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FILED PURSUANT TO RULE 424(b)(3)
OF THE SECURITIES ACT OF 1933
REGISTRATION NO. 33-57302-01
ANNUAL APPENDIX
ANNUAL APPENDIX DATED
APRIL 15, 1997 TO PROSPECTUS
DATED JANUARY 26, 1993, AS
SUPPLEMENTED THROUGH MARCH 17, 1997
Discover(R) Card Trust 1993 A
6.25% Class A Credit Card Pass-Through Certificates
6.80% Class B Credit Card Pass-Through Certificates
Greenwood Trust Company
Servicer
Discover Receivables Financing Group, Inc.
Seller
The following updates the Prospectus dated January 26, 1993, as
supplemented (the "Prospectus"), used by Dean Witter Reynolds Inc. in
connection with offers and sales of the Class A Certificates and the Class B
Certificates in market-making transactions in which Dean Witter Reynolds Inc.
acts as principal.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE INVESTOR CERTIFICATES, SEE "RISK FACTORS" ON PAGE
10. ALL REFERENCES TO "SPECIAL CONSIDERATIONS" SHALL BE REPLACED WITH
REFERENCES TO "RISK FACTORS."
1. GENERAL.
References in the Prospectus to Greenwood Trust Company ("Greenwood"),
Discover Receivables Financing Group, Inc. ("DRFG") and SCFC Receivables Corp.
("SRC"), as being indirect wholly-owned subsidiaries of Sears, are revised to
reflect that each is an indirect wholly-owned subsidiary of Dean Witter,
Discover & Co. ("DWDC") (formerly known as Dean Witter Financial Services
Group, Inc.). See "Prospectus Summary -- Spin-off of Dean Witter, Discover &
Co." and "Greenwood Trust Company."
References in the Prospectus to Sears Consumer Financial Corporation
("SCFC") are revised to reflect the change of its name to NOVUS Credit Services
Inc. ("NOVUS") and to reflect that it is no longer a wholly-owned subsidiary of
Sears but a wholly-owned subsidiary of DWDC.
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On February 5, 1997, DWDC and Morgan Stanley Group, Inc. ("Morgan
Stanley") announced their plans to merge in mid-1997. Upon completion of such
merger, Greenwood, DRFG, SRC and NOVUS will be indirect wholly-owned
subsidiaries of the merged entity, expected to be called Morgan Stanley, Dean
Witter, Discover & Co. ("MSDWD").
References in the Prospectus to Discover Card Services, Inc. ("DCSI") are
replaced by references to NOVUS Services, Inc. ("NSI").
2. REPORTS TO INVESTOR CERTIFICATEHOLDERS.
Delete the first sentence under the heading "Reports to Investor
Certificateholders" on page 2 of the Prospectus and replace with the following:
Monthly and annual reports containing information concerning the
Trust, prepared by the Servicer, will be made available to Certificate
Owners free of charge upon request by calling 302-323-7130, extension
328.
3. PROSPECTUS SUMMARY.
Delete the paragraph on page 9 relating to "Recent Developments" and
substitute the following:
SPIN-OFF OF DEAN WITTER, DISCOVER & CO. ... On March 1, 1993, Sears sold
through a primary initial public offering a minority interest of
approximately 20 percent in its wholly-owned subsidiary DWDC. Sears
distributed to Sears shareholders the balance of its ownership in DWDC in
a tax-free spin-off on June 30, 1993. Through the initial public
offering and the spin-off of DWDC, all subsidiaries of DWDC (including
Greenwood, DRFG and SRC) are no longer subsidiaries of Sears. DRFG
believes that this change in ownership does not have a material effect on
the Investor Certificates.
On February 5, 1997, DWDC and Morgan Stanley announced their plans
to merge in mid-1997. DRFG believes that the merger will not have a
material effect on the Investor Certificates.
4. RISK FACTORS.
a. Delete all text under the subheadings "Consumer Protection Laws and
Regulations" and "Discover Card Late Fee Proceedings" on pages 10-11 and
substitute the following:
Consumer Protection Laws and Regulations. The Accounts and the
Receivables are subject to numerous federal and state consumer protection
laws and regulations that impose requirements on the making and
enforcement of consumer loans. Such laws, as well as any new laws or new
rulings regarding new or existing laws that may be adopted, may adversely
affect the Servicer's ability to collect on the Receivables or maintain
previous levels of monthly periodic finance charges, and failure by the
Servicer to comply with such requirements could
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adversely affect the Servicer's ability to collect the Receivables. DRFG
has agreed in the Pooling and Servicing Agreement that if a Receivable
was not created in compliance in all material respects with all
requirements of laws applicable to DRFG and Greenwood with respect to
such Receivable, and if such noncompliance continues beyond a specified
cure period and has a material adverse effect on the interest of the
Trust in all the Receivables, DRFG will repurchase all Receivables in the
Accounts containing the Receivables affected by such noncompliance. See
"Description of the Investor Certificates -- Repurchase of Specified
Receivables." It is not anticipated that the Trustee will make any
examination of the Receivables or the records relating thereto for the
purpose of establishing the presence or absence of defects in the
Accounts, or for any other purpose. See "Certain Legal Matters Relating
to the Receivables -- Consumer Protection Laws and Debtor Relief Laws
Applicable to the Receivables."
Consumer Protection Laws and Regulations; Litigation. Greenwood is
involved from time to time in various legal proceedings that arise in the
ordinary course of its business. Greenwood does not believe that the
resolution of any of these proceedings will have a material adverse
effect on Greenwood's financial condition or on the Receivables. There
can be no assurance, however, regarding any of these effects.
Certain legal and administrative proceedings challenged, under the
laws of several states, the imposition of late payment fees (or other
incidental charges) by Greenwood on Discover cardmembers. In each of
these matters, the party proceeding against Greenwood claimed that
applicable state law prohibits or limits the imposition of late payment
fees, sought to enjoin Greenwood from imposing late payment fees on
Discover Card accounts of residents of the state in question and sought
refunds of (and, in some cases, civil penalties with respect to) late
payment fees previously imposed on such accounts. Greenwood asserted a
defense in these proceedings that federal law preempts any state law
prohibition against or limitation on charging a late payment fee or other
fee with respect to Discover Card accounts. On June 3, 1996, the United
States Supreme Court issued a decision holding that state laws limiting
late charges are preempted with respect to national banks by federal law,
and the Court remanded for reconsideration lower-court decisions that had
held that such state laws were not similarly preempted with respect to
other federally insured banks. In light of these rulings, all of the
outstanding legal and administrative proceedings challenging, on the
basis of state law, Greenwood's imposition of late fees and other
incidental charges on Discover cardmembers were resolved in 1996 in
Greenwood's favor. No such proceedings are currently pending.
Greenwood believes that none of the above referenced legal
proceedings concerning late payment fees has had a material effect on the
Receivables.
b. Delete the first and second full paragraphs on page 12 and substitute
the following:
Legislation. The Competitive Equality Banking Act of 1987 ("CEBA")
contains provisions that limit the ability of nonbanking companies, such
as DWDC and DWDC's wholly-owned subsidiary, NOVUS, the owner of
Greenwood, to own banks. However, the legislation permits any nonbanking
company that owned a bank on March 5, 1987 to retain control of the bank.
DWDC and NOVUS are permitted to retain control of Greenwood under this
legislation. CEBA provides that if DWDC, NOVUS or Greenwood fails to
comply with certain statutory
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restrictions, DWDC and NOVUS will be required to divest control of
Greenwood or to limit its activities significantly. Greenwood believes,
however, that in light of the programs it has in place, the limitations
of CEBA will not have a material impact on Greenwood's ability to
service, or maintain the level of, the Receivables. In addition, future
federal or state legislation, regulation or interpretation of federal or
state legislation or regulation could adversely affect the business of
Greenwood or the relationship of DWDC or NOVUS with Greenwood. See
"Greenwood Trust Company."
c. Insert the following before the first full paragraph on page 13:
Basis Risk. In general, accounts in the Discover Card Portfolio
accrue periodic finance charges at variable rates based upon factors such
as the prevailing prime rate, the amount of a cardmember's annual
purchases and his or her payment status (although certain account
balances may accrue periodic finance charges at fixed rates, in most
instances for specified periods of time). See "The Accounts -- Billing
and Payments." As a result, a significant portion of the Receivables
currently bear interest at the prevailing prime rate plus a margin, while
the Investor Certificates bear interest at fixed rates. If there is a
decline in the prime rate, the amount of Finance Charge Collections may
be reduced, which could cause an early commencement of the Amortization
Period or result in either shortfalls of Certificate Interest or losses
to the Investor Certificateholders. See "Description of the Investor
Certificates -- Amortization Events."
d. Delete the text on page 13 under the heading "Competition" and
substitute the following:
Competition in the Credit Card Industry. The credit card industry
in which the Discover Card competes is highly competitive. This
competition focuses on features and other financial incentives of credit
cards such as annual fees, finance charges, late payment fees, overlimit
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 charge cards
issued by travel and entertainment companies. 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 twenty-five 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
(e.g., credits towards purchases of airline tickets or rebates for the
purchase of an automobile), currently represent a rapidly growing segment
of the bank-issued credit card market. The majority of travel and
entertainment cards are issued by American Express Company, which has
been issuing cards since 1958. Travel and entertainment cards differ
from bank cards in that they have no pre-established credit limits and
have limited provisions for repayment in installments. American Express
Company, through a subsidiary bank, also issues cards with both a
pre-established credit limit and provisions for repayment in
installments. The Discover Card was introduced nationwide in 1986 and
competes with general purpose credit cards issued by other banks and with
travel and entertainment cards. Greenwood currently is the primary
issuer of the Discover Card. Greenwood also issues, and intends from
time to time to introduce, additional
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general purpose credit, charge and financial transaction cards;
however, none of the accounts associated with these cards is included in
the Discover Card Portfolio.
Many bank credit card issuers have instituted balance transfer
programs. Generally, under these transfer programs, cardholders are
offered a favorable annual percentage rate or other financial incentives
for a specified length of time on any portion of their account balances
arising from the transfer to their accounts of outstanding account
balances maintained on another credit card. The annual percentage rates
for balance transfers often are more favorable to cardholders than the
annual percentage rates for account balances arising from purchases or
cash advances.
This competition affects Greenwood's ability to obtain applicants
for Discover Card accounts, to encourage usage of the accounts by
cardmembers and to obtain participation in the Discover Card program by
service establishments. A significant adverse change in any of these
factors could result in a decrease in the level of the Receivables, and
of the receivables in the Discover Card Portfolio. If there is a
decrease in the level of Receivables, and if sufficient receivables in
Additional Accounts are not available to be added to the Trust or are not
added, an Amortization Event could result, causing an early commencement
of the Amortization Period. See "Risk Factors -- Payments and Maturity"
and "Description of the Investor Certificates -- Amortization Events."
DWDC, the indirect owner of Greenwood, pursues a general purpose
credit card strategy of multiple bank association and proprietary card
products. For example, in early 1994, MountainWest Financial
Corporation, a Utah industrial loan corporation that is indirectly owned
by DWDC, began participating in a program by NationsBank of Delaware,
N.A. to issue a new, nationally marketed co-branded MasterCard(R) credit
card under the name "Prime Option(SM)." Greenwood expects that from time
to time additional general purpose credit card products will be
introduced through Greenwood or other DWDC subsidiaries in order to
attract additional consumers. The introduction of a new general purpose
credit card product by any market competitor poses incremental
competition for Discover Card and for other credit card issuers.
Although Greenwood currently does not expect that the issuance of any new
card by Greenwood or another DWDC subsidiary will have a materially
greater impact on the Discover Card program than the introduction of a
comparable product by any other market competitor, no assurance can be
given with respect to the future competitive impact of such programs on
the Discover Card Portfolio.
e. Delete the text under the heading "Ability to Change Terms of the
Accounts" on pages 14-15 and substitute the following:
Ability to Change Terms of the Accounts. Pursuant to the Pooling
and Servicing Agreement, DRFG does not transfer Accounts to the Trust,
but only the Receivables arising in the Accounts. As owner of the
Accounts, Greenwood has the right to determine the periodic finance
charges applicable from time to time to the Accounts, to alter the
minimum monthly payment required under the Accounts, to change the credit
limit with respect to the Accounts and to change various other terms with
respect to the Accounts. A decrease in the periodic finance charges or
other fees with respect to an Account could decrease the Finance Charge
Collections, which would decrease the effective yield on the Receivables
and could also cause an early
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commencement of the Amortization Period as well as decreased
protection to Investor Certificateholders against shortfalls in
Certificate Interest and against charged-off Receivables. In addition, an
increase in credit limits could result in increases in Charged-Off
Amounts, which could result in a decrease in the level of the
Receivables, and of the receivables in the Discover Card Portfolio. If
there is a decrease in the level of Receivables, and if sufficient
receivables in Additional Accounts are not available to be added to the
Trust or are not added, an Amortization Event could result, causing an
early commencement of the Amortization Period. See "Description of the
Investor Certificates -- Distributions of Collections and Application of
Collections and Certain Other Amounts" and "-- Amortization Events."
The Pooling and Servicing Agreement provides that the Servicer must
administer, process and enforce the Accounts in accordance with its
customary and usual servicing procedures for servicing credit accounts
comparable to the Accounts and in accordance with its Credit Guidelines.
DRFG and Greenwood have also agreed that the terms governing an Account
will not be changed unless the change is also made to the terms of other
accounts in the Discover Card Portfolio of the same general type,
obligors of which are resident in a particular affected state or similar
jurisdiction. There can be no assurance that any such change may not
affect the Accounts to a greater or lesser degree than other accounts in
the Discover Card Portfolio. Except as set forth above, the Pooling and
Servicing Agreement and the Purchase and Contribution Agreement do not
contain any restrictions on the ability of Greenwood to change the terms
of the Accounts or the Receivables.
There can be no assurance that changes in applicable laws, changes
in the marketplace or prudent business practice might not result in a
determination by Greenwood to take actions that would result in other
changes in the terms of some or all of the Greenwood Discover Card
accounts.
f. Delete the last two sentences under the heading "Effects of the
Selection Process, Seasoning and Performance Characteristics" on page 15 and
substitute the following:
Based on historical experience, fixed pools of accounts (such as the
Accounts) in general experience more volatile performance characteristics
(particularly in the first few months following the selection of such
fixed pools of accounts) and may also experience somewhat higher yields
and charge-offs than the portfolios of accounts from which they are
selected (such as the Discover Card Portfolio), and monthly variations
may tend to be greater than annual changes. See "The Accounts -- Effects
of the Selection Process" and "The Accounts -- Composition of the
Accounts." In addition, less seasoned pools of accounts may experience
somewhat higher charge-offs and/or lower yields, as well as different
payment characteristics, than more seasoned pools of accounts. See "The
Accounts -- Composition of the Accounts -- Seasoning" and "Composition and
Historical Performance of the Discover Card Portfolio -- Composition of
the Discover Card Portfolio -- Seasoning."
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5. DESCRIPTION OF THE INVESTOR CERTIFICATES.
a. References under the subheadings "Repurchase of Trust Portfolio" and
"Repurchase of Specified Receivables" on pages 20-21, are revised to reflect
the assumption by SRC of repurchase obligations of Sears as described therein.
b. Delete the last sentence in the first full paragraph on page 33 under
the subheading "Reports to Investor Certificateholders" and substitute the
following:
The statement will be made available to Certificate Owners free from
charge upon request by calling 302-323-7130, extension 328.
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6. THE DISCOVER CARD BUSINESS.
Delete the text under the heading "The Discover Card Business" on pages
39-41 and substitute the following:
GENERAL
The Receivables which DRFG has conveyed to the Trust pursuant to the
Pooling and Servicing Agreement were generated from transactions made by
holders of the Discover(R) Card, a general purpose credit and financial
services card, and do not include receivables arising under the Discover
Card Corporate Card or the Discover Card Private Issue Card. All
references to the Discover Card in this section entitled "The Discover
Card Business" relate exclusively to the Discover Card issued by
Greenwood. With the exception of the small number of Discover Card
Corporate Cards issued by an affiliate of Greenwood, Greenwood is the
sole issuer of credit cards bearing the DISCOVER service mark. Greenwood
also issues, and intends from time to time to introduce, additional
general purpose credit, charge and financial transaction cards.
The Discover Card was first issued in regional pilot markets in
September 1985, and national distribution began in March 1986. The
Discover Card issued by Greenwood affords cardmembers access to a
revolving line of credit. The card can be used to purchase merchandise
and services from participating service establishments. The number of
service establishments that accept the Discover Card has continued to
increase. In 1996, approximately 425,000 new service establishments were
enrolled. The Discover Card can also be used to obtain cash advances at
automated teller machines and at certain other locations throughout the
United States. Cash advances can also be obtained by means of checks
written by cardmembers and drawn against their accounts. As of December
31, 1996, there were 34.2 million Discover Card accounts with 44.0
million cardmembers. The Discover Card issued by Greenwood may only be
used for personal, family or household purposes due to banking statutes
applicable to Greenwood. See "Greenwood Trust Company."
Each Discover cardmember is subject to account terms and conditions
that are uniform from state to state. See "The Accounts -- Billing and
Payments." In all cases, the agreement governing the terms and
conditions of the account (the "Cardmember Agreement") permits Greenwood
to change the credit terms, including the rate of the periodic finance
charge and the fees imposed on accounts, upon prior notice to
cardmembers. Each Discover Card account is assigned a credit limit when
the account is opened. Thereafter, individual credit limits may be
increased or decreased, at Greenwood's discretion, from time to time.
The credit limits on Discover Card accounts generally range from $1,000
to $6,000, although on occasion higher or lower limits may be authorized.
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There are additional features and services offered with the Discover
Card accounts. One is the Cashback Bonus(R), in which Greenwood annually
pays cardmembers a percentage of their purchase amounts, ranging up to
one percent, based on their annual purchases. This amount is remitted to
cardmembers in the form of a check or a credit to the cardmember's
account. No such amounts will be paid from the property of the Trust.
Another feature offered with the Discover Card accounts is a variable
rate of periodic finance charges applied to a cardmember's account
balance (except in certain limited circumstances) based on the prevailing
prime rate plus a margin, the amount of such cardmember's purchases and
the cardmember's payment history. See "The Accounts -- Billing and
Payments." Greenwood 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, Greenwood from time to time tests and implements new
offers, promotions and features of the Discover Card.
Greenwood, either directly, through its processing arrangements with
its affiliate, NSI, 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 new account solicitation, application processing,
new account fulfillment, transaction authorization and processing,
cardmember billing, payment processing, cardmember service and collection
of delinquent accounts. There are currently multiple geographically
dispersed operations centers maintained by Greenwood or NSI for servicing
cardmembers. An additional operations center is maintained for
processing accounts that have been charged-off as uncollectible.
NSI has established arrangements with service establishments to
accept the Discover Card and other credit, charge and financial
transaction cards that carry the NOVUS(SM) logo for cash advances and as
the means of payment for merchandise and services. Greenwood contracts
with NSI to have cards issued by Greenwood (including the Discover Card)
accepted at those establishments. The ability to generate new
receivables requires locations where the Discover Card can be used. NSI
employs a national sales and service force to maintain and increase the
size of its service establishment base. Additional operations centers
that currently are maintained by NSI 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.
CREDIT-GRANTING PROCEDURES
Accounts in the Discover Card Portfolio have been solicited by
various techniques and have undergone credit review to establish that the
cardmembers meet standards of ability and willingness to pay.
Principally, the accounts have been solicited (i) via "pre-approved"
direct mail or telemarketing, (ii) by "take-one" applications distributed
in many service establishments that accept the Discover Card and (iii)
with various other programs targeting specific segments of the
population. Solicitations have been supported by general broadcast and
print media
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advertising. Potential applicants who are sent pre-approved
solicitations have met certain credit criteria relating to their previous
payment patterns and longevity of account relationships with other credit
grantors. Since September 1987, all lists have been pre-screened though
credit bureaus before mailing. Pre-screening is a process by which an
independent credit reporting agency evaluates the lists of names supplied
by Greenwood against credit-worthiness criteria supplied by Greenwood
that are intended to provide a general indication, based on available
information, of the willingness and ability of such persons to repay
their obligations; the credit bureaus return to Greenwood only the names
of those persons meeting these criteria. Applications that are not
pre-approved are evaluated by using credit-scoring systems (statistical
evaluation models that assign point values to information regarding
applications). The credit-scoring systems used by Greenwood are based on
the credit-scoring systems developed by scoring model vendors. Certain
applications not approved under the credit-scoring systems are reviewed
by credit analysts. Any such application as to which a credit analyst
recommends approval is processed in Greenwood's main office in New
Castle, Delaware by senior bank review analysts and may be approved by
them.
As owner of the Greenwood Discover Card Accounts, Greenwood has the
right to change its credit-scoring criteria and credit-worthiness
criteria. Greenwood's application procedures and credit-scoring systems
are regularly reviewed and modified to reflect Greenwood's actual credit
experience with Discover Card account applicants and cardmembers as such
historical information becomes available. Greenwood believes that
refinements of these procedures and systems since the inception of the
Discover Card program have helped it to manage and predict its credit
losses, although there can be no assurance that these refinements will
not cause 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 level of the
Receivables, and of the receivables in the Discover Card Portfolio. If
there is a decrease in the level of Receivables, and if sufficient
Additional Accounts are not available to be added to the Trust or are not
added, an Amortization Event could result, causing an early commencement
of the Amortization Period. In addition, an increase in Charged-Off
Amounts without an offsetting increase in Finance Charge Receivables
could result in an Amortization Event, causing an early commencement of
the Amortization Period.
COLLECTION EFFORTS
Efforts to collect past-due Discover Card account receivables
currently are made primarily by collections personnel of NSI or
Greenwood. Under current practice, Greenwood includes a request for
payment of past-due amounts on the monthly billing statement of all
accounts with such amounts. Accounts with past-due amounts also receive
a written notice of late fee charges, as well as an additional request
for payment, 15 days after any monthly statement which 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. In the event that initial telephone contacts
fail to elicit a payment, Greenwood continues to contact the cardmember
by telephone and by mail. Greenwood may also enter into arrangements
with cardmembers to waive finance charges, late fees and principal due,
and extend or otherwise change payment schedules. The current policy of
Greenwood 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 such time,
except in cases
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of bankruptcy, where an uncollectible balance may be charged off
earlier. In general, after an account has been charged off, collections
personnel of NSI or Greenwood make attempts to collect all or a portion
of the charged-off account for a period of approximately four months. If
those attempts are unsuccessful, the charged-off account is generally
placed with one or more collection agencies for a period of approximately
a year or, alternatively, Greenwood may commence legal action against the
cardmember, including legal action for the attachment of property or bank
accounts of the cardmember or the garnishment of the cardmember's wages.
Under certain circumstances, Greenwood may also sell charged-off accounts
to third parties, either before or after collection efforts have been
attempted.
Under the terms of the Pooling and Servicing Agreement, any
recoveries received on Charged-Off Accounts will be retained by Greenwood
and will not be included in the assets of the Trust. See "Description of
the Investor Certificates -- Adjustment of Investor Interest as a Result
of Charge-Offs and Reimbursement of Charge-Offs" and "Composition and
Historical Performance of the Discover Card Portfolio -- Composition of
Discover Card Portfolio." The credit granting, servicing and charge-off
policies and collection practices of Greenwood may change over time in
accordance with Greenwood's business judgment and applicable law.
7. THE ACCOUNTS.
Delete the text on pages 41-43 under the subheading "Billing and Payments"
and substitute the following:
All Discover Card accounts have the same billing and payment
structure. Monthly billing statements are sent by Greenwood to each
cardmember with an outstanding debit balance. Discover Card accounts are
grouped into multiple billing cycles for operational purposes. Each
billing cycle has a separate monthly billing date at which time the
activity in the related accounts during the period of approximately 28 to
34 days ending on such billing date is processed and billed to
cardmembers. The Accounts include accounts in all billing cycles.
Each Discover cardmember with an outstanding debit balance in his or
her Discover Card account generally must make a minimum payment equal to
1/48th of the new balance on the account at the end of the billing cycle
for the account (prior to February 1996, 1/36th), rounded to the next
higher whole dollar amount, but not less than $10 or the entire balance,
whichever is less, plus any amount that is past due. Under certain
circumstances, the minimum payment is reduced by amounts paid in excess
of the minimum payment due during the previous three months and not
already so applied. From time to time, Greenwood 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.
Although these practices are not expected to have a material adverse
effect on the Investor Certificateholders, Collections may be reduced
during any period in which Greenwood offers cardmembers the opportunity
to skip the minimum monthly payment. A cardmember may pay the total
amount due at any time. Greenwood also may enter into arrangements with
delinquent cardmembers to extend or otherwise change payment schedules,
and to waive finance charges, late fees and principal due.
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Greenwood imposes periodic finance charges on Discover Card account
balances at fixed and variable annual percentage rates. Periodic finance
charges on purchases, cash advances and balance transfers 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 general, periodic finance charges
on purchases, cash advances and balance transfers are based on a prime
rate plus a margin (currently 8.9% to 13.9%), subject to certain minimum
rates currently ranging from 12.9% to 19.8%. The rates imposed on
individual Discover Card accounts are based on purchase activity and
payment status. In addition, in connection with programs for new
cardmembers, for balance transfers, and for other promotional purposes,
certain Discover Card account balances may accrue periodic finance
charges at lower fixed rates for a specified period of time. Balances
remaining from transactions posted to accounts in billing cycles
beginning prior to February 1993 also accrue periodic finance charges at
fixed rates.
In addition to periodic finance charges, Greenwood may impose
certain other charges and fees on Discover Card accounts. Greenwood
currently charges a cash advance transaction fee equal to 2.5% of each
cash advance, with a minimum fee of $2.00 per transaction. Greenwood
also currently charges a $20 late fee on Discover Card accounts, a $20
fee for balances exceeding a cardmember's credit limit as of the close of
such cardmember's monthly billing cycle and a $15 fee for any payment
check returned due to insufficient funds. See "Risk Factors -- Consumer
Protection Laws and Regulations," "-- Payments and Maturity" and
"-- Ability of the Seller to Change Terms of the Accounts."
The yield on the Accounts depends on changes in the prime rate over
time and in 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 Greenwood changes the terms of the Cardmember Agreement.
Reductions in the yield could, if sufficiently large, cause the
commencement of the Amortization Period or result in either shortfalls of
Certificate Interest or losses to the Investor Certificateholders as the
result of charged-off Receivables, and there can be no assurance
regarding any of these effects. See "Risk Factors -- Basis Risk" and
"Description of the Investor Certificates -- Amortization Events."
8. COMPOSITION AND HISTORICAL PERFORMANCE OF THE DISCOVER CARD
PORTFOLIO.
a. Delete the second sentence in the paragraph under the heading "General"
on page 44 and substitute the following:
A limited number of Discover Card accounts have been opened pursuant to
credit scoring criteria materially different from the credit scoring
criteria generally used for Discover Card accounts. These accounts have
been segregated from the rest of the Discover Card Portfolio and are not
reflected in the information contained herein. None of these accounts is
included in the Trust.
12
<PAGE> 13
b. Delete the text under the heading "Composition of Discover Card
Portfolio" and ending before the heading "Payment of the Investor Certificates"
located on pages 45-47 and substitute the following:
COMPOSITION OF DISCOVER CARD PORTFOLIO
Geographic Distribution. The Discover Card Portfolio is not concentrated
geographically. As of December 31, 1996, the five states with the largest
receivables balances were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL RECEIVABLES BALANCE
OF DISCOVER CARD PORTFOLIO
STATE AS OF DECEMBER 31, 1996
- ----- ---------------------------------------
<S> <C>
California........ 11.2%
Texas............. 9.1%
New York.......... 6.7%
Florida........... 5.7%
Illinois.......... 5.2%
</TABLE>
No other state accounted for more than 5% of the total receivables balance
of the Discover Card Portfolio as of December 31, 1996.
Credit Limit Information. Credit limit information as of December 31,
1996 with respect to the Discover Card Portfolio is summarized as follows:
<TABLE>
<CAPTION>
RECEIVABLES PERCENTAGE OF
OUTSTANDING TOTAL RECEIVABLES
CREDIT LIMIT (000)'S OUTSTANDING
- ------------ ------------- --------------------
<S> <C> <C>
Less than or equal to $1,000.00 $ 598,939 2.1%
$1,000.01 to $2,000.00......... $ 4,705,384 16.3%
$2,000.01 to $3,000.00......... $ 3,741,712 13.0%
Over $3,000.00................. $19,729,727 68.6%
------------- ------
Total..................... $28,775,762 100.0%
============= ======
</TABLE>
Seasoning. As of December 31, 1996, 80.3% of the accounts in the Discover
Card Portfolio were at least 24 months old. The distribution of the age of
accounts in the Discover Card Portfolio as of December 31, 1996 was as follows:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
AGE OF ACCOUNTS OF ACCOUNTS OF BALANCES
- --------------- ----------- -----------
<S> <C> <C>
Less than 12 Months.......................................... 8.6% 8.2%
12 to 23 Months.............................................. 11.1% 11.9%
24 to 35 Months.............................................. 11.3% 11.7%
36 Months and Greater........................................ 69.0% 68.2%
----------- -----------
Total................................................... 100.0% 100.0%
=========== ===========
</TABLE>
13
<PAGE> 14
Summary Yield Information. The annualized aggregate monthly yield for the
Discover Card Portfolio is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Aggregate Monthly Yield(1)........ 17.72% 16.95% 16.65%
</TABLE>
- ------------------
(1) Monthly Yield is calculated by dividing Monthly Finance Charges billed by
beginning monthly balance. Monthly Finance Charges include periodic
finance charges, cash advance item charges, late fees, and, as of March 1,
1996, overlimit fees, but exclude certain other items such as annual
membership fees, if any, which are included in Finance Charge Receivables
and recoveries with respect to charged-off accounts. Aggregate Monthly
Yield is the average of Monthly Yields annualized for each period shown.
Summary Current Delinquency Information. Current delinquency information
as of December 31, 1996 with respect to the Discover Card Portfolio is
summarized as follows:
<TABLE>
<CAPTION>
AGGREGATE
BALANCES PERCENTAGE
PAYMENT STATUS (000's) OF BALANCES
- -------------- ------------- -----------
<S> <C> <C>
Current........... $ 24,435,287 84.9%
1 to 29 Days...... $ 2,299,993 8.0%
30 to 59 Days..... $ 809,902 2.8%
60 to 89 Days..... $ 448,994 1.6%
90 to 119 Days.... $ 327,352 1.1%
120 to 149 Days... $ 249,238 0.9%
150 to 179 Days... $ 204,996 0.7%
------------- -----------
Total........ $ 28,775,762 100.0%
============= ===========
</TABLE>
Summary Historical Delinquency Information. Historical delinquency
information with respect to the Discover Card Portfolio is summarized as
follows:
<TABLE>
<CAPTION>
AVERAGE OF TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
DELINQUENT DELIQUENT DELIQUENT
AMOUNT AMOUNT AMOUNT
(000's) PERCENTAGE(1) (000's) PERCENTAGE(1) (000's) PERCENTAGE(1)
------ ------------- ------- ------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
30-59 Days........... $ 680,645 2.7% $ 568,382 2.6% $405,942 2.2%
60-89 Days........... $ 361,992 1.4% $ 276,821 1.3% $193,582 1.1%
90-179 Days.......... $ 593,661 2.3% $ 403,134 1.8% $282,080 1.5%
--------- ---- ---------- ---- -------- -----
Total........... $1,636,298 6.4% $1,248,337 5.7% $881,604 4.8%
========== ==== ========== ==== ======== ====
</TABLE>
For a discussion of economic factors affecting the performance of the
Discover Card Portfolio, including delinquencies, see "Risk Factors -- Social,
Legal and Economic Factors."
14
<PAGE> 15
- ---------------------------
(1) The percentages are the result of dividing Delinquent Amount by Average
Receivables Outstanding for the applicable period. Delinquent Amount is
the average of the monthly ending balances of delinquent accounts during
the periods indicated. Average Receivables Outstanding is the average of
the monthly average amount of receivables outstanding during the periods
indicated.
Summary Charge-Off Information. Charge-off information with respect to
the Discover Card Portfolio is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Receivables Outstanding(1).. $25,542,718 $22,031,829 $18,464,611
Gross Charge-Offs................... $ 1,458,450 $ 923,836 $ 680,487
Gross Charge-Offs as a Percentage of
Average Receivables(2).............. 5.71% 4.19% 3.69%
</TABLE>
For a discussion of economic factors affecting the performance of the
Discover Card Portfolio, including charge-offs, see "Risk Factors -- Social,
Legal and Economic Factors."
- ---------------------------
(1) Average Receivables Outstanding is the average of the monthly average
amount of receivables outstanding during the periods indicated.
(2) Recoveries with respect to charged-off Receivables will not be property
of the Trust.
Summary Payment Rate Information(1). The monthly rate of payments in the
Discover Card Portfolio is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Average Monthly Payment Rate(2).. 15.24% 16.20% 16.65%
High Monthly Payment Rate...... 18.08% 18.97% 17.89%
Low Monthly Payment Rate....... 13.33% 13.67% 15.16%
</TABLE>
- --------------------------
(1) Monthly Payment Rate is calculated by dividing monthly cardmember
remittances by the cardmember receivable balance outstanding as of the
beginning of the month.
(2) Average Monthly Payment Rate for a period is equal to the sum of
individual monthly payment rates for the period divided by the number of
months in the period.
9. GREENWOOD TRUST COMPANY.
15
<PAGE> 16
Delete the text under the heading "Greenwood Trust Company" on page 48 and
substitute the following:
Greenwood is a wholly-owned subsidiary of NOVUS and an indirect
subsidiary of DWDC. Greenwood was acquired by NOVUS in January 1985.
Greenwood was chartered as a banking corporation under the laws of the
State of Delaware in 1911, and its deposits are insured by the FDIC.
Greenwood is not a member of the Federal Reserve System. The executive
office of Greenwood is located at 12 Read's Way, New Castle, Delaware
19720. On March 1, 1993, Sears sold through a primary initial public
offering a minority interest of approximately 20 percent in DWDC. Sears
distributed to Sears shareholders the balance of its ownership in DWDC in
a tax-free spin-off on June 30, 1993. Through the initial public
offering and the spin-off of DWDC, all subsidiaries of DWDC (including
Greenwood, DRFG and SRC) are no longer subsidiaries of Sears. DRFG
believes that this change in ownership does not have a material effect on
the Investor Certificates. In addition to the experience obtained by
Greenwood 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 Greenwood and NSI has had extensive experience in
the credit operations of other credit card issuers. NSI performs sales
and marketing activities, provides operational support for the Discover
Card program and maintains merchant relationships. On February 5, 1997,
DWDC and Morgan Stanley announced their plans to merge in mid-1997. DRFG
believes that the merger will not have a material effect on the Investor
Certificates.
By virtue of enactment of CEBA, there are certain limitations placed
on Greenwood, including a requirement that Greenwood not engage in
activities in which it was not engaged as of March 5, 1987. Since its
acquisition by NOVUS, as a result of these and earlier limitations,
Greenwood has not engaged in the business of making commercial loans.
See "Risk Factors -- Legislation." However, the portions of CEBA which
limited the growth of the average asset base of Greenwood for each
12-month period ending September 30 to 7% of Greenwood's average asset
base for the preceding 12-month period have been repealed. Greenwood
believes that in light of the programs it has in place, the limitations
of CEBA will not have a material impact on the level of the Receivables
or on Greenwood's ability to service the Receivables.
10. THE SELLER.
a. Delete the seventh sentence under the subheading "General" beginning on
page 48 and substitute the following:
The Investor Certificates will not be guaranteed by DWDC (or, following
the merger with Morgan Stanley, by MSDWD) or any of its affiliates,
including Greenwood and DRFG.
b. Delete the first sentence of the first full paragraph under the
subheading "Greenwood" on page 50 and substitute the following:
16
<PAGE> 17
DRFG will receive, on the Closing Date, an opinion of Latham & Watkins,
with respect to Greenwood, concluding on a reasoned basis (although there
is no precedent based directly on similar facts) that subject to certain
facts, assumptions and qualifications specified therein (including
matters set forth under "Certain Legal Matters Relating to the
Receivables -- Transfer of Receivables" and "-- Certain UCC Matters"),
(i) if the transfer of Greenwood Receivables to DRFG by Greenwood
constitutes an absolute transfer, then such transfer is a transfer of all
right, title and interest of Greenwood in and to such Greenwood
Receivables to DRFG and (ii) if such transfer is not an absolute
transfer, (A) the security interest created by the Purchase and
Contribution Agreement in favor of DRFG is a valid security interest in
the right, title and interest of Greenwood in and to such Greenwood
Receivables and (B) under New York law, the perfection and priority of a
security interest in such Greenwood Receivables are governed by Delaware
law.
11. CERTAIN LEGAL MATTERS RELATING TO THE RECEIVABLES.
a. Delete the second sentence under the heading "Consumer Protection Laws
and Debtor Relief Laws Applicable to the Receivables" on page 51 and substitute
the following:
Such 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), Equal Credit Opportunity
Act (and the provisions of the Federal Reserve Board's Regulation B
issued thereunder), Fair Credit Reporting Act and Fair Debt Collection
Practices Act.
b. Delete the first full paragraph on page 52 relating to "Consumer
Protection Laws and Debtor Relief Laws Applicable to the Receivables."
12. CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
Delete the text under the heading "Certain Federal Income Tax
Consequences" on pages 52-58 and substitute the following:
The following summary of certain anticipated federal income tax
consequences of the purchase, ownership and disposition of the Investor
Certificates is based on the advice of Latham & Watkins ("Tax Counsel")
as counsel to DRFG. The summary is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), currently
applicable Treasury Regulations and judicial and administrative rulings
and decisions ("Current Law"). There can be no assurance that the
Internal Revenue Service (the "IRS") will not take a contrary view, and
no ruling from the IRS has been or will be sought. Legislative, judicial
or administrative changes may be forthcoming that could alter or modify
the statements and conclusions set forth herein. Any legislative,
judicial or administrative changes or interpretations may or may not be
retroactive and could affect tax consequences to Investor
Certificateholders.
The summary does not purport to deal with all aspects of federal
income taxation that may affect particular Investor Certificateholders in
light of their individual circumstances, and, except for certain limited
discussions of particular topics, is not intended for Investor
17
<PAGE> 18
Certificateholders subject to special treatment under the federal income
tax laws (e.g., life insurance companies, tax-exempt organizations,
financial institutions, broker-dealers and investors that have a
functional currency other than the United States dollar or hold their
Investor Certificates as part of a hedge, straddle or conversion
transaction). PROSPECTIVE INVESTOR CERTIFICATEHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY
OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF INVESTOR CERTIFICATES.
TAX TREATMENT OF THE INVESTOR CERTIFICATES AS INDEBTEDNESS
Tax Counsel has advised DRFG that, in their opinion, although the
matter is not free from doubt, under Current Law the Investor
Certificates will be treated as indebtedness for federal income tax
purposes. Such opinion is based, in part, upon (i) the expressed intent
of DRFG and Greenwood to treat the Investor Certificates for federal,
state and local income and franchise tax purposes as indebtedness secured
by the Receivables and other assets held in the Trust, (ii) the
commitment of each Investor Certificateholder, by the acceptance of an
Investor Certificate, similarly to treat the Investor Certificates for
federal, state and local income and franchise tax purposes as
indebtedness, (iii) Tax Counsel's conclusion that the federal income tax
treatment of the Investor Certificates should be determined based on the
economic substance of the arrangement created by the Pooling and
Servicing Agreement and the Purchase and Contribution Agreement and (iv)
Tax Counsel's analysis of such economic substance. There can be no
assurance, however, that the IRS or the courts will agree with the
conclusions of Tax Counsel. In that regard, the Pooling and Servicing
Agreement generally refers to the transfer of the Receivables as a
"sale," and DRFG has informed Tax Counsel (i) that different criteria are
used in determining the non-tax accounting treatment of the transaction
and (ii) that, for regulatory and financial accounting purposes, DRFG
will treat the transfer of the Receivables under the Pooling and
Servicing Agreement and the Purchase and Contribution Agreement as a
transfer of an ownership interest in the Receivables and not as the
creation of a debt obligation. Notwithstanding the foregoing, DRFG and
Greenwood will treat the Investor Certificates as indebtedness for
federal, state and local income and franchise tax purposes and the
Investor Certificateholders, by acceptance of the Investor Certificates,
agree to treat such Investor Certificates as indebtedness for federal,
state and local income and franchise tax purposes.
The above discussion is qualified in its entirety by reference to
the tax opinion that was filed as an exhibit to the Registration
Statement containing the Prospectus to which this Annual Appendix
relates. Except for the discussion in "-- Possible Characterization of
the Investor Certificates," the following discussion of federal income
tax consequences assumes that the Investor Certificates will be treated
as indebtedness for federal income tax purposes.
UNITED STATES INVESTOR CERTIFICATEHOLDERS
The rules set forth below apply to Investor Certificateholders who
are "United States Persons." A "United States Person" is (i) a citizen
or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the United
States or of any state, (iii) an estate the income of which is subject to
United States federal income taxation regardless of its source or (iv)
generally, a trust if a court within the United States
18
<PAGE> 19
is able to exercise primary supervision over the administration of
the trust, and one or more United States fiduciaries have the authority
to control all substantial decisions of the trust.
Stated Interest on Investor Certificates. Subject to the discussion
below, interest paid on the Investor Certificates will be taxable as
ordinary income when received or accrued by Investor Certificateholders
in accordance with their method of accounting. Generally, interest
received on the Investor Certificates will constitute "investment income"
for purposes of certain limitations of the Code concerning the
deductibility of investment interest expense.
Original Issue Discount. In general, the excess of the stated
redemption price at maturity of the Investor Certificates over their
issue price will constitute original issue discount ("OID"), unless such
excess is within a statutorily-defined de minimis exception.
If the Investor Certificates are issued with OID, Investor
Certificateholders generally will be required to include OID in income
for each accrual period in advance of receipt of the cash representing
such OID. A holder of a debt instrument issued with OID is required to
recognize as ordinary income the amount of OID on the debt instrument as
such discount accrues, in accordance with a constant yield method. 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. Under these
provisions, the computation of OID (and market discount, see "-- Market
Discount") on such debt instruments must be determined by taking into
account both the prepayment assumptions used in pricing the debt
instrument and the actual prepayment experience. As a result, the amount
of OID on such debt instruments that will accrue in any given accrual
period may either increase or decrease depending upon the actual
prepayment rate. Because no Treasury Regulations have been issued
interpreting Section 1272(a)(6), Investor Certificateholders should
consult their own tax advisors regarding the impact of the OID rules in
the event the Investor Certificates are issued with OID.
Market Discount. Investor Certificateholders should be aware that
the resale of an Investor Certificate may be affected by the market
discount provisions of the Code. These rules generally provide that,
subject to a statutorily-defined de minimis exception, if an Investor
Certificateholder acquires an Investor Certificate at a market discount
(i.e., at a price below its stated redemption price at maturity or its
revised issue price if it was issued with OID) and thereafter recognizes
gain upon a disposition of the Investor Certificate (or disposes of it in
certain non-recognition transactions such as a gift), the lesser of such
gain (or appreciation, in the case of an applicable non-recognition
transaction) or the portion of the market discount that accrued while the
Investor Certificate was held by such Investor Certificateholder will be
treated as ordinary interest income at the time of the disposition. The
market discount rules also provide that an Investor Certificateholder who
acquires an Investor Certificate at a market discount may be required to
defer a portion of any interest expense that otherwise may be deductible
on any indebtedness incurred or maintained to purchase or carry the
Investor Certificate until the Investor Certificateholder disposes of the
Investor Certificate in a taxable transaction.
Principal payments on the Investor Certificates will be made monthly
during the Amortization Period, if any. An Investor Certificateholder
who acquired an Investor Certificate at a market discount would be
required to treat as ordinary interest income the portion of any
principal payment attributable to accrued market discount on such
Investor Certificate.
19
<PAGE> 20
An Investor Certificateholder who acquired the Investor Certificate
at a market discount may elect to include market discount in income as
the discount accrues, either on a ratable basis or, if elected, on a
constant interest rate basis. The current inclusion election, once made,
applies to all market discount obligations acquired on or after the first
day of the first taxable year to which the election applies, and may not
be revoked without the consent of the IRS. If an Investor
Certificateholder elects to include market discount in income in
accordance with the preceding sentence, the foregoing rules with respect
to the recognition of ordinary income on sales, principal payments and
certain other dispositions of the Investor Certificates and the deferral
of interest deductions on indebtedness related to the Investor
Certificates will not apply.
Amortizable Bond Premium. Generally, if the price or tax basis of
an Investor Certificate held as a capital asset exceeds the sum of all
amounts payable on the Investor Certificate after the acquisition date
(other than payments of qualified stated interest), such excess may
constitute amortizable bond premium that the Investor Certificateholder
may elect to amortize under the constant interest rate method over the
period from the Investor Certificateholder's acquisition date to the
Investor Certificate's maturity date. Proposed Treasury Regulations,
which are not yet effective, exclude debt instruments subject to Section
1272(a)(6) of the Code from the amortizable bond premium rules contained
in such regulations. See discussion of Section 1272(a)(6) in "--
Original Issue Discount." Amortizable bond premium generally will be
treated as an offset to interest income on the Investor Certificate,
rather than as a separate interest deduction item subject to the
investment interest limitations of the Code. An Investor
Certificateholder that elects to amortize bond premium must reduce the
tax basis in the related Investor Certificate by the amount of bond
premium used to offset interest income. If an Investor Certificate
purchased at a premium is redeemed in full prior to its maturity, an
Investor Certificateholder who has elected to amortize bond premium
should be entitled to a deduction for any remaining unamortized bond
premium in the taxable year of redemption.
Sales of Investor Certificates. In general, an Investor
Certificateholder will recognize gain or loss upon the sale, exchange,
redemption or other taxable disposition of an Investor Certificate
measured by the difference between (i) the amount of cash and the fair
market value of any property received (other than the amount attributable
to, and taxable as, accrued but unpaid interest) and (ii) the Investor
Certificateholder's tax basis in the Investor Certificate (as increased
by any OID or market discount previously included in income by the
Investor Certificateholder and decreased by any deductions previously
allowed for amortizable bond premium and by any payments reflecting
principal or OID received with respect to such Investor Certificate).
Subject to the OID and market discount rules discussed above and to
the one-year holding period requirement for long-term capital gain
treatment, any such gain or loss generally will be long-term capital gain
or loss, provided the Investor Certificate was held as a capital asset.
The maximum federal income tax rate applicable to capital gains and
ordinary income for corporations is 35%. Moreover, capital losses
generally may be used only to offset capital gains. The ordinary federal
income tax rate for individuals, estates and trusts is 36% (for married
individuals filing joint returns with taxable income in excess of
$151,750 ($124,650 for unmarried individuals)) whereas the long-term
capital gains rate for such taxpayers is 28%. A further 10% surtax will
be imposed on ordinary income of individuals with taxable incomes in
20
<PAGE> 21
excess of $271,050 (for married individuals filing joint returns and for
unmarried individuals) and estates and trusts with taxable incomes in
excess of $8,100 (thereby creating a maximum federal income tax rate to
such taxpayers of 39.6%).
FOREIGN INVESTOR CERTIFICATEHOLDERS
Set forth below is a general discussion of the United States federal
income and estate tax consequences of the purchase, ownership, sale or
other disposition of an Investor Certificate by an Investor
Certificateholder that for United States federal income tax purposes, is
(i) a foreign corporation, (ii) a non-resident alien individual, (iii) a
foreign estate or trust or (iv) a foreign partnership, as such terms are
defined in the Code (a "non-U.S. Holder"). Some non-U.S. Holders
(including certain residents of certain United States possessions or
territories) may be subject to special rules not discussed herein.
Interest (including OID, if any) paid to a non-U.S. Holder of
Investor Certificates will not be subject to a required withholding of
United States federal income tax, provided that (i) such interest
payments are effectively connected with the conduct of a trade or
business of the non-U.S. Holder within the United States and such
non-U.S. Holder provides an appropriate statement to such effect, or (ii)
(a) the holder is not (1) a "10 percent shareholder" of DRFG or Greenwood
or (2) a "controlled foreign corporation" with respect to which DRFG or
Greenwood is a "related person" within the meaning of the Code and (b)
the beneficial owner (and, if relevant, a financial institution on the
beneficial owner's behalf) provides an appropriate statement, signed
under penalty of perjury, certifying that the beneficial owner of such
Investor Certificate is not a United States Person and providing the
beneficial owner's name and address. The statement generally must be
provided in the year a payment occurs or in either of the two preceding
years. For years after 1997, nonbinding Proposed Treasury Regulations
specify that the statement must be provided prior to payment.
A non-U.S. Holder generally will not be subject to United States
federal income tax on gain realized on the disposition of an Investor
Certificate (other than gain attributable to accrued interest or OID,
which is addressed in the preceding paragraph); provided that (i) the
gain is not effectively connected with the conduct of a trade or business
within the United States by the non-U.S. Holder and (ii) in the case of
an individual holder, (A) the non-U.S. Holder is not present in the
United States for 183 days or more in the taxable year of the sale,
exchange or redemption or (B)(1) the non-U.S. Holder does not have a "tax
home" in the United States and (2) the gain is not attributable to an
office or other fixed place of business maintained in the United States
by the non-U.S. Holder.
If the interest or gain on an Investor Certificate held by a
non-U.S. Holder is effectively connected with the conduct of a trade or
business within the United States by the non-U.S. Holder, then the
non-U.S. Holder (although exempt from the withholding of tax previously
discussed if the non-U.S. Holder provides an appropriate statement)
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 Investor Certificateholders." In addition, if the non-U.S. Holder
is a foreign corporation, it may be subject to a branch profits tax equal
to 30% of its "effectively connected earnings and profits"
21
<PAGE> 22
within the meaning of the Code for the taxable year, as adjusted
for certain items, unless it qualifies for a lower rate under an
applicable tax treaty.
An Investor Certificate held by an individual who at the time of
death is a non-U.S. Holder will not be subject to United States federal
estate tax as a result of such individual's death if, immediately before
death, (i) the individual was not a "10 percent shareholder" of DRFG or
Greenwood and (ii) interest on such Investor Certificate was not
effectively connected with the conduct of a trade or business within the
United States by the individual.
THE FOREGOING DESCRIPTION OF THE POTENTIAL UNITED STATES FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS IS NECESSARILY
INCOMPLETE. NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE APPLICATION OF THE FOREGOING MATTERS TO THEM.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Information reporting requirements apply to certain payments of
principal of and interest on (and the amount of OID, if any, accrued on)
an obligation, and to proceeds of certain sales of an obligation before
maturity, to certain nonexempt Investor Certificateholders who are United
States Persons. In addition, a backup withholding tax may also apply
with respect to such amounts if such Investor Certificateholders fail to
provide correct taxpayer identification numbers and other information.
The backup withholding tax rate is 31%. DRFG, Greenwood, or a paying
agent or a broker, as the case may be, will be required to withhold from
any payment that is subject to backup withholding unless the Investor
Certificateholder furnishes its taxpayer identification number in the
manner prescribed in applicable Treasury Regulations and certain other
conditions are met.
In the case of payments of principal of, and interest on (and the
amount of OID, if any, accrued on) Investor Certificates by DRFG,
Greenwood or their paying agents to non-U.S. Holders, Temporary Treasury
Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite
certification has been received or an exemption has otherwise been
established (provided that neither DRFG nor Greenwood nor their paying
agents has actual knowledge that the holder is a United States Person or
that the conditions of any other exemption are not in fact satisfied).
Payments of the proceeds of the sale of an Investor Certificate to or
through a foreign office of a United States broker or foreign brokers
with certain types of relationships to the United States, however, are
subject to certain information reporting requirements, unless the payee
is an exempt recipient or such broker has evidence in its records that
the payee is not a United States Person and no actual knowledge that such
evidence is false and certain other conditions are met. Temporary
Treasury Regulations indicate that such payments are not currently
subject to backup withholding. Under current Treasury Regulations,
payments of the proceeds of a sale to or through the United States office
of a broker will be subject to information reporting and backup
withholding unless the payee certifies under penalty of perjury as to his
status as a non-U.S. Holder and certain other qualifications (and no
agent of the broker who is responsible for receiving or reviewing such
statement has actual knowledge that it is incorrect) and provides his
name and address or the payee otherwise establishes an exemption.
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Temporary Treasury Regulations indicate that the United States
Treasury Department is studying the possible application of backup
withholding to payments made by foreign offices of certain United States
and United States related intermediaries, including brokers, as well as
the standard of evidence required to prove foreign status for information
reporting purposes.
Any amounts withheld under the backup withholding rules from a
payment to an Investor Certificateholder will be allowed as a refund or a
credit against such Investor Certificateholder's United States federal
income tax.
POSSIBLE CHARACTERIZATION OF THE INVESTOR CERTIFICATES
The foregoing discussion assumes that the Investor Certificates will
be treated as indebtedness for federal income tax purposes. However,
although Tax Counsel has opined to such effect, the matter is not free
from doubt, and there can be no assurance that the IRS or the courts will
agree with Tax Counsel's opinion. If the IRS were to contend
successfully that the Investor Certificates are not indebtedness for
federal income tax purposes, it could find that the arrangement created
by the Pooling and Servicing Agreement and the Purchase and Contribution
Agreement constitutes a partnership which could be treated as a "publicly
traded partnership" taxable as a corporation.
If the Investor Certificates were treated as interests in a
partnership, the partnership in all likelihood would be treated as a
"publicly traded partnership." 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), such partnership would
not be subject to federal income tax. Rather, the Investor
Certificateholders would be required to include in income their share of
the income and deductions generated by the assets of the Trust, as
determined under partnership tax accounting rules. In such event, the
amount, timing and character of the income required to be recognized by
an Investor Certificateholder could differ materially from the amount,
timing and character thereof if the Investor Certificates were
characterized as indebtedness. 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 the
Investor Certificateholders, as partners in such a partnership, could be
taxed on their share of the partnership's income in such 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 (or, at its election,
income allocable to) non-U.S. Holders, and each such non-U.S. Holder
would be credited for such 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 Investor
Certificateholders." 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 will be required in the case of any such
non-U.S. Holder that is engaged in a trade or business within the United
States to which the Investor Certificate income is effectively connected.
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Alternatively, 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
an Investor 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 such non-U.S. Holder's distributive share of the
partnership's interest income.
If the Investor Certificates were treated as interests in a
"publicly traded partnership" taxable as a corporation, 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 the Investor Certificateholders. See "Certain State
Tax Consequences." Under such circumstances, the Investor 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 Investor Certificateholders could be treated as dividends
and, if made to non-U.S. Holders, could be subject to United States
federal income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty).
Finally, the IRS might contend that even though the Class A
Certificates are properly classified as debt obligations for federal
income tax purposes, the Class B Certificates are not properly classified
as such. Under this approach, the Class B Certificates might be viewed
as equity interests in an entity (such as Greenwood or DRFG or a joint
venture consisting of DRFG, Greenwood and the Class B
Certificateholders), with the Class A Certificates treated as debt
obligations of such entity. If such an 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 Certificateholders would be
subject to the tax consequences previously 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
Certificateholders 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 Investor
Certificateholders."
Based on Tax Counsel's advice as to the likely treatment of the
Investor Certificates for federal income tax purposes, DRFG, Greenwood
and the Trust will not attempt to cause the arrangement created by the
Pooling and Servicing Agreement and the Purchase and Contribution
Agreement to comply with the federal or state income tax reporting
requirements applicable to partnerships or corporations. If such
arrangement were later held to constitute a partnership or corporation,
the manner of bringing it into compliance with such requirements is
unclear.
Prospective Investor Certificateholders should consult their own tax
advisors as to the risk that the Investor Certificates will not be
treated as indebtedness, and the possible tax consequences of potential
alternative treatments.
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13. CERTAIN STATE TAX CONSEQUENCES.
Delete the text under the heading "Certain State Tax Consequences" on
pages 58-59 and substitute the following:
The following summary of certain anticipated state tax consequences
with respect to the Investor Certificates is based on the advice of Tax
Counsel as counsel to DRFG. The summary is based upon currently
applicable statutes, regulations and judicial and administrative rulings
and decisions of certain states. There can be no assurance that the
taxing authorities of such states will not take a contrary view, and no
ruling therefrom has been or will be sought. Legislative, judicial or
administrative changes may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to Investor Certificateholders. Except as set forth below,
this discussion of state tax consequences assumes that the Investor
Certificates will be treated as indebtedness for federal tax purposes.
State tax consequences to each Investor Certificateholder will
depend upon the provisions of the state tax laws to which the Investor
Certificateholder is 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 such state-modified income, while corporations and other
taxpayers generally pay state tax only on that portion of state-modified
income assigned to the taxing state under the state's own apportionment
and allocation rules. Because each state's tax laws vary, it is
impossible to predict the tax consequences to the Investor
Certificateholders in all of the state taxing jurisdictions in which they
are already subject to tax.
Delaware is the location of DRFG's and Greenwood's headquarters,
where Greenwood originates and owns the Accounts and services the
Receivables pursuant to the Pooling and Servicing Agreement. Tax Counsel
has advised DRFG, that, in their opinion, although the matter is not free
from doubt, the Investor Certificates are treated as indebtedness for
purposes of the Delaware income tax. Accordingly, although the matter is
not free from doubt, if the Investor Certificates are treated as
indebtedness in Delaware, Investor Certificateholders not otherwise
subject to taxation in Delaware will not become subject to the Delaware
income tax solely because of their ownership of the Investor
Certificates.
Generally, an Investor Certificateholder is required to pay, in
states in which such an Investor Certificateholder already is subject to
state tax, additional state tax as a result of interest earned on such
Investor Certificateholder's investment in the Investor Certificates.
Moreover, a state could claim that the Trust has undertaken activities
therein and is subject to taxation by that state. Were any state to make
and sustain that claim, the treatment of the Investor Certificates for
purposes of such state's tax laws would be determined thereunder, and
there can be no assurance that the Investor Certificates would be treated
as indebtedness of Greenwood and DRFG for purposes of such state
taxation.
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If such Investor Certificates were treated as interests in a
partnership or a corporation, the state tax consequences to the Investor
Certificateholders could be materially different, especially in states
which may be considered to have a business connection with the
Receivables. See "Certain Federal Income Tax Consequences -- Possible
Characterization of the Investor Certificates."
THE FOREGOING DESCRIPTION OF THE POTENTIAL STATE TAX CONSEQUENCES IS
INCOMPLETE. INVESTOR CERTIFICATEHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE FOREGOING MATTERS TO
THEM.
14. ERISA CONSIDERATIONS.
Delete the last two paragraphs on page 60, including the carryover
paragraph on pages 60-61, as well as the first full paragraph on page 61, and
substitute the following:
If the Class A Certificates were deemed to be an extension of credit
for ERISA purposes, the purchase of the Class A Certificates by a Plan
with respect to which DRFG or one of its affiliates is a "party in
interest" or "disqualified person" might be considered a prohibited
extension of credit under Section 406 of ERISA and Section 4975 of the
Code unless an exemption is applicable. There are at least four
prohibited transaction class exemptions issued by the DOL that might
apply, depending in part on who decided to acquire the Class A
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); PTE 90-1 (Class Exemption for Certain Transactions Involving
Insurance Company Pooled Separate Accounts); and PTE 96-23 (Class
Exemption for Plan Asset Transactions Determined by In-House Asset
Managers).
Moreover, whether the Class A Certificates are debt or equity for
ERISA purposes, a possible violation of the prohibited transaction rules
could occur if the Class A Certificates were purchased during the
offering with assets of a Plan if Greenwood, DRFG, the Trustee, any
Underwriter or any of their affiliates were a fiduciary with respect to
such Plan. Under ERISA and the Code, a person is a "fiduciary" with
respect to a Plan to the extent (i) he or she exercises any discretionary
authority or discretionary control respecting management of such Plan or
exercises any authority or control respecting management or disposition
of its assets, (ii) he or she renders investment advice for a fee or
other compensation, direct or indirect, with respect to any moneys or
other property of such Plan, or has any authority or responsibility to do
so or (iii) he or she has any discretionary authority or discretionary
responsibility in the administration of such Plan. Accordingly, the
fiduciaries of any Plan should not purchase the Class A Certificates
during the offering with assets of any Plan if Greenwood, DRFG, the
Trustee, the Underwriters or any of their affiliates is a fiduciary with
respect to the Plan.
In light of the foregoing, fiduciaries of Plans considering the
purchase of the Class A Certificates should consult their own tax or
other appropriate counsel regarding the application of ERISA and the Code
to their purchase of the Class A Certificates.
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In particular, insurance companies considering the purchase of Class
A Certificates should consult their own benefits counsel or other
appropriate counsel with respect to the United States Supreme Court's
decision in John Hancock Mutual Life Insurance Co. v. Harris Trust &
Savings Bank, 114 S. Ct. 517 (1993) ("John Hancock"), DOL PTE 95-60
(Class Exemption for Certain Transactions Involving Insurance Company
General Accounts) and Section 401(c) of ERISA. In John Hancock, the
Supreme Court held that the assets held in an insurance company's general
account may be deemed to be "plan assets" under certain circumstances.
Subject to numerous conditions and limitations, PTE 95-60 effectively
reverses this portion of the holding in John Hancock. Section 401(c) of
ERISA was added by the Small Business Job Protection Act of 1996 and
requires the Secretary of Labor to issue final regulations by December
31, 1997 which are to provide guidance for the purpose of determining, in
cases where an insurer issues one or more policies (supported by the
assets of the insurer's general account) to or for the benefit of an
employee benefit plan, which assets of such insurer (other than assets
held in a separate account) constitute "plan assets" for the purposes of
the fiduciary responsibility provisions of ERISA and Section 4975 of the
Code. Such regulations shall only apply with respect to policies which
are issued by an insurer on or before December 31, 1998, to or for the
benefit of an employee benefit plan which is supported by the assets of
such insurer's general account. With respect to policies issued on or
before December 31, 1998, such regulations shall take effect at the end
of the 18-month period following the date on which such regulations
become final. Section 401(c) also provides that no person will be
subject to liability under Section 4975 of the Code and the fiduciary
responsibility provisions of ERISA on the basis of a claim that the
assets of an insurer (other than assets held in a separate account) are
"plan assets," for conduct occurring before the date which is 18 months
following the date the final regulations become final.
Accordingly, investors should analyze whether John Hancock, PTE
95-60, Section 401(c) of ERISA and any regulations issued pursuant to
Section 401(c) of ERISA may have an impact with respect to their purchase
of Class A Certificates.
15. AVAILABLE INFORMATION
Delete the text under the heading "Available Information" on page 62 of
the Prospectus and substitute the following:
The Trust will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance
therewith, DRFG, on behalf of the Trust, will file reports and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports filed by DRFG on behalf of the Trust are
available for inspection without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York,
New York 10048; and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such reports and other documents may also be obtained from the
web site that the Commission maintains at http://www.sec.gov.
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16. GLOSSARY OF TERMS
a. Delete the definition of "Charged-Off Amount" on page 65 of the
Prospectus and substitute the following:
"Charged-Off Amount" will mean, with respect to any Distribution Date,
the aggregate amount of Receivables in Accounts which become Charged-Off
Accounts in the related Due Period, less (i) the cumulative, uncollected
amount previously billed by the Servicer to Accounts that became
Charged-Off Accounts during the related Due Period with respect to
finance charges, cash advance fees, annual membership fees, 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 and (ii) the full amount of any such Receivables
which have been repurchased by Greenwood.
b. Delete the definition of "Finance Charge Receivables" on page 69 of the
Prospectus and substitute the following:
"Finance Charge Receivables" will mean with respect to any Account for
any Due Period the net amount billed by the Servicer during such Due
Period as finance charges on such Account and cash advance fees, annual
membership fees, fees for transactions that exceed the credit limit on
such Account, late payment charges billed during such Due Period to such
Account and any other charge that the Servicer may designate as "Finance
Charge Receivables" from time to time (provided that the Servicer shall
not designate amounts owing for the payment of goods and services or cash
advances as "Finance Charge Receivables"), less, in the event that such
Account becomes a Charged-Off Account during such Due Period, the
cumulative, uncollected amount previously billed by the Servicer to such
Account as finance charges, cash advance fees, annual membership fees,
fees for transactions that exceed the credit limit on such 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; provided, however, in the event any Account
that is included in the Accounts as of the Cut-Off Date is not selected
before the beginning of the Due Period next preceding the Due Period
related to the first Distribution Date, the Servicer may utilize a
reasonable method of estimation to determine the amount of the Finance
Charge Receivables with respect to such Account for the period beginning
on the first day of such next preceding Due Period and ending on the date
on which such Account is selected.
28
