obligated to purchase the certificates if certain conditions
precedent are satisfied, and they will be obligated to purchase all the
certificates of the series offered by the related prospectus supplement if they
purchase any of those certificates. The underwriters may, from time to time,
change any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers.
Discover Bank or agents designated by Discover Bank may also sell
certificates directly from time to time. Discover Bank will name any agent
involved in the offering and sale of the certificates, and any commissions
payable by Discover Bank to that agent, in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any such agent
is acting solely as an agent for the period of its appointment.
If so indicated in the related prospectus supplement, Discover Bank will
authorize agents, underwriters or dealers to solicit offers by certain
institutional investors to purchase certificates providing for payment for
delivery on a future date specified in the related prospectus supplement. There
may be limitations on the minimum amount that may be purchased by any
institutional investor or on the portion of the aggregate principal amount of
the particular certificates that may be sold pursuant to those arrangements.
Institutional investors to which these offers may be made, when authorized,
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and other
institutions that Discover Bank may approve. Unless otherwise specified in the
related prospectus supplement, the obligations of any purchasers pursuant to
delayed delivery and payment arrangements will not be subject to any conditions
except:
- the institution shall not, at the time of delivery, be prohibited from
purchasing the certificates under the laws of any jurisdiction of the
United States to which the institution is subject, and
- if Discover Bank is selling the certificates to underwriters, Discover
Bank will have sold to those underwriters the total principal amount of
the applicable certificates minus the principal amount of those
certificates covered by delayed delivery and payment arrangements.
Underwriters will not have any responsibility for the validity of those
arrangements or the performance of Discover Bank or the institutional investors
under those arrangements.
Underwriters, dealers and agents that participate in the distribution of
the certificates may be deemed to be underwriters, and any discounts or
commissions received by them from Discover Bank and any profit
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on the resale of the certificates by them may be deemed to be underwriting
discounts and commissions, under the Securities Act of 1933. Discover Bank may
agree to indemnify underwriters, dealers and agents that participate in the
distribution of certificates against certain civil liabilities, including
liabilities under the Securities Act of 1933, or to contribute to payments that
the underwriters, dealers or agents may be required to make with respect to
those liabilities. Underwriters, dealers and agents may engage in transactions
with, or perform services for, Discover Bank in the ordinary course of their
respective businesses.
The certificates may or may not be listed on a national securities
exchange. Discover Bank cannot predict whether a secondary market will develop
for the certificates or, if it does develop, whether it will continue.
The distribution of certificates will conform to the requirements set forth
in Rule 2720 of the National Association of Securities Dealers, Inc.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, Latham &
Watkins will give opinions on the legality of the certificates, the tax
consequences of the issuance of the certificates and certain creditors' rights
matters for Discover Bank. Young Conaway Stargatt & Taylor, LLP will also give
opinions on certain creditors' rights matters for Discover Bank. Unless
otherwise specified in the related prospectus supplement, Cadwalader, Wickersham
& Taft will also give opinions on the legality of the certificates for any
underwriters.
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GLOSSARY OF TERMS
The certificates will be issued pursuant to the Pooling and Servicing
Agreement and the applicable Series Supplement. The following glossary of terms
is not complete. You should also refer to the prospectus supplement, the Pooling
and Servicing Agreement and the applicable Series Supplement for additional
definitions. If you send a written request to the trustee at its corporate trust
office, the trustee will provide to you without charge a copy of the Pooling and
Servicing Agreement, without exhibits and schedules, and the applicable Series
Supplement, without exhibits.
"ACCOUNT" will mean:
- a Discover Card account established pursuant to a credit agreement
between Discover Bank and any person, receivables under which are
transferred to the trust by Discover Bank pursuant to either the Pooling
and Servicing Agreement or an Assignment of Additional Accounts;
- a Discover Card account established pursuant to a credit agreement
between an Additional Seller and any person, receivables under which are
transferred to the trust by the Additional Seller pursuant to an
Assignment of Additional Accounts; and
- a credit account that is not a Discover Card account, established
pursuant to a credit agreement between Discover Bank or an Additional
Seller and any person, receivables under which are transferred to the
trust by Discover Bank or the Additional Seller pursuant to an Assignment
of Additional Accounts.
No Account will be a Charged-Off Account as of the date the Account is selected
to be added to the trust. The definition of an Account will include the
surviving credit account of a combination of credit accounts if:
- an Account or another credit account is combined with an Account pursuant
to the credit guidelines for the Account; and
- the surviving credit account was an Account before the accounts were
combined.
The term "Account" will be deemed to refer to an additional Account only from
and after the addition date for that additional Account. The definition of
Account will not include any Account removed from the trust after it has been
reassigned to the holder of the Seller Certificate.
"ADDITIONAL SELLER" will mean an affiliate of Discover Bank that is
included in the same "affiliated group" as Discover Bank for United States
federal income tax purposes and that transfers Receivables in additional
Accounts to the trust.
"AGGREGATE INVESTED AMOUNT" will mean at any time the sum of the invested
amounts of all series of certificates then issued and outstanding.
"AGGREGATE INVESTOR INTEREST" will mean at any time the sum of the investor
interests of all series of certificates then issued and outstanding.
"AGGREGATE INVESTOR PERCENTAGE" will mean the sum of the allocation
percentages for all series of certificates then issued and outstanding.
"AMORTIZATION EVENT" will mean an event that may adversely affect the trust
and your investment in the certificates, and that may cause the trust to begin
to repay the certificates. We describe these events in more detail in "The
Certificates--Amortization Events," in the prospectus supplement.
"AMORTIZATION PERIOD" will mean, for any series, the period beginning when
an Amortization Event occurs for that series and continuing until the trust has
fully paid the principal of the applicable series or until the Series
Termination Date for that series. The first distribution date of the
Amortization Period will be the distribution date in the calendar month
following the date on which the Amortization Event occurred.
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"ASSIGNMENT OF ADDITIONAL ACCOUNTS" will mean an assignment entered into
between Discover Bank, the trustee, and if applicable an Additional Seller,
pursuant to which additional accounts are designated as Accounts for the trust.
"CCA INVESTOR INTEREST" means, with respect to Series 1993-3, a collateral
interest in receivables arising under certain circumstances relating to the
credit enhancement for that series.
"CHARGED-OFF ACCOUNT" will mean each Account with respect to which the
servicer has charged off the Receivables in the Account as uncollectible.
"CHARGED-OFF AMOUNT" will mean, for any distribution date or Trust
Distribution Date, the total amount of Receivables in Accounts that became
Charged-Off Accounts in the previous calendar month minus:
- the cumulative, uncollected amount previously billed by the servicers to
Accounts that became Charged-Off Accounts during the prior calendar month
with respect to finance charges, cash advance fees, annual membership
fees, if any, fees for transactions that exceed the credit limit on the
Account, late payment charges, and any other type of charges that the
servicer has designated as "Finance Charge Receivables" for Accounts that
are not Charged-Off Accounts, and
- the full amount of any Receivables in these Charged-Off Accounts that
Discover Bank repurchased.
"CLASS PERCENTAGE" will mean, for any class of any series, with respect to
any distribution date or any Trust Distribution Date, as applicable, the
allocation percentages by which the trust allocates Finance Charge Collections,
Principal Collections and the Charged-Off Amount to that class. The allocation
percentage for a class may vary for each of these items. We describe the Class
Percentage for each class of your series in more detail in the glossary of terms
in the applicable prospectus supplement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLECTIONS ACCOUNT" will mean the non-interest bearing segregated trust
account for collections established and maintained by the trustee with an office
or branch of the trustee or a Qualified Institution for the benefit of the
investors in the trust.
"DEFINITIVE CERTIFICATE" will mean any certificate issued to an investor in
fully registered, certificated form, rather than to DTC or its nominees.
"DFS" will mean Discover Financial Services, Inc.
"DOL" means the U.S. Department of Labor.
"EARLY ACCUMULATION EVENT," if applicable for any series, will mean an
event that is designed to protect investors from certain events that may
adversely affect the trust and that will obligate the trust to accumulate
Principal Collections and similar amounts allocated to the series on a monthly
basis in the series principal funding account. If your series could have an
Early Accumulation Event, we will describe those events in more detail in the
related prospectus supplement.
"EARLY ACCUMULATION PERIOD," if applicable for any series, will mean the
period beginning when an Early Accumulation Event occurs and continuing until an
Amortization Event occurs, the trust has fully paid the principal of the
applicable series or the Series Termination Date for the applicable series.
"ELIGIBLE RECEIVABLE" will mean each Receivable which is eligible to be
transferred to the trust by a seller. We describe the eligibility criteria for
an Eligible Receivable in "The Certificates--Repurchase of Specified
Receivables."
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EUROCLEAR OPERATOR" means Morgan Guaranty Trust Company of New York,
Brussels, Belgium office.
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"EXEMPTION" means the approval of individual prohibited transaction relief
for Greenwood Trust Company, Final Authorization Number (FAN) 2000-05E (February
12, 2000) pursuant to Prohibited Transaction Exemption No. 96-62.
"FINANCE CHARGE COLLECTIONS" for any calendar month will mean the sum of:
(a) the lesser of:
- the aggregate amount of Finance Charge Receivables for the preceding
calendar month and
- collections actually received in the applicable calendar month; and
(b) all amounts received during the calendar month with respect to
Receivables in the trust that have previously been charged-off as uncollectible,
including all proceeds from sales of those receivables by the trust to third
parties pursuant to the Pooling and Servicing Agreement.
"FINANCE CHARGE RECEIVABLES" will mean, for any Account for any calendar
month,
- the net amount billed by the servicer during that month as periodic
finance charges on the Account and cash advance fees, annual membership
fees, if any, fees for transactions that exceed the credit limit on the
Account, late payment charges billed during that month to the Account and
any other charges that the servicer may designate as "Finance Charge
Receivables" from time to time, provided that the servicer will not
designate amounts owing for the payment of goods and services or cash
advances as "Finance Charge Receivables," minus
- if the Account becomes a Charged-Off Account during that month, the
cumulative, uncollected amount previously billed by the servicer to the
Account as periodic finance charges, cash advance fees, annual membership
fees, if any, fees for transactions that exceed the credit limit on the
Account, late payment charges and any other type of charges that the
servicer has designated as "Finance Charge Receivables" with respect to
Accounts that are not Charged-Off Accounts.
"FIXED PRINCIPAL ALLOCATION EVENT" will mean an event that causes the trust
to allocate principal collections to a series based on a previous investor
interest in Receivables for that series. We will describe the Fixed Principal
Allocation Events for your series in "The Certificates--Class Principal
Collections" and the glossary of terms in the applicable prospectus supplement.
"GROUP COLLECTIONS ACCOUNT" will mean the non-interest bearing segregated
trust account for collections allocated to a group established and maintained by
the trustee with an office or branch of the trustee or a Qualified Institution
for the benefit of the investors in each series that is a member of that group.
"HIGHEST RATING" will mean, for purposes of the definition of Permitted
Investments, with respect to Moody's, P-1 or Aaa, and, with respect to Standard
& Poor's, A-1+ or AAA, or with respect to either Standard & Poor's or Moody's,
any rating category that will not cause the Rating Agency to reduce or withdraw
its rating on any class of any series then outstanding, as confirmed in writing
by the applicable Rating Agency.
"IRA" means any Individual Retirement Account or Individual Retirement
Annuity.
"MASTER SERVICER TERMINATION EVENT" will mean an event that will give
either the trustee or investors holding certificates representing at least 51%
of the class invested amount for any class of any series then outstanding that
is materially adversely affected by the event the right to:
- terminate the master servicer's rights and obligations under the Pooling
and Servicing Agreement and any Series Supplement then outstanding, and
- cause the trustee to appoint a successor master servicer.
These events include certain breaches of representations, warranties or
covenants, or certain events of insolvency with respect to the master servicer.
We describe these events in more detail under "Servicing--Master Servicer
Termination Events."
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"MINIMUM PRINCIPAL RECEIVABLES BALANCE" will mean, on any date of
determination, an amount equal to the sum of the series minimum principal
receivables balances for each series then outstanding.
"MSDW" means Morgan Stanley Dean Witter & Co.
"NON-U.S. HOLDER" means the beneficial owner of a certificate that, for
United States federal income tax purposes, is
- a nonresident alien individual,
- a foreign corporation,
- a foreign partnership, or
- a foreign estate or trust,
as those terms are defined in the Code.
"OID" means original issue discount.
"PERMITTED INVESTMENTS" will mean:
(i) negotiable instruments or securities represented by instruments in
bearer or registered form which evidence:
(a) obligations issued or fully guaranteed, as to timely payment, by
the United States of America or any instrumentality or agency of
the United States of America, when those obligations are backed by
the full faith and credit of the United States of America;
(b) time deposits in, or bankers' acceptances issued by, any depository
institution or trust company:
- incorporated under the laws of the United States of America or
any state of the United States, or which is a domestic branch of
a foreign bank,
- subject to supervision and examination by federal or state
banking or depository institution authorities; and
- that has, at the time the trust invests or contractually commits
to invest in its time deposits or bankers' acceptances, the
Highest Rating on its short-term deposits or commercial paper or,
if its short-term deposits or commercial paper are unrated, the
Highest Rating on its long-term unsecured debt obligations;
(c) commercial paper or other short-term obligations having the Highest
Rating at the time the trust invests or contractually commits to
invest in that commercial paper or other short-term obligations; or
(d) investments in money market funds having the Highest Rating;
(ii) demand deposits in the name of the trust or the trustee in any
depository institution or trust company referred to in clause (i)(b)
above;
(iii) shares of an open end diversified investment company that is
registered under the Investment Company Act of 1940, as amended, and
that:
(a) invests its assets exclusively in obligations of or guaranteed by
the United States of America or any instrumentality or agency of
the United States of America, having in each instance a final
maturity date of less than one year from their date of purchase, or
other Permitted Investments;
(b) seeks to maintain a constant net asset value per share; and
(c) has aggregate net assets of not less than $100,000,000 on the date
the trust purchases those shares.
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These securities will not be represented by an instrument, will be
registered in the name of the trustee upon books maintained for that
purpose by or on behalf of the issuer of these securities and will be
identified on books maintained for that purpose by the trustee as held
for the benefit of the trust or the investors. The trust may only invest
in these securities if they will not result in a reduction or withdrawal
of the rating of any class of any series then outstanding, as confirmed
in writing by the Rating Agencies;
(iv) a guaranteed investment contract--guaranteed as to timely payment--the
terms of which meet the criteria of the Rating Agencies and with an
entity whose credit standards meet the criteria of the Rating Agencies
necessary to preserve the rating of each class of each series then
outstanding; and
(v) repurchase agreements transacted with either
(a) an entity subject to the United States federal bankruptcy code,
provided that:
(1) the term of the repurchase agreement is consistent with the
requirements set forth in Section 4.02(c) of the Pooling and
Servicing Agreement with regard to the maturity of Permitted
Investments or is due on demand,
(2) the trustee or a third party acting solely as agent for the
trustee has possession of the collateral,
(3) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the trustee, the trustee on behalf
of the trust has a perfected first priority security interest
in the collateral,
(4) the market value of the collateral is maintained at the
requisite collateral percentage of the obligation in accordance
with the standards of the Rating Agencies,
(5) the failure to maintain the requisite collateral level will
obligate the trustee to liquidate the collateral immediately,
(6) the securities subject to the repurchase agreement are
certificates of deposit, bankers acceptances or obligations of,
or fully guaranteed as to principal and interest by, the United
States of America or an agency of the United States of America,
(7) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the Trustee, the securities
subject to the repurchase agreement are free and clear of any
third party lien or claim; or
(b) a financial institution insured by the FDIC, or any broker-dealer
with "retail customers" that is under the jurisdiction of the
Securities Investors Protection Corp., or SIPC, provided that:
(1) the market value of the collateral is maintained at the
requisite collateral percentage of the obligation in accordance
with the standards of the Rating Agencies,
(2) the trustee or a third party acting solely as agent for the
trustee has possession of the collateral,
(3) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the trustee, the trustee on behalf
of the trust has a perfected first priority security interest
in the collateral,
(4) as evidenced by a certificate of a servicing officer of the
master servicer delivered to the trustee, the collateral is
free and clear of third party liens; and, in the case of an
SIPC broker, was not acquired pursuant to a repurchase or
reverse repurchase agreement and
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(5) failure to maintain the requisite collateral percentage will
obligate the trustee to liquidate the collateral.
At the time the trust invests or contractually commits to invest in any
repurchase agreement, the entity or institution must have the Highest
Rating on its short-term deposits or commercial paper or, if its
short-term deposits or commercial paper are unrated, the Highest Rating
on its long-term unsecured debt obligations. Permitted Investments will
include, without limitation, securities of Discover Bank or any of its
affiliates which otherwise qualify as a Permitted Investment under
clause (i), (ii), (iii), (iv) or (v) above.
"POOLING AND SERVICING AGREEMENT" will mean the Pooling and Servicing
Agreement dated as of October 1, 1993, by and between Discover Bank, formerly
Greenwood Trust Company, as master servicer, servicer and seller, and U.S. Bank
National Association, formerly First Bank National Association, successor
trustee to Bank of America Illinois, formerly Continental Bank, National
Association, as trustee, as that agreement may be amended or supplemented from
time to time.
"PRINCIPAL COLLECTIONS" will mean, for any calendar month, all collections
other than Finance Charge Collections.
"PRINCIPAL RECEIVABLE" will mean each Receivable other than Finance Charge
Receivables.
"QUALIFIED INSTITUTION" will mean a depository institution organized under
the laws of the United States of America or any one of the states of the United
States of America that at all times has a short-term certificate of deposit
rating of A-1 or better by Standard & Poor's and P-1 or better by Moody's, and
whose deposits are insured by the FDIC.
"RATING AGENCY" will mean Moody's or Standard & Poor's, and "Rating
Agencies" will mean Moody's and Standard & Poor's.
"PTE" means a Department of Labor Prohibited Transaction Exemption.
"RECEIVABLE" will mean any amounts owing by the obligor under an Account
from time to time, including, without limitation, amounts owing for the payment
of goods and services, cash advances, finance charges and other charges, if any.
A Receivable will be deemed to have been created at the end of the day on the
date the servicer first records the transaction on the cardmember master file of
the accounts maintained by the servicer or on the servicer's behalf, without
regard to the effective date of recordation. A Receivable will not include any
amount owing under a Charged-Off Account or an Account the Receivables in which
have been repurchased pursuant to the Pooling and Servicing Agreement. Reference
to a "receivable" will include any amount owing by an obligor under a
Charged-Off Account or an Account in which the Receivables have been repurchased
pursuant to the Pooling and Servicing Agreement.
"RECEIVABLE REPURCHASE EVENT" means the failure of any Receivable to be an
Eligible Receivable at the time the seller transfers it to the trust, if that
failure has a material adverse effect on the investors' interest in the
Receivables as a whole and the seller does not cure that failure within 60 days
of:
- the relevant seller's actual knowledge of the breach, or
- the relevant seller's receipt of written notice of the event from the
trustee.
See "The Certificates--Repurchase of Specified Receivables."
"REQUIRED DAILY DEPOSIT" will mean, for any series, for any servicer that
is required during any month to deposit collections into the Collections Account
on a daily basis pursuant to the Pooling and Servicing Agreement, amounts that
will be available to pay interest and principal, as applicable, under the cash
flows for the applicable series, up to that servicer's proportionate share of
the interest and principal expected to be paid to investors in that series on
the related distribution date, as more fully specified in the applicable Series
Supplement.
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"RESTRICTED GROUP" means, for purposes of ERISA, Discover Bank, the
trustee, the master servicer or any servicer, or, with respect to any particular
series, an underwriter, a party providing credit support, or the counterparty on
an interest rate swap or cap for the series, or any affiliate of any of them.
"SELLER CERTIFICATE" will mean:
- if a seller elects to evidence its interest in the trust in certificated
form pursuant to the Pooling and Servicing Agreement, the certificate
executed by Discover Bank and authenticated by the trustee, or
- an uncertificated interest in the trust as evidenced by a recording in
the books and records of the trustee,
in each case representing a residual interest in the assets of the trust not
represented by the certificates of any series.
"SELLER CERTIFICATE OWNERSHIP AGREEMENT" will mean, if applicable, the
agreement entered into by Discover Bank, as seller, and any Additional Seller,
as that agreement may be amended or supplemented from time to time.
"SELLER INTEREST" will mean, for any trust distribution date or
distribution date, the aggregate amount of Principal Receivables in the trust at
the end of the previous calendar month minus the Aggregate Investor Interest at
the end of that day; provided, however, that the Seller Interest will not be
less than zero.
"SELLER PERCENTAGE" will mean, on any date of determination, for any
specified category, an amount equal to 100% minus the applicable Aggregate
Investor Percentage for that category.
"SERIES REPURCHASE EVENT" means the discovery that as of the date the trust
issues a series, the applicable Series Supplement does not constitute a legal,
valid and binding obligation of each seller, enforceable against each seller in
accordance with its terms, subject to usual and customary exceptions relating to
bankruptcy, insolvency and general equity principles. See "The
Certificates--Repurchase of a Series."
"SERIES SUPPLEMENT" will mean the Series Supplement to the Pooling and
Servicing Agreement, dated as of the date the trust issues a series of
certificates, between Discover Bank and the trustee, that establishes each
series of certificates.
"SERIES TERMINATION DATE" will mean, for any series, the last date on which
the trust will pay principal or interest to the investors of that series.
"SERVICER TERMINATION EVENT" will mean an event that will give either the
trustee or investors holding certificates representing at least 51% of the
invested amount for any class of any series then outstanding that is materially
adversely affected by the event the right to:
- terminate the servicer's rights and obligations under the Pooling and
Servicing Agreement and any Series Supplement then outstanding, and
- cause the trustee to appoint a successor servicer.
These events include certain breaches of representations, warranties or
covenants, or certain events of insolvency with respect to the servicer. We
describe these events in more detail under "Servicing--Servicer Termination
Events."
"TRUST DISTRIBUTION DATE" will mean November 10, 1993 and the tenth day of
each calendar month thereafter, or, if that tenth day is not a business day, the
next succeeding business day.
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"TRUST PORTFOLIO REPURCHASE EVENT" means the discovery that as of October
1, 1993, or with respect to any additional Accounts, as of the date the
applicable seller assigned the Receivables in those Accounts to the trust,
- certain legal defects existed under the Pooling and Servicing Agreement
or the assignments,
- certain defects existed in the trust's rights in the Receivables, or
- certain representations and warranties of any seller were not true and
the breach is not cured within a specified time period.
For more information about these events and their consequences, see "The
Certificates--Repurchase of Trust Portfolio."
"UNITED STATES PERSON" means, generally, a beneficial owner of a
certificate that is:
- a citizen or resident of the United States,
- a corporation or partnership, including an entity treated as a
corporation or partnership for federal income tax purposes, created or
organized in the United States or under the laws of the United States or
of any state,
- an estate the income of which is subject to United States federal income
taxation regardless of the source of that income, or
- a trust if a court within the United States is able to exercise primary
supervision over the trust's administration, and one or more United
States persons have the authority to control all substantial decisions of
the trust, and certain other trusts in existence on August 20, 1996 that
have validly elected to be treated as United States Persons.
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