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FILED PURSUANT TO RULE 424(b(3)
OF THE SECURITIES ACT OF 1933
REGISTRATION NO. 33-57302-02
ANNUAL APPENDIX
ANNUAL APPENDIX DATED
MARCH 15, 1999 TO PROSPECTUS
DATED JANUARY 26, 1993 AS
SUPPLEMENTED THROUGH FEBRUARY 16, 1999
Discover(R) Card Trust 1993 B
6.75% Class A Credit Card Pass-Through Certificates
7.10% 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. ("DWR"),
Morgan Stanley & Co. Incorporated ("MS&Co."), and Morgan Stanley International
Limited ("MSIL") in connection with offers and sales of the Class A Certificates
and the Class B Certificates in market-making transactions in which any of DWR,
MS & Co., or MSIL acts as principal.
INVESTING IN THE INVESTOR CERTIFICATES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 11. WE REFER IN THE PROSPECTUS TO "SPECIAL CONSIDERATIONS";
PLEASE NOTE THAT THESE REFERENCES SHOULD BE TO "RISK FACTORS."
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1. GENERAL
On May 31, 1997, Dean Witter, Discover & Co., and Morgan Stanley Group Inc.
consummated their merger. Dean Witter, Discover & Co., the indirect parent of
Greenwood Trust Company and DRFG, is the surviving corporation in the merger and
will continue its corporate form under the name "Morgan Stanley Dean Witter &
Co." ("MSDW").
DWR, MS & Co., and MSIL are wholly owned subsidiaries of MSDW. DWR, MS &
Co., MSIL and other affiliates of DRFG may use the prospectus in connection with
offers and sales of the securities described in the prospectus in the course of
their businesses as broker-dealers. DWR, MS & Co., MSIL and these other
affiliates may act as principal or agent in these transactions. If they sell
these securities, they will sell them at varying prices related to prevailing
market prices at the time of sale or otherwise. None of DWR, MS & Co., MSIL or
any other affiliate is obligated to make a market and each may discontinue any
market-making activities at any time without notice.
Where we refer 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, please note that
each is now an indirect wholly-owned subsidiary of MSDW (formerly known as Dean
Witter Financial Services Group, Inc., Dean Witter, Discover & Co. ("DWDC") and
Morgan Stanley, Dean Witter, Discover & Co). See "prospectus Summary -- Spin-off
of Dean Witter, Discover & Co." and "Greenwood Trust Company."
Where we refer in the prospectus to Sears Consumer Financial Corporation
("SCFC"), please note that SCFC has changed its name to NOVUS Credit Services
Inc. ("NOVUS") and that it is no longer a wholly-owned subsidiary of Sears but a
wholly-owned subsidiary of MSDW.
Where we refer in the prospectus to Discover Card Services, Inc. ("DCSI"),
please note that DCSI has changed its name to Discover Financial Services, Inc.
("DFS").
2. REPORTS TO INVESTOR CERTIFICATEHOLDERS
Delete the first sentence under the heading "Reports to Investor
Certificateholders" on page 2 of the prospectus and replace it with the
following:
You may obtain monthly and annual reports containing information about
the Trust, prepared by the Servicer, free of charge by calling
302-323-7434.
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3. PROSPECTUS SUMMARY
Delete the following the paragraph on page 10 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. In May 1997, DWDC merged with
Morgan Stanley Group Inc. and changed its name to Morgan Stanley, Dean
Witter, Discover & Co. (now Morgan Stanley Dean Witter & Co.). DRFG
believes that the change in ownership and subsequent merger will have no
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 11-13 and
substitute the following:
Consumer Protection Laws and Regulations. Greenwood 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 could
adversely affect Greenwood's ability to collect on the receivables in the
Trust or to maintain previous levels of monthly periodic finance charges.
If Greenwood 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.) DRFG has agreed in the Pooling and Servicing Agreement that if:
o Greenwood has not complied in all material respects with the legal
requirements that applied to its creation of a receivable included in
the Trust,
o Greenwood does not cure its noncompliance in a specified period of time,
and
o Greenwood's noncompliance has a material adverse effect on the Trust's
interest in all of the receivables in the Trust,
then DRFG will purchase all receivables in the affected accounts. See
"Description of the Investor Certificates - Repurchase of Specified
Receivables." DRFG 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). See "Certain Legal Matters
Relating
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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. DRFG cannot
assure you, however, that these proceedings will not have such a material
adverse effect.
b. Delete the first and second full paragraph on page 13 and substitute
the following:
Legislation. The Competitive Equality Banking Act of 1987 ("CEBA")
contains provisions that limit the ability of nonbanking companies, such as
MSDW and NOVUS, 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 Greenwood under CEBA. CEBA
provides that if MSDW, NOVUS or Greenwood fails to comply with certain
statutory restrictions, MSDW 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 MSDW or NOVUS with Greenwood. See "Greenwood Trust
Company."
c. Delete the text on page 14 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 financial incentives of credit cards such as annual
fees, finance charges, rebates and other enhancement features. The market
includes (a) 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 organizations, and (b) charge cards issued by
travel and entertainment companies. The vast majority of the bank-issued
credit cards (the so-called "general purpose" 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 are accepted worldwide by merchants of
goods and services and recognized by consumers and the general public.
Co-branded credit cards, which
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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),
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, a card issuer 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. American Express Company, through a
subsidiary bank, also issues cards with both a pre-established credit limit
and provisions for repayment in installments. Greenwood introduced the
Discover Card nationwide in 1986; the Discover Card competes with general
purpose credit cards issued by other banks and with travel and
entertainment cards. In late December 1998, Greenwood introduced the
Discover Platinum Card to compete with gold, platinum and other premium
credit, travel and entertainment cards of other issuers. Currently,
Greenwood is the only issuer of the Discover Card. Greenwood has also
issued, and may from time to time introduce, additional general purpose
credit cards; the Discover Card portfolio, however, does not include the
accounts associated with these cards.
Many bank credit card issuers have instituted balance transfer
programs. Generally, under these transfer programs, the issuers 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
annual percentage rates for balance transfers often are more favorable to
cardholders than the annual rates for account balances arising from
purchases or cash advances.
Competition in the credit card industry affects Greenwood's ability to
obtain applicants for Discover Card accounts, to encourage cardmembers to
use accounts and to persuade service establishments to accept the Discover
Card. If Greenwood does not compete successfully in these areas, the level
of receivables in the Trust and in the Discover Card portfolio may decline.
If the level of receivables in the Trust declines, and Greenwood cannot add
enough receivables from other accounts (or interests in other pools of
credit card receivables) to maintain the minimum levels of receivables
required by the Pooling and Servicing Agreement, an Amortization Event may
occur causing the commencement of the Amortization Period. See "Risk
Factors - Payments and Maturity" and "Description of the Investor
Certificates - Amortization Events."
MSDW, the indirect owner of Greenwood, generally has a strategy of
issuing additional card products as appropriate in the marketplace. For
example, Greenwood issues the Private Issue(R) Card and certain co-branded
and affinity credit cards, and expects that from time to time Greenwood or
other MSDW subsidiaries will introduce additional general purpose credit
card products to attract additional consumers. The
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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 MSDW subsidiary will have
a materially greater impact on the Discover Card program than the
introduction of a comparable product by any other market competitor, it
cannot predict the effect that these programs will have on the Discover
Card portfolio.
d. Delete the text under the heading "Ability to Change Terms of the
Accounts" on pages 14-16 and substitute the following:
Greenwood May Change Terms of the Accounts. Pursuant to the Pooling
and Servicing Agreement, DRFG does not transfer accounts to the Trust, but
only the receivables in the accounts. As owner of any account, Greenwood
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. This decrease
could cause an Amortization Event to occur; investors would also have less
protection against shortfalls in interest and charged-off receivables. In
addition, if Greenwood 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. If the level of receivables in
the Trust declines, and Greenwood cannot add enough receivables from other
accounts (or interests in other pools of credit card receivables) to
maintain the required minimum levels of receivables, an Amortization Event
may occur. The newly introduced Discover Platinum Card offers cardmembers
credit limits that may be substantially higher, and imposes periodic
finance charges that are generally lower, than those available with a
classic Discover Card. Although Greenwood anticipates that the introduction
of the Discover Platinum Card will have a positive impact on the number of
Discover Card accounts, the size of revolving balances and cardmember
loyalty, there can be no assurance that the higher credit limits and lower
periodic finance charges of the Discover Platinum Card will not have the
effects set forth above in this paragraph. 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 Greenwood must
administer, process and enforce the Accounts in accordance with its
customary and usual servicing procedures for servicing comparable credit
accounts. It must also act in accordance with its Credit Guidelines. DRFG
and Greenwood have also agreed that Greenwood may not change the terms
governing an Account unless it also changes the terms of its other accounts
in the Discover Card portfolio of the same general type and as to which the
cardholders reside in a particular affected state or similar jurisdiction.
However, changes to account terms may not affect Accounts in the Trust to
the same degree as they affect accounts in the Discover Card portfolio as a
whole. Except as described in this
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paragraph, the Pooling and Servicing Agreement does not restrict
Greenwood's ability to change the terms of accounts or receivables.
Greenwood may decide, because of changes in the marketplace or applicable
laws, or as a prudent business practice, to change the terms of some or all
of its Discover Card accounts.
5. DESCRIPTION OF THE INVESTOR CERTIFICATES
a. Please note that SRC assumed Sears obligations to repurchase
Receivables as described under the subheadings "Repurchase of Trust Portfolio"
and "Repurchase of Specified Receivables" on pages 21-23.
b. Delete the last sentence in the first full paragraph on page 36 under
the subheading "Reports to Investor Certificateholders" and substitute the
following:
You may obtain the statement free of charge by calling 302-323-7434.
c. Delete the text under the subheading "Evidence as to Compliance" on
pages 36-37 and substitute the following:
Evidence as to Compliance. The Pooling and Servicing Agreement
provides that on or about March 15 of each calendar year, commencing in
March 1999, the Servicer will cause a firm of nationally recognized
independent public accountants to furnish a report to each of:
o the Trustee and the Servicer to the effect that:
o the accountants are of the opinion that the system of internal
accounting controls in effect on the date of their report
relating to the servicing procedures performed by the Servicer
under the Pooling and Servicing Agreement was sufficient to
prevent errors and irregularities that would be material to
the assets of the Trust, and
o nothing has come to the accountants' attention that would
cause them to believe the servicing has not been conducted in
compliance with the Pooling and Servicing Agreement, except
for those exceptions that the accountants believe to be
immaterial or that they otherwise set forth in their report;
o and the Trustee to the effect that the accountants have compared the
mathematical calculations of the amounts set forth in the Servicer's
monthly certificates delivered during the transition period from
January 1, 1998 through November 30, 1998, or the preceding fiscal
year ended November 30, as applicable, covered by their report with
the Servicer's computer reports that generated these amounts,
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confirming that the amounts are in agreement, except for those
exceptions that the accountants believe to be immaterial or that they
otherwise set forth in their report.
The procedures to be followed by the accountants will not constitute an
audit conducted in accordance with generally accepted auditing standards.
The Pooling and Servicing Agreement provides that the Servicer
will deliver to the Trustee, on or before March 15 of each calendar year
beginning in March 1999, an annual statement signed by an officer of the
Servicer to the effect that:
o in the course of the officer's duties as an officer of the Servicer,
he or she would normally obtain knowledge of any Servicer
Termination Event, and
o whether or not the officer has obtained knowledge of any Servicer
Termination Event during the transition period from January 1, 1998
through November 30, 1998, or the preceding fiscal year ended
November 30, as applicable, and, if so, specifying each Servicer
Termination Event of which the signing officer has knowledge and the
nature of the Servicer Termination Event.
d. Delete the first sentence under the subheading "Sale of Seller
Interest" on page 37 and substitute the following:
Pursuant to the Purchase and Contribution Agreement, the Trustee will
(a) issue the Seller Certificate, if certificated, to Greenwood and DRFG as
tenants-in-common or (b) record Greenwood's and DRFG's uncertificated
fractional undivided interest in the Trust in its books and records.
6. THE DISCOVER CARD BUSINESS
Delete the text under the heading "The Discover Card Business" on pages
42-44 and substitute the following:
GENERAL
DRFG 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, and do not include receivables arising under the
Discover Card Corporate Card, the Private Issue Card and co-branded and
affinity cards. In the prospectus, 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 DRFG has conveyed to the Trust (in which case we refer to
the "Receivables" and
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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 Greenwood. 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 Greenwood, Greenwood is the sole issuer of
credit cards bearing the DISCOVER service mark. Greenwood has also issued,
and may from time to time introduce, additional general purpose credit
cards.
Greenwood first issued the classic Discover Card in regional pilot
markets in September 1985, and began distributing the Discover Card
nationally in March 1986. In early January 1999, Greenwood 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 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 three million merchants and cash advance
locations that accept the Discover Card. As of November 30, 1998, there
were 33.6 million Discover Card accounts with 42.0 million cardmembers.
Cardmembers can only use their Discover Cards for personal, family or
household purposes because of banking statutes that apply to Greenwood. See
"Greenwood Trust Company."
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 Greenwood 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. Greenwood assigns each Discover Card
account a credit limit when it opens the account. After the account is
opened, Greenwood may increase or decrease the credit limit on the account,
at Greenwood's discretion, at any time. The credit limits on classic
Discover Card accounts generally range from $1,000 to $9,000, although on a
case-by-case basis Greenwood 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, Greenwood will not grant
cash advances that exceed, in the aggregate, an amount equal to 50% of the
cardmember's credit limit.
Greenwood offers various features and services with the Discover Card
accounts. One feature 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
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purchases. Greenwood 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. Greenwood 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 features of the
Discover Platinum Card elsewhere in "The Discover Card Business" section
and in "The Accounts" section below.
Currently, Greenwood applies a variable rate of periodic finance
charges to classic Discover Card account balances (except in certain
limited circumstances). This rate is based on the prevailing prime rate
plus a margin, and is also affected by the amount of the cardmember's
purchases, and the cardmember's payment history. Greenwood has notified
cardmembers that, effective with billing cycles beginning in March 1999, it
will begin applying a fixed instead of a variable rate of periodic finance
charges to purchases of merchandise and services. Based on the variable
rate that applies to the account at the end of the account's billing cycle
in March 1999, Greenwood will assign a corresponding fixed rate to the
account. Greenwood will continue to apply a variable rate of periodic
finance charges to cash advances, with a minimum rate of 20.99%. 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, and to increase accounts, balances
and cardmember loyalty, Greenwood from time to time tests and implements
new offers, promotions and features of the Discover Card. The recently
introduced Discover Platinum Card is an example of this.
Greenwood, either through its processing arrangements with its
affiliate, 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. Greenwood and DFS maintain multiple operations centers across the
country for servicing cardmembers. DFS also maintains an additional
operations center to process accounts that Greenwood has charged off as
uncollectible.
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. Greenwood contracts with DFS to have cards issued
by Greenwood (including the Discover Card) accepted at those
establishments. Greenwood's ability to generate
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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.
CREDIT-GRANTING PROCEDURES
Greenwood 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.
Greenwood 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. Greenwood 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, Greenwood has pre-screened all lists
through 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 stability and the willingness and ability of
these persons to repay their obligations. The credit bureaus return to
Greenwood only the names of those persons meeting these criteria. Greenwood
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. Greenwood
evaluates applications that are not preselected by using a credit-scoring
system (a statistical evaluation model that assigns point values to credit
information regarding applicants). The credit-scoring system used by
Greenwood is based on information reported by cardmembers on their
applications and by the credit bureaus. Greenwood uses information from
both of these sources to establish credit-worthiness. Certain applications
not approved under the credit-scoring systems are reviewed by credit
analysts. If a credit analyst recommends that any of these applications be
approved, senior bank review analysts in Greenwood's main office in New
Castle, Delaware, review and may approve them.
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As owner of the Discover Card accounts, Greenwood has the right to
change its credit-scoring criteria and credit-worthiness criteria.
Greenwood regularly reviews and modifies its application procedures and
credit-scoring system to reflect Greenwood's actual credit experience with
Discover Card account applicants and cardmembers as that historical
information becomes available. Greenwood 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, Greenwood
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 level 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 DRFG does not add additional
accounts to the Trust, an Amortization Event could result, causing the
Trust to begin to repay the principal of the Investor Certificates 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 the Investor Certificates sooner than
expected.
COLLECTION EFFORTS
Efforts to collect past-due Discover Card account receivables are made
primarily by collections personnel of DFS or Greenwood. Under current
practice, Greenwood includes a request for payment of past-due amounts on
the monthly billing statement 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, Greenwood
continues to contact the cardmember by telephone and by mail. Greenwood
also may enter into arrangements with cardmembers to waive finance charges,
late fees and principal due, or extend or otherwise change payment
schedules. Greenwood'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, (except in certain cases, such as bankruptcy, where
an uncollectible balance may be charged off earlier). In general, after
Greenwood has charged off an account, collections personnel of DFS or
Greenwood 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, Greenwood generally places the charged-off amount 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 to attach the cardmember's property or bank accounts or to garnish
the cardmember's wages. Greenwood and the Trust may also sell
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their respective interests in charged-off accounts and related receivables
to third parties, either before or after collection efforts have been
attempted.
Under the terms of the Pooling and Servicing Agreement, Greenwood will
retain any recoveries received on Charged-Off Accounts, and these
recoveries 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." Greenwood may change its credit
granting, servicing and charge-off policies and its collection practices
over time in accordance with Greenwood's business judgment and applicable
law.
7. THE ACCOUNTS
a. Add as first paragraph under the subheading "General" on page 44:
The Receivables in the Accounts as of February 1, 1999 totaled
$317,864,562.51. The Accounts had an average balance of $1,574.58 and an
average credit limit of $6,765.00 as of February 1, 1999.
b. Delete the text on pages 45-46 under the subheading "Billing and
Payments" and substitute the following:
Discover Card accounts generally have the same billing and payment
structure. Greenwood 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 Greenwood 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 1/48th 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. Effective with billing cycles beginning in
March 1999, if a cardmember exceeds his or her credit limit, Greenwood may
require the cardmember to immediately pay the amount that is above the
credit limit. 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. A cardmember may pay the
total amount due at any time. Greenwood may also enter into
13
<PAGE> 14
arrangements with delinquent cardmembers to extend or otherwise change
payment schedules, and to waive finance charges, late fees and/or principal
due. Although Greenwood does not expect these practices to have a material
adverse effect on the investors, collections may be reduced during any
period in which Greenwood offers cardmembers the opportunity to skip the
minimum monthly payment or to extend or change payment schedules.
Currently, Greenwood imposes periodic finance charges on the balances
in classic Discover Card accounts at variable annual percentage rates
(except in certain limited circumstances). 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. Currently, periodic finance charges on purchases, cash
advances and balance transfers in classic Discover Card accounts are
generally based on the prime rate plus a margin (currently 8.99% to
13.99%), subject to certain minimum rates currently ranging from 12.99% to
21.99%. These rates are also based on a cardmember's purchase activity and
payment status. Effective with billing cycles beginning in March 1999,
periodic finance charges on purchases made using a classic Discover Card
will be based on a fixed instead of a variable rate. Depending on the
variable rate that applies to an account at the end of its billing cycle in
March 1999, Greenwood will generally assign a corresponding fixed rate to
the account. These new fixed rates will apply to the entire outstanding
balance of a cardmember's account. However, Greenwood will continue to
impose a variable rate of interest on cash advances charged to classic
Discover Card accounts, with a minimum rate of 20.99%. In addition, 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. Balances remaining from transactions
posted to accounts in billing cycles beginning before March 1, 1993 will
continue to accrue periodic finance charges at fixed rates.
Balances in Discover Platinum Card accounts accrue interest at
competitive fixed rates, except for balances transferred to these accounts,
which will accrue interest at promotional rates for short periods of time.
The periodic finance charge imposed on cash advances made using a Discover
Platinum Card is 19.99%.
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 new cash
advance, with a minimum fee of $3.00 per transaction. Greenwood also
currently charges a $25 late fee each time a payment has not been made by
the required due date, a $25 fee for balances exceeding a cardmember's
credit limit as of the close of the cardmember's monthly billing cycle, a
$25 fee for any payment check returned unpaid and a $25 fee for Discover
Card cash advance, balance transfer or other promotional checks that are
returned by Greenwood due to insufficient credit availability. Each of
these $25 fees will increase to $29 effective with
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<PAGE> 15
billing cycles beginning in March 1999. 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 in the Trust, which consists of the finance
charges and fees, depends on various factors including 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 large enough, cause the commencement of
the Amortization Period or result in insufficient collections to pay
interest and principal to investors. DRFG cannot assure you about any of
these effects. See "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 48 and replace it with the following:
Greenwood 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 have
been segregated from the rest of the Discover Card portfolio and are not
reflected in the information contained in the prospectus. None of these
accounts is included in the Trust.
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 48-51 and substitute the following:
COMPOSITION OF DISCOVER CARD PORTFOLIO
Geographic Distribution. The Discover Card portfolio is not highly
concentrated geographically. As of November 30, 1998, the following five states
had the largest receivables balances:
15
<PAGE> 16
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL RECEIVABLES BALANCE
OF DISCOVER CARD PORTFOLIO
STATE AS OF NOVEMBER 30, 1998
- ----- ---------------------------------------
<S> <C>
California ............. 11.3%
Texas .................. 9.3%
New York ............... 6.7%
Florida ................ 6.0%
Illinois ............... 5.1%
</TABLE>
No other state accounted for more than 5% of the total receivables balance
of the Discover Card portfolio as of November 30, 1998.
Credit Limit Information. As of November 30, 1998, the accounts in the
Discover Card portfolio had the following credit limits:
<TABLE>
<CAPTION>
RECEIVABLES PERCENTAGE OF
OUTSTANDING TOTAL RECEIVABLES
CREDIT LIMIT (000)'S OUTSTANDING
- ------------ ----------- -----------------
<S> <C> <C>
Less than or equal to $1,000.000 .............. $ 632,180 2.1%
$1,000.01 to $2,000.00 ........................ $ 2,782,815 9.2%
$2,000.01 to $3,000.00 ........................ $ 2,927,625 9.7%
Over $3,000.00 ................................ $23,788,446 79.0%
----------- -----
Total .................................... $30,131,066 100.0%
=========== =====
</TABLE>
Seasoning. As of November 30, 1998, 88.3% 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, 1998 were distributed as follows:
<TABLE>
<CAPTION>
Percentage Percentage
AGE OF ACCOUNTS of Accounts of Balances
- --------------- ----------- -----------
<S> <C> <C>
Less than 12 Months........ 5.0% 2.3%
12 to 23 Months............ 6.7% 6.0%
24 to 35 Months............ 8.9% 9.3%
36 Months and Greater...... 79.4% 82.4%
----- -----
Total................. 100.0% 100.0%
===== =====
</TABLE>
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<PAGE> 17
Summary Yield Information. The annualized aggregate monthly yield
for the Discover Card portfolio is summarized as follows:
<TABLE>
<CAPTION>
TWELVE MONTHD ENDED ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
NOVEMBER 30, 1998 NOVEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Aggregate
Monthly Yield(1) 18.02% 18.19% 17.72%
</TABLE>
- ------------
(1) Greenwood calculates "Monthly Yield" 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
as of March 1, 1996, overlimit fees, but exclude 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. As of November 30, 1998, 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 ................. $26,020,162 86.3%
1 to 29 Days ............ $ 2,122,334 7.0%
30 to 59 Days ........... $ 637,435 2.1%
60 to 89 Days ........... $ 480,072 1.6%
90 to 119 Days .......... $ 352,966 1.2%
120 to 149 Days ......... $ 287,277 1.0%
150 to 179 Days ......... $ 230,820 0.8%
----------- -----
Total .......... $30,131,066 100.0%
=========== =====
</TABLE>
Summary Historical Delinquency Information. The accounts in the
Discover Card portfolio had the following historical delinquency rates:
<TABLE>
<CAPTION>
AVERAGE OF TWELVE MONTHS AVERAGE OF ELEVEN MONTHS AVERAGE OF TWELVE MONTHS
ENDED NOVEMBER 30, 1998 ENDED NOVEMBER 30, 1997 ENDED DECEMBER 31, 1996
------------------------ ------------------------ --------------------------
DELINQUENT DELINQUENT DELINQUENT
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 ....... $ 759,521 2.6% $ 743,464 2.6% $ 680,645 2.7%
60-89 Days ....... $ 456,059 1.5% $ 432,410 1.5% $ 361,992 1.4%
90-179 Days ...... $ 853,961 2.9% $ 803,204 2.8% $ 593,661 2.3%
---------- --- ---------- --- ---------- ---
Total ............ $2,069,541 7.0% $1,979,078 6.9% $1,636,298 6.4%
========== === ========== === ========== ===
</TABLE>
- ---------------
(1) Greenwood calculates the percentages by dividing the Delinquent Amount by
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.
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<PAGE> 18
WE DISCUSS THE ECONOMIC FACTORS THAT AFFECT THE PERFORMANCE OF THE DISCOVER
CARD PORTFOLIO, INCLUDING DELINQUENCIES, IN "RISK FACTORS - SOCIAL, LEGAL
AND ECONOMIC FACTORS."
Summary Charge-Off Information. The accounts in the Discover Card portfolio
have had the following historical charge-offs:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
NOVEMBER 30, 1998 NOVEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average Receivables Outstanding (1) $29,749,158 $28,403,076 $25,542,718
Gross Charge Offs $ 2,215,002 $ 1,891,601 $ 1,458,450
Gross Charge-Offs as a Percentage of
Average Receivables Outstanding (2) 7.45% 7.27% 5.71%
</TABLE>
- -----------------
(1) "Average Receivables Outstanding" is the average of the monthly average
amount of receivables outstanding during the periods indicated.
(2) Recoveries with respect to receivables in the Trust that have been charged
off as uncollectible are not treated as property of the Trust.
WE DISCUSS THE ECONOMIC FACTORS THAT AFFECT THE PERFORMANCE OF THE DISCOVER
CARD PORTFOLIO, INCLUDING CHARGE-OFFS, IN "RISK FACTORS - SOCIAL, LEGAL
AND ECONOMIC FACTORS."
Summary Payment Rate Information(1). The accounts in the Discover Card
portfolio have had the following historical monthly payment rates:
<TABLE>
<CAPTION>
Twelve Months Ended Eleven Months Ended Twelve Months Ended
November 30, 1998 November 30, 1997 December 31, 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Average Monthly Payment Rate(2) 15.42% 14.51% 15.24%
High Monthly Payment Rate 17.01% 16.31% 18.08%
Low Monthly Payment Rate 13.90% 12.41% 13.33%
</TABLE>
- ---------------
(1) Greenwood calculates the "Monthly Payment Rate" by dividing monthly
cardmember remittances by the cardmember receivable balance outstanding as
of the beginning of the month.
(2) Greenwood 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.
9. GREENWOOD TRUST COMPANY
Delete the text under the heading "Greenwood Trust Company" on pages 51-52
and substitute the following:
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<PAGE> 19
Greenwood is a wholly-owned subsidiary of NOVUS and an indirect
subsidiary of MSDW. 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 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. In May 1997, DWDC merged with Morgan Stanley Group
Inc. and changed its name to Morgan Stanley, Dean Witter, Discover & Co.
(now Morgan Stanley Dean Witter & Co.). DRFG believes that the change in
ownership and subsequent merger will 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 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 enactment of CEBA placed certain limitations on Greenwood,
including a requirement that Greenwood engage only in activities in which
it was engaged as of March 5, 1987. Since NOVUS acquired Greenwood, as a
result of these and earlier limitations, Greenwood has not engaged in the
business of making commercial loans. See "Risk Factors - Legislation."
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.
b. Add the following subsection immediately before "The Seller" on
page 52:
YEAR 2000
Greenwood and DFS, like most other companies, use computer programs
that identify particular dates using only the last two digits of a year,
instead of all four digits. If these programs cannot recognize "00" as a
date in the year 2000, the programs may be unable to process transactions
properly with dates in the year 2000 and beyond (the "Year 2000 issue").
Greenwood and DFS are taking steps to address the Year 2000 issue,
including updating their mission critical internal computer systems and
programs as follows:
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<PAGE> 20
o they have inventoried and identified those internal computer systems
and programs that may be affected by the Year 2000 issue;
o they have completed an assessment of whether these systems and
programs can accommodate references to the year 2000 and beyond; and
o they have completed the remediation and testing of substantially all
mission critical systems (including systems and programs used in
connection with the Trust and with servicing Accounts in the Trust).
Greenwood and DFS expect that integration testing of substantially
all of these systems with material external counterparties and suppliers,
which is currently underway, will be completed during 1999. The Trust has
not borne and will not bear any of the costs associated with this
inventory, identification, assessment, remediation and testing.
Greenwood has issued over twenty-eight million Discover Cards that
expire in the year 2000 or after, and has not yet experienced any material
problems with these "00" expiration dates. Greenwood and DFS continue to
work with service establishments that accept the Discover Card to help
insure that all point-of-sale hardware can accommodate cards with these
new expiration dates.
There are various risks associated with the Year 2000 issue,
including the possibility that the mission critical computer system and
programs of Greenwood and DFS may fail. In addition, Greenwood and DFS may
also be materially adversely affected by the failure of external
counterparties and suppliers to remediate their own Year 2000 issues.
Greenwood and DFS are diligently working with their material external
counterparties and suppliers to assess the efforts of these counterparties
and suppliers to deal with their Year 2000 issues, and to assess the
exposure that Greenwood, DFS and the Trust may have to them.
Greenwood and DFS also have business continuity plans in place that
cover their operations (including operations of the Trust and those
related to servicing Accounts in the Trust). Greenwood and DFS intend to
document and test Year 2000 specific contingency plans (including plans
for the Trust) during 1999 as part of their Year 2000 risk mitigation
efforts.
The expectations of Greenwood and DFS about their timely completion
of Year 2000 modifications are subject to uncertainties that could cause
actual results to differ materially from what has been discussed above.
Factors that could influence the effective timing of remediation efforts
include: (i) the success of Greenwood and DFS in identifying internal
computer systems and programs that contain two-digit year codes, (ii) the
nature and amount of programming and testing required to upgrade or
replace each of the affected computer systems and programs, (iii) the
nature and amount of testing, verification and reporting required by
regulators, (iv) the cost and availability of related
20
<PAGE> 21
labor and consulting services, and (v) the success of Greenwood's and
DFS's material external counterparties and suppliers in addressing their
respective Year 2000 issues.
10. THE SELLER
a. Delete the seventh sentence under the subheading "General" beginning
on page 52 and substitute the following:
The Investor Certificates will not be guaranteed by MSDW or any of
its affiliates, including Greenwood and DRFG.
b. Add at the end of the last sentence of the first paragraph under the
subheading "Greenwood" on page 53:
In addition, if the Federal Deposit Insurance Corporation is
appointed as conservator or receiver for Greenwood, it has the power under
the Federal Deposit Insurance Act, as amended, to repudiate contracts,
including contracts of Greenwood 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 Federal Deposit Insurance
Corporation were to be appointed as conservator or receiver of Greenwood
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 Investor Certificates. In a 1993 case, the
Resolution Trust Corporation, which has ceased to exist as of December 31,
1995 (the Federal Deposit Insurance Corporation has taken over its
responsibilities), repudiated certain secured zero-coupon bonds issued by
a savings association. In that case, 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.
c. Delete the first sentence of the second paragraph under the
subheading "Greenwood" on page 53 and substitute the following:
DRFG received, on the Closing Date, an opinion of Latham & Watkins, with
respect to Greenwood, concluding on a reasoned basis (although there was no
precedent based directly on 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"):
o under New York law, the law of the jurisdiction in which the debtor is
located governs the perfection and the effect of perfection or
nonperfection of a security interest in the Receivables;
21
<PAGE> 22
o if Greenwood's transfer of the Receivables to DRFG constitutes an
absolute transfer, then the transfer is a transfer of all right, title
and interest of Greenwood in and to those Receivables to DRFG; and
o if the transfer is deemed not to be an absolute transfer, it would be
treated as a security interest created by the Purchase and Contribution
Agreement in favor of DRFG in Greenwood's right, title and interest in
and to the Receivables.
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 55 and substitute
the following:
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), Equal Credit Opportunity Act (and
the provisions of the Federal Reserve Board's Regulation B issued under
it), Fair Credit Reporting Act and Fair Debt Collection Practices Act.
b. Delete the first paragraph on page 56 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 56-62 and substitute the following:
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This summary of the material federal income tax consequences to investors
in Investor Certificates is based on the opinion of Latham & Watkins ("Tax
Counsel") as counsel to DRFG. This summary is based on the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations and judicial and
administrative rulings and decisions as of the date of the prospectus. We cannot
assure you that the Internal Revenue Service (the "IRS") 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.
22
<PAGE> 23
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 an entity subject to special treatment under the federal income tax
laws, such as:
o a life insurance company;
o a tax-exempt organization;
o a financial institution;
o a broker-dealer;
o an investor that has a functional currency other than the United
States dollar; or
o an investor that holds Investor 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 INVESTOR
CERTIFICATES.
TAX TREATMENT OF THE INVESTOR CERTIFICATES AS DEBT
DRFG will treat the Investor Certificates as debt for federal, state and
local income and franchise tax purposes. By accepting an Investor Certificate,
you also will commit to treat your Investor Certificates as debt for federal,
state and local income and franchise tax purposes. However, the Pooling and
Servicing Agreement generally refers to the transfer of the Receivables as a
"sale," and DRFG has informed its tax counsel that:
o DRFG uses different criteria to determine the nontax accounting
treatment of the transaction, and
o for regulatory and financial accounting purposes, DRFG will treat the
transfer of the Receivables under the Pooling and Servicing Agreement 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 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 Investor
Certificates, the issue is whether the investors have loaned money to DRFG or
have purchased Receivables from DRFG (through ownership of the Investor
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, DRFG's
23
<PAGE> 24
tax counsel believes that the rationale of those cases will not apply to this
transaction, based, in part, upon:
o DRFG's expressed intent to treat the Investor 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
o each investor's commitment, by accepting an Investor Certificate,
similarly to treat the Investor 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 of an interest in the
Receivables or a loan secured by the Receivables (including the form of the
transaction), it is DRFG's tax counsel's opinion that the primary factor is
whether the investors (through ownership of the Investor Certificates) have
assumed the benefits and burdens of ownership of the Receivables. DRFG'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 Investor
Certificates).
For the reasons described above, DRFG's tax counsel has advised DRFG that,
in its opinion, under applicable law the Investor Certificates will be treated
as debt 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 Investor Certificates" for a discussion of your federal income tax
consequences if your Investor Certificates are not treated as debt for federal
income tax purposes. Except for that discussion, the following discussion
assumes that your Investor Certificates will be treated as debt 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:
o a citizen or resident of the United States,
o a corporation or partnership created or organized in the United States
or under the laws of the United States or of any state,
o an estate the income of which is subject to United States federal income
taxation regardless of the source of that income, or
o 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 (or, under certain circumstances, a trust
24
<PAGE> 25
the income of which is subject to United States federal income taxation
regardless of the source of that income).
Stated Interest on Investor Certificates. Subject to the discussion below:
o if you use the cash method of accounting for tax purposes, you will be
taxed on the interest on your Investor Certificate at the time it is
paid to you; or
o if you use the accrual method of accounting for tax purposes, you will
be taxed on the interest on your Investor Certificate at the time it
accrues.
The federal government will tax your interest as ordinary income. Generally,
interest you receive on your Investor Certificates will constitute "investment
income" for purposes of certain limitations of the Code concerning the
deductibility of investment interest expense.
Market Discount. You should be aware that if you resell your Investor
Certificates, you 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 you acquire an Investor Certificate at a market discount (i.e., at
a price below its stated redemption price at maturity) and you later recognize
gain upon a disposition of the Investor Certificate (or dispose of it in certain
nonrecognition transactions such as a gift), you must treat as ordinary interest
income at the time of disposition the lesser of your gain (or appreciation, in
the case of an applicable nonrecognition transaction) or the portion of the
market discount that accrued while you held the Investor Certificate. If you
acquired your Investor Certificate at a market discount, you will be required to
treat as ordinary interest income the portion of any principal payment
(including a payment on maturity) attributable to accrued
25
<PAGE> 26
market discount on your Investor Certificate. If you acquire an Investor
Certificate at a market discount, you may 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 Investor Certificate until you
dispose of the Investor Certificate in a taxable transaction.
If you acquired your Investor 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 so elect, on a constant interest rate basis. Once you
make this election to include the discount in your income as it accrues, 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 it without the consent of the IRS. If you elect to include market
discount in income in accordance with the preceding sentence, you will not
recognize ordinary income on sales, principal payments and certain other
dispositions of the Investor Certificates and you will not have to defer
interest deductions on debt related to the Investor Certificates.
The Clinton Administration has proposed legislation that would require you,
if you are an accrual method taxpayer that acquired your Investor Certificate at
a market discount, to include the discount in income as it accrues, subject to
certain limitations. As proposed, this provision would apply to Investor
Certificates that you acquire on or after the date of enactment. DRFG cannot
predict whether this legislation will be enacted, or if enacted, what its
ultimate form or effective date will be.
Amortizable Bond Premium. Generally, if the price you paid for your
Investor Certificate or your tax basis in your Investor Certificate held as a
capital asset exceeds the sum of all amounts payable on the Investor Certificate
after your acquisition date (other than payments of qualified stated interest),
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 Investor Certificate's maturity date. If your Investor
Certificate is subject to Section 1272(a)(6) of the Code (which applies 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), the application of the
amortizable bond premium rules is unclear, as Treasury Regulations specifically
exclude these instruments from the amortizable bond premium rules contained in
those regulations, but do not describe how bond premium should treated. 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. You may generally treat amortizable bond premium 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. If you elect to
amortize bond premium, you must generally reduce your tax basis in the related
Investor Certificate by the amount of bond premium used to offset interest
income. If your Investor Certificate purchased at a premium is redeemed in full
prior to its maturity, you should be entitled to a deduction for any remaining
unamortized bond premium in the taxable year of redemption if you have elected
to amortize bond premium.
Sales of Investor Certificates. In general, you will recognize gain or loss
upon the sale, exchange, redemption or other taxable disposition of your
Investor Certificate measured by the difference between:
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o 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
o your tax basis in the Investor Certificate (as increased by any market
discount 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 that you received with
respect to the Investor Certificate).
Subject to the market discount rules discussed above and to the
one-year holding period requirement for long-term capital gain treatment, any
gain or loss generally will be long-term capital gain or loss, provided you held
the Investor Certificate as a capital asset. The maximum federal income tax rate
applicable to capital gains and ordinary income for corporations is 35%. The
maximum ordinary federal income tax rate for individuals, estates and trusts is
39.6%, whereas the maximum long-term capital gains rate for those taxpayers is
20%.
FOREIGN INVESTORS
The following summary of the United States federal income and estate tax
consequences of the purchase, ownership, sale or other disposition of an
Investor 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:
o a foreign corporation,
o a nonresident alien individual, a foreign estate or trust, or
o a foreign partnership,
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 paid to you on your Investor Certificates will not be subject to
withholding of United States federal income tax, provided that:
o these interest payments are effectively connected with the conduct of
your trade or business within the United States and you provide an
appropriate statement to that effect, or
o you are not a "10 percent shareholder" of DRFG or Greenwood or a
"controlled foreign corporation" with respect to which DRFG or Greenwood
is a "related person" within the meaning of the Code, and you (and, if
relevant, a financial institution on your behalf) provide an appropriate
statement, signed under penalties of perjury,
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certifying that you are not a United States Person and providing your
name and address.
Your statement generally must be provided in the year a payment occurs or in
either of the two preceding years. For years after 1999, Treasury Regulations
specify that the statement must be made on Form W-8 and provided before payment.
You generally will not be subject to United States federal income tax on
gain realized on the disposition of your Investor Certificate (other than gain
attributable to accrued interest, which is addressed in the preceding
paragraph); provided that
o the gain is not effectively connected with your conduct of a trade or
business within the United States, and
o if you are an individual,
o you have not been present in the United States for 183 days or more
in the taxable year of the sale, exchange or redemption, or
o 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 Investor 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 previously
discussed if you provide an appropriate statement, you generally will be subject
to United States federal income tax on the interest 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 Investor Certificates will not be subject
to United States federal estate tax as a result of your death if, immediately
before death,
o you were not a "10 percent shareholder" of DRFG or Greenwood, and
o your interest on the Investor 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. YOU ARE
URGED TO CONSULT YOUR OWN TAX ADVISORS ABOUT THESE MATTERS.
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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:
o certain payments of principal and interest on an Investor Certificate;
and
o 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, DRFG, Greenwood, a paying agent, or a
broker, as the case may be, will be required to withhold from these payments to
you a tax equal to 31% of each payment.
Treasury Regulations provide that backup withholding and information
reporting will not apply to payments of principal and interest on Investor
Certificates by DRFG, Greenwood or their paying agents to you if you certify
under penalties of perjury that you are not a United States Person or otherwise
establish an exemption, provided that none of DRFG, Greenwood or their paying
agents has actual knowledge that you are a United States Person or that the
conditions of any other exemption are not in fact satisfied. Certain information
reporting requirements will apply to payments of the proceeds of your 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,
unless:
o you are an exempt recipient; or
o the broker has evidence in its records that you are not a United States
Person and no actual knowledge that the evidence is false and certain
other conditions are met.
After 1999, these payments may be subject to backup withholding unless
they are exempt from information reporting. Information reporting and backup
withholding will apply to payments of the proceeds of your sale of an Investor
Certificate to or through the United States office of a broker unless:
o you make appropriate certifications that you are not a United States
Person (and no agent of the broker who is responsible for receiving or
reviewing your statement has actual knowledge that it is incorrect), or
o 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.
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The Treasury Department has promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. Special rules apply that permit the
shifting of primary responsibility for withholding to certain financial
intermediaries acting on behalf of beneficial owners. The final regulations are
generally effective for payments made after December 31, 1999, subject to
certain transition rules. You are urged to consult your own tax advisors with
respect to these final regulations.
POSSIBLE CHARACTERIZATION OF THE INVESTOR CERTIFICATES
The above discussion assumes that the Investor Certificates will be treated
as debt for federal income tax purposes. However, although DRFG's tax counsel
has rendered an opinion to that effect with respect to the Investor
Certificates, the matter is not free from doubt, and we cannot assure you that
the IRS or the courts will agree with DRFG's tax counsel's opinion. If the IRS
were to contend successfully that the Investor Certificates are not debt 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 that could be treated as a "publicly traded
partnership" taxable as a corporation. If your 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), that 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
Investor Certificates were characterized as debt. 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 (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 will be required in the case of any non-U.S. Holder that is engaged
in a
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trade or business within the United States to which the income with respect to
an Investor Certificate is effectively connected.
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 the non-U.S. Holder's
distributive share of the partnership's interest income.
If your 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 you. See "State Tax
Consequences." Under these circumstances, your 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 you 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 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
Greenwood or DRFG or a joint venture consisting of DRFG, Greenwood 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 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 DRFG's 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 this arrangement were later held to constitute
a
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partnership or corporation, 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 Investor
Certificates will not be treated as debt, and the possible tax consequences of
potential alternative treatments.
13. CERTAIN STATE TAX CONSEQUENCES
Delete the text under the heading "Certain State Tax Consequences" on
pages 62-63 and substitute the following:
STATE TAX CONSEQUENCES
This summary of the state tax consequences to investors in Investor
Certificates is based on the opinion of DRFG's tax counsel. The summary is based
upon currently applicable tax laws of certain states. DRFG has not sought and
will not seek a ruling from the taxing authorities of those states on the
anticipated state tax consequences discussed in this summary. We cannot assure
you that the taxing authorities of any state will agree with the conclusions in
this summary. Subsequent legislative, judicial or administrative changes--which
may or may not be applied retroactively--could affect the tax consequences to
investors. Except as discussed below, this discussion of state tax consequences
assumes that the Investor Certificates will be treated as debt 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.
DRFG's and Greenwood's headquarters are located in Delaware and that is
where Greenwood originates and owns the Accounts and services the Receivables
pursuant to the Pooling and Servicing Agreement. DRFG's tax counsel has advised
DRFG that, in their opinion, although the matter is not free from doubt, the
Investor Certificates will be treated as debt for purposes of the Delaware
income tax. Accordingly, although the matter is not free from doubt, if the
Investor Certificates are treated as debt in Delaware, investors not otherwise
subject to taxation in Delaware will not become subject to the Delaware income
tax solely because they own Investor 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 Investor Certificates. Moreover, a state could claim that the
Trust has undertaken activities within that state and
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therefore the Trust is subject to taxation by that state. Were any state to make
and sustain that claim, the treatment of the Investor Certificates would be
determined under that state's tax laws, and it is possible that the Investor
Certificates would not be treated as debt for purposes of that state taxation.
If your Investor 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 Investor Certificates."
THE ABOVE DESCRIPTION OF THE POTENTIAL STATE TAX CONSEQUENCES IS
INCOMPLETE. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISORS ABOUT THESE MATTERS.
14. ERISA CONSIDERATIONS
Delete the text under the subheading "ERISA Considerations" on pages 63-64
and substitute the following:
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on those employee benefit plans,
including Individual Retirement Accounts and Individual Retirement Annuities
(collectively "IRAs"), to which they apply ("Plans") and on fiduciaries of those
Plans. To comply with ERISA's general fiduciary standards, before investing in
Investor Certificates, a Plan fiduciary should determine whether such an
investment is permitted under the governing Plan instruments and is 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 the Plan's
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 Investor Certificates should also consider whether such an
investment might constitute or give rise to a prohibited transaction under ERISA
or the Code.
Certain transactions involved in the operation of 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 (the "DOL") has published a
regulation (the "Regulation"), which defines when a Plan's investment in an
entity will be deemed to include an interest in the underlying assets of the
entity (such as the Trust) for purposes 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 Regulation. Under the 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
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upon DRFG, Greenwood, the Trustee or any Underwriter, that similar "pass
through" Investor Certificates in a trust constituted equity interests.
Assuming that the Investor Certificates are equity interests, the
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:
o freely transferable,
o 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
o either is
o part of a class of securities registered under section 12(b) or 12(g) of
the Securities Exchange Act of 1934, or
o 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, if the class of securities of which the 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 the Class A Certificates are deemed to be debt and not equity for ERISA
purposes, the purchase of the Class A Certificates by a Plan with respect to
which Greenwood, DRFG or one of their 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 applies.
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 Investor
Certificates for the Plan:
o DOL Prohibited Transaction Exemption ("PTE") 84-14 (Class Exemption for
Plan Asset Transactions determined by Independent Qualified Professional
Asset Managers);
o PTE 91-38 (Class Exemption for Certain Transactions Involving Bank
Collective Investment Funds);
o PTE 90-1 (Class Exemption for Certain Transactions Involving Insurance
Company Pooled Separate Accounts); and
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<PAGE> 35
o 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 purchaser of Class A Certificates might violate the prohibited
transaction rules if the purchase were made during the offering with assets of a
Plan and Greenwood, DRFG, the Trustee, any Underwriter or any of their
affiliates was a fiduciary with respect to that Plan. Under ERISA and the Code,
a person is a "fiduciary" with respect to a Plan to the extent:
o he [or she] exercises any discretionary authority or discretionary
control respecting management of that Plan or exercises any authority or
control respecting management or disposition of its assets,
o he [or she] renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of that
Plan, or has any authority or responsibility to do so, or
o he [or she] has any discretionary authority or discretionary
responsibility in the administration of that Plan.
Accordingly, the fiduciaries of any Plan should not purchase Class A
Certificates during the offering with assets of any Plan if Greenwood, DRFG, the
Trustee, any Underwriter 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
Class A Certificates should consult their own benefits counsel or other
appropriate counsel regarding the application of ERISA and the Code to their
purchase of the Class A Certificates.
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 provides an exemption from 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 regulations 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 the
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. On December 22, 1997, the DOL issued proposed regulations
under Section 401(c) of ERISA. 29 CFR 2550.401c-1. These regulations apply only
to policies that are issued by an insurer on or before December 31, 1998, to or
for the
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<PAGE> 36
benefit of an employee benefit plan that is supported by the assets of
the insurer's general account. These regulations will take effect at the end of
the 18-month period following the date on which they become final. Section
401(c) of ERISA 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 that
is 18 months after the date the 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 effect on their purchase of Class A Certificates.
15. AVAILABLE INFORMATION
Delete the text under the heading "Available Information" on page 64 of the
prospectus and substitute the following:
The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. DRFG, on behalf of the Trust,
will file reports and other information with the Securities and Exchange
Commission (the "Commission"). You may review the reports 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, you may
also obtain these reports and other documents from the web site that the
Commission maintains at http://www.sec.gov. You may also obtain copies of
these materials from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
16. GLOSSARY OF TERMS
a. Delete the definition of "Charged-Off Amount" on page 67 of the
prospectus and substitute the following:
"CHARGED-OFF AMOUNT" will mean, for any Distribution Date, the total amount
of Receivables in Accounts that become Charged-Off Accounts in the previous
calendar month minus:
o the cumulative, uncollected amount previously billed by the Servicer to
Accounts that became Charged-Off Accounts during the previous calendar
month 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
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<PAGE> 37
charges that the Servicer has designated as "Finance Charge Receivables"
for Accounts that are not Charged-Off Accounts, and
o the full amount of any Receivables in these Charged-Off Accounts that
Greenwood repurchased.
b. Delete the definition of "Certificate" on page 68 of the prospectus
and substitute the following:
"CERTIFICATE" will mean any certificated Seller Certificate or any one of
the Class A Certificates or the Class B Certificates.
c. Delete the definition of "Certificateholder" or "Holder" on page 68 of
the prospectus and substitute the following:
"CERTIFICATEHOLDER" OR "HOLDER" will mean an Investor Certificateholder, a
Person in whose name a Certificate is registered in the register maintained
pursuant to the Pooling and Servicing Agreement for the registration, transfer
and exchange of Certificates, or a Person in whose name ownership of the
uncertificated Seller Certificate is recorded in the books and records of the
Trustee.
d. Delete the definition of "Finance Charge Receivables" on page 71 of
the prospectus and substitute the following:
"FINANCE CHARGE RECEIVABLES" will mean, for any Account for any calendar
month,
o the net amount billed by the Servicer during that month as periodic
finance charges on the Account and cash advance fees, annual membership
fees, 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
o 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 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.
e. Delete the definition of "Seller Certificate" on page 78 of the
prospectus and substitute the following:
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"SELLER CERTIFICATE" will mean (i) if Greenwood and DRFG elect to evidence
their fractional undivided interest in the Trust in certificated form pursuant
to the Pooling and Servicing Agreement, the certificate executed by DRFG and
authenticated by the Trustee, or (ii) an uncertificated fractional undivided
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 Class A Certificates or the Class B Certificates.
38
