1
EXHIBIT 99(C)
Discover Card Master Trust I
Description of Recent Developments
The following describes certain recent developments relating to the
Discover(R) Card Master Trust I (the "Master Trust"). Capitalized terms used
herein and not otherwise defined will have the meaning ascribed to them in the
relevant prospectus or prospectus supplement.
1. THE SELLER
On February 5, 1997, Dean Witter, Discover & Co. ("DWDC"), the indirect
parent of Greenwood Trust Company ("Greenwood"), and Morgan Stanley Group, Inc.
("Morgan Stanley") announced their plans to merge in mid-1997. Upon completion
of such merger, Greenwood and Greenwood's direct parent, NOVUS Credit Services,
Inc. ("NOVUS"), a wholly-owned subsidiary of DWDC, will be indirect
wholly-owned subsidiaries of the merged entity, expected to be called Morgan
Stanley, Dean Witter, Discover & Co.
The portions of the Competitive Equality in Banking Act of 1987 which
limited the growth of the average asset base of Greenwood for each 12-month
period ending September 30 to 7% of Greenwood's average asset base for the
preceding 12-month period have been repealed.
2. DISCOVER CARD BUSINESS
a. GENERAL
The number of service establishments that accept the Discover Card
has continued to increase. In 1996, approximately 425,000 new service
establishments were enrolled. As of December 31, 1996, there were 34.2
million Discover Card accounts with 44.0 million cardmembers. Each
Discover Cardmember is subject to account terms and conditions that are
uniform from state to state. The credit limits on Discover Card accounts
generally range from $1,000 to $6,000, although on occasion higher or
lower limits may be authorized.
b. COLLECTION EFFORTS
Efforts to collect past-due Discover Card account receivables
currently are made primarily by collections personnel of NOVUS Services,
Inc. ("NSI") or Greenwood. Under current practice, Greenwood includes a
request for payment of past-due amounts
2
on the monthly billing statement of all accounts with such amounts.
Accounts with past-due amounts also receive a written notice of late fee
charges, as well as an additional request for payment, 15 days after any
monthly statement which includes a past-due amount. Collection personnel
generally initiate telephone contact with cardmembers within 30 days
after any portion of their balance becomes past due. In the event that
initial telephone contacts fail to elicit a payment, Greenwood continues
to contact the cardmember by telephone and by mail. Greenwood may also
enter into arrangements with cardmembers to waive finance charges, late
fees and principal due, and extend or otherwise change payment schedules.
The current policy of Greenwood is to recognize losses and to charge off
an account at the end of the sixth full calendar month after a payment
amount is first due if payment of any portion of that amount has not been
received by such time, except in cases of bankruptcy, where an
uncollectible balance may be charged off earlier. In general, after an
account has been charged off, collections personnel of NSI or Greenwood
make attempts to collect all or a portion of the charged-off account for
a period of approximately four months. If those attempts are
unsuccessful, the charged-off account is generally placed with one or
more collection agencies for a period of approximately a year or,
alternatively, Greenwood may commence legal action against the
cardmember, including legal action for the attachment of property or bank
accounts of the cardmember or the garnishment of the cardmember's wages.
Under certain circumstances, Greenwood may also sell charged-off accounts
to third parties, either before or after collection efforts have been
attempted. To facilitate such sales, a limited number of Charged-Off
Accounts may, subject to Rating Agency consent, be removed from the Trust
prior to such sales.
Under the terms of the Pooling and Servicing Agreement, any
recoveries received on Charged-Off Accounts (other than the proceeds of
sales of Charged-Off Accounts that have been removed from the Trust) are
included in the assets of the Trust and are treated as Finance Charge
Collections. Recoveries on Charged-Off Accounts initially are lower than
the level of recoveries for the Discover Card Portfolio because
charged-off accounts were not included as Accounts as of the Account
Selection Date. Greenwood believes that, over time, the level of
recoveries as a percentage of the Receivables in the Trust will increase
to more closely approximate the level of recoveries in the Discover Card
Portfolio, although the extent of such increase cannot be predicted and
may be limited by removals of Charged-Off Accounts from the Trust. There
can be no assurance that the level of recoveries for the Trust will ever
equal the level of recoveries for the Discover Card Portfolio.
Similarly, any addition of Additional Accounts to the Trust will cause a
temporary reduction in the level of recoveries as a percentage of the
Receivables in the Trust because no Additional Accounts will be
charged-off accounts at the time of their addition to the Trust. The
credit granting, servicing and charge-off policies and collection
practices of Greenwood may change over time in accordance with
Greenwood's business judgment and applicable law.
2
3
3. THE ACCOUNTS
a. BILLING AND PAYMENTS
All Discover Card accounts have the same billing and payment
structure. Monthly billing statements are sent by Greenwood to each
cardmember with an outstanding debit balance. Discover Card accounts are
grouped into multiple billing cycles for operational purposes. Each
billing cycle has a separate monthly billing date at which time the
activity in the related accounts during the period of approximately 28 to
34 days ending on such billing date is processed and billed to
cardmembers. The Accounts include accounts in all billing cycles.
Each Discover cardmember with an outstanding debit balance in his or
her Discover Card account must generally make a minimum payment equal to
1/48th of the new balance on the account at the end of the billing cycle
for the account (prior to February 1996, 1/36th), rounded to the next
higher whole dollar amount, but not less than $10 or the entire balance,
whichever is less, plus any amount that is past due. Under certain
circumstances, the minimum payment is reduced by amounts paid in excess
of the minimum payment due during the previous three months and not
already so applied. From time to time, Greenwood has offered and may
continue to offer cardmembers with accounts in good standing the
opportunity to skip the minimum monthly payment, while continuing to
accrue periodic finance charges, without being considered to be past due.
Although these practices are not expected to have a material adverse
effect on the Investor Certificateholders, Collections may be reduced
during any period in which Greenwood offers cardmembers the opportunity
to skip the minimum monthly payment. A cardmember may pay the total
amount due at any time. Greenwood also may enter into arrangements with
delinquent cardmembers to extend or otherwise change payment schedules,
and to waive finance charges, late fees and principal due.
Greenwood imposes periodic finance charges on Discover Card account
balances at fixed and variable annual percentage rates. Periodic finance
charges on purchases, cash advances and balance transfers are calculated
on a daily basis, subject to a grace period that essentially provides
that periodic finance charges are not imposed if the cardmember pays his
or her entire balance each month. In general, periodic finance charges
on purchases, cash advances and balance transfers are based on a prime
rate plus a margin (currently 8.9% to 13.9%), subject to certain minimum
rates currently ranging from 12.9% to 19.8%. The rates imposed on
individual Discover Card accounts are based on purchase activity and
payment status. In addition, in connection with programs for new
cardmembers, for balance transfers, and for other promotional purposes,
certain Discover Card account balances may accrue periodic finance
charges at lower fixed rates for a specified period of time. Balances
remaining from transactions posted to accounts in billing cycles
beginning prior to February 1993 also accrue periodic finance charges at
fixed rates.
3
4
In addition to periodic finance charges, Greenwood may impose
certain other charges and fees on Discover Card accounts. Greenwood
currently charges a cash advance transaction fee equal to 2.5% of each
cash advance, with a minimum fee of $2.00 per transaction. Greenwood
also currently charges a $20 late fee on Discover Card accounts, a $20
fee for balances exceeding a cardmember's credit limit as of the close of
such cardmember's monthly billing cycle and a $15 fee for any payment
check returned due to insufficient funds.
The yield on the Accounts depends on changes in the prime rate over
time and in cardmember usage and payment performance, none of which can
be predicted, as well as the extent to which balance transfer offers and
special promotion offers are made and accepted, and the extent to which
Greenwood changes the terms of the Cardmember Agreement. Reductions in
the yield could, if sufficiently large, cause the commencement of the
Amortization Period or result in either shortfalls of Certificate
Interest or losses to the Investor Certificateholders as the result of
charged-off Receivables, and there can be no assurance regarding any of
these effects.
b. The following updates information relating to the composition of the
Accounts contained in prospectuses relating to the Master Trust.
COMPOSITION OF THE ACCOUNTS
The Receivables in the Accounts as of March 1, 1997 totaled
$17,826,573,129.78. The Accounts had an average balance of $830 and an average
credit limit of $4,240 as of March 1, 1997.
Geographic Distribution. As of March, 1, 1997, the five states with the
largest Receivables balances were as follows:
PERCENTAGE OF TOTAL RECEIVABLES
STATE BALANCE IN THE ACCOUNTS
- ----- -------------------------------
California... 11.8%
Texas........ 9.2%
New York..... 6.8%
Florida...... 5.8%
Illinois..... 4.9%
4
5
Credit Limit Information. Credit limit information as of March 1, 1997
with respect to the Accounts is summarized as follows:
RECEIVABLES PERCENTAGE OF
OUTSTANDING TOTAL RECEIVABLES
CREDIT LIMIT (000)'S OUTSTANDING
- ------------ ------------- ----------------
Less than or equal to $1,000.00...... $ 406,589 2.3%
$1,000.01 to $2,000.00............... $ 3,470,320 19.5%
$2,000.01 to $3,000.00............... $ 2,712,610 15.2%
Over $3,000.00....................... $11,237,054 63.0%
----------- ------
Total.............................. $17,826,573 $100.0%
============ ======
Seasoning. As of March 1, 1997, 72.6% of the Accounts were at least 24
months old. The distribution of the age of Accounts as of March 1, 1997 was as
follows:
PERCENTAGE PERCENTAGE
AGE OF ACCOUNTS OF ACCOUNTS OF BALANCES
- --------------- ----------- -----------
Less than 12 Months................... 9.7% 9.7%
12 to 23 Months....................... 17.7% 19.2%
24 to 35 Months....................... 6.0% 6.1%
36 Months and Greater................. 66.6% 65.0%
----- -----
Total.............................. 100.0% 100.0%
===== =====
Summary Current Delinquency Information. Current delinquency information
as of March 1, 1997 with respect to the Accounts is summarized as follows:
AGGREGATE
BALANCES PERCENTAGE
PAYMENT STATUS (000'S) OF BALANCES
- -------------- ------------- -----------
Current.......................................... $15,384,494 86.2%
1 to 29 Days..................................... $ 1,062,693 6.0%
30 to 59 Days.................................... $ 515,507 2.9%
60 to 89 Days.................................... $ 303,002 1.7%
90 to 119 Days................................... $ 222,988 1.3%
120 to 149 Days.................................. $ 185,419 1.0%
150 to 179 Days.................................. $ 152,470 0.9%
------------- ----------
Total........................................ $17,826,573 100.0%
============= ==========
5
6
4. COMPOSITION AND HISTORICAL PERFORMANCE OF THE DISCOVER CARD PORTFOLIO.
The following updates information relating to the Discover Card Portfolio
contained in the prospectuses relating to the Master Trust.
COMPOSITION OF DISCOVER CARD PORTFOLIO
Geographic Distribution. The Discover Card Portfolio is not concentrated
geographically. As of December 31, 1996, the five states with the largest
receivables balances were as follows:
PERCENTAGE OF TOTAL RECEIVABLES BALANCE
OF DISCOVER CARD PORTFOLIO
STATE AS OF DECEMBER 31, 1996
- ----- ---------------------------------------
California.. 11.2%
Texas....... 9.1%
New York.... 6.7%
Florida..... 5.7%
Illinois.... 5.2%
No other state accounted for more than 5% of the total receivables balance
of the Discover Card Portfolio as of December 31, 1996.
Credit Limit Information. Credit limit information as of December 31,
1996 with respect to the Discover Card Portfolio is summarized as follows:
RECEIVABLES PERCENTAGE OF
OUTSTANDING TOTAL RECEIVABLES
CREDIT LIMIT (000)'S OUTSTANDING
- ------------ ------------- --------------------
Less than or equal to $1,000.00....... $ 598,939 2.1%
$1,000.01 to $2,000.00................. $ 4,705,384 16.3%
$2,000.01 to $3,000.00................. $ 3,741,712 13.0%
Over $3,000.00.......................... $19,729,727 68.6%
------------- -----------
Total............................ $28,775,762 100.0%
============= ===========
Seasoning. As of December 31, 1996, 80.3% of the accounts in the Discover
Card Portfolio were at least 24 months old. The distribution of the age of
accounts in the Discover Card Portfolio as of December 31, 1996 was as follows:
6
7
PERCENTAGE PERCENTAGE
AGE OF ACCOUNTS OF ACCOUNTS OF BALANCES
- --------------- --------------- -----------
Less than 12 Months.............................. 8.6% 8.2%
12 to 23 Months.................................. 11.1% 11.9%
24 to 35 Months.................................. 11.3% 11.7%
36 Months and Greater............................ 69.0% 68.2%
-------------- ----------
Total................................. 100.0% 100.0%
============== ==========
Summary Yield Information. The annualized aggregate monthly yield for the
Discover Card Portfolio is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Aggregate Monthly Yields(1)
Excluding Recoveries (2)........... 17.72% 16.95% 16.65%
Including Recoveries (3)............ 18.20% 17.39% 17.07%
(1) Monthly Yield is calculated by dividing Monthly Finance Charges billed by
beginning monthly balance. Monthly Finance Charges include periodic
finance charges, cash advance item charges, late fees, and as of March 1,
1996, overlimit fees, but exclude certain other items, such as annual
membership fees, if any, which are included in Finance Charge Receivables.
Aggregate Monthly Yield is the average of Monthly Yields annualized for
each period shown.
(2) Monthly Yield excluding any recoveries received with respect to
charged-off accounts.
(3) Monthly Yield including recoveries received with respect to charged-off
accounts. Recoveries received with respect to Charged-Off Accounts (other
than the proceeds of sales of Charged-Off Accounts that have been removed
from the Trust) are included in the Trust and are treated as Finance
Charge Collections. However, the level of recoveries for the Trust will
initially be lower than the level of recoveries for the Discover Card
Portfolio because charged-off accounts were not included in the Accounts
selected for inclusion in the Trust. The level of recoveries on
Additional Accounts will also initially be lower than the level of
recoveries for the Discover Card Portfolio because charged-off accounts
will not be included in Additional Accounts selected for inclusion in the
Trust. Greenwood believes that, over time, the level of recoveries on the
Accounts (including on any Additional Accounts), as a percentage of the
Receivables in the Trust will increase to more closely approximate the
level of recoveries in the Discover Card Portfolio, although the extent of
such increase cannot be predicted and may be limited by removals of
Charged-Off Accounts from the Trust.
7
8
Summary Current Delinquency Information. Current delinquency information
as of December 31, 1996 with respect to the Discover Card Portfolio is
summarized as follows:
AGGREGATE
BALANCES PERCENTAGE
PAYMENT STATUS (000'S) OF BALANCES
- -------------- ------------- -----------
Current..................................................... $24,435,287 84.9%
1 to 29 Days................................................ $ 2,299,993 8.0%
30 to 59 Days............................................... $ 809,902 2.8%
60 to 89 Days............................................... $ 448,994 1.6%
90 to 119 Days.............................................. $ 327,352 1.1%
120 to 149 Days............................................. $ 249,238 0.9%
150 to 179 Days............................................. $ 204,996 0.7%
------------- ----------
Total................................................... $28,775,762 100.0%
============= ==========
Summary Historical Delinquency Information. Historical delinquency
information with respect to the Discover Card Portfolio is summarized as
follows:
AVERAGE OF TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
DELINQUENT DELINQUENT DELINQUENT
AMOUNT AMOUNT AMOUNT
(000'S) PERCENTAGE(1) (000'S) PERCENTAGE(1) (000'S) PERCENTAGE(1)
----------- ------------- ----------- ------------- ------------ -------------
30-59 Days........... $680,645 2.7% $568,382 2.6% $405,942 2.2%
60-89 Days........... $361,992 1.4% $276,821 1.3% $193,582 1.1%
90-179 Days......... $593,661 2.3% $403,134 1.8% $282,080 1.5%
----------- ------ ----------- ---- ------------ ------
Total $1,636,298 6.4% $1,248,337 5.7% $881,604 4.8%
=========== ====== =========== ==== ============ ======
(1) The percentages are the result of dividing Delinquent Amount by Average
Receivables Outstanding for the applicable period. Delinquent Amount is
the average of the monthly ending balances of delinquent accounts during
the periods indicated. Average Receivables Outstanding is the average of
the monthly average amount of receivables outstanding during the periods
indicated.
Summary Charge-Off Information. Charge-off information with respect to
the Discover Card Portfolio is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Average Receivables Outstanding(1)... $25,542,718 $22,031,829 $18,464,611
Gross Charge-Offs.................... $ 1,458,450 $ 923,836 $ 680,487
Gross Charge-Offs as a Percentage
of Average Receivables(2)............ 5.71% 4.19% 3.69%
8
9
- ---------------
(1) Average Receivables Outstanding is the average of the monthly average
amount of receivables outstanding during the periods indicated.
(2) Recoveries with respect to charged-off Receivables (other than the
proceeds of sales of Charged-Off Accounts that have been removed from the
Trust) are property of the Trust and are treated as Finance Charge
Collections.
Summary Payment Rate Information(1). The monthly rate of payments in the
Discover Card Portfolio is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Average Monthly Payment Rate(2)... 15.24% 16.20% 16.65%
High Monthly Payment Rate......... 18.08% 18.97% 17.89%
Low Monthly Payment Rate.......... 13.33% 13.67% 15.16%
- -------------
(1) Monthly Payment Rate is calculated by dividing monthly cardmember
remittances by the cardmember receivable balance outstanding as of the
beginning of the month.
(2) Average Monthly Payment Rate for a period is equal to the sum of
individual monthly payment rates for the period divided by the number of
months in the period.
9
10
5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following sections of "Certain Federal Income Tax Consequences"
are updated as follows:
GENERAL
The following summary of certain anticipated federal income tax
consequences of the purchase, ownership and disposition of investor
certificates of a series is based on the advice of Latham & Watkins
("Tax Counsel") as counsel to Greenwood. The summary is based on
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), currently applicable Treasury Regulations and judicial and
administrative rulings and decisions ("Current Law"). There can be no
assurance that the Internal Revenue Service (the "IRS") will not take a
contrary view, and no ruling from the IRS has been or will be sought.
Legislative, judicial or administrative changes may be forthcoming that
could alter or modify the statements and conclusions set forth herein.
Any legislative, judicial or administrative changes or interpretations
may or may not be retroactive and could affect tax consequences to
investor certificateholders of one or more series.
The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investor certificateholders
in light of their individual circumstances, and, except for certain
limited discussions of particular topics, is not intended for investor
certificateholders subject to special treatment under the federal income
tax laws (e.g., life insurance companies, tax-exempt organizations,
financial institutions, broker-dealers and investors that have a
functional currency other than the United States dollar or hold their
investor certificates as part of a hedge, straddle or conversion
transaction). PROSPECTIVE INVESTOR CERTIFICATEHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY
OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF INVESTOR CERTIFICATES.
The discussion assumes that an investor certificate (i) is issued
in registered form, (ii) has all payments denominated in United States
dollars and not determined by reference to the value of any other
currency, and (iii) has a term that exceeds one year. Moreover, the
discussion assumes that, unless Section 1272(a)(6) applies to the
investor certificate, the interest formula for the investor certificate
meets the requirements for "qualified stated interest" under Treasury
Regulations relating to original issue discount ("OID"), and that any
OID on an investor certificate arising from any excess of the principal
amount of such investor certificate over its issue price is de minimis
(i.e., is less than 1/4% of its principal amount multiplied by the
number of full years until its maturity date).
10
11
TAX TREATMENT TO THE INVESTOR CERTIFICATES AS INDEBTEDNESS
Tax Counsel has advised Greenwood that, in their opinion, although
the matter is not free from doubt, under Current Law the investor
certificates of all previously issued series will be treated as
indebtedness of Greenwood for federal income tax purposes. Such opinions
were based, in part, upon (i) the expressed intent of Greenwood to treat
the investor certificates for federal, state and local income and
franchise tax purposes as indebtedness secured by the Receivables and
other assets held in the Trust, (ii) the commitment of each investor
certificateholder, by the acceptance of an investor certificate, similarly
to treat the investor certificates for federal, state and local income and
franchise tax purposes as indebtedness, (iii) Tax Counsel's conclusion
that the federal income tax treatment of the investor certificates should
be determined based on the economic substance of the arrangement created
by the Pooling and Servicing Agreement and the Series Supplement of each
series, and (iv) Tax Counsel's analysis of such economic substance. There
can be no assurance, however, that the IRS or the courts will agree with
the conclusions of Tax Counsel. In that regard, the Pooling and Servicing
Agreement and the Series Supplement of a series generally refer to the
transfer of the Receivables as a "sale," and Greenwood has informed Tax
Counsel (i) that different criteria are used in determining the non-tax
accounting treatment of the transaction and (ii) that, for regulatory and
financial accounting purposes, Greenwood will treat the transfer of the
Receivables under the Pooling and Servicing Agreement and the Series
Supplement with respect to such series as a transfer of an ownership
interest in the Receivables and not as the creation of a debt obligation.
Notwithstanding the foregoing, Greenwood will treat the investor
certificates as indebtedness for federal, state and local income and
franchise tax purposes and the investor certificateholders, by acceptance
of the investor certificates, agree to treat such investor certificates of
a series as indebtedness of Greenwood for federal, state and local income
and franchise tax purposes. Except for the discussion in "-- Possible
Characterization of the Investor Certificates" below, the following
discussion of federal income tax consequences assumes that the investor
certificates of a series will be treated as indebtedness of Greenwood for
federal income tax purposes.
The above discussion is qualified in its entirety by reference to
the tax opinions delivered in connection with any issuance of the
investor certificates of a series, and filed as an exhibit to the
Registration Statement to which such series relates.
UNITED STATES INVESTOR CERTIFICATEHOLDERS
The rules set forth below apply to investor certificateholders who
are "United States Persons." A "United States Person" is (i) a citizen
or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the
United States or of any state, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its
source, or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust, and
one or more United States fiduciaries have the authority to control all
substantial decisions of the trust.
Stated Interest on Investor Certificates. Subject to the
discussion below, interest paid on the investor certificates will be
taxable as ordinary income when received or accrued by investor
certificateholders in accordance with their method of accounting.
Generally, interest received on the investor certificates will
constitute "investment income" for purposes of certain limitations of
the Code concerning the deductibility of investment interest expense.
11
12
Original Issue Discount. In general, the excess of the stated
redemption price at maturity of the investor certificates of a series
over their issue price will constitute OID, unless such excess is within
a statutorily-defined de minimis exception.
If the investor certificates of a series are issued with OID,
investor certificateholders generally will be required to include OID in
income for each accrual period in advance of receipt of the cash
representing such OID. A holder of a debt instrument issued with OID is
required to recognize as ordinary income the amount of OID on the debt
instrument as such discount accrues, in accordance with a constant yield
method. Under Section 1272(a)(6) of the Code, special provisions apply
to debt instruments on which payments may be accelerated due to
prepayments of other obligations securing those debt instruments. Under
these provisions, the computation of OID (and market discount, see "--
Market Discount," below) on such debt instruments must be determined by
taking into account both the prepayment assumptions used in pricing the
debt instrument and the actual prepayment experience. As a result, the
amount of OID on such debt instruments that will accrue in any given
accrual period may either increase or decrease depending upon the actual
prepayment rate. Because no Treasury Regulations have been issued
interpreting Section 1272(a)(6), investor certificateholders should
consult their own tax advisors regarding the impact of the OID rules in
the event the investor certificates of a series are issued with OID.
Market Discount. Investor certificateholders should be aware that
the resale of an investor certificate may be affected by the market
discount provisions of the Code. These rules generally provide that,
subject to a statutorily-defined de minimis exception, if an investor
certificateholder acquires an investor certificate at a market discount
(i.e., at a price below its stated redemption price at maturity or its
revised issue price if it was issued with OID) and thereafter recognizes
gain upon a disposition of the investor certificate (or disposes of it
in certain non-recognition transactions such as a gift), the lesser of
such gain (or appreciation, in the case of an applicable non-recognition
transaction) or the portion of the market discount that accrued while
the investor certificate was held by such investor certificateholder
will be treated as ordinary interest income at the time of the
disposition. The market discount rules also provide that an investor
certificateholder who acquires an investor certificate at a market
discount may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained
to purchase or carry the investor certificate until the investor
certificateholder disposes of the investor certificate in a taxable
transaction.
Principal payments on the investor certificates of a series will be
made monthly, semi-annually or at other regular intervals. An investor
certificateholder who acquired an investor certificate at a market
discount would be required to treat as ordinary interest income the
portion of any principal payment attributable to accrued market discount
on such investor certificate.
12
13
An investor certificateholder who acquired an investor certificate
at a market discount may elect to include market discount in income as
the discount accrues, either on a ratable basis or, if elected, on a
constant interest rate basis. The current inclusion election, once
made, applies to all market discount obligations acquired on or after
the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the IRS. If an investor
certificateholder elects to include market discount in income in
accordance with the preceding sentence, the foregoing rules with respect
to the recognition of ordinary income on sales, principal payments and
certain other dispositions of the investor certificates and the deferral
of interest deductions on indebtedness related to the investor
certificates will not apply.
Amortizable Bond Premium. Generally, if the price or tax basis
of an investor certificate held as a capital asset exceeds the sum of all
amounts payable on the investor certificate after the acquisition date
(other than payments of qualified stated interest), such excess may
constitute amortizable bond premium that the investor certificateholder
may elect to amortize under the constant interest rate method over the
period from the investor certificateholder's acquisition date to the
investor certificate's maturity date. Certain proposed Treasury
Regulations, which are not yet effective, exclude debt instruments subject
to Section 1272(a)(6) of the Code from the amortizable bond premium rules
contained in such regulations. See discussion of Section 1272(a)(6) in
"-- Original Issue Discount." Amortizable bond premium generally will be
treated as an offset to interest income on the investor certificate,
rather than as a separate interest deduction item subject to the
investment interest limitations of the Code. An investor
certificateholder that elects to amortize bond premium must reduce the tax
basis in the related investor certificate by the amount of bond premium
used to offset interest income. If an investor certificate purchased at a
premium is redeemed in full prior to its maturity, an investor
certificateholder who has elected to amortize bond premium should be
entitled to a deduction for any remaining unamortized bond premium in the
taxable year of redemption.
Sales of Investor Certificates. In general, an investor
certificateholder will recognize gain or loss upon the sale, exchange,
redemption or other taxable disposition of an investor certificate
measured by the difference between (i) the amount of cash and the fair
market value of any property received (other than the amount
attributable to, and taxable as, accrued but unpaid interest) and (ii)
the investor certificateholder's tax basis in the investor certificate
(as increased by any OID or market discount previously included in
income by the investor certificateholder and decreased by any deductions
previously allowed for amortizable bond premium and by any payments
reflecting principal or OID received with respect to such investor
certificate).
Subject to the OID and market discount rules discussed above and to
the one-year holding period requirement for long-term capital gain
treatment, any such gain or loss generally will be long-term capital
gain or loss, provided the investor certificate was held as a capital
asset. The maximum federal income tax rate applicable to capital gains
and ordinary income for corporations is 35%. Moreover, capital losses
generally may
13
14
be used only to offset capital gains. The ordinary federal income tax
rate for individuals, estates and trusts is 36% (for married individuals
filing joint returns with taxable income in excess of $151,750 ($124,650
for unmarried individuals)), whereas the long-term capital gains rate for
such taxpayers is 28%. A further 10% surtax will be imposed on ordinary
income of individuals with taxable incomes in excess of $271,050 (for
married individuals filing joint returns and for unmarried individuals)
and estates and trusts with taxable incomes in excess of $8,100 (thereby
creating a maximum federal income tax rate to such taxpayers of 39.6%).
FOREIGN INVESTOR CERTIFICATEHOLDERS
Set forth below is a general discussion of the United States
federal income and estate tax consequences of the purchase, ownership,
sale or other disposition of an investor certificate by an investor
certificateholder that, for United States federal income tax purposes,
is (i) a foreign corporation, (ii) a non-resident alien individual,
(iii) a foreign estate or trust or (iv) a foreign partnership, as such
terms are defined in the Code (a "non-U.S. Holder"). Some non-U.S.
Holders (including certain residents of certain United States
possessions or territories) may be subject to special rules not
discussed herein.
Interest (including OID, if any) paid to a non-U.S. Holder of
investor certificates will not be subject to a required withholding of
United States federal income tax, provided that (i) such interest
payments are effectively connected with the conduct of a trade or
business of the non-U.S. Holder within the United States and such
non-U.S. Holder provides an appropriate statement to such effect, or
(ii)(a) the holder is not (1) a "10 percent shareholder" of Greenwood or
(2) a "controlled foreign corporation" with respect to which Greenwood
is a "related person" within the meaning of the Code and (b) the
beneficial owner (and, if relevant, a financial institution on the
beneficial owner's behalf ) provides an appropriate statement, signed
under penalty of perjury, certifying that the beneficial owner of such
investor certificate is not a United States Person and providing the
beneficial owner's name and address. The statement generally must be
provided in the year a payment occurs or in either of the two preceding
years. For years after 1997, certain Proposed Treasury Regulations
specify that the statement must be provided prior to payment.
A non-U.S. Holder generally will not be subject to United States
federal income tax on gain realized on the disposition of an investor
certificate (other than gain attributable to accrued interest or OID,
which is addressed in the preceding paragraph); provided that (i) the
gain is not effectively connected with the conduct of a trade or
business within the United States by the non-U.S. Holder and (ii) in the
case of an individual holder, (A) the non-U.S. Holder is not present in
the United States for 183 days or more in the taxable year of the sale,
exchange or redemption or (B)(1) the non-U.S. Holder does not have a
"tax home" in the United States and (2) the gain is not attributable to
an office or other fixed place of business maintained in the United
States by the non-U.S. Holder.
14
15
If the interest or gain on an investor certificate held by a
non-U.S. Holder is effectively connected with the conduct of a trade or
business within the United States by the non-U.S. Holder, then the
non-U.S. Holder (although exempt from the withholding of tax previously
discussed if the non-U.S. Holder provides an appropriate statement)
generally will be subject to United States federal income tax on the
interest (including OID, if any) or gain at regular federal income tax
rates in a similar fashion to a United States Person. See "-- United
States Investor Certificateholders," above. In addition, if the
non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and
profits" within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under
an applicable tax treaty.
An investor certificate held by an individual who at the time of
death is a non-U.S. Holder will not be subject to United States federal
estate tax as a result of such individual's death if, immediately before
death, (i) the individual was not a 10 percent shareholder" of Greenwood
and (ii) interest on such investor certificate was not effectively
connected with the conduct of a trade or business within the United
States by the individual.
THE FOREGOING DESCRIPTION OF THE POTENTIAL UNITED STATES FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS IS NECESSARILY
INCOMPLETE. NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE FOREGOING MATTERS TO
THEM.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Information reporting requirements apply to certain payments of
principal of and interest on (and the amount of OID, if any, accrued on)
an obligation, and to proceeds of certain sales of an obligation before
maturity, to certain nonexempt investor certificateholders who are
United States Persons. In addition, a backup withholding tax also may
apply with respect to such amounts if such investor certificateholders
fail to provide correct taxpayer identification numbers and other
information. The backup withholding tax rate is 31%. Greenwood, or a
paying agent or a broker, as the case may be, will be required to
withhold from any payment that is subject to backup withholding unless
the investor certificateholder furnishes its taxpayer identification
number in the manner prescribed in applicable Treasury Regulations and
certain other conditions are met.
In the case of payments of principal of and interest on (and the
amount of OID, if any, accrued on) investor certificates by Greenwood or
its paying agents to non-U.S. Holders, Temporary Treasury Regulations
provide that backup withholding and information reporting will not apply
to payments with respect to which either requisite certification has
been received or an exemption has otherwise been established
15
16
(provided that neither Greenwood nor its paying agents has actual
knowledge that the holder is a United States Person or that the conditions
of any other exemption are not in fact satisfied). Payments of the
proceeds of the sale of an investor certificate to or through a foreign
office of a United States broker or foreign brokers with certain types of
relationships to the United States, however, are subject to certain
information reporting requirements, unless the payee is an exempt
recipient or such broker has evidence in its records that the payee is not
a United States Person and no actual knowledge that such evidence is false
and certain other conditions are met. Temporary Treasury Regulations
indicate that such payments are not currently subject to backup
withholding. Under current Treasury Regulations, payments of the proceeds
of a sale to or through the United States office of a broker will be
subject to information reporting and backup withholding unless the payee
certifies under penalty of perjury as to his status as a non-U.S. Holder
and certain other qualifications (and no agent of the broker who is
responsible for receiving or reviewing such statement has actual knowledge
that it is incorrect) and provides his name and address or the payee
otherwise establishes an exemption.
Temporary Treasury Regulations indicate that the United States
Treasury Department is studying the possible application of backup
withholding to payments made by foreign offices of certain United States
and United States related intermediaries, including brokers, as well as
the standard of evidence required to prove foreign status for information
reporting purposes.
Any amounts withheld under the backup withholding rules from a
payment to an investor certificateholder will be allowed as a refund or
a credit against such investor certificateholder's United States federal
income tax.
POSSIBLE CHARACTERIZATION OF THE INVESTOR CERTIFICATES
The foregoing discussion assumes that the investor certificates of
a series will be treated as indebtedness of Greenwood for federal income
tax purposes. However, although Tax Counsel has opined to such effect
with respect to each previously issued series of investor certificates,
the matter is not free from doubt, and there can be no assurance that
the IRS or the courts will agree with Tax Counsel's opinion. If the IRS
were to contend successfully that the investor certificates of a series
are not indebtedness of Greenwood for federal income tax purposes, it
could find that the arrangement created by the Pooling and Servicing
Agreement and the Series Supplement with respect to such series
constitutes a partnership which could be treated as a "publicly traded
partnership" taxable as a corporation.
If the investor certificates of a series were treated as interests
in a partnership, the partnership in all likelihood would be treated as
a "publicly traded partnership." If the partnership were nevertheless
not taxable as a corporation (for example, because of an exception for a
"publicly traded partnership" whose income is interest that is not
derived in the conduct of a financial business), such partnership would
not be subject to federal
16
17
income tax. Rather, the investor certificateholders of such series would
be required to include in income their share of the income and deductions
generated by the assets of the Trust, as determined under partnership tax
accounting rules. In such event, the amount, timing and character of the
income required to be recognized by an investor certificateholder could
differ materially from the amount, timing and character thereof if the
investor certificates were characterized as indebtedness of Greenwood. It
also is possible that such a partnership could be subject to tax in certain
states where the partnership is considered to be engaged in business, and
that the investor certificateholders, as partners in such a partnership,
could be taxed on their share of the partnership's income in such states.
In addition, if such a partnership is considered to be engaged in a
trade or business within the United States, the partnership would be
subject to a withholding tax on distributions to (or, at its election,
income allocable to) non-U.S. Holders, and each such non-U.S. Holder would
be credited for such non-U.S. Holder's share of the withholding tax paid
by the partnership. Moreover, the non-U.S. Holder generally would be
subject to United States federal income tax at regular federal income tax
rates, and possibly a branch profits tax (in the case of a corporate
non-U.S. Holder), as previously described. See "- Foreign Investor
Certificateholders" above. Further, even if the partnership is not
considered to be engaged in a trade or business within the United States,
it appears that partnership withholding will be required in the case of
any such non-U.S. Holder that is engaged in a trade or business within the
United States to which the investor certificate income is effectively
connected.
Alternatively, although there may be arguments to the contrary, it
appears that if such a partnership is not considered to be engaged in a
trade or business within the United States and if income with respect to
an investor certificate is not otherwise effectively connected with the
conduct of a trade or business within the United States by a non-U.S.
Holder, the non-U.S. Holder would be subject to United States federal
income tax and withholding at a rate of 30% (unless reduced by an
applicable treaty) on such non-U.S. Holder's distributive share of the
partnership's interest income.
If the investor certificates of a series were treated as interests
in a "publicly traded partnership" taxable as a corporation, the income
from the assets of the Trust would be subject to federal income tax and
tax imposed by certain states where the entity would be considered to
have operations at corporate rates, which would reduce the amounts
available for distribution to the investor certificateholders. Under
such circumstances, the investor certificates may be treated as debt of
an entity taxable as a corporation or, alternatively, as equity of such
an entity in which latter case interest payments to investor
certificateholders could be treated as dividends and, if made to
non-U.S. Holders, could be subject to United States federal income tax
and withholding at a rate of 30% (unless reduced by an applicable tax
treaty).
Finally, with respect to a series having a class of subordinated
certificates, the IRS might contend that even though the Class A
certificates are properly classified as debt
17
18
obligations of Greenwood for federal income tax purposes, the Class B
certificates are not properly classified as such. Under this approach,
the Class B certificates might be viewed as equity interests in an entity
(such as Greenwood or a joint venture consisting of Greenwood and the
Class B certificateholders), with the Class A certificates treated as debt
obligations of such entity. If such an entity were characterized as a
partnership not taxable as a corporation, the entity would not be subject
to federal income tax, although the Class B certificateholders would be
subject to the tax consequences previously described with respect to
interests in a partnership that is not taxable as a corporation.
Alternatively, if such an entity were characterized as a "publicly traded
partnership" taxable as a corporation, the tax liability on the income of
the entity might, in certain circumstances, reduce distributions on
both the Class A certificates and the Class B certificates, and the Class
B certificateholders would be subject to the tax consequences previously
described with respect to interests in a "publicly traded partnership"
taxable as a corporation. In addition, any non-U.S. Holder of a Class A
certificate who is the actual or constructive owner of 10% or more of the
outstanding principal amount of the Class B certificates may be treated as
a "10 percent shareholder." See "- Foreign Investor Certificateholders"
above.
Based on Tax Counsel's advice as to the likely treatment of the
investor certificates for federal income tax purposes, Greenwood and the
Trust will not attempt to cause the arrangement created by the Pooling and
Servicing Agreement and the Series Supplement with respect to a series to
comply with the federal or state income tax reporting requirements
applicable to partnerships or corporations. If such arrangement were
later held to constitute a partnership or corporation, the manner of
bringing it into compliance with such requirements is unclear.
Prospective investor certificateholders should consult their own
tax advisors as to the risk that the investor certificates will not be
treated as indebtedness of Greenwood, and the possible tax consequences
of potential alternative treatments.
6. CERTAIN STATE INCOME TAX CONSEQUENCES
The section entitled "Certain State Income Tax Consequences"
is updated as follows:
If such investor certificates were treated as interests in a
partnership or a corporation the state tax consequences to the
investor certificateholders could be materially different, especially
in states which may be considered to have a business connection
with the Receivables. See "Certain Federal Income Tax
Consequences - Possible Characterization of the Investor
Certificates," above.
7. ERISA CONSIDERATIONS
The section entitled "ERISA Considerations" is updated as follows:
If the investor certificates were deemed to be an extension of
credit for ERISA purposes, the purchase of the investor certificates by a
Plan with respect to which Greenwood or one of its affiliates is a "party
in interest" or "disqualified person" might be considered a prohibited
extension of credit under Section 406 of ERISA and Section 4975 of the
Code unless an exemption is applicable. There are at least four
prohibited transaction class exemptions issued by the DOL that might
apply, depending in part on who decided to acquire the investor
certificates for the Plan: DOL Prohibited Transaction Exemption ("PTE")
84-14 (Class Exemption for Plan Asset Transactions determined by
Independent Qualified Professional Asset Managers); PTE 91-38 (Class
Exemption for Certain Transactions Involving Bank Collective Investment
Funds); PTE 90-1 (Class Exemption for Certain Transactions Involving
Insurance Company Pooled Separate Accounts); and PTE 96-23 (Class
Exemption for Plan Asset Transactions Determined by In-House Asset
Managers).
Moreover, whether the investor certificates are debt or equity for
ERISA purposes, a possible violation of the prohibited transaction rules
could occur if the investor certificates were purchased during the
offering with assets of a Plan if Greenwood, the Trustee, any Underwriter
or any of their affiliates were a fiduciary with respect to such Plan.
Under ERISA and the Code, a person is a "fiduciary" with respect to a
Plan to the extent (i) he exercises any discretionary authority or
discretionary control respecting management of such Plan or exercises any
authority or control respecting management or disposition of its assets,
(ii) he renders investment advice for a fee or other compensation, direct
or indirect, with respect to any moneys or other property of such Plan,
or has any authority or responsibility to do so or (iii) he has any
discretionary authority or discretionary responsibility in the
administration of such Plan. Accordingly, the fiduciaries of any Plan
should not purchase the investor certificates during the offering with
assets of any Plan if Greenwood, the Trustee, the Underwriters or any of
their affiliates is a fiduciary with respect to the Plan.
In light of the foregoing, fiduciaries of Plans considering the
purchase of the investor certificates should consult their own tax or
other appropriate counsel regarding the application of ERISA and the Code
to their purchase of the investor certificates.
In particular, insurance companies considering the purchase of
investor certificates should consult their own benefits counsel or other
appropriate counsel with respect to the United States Supreme Court's
decision in John Hancock Mutual Life Insurance Co. v. Harris Trust &
Savings Bank, 114 S. Ct. 517 (1993) ("John Hancock"), DOL PTE 95-60
(Class Exemption for Certain Transactions Involving Insurance Company
General Accounts) and Section 401(c) of ERISA. In John Hancock, the
Supreme Court held that the assets held in an insurance company's general
account may be deemed to be "plan assets" under certain
circumstances. Subject to numerous conditions and limitations, PTE 95-60
effectively reverses this portion of the holding in John Hancock.
Section 401(c) of ERISA was added by the Small Business Job Protection
Act of 1996 and requires the Secretary of Labor to issue final
regulations by December 31, 1997 which are to provide guidance for the
purpose of determining, in cases where an insurer issues one or more
policies (supported by the assets of the insurer's general account) to or
for the benefit of an employee benefit plan, which assets of such insurer
(other than assets held in a separate account) constitute "plan assets"
for the purposes of the fiduciary responsibility provisions of ERISA and
Section 4975 of the Code. Such regulations shall only apply with respect
to policies which are issued by an insurer on or before December 31,
1998, to or for the benefit of an employee benefit plan which is
supported by the assets of such insurer's general account. With respect
to policies issued on or before December 31, 1998, such regulations shall
take effect at the end of the 18-month period following the date on which
such regulations become final. Section 401(c) also provides that no
person will be subject to liability under Section 4975 of the Code and
the fiduciary responsibility provisions of ERISA on the basis of a claim
that the assets of an insurer (other than assets held in a separate
account) are "plan assets," for conduct occurring before the date which
is 18 months following the date the final regulations become final.
Accordingly, investors should analyze whether John Hancock, PTE
95-60, Section 401(c) of ERISA and any regulations issued pursuant to
Section 401(c) of ERISA may have an impact with respect to their purchase
of investor certificates.
18
19
8. GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
a. Exemption for non-U.S. Holders (Form W-8). Beneficial owners of
investor certificates that are non-U.S. Holders can obtain a complete
exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the beneficial owner becomes a
United States citizen or resident during the period to which the
statement relates, or certain other changes in circumstances occur, such
change must be communicated to the appropriate party within 30 days
thereof. Form W-8 is generally effective for three calendar years, but a
new certificate may be required to be filed by the recipient each time a
payment is made.
b. U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer,
its agent, files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding
directly on the books of the clearing agency) an investor certificate.
Certain proposed (nonbinding) regulations which would be applicable to
payments made after 1997, provide for the unification and simplification
of certain current certificate procedures.
The term "U.S. Holder" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws
of the United States or any state, (iii) an estate the income of which is
includible in gross income for United States tax purposes, regardless of
its source, or (iv) a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust, and
one or more United States fiduciaries have the authority to control all
substantial decisions of the trust.
19