REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Metris Master Trust
(Issuer with respect to Offered Certificates)
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Metris Receivables, Inc.
(Originator of the Trust described herein)
(Exact name of registrant as specified in its charter)
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DELAWARE 41-1810301
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
4400 BAKER ROAD
SUITE F470
MINNETONKA, MN 55343
(612) 936-5077
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JILL B. BARCLIFT, ESQ.
600 SOUTH HIGHWAY 169
SUITE 1800
ST. LOUIS PARK, MN 55426
(612) 525-5090
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
ANDREW M. FAULKNER, ESQ. MICHAEL P. SHERMAN, ESQ. RENWICK MARTIN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER FINGERHUT COMPANIES, INC. BROWN & WOOD LLP
& FLOM LLP 4400 BAKER ROAD ONE WORLD TRADE CENTER
919 THIRD AVENUE MINNETONKA, MN 55343 58TH FLOOR
NEW YORK, NY 10022 (612) 932-3585 NEW YORK, NY 10048
(212) 735-2853 (212) 839-5319
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable on or after the effective date of the Registration
Statement.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================
TITLE OF EACH
CLASS
OF SECURITIES TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED CERTIFICATE (1) PRICE (1) FEE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
____% Asset $500,000 100% $500,000 $151.52
Backed
Certificates,
Series 1997-2,
Class A...........
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____% Asset $500,000 100% $500,000 $151.52
Backed
Certificates,
Series 1997-2,
Class B...........
- ---------------------------------------------------------------------------------------
Total............. $1,000,000 100% $1,000,000 $303.04
=======================================================================================
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED __________, 1997
Prospectus
METRIS MASTER TRUST
$__________ ___% ASSET BACKED CERTIFICATES, SERIES 1997-2, CLASS A
$__________ ___% ASSET BACKED CERTIFICATES, SERIES 1997-2, CLASS B
METRIS RECEIVABLES, INC. DIRECT MERCHANTS CREDIT CARD BANK,
TRANSFEROR NATIONAL ASSOCIATION SERVICER
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Each of the ____% Asset Backed Certificates, Series 1997-2, Class A (the
"Class A Certificates") and each of the ____% Asset Backed Certificates,
Series 1997-2, Class B (the "Class B Certificates," and, together with the
Class A Certificates, the "Offered Certificates") will represent an
undivided interest in the Metris Master Trust (the "Trust") created
pursuant to a Pooling and Servicing Agreement among Metris Receivables,
Inc., as transferor (the "Transferor"), Direct Merchants Credit Card Bank,
National Association, as servicer (the "Servicer") and The Bank of New York
(Delaware), as trustee (the "Trustee"). The fractional undivided interests
in the Trust represented by the Class B Certificates will be subordinated
to fund certain payments with respect to the Class A Certificates as
described in "Description of the Offered Certificates--Application of
Collections," "--Reallocated Principal Collections," and "--Investor
Charge-Offs." The property of the Trust includes a portfolio of receivables
(the "Receivables") generated or acquired from time to time in the ordinary
course of business in a portfolio of MasterCard(R) and VISA(R) or other
revolving consumer credit card accounts (the "Accounts"), all monies due or
to become due in payment of such Receivables and the benefit of funds on
deposit in certain accounts, including the Pre-Funding Account (as defined
herein). Certain capitalized terms used herein are defined in the "Glossary
of Terms" beginning on page 109 herein.
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 29 HEREIN.
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THE OFFERED CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR RECOURSE OBLIGATIONS OF THE TRANSFEROR,
METRIS COMPANIES INC., DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL
ASSOCIATION OR ANY AFFILIATE THEREOF. AN OFFERED CERTIFICATE IS NOT A
DEPOSIT AND NEITHER THE OFFERED CERTIFICATES NOR THE UNDERLYING ACCOUNTS OR
RECEIVABLES ARE INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT THE TRANSFEROR(1)(2)
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Per Class A Certificate % % %
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Per Class B Certificate % % %
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Total.................. $ $ $
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(1) Plus accrued interest, if any, from , 1997.
(2) Before deduction of expenses estimated to be $ .
The Offered Certificates are offered by the Underwriters as
described in "Underwriting," subject to prior sale, when, as and if issued
to and accepted by the Underwriters and subject to approval of certain
legal matters by counsel for the Underwriters. The Underwriters reserve the
right to reject orders in whole or in part. It is expected that the Offered
Certificates will be delivered in book-entry form on or about , 1997
through the facilities of The Depository Trust Company, Cedel Bank, societe
anonyme and the Euroclear System.
UNDERWRITERS OF THE CLASS A CERTIFICATES
BEAR, STEARNS & CO. INC.
UNDERWRITER OF THE CLASS B CERTIFICATES
BEAR, STEARNS & CO. INC.
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The date of this Prospectus is , 1997.
Concurrently with the issuance of the Offered Certificates, the
Trust will issue the Asset Backed Certificates, Series 1997-2, Class C (the
"Class C Certificates"), which may be privately placed, and will issue the
Asset Backed Certificates, Series 1997-2, Class D (the "Class D
Certificates," and, together with the Class C Certificates and the Offered
Certificates, the "Certificates") to the Transferor. The Class C
Certificates and the Class D Certificates are not being offered pursuant to
this Prospectus. The Offered Certificates, the Class C Certificates and the
Class D Certificates constitute "Series 1997-2". The fractional undivided
interests in the Trust represented by the Class C Certificates will be
subordinated to fund certain payments with respect to the Offered
Certificates and the fractional undivided interests in the Trust
represented by the Class D Certificates will be subordinated to fund
certain payments with respect to the Class C Certificates and the Offered
Certificates. See "Description of the Offered Certificates--Application of
Collections," "--Reallocated Principal Collections," and "--Investor
Charge-Offs." The Transferor will own the remaining undivided interest in
the Trust not represented by the Certificates and any other investor
certificates issued by the Trust, which retained interest will be
represented by the Exchangeable Transferor Certificate (as defined herein).
The Transferor from time to time may offer other series of certificates
that evidence undivided interests in certain assets of the Trust by
exchanging a portion of its interest in the Trust therefor. Only the
Offered Certificates are being offered hereby.
Interest will accrue on the Class A Certificates at the rate of %
per annum (the "Class A Certificate Rate"). Interest will accrue on the
Class B Certificates at the rate of % per annum (the "Class B Certificate
Rate"). Interest with respect to the Certificates will be paid on , 1997
and on the 20th day of each month thereafter (or, if any such 20th day is
not a business day, the next succeeding business day) (each a "Distribution
Date"). Principal with respect to the Class A Certificates and the Class B
Certificates is scheduled to be distributed on the Distribution Date (the
"Expected Final Payment Date"), but may be distributed earlier or later
under certain circumstances described herein. Principal payments will not
be made to Class B Certificateholders unless and until the Class A Invested
Amount is paid in full. See "Maturity Considerations" and "Description of
the Offered Certificates--Pay Out Events."
There currently is no secondary market for the Offered Certificates,
and there is no assurance that one will develop or, if one does develop,
that it will continue until the Offered Certificates are paid in full.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Offered Certificates. Such transactions may include stabilizing and the
purchase of Offered Certificates to cover syndicate short positions. For a
description of these activities, see "Underwriting" herein.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Definitive Certificates (as defined herein) are
issued (which will occur under the limited circumstances described herein),
monthly and annual reports, containing information concerning the Trust and
prepared by the Servicer pursuant to the Pooling and Servicing Agreement
(as defined herein), will be sent on behalf of the Trust to Cede & Co., as
nominee of The Depository Trust Company ("DTC") which will be the only
registered holder (a "Certificateholder") of the Offered Certificates. See
"Description of the Offered Certificates--Book-Entry Registration,"
"--Reports to Certificateholders" and "--Evidence as to Compliance." Such
reports will not constitute financial statements prepared in accordance
with generally accepted accounting principles. None of Metris Companies
Inc., Direct Merchants Credit Card Bank, National Association, or any
successor servicer intends to send any of its financial reports to
Certificateholders or to the owners of beneficial interests in the Offered
Certificates ("Certificate Owners"). The Transferor will file with the
Securities and Exchange Commission (the "Commission") such periodic reports
with respect to the Trust as are required under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder for so long as the Offered Certificates are
outstanding.
AVAILABLE INFORMATION
Metris Receivables, Inc., as originator of the Trust, has filed a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with the Commission on behalf of the Trust with respect
to the Certificates offered pursuant to this Prospectus. For further
information, reference is made to the Registration Statement and amendments
thereof and exhibits thereto, which are available for inspection without
charge at the public references facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, Suite
1300, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration
Statement and amendments thereof and exhibits thereto may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a Web site at "http://www.sec.gov" that contains information
regarding registrants that file electronically with the Commission.
Periodic reports with respect to the Trust that have been filed under the
Exchange Act and the rules and regulations of the Commission thereunder and
other information filed by the Transferor can be inspected and copied at
the public reference facilities maintained by the Commission referred to
above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Transferor, on behalf
of the Trust, pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Prospectus and prior to the termination
of the offering of the Certificates shall be deemed to be incorporated by
reference into this Prospectus and to be part hereof. Any statement
contained in a document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in
this Prospectus or in any subsequently filed document which also is or is
deemed to be incorporated by reference in this Prospectus modifies or
supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a
part of this Prospectus.
The Transferor will provide without charge to each person to whom a
copy of this Prospectus is delivered, on the written or oral request of any
such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Written requests
for such copies should be directed to Metris Receivables, Inc., 4400 Baker
Road, Suite F470, Minnetonka, Minnesota 55343. Telephone requests for such
copies should be directed to Metris Receivables, Inc. at (612) 936-5077.
OTHER INFORMATION
Upon receipt of a request by an investor who has received an
electronic Prospectus from an Underwriter or a request by such investor's
representative within the period during which there is an obligation to
deliver a Prospectus, the Transferor or such Underwriter will promptly
deliver, or cause to be delivered, without charge, a paper copy of the
Prospectus.
The distribution of this Prospectus and the offering of the Offered
Certificates in certain jurisdictions may be restricted by law. Persons
into whose possession this Prospectus comes are required by the
Underwriters to inform themselves about and to observe any such
restrictions.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus. Certain
capitalized terms used herein are defined in the "Glossary of Terms"
beginning on page 109 or elsewhere in this Prospectus. Unless the context
requires otherwise, certain capitalized terms, when used in this
Prospectus, relate only to the Certificates and not to other certificates
which may exist from time to time.
Offered Certificates............. $ aggregate principal
amount of Class A Certificates and
$ aggregate principal amount of
Class B Certificates are being offered
hereby.
The Offered Certificates represent
interests in the Trust only and do not
represent interests in or recourse
obligations of Metris Companies Inc.
("Metris"), Direct Merchants Credit
Card Bank, National Association
("Direct Merchants Bank"), the
Transferor, or any affiliate of any of
them.
The Class B Certificates will be
subordinated to fund certain payments
with respect to the Class A
Certificates as described herein. See
"Description of the Offered Certifi-
cates--Subordination of the Class
B Certificates."
Other Certificates............... $ aggregate principal amount
of Class C Certificates and $
aggregate principal amount of Class D
Certificates are being issued
concurrently to the Transferor. The
Trust has previously issued three other
Series. See "Annex I: Other Series" for
a summary of the terms of these other
Series. The Transferor from time to
time may create other Series of
certificates that evidence undivided
interests in assets of the Trust (other
than any Enhancement for, or
Collections allocated initially to, any
other Series), by exchanging a portion
of its interest in the Trust. Only the
Offered Certificates are being offered
hereby.
Transferor....................... Metris Receivables, Inc. is the
Transferor. The principal executive
offices of the Transferor are located
at 4400 Baker Road, Suite F470,
Minnetonka, MN 55343, telephone number
(612) 936-5077. See "The Transferor."
Servicer......................... Direct Merchants Bank will be the initial
Servicer. The principal executive
offices of the Servicer are located at
1455 West 2200 South, Salt Lake City,
Utah 84119, telephone number (801)
974-4699. A substitute Servicer may be
appointed in certain circumstances. See
"Description of the Offered
Certificates--Certain Matters Regarding
the Transferor and the Servicer."
Trustee.......................... The Bank of New York (Delaware), is the
Trustee. Under certain circumstances
specified herein, the Transferor and
the holders of the Certificates will
have the right to remove the Trustee.
See "Description of the Offered
Certificates--The Trustee."
Credit Card Originators.......... The Credit Card Originators are Direct
Merchants Bank and its successors or
assigns under the Bank Purchase
Agreement or any other transferee of
Accounts from Direct Merchants Bank. In
addition, Credit Card Originators may
include any other originator of
Accounts that enters into a receivables
purchase agreement with Direct
Merchants Bank, Metris (or any
successor to or assignee of Metris that
is a party to a receivables purchase
agreement with the Transferor) or the
Transferor in accordance with the
provisions of the Pooling and Servicing
Agreement, from time to time.
Trust............................ Metris Master Trust (the "Trust") was
formed pursuant to the Pooling and
Servicing Agreement, which has been
supplemented by the Supplements
thereto relating to the Previously
Issued Series and will be
supplemented by the Series 1997-2
Supplement relating to the
Certificates and the Supplements
applicable to any other Series that
may be issued in the future. See "The
Trust."
As more fully described below and
elsewhere herein, the Trust's assets
include the Receivables (the
"Receivables") that arise under
certain MasterCard(R)and VISA(R)1
accounts and may arise under other
revolving consumer credit card
accounts (the "Accounts") and the
proceeds thereof arising under the
Accounts from time to time.
Collections on the Receivables are
deposited into the Collection Account
maintained in the name of the Trust
and allocated on each business day
between collections on Finance Charge
Receivables ("Finance Charge
Collections") and Collections
received with respect to Principal
Receivables ("Principal
Collections"). Finance Charge
Collections and Principal Collections
are allocated on each business day
among the Transferor Interest and the
respective interests of the
certificateholders of each Series
issued and outstanding from time to
time in accordance with the Pooling
and Servicing Agreement and
applicable Supplements. In general,
in accordance with such allocations
and the provisions of the Pooling and
Servicing Agreement and the
applicable Supplements, (i) Finance
Charge Collections and certain other
amounts are applied on each business
day to fund interest on the
certificates of any Series then
outstanding, to pay certain fees and
expenses, to cover investor default
amounts, to reimburse investor
charge-offs and to make required
payments to the Transferor, and (ii)
Principal Collections and certain
other amounts are applied on each
business day to fund principal on the
certificates of any Series then
outstanding, except that during any
revolving period applicable to a
Series, Principal Collections
otherwise allocable to the
certificateholders of such Series are
paid to the holder of the
Exchangeable Transferor Certificate
or, with respect to amounts allocated
to any class of certificates of such
Series which are not retained by the
Transferor, paid to the
certificateholders of any other
Series then outstanding. See
"Description of the Offered
Certificates--Application of
Collections--Payment of Fees,
Interest and Other Items."
Trust Assets..................... The Trust assets include (i) all
Receivables generated or acquired
from time to time by Direct Merchants
Bank satisfying certain criteria
described herein (see "Description of
the Offered Certificates--Eligible
Receivables"), (ii) all funds to be
collected from Obligors in respect of
the Receivables (which shall not
include fees and charges for
insurance and insurance type
products), (iii) all right, title,
and interest of the Transferor in,
to, and under the Purchase Agreement
and the Bank Purchase Agreement, (iv)
the benefit of funds on deposit in
certain bank accounts maintained for
the benefit of certificateholders of
each Series, including the Excess
Funding Account, (v) the benefit of
funds on deposit in certain bank
accounts maintained for the benefit
of the Certificateholders, including
the Pre-Funding Account and the
Principal Funding Account, (vi)
Recoveries, and (vii) proceeds of the
foregoing. The Offered Certificates
will not have the benefit of any
Enhancement other than the
subordination of the Class B
Certificates, Class C Certificates
and Class D Certificates for the
benefit of each Class of Certificates
with an earlier alphabetical
designation as described above. The
Trust assets do not currently include
interchange fees received by Direct
Merchants Bank in connection with the
Receivables, but such fees may be
included as Trust assets at some
future date.
Pursuant to the Bank Purchase Agreement,
Metris purchases from Direct
Merchants Bank all of the Receivables
arising from time to time under
Accounts. See "Description of the
Purchase Agreements--Purchases of
Receivables."
Pursuant to the Purchase Agreement, the
Transferor purchases from Metris all
of the Receivables arising from time
to time under Accounts. See
"Description of the Purchase
Agreements--Purchases of
Receivables."
Direct Merchants Bank, Metris or the
Transferor may, from time to time,
enter into similar receivables
purchase agreements with other Credit
Card Originators.
- ----------------
1 Mastercard(R) and VISA(R) are federally registered servicemarks of
Mastercard International Inc. and VISA USA Incorporated, respectively.
Pursuant to the Pooling and Servicing
Agreement, the Transferor
automatically transfers to the Trust
all of its right, title and interest
in and to the Receivables purchased
by it pursuant to the Purchase
Agreement. See "Risk
Factors--Transfer of the Receivables;
Insolvency Risk Considerations" for a
discussion of certain legal
considerations relating to such
transfer.
Receivables...................... The Receivables consist of amounts owing
on MasterCard(R)credit cards and
VISA(R) credit cards and may include
amounts owing on other revolving
credit cards (see "Description of the
Offered Certificates--Eligible
Receivables"). The Receivables in the
Trust are divided into two
components: Principal Receivables and
Finance Charge Receivables. At any
time, "Finance Charge Receivables"
means all amounts billed from time to
time to the Obligors on any Account
in respect of Periodic Finance
Charges, overlimit fees, late
charges, returned check fees, annual
membership fees and annual service
charges, if any, transaction charges,
cash advance fees and similar fees
and charges (excluding fees and
charges for insurance and insurance
type products and interchange fees),
plus Recoveries, investment earnings
on amounts credited to the Excess
Funding Account and Discount Option
Receivables, if any. "Principal
Receivables" equals all other
Eligible Receivables.
All new Receivables arising in the
Accounts are purchased by Metris from
Direct Merchants Bank pursuant to the
Bank Purchase Agreement and
subsequently are purchased by the
Transferor from Metris pursuant to
the Purchase Agreement and thereafter
will be automatically transferred to
the Trust. Accordingly, the amount of
Receivables fluctuates from day to
day as new Receivables are generated
and as existing Receivables are
collected, written off as
uncollectible, or otherwise adjusted.
Collections...................... The Servicer deposits all collections of
Receivables in the Collection Account
("Collections"). The Collections on
the Receivables received on any
business day are allocated by the
Servicer between Principal
Collections and Finance Charge
Collections in accordance with the
definitions thereof. All such amounts
are then allocated in accordance with
the respective interests of the
Certificateholders, the
certificateholders of any other
Series, and the holder of the
Exchangeable Transferor Certificate
in the Principal Receivables and in
the Finance Charge Receivables in the
Trust. See "Description of the
Offered Certificates--Allocation
Percentages."
Allocation of Trust Assets....... The Trust's assets will be allocated
among the Class A Certificateholders'
Interest, the Class B
Certificateholders' Interest, the
Class C Certificateholders' Interest,
the Class D Certificateholders'
Interest, the interest of the
Certificateholders of the Previously
Issued Series and any other Series
issued pursuant to the Pooling and
Servicing Agreement and applicable
Supplements, and the Transferor
Interest. The interest of the
certificateholders of any class of
any Series in the assets of the Trust
will be limited to the
certificateholders' interest for such
class and Series, and such
certificateholders will not have any
recourse against any assets of the
Trust other than those allocated to
such certificateholders' interest
pursuant to the Pooling and Servicing
Agreement and any applicable
Supplement. The Transferor Interest
represents the right to the assets of
the Trust not allocated to the
Certificateholders' Interest or the
interest of the certificateholders of
any other Series issued pursuant to
the Pooling and Servicing Agreement
and applicable Supplements. The
principal amount of the Transferor
Interest will fluctuate as the amount
of Receivables in the Trust, the
invested amount of each Series
(including the Variable Funding
Certificates) and the amounts on
deposit in the Excess Funding Account
and the Pre-Funding Account change
from time to time. See "Description
of the Offered Certificates--General,"
"--Previously Issued Series," "--Excess
Funding Account" and "--Pre-Funding
Account."
The Class A Certificates will evidence
undivided interests in the assets of
the Trust allocated to the Class A
Certificateholders' Interest and will
represent the right to receive from
such assets funds up to (but not in
excess of) the amounts required to
make payments of interest on the
Class A Certificates at the Class A
Certificate Rate, the payment of
principal to the extent of the Class
A Invested Amount (which may be less
than the aggregate unpaid principal
amount of the Class A Certificates,
in certain circumstances, if the
Investor Default Amount exceeds funds
allocable thereto and the Class B
Invested Amount, the Class C Invested
Amount and the Class D Invested
Amount are reduced to zero) and
amounts on deposit in the Pre-Funding
Account allocated to the Class A
Certificates. See "Description of the
Offered Certificates--Subordination
of the Class B Certificates,"
"--Pre-Funding Account,"
"--Allocation Percentages" and
"--Investor Charge-Offs."
The Class B Certificates will evidence
undivided interests in the assets of
the Trust allocated to the Class B
Certificateholders' Interest and will
represent the right to receive from
such assets funds up to (but not in
excess of) the amounts required to
make payments of interest on the
Class B Certificates at the Class B
Certificate Rate, the payment of
principal to the extent of the Class
B Invested Amount (which may be less
than the aggregate unpaid principal
amount of the Class B Certificates,
in certain circumstances, if the
Investor Default Amount exceeds funds
allocable thereto and the Class C
Invested Amount and the Class D
Invested Amount are reduced to zero)
and amounts on deposit in the
Pre-Funding Account allocated to the
Class B Certificates. See
"Description of the Offered
Certificates--Subordination of the
Class B Certificates," "--Pre-Funding
Account," "--Allocation Percentages"
and "--Investor Charge-Offs."
The Class C Certificates will evidence
undivided interests in the assets of
the Trust allocated to the Class C
Certificateholders' Interest and will
represent the right to receive from
such assets funds up to (but not in
excess of) the amounts required to
make payments of interest on the
Class C Certificates at the Class C
Certificate Rate, the payment of
principal to the extent of the Class
C Invested Amount (which may be less
than the aggregate unpaid principal
amount of the Class C Certificates,
in certain circumstances, if the
Investor Default Amount exceeds funds
allocable thereto and the Class D
Invested Amount is reduced to zero)
and amounts on deposit in the
Pre-Funding Account allocated to the
Class C Certificates. See
"Description of the Offered
Certificates--Subordination of the
Class B Certificates," "--Pre-Funding
Account," "--Allocation Percentages"
and "--Investor Charge-Offs." The
Class C Certificates are not being
offered hereby.
The Class D Certificates will evidence
undivided interests in the assets of
the Trust allocated to the Class D
Certificateholders' Interest and will
represent the right to receive from
such assets funds up to (but not in
excess of) the amounts required to
make payments of principal and
interest (if any) to the extent of
the Class D Invested Amount. The
Class D Certificates are not being
offered hereby.
The aggregate amount of Receivables in
the Accounts as of , 1997
was $ comprised of $ of
Finance Charge Receivables and
$ of Principal Receivables. The
"Initial Invested Amount" will be equal
to the sum of (i) an amount equal to
the initial principal balance of the
Class A Certificates less the Class A
Percentage on the Closing Date of the
initial deposit to the Pre-Funding
Account, plus the Class A Percentage of
any withdrawals from the Pre-Funding
Account during the Funding Period in
connection with increases in the
aggregate amount of Principal
Receivables in the Trust; (ii) an
amount equal to the initial principal
balance of the Class B Certificates
less the Class B Percentage on the
Closing Date of the initial deposit to
the Pre-Funding Account, plus the Class
B Percentage of any withdrawals from
the Pre-Funding Account during the
Funding Period in connection with
increases in the aggregate amount of
Principal Receivables in the Trust;
(iii) an amount equal to the initial
principal balance of the Class C
Certificates less the Class C
Percentage on the Closing Date of the
initial deposit to the Pre-Funding
Account, plus the Class C Percentage of
any withdrawals from the Pre-Funding
Account during the Funding Period in
connection with increases in the
aggregate amount of Principal
Receivables in the Trust; and (iv) an
amount equal to the initial principal
balance of the Class D Certificates.
The Invested Amount will, except as
otherwise provided herein, increase up
to a maximum amount of $ (the
"Full Invested Amount") during the
Funding Period, remain fixed at the
Full Invested Amount during the
Revolving Period and decline thereafter
during any Amortization Period or Early
Amortization Period as principal is
paid on the Certificates. The Invested
Amount is subject to increase during
the Funding Period to the extent
amounts are withdrawn from the
Pre-Funding Account and paid to the
Transferor in connection with the
addition of Principal Receivables to
the Trust or, at the end of the Funding
Period, deposited in the Excess Funding
Account. During the Accumulation
Period, the Adjusted Invested Amount
will be reduced concurrently with
deposits to the Principal Funding
Account. The aggregate principal amount
of the Certificates, except as
otherwise provided herein, will remain
fixed at the initial amount thereof
during the period beginning on the
Closing Date and ending with the date
on which the first principal payment is
made with respect to the Certificates
during the Amortization Period. No
payment of principal with respect to
the Class B Certificates may be made
until the final principal payment of
the Class A Invested Amount with
respect to the Class A Certificates has
been made. No payment of principal with
respect to the Class C Certificates may
be made until the final principal
payment of the Class A Invested Amount
with respect to the Class A
Certificates and the final principal
payment of the Class B Invested Amount
with respect to the Class B
Certificates have been made. During the
Accumulation Period, the Class D
Invested Amount will be reduced
concurrently with deposits to the
Principal Funding Account for the
benefit of the Offered Certificates and
the Class C Certificates to an amount
equal to the Stated Class D Amount. See
"Description of the Offered
Certificates--Principal Payments."
The Class A Certificateholders' Interest,
the Class B Certificateholders'
Interest, the Class C Certificate-
holders' Interest, and the Class D
Certificateholders' Interest will
each include the right to receive
(but only to the extent needed to
make required payments under the
Pooling and Servicing Agreement)
varying percentages of Finance Charge
Collections and Principal Collections
during each Monthly Period. Finance
Charge Collections prior to the
occurrence of a Pay Out Event, the
amount of Receivables in Defaulted
Accounts at all times, and Principal
Collections during the Revolving
Period will be allocated on each
business day to the Class A
Certificateholders' Interest, the
Class B Certificateholders' Interest,
the Class C Certificateholders'
Interest, and the Class D
Certificateholders' Interest based on
the Class A Floating Allocation
Percentage, the Class B Floating
Allocation Percentage, the Class C
Floating Allocation Percentage, and
the Class D Floating Allocation
Percentage, respectively. On and
after the date on which a Pay Out
Event is deemed to occur, Finance
Charge Collections will be allocated
on each business day to the Class A
Certificate holders' Interest, the
Class B Certificateholders' Interest,
the Class C Certificateholders'
Interest and the Class D
Certificateholders' Interest based on
the Fixed/Floating Allocation
Percentage. During the Revolving
Period for each Series, all Principal
Collections that would otherwise be
allocated to the Certificateholders
will be allocated on each business
day and paid to the holder of the
Exchangeable Transferor Certificate
(except for Shared Principal
Collections used to make payments to
other Series). During the
Amortization Period, until the Class
B Principal Payment Commencement
Date, Principal Collections will
generally be allocated on each
business day to the Class A
Certificateholders' Interest based on
the Fixed/Floating Allocation
Percentage. On and after the Class B
Principal Payment Commencement Date,
Principal Collections will generally
be allocated on each business day to
the Class B Certificateholders'
Interest based on the Fixed/Floating
Allocation Percentage. On and after
the Class C Principal Payment
Commencement Date, all Principal
Collections will generally be
allocated on each business day to the
Class C Certificateholders' Interest
based on the Fixed/Floating
Allocation Percentage. See
"Description of the Offered
Certificates--Allocation
Percentages."
Exchanges........................ The Pooling and Servicing Agreement
provides that the Trustee will issue
two types of certificates: (i)
investor certificates in one or more
Series each of which may have
multiple classes of certificates of
which one or more such classes may be
transferable, and (ii) the
Exchangeable Transferor Certificate.
The Exchangeable Transferor
Certificate will evidence the
Transferor Interest, will initially
be held by the Transferor, and will
be transferable only as provided in
the Pooling and Servicing Agreement,
including through the issuance of a
Supplemental Certificate. See
"Description of the Offered
Certificates--Exchanges." The
Exchangeable Transferor Certificate
is not being registered under the
Securities Act. The Pooling and
Servicing Agreement also provides
that, pursuant to any one or more
Supplements, the Transferor may
tender the Exchangeable Transferor
Certificate or, if provided in the
relevant Supplement, certificates
comprising any Series and the
Exchangeable Transferor Certificate,
to the Trustee in exchange for
certificates comprising one or more
new Series and a reissued
Exchangeable Transferor Certificate.
However, at all times, the interest
in the Principal Receivables in the
Trust and amounts on deposit in the
Excess Funding Account represented by
the Transferor Interest must equal or
exceed the Minimum Transferor
Interest. Under the Pooling and
Servicing Agreement, the Transferor
may define, with respect to any new
Series, the Principal Terms of such
Series. See "Description of the
Offered Certificates--Exchanges." The
Transferor may offer any Series for
sale in transactions either
registered under the Securities Act
or exempt from registration
thereunder, directly, through one or
more underwriters or placement
agents, in fixed-price offerings, in
negotiated transactions or otherwise.
The Transferor currently intends to
offer, from time to time, additional
Series issued by the Trust.
Under the Pooling and Servicing
Agreement, an Exchange of the
Exchangeable Transferor Certificate
for certificates comprising one or
more Series and a reissued
Exchangeable Transferor Certificate
may occur only upon delivery to the
Trustee of the following: (i) a
Supplement specifying the Principal
Terms of each Series to be issued in
connection therewith, (ii) a Tax
Opinion, (iii) if required by such
Supplement, the form of Enhancement
and an appropriate Enhancement
agreement with respect thereto, (iv)
written confirmation from each Rating
Agency that the Exchange will not
result in such Rating Agency reducing
or withdrawing its rating on any then
outstanding Series rated by it, (v)
an officer's certificate of the
Transferor stating that, after giving
effect to such Exchange, the
Transferor Interest would be at least
equal to the Minimum Transferor
Interest, and (vi) the existing
Exchangeable Transferor Certificate
and, if applicable, the existing
certificates representing the Series
to be exchanged. See "Description of
the Offered Certificates--Exchanges."
Interest......................... Interest on the Offered Certificates will
be payable on , 1997 and on the 20th
day of each month thereafter or, if
such day is not a business day, on
the next succeeding business day
(each, a "Distribution Date"), in an
amount equal to (i) with respect to
the Class A Certificates, one-twelfth
of the product of the Class A
Certificate Rate and the outstanding
principal balance of the Class A
Certificates as of the preceding
Record Date (or in the case of the
first Distribution Date, the initial
principal amount of the Class A
Certificates) and (ii) with respect
to the Class B Certificates,
one-twelfth of the product of the
Class B Certificate Rate and the
outstanding principal balance of the
Class B Certificates as of the
preceding Record Date (or in the case
of the first Distribution Date, the
initial principal amount of the Class
B Certificates). Interest for the
first Distribution Date will include
accrued interest at the applicable
Certificate Rate (the "Certificate
Rates") from the Closing Date through
, 1997. Interest will be calculated
on the basis of a 360-day year of
twelve 30-day months.
Interest payments on the Class A
Certificates on each Distribution
Date will be funded from Available
Series Finance Charge Collections
with respect to the preceding Monthly
Period (or, with respect to the first
Distribution Date, such Collections
from and including the Closing Date
to and including , 1997 plus the
amount of the initial deposit to the
Interest Funding Account to be made
on the Closing Date) and from certain
other funds allocated as set forth in
the Pooling and Servicing Agreement
to the respective classes of the
Certificates and deposited on each
business day during such Monthly
Period in the Interest Funding
Account. See "Description of the
Offered Certificates--Interest
Payments."
Subject to the prior payment of interest
on the Class A Certificates, interest
payments on the Class B Certificates
on each Distribution Date will be
funded from the portion of Available
Series Finance Charge Collections
with respect to the preceding Monthly
Period and from certain other funds
allocated as set forth in the Pooling
and Servicing Agreement to the Class
B Certificates and deposited on each
business day during such Monthly
Period in the Interest Funding
Account. See "Description of the
Offered Certificates--Interest
Payments" and "--Application of
Collections."
Funding Period................... During the period from and including the
Closing Date to but excluding the
earlier of (x) the first day for
which the Invested Amount equals the
Full Invested Amount; (y) the first
day on which a Pay Out Event is
deemed to occur; and (z) the first
business day of the _________ Monthly
Period (the "Funding Period"), the
Pre-Funded Amount will be maintained
in a trust account to be established
with The Bank of New York (the
"Pre-Funding Account"). The
"Pre-Funded Amount" will equal the
amount of the initial deposit to the
Pre-Funding Account, less the amounts
of any increases in the Invested
Amount pursuant to the Series 1997-2
Supplement in connection with the
increase in the amount of Receivables
in the Trust. On the Closing Date a
cash deposit will be made to the
Pre-Funding Account such that the
amount of Principal Receivables plus
the amount of such cash deposit on
such date will at least equal the sum
of the initial outstanding principal
balances of the Class A Certificates,
the Class B Certificates, the Class C
Certificates and the Class D
Certificates, and the then current
outstanding principal amount of the
Previously Issued Series. Funds on
deposit in the Pre-Funding Account
will be invested by the Trustee at
the direction of the Servicer in Cash
Equivalents.
During the Funding Period, funds on
deposit in the Pre-Funding Account
will be withdrawn and paid to the
Transferor to the extent of any
increases in the Invested Amount as a
result of the increase in the amount
of Receivables in the Trust. The
Transferor expects that the funds on
deposit in the Pre-Funding Account
will be fully invested in Receivables
by the end of the _________ Monthly
Period. In the event of the
occurrence of a Pay Out Event during
the Funding Period, the amounts
remaining on deposit in the
Pre-Funding Account, will be payable
as principal first to the Class A
Certificateholders until the Class A
Invested Amount is paid in full and
then to the Class B
Certificateholders until the Class B
Invested Amount is paid in full and
then to the Class C Certificate-
holders until the Class C
Invested Amount is paid in full.
Should the Pre-Funded Amount be
greater than zero on the first day of
the __________ Monthly Period, such
amount will be deposited in the
Excess Funding Account and the
Invested Amount will be increased in
an amount equal to such deposit.
Amounts on deposit in the Excess
Funding Account are treated as assets
of the Trust allocated to all Series
then outstanding and the Exchangeable
Transferor Certificate and will be
applied as described in "Description
of the Offered Certificates--Excess
Funding Account."
Revolving Period................. The "Revolving Period" with respect to
the Certificates means the period
from and including the Closing Date
to, but excluding, the earlier of (a)
the commencement of the Accumulation
Period and (b) the commencement of
the Early Amortization Period. See
"Description of the Certificates--Pay
Out Events" herein for a discussion
of the events which might lead to the
termination of the Revolving Period
prior to the commencement of the
Accumulation Period. The accumulation
period with respect to the
Certificates (the "Accumulation
Period") is scheduled to begin at the
close of business on the last day of
the _________ Monthly Period. Subject
to the conditions set forth herein
under "Description of the Offered
Certificates--Postponement of
Accumulation Period," the day on
which the Revolving Period ends and
the Accumulation Period begins may be
delayed to no later than the close of
business on the last day of the
_________ Monthly Period. During the
Revolving Period, Principal
Collections otherwise allocable to
the Certificateholders (other than
any Shared Principal Collections paid
to the holders of certificates of
other Series and any Reallocated
Principal Collections) will, subject
to certain limitations, be paid from
the Trust to the holder of the
Exchangeable Transferor Certificate.
See "Description of the Offered
Certificates--Pay Out Events" for a
discussion of the events which might
lead to the termination of the
Revolving Period for the Certificates
prior to the end of the ________
Monthly Period.
Principal Payment;
Accumulation Period........... Unless a Pay Out Event shall have
occurred, the Accumulation Period
will begin at the close of business
on the last day of the Revolving
Period and will end on the earliest
to occur of (i) the commencement of
the Early Amortization Period, (ii)
payment of the Invested Amount in
full and (iii) the Termination Date.
With respect to each Monthly Period
during the Accumulation Period, prior
to the payment in full of the Class A
Invested Amount, the Class B Invested
Amount and the Class C Invested
Amount, amounts equal to the least of
(i) the Available Investor Principal
Collections for such Monthly Period,
(ii) the sum of the Controlled
Accumulation Amount plus any
Accumulation Shortfall for such
Monthly Period and (iii) the ABC
Adjusted Invested Amount, will be
deposited monthly in the Principal
Funding Account until the Principal
Funding Account Balance is equal to
the sum of the Class A Invested
Amount, the Class B Invested Amount
and the Class C Invested Amount.
Although it is anticipated that
during each Monthly Period in the
Accumulation Period prior to the
Expected Final Payment Date funds
will be deposited in the Principal
Funding Account in an amount equal to
the applicable Controlled Deposit
Amount and that scheduled principal
will be available for distribution to
the Class A Certificateholders and
the Class B Certificateholders on the
Expected Final Payment Date, no
assurance can be given in that
regard. See "Maturity
Considerations." If the Principal
Collections for any Monthly Period
are less than the applicable
Controlled Deposit Amount, the amount
of such deficiency will be the
applicable "Accumulation Shortfall"
for the succeeding Monthly Period.
See "Description of the Offered
Certificates--Application of
Collections" herein.
Funds on deposit in the Principal Funding
Account will be available to pay the
Class A Certificateholders in respect
of the Class A Invested Amount on the
Expected Final Payment Date. If the
aggregate principal amount of
deposits made to the Principal
Funding Account are insufficient to
pay in full the Class A Invested
Amount on the Expected Final Payment
Date, the Early Amortization Period
will commence as described below, and
the Class A Certificateholders will
receive distributions of Class A
Principal and Class A Monthly
Interest on each Distribution Date
thereafter until the Class A Invested
Amount is paid in full.
On the Expected Final Payment Date,
provided that the Class A Invested
Amount is paid in full and the Early
Amortization Period has not
commenced, funds remaining on deposit
in the Principal Funding Account will
be used to pay the Class B Invested
Amount as described herein. If the
funds remaining on deposit in the
Principal Funding Account are
insufficient to pay in full the Class
B Invested Amount on the Expected
Final Payment Date, the Early
Amortization Period will commence as
described below, and the Class B
Certificateholders will receive
distributions of Class B Principal
and Class B Monthly Interest on each
Distribution Date thereafter until
the Class B Invested Amount is paid
in full.
If a Pay Out Event occurs during the
Accumulation Period, the Early
Amortization Period will commence and
any amount on deposit in the
Principal Funding Account will be
paid to the Certificateholders of
each Class of Certificates,
sequentially, in alphabetical order,
on the Distribution Date following
the Monthly Period in which the Early
Amortization Period commences.
Other Series offered by the Trust may or
may not have accumulation periods
like the Accumulation Period or
amortization periods like the Early
Amortization Period, and such periods
may have different lengths and begin
on different dates than the
Accumulation Period or Early
Amortization Period described herein.
Thus, certain Series may be in their
revolving periods while others are in
periods during which Principal
Collections are distributed to or
accumulated for such other Series. In
addition, other Series may allocate
Principal Collections based upon
different investor percentages. See
"Description of the Offered
Certificates--Exchanges" for a
discussion of the potential terms of
other Series. See "Annex I: Other
Series" for a description of the
terms of the Previously Issued
Series.
Early Amortization Period........ During the Early Amortization Period,
Principal Collections allocable to
the respective Certificateholders'
Interest and certain other amounts
(including Shared Principal
Collections from any other Series,
funds on deposit in the Excess
Funding Account and, on the first
Distribution Date with respect to the
Early Amortization Period, funds on
deposit in the Pre-Funding Account or
the Principal Funding Account) will
no longer be reinvested in the Trust
or otherwise used to maintain the
Certificateholders' Interest of such
Series, but instead will be
distributed as principal payments
monthly on each Distribution Date
beginning with the first Distribution
Date following the Monthly Period in
which a Pay Out Event occurs or is
deemed to have occurred to the Class
A Certificateholders in respect of
the Class A Invested Amount and,
following the payment in full of the
Class A Invested Amount, to the Class
B Certificateholders in respect of
the Class B Invested Amount and,
following the payment in full of the
Class B Invested Amount, to the Class
C Certificateholders in respect of
the Class C Invested Amount and,
following the payment in full of the
Class C Invested Amount, to the Class
D Certificateholders until the Class
D Invested Amount is paid in full.
See "Description of the Offered
Certificates--Pay Out Events."
Shared Principal Collections..... To the extent that Principal Collections
and other amounts that are allocated
to the Certificateholders' Interest
of any class of any Series are not
needed to make payments to the
Certificateholders of such class or
required to be deposited in the
Principal Account, they may be
applied to cover principal payments
due to or for the benefit of
certificateholders of another Series,
including principal payments which
the Transferor elects to make with
respect to any Variable Funding
Certificates. Any such reallocation
will not result in a reduction in the
Certificateholders' Interest of the
Series to which such Principal
Collections were initially allocated.
In addition, Principal Collections
and certain other amounts otherwise
allocable to other Series, to the
extent such collections are not
needed to make payments to the
certificateholders of such other
Series, may be applied to cover
principal payments due to or for the
benefit of the holders of the
Certificates. See "Description of the
Offered Certificates--Application of
Collections."
Excess Funding Account........... At any time at which the Transferor
Interest is less than the Minimum
Transferor Interest, funds (to the
extent available therefor as
described herein) otherwise payable
to the Transferor will be deposited
in the Excess Funding Account on each
business day until the Transferor
Interest is at least equal to the
Minimum Transferor Interest. Funds on
deposit in the Excess Funding Account
may at the option of the Transferor
be withdrawn and paid to the
Transferor to the extent that on any
day the Transferor Interest exceeds
the Minimum Transferor Interest.
Any funds on deposit in the Excess
Funding Account at the beginning of
the Amortization Period will be
deposited in the Principal Account as
part of Class A Principal, Class B
Principal, or Class C Principal, as
applicable, for any Distribution
Date. In addition, no funds allocated
to investor certificates will be
deposited in the Excess Funding
Account during any amortization
period or early amortization period
for any Series until the Principal
Account for such Series for such
Distribution Date has been fully
funded or the investor certificates
of such Series have been paid in
full. See "Description of the Offered
Certificates--Excess Funding
Account."
Distribution of Available Series
Finance Charge Collections
Allocable to Certificate-
holders....................... Available Series Finance Charge
Collections will be applied on each
business day in a Monthly Period in
the following order of priority:
(i) an amount equal to the amount of
Class A Monthly Interest and any
overdue Class A Monthly Interest
not previously deposited in the
Interest Funding Account for such
Monthly Period and interest on any
overdue interest amounts will be
deposited in the Interest Funding
Account;
(ii) an amount equal to the amount of
Class B Monthly Interest and any
overdue Class B Monthly Interest
not previously deposited in the
Interest Funding Account for such
Monthly Period and interest on
any overdue interest amounts will
be deposited in the Interest
Funding Account;
(iii) an amount equal to the amount of
Class C Monthly Interest and any
overdue Class C Monthly Interest
not previously deposited in the
Interest Funding Account for such
Monthly Period and interest on any
overdue interest amounts will be
deposited in the Interest Funding
Account;
(iv) an amount equal to the Monthly
Servicing Fee plus any Monthly
Servicing Fee that was due but
not paid on any prior business
day will be paid to the Servicer;
(v) an amount equal to the Investor
Default Amount on such business
day and, to the extent not
previously paid, the Investor
Default Amount for each prior
business day in such Monthly
Period will be (a) during the
Revolving Period, treated as
Shared Principal Collections and
(b) during the Amortization
Period, treated as Available
Investor Principal Collections
for the benefit of the
Certificates;
(vi) an amount equal to the Series
Allocation Percentage of any
Adjustment Payment which the
Transferor is required but fails
to make pursuant to the Pooling
and Servicing Agreement will be
(a) during the Revolving Period,
treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Investor Principal
Collections for the benefit of
the Certificates;
(vii) an amount equal to unreimbursed
Class A Investor Charge-Offs on
such business day will be (a)
during the Revolving Period,
treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Investor Principal
Collections for the benefit of
the Certificates;
(viii) an amount equal to the accrued and
unpaid interest on the
outstanding aggregate principal
amount of the Class B
Certificates not previously
deposited in the Interest Funding
Account for such Monthly Period
will be deposited in the Interest
Funding Account;
(ix) an amount equal to the accrued and
unpaid interest on the
outstanding aggregate principal
amount of the Class C
Certificates not previously
deposited in the Interest Funding
Account for such Monthly Period
will be deposited in the Interest
Funding Account;
(x) an amount equal to unreimbursed
Class B Investor Charge-Offs on
such business day will be (a)
during the Revolving Period,
treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates;
(xi) an amount equal to unreimbursed
Class C Investor Charge-Offs on
such business day will be (a)
during the Revolving Period,
treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates;
(xii) an amount equal to unreimbursed
Class D Investor Charge-Offs on
such business day will be (a)
during the Revolving Period,
treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates;
(xiii) an amount equal to the lesser of
any remaining Available Series
Finance Charge Collections and
any required funding of a reserve
account for the benefit of the
Class C Certificates will be
deposited in such reserve
account;
(xiv) on and after the Reserve
Account Funding Date, but prior
to the date on which the
Accumulation Period Reserve
Account terminates, an amount
equal to the lesser of any
Available Series Finance Charge
Collections remaining and the
excess, if any, of the Required
Reserve Account Amount over the
Available Reserve Account Amount
will be deposited in the
Accumulation Period Reserve
Account;
(xv) the amount designated by the
Transferor in writing in its
instructions to the Trustee to be
deposited in the Payment Reserve
Account will be deposited in the
Payment Reserve Account; and
(xvi) the remainder will be treated as
Excess Finance Charge Collections
or Transferor Retained Finance
Charge Collections, as
applicable. Transferor Retained
Finance Charge Collections will
be applied on each Default
Recognition Date to the payment
of the Investor Default Amount in
accordance with clause (v) above.
See "Description of the Offered
Certificates--Application of
Collections."
On each Transfer Date all investment
income (net of investment losses and
expenses) on funds on deposit in the
Pre-Funding Account, the Principal
Funding Account and the Accumulation
Period Reserve Account will be applied
as if such amounts were Available
Series Finance Charge Collections on
the last business day of the preceding
Monthly Period.
Coverage of Interest
Shortfalls from Transferor
Finance Charge Collections.... To the extent that any amounts are on
deposit in the Excess Funding Account
or the Pre-Funding Account on any
business day, the Servicer will
determine the amount (the "Negative
Carry Amount"), if any, equal to the
excess of (x) the product of (a) the
Base Rate and (b) the product of (i)
the sum of the amounts on deposit in
the Excess Funding Account and the
Pre-Funding Account and (ii) the
number of days elapsed since the
previous business day divided by the
actual number of days in such year
over (y) the aggregate amount of all
earnings since the previous business
day available from the Cash
Equivalents in which funds on deposit
in the Excess Funding Account or the
Pre-Funding Account are invested. The
Servicer will apply an amount equal
to the lesser of (i) the Series
Allocation Percentage of the Finance
Charge Collections allocable to the
Exchangeable Transferor Certificate
("Transferor Finance Charge
Collections") on such business day
and (ii) the Negative Carry Amount
for such business day in the manner
specified for application of
Available Series Finance Charge
Collections.
Coverage of Interest Shortfalls
from Accumulation Period
Reserve Account............... All amounts in the Principal Funding
Account will be invested at the
direction of the Servicer by the
Trustee in certain Cash Equivalents.
Investment earnings (net of
investment losses and expenses) on
funds on deposit in the Principal
Funding Account (the "Principal
Funding Account Investment Proceeds")
during the Accumulation Period will
be applied on each Transfer Date to
the extent of the Covered Amount as
if such amount were Available Series
Finance Charge Collections on the
last business day of the preceding
Monthly Period. If, for any Interest
Accrual Period, the Principal Funding
Account Investment Proceeds are less
than an amount equal to, for such
Interest Accrual Period, one-twelfth
of the product of (a) the weighted
average of the Class A Certificate
Rate, the Class B Certificate Rate
and the Class C Certificate Rate for
such Interest Accrual Period and (b)
the Principal Funding Account Balance
as of the last day of the Monthly
Period preceding the Monthly Period
in which such Interest Accrual Period
ends (the "Covered Amount"), the
amount of such deficiency will be
paid from the Accumulation Period
Reserve Account to the extent of the
Available Reserve Account Amount and
will be applied on the applicable
Transfer Date as if such amount were
Available Series Finance Charge
Collections on the last business day
of the preceding Monthly Period.
Sharing of Excess Finance
Charge Collections............ Finance Charge Collections on any
business day in excess of the amounts
necessary to make required payments
on such business day will be applied
to cover any shortfalls with respect
to amounts payable from Finance
Charge Collections allocable to any
other Series then outstanding, pro
rata based upon the amount of the
shortfall, if any, with respect to
such other Series. Any Excess Finance
Charge Collections remaining after
covering shortfalls with respect to
all outstanding Series will be paid
to the Transferor.
Investor Default Amount;
Investor Charge-Off........... A portion of all Receivables in Defaulted
Accounts (the "Investor Default
Amount") will be allocated to the
Certificateholders in an amount equal
to the product of the Floating
Allocation Percentage applicable
during the related Monthly Period and
the principal amount of Receivables
in Defaulted Accounts for such
Monthly Period. If on any
Determination Date the aggregate
Investor Default Amount and Series
Allocation Percentage of unpaid
Adjustment Payments, if any, for the
preceding Monthly Period exceeded the
aggregate amount of Available Series
Finance Charge Collections applied to
the payment thereof as described in
clauses (v) and (vi) of "Distribution
of Available Series Finance Charge
Collections Allocable to
Certificateholders" above, and the
amount of (w) Transferor Finance
Charge Collections, (x) Excess
Finance Charge Collections, in each
case to the extent applied to the
payment thereof as described in
"Coverage of Interest Shortfalls from
Transferor Finance Charge
Collections" and "Sharing of Excess
Finance Charge Collections,"
respectively, (y) any Reallocated
Principal Collections applied with
respect thereto, and (z) any
Principal Funding Account Investment
Proceeds and amounts withdrawn from
the Accumulation Period Reserve
Account to be applied with respect
thereto, then the Class D Invested
Amount will be reduced to the extent
of such excess (but not in an amount
greater than the sum of the remaining
aggregate Investor Default Amount and
the remaining unpaid Adjustment
Payments for such Monthly Period) to
avoid a charge-off with respect to
the Class A Certificates, the Class B
Certificates or the Class C
Certificates.
The Class D Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal
balance of the Class D Certificates)
on any business day by the amount of
Available Series Finance Charge
Collections allocated and available
for such purpose as described in
clause (xii) of "Distribution of
Available Series Finance Charge
Collections Allocable to
Certificateholders." If the Class D
Invested Amount is reduced to zero, a
portion of the Class C Invested
Amount equal to the amount by which
such insufficiency would have caused
the Class D Invested Amount to be
reduced below zero (but not in excess
of the sum of the remaining aggregate
Investor Default Amount and the
remaining unpaid Adjustment Payments
for such Monthly Period) will be
deducted from the Class C Invested
Amount ("Class C Investor
Charge-Off") to avoid a charge-off
with respect to the Class A
Certificates or the Class B
Certificates. If and for so long as
the Class D Invested Amount is
reduced to zero, the Class C
Certificateholders will bear directly
the credit and other risks associated
with their undivided interest in the
Trust.
The Class C Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal
balance of the Class C Certificates)
on any business day by the amount of
Available Series Finance Charge
Collections allocated and available
for that purpose as described in
clause (xi) of "Distribution of
Available Series Finance Charge
Collections Allocable to
Certificateholders." If the Class C
Invested Amount is reduced to zero, a
portion of the Class B Invested
Amount equal to the amount by which
such insufficiency would have caused
the Class C Invested Amount to be
reduced below zero (but not in excess
of the sum of the remaining aggregate
Investor Default Amount and the
remaining unpaid Adjustment Payments
for such Monthly Period) will be
deducted from the Class B Invested
Amount, and allocated to the Class B
Investor Charge-Offs to avoid a
charge-off with respect to the Class
A Certificates. If and for so long as
the Class C Invested Amount is
reduced to zero, the Class B
Certificateholders will bear directly
the credit and other risks associated
with their undivided interest in the
Trust.
The Class B Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal
balance of the Class B Certificates)
on any business day by the amount of
Available Series Finance Charge
Collections allocated and available
for that purpose as described in
clause (x) of "Distribution of
Available Series Finance Charge
Collections Allocable to
Certificateholders." If the Class B
Invested Amount is reduced to zero, a
portion of the Class A Invested
Amount equal to the amount by which
such insufficiency would have caused
the Class B Invested Amount to be
reduced below zero (but not in excess
of the sum of the remaining aggregate
Investor Default Amount and the
remaining unpaid Adjustment Payments
for such Monthly Period) will be
deducted from the Class A Invested
Amount and allocated to the Class A
Investor Charge-Offs. If and for so
long as the Class B Invested Amount
is reduced to zero, the Class A
Certificate-holders will bear
directly the credit and other risks
associated with their undivided
interest in the Trust.
The Class A Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal
balance of the Class A Certificates)
on any business day by the amount of
Available Series Finance Charge
Collections allocated and available
for that purpose as described in
clause (vii) of "Distribution of
Available Series Finance Charge
Collections Allocable to
Certificateholders." See "Description
of the Offered Certificates--Investor
Charge-Offs."
Paired Series.................... Subject to satisfaction of the Rating
Agency Condition, the Certificates
may be paired with one or more other
Series or a portion of one or more
other series issued by the Trust
(each, a "Paired Series") at or after
the Amortization Period Commencement
Date but prior to the occurrence of a
Pay Out Event. If a Paired Series is
issued with respect to Series 1997-2,
following the issuance of such Paired
Series, as the Class A Adjusted
Invested Amount and the Class B
Adjusted Invested Amount and, if
applicable, the Class C Adjusted
Invested Amount and the Class D
Invested Amount are reduced, the
invested amount of the Paired Series
would increase by an amount that
otherwise would have increased the
Transferor Interest. Upon payment in
full of Series 1997-2, the increase
in the invested amount of the Paired
Series will be equal to the amount of
the Invested Amount paid to
Certificateholders of Series 1997-2
since the issuance of such Paired
Series. If a Pay Out Event occurs
with respect to any such Paired
Series prior to the payment in full
of the Certificates, the final
payment of principal to the
Certificateholders may be delayed.
See "Description of the Offered
Certificates--Paired Series."
Subordination of the Class B
Certificates, the Class C
Certificates and the Class D
Certificates.................. The Class B Certificates will be
subordinated to fund payments of
principal and interest on the Class A
Certificates. The Class C
Certificates will be subordinated to
fund payments of principal and
interest on the Class A Certificates
and the Class B Certificates. The
Class D Certificates will be
subordinated to fund payments of
principal and interest on the Class A
Certificates, the Class B
Certificates and the Class C
Certificates. See "Description of the
Offered Certificates--Subordination
of the Class B Certificates,"
"--Reallocation of Cash Flows" and
"--Reallocated Principal
Collections." The Class B Invested
Amount, the Class C Invested Amount,
and the Class D Invested Amount will
be subordinated as described herein
to the extent necessary to fund
certain payments with respect to each
Class of Certificates with an earlier
alphabetical designation as described
herein. If on any business day there
is a positive Class A Required
Amount, Class B Required Amount or
Class C Required Amount, certain
Principal Collections for such
business day will be used to fund
first the Class A Required Amount,
second the Class B Required Amount
and third the Class C Required Amount
and the Invested Amounts of the Class
D Certificates, the Class C
Certificates or the Class B
Certificates may be reduced on the
related Distribution Date as more
fully described herein in
"Description of the Offered
Certificates--Reallocated Principal
Collections." To the extent the Class
B Invested Amount, the Class C
Invested Amount or the Class D
Invested Amount is reduced, the
percentage of Finance Charge
Collections allocated to the Class B
Certificateholders, the Class C
Certificateholders, or the Class D
Certificateholders, as applicable, in
subsequent Monthly Periods will be
reduced. Moreover, to the extent the
amount of such reduction in the Class
B Invested Amount, the Class C
Invested Amount, or the Class D
Invested Amount is not reimbursed,
the amount of principal distributable
to the Class B Certificateholders,
the Class C Certificateholders, or
the Class D Certificateholders, as
applicable, from the Collection
Account will be reduced.Principal
payments with respect to the Class B
Certificates will not be made until
the final payment of the Class A
Invested Amount has been made to the
Class A Certificateholders. Principal
payments with respect to the Class C
Certificates will not be made until
the final payment of the Class A
Invested Amount has been made to the
Class A Certificateholders and the
final payment of the Class B Invested
Amount has been made to the Class B
Certificateholders. During the
Accumulation Period, the Class D
Invested Amount will be reduced
concurrently with deposits to the
Principal Funding Account for the
benefit of the Offered Certificates
and the Class C Certificates to an
amount equal to the Stated Class D
Amount. See "Description of the
Offered Certificates--Subordination
of the Class B Certificates,"
"--Reallocation of Cash Flows" and
"--Reallocated Principal
Collections."
Defeasance....................... On the date that the Transferor has
deposited (x) in the Principal
Funding Account an amount equal to
the sum of the outstanding principal
balances of the Class A Certificates,
the Class B Certificates and the
Class C Certificates, which amount
shall be invested in Cash Equivalents
and (y) in the Accumulation Period
Reserve Account an amount equal to or
greater than the Covered Amount, as
estimated by the Transferor, for the
period from the date of the deposit
to the Principal Funding Account
through the Expected Final Payment
Date for the Offered Certificates and
the Class C Certificates and has
satisfied certain other conditions,
the Certificates will no longer be
entitled to the security interest of
the Trust in the Receivables and
other Trust assets (except those set
forth above), and the percentages
applicable to the allocation to the
Certificateholders of Principal
Collections, Finance Charge
Collections and Defaulted Receivables
will be reduced to zero. Upon the
satisfaction of the foregoing
conditions, the Class D Invested
Amount will be reduced to zero. See
"Description of the Offered
Certificates--Defeasance."
Optional Repurchase.............. The Invested Amount of the Class A
Certificates, Class B Certificates
and Class C Certificates will be
subject to optional repurchase by the
Transferor on any Distribution Date
if on such Distribution Date the sum
of the Class A Invested Amount, Class
B Invested Amount and Class C
Invested Amount would be reduced to
an amount less than or equal to 10
percent of the sum of the highest
Class A Invested Amount, Class B
Invested Amount and Class C Invested
Amount since the Closing Date, if
certain conditions set forth in the
Pooling and Servicing Agreement are
met. The repurchase price will be
equal to the sum of the Class A
Invested Amount, Class B Invested
Amount and Class C Invested Amount
that would be remaining on such date
after giving effect to any payments
on such date plus accrued interest
which would otherwise remain unpaid
on the Class A Certificates, Class B
Certificates and Class C Certificates
through the day preceding the
Distribution Date on which the
repurchase occurs. See "Description
of the Offered Certificates--Final
Payment of Principal; Termination."
Tax Status....................... In the opinion of Special Tax Counsel,
the Class A Certificates and the
Class B Certificates will be
characterized as debt for federal
income tax purposes. Under the
Pooling and Servicing Agreement, the
Transferor, the Servicer, the Class A
Certificateholders and the Class B
Certificateholders agree to treat the
Class A Certificates and the Class B
Certificates as debt for federal,
state, and other tax purposes. See
"Certain Federal Income Tax
Consequences" for additional
information concerning the
application of federal income tax
laws.
ERISA Considerations............. Under a regulation issued by the U.S.
Department of Labor (the "Plan Assets
Regulation"), the Trust's assets
would not be deemed "plan assets" of
an employee benefit plan holding an
interest in the Class A Certificates
or Class B Certificates if such Class
of Certificates qualify as
"publicly-offered securities" within
the meaning of the Plan Assets
Regulation. To qualify as
"publicly-offered securities" within
the meaning of the Plan Assets
Regulation, certain conditions must
be met, including that interests in
such Class of Certificates be held by
at least 100 persons independent of
the Transferor and each other upon
completion of the public offering
being made hereby. The Class A
Underwriters expect, although no
assurance can be given, that the
Class A Certificates will be held by
at least 100 such persons, and the
Transferor anticipates that the other
conditions of the "publicly-offered
security" exception contained in the
Plan Assets Regulation will be met
with respect to the Class A
Certificates. No monitoring or other
measures will be taken to ensure that
any such conditions will be met with
respect to the Class A Certificates.
If the Trust's assets were deemed to
be "plan assets" of such a plan,
there is uncertainty whether existing
exemptions from the "prohibited
transaction" rules of the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), would
apply to all transactions involving
the Trust's assets. See "Employee
Benefit Plan Considerations."
The Class B Underwriters do not expect
that the Class B Certificates will be
held by 100 or more independent
investors and, therefore, do not
expect that the Class B Certificates
will qualify as "publicly-offered
securities" under the Plan Assets
Regulation. Accordingly, the Class B
Certificates may not be acquired by
employee benefit plan investors
subject to Title I of ERISA or
Section 4975 of the Internal Revenue
Code of 1986, as amended (the
"Code"), including, but not limited
to, as applicable, an insurance
company general account. Each
Certificate Owner of a Class B
Certificate, by its acceptance
thereof, will be deemed to have
represented and warranted that it is
not an employee benefit plan investor
subject to Title I of ERISA or
Section 4975 of the Code. See
"Employee Benefit Plan
Considerations."
Offered Certificate Ratings...... It is a condition to the issuance of the
Class A Certificates that they be
rated "AAA" or its equivalent by at
least one nationally recognized
rating agency.
Itis a condition to the issuance of the
Class B Certificates that they be
rated at least "A" or its equivalent
by at least one nationally recognized
rating agency.
RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the Offered Certificates. Each
Underwriter intends to make a market in each Class of the Offered
Certificates purchased by it from the Transferor, but is not obligated to
do so. There is no assurance that a secondary market will develop or, if it
does develop, that it will provide Certificate Owners with liquidity of
investment or that it will continue until the Offered Certificates are paid
in full.
LIMITED OPERATING HISTORY OF DIRECT MERCHANTS BANK
Direct Merchants Bank began originating and servicing credit card
accounts in March 1995, and thus has limited underwriting and servicing
experience, and limited delinquency, default and loss experience with
respect to the Accounts.
LIMITED HISTORY OF TRUST AND TRANSFEROR
The Trust and the Transferor were formed in May 1995. The Transferor
and the Trust have no substantial assets other than their respective
interests in the Receivables and the proceeds thereof as described herein.
LIMITED HISTORY OF PORTFOLIO
The Trust assets consist primarily of Receivables generated from
Accounts originated since March 1995. Approximately __% of the Accounts in
the Trust Portfolio have been originated within the last twelve months. As
a result, the current portfolio history may not be indicative of the
portfolio performance as the Receivables and Accounts mature. See the
"Composition by Account Age--Trust Portfolio" table in "The Receivables."
NON-RECOURSE TO METRIS, TRANSFEROR, DIRECT MERCHANTS BANK OR AFFILIATES
THEREOF
No Certificateholder will have recourse for payment of its
Certificates to any assets of Metris, the Transferor (other than the
Exchangeable Transferor Certificate and any Transferor Retained Class, to
the extent described herein), Direct Merchants Bank, or any affiliates
thereof. Consequently, Certificateholders must rely solely upon payments on
the Receivables for the payment of principal of and interest on the
Certificates. Furthermore, under the Pooling and Servicing Agreement, the
Certificateholders have an interest in the Receivables and Collections only
to the extent of the Certificateholders' Interest and, to the limited
extent described herein, the Transferor Interest. Should the Offered
Certificates not be paid in full on a timely basis, Certificateholders may
not look to any assets of any of Metris, the Transferor (other than the
Exchangeable Transferor Certificate and any Transferor Retained Class, to
the extent described herein), Direct Merchants Bank or any affiliates
thereof to satisfy their claims.
TRANSFER OF THE RECEIVABLES; INSOLVENCY RISK CONSIDERATIONS
Under the Purchase Agreements, Direct Merchants Bank has represented
and warranted to Metris and Metris has represented and warranted to the
Transferor, respectively, that the transfer of Receivables to Metris or the
Transferor, as applicable, is a valid sale and assignment. In addition,
Direct Merchants Bank, Metris and the Transferor have agreed that if,
notwithstanding their intent, the respective sales of Receivables to Metris
and the Transferor, are not treated as sales, the Purchase Agreements will
be deemed to create a security interest in the Receivables. In a
receivership or conservatorship of Direct Merchants Bank or in a bankruptcy
proceeding involving Metris, if the conveyance of the Receivables is not
treated as a sale, but is deemed to create a security interest in the
Receivables, Metris' or the Transferor's interest in the Receivables may be
subject to tax or other governmental liens relating to Direct Merchants
Bank or Metris, respectively, arising before the subject Receivables came
into existence and to certain administrative expenses of the receivership,
conservatorship or bankruptcy proceeding. Direct Merchants Bank and Metris
have taken or will take certain actions required to perfect the
Transferor's interest in the Receivables. If a bankruptcy trustee for
Metris, Metris as debtor-in-possession, or a creditor of Metris were to
take the view that Direct Merchants Bank or Metris and the Transferor
should be substantively consolidated or that the transfer of the
Receivables from Direct Merchants Bank to Metris or from Metris to the
Transferor, respectively, should be recharacterized as a pledge of such
Receivables, then delays in payments on the Offered Certificates or (should
the bankruptcy court rule in favor of any such trustee,
debtor-in-possession or creditor) reductions in such payments on such
Certificates could result.
A conservator or receiver would have the power under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") to
repudiate contracts of, and to request a stay of up to 90 days of any
judicial action or proceeding involving, Direct Merchants Bank. However,
notwithstanding the insolvency of, or the appointment of a receiver or
conservator for, Direct Merchants Bank, subject to certain qualifications,
a valid perfected security interest of Metris in the Receivables should be
enforceable (to the extent of Metris' "actual direct compensatory damages"
(as described below)) and payments to Metris with respect to the
Receivables (up to the amount of such damages) should not be subject to an
automatic stay of payment or to recovery by such a conservator or receiver.
If, however, the conservator or receiver were to assert that the security
interest was unperfected or unenforceable, or were to require Metris to
establish its right to those payments by submitting to and completing the
administrative claims procedure established under FIRREA, or the
conservator or receiver were to request a stay of proceedings with respect
to Direct Merchants Bank as provided under FIRREA, delays in payments to
the Trust and on the Certificates and possible reductions in the amount of
those payments could occur. In the event of a repudiation of obligations by
a conservator or receiver, FIRREA provides that a claim for the repudiated
obligation is limited to "actual direct compensatory damages" determined as
of the date of the appointment of the conservator or receiver (which in
most cases are expected to include the outstanding principal on the
Certificates plus interest accrued thereon to the date of payment). The
FDIC has not adopted a formal policy statement on payment of principal and
interest on collateralized borrowings of banks that are repudiated. The
Transferor believes that the general practice of the FDIC in such
circumstances is to permit the collateral to be applied to pay the
principal owed plus interest at the contract rate up to the date of
payment, together with the costs of liquidation of the collateral if
provided for in the contract. In one case involving the repudiation by the
Resolution Trust Corporation (the "RTC") of certain secured zero-coupon
bonds issued by a savings association, a United States federal district
court held that "actual direct compensatory damages" in the case of a
marketable security meant the value of the repudiated bonds as of the date
of repudiation. If that court's view were applied to determine Metris'
"actual direct compensatory damages" in the event a conservator or receiver
of Direct Merchants Bank repudiated the Bank Purchase Agreement, the amount
paid to Certificateholders could, depending upon circumstances existing on
the date of the repudiation, be less than the principal of the Certificates
and the interest accrued thereon to the date of payment. See "Certain Legal
Aspects of the Receivables--Certain Matters Relating to Bankruptcy or
Receivership." In addition, in the event of a Servicer Default, if a
conservator or receiver is appointed for the Servicer, and no Servicer
Default other than such conservatorship or receivership exists, the
conservator or receiver may have the power to prevent either the Trustee or
the majority of the Certificateholders from effecting a transfer of
servicing to a successor Servicer.
Although the Pooling and Servicing Agreement provides that the
Transferor will transfer all of its right, title, and interest in and to
the Receivables to the Trust, a court could treat such transactions as an
assignment of collateral as security for the benefit of holders of
certificates issued by the Trust. It is possible that the risk of such
treatment may be increased by the retention by the Transferor of the
Exchangeable Transferor Certificate, the Class D Certificates, a class of
each of the Previously Issued Series and any other class of Certificates
that may be issued and retained by the Transferor. The Transferor
represents and warrants in the Pooling and Servicing Agreement that the
transfer of the Receivables to the Trust is either a valid transfer and
assignment of the Receivables to the Trust or the grant to the Trust of a
security interest in the Receivables. The Transferor has taken and will
take certain actions required to perfect the Trust's interest in the
Receivables and warrants that if the transfer to the Trust is deemed to be
a grant to the Trust of a security interest in the Receivables, the Trustee
will have a first priority perfected security interest therein, subject
only to Permitted Liens. If the transfer of the Receivables to the Trust is
deemed to create a security interest therein under the UCC, a tax or
government lien on property of the Transferor arising before Receivables
come into existence may have priority over the Trust's interest in such
Receivables. In the event of the insolvency of the Transferor, certain
administrative expenses may also have priority over the Trust's interest in
such Receivables. See "Certain Legal Aspects of the Receivables--Transfer
of Receivables."
To the extent that the Transferor is deemed to have granted a
security interest in the Receivables to the Trust and such security
interest was validly perfected before any insolvency of the Transferor and
was not granted or taken in contemplation of insolvency or with the intent
to hinder, delay, or defraud the Transferor or its creditors, such security
interest should not be subject to avoidance in the event of insolvency or
receivership of the Transferor, and payments to the Trust with respect to
the Receivables should not be subject to recovery by a bankruptcy trustee
or receiver of the Transferor. If, however, such a bankruptcy trustee or
receiver were to assert a contrary position, delays in payments on the
Offered Certificates and possible reductions in the amount of those
payments could occur.
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied, 114 S. Ct. 554 (1993), the United States Court of
Appeals for the 10th Circuit suggested that even where a transfer of
accounts from a seller to a buyer constitutes a "true sale," the accounts
would nevertheless constitute property of the seller's estate in a
bankruptcy of the seller. If Metris or the Transferor were to become
subject to a bankruptcy proceeding or if Direct Merchants Bank were to
become subject to a receivership and a court were to follow the 10th
Circuit's reasoning, Certificateholders might experience delays in payment
or possibly losses in their investment in the Certificates. Counsel to the
Transferor has advised the Transferor that the facts of Octagon are
distinguishable from those in the sale transactions between Direct
Merchants Bank and Metris, Metris and the Transferor and the Transferor and
the Trust and the reasoning of the 10th Circuit appears to be inconsistent
with established precedent and the UCC. See "Certain Legal Aspects of the
Receivables--Certain Matters Relating to Bankruptcy or Receivership."
If a bankruptcy trustee or receiver were appointed for the
Transferor, Direct Merchants Bank or Metris, causing a Pay Out Event with
respect to all Series then outstanding, new Principal Receivables would not
be transferred to the Trust pursuant to the Pooling and Servicing
Agreement. If a bankruptcy trustee were appointed for the Transferor, the
Trustee would sell the portion of the Receivables allocable in accordance
with the Pooling and Servicing Agreement to each Series (unless holders of
more than 50 percent of the principal amount of each class of each Series,
excluding any class or portion thereof held by the Transferor, and the
holders of any Supplemental Certificates or any other interest in the
Exchangeable Transferor Certificates other than the Transferor instruct
otherwise), thereby causing early termination of the Trust and a loss to
the Certificateholders if the net proceeds allocable to the
Certificateholders from such sale, if any, were insufficient to pay the
Certificateholders in full. The net proceeds of any such sale of the
portion of the Receivables allocated in accordance with the Pooling and
Servicing Agreement to this Series will first be used to pay amounts due to
the Class A Certificateholders, will thereafter be used to pay amounts due
to the Class B Certificateholders, will thereafter be used to pay amounts
due to the Class C Certificateholders, and will thereafter be used to pay
amounts due to the Class D Certificateholders. If the only Pay Out Event to
occur is either the insolvency of the Transferor or the appointment of a
bankruptcy trustee or receiver for the Transferor, the bankruptcy trustee
or receiver may have the power to continue to require the Transferor to
transfer new Receivables to the Trust and to prevent the early sale,
liquidation, or disposition of the Receivables and the commencement of the
Early Amortization Period. In addition, a bankruptcy trustee or receiver
for the Transferor may have the power to cause early payment of the
Certificates. In the event of an earl payment of principal on the
Certificates, Certificateholders may realize a lower yield on their
reinvestment of such early payment and may be required to incur costs
associated with reinvesting such funds. See "Certain Legal Aspects of the
Receivables--Certain Matters Relating to Bankruptcy or Receivership."
CONSUMER AND DEBTOR PROTECTION LAWS
The Accounts and the Receivables are subject to numerous federal and
state consumer protection laws that impose requirements related to offering
and extending credit. The United States Congress and the states may enact
laws and amendments to existing laws to regulate further the credit card
industry or to reduce finance charges or other fees or charges applicable
to credit card and other consumer revolving loan accounts. Such laws, as
well as any new laws or rulings which may be adopted, may adversely affect
the Servicer's ability to collect on the Receivables or maintain previous
levels of periodic rate finance charges and other fees and charges with
respect to the Accounts. Any failure by the Servicer, Direct Merchants
Bank, or other Credit Card Originators to comply with such legal
requirements also could adversely affect the Trust's ability to collect the
full amount of the Receivables. Although the Transferor will make certain
representations and warranties relating to the validity and enforceability
of the Receivables, the Trustee will not make any examination of the
Receivables or the records relating thereto for the purpose of establishing
the presence or absence of defects or compliance with such representations
and warranties, or for any other purpose. In the event of a breach of
certain representations and warranties, the Transferor may be obligated to
accept the reassignment and transfer of the entire Trust portfolio. See
"Description of the Offered Certificates--Representations and Warranties"
and "Certain Legal Aspects of the Receivables--Consumer Protection Laws."
Application of federal and state bankruptcy and debtor relief laws to
the obligations represented by the Receivables could adversely affect the
interests of the holders of the Offered Certificates in the Receivables, if
such laws result in any Receivables being written off as uncollectible. See
"Description of the Offered Certificates--Defaulted Receivables; Dilution."
PAYMENTS AND MATURITY
The Receivables may be paid at any time and there is no assurance
that there will be additional Receivables created or that any particular
pattern of repayments will occur. A significant decline in the amount of
Receivables generated could result in the occurrence of a Pay Out Event and
the commencement of the Early Amortization Period if, as a result, the
Transferor Interest were reduced below the Minimum Transferor Interest or
amounts in the Pre-Funding Account or the Excess Funding Account result in
significant Negative Carry Amounts. See "Maturity Considerations" and
"Description of the Offered Certificates--Pay Out Events" for a discussion
of other Pay Out Events. If a Pay Out Event occurs, the Early Amortization
Period will commence and the average life and maturity of the Offered
Certificates may be significantly reduced. There can be no assurance in
that event that the holders of the Offered Certificates would be able to
reinvest any accelerated distributions on account of such Offered
Certificates in other suitable investments having a comparable yield.
EFFECT OF SUBORDINATION OF CLASS B CERTIFICATES; PRINCIPAL PAYMENTS
The Class B Certificates will be subordinated in right of payment of
principal to the Class A Certificates. Payments of principal in respect of
the Class B Certificates are scheduled to be paid on the Expected Final
Payment Date concurrently with the payment of principal to the Class A
Certificates but if the Early Amortization Period begins, payment of
principal in respect of the Class B Certificates will not commence until
after the final principal payment with respect to the Class A Certificates
has been made and the Class A Invested Amount has been paid in full.
Moreover, the Class B Invested Amount is subject to reduction on any
Distribution Date if collections of Principal Receivables allocable to the
Class B Certificates are reallocated to cover the Class A Required Amount
or if the aggregate Investor Default Amount and unpaid Adjustment Payments,
if any, for each business day in the preceding Monthly Period exceeds the
aggregate Available Series Finance Charge Collections applied to the
payment thereof and is not funded from Excess Finance Charge Collections,
Transferor Finance Charge Collections, Class C Reallocated Principal
Collections or Class D Reallocated Principal Collections and is not
assessed against the Class C Invested Amount or the Class D Invested
Amount. If the Class B Invested Amount suffers such a reduction, Finance
Charge Collections allocable to the Class B Certificateholders' Interest in
future Monthly Periods will be reduced. Moreover, to the extent the amount
of such reduction in the Class B Invested Amount is not reimbursed, the
amount of principal distributable to the Class B Certificateholders will be
reduced. See "Description of the Offered Certificates--Allocation
Percentages," "--Reallocated Principal Collections," "--Investor
Charge-Offs" and "--Subordination of the Class B Certificates."
EFFECT OF ADDITION OF TRUST ASSETS ON CREDIT QUALITY
The Transferor intends to designate, and in some cases will be
obligated to designate, Supplemental Accounts, the Receivables in which
will be conveyed to the Trust. In addition, upon the satisfaction of
certain conditions, the Transferor may elect to automatically designate on
and after a specified date all Additional Accounts, the Receivables in
which will be conveyed to the Trust. Such Supplemental Accounts or
Additional Accounts may include accounts originated using criteria
different from those which were applied to the Accounts existing on the
Closing Date related to the Trust or to previously-designated Supplemental
Accounts or Additional Accounts, because such accounts were originated at a
different date or were purchased or otherwise acquired from one or more
Credit Card Originators. Consequently, there can be no assurance that
Supplemental Accounts or Additional Accounts designated in the future will
be of the same credit quality as previously-designated Accounts. In
addition, such Supplemental Accounts or Additional Accounts may consist of
consumer revolving credit card accounts or other consumer revolving credit
accounts that have different terms or characteristics than the Accounts,
Supplemental Accounts and the Additional Accounts previously included in
the Trust, including lower periodic rate finance charges and other fees and
charges, or different payment rates and higher loss or delinquency
experience, which may have the effect of reducing the average yield on the
portfolio of accounts included in the Trust. The designation of
Supplemental Accounts will be subject to the satisfaction of certain
conditions described herein under "Description of the Offered
Certificates--Addition of Trust Assets," including that the Transferor
shall have received written notice from each Rating Agency that such
designation will not cause a Ratings Event to occur; however, there is no
mechanism to assure consistent credit quality from time to time.
NEGATIVE CARRY
Any amounts deposited in the Excess Funding Account, the Pre-Funding
Account and the Principal Funding Account subsequent to the Closing Date
may result in a reduction of Portfolio Yield to the extent that the Cash
Equivalents in which such amounts are invested earn a rate which is less
than the effective yield from Finance Charge Receivables.
BASIS RISK
The Accounts in the Trust generally have finance charges set at a
variable rate above a designated prime rate or other designated index. If
there is a decline in such prime rate or other designated index, the amount
of collections of Finance Charge Receivables on such Accounts may be
reduced, whereas the amounts payable as interest on such Certificates and
other amounts required to be funded out of collections of Finance Charge
Receivables with respect to such Series may not be similarly reduced.
COMPETITION IN THE CREDIT CARD INDUSTRY
The credit card industry is highly competitive and operates in a
legal and regulatory environment increasingly focused on the cost of
services charged for credit cards. As new credit card issuers enter the
market and all issuers seek to expand their share of the market, there is
increased use of advertising, target marketing and pricing competition. The
Trust will be dependent upon the Transferor's continued ability to purchase
new Receivables. If the rate at which new Receivables are purchased
declines significantly and the Transferor is unable to designate
Supplemental Accounts or Additional Accounts, a Pay Out Event could occur,
in which case the Early Amortization Period would commence. In the event of
an early payment of principal on the Certificates, Certificateholders may
realize a lower yield on their reinvestment of such early payment and may
be required to incur costs associated with reinvesting such early payment.
SOCIAL, TECHNOLOGICAL AND ECONOMIC FACTORS
Changes in purchase and payment patterns by Obligors may result from
a variety of social, technological, and economic factors. Social factors
include potential changes in consumers' attitudes toward financing
purchases with debt. Technological factors include new methods of payment,
such as debit cards. Economic factors include the rate of inflation,
unemployment levels and relative interest rates. Cardholders with respect
to the Accounts generally have billing addresses in all 50 states, the
District of Columbia and other United States territories and possessions.
There is no basis, however, to predict whether, or to what extent, social,
technological, or economic factors will affect future use of credit or
repayment patterns.
BOOK-ENTRY REGISTRATION
Each Class of the Offered Certificates initially will be represented
by one or more Certificates registered in the name of Cede & Co., the
nominee for DTC, and will not be registered in the names of the Certificate
Owners or their nominees. Unless and until Definitive Certificates are
issued, Certificate Owners will not be recognized by the Trustee as
Certificateholders, as that term is used in the Pooling and Servicing
Agreement. Hence, until such time, Certificate Owners will only be able to
receive payments from, and exercise the rights of Certificateholders
indirectly through DTC and its participating organizations and, unless a
Certificate Owner requests a copy of any such report from the Trustee, will
receive reports and other information provided for under the Pooling and
Servicing Agreement only if, when and to the extent provided to Certificate
Owners by DTC and its participating organizations. In addition, the ability
of Certificate Owners to pledge Certificates to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of
such Certificates, may be limited due to the lack of physical certificates
for such Certificates. See "Description of the Offered
Certificates--Book-Entry Registration" and "--Definitive Certificates."
ABILITY OF SERVICER TO CHANGE PAYMENT TERMS
Pursuant to the Pooling and Servicing Agreement, the Transferor will
not be transferring to the Trust the Accounts but only the Receivables
arising in the Accounts. As owner of the Accounts, Direct Merchants Bank
will have the right to determine the annual percentage rates and the fees
which will be applicable from time to time to the Accounts, to alter the
minimum monthly payment required under the Accounts and to change various
other terms with respect to the Accounts. A decrease in the annual
percentage rates or a reduction in fees would decrease the effective yield
on the Accounts and could result in the occurrence of a Pay Out Event with
respect to the Series. An alteration of payment terms may result in fewer
payments on Receivables being made in any month. Under the Bank Purchase
Agreement, Direct Merchants Bank agrees that, unless required by law or
unless it deems it necessary in its sole discretion to maintain on a
competitive basis its credit card business, it will not at any time reduce
the annual percentage rates of the Periodic Finance Charges assessed on the
Receivables or other fees charged on any of the Accounts if, as a result of
any such reduction, either (i) Direct Merchants Bank's reasonable
expectation is that such reduction will cause a Pay Out Event to occur so
long as there are certificates of any Series outstanding or (ii) such
reduction is not also applied to any comparable segment of consumer
revolving credit card accounts owned by Direct Merchants Bank that have
characteristics the same as, or substantially similar to, such Accounts.
In addition, the Servicer will have the right to change the terms of
the Contracts relating to the Accounts or its policies and procedures with
respect to the servicing thereof (including the amount or timing of
charge-offs and the Periodic Finance Charges and other fees to be assessed
on the Accounts) if (i) (if the Servicer owns a comparable segment of
consumer revolving credit card accounts) such change is made applicable to
such comparable segment of consumer revolving credit card accounts owned by
the Servicer that have characteristics the same as, or substantially
similar to, the Accounts that are subject to such change and (ii) (if the
Servicer does not own a comparable segment of receivables) it will not make
any such change with the intent to materially benefit the Servicer over
Metris, except as otherwise restricted by any endorsement, sponsorship or
other agreement between the Servicer and an unrelated third party or by the
terms of the Contracts. The Purchase Agreement contains parallel covenants
of Metris. There can be no assurance that changes in applicable law,
changes in the marketplace or prudent business practice might not result in
a determination by the Servicer to take actions which would change the
payment or other Account terms. Except as specified above, there are no
restrictions in the Bank Purchase Agreement or the Pooling and Servicing
Agreement on the ability of the Servicer to change the terms of the
Accounts. While the Servicer has no current intention of taking actions
which would change the payment or other terms of the Accounts other than in
accordance with its customary and usual procedures, there can be no
assurances that changes in the marketplace or prudent business practice
might not result in a determination to do so.
CONTROL
Subject to certain exceptions, the investor certificateholders of
each Series may take certain actions, or direct certain actions to be
taken, under the Pooling and Servicing Agreement or the related Supplement.
In determining whether the required percentage of Certificateholders have
given their approval or consent, except as otherwise specified, the Class A
Certificateholders, the Class B Certificateholders and the Class C
Certificateholders will be treated as a single Series. Accordingly, the
Class A Certificateholders will have the power to determine whether any
such action is taken without regard to the position or interests of the
Class B Certificateholders or the Class C Certificateholders relating to
such action. Neither the Class B Certificateholders nor the Class C
Certificateholders will have similar power. However, under certain
circumstances the consent or approval of a specified percentage of the
aggregate invested amount of all Series outstanding or of the invested
amount of each class of each Series may be required to direct certain
actions, including requiring the appointment of a successor Servicer
following a Servicer Default, amending the Pooling and Servicing Agreement
in certain circumstances, directing the Servicer not to sell the
Receivables upon the occurrence of an Insolvency Event and directing a
repurchase of all outstanding Series upon the breach of certain
representations and warranties by the Transferor.
MASTER TRUST CONSIDERATIONS
In addition to the Certificates, the Trust, as a master trust, has
issued the Previously Issued Series and is expected to issue additional
Series from time to time. See "Annex I: Other Series." While the Principal
Terms of any Series will be specified in a Supplement, the provision of a
Supplement and, therefore, the terms of any additional Series, will not be
subject to the prior review or consent of holders of the certificates of
any previously issued Series. Such Principal Terms may include methods for
determining applicable investor percentages and allocating collections,
provisions creating security or Enhancements, different classes of
certificates (including subordinated classes of certificates), provisions
subordinating such Series to another Series (if the Supplement relating to
such Series so permits) or another Series to such Series (if the Supplement
for such other Series so permits), and any other amendment or supplement to
the Pooling and Servicing Agreement which is made applicable only to such
Series. See "Description of the Offered Certificates--Exchanges." In
addition, the provisions of any Supplement may give the holders of the
certificates issued pursuant thereto consent, approval, or other rights
that could result in such holders having the power to cause the Transferor,
the Servicer, or the Trustee to take or refrain from taking certain
actions, including, without limitation, actions with respect to the
exercise of certain rights and remedies under the Pooling and Servicing
Agreement, without regard to the position or interest of the
certificateholders of any other Series. Similar rights may also be given to
the provider of any Enhancement for any Series. It is a condition precedent
to issuance of any additional Series that each Rating Agency that has rated
any outstanding Series deliver written confirmation to the Trustee that the
Exchange will not result in such Rating Agency reducing or withdrawing its
rating on any outstanding Series. There can be no assurance, however, that
the Principal Terms of any other Series, including any Series issued from
time to time hereafter, might not have an adverse impact on the timing and
amount of payments received by a Certificateholder or the value of
Certificates even if there is no change in the rating of any outstanding
Series. See "Description of the Offered Certificates--Exchanges."
CERTIFICATE RATING
It is a condition to issuance of the Class A Certificates that they
be rated "AAA" or its equivalent by at least one nationally recognized
rating agency. It is a condition to issuance of the Class B Certificates
that they be rated "A" or its equivalent by at least one nationally
recognized rating agency. The ratings assigned to the Offered Certificates
by a Rating Agency will reflect such Rating Agency's assessment of the
likelihood that Certificateholders of such Class will receive the payments
of interest and principal required to be made under the Pooling and
Servicing Agreement, in the case of principal on or prior to the
Termination Date, and in the case of interest, as required under the
Pooling and Servicing Agreement. The ratings will be based primarily on an
assessment of the Receivables in the Trust (including the eligibility
criteria for the transfer of Receivables in Additional Accounts to the
Trust), of the amounts held in any trust account for the benefit of the
Offered Certificates (including in the Pre-funding Account and the Excess
Funding Account, if any) and the subordination of the Class B Certificates,
Class C Certificates and the Class D Certificates for the benefit of the
Class A Certificates and the subordination of the Class C Certificates and
the Class D Certificates for the benefit of the Class B Certificates.
However, any such rating will not address the possibility of the occurrence
of a Pay Out Event with respect to the Offered Certificates, the
possibility of the imposition of United States withholding tax with respect
to non-U.S. Certificateholders or the likelihood that the principal of, or
interest on, the Offered Certificates will be paid by the Expected Final
Payment Date. It is a condition to issuance of the Class C Certificates
that they be rated "BBB" or its equivalent by at least one nationally
recognized rating agency. The Class D Certificates will not be rated. The
ratings are not a recommendation to purchase, hold, or sell the Class A
Certificates, the Class B Certificates or the Class C Certificates,
inasmuch as such ratings do not comment as to the market price or
suitability for a particular investor. There can be no assurance that the
ratings will remain in effect for any given period of time or that either
rating will not be lowered or withdrawn by any Rating Agency if in its
judgment circumstances so warrant.
The Transferor will request a rating of the Offered Certificates by
at least one nationally recognized rating agency. There can be no assurance
as to whether any rating agency not requested to rate the Offered
Certificates will nonetheless issue a rating with respect to any Class of
the Offered Certificates, and, if so, what such rating would be. A rating
assigned to any Class of the Offered Certificates by a rating agency that
has not been requested by the Transferor to do so may be lower than the
ratings assigned by the Rating Agencies pursuant to the Transferor's
request.
PRE-FUNDING ACCOUNT AND THE FUNDING PERIOD
The Invested Amount will be increased during the Funding Period (but
not in excess of the Full Invested Amount) to the extent amounts are (x)
withdrawn from the Pre-Funding Account and paid to the Transferor in
connection with the addition of Receivables to the Trust or (y) deposited
in the Excess Funding Account. It is anticipated that Receivables will be
added to the Trust in an amount necessary to increase the Invested Amount
to an amount equal to the Full Invested Amount by the end of the ________
Monthly Period; however, there can be no assurance that a sufficient amount
of Receivables will be available for such purpose. Should the Pre-Funded
Amount be greater than zero at the end of the Funding Period, the amounts
remaining on deposit in the Pre-Funding Account will be deposited into the
Excess Funding Account. If there is a decline in the balance of the
Receivables during the Funding Period, deposits may be made to the Excess
Funding Account. Amounts on deposit in the Excess Funding Account are
invested in Cash Equivalents and are treated as assets of the entire Trust
allocated to all Series then outstanding and to the Exchangeable Transferor
Certificate, and will be applied as described in "Description of the
Offered Certificates--Excess Funding Account." Such funds may be released
to holders of certificates of other Series in connection with a reduction
of the principal balance of the certificates of such other Series. To the
extent that the net investment income earned on amounts on deposit in the
Pre-Funding Account during the Funding Period or in the Excess Funding
Account is less than the Base Rate, the Servicer will apply Transferor
Finance Charge Collections to the extent available to cover any related
Negative Carry Amount. If Transferor Finance Charge Collections are not
sufficient to cover such Negative Carry Amount, there will be a decline in
the excess of the Portfolio Yield over the Base Rate which could result in
a Pay Out Event. See "--Payments and Maturity" for a discussion of certain
effects of a Pay Out Event.
THE TRUST
The Trust was formed, in accordance with the laws of the State of
Delaware, pursuant to the Pooling and Servicing Agreement. The Trust was
formed for the transactions described herein and similar transactions, as
contemplated by the Pooling and Servicing Agreement, and prior to formation
had no assets or obligations. The Trust has not engaged, and will not
engage, in any business activity, other than as described herein, but
rather will only acquire and hold the Receivables (and related assets),
issue (or cause to be issued) the Certificates, the Exchangeable Transferor
Certificate, and certificates representing additional Series and engage in
related activities (including, with respect to any Series, entering into
any Enhancement and Enhancement agreement relating thereto) and make
payments thereon. As a consequence, the Trust is not expected to have any
need for additional capital resources.
METRIS COMPANIES INC.
Metris Companies Inc. ("Metris") is an information-based direct
marketer of consumer credit products, extended service plans, and fee-based
products and services to moderate income consumers. Metris' consumer credit
products currently are unsecured and secured credit cards issued by its
subsidiary, Direct Merchants Credit Card Bank, National Association
("Direct Merchants Bank"). Metris' customers and prospects include existing
customers of an affiliate, Fingerhut ("Fingerhut Customers"), and
individuals who are not Fingerhut Customers but for whom credit bureau
information is available ("External Prospects"). Through operating
subsidiaries, Metris also provides extended service plans on certain
categories of products that extend service coverage beyond the
manufacturer's warranty. Metris markets its fee-based products and
services, including debt waiver programs, card registration, third party
insurance and membership clubs, to its credit card customers, customers of
Fingerhut, and customers of third party credit card issuers. Metris had net
income of $17.5 million for the first half of 1997 and net income of $20
million for 1996.
Metris is a Delaware corporation incorporated on August 20, 1996, and
is an 83 percent owned indirect subsidiary of Fingerhut Companies, Inc.
("FCI"). Metris became a publicly held company in October 1996 after
completing an initial public offering. Metris' principal subsidiaries are
Direct Merchants Bank, Metris Direct, Inc. and Metris Receivables, Inc.
Prior to the initial public offering, the Company's business was operated
as a division of FCI.
THE TRANSFEROR
Metris Receivables, Inc., formerly known as Fingerhut Financial
Services Receivables, Inc. (the "Transferor"), was incorporated under the
laws of the State of Delaware on May 23, 1995. All of its outstanding
capital stock is owned by Metris. The Transferor was organized for the
limited purpose of purchasing, holding, owning and selling receivables and
any activities incidental to and necessary or convenient for the
accomplishment of such purposes, and has no material assets other than such
receivables. Neither Metris, as stockholder of the Transferor, nor the
Transferor's board of directors, intends to change its business purpose.
The Transferor's executive offices are located at 4400 Baker Road, Suite
F470, Minnetonka, Minnesota 55343. The Transferor's telephone number is
(612) 936-5077.
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Direct Merchants Credit Card Bank, National Association ("Direct
Merchants Bank" or the "Bank"), a wholly owned subsidiary of Metris, is a
special-purpose credit card bank, established under Section 2(c)(2)(F) of
the Bank Holding Company Act of 1956, as amended by the Competitive
Equality Banking Act of 1987, as amended. Direct Merchants Bank was
chartered as a national banking association on February 14, 1995. Its
principal executive offices are located at 1455 West 2200 South, Salt Lake
City, Utah 84119, telephone number (801) 974-4699.
FINGERHUT CORPORATION
Fingerhut Corporation ("Fingerhut"), a wholly owned subsidiary of
FCI, has been in the direct marketing business for over 45 years and is one
of the largest consumer catalog marketers in the United States. Fingerhut
sells a broad range of general merchandise products and services to
moderate income consumers, using catalogs and other direct marketing
solicitations, and had 1996 net sales of approximately $1.538 billion.
Fingerhut makes substantially all of its sales using proprietary private
label credit. As customers make payments and order new products, Fingerhut
enters a variety of payment, behavioral and other data into its database
(the "Fingerhut Database").
The Fingerhut Database. The Fingerhut Database contains information
on more than 30 million individuals, including approximately 9 million
customers who have made a purchase from Fingerhut within the past 24
months. This database contains up to 1,400 potential data items in a
customer record, including names, addresses, behavioral characteristics,
general demographic information and information provided by the customer.
Fingerhut uses information in the Fingerhut Database, along with
sophisticated proprietary credit scoring models, to produce proprietary
credit scores (the "Fingerhut Scores") for Fingerhut customers. The
Fingerhut Database also includes a "suppress" file (the "Suppress File"),
which contains information on approximately 8 million individuals about
whom it has information relating to fraud and other similar indicators of
unacceptably high risk. Fingerhut periodically updates the information in
the Fingerhut Database. Fingerhut does not report its credit information to
the credit bureaus, which means this information is not publicly available.
Direct Merchants Bank currently has agreements to use the information in
the Fingerhut Database for marketing general purpose credit cards to
Fingerhut Customers.
DIRECT MERCHANTS BANK'S CREDIT CARD ACTIVITIES
GENERAL
The Receivables conveyed to the Trust have been and will be generated
from transactions made by holders of co-branded and other MasterCard(R)
credit card and VISA(R) credit card accounts and may also include, although
they do not currently include, receivables generated from transactions made
by holders of other general purpose credit card accounts originated or
acquired by Direct Merchants Bank. Certain data processing, administrative
and other functions associated with the servicing of the Receivables are
performed on behalf of Direct Merchants Bank through a credit card
processor, First Data Resources, Inc. ("FDR"), whose principal executive
offices are located in Omaha, Nebraska. See "--Description of FDR." In
addition, the collection and management of delinquent accounts are
performed by Metris Direct, Inc. ("Metris Direct"), an affiliate of Direct
Merchants Bank. As of September 30, 1997, Direct Merchants Bank had
approximately _____ million credit card accounts and $___ billion in
managed loans; Fingerhut Customers represented ___% of the accounts and
___% of the managed loans.
NEW ACCOUNT UNDERWRITING
Direct Merchants Bank targets moderate income consumers whom it
believes are underserved by traditional providers of consumer credit.
"Moderate income" refers to those households in the United States that have
annual incomes of between $15,000 and $35,000 (approximately 31 million
households according to a 1994 U.S. Census Bureau report).
Prior to July 1997, the Accounts were generated under a license from
MasterCard International Inc. and were originated or purchased by Direct
Merchants Bank. Direct Merchants Bank is a member of MasterCard
International Inc. MasterCard International Inc. licenses its mark
permitting financial institutions to issue credit cards to their customers.
In addition, MasterCard International Inc. provides clearing services
facilitating exchange of payments among member institutions and networks
linking members' credit authorization systems. MasterCard credit cards are
issued as part of the worldwide MasterCard International Inc. systems, and
the transactions creating the receivables through the use of the credit
cards are processed through the MasterCard International Inc. authorization
and settlement systems. The MasterCard(R) credit cards from which the
Accounts were established may be used to purchase goods and services, to
obtain cash advances and to consolidate and transfer account balances from
other credit cards. Cardholders make purchases when using a credit card to
buy goods or services. A cash advance is made when a credit card is used to
obtain cash from a financial institution, an automated teller machine, or
by a draft drawn on an Account. Amounts due with respect to purchases, cash
advances and transfers of account balances will be included in the
Receivables. Direct Merchants Bank is also a member of VISA USA
Incorporated. In early 1997, Direct Merchants Bank acquired a portfolio of
approximately 20,000 VISA(R) credit card accounts. The Transferor has
designated such accounts as Supplemental Accounts which have been added to
the Trust as Accounts. Beginning in July 1997, the bank began originating
accounts under the VISA license.
Credit Scoring. Direct Merchants Bank requests a Fingerhut Score for
prospective customers who are Fingerhut customers. Direct Merchants Bank
also requests credit bureau information for all Fingerhut Customers,
including risk scores provided by Fair, Isaacs & Company, a third party
provider of risk scorecards ("FICO scores"). For those Fingerhut Customers
who have FICO scores, Direct Merchants Bank uses the Fingerhut Score to
further segment Fingerhut Customers into narrower ranges within each FICO
score subsegment, allowing it to better evaluate individual credit risk and
to tailor its risk-based pricing accordingly. Additionally, the Fingerhut
Score is used to target individuals who have no, or limited, credit bureau
information and consequently no FICO scores, allowing the Bank to target
Fingerhut Customers who would not typically be solicited by other credit
card issuers.
In 1995, Direct Merchants Bank and Equifax, Inc., a third party
credit bureau, applied the credit risk evaluation techniques and knowledge
developed in creating the Fingerhut Score models to publicly available
credit bureau information in order to develop a proprietary modeling system
for External Prospects (the "Proprietary Modeling System"). The Proprietary
Modeling System, which is available for use exclusively by Direct Merchants
Bank and other of Metris' subsidiaries, consists of sophisticated models
which produce a credit risk score (a "Proprietary Score") for each
prospect. The Proprietary Score, like the Fingerhut Score, segments
External Prospects into narrower ranges within each FICO score subsegment,
allowing the Bank to better evaluate individual credit risk and to tailor
its risk-based pricing accordingly. Direct Merchants Bank also uses this
segmentation to exclude certain individuals from its marketing
solicitations.
Direct Merchants Bank generates External Prospects from lists
directly obtained from the major credit bureaus based on criteria
established by the Bank. Direct Merchants Bank establishes the range of
FICO scores that it plans to target for a specific campaign, and receives
files from the credit bureaus which contain individual credit records of
the External Prospects who fall within this range. The files are
incorporated into the Proprietary Modeling System, which further segments
External Prospects based upon their Proprietary Scores. The mailing lists
that are generated from the Proprietary Modeling System are also checked
against the Suppress File. Direct Merchants Bank currently does not solicit
External Prospects who do not have FICO scores. Direct Merchants Bank
periodically monitors the performance of the Proprietary Modeling System
and re-evaluates the effectiveness of the Proprietary Score in segmenting
credit risk, resulting in further refinements to its selection criteria for
External Prospects. Direct Merchants Bank and other Metris subsidiaries
continue to develop proprietary credit risk models to assist in evaluating
potential customers.
Solicitation. Prospects for solicitation include both Fingerhut
Customers and External Prospects and are contacted on a nationwide basis
generally through pre-screened direct mail and telephone solicitations.
Direct Merchants Bank receives responses to its prescreened solicitations,
performs fraud screening, verifies name and address changes, and obtains
any information which may be missing from the application. Applications are
then sent to third party data entry providers, which key the application
information and process the applications based on the criteria provided by
Direct Merchants Bank. Applications are approved, denied or referred to
Direct Merchants Bank for exception processing. Direct Merchants Bank
processes exceptions for, among other things, derogatory credit bureau
information and fraud warnings. Exception applications are processed
manually by a credit analyst based on policies approved by the Bank's
credit committee.
Pricing. Direct Merchants Bank uses a risk-based pricing strategy.
The specific pricing for each credit card offer is determined primarily
based on the prospect's risk profile prior to solicitation. Each prospect
is evaluated to determine credit needs, credit risk, and existing credit
availability. A customized offer is developed that includes the most
appropriate product, brand, pricing, and credit line. Direct Merchants Bank
currently offers multiple pricing structures, with a range of annual fees
and variable annual percentage rates based on floating rates of interest,
primarily the prime rate. Once the account is opened, the customer's
internal and external credit performance are actively monitored and their
behavior and risk scores are periodically recalculated. As the customer
evolves through the credit lifecycle and is regularly rescored, the lending
relationship can evolve to include more competitive (or more restrictive)
pricing and product configurations.
The Adaptive Control System. Direct Merchants Bank uses FDR's
adaptive control system (the "Adaptive Control System") which uses
statistical models and basic account financial information to automatically
and regularly assign appropriate credit line increases and decreases to
individual customers, as well as to determine the systematic collection
steps to be taken at the various stages of delinquency. The Adaptive
Control System manages the authorization of each transaction; in addition,
it determines the collections strategies to be used for non-delinquent
accounts that have balances above their assigned credit line (referred to
as "overlimit" accounts).
Credit Lines. Once an account is approved, an initial credit line is
established based on the individual's risk profile using automated
screening and credit scoring techniques. This process results in a
portfolio with average credit lines that are below the industry average due
to the higher average risk elements inherent in Direct Merchants Bank's
target market. Direct Merchants Bank may elect, at any time and without
prior notice to the cardholder, to preclude or restrict further credit card
use by the cardholder, usually as a result of poor payment performance or
the Bank's concern over the creditworthiness of the cardholder. Credit
lines are managed based on the results of the behavioral scoring analysis
in accordance with criteria established by Direct Merchants Bank.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants
Bank reserves the right to change or terminate certain terms, conditions,
services, or features of the account (including increasing or decreasing
periodic finance charges, late fees, returned check charges and any other
charges or the minimum payment), subject to the conditions set forth in the
account agreement.
Direct Merchants Bank may change its credit standards or screening
criteria and methods at any time.
SERVICING, BILLING AND PAYMENTS
Direct Merchants Bank has established a relationship with FDR for
cardholder processing services. FDR is a provider of information processing
and related services including cardholder processing (services for
financial institutions which issue credit cards to cardholders), and
merchant processing (services for financial institutions which make
arrangements with merchants for the acceptance of credit cards as methods
of payment). Applications processing has been handled internally by Direct
Merchants Bank since September 1995. Back office support for mail inquiries
and fraud management were internalized by the Bank in April 1996.
Direct Merchants Bank generally assesses periodic finance charges on
an account if the cardholder has not paid the balance in full from the
previous billing cycle. These finance charges are based upon the average
daily balance outstanding on the account during the monthly billing cycle.
Payments by cardholders on the accounts are processed and applied first to
any billed and unpaid fees, next to billed and unpaid finance charges and
then to billed and unpaid transactions in the order determined by Direct
Merchants Bank. If a payment in full is not received prior to 25 days after
the statement cycle date (the "Payment Date"), finance charges are imposed
on all purchases from the date of the transaction to the statement cycle
date. Finance charges are also imposed on each cash advance from the day
such advance is made until the advance is paid in full. The finance charge
is applied to the average daily balance. The average daily balance is the
sum of the daily unpaid balances of purchases and cash advances on each day
of the monthly billing cycle divided by the number of days in such monthly
billing cycle. Such unpaid balances are determined by deducting payments
and credits, adding any unpaid finance charges and late charges and adding
new purchases, cash advances and other charges, in each case as of the date
of the transaction. Many cardholders are given a grace period. For most
cardholders, if the entire balance on the account is paid during the grace
period, a finance charge is not imposed. Certain cardholders are not given
a grace period, depending on the credit card terms offered, which are
determined by the prospect's risk profile prior to solicitation.
Direct Merchants Bank generally assesses an annual fee on its
accounts. For most accounts, the annual fee is billed 90 days after the
account is opened and annually on each anniversary thereafter. Direct
Merchants Bank may waive the annual membership fees, or a portion thereof,
in connection with the solicitation of new accounts depending on the credit
terms offered, which are determined by the prospect's risk profile prior to
solicitation or when it determines a waiver to be necessary in order to be
competitive. In addition to the annual fee, Direct Merchants Bank may
charge accounts certain other fees including: (i) a late fee with respect
to any unpaid monthly payment if it does not receive the required minimum
monthly payment by the Payment Date, (ii) a cash advance fee for each cash
advance, (iii) a fee with respect to each check submitted by a cardholder
in payment of an account which is not honored by the cardholder's bank, and
(iv) an overlimit charge if, at any time during the billing cycle, the
total amount owed exceeds the cardholder's credit line by at least $30 due
to transaction activity.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants
Bank reserves the right to change or terminate certain terms, conditions,
services and features of the account (including periodic finance charges,
late fees, returned check charges and any other charges or the minimum
payment), subject to the conditions set forth in the account agreement.
Monthly billing statements are sent to cardholders by FDR on behalf
of Direct Merchants Bank. When an account is established, it is assigned a
billing cycle. Currently, there are 21 billing cycles and each such cycle
has a separate monthly billing date based on the respective business day
the cycle represents in each calendar month. On a set billing date each
month, a statement is sent to all accounts with an outstanding balance
greater than $1.00. Cardholders must make a minimum monthly payment of the
greater of $10.00 or 2.0 percent of the outstanding balance, or the balance
of the account if the balance is less than $10. Payment is due upon receipt
of the statement. Cardholder payments are processed by Household Credit
Services, a subsidiary of Household International, Inc. If the minimum
payment is not collected within 25 days after the statement cycle date, the
account is considered delinquent.
Most merchant transactions by cardholders are authorized online by
FDR.
DESCRIPTION OF FDR
FDR provides data processing, credit card reissuance, statementing,
inbound customer service telephone calls and interbank settlement for
Direct Merchants Bank. Application processing has been handled internally
by Direct Merchants Bank since September 1995. Back office support for mail
inquiries and fraud management were internalized in April 1996. Direct
Merchants Bank believes that its relationship with FDR allows it to achieve
operational efficiencies while remaining flexible enough to handle
additional growth. Furthermore, Direct Merchants Bank's agreement with FDR
allows Direct Merchants Bank to internalize specific operational functions
if Direct Merchants Bank desires. If FDR were to fail to perform its
services for Direct Merchants Bank or become insolvent, delays in
processing and recovery of information with respect to charges incurred by
the respective cardholders could occur, and the replacement of the services
FDR currently provides to Direct Merchants Bank could be time-consuming. As
a result, delays in payment to Certificateholders could occur.
FDR provides computer data processing services primarily to the
bankcard industry. FDR is a subsidiary of First Data Corp.
DELINQUENCY, LOSSES AND COLLECTIONS
Direct Merchants Bank considers an account delinquent if a payment
due thereunder is not received within 25 days from the closing date of the
statements. Collection procedures are determined with the assistance of the
Adaptive Control System, which continually monitors all delinquent
accounts. The collections function has been handled internally since
January 1996. Metris Direct's collections department generates letters
through a proprietary letter system when appropriate. Delinquent customers
receive automatic collection letters at various stages in their
delinquency, from 5-90 days past due. Metris Direct's collections personnel
attempt a minimum of two contacts in each 30-day delinquency cycle, unless
special arrangements have been made with the customer. Accounts that become
90 days delinquent are closed but not necessarily charged off. Accounts are
charged off and taken as a loss either after formal notification of
bankruptcy or at the end of the month during which they become
contractually 180 days past due. Accounts identified as fraud losses are
charged off no later than 90 days after the last activity. Accounts
identified as deceased without a surviving, contractually liable individual
or an estate large enough to pay the debt in full are charged off
immediately upon notification. Charged-off accounts are referred to Direct
Merchants Bank's recovery unit in Baltimore, Maryland, for coordination of
collection efforts to recover the amounts owed. When appropriate, accounts
are placed with external collection agencies or attorneys.
Direct Merchants Bank uses FDR's fraud protection system to improve
the rate of early detection of fraudulent activity on a cardholder account.
The system also provides work flow management that is used to investigate
potentially fraudulent transactions and to take prompt immediate action to
reduce further losses. A fraud score is established based on the details of
the authorization request and the previous behavior pattern of the
cardholder. This score is used in the determination of actions to be taken
for potentially fraudulent transactions.
Direct Merchants Bank reserves the right to cancel charge privileges
at any time, usually as a result of violating the contractual terms
(delinquency, overlimit, etc.) of the credit account. Activity on lost,
stolen, or fraudulent accounts is blocked immediately upon notification by
the cardholder or upon determination by FDR that a card is lost or stolen
or being used fraudulently.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
As of
As of As of As of As of September 30,
August 31, 1997 June 30, 1997 March 31, 1997 December 31, 1996 1996
--------------- ------------- -------------- ----------------- ------------
Percent- Percent- Percent- Percent- Percent-
age age age age age
of of of of of
Total Total Total Total Total
Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv-
ables ables ables ables ables ables ables ables ables ables
------- ------- ------- -------- ------- -------- ------- -------- -------- -------
Receivables
Outsanding(1)
Receivables
Delinquent:
30-59 Days
60-89 Days
90 or More
Days ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
Total
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of As of
June 30, 1996 March 31, 1996 December 31, 1995 September 30, 1995 June 30, 1995
------------- -------------- ----------------- ------------------ -------------
Percentage Percentage Percentage Percentage Percentage
of Total of Total of Total of Total of Total
Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv- Receiv-
ables ables ables ables ables ables ables ables ables ables
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Receivables
Outsanding(1)
Receivables
Delinquent:
30-59 Days
60-89 Days
90 or More
Days
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
Total
======= ========== ======= ========== ======= ========== ======= ========== ======= ==========
</TABLE>
(1) The Receivables Outstanding on the accounts consist of all amounts due
from cardholders as posted to the accounts as of the date shown.
LOSS EXPERIENCE
The following table sets forth the delinquency and the loss
experience for each of the periods shown for the Direct Merchants Bank
Portfolio. There can be no assurance that the delinquency and loss
experience for the Trust Portfolio will be similar to the historical
experience set forth below, because among other things, economic and
financial conditions affecting the ability of cardholders to make payments
may be different from those that have prevailed during the periods
reflected below and many of the Accounts have been originated in the last
twelve months.
<TABLE>
<CAPTION>
LOSS EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO (DOLLARS IN THOUSANDS)
NINE
YEAR MONTHS
QUARTER ENDED ENDED QUARTER ENDED ENDED
SEPT. JUNE MARCH DEC. DEC. SEPT. JUNE MARCH DEC. DEC. SEPT. JUNE
30, 30, 31, 31, 31, 30, 30, 31, 31, 31, 30, 30,
1997 1997 1997 1996 1996 1996 1996 1996 1995 1995 1995 1995
----- ----- ----- ---- ---- ----- ----- ----- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(1).. $1,017,236 $1,401,552 $1,185,070 $872,529 $609,792 $242,694 $394,610 $248,788 $84,685
Total Gross
Charge-Off (2).. $64,453 $26,445 $17,042 $12,020 $8,946 $4,046 $3,206 $840 $0
Total Gross
Charge-Offs
as a Percentage
of Average
Receivables
Outstanding..... 6.34% 1.89% 1.44% 1.38% 1.47% 1.67% 0.81% 0.34% 0.00%
(Annualized).... 6.34% 7.51% 5.72% 5.54% 5.90% 2.21% 3.22% 1.34% 0.00%
</TABLE>
(1) Average Receivables Outstanding is calculated by determining the daily
average of outstanding account balances for each month and then dividing
the sum of such daily averages for such months by the number of months in
such period.
(2) Gross Charge-Offs are Total Principal Charge-Offs before recoveries and
do not include the amount of any reductions in Average Receivables
Outstanding due to fraud, returned goods, customer disputes or other
miscellaneous credit adjustments.
RECOVERIES
Pursuant to the terms of the Pooling and Servicing Agreement, the
Servicer will be required to transfer all Recoveries to the Trust. In the
event of any sale or other disposition of Receivables in Defaulted Accounts
as provided in the Pooling and Servicing Agreement, Recoveries will not
include amounts received by the purchaser or transferee of such Receivables
but will be limited to amounts received by the Servicer from the purchaser
or transferee. Collections of Recoveries will be treated as collections of
Finance Charge Receivables.
YIELD CONSIDERATIONS
The Portfolio Yield on the portfolio of unsecured credit card
accounts serviced by Direct Merchants Bank (the "Direct Merchants Bank
Portfolio") is set forth in the following table. The Portfolio Yields in
the table are calculated and reported on a billed basis. The Portfolio
Yields on Receivables included in the Trust are calculated and reported on
a cash basis. Portfolio Yields calculated on a billed basis may differ from
Portfolio Yields calculated on a cash basis due to (a) a lag between when
finance charges and fees are billed to cardholder accounts and when such
finance charges and fees are collected, (b) finance charges and fees that
are not ultimately collected from the cardholder and (c) growth in the
Direct Merchants Bank Portfolio.
The Portfolio Yield calculated on both a billed and a cash basis will
also be affected by numerous factors, including changes in the monthly
interest rate, variations in the rate of payments and new borrowings on the
Accounts, the amount of the annual membership fee and other fees, changes
in the delinquency and loss rates on the Receivables, and the percentage of
cardholders who pay their balances in full each month and, except in the
case of cash advances, do not incur periodic finance charges, which may in
turn be caused by a variety of factors including seasonal variations, the
availability of other sources of credit and general economic conditions.
See "Maturity Considerations." The interchange fees are not included in the
Trust and are not included in the yield numbers for the Direct Merchants
Bank Portfolio in the following table.
<TABLE>
<CAPTION>
YIELD EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO
(DOLLARS IN THOUSANDS)
Nine Nine
Months Months Quarter
Quarter Ended Ended Quarter Ended Ended Ended
Sept. June March Dec. Dec Sept. June March Dec. Sept. June
30, 30, 31, 31, 31, 30, 30, 31, 31, Dec.31, 30, 30,
1997 1997 1997 1996 1996 1996 1996 1996 1995 1995 1995 1995
----- ----- ----- ----- ---- ----- ----- ----- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(1)... $1,017,236 $1,401,552 $1,185,070 $872,529 $609,792 $242,694 $394,610 $248,788 $84,685
Total Finance
Charges and Fees
Billed (2)(3).... $269,298 $93,506 $75,252 $58,727 $41,813 $49,021 $23,071 $21,671 $4,279
Average
Revenue Yield
(Annualized)..... 26.47% 26.54% 25.26% 27.07% 27.58% 26.81% 23,20% 34.56% 20.27%
</TABLE>
(1) Average Receivables Outstanding is calculated by determining the daily
average of outstanding account balances for each month and then dividing
the sum of such daily averages for such months by the number of months
in such period.
(2) Total Finance Charges and Fees Billed include finance charges, cash
advance fees, annual membership fees, late fees, and other charges. It
does not include interchange fee.
(3) Total Finance Charges and Fees Billed are presented net of adjustments
made pursuant to the Bank's normal servicing procedures, including
removal of incorrect or disputed finance charges and reversal of finance
charges accrued on charged-off accounts.
THE RECEIVABLES
The Accounts had, as of August 31, 1997, an average Principal
Receivable balance of $ and an average credit limit of $ . The percentage
of the total Receivable balance to the aggregate total credit limit, as of
August 31, 1997, was percent.
The following tables summarize the Receivables which have been
conveyed to the Trust (the "Trust Portfolio") by various criteria as of the
close of business on September 30, 1997. Because the future composition of
the Trust Portfolio may change over time, these tables are not necessarily
indicative of the composition of the Trust Portfolio at any subsequent
time. The Transferor will add to the Trust, in compliance with the
provisions of the Pooling and Servicing Agreement, Receivables in
Additional Accounts and Supplemental Accounts in addition to those
reflected in the tables below.
COMPOSITION BY CREDIT LIMIT
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
CREDIT LIMIT RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ------------------ -------- -------- ----------- -----------
$500.01-$1,000.00 % $ %
$1,000.01 - $1,500.00......
$1,500.01 - $5,000.00......
$5,000.01 - $10,000.00.....
$10,000.01 & Greater.......
Total................ 100.0% $ 100.0%
COMPOSITION BY PERIOD OF DELINQUENCY
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
PERIOD OF DELINQUENCY OF TOTAL OF TOTAL
(DAYS CONTRACTUALLY NUMBER OF NUMBER OF RECEIVABLE RECEIVABLES
DELINQUENT) ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ----------- -------- -------- ----------- -----------
30 59 Days................. % $ %
60 89 Days.................
90 119 Days................
120 149 Days...............
150 Days or More...........
Total................ 100.0% $ 100.0%
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLE RECEIVABLES
ACCOUNT BALANCE RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------- -------- -------- ----------- -----------
Credit Balance............. % $ %
No Balance.................
$ 0.01 $ 500.00............
$ 500.01 $1,000.00.........
$1,000.01 $1,500.00........
$1,500.01 $3,000.00........
$3,000.01 $5,000.00........
$5,000.01 & Greater........
Total................ 100.0% $ 100.0%
COMPOSITION BY GEOGRAPHIC DISTRIBUTION
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
LOCATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- -------- -------- -------- ----------- -----------
Alabama.................... % $ %
Alaska.....................
Arizona....................
Arkansas...................
California.................
Colorado...................
Connecticut................
Delaware...................
District of Columbia.......
Florida....................
Georgia....................
Hawaii.....................
Idaho......................
Illinois...................
Indiana....................
Iowa.......................
Kansas.....................
Kentucky...................
Louisiana..................
Maine......................
Maryland...................
Massachusetts..............
Michigan...................
Minnesota..................
Mississippi................
Missouri...................
Montana....................
Nebraska...................
Nevada.....................
New Hampshire..............
New Jersey.................
New Mexico.................
New York...................
North Carolina.............
North Dakota...............
Ohio.......................
Oklahoma...................
Oregon.....................
Pennsylvania...............
Rhode Island...............
South Carolina.............
South Dakota...............
Tennessee..................
Texas......................
Utah.......................
Vermont....................
Virginia...................
Washington.................
West Virginia..............
Wisconsin..................
Wyoming....................
Other......................
Total................ 100.0% $ 100.0%
COMPOSITION BY ACCOUNT AGE
TRUST PORTFOLIO
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLE RECEIVABLES
ACCOUNT AGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ----------- -------- -------- ----------- -----------
Not more than 6 Months..... % $ %
Over 6 Months to 12 Months.
Over 12 Months to 24 Months
Over 24 Months.............
Total................ 100.0% $ 100.0%
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement provides that the Class A
Certificateholders and the Class B Certificateholders are scheduled to
receive payments of principal on the Expected Final Payment Date, which is
the Distribution Date, but may receive principal payments earlier in the
event of a Pay Out Event which results in the commencement of the Early
Amortization Period. The Class B Certificateholders will not begin to
receive payments of principal until the Class A Invested Amount has been
paid in full.
During the Accumulation Period, an amount equal to, for each Monthly
Period, the least of (a) the Available Investor Principal Collections, (b)
the applicable "Controlled Deposit Amount," which is equal to the sum of
the applicable Controlled Accumulation Amount for such Monthly Period and
the applicable Accumulation Shortfall, if any, and (c) the ABC Adjusted
Invested Amount (prior to any deposits on such day) will be deposited in
the Principal Funding Account until the amount on deposit in the Principal
Funding Account (the "Principal Funding Account Balance") equals the sum of
the Class A Invested Amount, the Class B Invested Amount and the Class C
Invested Amount.
Although it is anticipated that Available Investor Principal
Collections will be available during each Monthly Period in the
Accumulation Period to make a deposit to the Principal Funding Account of
the applicable Controlled Deposit Amount and that on the Expected Final
Payment Date the Class A Invested Amount will be paid to the Class A
Certificateholders, the Class B Invested Amount will be paid to the Class B
Certificateholders and the Class C Invested Amount will be paid to the
Class C Certificateholders, no assurance can be given in that regard. If
the amount required to pay the Class A Invested Amount, the Class B
Invested Amount or the Class C Invested Amount in full is not available in
the Principal Funding Account on the Expected Final Payment Date, or if a
Pay Out Event occurs during the Accumulation Period, the Early Amortization
Period will commence and any amount on deposit in the Principal Funding
Account will be paid to the Class A Certificateholders on the next
Distribution Date and an amount equal to the Available Investor Principal
Collections will be paid to the Class A Certificateholders on each
succeeding Distribution Date until the earlier of the Distribution Date on
which the Class A Invested Amount has been paid in full and the Termination
Date. After the Class A Invested Amount has been paid in full, Available
Investor Principal Collections will be paid to the Class B
Certificateholders on each Distribution Date until the earlier of the date
on which the Class B Invested Amount has been paid in full and the
Termination Date.
A "Pay Out Event" occurs, either automatically or after specified
notice, upon (a) the failure of the Transferor to make certain payments or
transfers of funds for the benefit of the Certificateholders or to observe
or perform in any material respect certain other covenants within the time
periods stated in the Pooling and Servicing Agreement, (b) material
breaches of certain representations, warranties, or covenants of the
Transferor which remain uncured after grace periods specified in the
Pooling and Servicing Agreement, (c) certain bankruptcy or insolvency
events relating to Metris, the Transferor or Direct Merchants Bank, (d) the
occurrence of a Servicer Default that would have a material adverse effect
on the Certificateholders, (e) (w) the Transferor Interest being less than
the Minimum Transferor Interest, (x) (i) the sum of the amount on deposit
in the Pre-Funding Account plus the Series Allocation Percentage of the sum
of the total amount of Principal Receivables plus amounts on deposit in the
Excess Funding Account being less than (ii) the sum of the aggregate
outstanding principal amounts of the Class A Certificates, the Class B
Certificates, the Class C Certificates and the Class D Certificates, (y)
the total amount of Principal Receivables and the amounts on deposit in the
Excess Funding Account and the Principal Funding Account being less than
the Minimum Aggregate Principal Receivables (z) the Retained Percentage
shall be equal or less than 2 percent, in each case as of any Determination
Date, (f) the Trust becoming subject to regulation as an "investment
company" within the meaning of the Investment Company Act, or (g) a
reduction in the average of the Portfolio Yields for any three consecutive
Monthly Periods to a rate which is less than the weighted average of the
Base Rates for such three consecutive Monthly Periods. See "Description of
the Offered Certificates--Pay Out Events." In the event of an early payment
of principal on the Offered Certificates, Certificateholders may realize a
lower yield on their reinvestment of such early payment and may be required
to incur costs associated with reinvesting such funds.
The "Base Rate" means, with respect to any Monthly Period, the sum of
(i) the weighted average of the Class A Certificate Rate, the Class B
Certificate Rate and the Class C Certificate Rate as of the last day of
such Monthly Period (weighted based on the Class A Invested Amount, the
Class B Invested Amount and the Class C Invested Amount, respectively, as
of the last day of such Monthly Period) plus (ii) the product of 2.00
percent per annum and the percentage equivalent of a fraction the numerator
of which is the Adjusted Invested Amount and the denominator of which is
the Invested Amount, each as of the last day of such Monthly Period. The
term "Portfolio Yield" means, with respect to any Monthly Period, the
annualized percentage equivalent of a fraction, the numerator of which is
the sum of the aggregate amount of Available Series Finance Charge
Collections for such Monthly Period (not including the amounts on deposit
in the Payment Reserve Account and Adjustment Payments made by the
Transferor with respect to Adjustment Payments required to be made but not
made in prior Monthly Periods, if any) plus the Principal Funding Account
Investment Proceeds, investment earnings on amounts on deposit in the
Pre-Funding Account and amounts withdrawn from the Accumulation Period
Reserve Account with respect to such Monthly Period calculated on a cash
basis after subtracting the Investor Default Amount and the Series
Allocation Percentage of any Adjustment Payments which the Transferor is
required but fails to make pursuant to the Pooling and Servicing Agreement
for such Monthly Period, and the denominator of which is the average daily
Invested Amount plus the Pre-Funded Amount during the preceding Monthly
Period; provided, however, that Excess Finance Charge Collections applied
for the benefit of the Certificateholders may be added to the numerator if
the Rating Agency Condition is satisfied. See "Description of the Offered
Certificates--Pay Out Events."
Payment Rates. The following table sets forth the highest and lowest
cardholder monthly payment rates for the Receivables during any month in
the period shown and the average cardholder monthly payment rates for all
months during the period shown, in each case calculated as a percentage of
the previous month's total statement balance. Payment rates shown in the
table are based on amounts which would be deemed payments of Principal
Receivables and Finance Charge Receivables with respect to the Accounts
(total payments).
CARDHOLDER MONTHLY PAYMENT RATES FOR THE DIRECT MERCHANTS BANK PORTFOLIO
<TABLE>
<CAPTION>
QUARTER ENDED
SEPT. JUNE MARCH DEC. SEPT. JUNE MARCH DEC. SEPT. JUNE
30, 30, 31, 31, 30, 30, 31, 31, 30, 30,
1997 1997 1997 1996 1996 1996 1996 1995 1995 1995
----- ----- ----- ----- ----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Highest Month....... 7.5% 8.4% 8.8% 8.5% 8.7% 12.7% 64.7%
Lowest Month........ 6.8% 6.4% 8.0% 8.0% 7.9% 8.5% 19.7%
Monthly Average (1). 7.1% 7.5% 8.3% 8.3% 8.3% 10.5% 42.2%
</TABLE>
(1) Monthly Averages shown are expressed as an arithmetic average of the
payment rate for each month for the period indicated.
The amount of collections of Receivables may vary from month to month
due to various factors, including seasonal variations, general economic
conditions, economic and financial conditions affecting the payment habits
of individual cardholders, the Credit Card Originator's minimum monthly
payment requirements, and acts of God. There can be no assurance that
collections with respect to the Trust, and thus the rate at which the
Certificateholders could expect to receive payments of principal on their
Certificates during the Amortization Period, will be similar to the
historical experience set forth above. If a Pay Out Event occurs, the
average life and maturity of the Offered Certificates could be
significantly reduced.
Because the actual payment rate at the end of the Revolving Period
may be less than the payment rate used to determine the Controlled
Accumulation Amount, or a Pay Out Event may occur which would initiate the
Early Amortization Period, there can be no assurance that the actual number
of months elapsed from the date of issuance of the Offered Certificates to
the Expected Final Payment Date will equal the expected number of months
for such period. See "Risk Factors--Payments and Maturity." As described
under "Description of the Offered Certificates--Postponement of
Accumulation Period," the Servicer may shorten the Accumulation Period and,
in such event, there can be no assurance that the duration of the
Accumulation Period will be sufficient for the accumulation of all amounts
necessary to pay the Class A Invested Amount and the Class B Invested
Amount on the Expected Final Payment Date, especially if a pay out event
were to occur with respect to one or more other Series thereby limiting the
amount of Shared Principal Collections allocable to the Offered
Certificates.
POOL FACTOR AND RELATED INFORMATION
The "Class A Pool Factor" and the "Class B Pool Factor" are each a
seven-digit decimal, which the Servicer will compute monthly, expressing as
of each Record Date, respectively, the sum of the Class A Invested Amount
and the Class A Percentage of funds on deposit in the Pre-Funding Account
as a proportion of the Class A Initial Invested Amount, and the sum of the
Class B Invested Amount and the Class B Percentage of funds on deposit in
the Pre-Funding Account as a proportion of the Class B Initial Invested
Amount. On the Closing Date, the Class A Pool Factor and the Class B Pool
Factor will each be 1.0000000 and will remain unchanged during the
Revolving Period, except in certain limited circumstances. Thereafter, on
and after the first Distribution Date on which principal payments are made
to the Class A Certificateholders during the Amortization Period, the Class
A Pool Factor will decline to reflect reductions in the Class A Invested
Amount and on and after the Class B Principal Payment Commencement Date,
the Class B Pool Factor will decline to reflect reductions in the Class B
Invested Amount. A Certificateholder's pro rata interest in the Principal
Receivables in the Trust for a given month can be determined by multiplying
the denomination of the holder's Certificate by the applicable Pool Factor
for that month.
Pursuant to the Pooling and Servicing Agreement, monthly reports
concerning the Class A Invested Amount, the Class A Pool Factor, the Class
B Invested Amount and the Class B Pool Factor and various other items of
information will be made available to the Class A Certificateholders and
the Class B Certificateholders, respectively. See "Description of the
Offered Certificates--Reports to Certificateholders."
USE OF PROCEEDS
The Transferor will apply the net proceeds received from the sale of
the Offered Certificates, which is expected to be approximately
$__________, to pay a class of the Series 1995-1 Variable Funding
Certificates, to fund the Pre-Funding Account to the extent of the
Pre-Funded Amount, to pay the purchase price of Receivables and to make a
deposit to the Interest Funding Account for the payment of Class A Interest
on the first Distribution Date.
DESCRIPTION OF THE OFFERED CERTIFICATES
The Offered Certificates will be issued pursuant to the Pooling and
Servicing Agreement and the Series 1997-2 Supplement. Pursuant to the
Pooling and Servicing Agreement, the Transferor and the Trustee previously
executed the Supplements with respect to the Previously Issued Series and
may execute additional Supplements in order to issue additional Series.
GENERAL
The Offered Certificates will represent undivided interests in
certain assets of the Trust, including the right to the investor allocation
percentage of all Obligor payments on the Receivables in the Trust. Each
Class A Certificate and Class B Certificate represents the right to receive
payments of interest at the Class A Certificate Rate or the Class B
Certificate Rate, as the case may be, funded from Available Series Finance
Charge Collections and the right to receive payments of principal on the
Expected Final Payment Date or such earlier date following the occurrence
of a Pay Out Event funded from Principal Collections allocated to the Class
A Certificateholders' Interest or the Class B Certificateholders' Interest,
as the case may be. With respect to the Accumulation Period, principal
payments will be made to the Class A Certificateholders and the Class B
Certificateholders on the Expected Final Payment Date.
The Transferor will own the Exchangeable Transferor Certificate and
the Class D Certificates. The Exchangeable Transferor Certificate will
represent an undivided interest in the Trust, including the right to the
Transferor Percentage of all Obligor payments on the Receivables in the
Trust equal to 100 percent minus the sum of the applicable investor
allocation percentages (which shall not exceed 100 percent) for all Series
of certificates then outstanding. See "--Certain Matters Regarding the
Transferor and the Servicer." During the Revolving Period, following the
Funding Period, the amount of the Invested Amount in the Trust will remain
constant except under certain limited circumstances. See "--Defaulted
Receivables; Dilution." The amount of Principal Receivables in the Trust,
however, will vary each day as new Principal Receivables are transferred to
the Trust and others are paid. The amount of the Transferor Interest (or
the amount in the Excess Funding Account) will fluctuate each day,
therefore, to reflect the changes in the amount of the Principal
Receivables in the Trust unless and to the extent that the Previously
Issued Series or another Series absorb such change. During the Accumulation
Period, the Adjusted Invested Amount will decline as Obligor payments of
Principal Receivables are collected and held in the Principal Funding
Account for distribution to the Certificateholders. During the Early
Amortization Period, the Invested Amount will decline as Obligor payments
of Principal Receivables are collected and distributed to
Certificateholders. As a result, unless and to the extent that the
Previously Issued Series or another Series absorb such increase, the
Transferor Interest will generally increase each month during the
Accumulation Period or the Early Amortization Period to reflect the
reductions in the Adjusted Invested Amount or the Invested Amount of the
Certificates and will also change to reflect the variations in the amount
of the Principal Receivables in the Trust. The Transferor Interest maybe
reduced as the result of an Exchange. See "--Exchanges."
Each Class of Offered Certificates initially will be represented by
certificates registered in the name of the nominee of DTC (together with
any successor depository selected by the Transferor, the "Depository"),
except as set forth below. Beneficial interests in each Class of Offered
Certificates will be available for purchase in minimum denominations of
$1,000 and in integral multiples of $1,000 in excess thereof in book-entry
form only. The Transferor has been informed by DTC that DTC's nominee will
be Cede & Co. Accordingly, Cede & Co. is expected to be the holder of
record of the Offered Certificates. Unless and until Definitive
Certificates are issued under the limited circumstances described herein,
no Certificate Owner acquiring an interest in any Class of Offered
Certificates will be entitled to receive a certificate representing such
Certificate Owner's interest in such Certificates. Until such time, all
references herein to actions by Certificateholders of any Class of Offered
Certificates will refer to actions taken by the Depository upon
instructions from its participating organizations ("Participants") and all
references herein to distributions, notices, reports and statements to
Certificateholders of any Class of Offered Certificates will refer to
distributions, notices, reports and statements to the Depository or its
nominee, as the registered holder of the Offered Certificates of such
Class, for distribution to Certificate Owners of such Class in accordance
with the Depository's procedures. See "--Book-Entry Registration" and
"--Definitive Certificates."
BOOK-ENTRY REGISTRATION
With respect to each Class of Offered Certificates in book-entry
form, Certificateholders may hold their Certificates through DTC (in the
United States) or Cedel or Euroclear (in Europe), which in turn hold
through DTC, if they are participants of such systems, or indirectly
through organizations that are participants in such systems.
Cede & Co., as nominee for DTC, will hold the global certificates.
Cedel and Euroclear will hold omnibus positions on behalf of the Cedel
Participants and the Euroclear Participants, respectively, through
customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries (collectively, the "Depositaries")
which in turn will hold such positions in customers' securities accounts in
the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities for its Participants ("DTC
Participants") and facilitates the clearance and settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Participants include securities brokers and dealers, banks,
trust companies, clearing corporations, and certain other organizations.
Indirect access to the DTC system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to
DTC and its Participants are on file with the Securities and Exchange
Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC in the United States, on the one hand, and directly or
indirectly through Cedel Participants or Euroclear Participants, on the
other, will be effected in DTC in accordance with DTC rules on behalf of
the relevant European international clearing system by its Depositary;
however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to
effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Cedel
Participants and Euroclear Participants may not deliver instructions
directly to the Depositaries.
Because of time-zone differences, credits or securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Cedel Participant or Euroclear Participant on such business day.
Cash received in Cedel or Euroclear as a result of sales of securities by
or through a Cedel Participant or a Euroclear Participant to a DTC
Participant will be received with value on the DTC settlement date but will
be available in the relevant Cedel or Euroclear cash account only as of the
business day following settlement in DTC.
Purchases of Certificates under the DTC system must be made by or
through Participants, which will receive a credit for the Certificates on
DTC's records. The ownership interest of each actual Certificate Owner is
in turn to be recorded on the Participants' and Indirect Participants'
records. Certificate Owners will not receive written confirmation from DTC
of their purchase, but Certificate Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Participant or Indirect Participant
through which the Certificate Owner entered into the transaction. Transfers
of ownership interests in the Certificates are to be accomplished by
entries made on the books of Participants acting on behalf of Certificate
Owners. Certificate Owners will not receive certificates representing their
ownership interest in Certificates, except in the event that use of the
book-entry system for the Certificates is discontinued.
To facilitate subsequent transfers, all Certificates deposited by
Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Certificates with DTC and their
registration in the name of Cede & Co. effects no change in beneficial
ownership. DTC has no knowledge of the actual Certificate Owners of the
Certificates; DTC's records reflect only the identity of the Participants
to whose accounts such Certificates are credited, which may or may not be
the Certificate Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to
Participants, by Participants to Indirect Participants, and by Participants
and Indirect Participants to Certificate Owners will be governed by
arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to
Certificates. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns Cede &
Co.'s consenting or voting rights to those Participants to whose accounts
the Certificates are credited on the record date (identified in a listing
attached thereto). Principal and interest payments on the Certificates will
be made to DTC. DTC's practice is to credit Participants' accounts on the
Distribution Date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payment on the Distribution Date. Payments by Participants to Certificate
Owners will be governed by standing instructions and customary practices,
as is the case with securities held for the accounts of customers in bearer
form or registered in "street name," and will be the responsibility of such
Participant and not of DTC, the Trustee or the Transferor, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal and interest to DTC is the responsibility of the
Trustee, disbursement of such payments to Participants shall be the
responsibility of DTC, and disbursement of such payments to the Certificate
Owners shall be the responsibility of Participants and Indirect
Participants.
DTC may discontinue providing its services as securities depository
with respect to the Certificates at any time by giving reasonable notice to
the Transferor or the Trustee. Under such circumstances, in the event that
a successor securities depository is not obtained, Definitive Certificates
are required to be printed and delivered. The Transferor may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor securities depository). In that event, Definitive Certificates
will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Transferor believes to be
reliable, but the Transferor takes no responsibility for the accuracy
thereof.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws
of Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel
Participants through electronic book-entry changes in accounts of Cedel
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled by Cedel in any of 36 currencies,
including United States dollars. Cedel provides to its Cedel Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedel interfaces with domestic markets in several countries. As
a professional depository, Cedel is subject to regulations by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers
and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters of any Series of
Certificates. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Cedel Participant, either directly or
indirectly.
The Euroclear System (the "Euroclear System") was created in 1968 to
hold securities for participants of the Euroclear System ("Euroclear
Participants") and to clear and settle transactions between Euroclear
Participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates
and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 34 currencies, including United
States dollars. The Euroclear System includes various other services,
including securities lending and borrowing and interfaces with domestic
markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. The Euroclear System is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York, (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear system on behalf of Euroclear
Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any Series of
Certificates. Indirect access to the Euroclear System is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such,
it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission. Securities clearance accounts and cash accounts
with the Euroclear Operator are governed by the Terms and Conditions
Governing Use of Euroclear and the related Operating Procedures of the
Euroclear System and applicable Belgian law (collectively, the "Terms and
Conditions"). The Terms and Conditions govern transfers of securities and
cash within the Euroclear System, withdrawal of securities and cash from
the Euroclear System, and receipts of payments with respect to securities
in the Euroclear System. All securities in the Euroclear System are held on
a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms
and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Certificates held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions
will be subject to tax reporting in accordance with relevant United States
tax laws and regulations. Cedel or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Certificateholder
under the related Pooling and Servicing Agreement on behalf of a Cedel
Participant or a Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
DEFINITIVE CERTIFICATES
The Offered Certificates of each Class will be issued in fully
registered, certificated form to the Certificate Owners of such Class or
their nominees ("Definitive Certificates"), rather than to the Depository
or its nominee, only if (i) the Transferor advises the Trustee in writing
that the Depository is no longer willing or able to discharge properly its
responsibilities as Depository with respect to the Certificates of such
Class, and the Trustee or the Transferor is unable to locate a qualified
successor, (ii) the Transferor, at its option, advises the Trustee in
writing that it elects to terminate the book-entry system through the
Depository, or (iii) after the occurrence of a Servicer Default,
Certificate Owners representing not less than 50 percent of the Invested
Amount of such Class advise the Trustee and the Depository through
Participants in writing that the continuation of a book-entry system
through the Depository is no longer in the best interest of the Certificate
Owners of such Class.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Depository is required to notify all Participants
of the availability through the Depository of Definitive Certificates. Upon
surrender by the Depository of the definitive certificate representing the
Certificates of the affected Class and instructions for registration, the
Trustee will issue the Certificates of such Class as Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Pooling and
Servicing Agreement.
Distribution of principal and interest on the Offered Certificates
will be made by the Trustee directly to Certificateholders in accordance
with the procedures set forth herein and in the Pooling and Servicing
Agreement. Interest payments and any principal payments on each
Distribution Date will be made to Certificateholders in whose names the
Definitive Certificates were registered at the close of business on the
related Record Date. Distributions will be made by check mailed to the
address of such Certificateholder as it appears on the register maintained
by the Trustee. The final payment on any Offered Certificate, however, will
be made only upon presentation and surrender of such Certificate at the
office or agency specified in the notice of final distribution to
Certificateholders. The Trustee will provide such notice to registered
Certificateholders mailed not later than the fifth day of the month of such
final distributions.
Definitive Certificates will be transferable and exchangeable at the
offices of the transfer agent and registrar, which initially will be the
Trustee (in such capacity, the "Transfer Agent and Registrar"). No service
charge will be imposed for any registration of transfer or exchange, but
the Transfer Agent and Registrar may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
The Transfer Agent and Registrar will not be required to register the
transfer or exchange of Definitive Certificates for the period from the
Record Date preceding the due date for any payment to the Distribution Date
with respect to such Definitive Certificates.
INTEREST PAYMENTS
Interest will accrue on the outstanding principal balance of the
Class A Certificates at the Class A Certificate Rate and on the outstanding
principal balance of the Class B Certificates at the Class B Certificate
Rate, in each case from the Closing Date. Interest will be distributed on ,
1997, and on each Distribution Date thereafter to Certificateholders of
each Class in an amount equal to one-twelfth of the product of the
applicable Certificate Rate and the applicable outstanding principal
balance as of the preceding Record Date, except that interest for the first
Distribution Date will include accrued interest at the applicable
Certificate Rate from the Closing Date through , 1997. Interest will be
calculated on the basis of a 360-day year of twelve 30-day months. Interest
payments on the Class A Certificates on any Distribution Date will be
funded from Available Series Finance Charge Collections with respect to the
preceding Monthly Period (and with respect to the first Distribution Date,
the amount of the initial deposit to the Interest Funding Account to be
made on the Closing Date) and from certain other funds allocated as set
forth in the Pooling and Servicing Agreement to the respective classes of
the Certificates and deposited on each business day during such Monthly
Period in the Interest Funding Account. Subject to the prior payment of
interest on the Class A Certificates, interest payments on the Class B
Certificates on any Distribution Date will be funded from Available Series
Finance Charge Collections with respect to the preceding Monthly Period and
from certain other funds allocated as set forth in the Pooling and
Servicing Agreement to the respective classes of the Certificates and
deposited on each business day during such Monthly Period in the Interest
Funding Account.
PRINCIPAL PAYMENTS
During the Revolving Period (the period from and including the
Closing Date to but excluding the earlier of (a) the commencement of the
Accumulation Period and (b) the commencement of the Early Amortization
Period), Principal Collections allocable to the Invested Amount, subject to
certain limitations, including the allocation of any Reallocated Principal
Collections with respect to the related Monthly Period to pay the Class A
Required Amount and the Class B Required Amount, will be treated as Shared
Principal Collections.
With respect to each Monthly Period during the Accumulation Period,
the Trustee will deposit in the Principal Funding Account an amount equal
to the least of (a) the Available Investor Principal Collections with
respect to the preceding Monthly Period, (b) the applicable Controlled
Deposit Amount and (c) the ABC Adjusted Invested Amount prior to any such
deposit. Amounts in the Principal Funding Account up to the Class A
Invested Amount will be paid to the Class A Certificateholders on the
Expected Final Payment Date. After payment in full of the Class A Invested
Amount, amounts remaining in the Principal Funding Account will be paid to
the Class B Certificateholders on the Expected Final Payment Date. After
payment in full of the Class A Invested Amount and the Class B Invested
Amount, amounts remaining in the Principal Funding Account will be paid to
the Class C Certificateholders on the Expected Final Payment Date. During
the Accumulation Period, concurrently with deposits to the Principal
Funding Account for the benefit of the Class A Certificates, Class B
Certificates and Class C Certificates, the Class D Invested Amount will be
reduced to an amount equal to the Stated Class D Amount. During the
Accumulation Period, the portion of Available Investor Principal
Collections not required to be deposited in the Principal Funding Account
will generally be treated as Shared Principal Collections.
"Available Investor Principal Collections" means, with respect to any
Monthly Period, an amount equal to the sum of (i) an amount equal to the
Fixed/Floating Allocation Percentage of all Principal Collections (less the
amount of Reallocated Principal Collections) received during such Monthly
Period, (ii) any amount on deposit in the Excess Funding Account or the
Pre-Funding Account allocated to the Certificates with respect to such
Monthly Period, (iii) the aggregate Investor Default Amount and the Series
Allocation Percentage of any unpaid Adjustment Payments paid from Available
Series Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections or Reallocated Principal Collections with
respect to such Monthly Period and any reimbursements from Available Series
Finance Charge Collections, Transferor Finance Charge Collections, Excess
Finance Charge Collections or Reallocated Principal Collections of
unreimbursed Class A Investor Charge-Offs, Class B Investor Charge-Offs,
Class C Investor Charge-Offs and Class D Investor Charge-Offs and (iv)
Shared Principal Collections allocated to the Certificates.
On each Distribution Date following the Monthly Period in which the
Early Amortization Period commences, the Class A Certificateholders will be
entitled to receive Available Investor Principal Collections for the
preceding Monthly Period in an amount up to the Class A Invested Amount
until the earlier of the date the Class A Invested Amount is paid in full
and the Termination Date. In addition, if a Pay Out Event occurs during the
Accumulation Period, the Early Amortization Period will commence and any
amount on deposit in the Principal Funding Account will be paid to the
Certificateholders of each Class of Certificates, sequentially, in
alphabetical order, on the Distribution Date following the Monthly Period
in which the Early Amortization Period commences. After payment in full of
the Class A Invested Amount, the Class B Certificateholders will be
entitled to receive Available Investor Principal Collections on each
Distribution Date during the Early Amortization Period until the earlier of
the date the Class B Invested Amount is paid in full and the Termination
Date. After payment in full of the Class B Invested Amount, the Class C
Certificateholders will be entitled to receive Available Investor Principal
Collections on each Distribution Date until the earlier of the date the
Class C Invested Amount is paid in full and the Termination Date. See
"--Pay Out Events" below for a discussion of events which might lead to the
commencement of the Early Amortization Period.
In the event of a sale of the Receivables and an early termination of
the Trust due to a Trigger Event, the breach of certain representations and
warranties, an optional repurchase of the Receivables by the Transferor, a
repurchase of the Receivables in connection with a Servicer Default or a
sale of the Receivables in connection with the Termination Date (each as
described under "--Pay Out Events," "--Servicer Default," and "--Final
Payment of Principal; Termination"), distributions of principal will be
made to the Certificateholders upon surrender of their Certificates. The
proceeds of any such sale or repurchase of Receivables will be allocated
first to pay amounts due with respect to the Class A Certificates, then to
pay amounts due with respect to the Class B Certificates, then to pay
amounts due with respect to the Class C Certificates and then to pay
amounts due with respect to the Class D Certificates as described herein.
POSTPONEMENT OF ACCUMULATION PERIOD
Upon written notice to the Trustee, the Servicer may elect to
postpone the commencement of the Accumulation Period, and extend the length
of the Revolving Period, subject to certain conditions including those set
forth below. The Servicer may make such election only if the Accumulation
Period Length (determined as described below) is less than twelve months.
On each Determination Date, until the Accumulation Period begins, the
Servicer will determine the "Accumulation Period Length," which is the
number of months expected to be required to fully fund the Principal
Funding Account no later than the end of the Monthly Period preceding the
Expected Final Payment Date, based on (a) the monthly collections of
Principal Receivables expected to be distributable to the
certificateholders of all Series (unless Shared Principal Collections from
any such other Series are not allocated to be shared with the
Certificates), assuming a principal payment rate no greater than the lowest
monthly principal payment rate on the Receivables for the preceding twelve
months and (b) the amount of principal expected to be distributable to
certificateholders of Series (which may exclude certain other Series) which
are not expected to be in their revolving periods during the Accumulation
Period. If the Accumulation Period Length is less than twelve months, the
Servicer may, at its option, postpone the commencement of the Accumulation
Period such that the number of months included in the Accumulation Period
will be equal to or exceed the Accumulation Period Length. The effect of
the foregoing calculation is to permit the reduction of the length of the
Accumulation Period based on (i) the invested amounts of certain other
Series which are scheduled to be in their revolving periods during the
Accumulation Period and (ii) increases in the principal payment rate
occurring after the Closing Date. The length of the Accumulation Period
will not be less than one month. If the Accumulation Period is postponed in
accordance with the foregoing, and if a Pay Out Event occurs after the date
originally scheduled as the commencement date of the Accumulation Period,
it is probable that Certificateholders would receive some of their
principal later than if the Accumulation Period had not been so postponed.
SUBORDINATION OF THE CLASS B CERTIFICATES
The Class B Certificates will be subordinated to the extent necessary
to fund certain payments with respect to the Class A Certificates. To the
extent the Class B Invested Amount is reduced, the percentage of Finance
Charge Collections allocated to the Class B Certificateholders in
subsequent Monthly Periods will be reduced. Moreover, to the extent the
amount of such reduction in the Class B Invested Amount is not reimbursed,
the amount of principal distributable to the Class B Certificateholders
will be reduced.
The Class C Certificates will be subordinated to the extent necessary
to fund certain payments with respect to the Class A Certificates and the
Class B Certificates. To the extent the Class C Invested Amount is reduced,
the percentage of Finance Charge Collections allocated to the Class C
Certificateholders in subsequent Monthly Periods will be reduced. Moreover,
to the extent the amount of such reduction in the Class C Invested Amount
is not reimbursed, the amount of principal distributable to the Class C
Certificateholders will be reduced.
If, on any Determination Date, the aggregate Investor Default Amount
and the unpaid Adjustment Payments, if any, for each business day in the
preceding Monthly Period exceeds (a) the aggregate amount of Available
Series Finance Charge Collections applied to the payment thereof as
described in clauses (v) and (vi) of "--Application of Collections--Payment
of Fees, Interest and Other Items," (b) the amount of Transferor Finance
Charge Collections and Excess Finance Charge Collections allocated thereto
as described in "--Reallocation of Cash Flows," and (c) the amount of
Reallocated Principal Collections allocated with respect thereto as
described in "--Reallocated Principal Collections," the Class D Invested
Amount (following the reduction thereof in an amount equal to the amount of
any Reallocated Principal Collections to be applied on the related
Distribution Date) will be reduced by the amount by which the sum of
aggregate Investor Default Amount and the unpaid Adjustment Payments
exceeds the amount applied with respect thereto during the preceding
Monthly Period. Such reductions of the Class D Invested Amount will
thereafter be reimbursed and the Class D Invested Amount increased on each
business day by the amount, if any, of Available Series Finance Charge
Collections and Excess Finance Charge Collections allocated and available
for that purpose.
In the event that any such reduction of the Class D Invested Amount
would cause the Class D Invested Amount to be a negative number, the Class
D Invested Amount will be reduced to zero and the Class C Invested Amount
will be reduced by the amount by which the Class D Invested Amount would
have been reduced below zero, but not more than the sum of the remaining
aggregate Investor Default Amount and the remaining unpaid Adjustment
Payments for such Monthly Period. Such reductions of the Class C Invested
Amount will thereafter be reimbursed and the Class C Invested Amount
increased on each business day by the amount, if any, of Available Series
Finance Charge Collections and Excess Finance Charge Collections for such
business day allocated and available for that purpose.
In the event that any such reduction of the Class C Invested Amount
would cause the Class C Invested Amount to be a negative number, the Class
C Invested Amount will be reduced to zero and the Class B Invested Amount
will be reduced by the amount by which the Class C Invested Amount would
have been reduced below zero, but not more than the sum of the remaining
aggregate Investor Default Amount and the remaining unpaid Adjustment
Payments for such Monthly Period. Such reductions of the Class B Invested
Amount will thereafter be reimbursed and the Class B Invested Amount
increased on each business day by the amount, if any, of Available Series
Finance Charge Collections and Excess Finance Charge Collections for such
business day allocated and available for that purpose. If the Class B
Invested Amount is reduced to zero, the Class A Invested Amount will be
reduced by the amount by which the Class B Invested Amount would have been
reduced below zero, but not more than the sum of the remaining aggregate
Investor Default Amount and the remaining unpaid Adjustment Payments for
such Monthly Period. Such reductions of the Class A Invested Amount will
thereafter be reimbursed and the Class A Invested Amount increased on each
business day by the amount, if any, of Available Series Finance Charge
Collections and Excess Finance Charge Collections allocated and available
for that purpose. See "--Reallocation of Cash Flows," "--Reallocated
Principal Collections" and "--Investor Charge-Offs."
TRANSFER AND ASSIGNMENT OF RECEIVABLES
On the date of the initial issuance of the Series 1995-1 Variable
Funding Certificates, (the "Initial Closing Date"), the Transferor
transferred and assigned to the Trust all of its right, title, and interest
in and to the Receivables outstanding as of the Initial Closing Date, all
of the Receivables thereafter created and the proceeds of all of the
foregoing. Prior to such transfer and assignment and pursuant to the
Purchase Agreement, FCI (as predecessor to Metris under the Purchase
Agreement) contributed and sold to the Transferor all its right, title and
interest in and to the Receivables existing as of the Initial Closing Date,
all the Receivables thereafter created and all FCI's interest in the Bank
Purchase Agreement. Prior to such sale and contribution and pursuant to the
Bank Purchase Agreement, Direct Merchants Bank sold to FCI (as predecessor
to Metris under the Bank Purchase Agreement) all its right, title and
interest in and to the Receivables existing as of the date of such
agreement and all the Receivables arising from time to time thereafter. In
connection with the realignment of FCI's subsidiaries in September 1996,
FCI assigned to Metris all of FCI's rights and Metris assumed all of FCI's
obligations under the Bank Purchase Agreement and the Purchase Agreement.
On the Closing Date, the Trustee will authenticate the Certificates and
deliver the Certificates to the Transferor which will in turn deliver the
Offered Certificates to the Underwriters against payment of the net
proceeds of the sale of the Offered Certificates.
Direct Merchants Bank for itself and as Servicer has identified in
its computer files that the Receivables are Receivables as defined herein.
Direct Merchants Bank, as initial Servicer, retains and will not deliver to
the Trustee any other records or agreements relating to the Receivables.
The records and agreements relating to the Receivables will not be
segregated from those relating to other accounts and receivables of Direct
Merchants Bank and the physical documentation relating to Receivables will
not be stamped or marked to reflect the transfer of Receivables to the
Trust. The Trustee will have reasonable access to such records and
agreements as required by applicable law or to enforce the rights of the
Certificateholders. Direct Merchants Bank has filed one or more UCC-1
financing statements in accordance with the UCC to perfect the interest of
FCI (as predecessor to Metris) in the Receivables and a UCC-3 financing
statement reflecting FCI's assignment of such interest in the Receivables
to Metris. FCI (as predecessor to Metris under the Purchase Agreement) and
Metris have filed UCC-1 financing statements in accordance with the UCC to
perfect the Transferor's interest in the Receivables. The Transferor, in
turn, has filed one or more UCC-1 financing statements in accordance with
applicable state law to perfect the Trust's interest in the Receivables,
which financing statements have been amended by the filing of one or more
UCC-3 financing statements reflecting the change in the name of the
Transferor. See "Certain Legal Aspects of the Receivables."
EXCHANGES
The Pooling and Servicing Agreement provides for the Trustee to issue
two types of certificates: (i) investor certificates in one or more Series
of certificates, each of which may have one or more classes of certificates
of which one or more such classes may be transferable, and (ii) the
Exchangeable Transferor Certificate. The Exchangeable Transferor
Certificate evidences the Transferor Interest, is held by the Transferor,
and will be transferable only as provided in the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement also provides that, pursuant
to any one or more Supplements, the holder of the Exchangeable Transferor
Certificate may tender the Exchangeable Transferor Certificate and the
certificates evidencing any Series of certificates, to the Trustee in
exchange for one or more new Series and a reissued Exchangeable Transferor
Certificate. Under the Pooling and Servicing Agreement, the holder of the
Exchangeable Transferor Certificate may define, with respect to any newly
issued Series, certain terms including: (i) its name or designation; (ii)
its initial invested amount (or method for calculating such amount); (iii)
its certificate rate (or the method of allocating interest payments or
other cash flows to such Series); (iv) the closing date; (v) the rating
agency or agencies, if any, rating the Series; (vi) the interest payment
date or dates and the date or dates from which interest shall accrue; (vii)
the name of the clearing agency, if any; (viii) the method of allocating
Principal Collections for such Series and the method by which the principal
amount of investor certificates of such Series will amortize or accrue and
the method for allocating Finance Charge Collections; (ix) the names of any
accounts to be used by such Series and the terms governing the operation of
any such accounts; (x) the percentage used to calculate monthly servicing
fees; (xi) the Minimum Transferor Interest; (xii) the Enhancement provider,
if applicable, and the terms of any Enhancement with respect to such
Series; (xiii) the base rate applicable to such Series; (xiv) the terms on
which the certificates of such Series may be repurchased or remarketed to
other investors; (xv) the termination date of such Series; (xvi) any
deposit into any account provided for such Series; (xvii) the number of
classes of such Series and, if more than one class, the rights and
priorities of each such class; (xviii) the fees, if any, to be included in
funds available to certificateholders of such Series; (xix) the
subordination, if any, of such new Series with respect to any other Series;
(xx) the rights, if any, of the holder of the Exchangeable Transferor
Certificate that have been transferred to the holders of such Series; (xxi)
the pool factor; (xxii) the Minimum Aggregate Principal Receivables;
(xxiii) whether such Series will be part of a group or subject to being
paired with any other prefunded Series; (xxiv) whether such Series will be
prefunded; and (xxv) any other relevant terms, including whether or not
such Series will be pledged as collateral for an issuance of any other
securities, including commercial paper (all such terms, the "Principal
Terms" of such Series). None of the Transferor, the Servicer, the Trustee,
or the Trust is required or intends to obtain the consent of any
Certificateholder to issue any additional Series or in connection with the
determination of the Principal Terms thereof. However, as a condition of an
Exchange, the holder of the Exchangeable Transferor Certificate will
deliver to the Trustee written confirmation that the Exchange will not
result in either Rating Agency reducing or withdrawing its rating of any
outstanding Series, including the Offered Certificates. The Transferor may
offer any Series to the public or other investors in transactions either
registered under the Securities Act or exempt from registration thereunder,
directly, through one or more underwriters or placement agents, in
fixed-price offerings, in negotiated transactions or otherwise. Any such
Series may be issued in fully registered or book-entry form in minimum
denominations determined by the Transferor. The Transferor currently
intends to offer, from time to time, additional Series. The Series 1997-2
Certificates are not subject to repurchase (except for any optional
repurchase as described in "--Final Payment of Principal; Termination") or
remarketing to other investors and the Transferor does not currently intend
to offer a Series of certificates subject to repurchase or remarketing.
The Pooling and Servicing Agreement provides that the holder of the
Exchangeable Transferor Certificate may perform Exchanges and define the
Principal Terms of each Series, including the period during which
amortization of the principal amount thereof is intended to occur, which
period may have a different length and begin on a different date than such
period for any other Series. Accordingly, one or more Series may be in
their amortization periods while other Series are not. Moreover, any Series
may have the benefit of an Enhancement that is available only to such
Series. Under the Pooling and Servicing Agreement, the Trustee will hold
any such form of Enhancement only on behalf of the Series with respect to
which it relates. Likewise, with respect to each such form of Enhancement,
the holder of the Exchangeable Transferor Certificate may deliver a
different form of Enhancement agreement. The Pooling and Servicing
Agreement also provides that the holder of the Exchangeable Transferor
Certificate may specify different coupon rates and monthly servicing fees
with respect to each Series (or a particular class within such Series).
Collections allocated to Finance Charge Receivables not used to pay
interest on the certificates, the monthly servicing fee, the investor
default amount, or investor charge-offs with respect to any Series will be
allocated as provided in such Enhancement agreement, if applicable. The
holder of the Exchangeable Transferor Certificate also has the option under
the Pooling and Servicing Agreement to vary between Series the terms upon
which a Series (or a particular class within such Series) may be
repurchased by the Transferor or remarketed to other investors.
Additionally, certain Series may be subordinated to other Series, and
classes within a Series may have different priorities. The Series 1997-2
Supplement does not permit the subordination of the Certificates to any
other Series that may be issued by the Trust (except to the limited extent
described herein with respect to Shared Principal Collections and Excess
Finance Charge Collections). There is no limit to the number of Exchanges
that may be performed under the Pooling and Servicing Agreement. The Trust
will terminate only as provided in the Pooling and Servicing Agreement.
Under the Pooling and Servicing Agreement and pursuant to a
Supplement, an Exchange may occur only upon the satisfaction of certain
conditions provided in the Pooling and Servicing Agreement. Under the
Pooling and Servicing Agreement, the holder of the Exchangeable Transferor
Certificate may perform an Exchange by notifying the Trustee at least five
business days in advance of the date upon which the Exchange is to occur.
Under the Pooling and Servicing Agreement, the notice will state the
designation of any Series to be issued on the date of the Exchange and,
with respect to each such Series: (i) its initial principal amount (or
method for calculating such amount), (ii) its certificate rate (or the
method of allocating interest payments or other cash flows to such Series),
and (iii) the provider of the Enhancement, if any, which is expected to
provide credit support with respect to it. The Pooling and Servicing
Agreement provides that on the date of the Exchange the Trustee will
authenticate any such Series only upon delivery to the Trustee of the
following: (i) a Supplement specifying the Principal Terms of such Series,
(ii) an opinion of counsel to the effect that the certificates of such
Series will be characterized as indebtedness or as partnership interests
under existing law for federal and applicable state income tax purposes, or
that the issuance of such Series will not materially adversely affect the
federal income tax characterization of any outstanding Series or result in
the trust being subject to tax at the entity level for federal or
applicable state tax purposes (a "Tax Opinion"), (iii) if required by such
Supplement, the form of Enhancement and an appropriate Enhancement
agreement with respect thereto executed by the Transferor and the issuer of
the Enhancement, (iv) written confirmation from each Rating Agency that the
Exchange will not result in such Rating Agency's reducing or withdrawing
its rating on any then outstanding Series rated by it, (v) the existing
Exchangeable Transferor Certificate and, if applicable, the certificates
representing the Series to be exchanged, and (vi) an officer's certificate
of the Transferor stating that, after giving effect to such Exchange, (a)
the Transferor Interest would be at least equal to the Minimum Transferor
Interest, (b) the Retained Interest (as defined in the Pooling and
Servicing Agreement) equals or exceeds the Minimum Retained Interest and
(c) the Trustee received confirmation from each Rating Agency that the then
current ratings of the Investor Certificates will not be reduced or
withdrawn and an opinion of Special Tax Counsel that such Certificate will
be characterized as indebtedness or interests in a partnership for federal
income tax purposes or the issuance of such Certificate will not materially
adversely effect the Federal or any applicable state tax consequences of
the Series.
Under the Pooling and Servicing Agreement, the Transferor may also
exchange the Exchangeable Transferor Certificate for a newly issued
Exchangeable Transferor Certificate and a second certificate (a
"Supplemental Certificate") the terms of which will be defined in a
Supplement upon the satisfaction of certain conditions provided in the
Pooling and Servicing Agreement.
PREVIOUSLY ISSUED SERIES
The Trust has previously issued the Series 1997-1 Asset Backed
Certificates, the Series 1996-1 Asset Backed Certificates and the Series
1995-1 Variable Funding Certificates bearing the various rates of interest
and having the outstanding principal amounts set forth in "Annex I: Other
Series."
REPRESENTATIONS AND WARRANTIES
Pursuant to the Pooling and Servicing Agreement, the Transferor
represents and warrants that, among other things, subject to specified
exceptions and limitations (i) the Transferor is duly organized, validly
existing, and in good standing under the laws of the state of Delaware and
has the corporate power and authority to execute, deliver, and perform its
obligations under the Pooling and Servicing Agreement, the Series 1997-2
Supplement, and the Purchase Agreement, (ii) the Transferor is duly
qualified to do business and in good standing (or is exempt from such
requirement) in any state required in order to conduct its business and has
obtained all necessary licenses and approvals required under federal and
Delaware law, provided, however, that no representation or warranty is made
with respect to any qualifications, licenses or approvals which the Trustee
would have to obtain to do business in any state in which the Trustee seeks
to enforce any Receivable, (iii) the execution and delivery of the Pooling
and Servicing Agreement, the Series 1997-2 Supplement, and the Purchase
Agreement, and the consummation of the transactions provided for therein,
have been duly authorized by the Transferor by all necessary corporate
action on its part, (iv) each of the Pooling and Servicing Agreement, the
Series 1997-2 Supplement, and the Purchase Agreement constitutes a legal,
valid, and binding obligation of the Transferor, and (v) the transfer of
Receivables by it to the Trust under the Pooling and Servicing Agreement
constitutes either a valid transfer and assignment to the Trust of all
right, title, and interest of the Transferor in and to the Receivables and
the proceeds thereof and amounts in any of the accounts established for the
benefit of certificateholders free and clear of any lien of any person
claiming through or under the Transferor or any of its affiliates (except
for Permitted Liens and certain rights of the Transferor) or the grant of a
first priority security interest in such Receivables and the proceeds
thereof (including amounts in any of the accounts established for the
benefit of certificateholders). In the event of a breach of any of the
representations and warranties described in this paragraph with respect to
any Series, either the Trustee or the holders of certificates evidencing
undivided interests in the Trust aggregating more than 50 percent of the
invested amount of such Series, by written notice to the Transferor (and to
the Trustee and the Servicer if given by the Certificateholders of such
Series), may direct the Transferor to accept reassignment of an amount of
Principal Receivables equal to the invested amount to be reassigned (as
described below) within 60 days of such notice, or within such longer
period specified in such notice. The Transferor will thereupon be obligated
to accept reassignment of such Receivables on a Distribution Date occurring
within such applicable period. Such reassignment will not be required to be
made, however, if at any time during such applicable period, or such longer
period, the representations and warranties shall then be true and correct
in all material respects. The amount to be deposited by the Transferor for
distribution to certificateholders in connection with such reassignment
will be equal to the invested amount for all Series of certificates other
than the Series 1995-1 Variable Funding Certificates required to be
reassigned on the last day of the Monthly Period preceding the Distribution
Date on which the reassignment is scheduled to be made, and, with respect
to the Variable Funding Certificates, the invested amount as of the
Distribution Date on which the reassignment is scheduled to be made, less
the amount, if any, previously allocated for payment of principal to such
certificateholders on such Distribution Date, plus an amount equal to all
interest accrued but unpaid on such certificates at the applicable
certificate rate through the last day of the related Interest Accrual
Period, less the amount transferred to the Distribution Account from the
Interest Funding Account in respect of interest on such certificates for
the month ending on such last day of the Monthly Period. The payment of the
reassignment deposit amount and the transfer of all other amounts deposited
for the preceding month in the Distribution Account will be considered a
payment in full of the investor interest for all Series of certificates
required to be repurchased and will be distributed upon presentation and
surrender of the certificates for each such Series. If the Trustee or
certificateholders give a notice as provided above, the obligation of the
Transferor to make any such deposit will constitute the sole remedy
available to the Trustee and the certificateholders with respect to any
breach of the Transferor's representations and warranties.
Pursuant to the Pooling and Servicing Agreement, the Transferor also
represents and warrants that, among other things, subject to specified
exceptions and limitations, (i) the execution and delivery of the Pooling
and Servicing Agreement, the Series 1997-2 Supplement, and the Purchase
Agreement, and the performance of the transactions contemplated thereby, do
not contravene the Transferor's charter or by-laws, violate any material
provision of law applicable to it or require any filing (except for filing
under the UCC), registration, consent, or approval under any such law
except for such filings, registrations, consents, or approvals as have
already been obtained and are in full force and effect, (ii) except as
described in the Purchase Agreement, the Transferor and each prior owner of
the Receivables has filed all material tax returns required to be filed and
has paid or made adequate provision for the payment of all material taxes,
assessments, and other governmental charges due from the Transferor or such
prior owner or is contesting any such tax, assessment or other governmental
charge in good faith through appropriate proceedings, (iii) there are no
proceedings or investigations pending or, to the best knowledge of the
Transferor, threatened against the Transferor, before any court, regulatory
body, administrative agency, or other tribunal or governmental
instrumentality asserting the invalidity of the Pooling and Servicing
Agreement, the Series 1997-2 Supplement, and the Purchase Agreement,
seeking to prevent the consummation of any of the transactions contemplated
thereby, seeking any determination or ruling that would materially and
adversely affect the performance by the Transferor of its obligations
thereunder, or seeking any determination or ruling that would materially
and adversely affect the validity or enforceability thereof or of the tax
attributes of the Trust, (iv) each Receivable is or will be an account
receivable arising out of the performance by Direct Merchants Bank in
accordance with the terms of the Contract giving rise to such Receivable,
(v) each Account classified as an Eligible Account in any document or
report delivered pursuant to the Pooling and Servicing Agreement satisfies
the definition of Eligible Account and the Transferor has no knowledge of
any fact which should have led it to expect at the time of the
classification of any Receivable as an Eligible Receivable that such
Receivable would not be paid in full when due, and each Receivable
classified as an Eligible Receivable by the Transferor in any document or
report delivered under the Pooling and Servicing Agreement satisfies the
requirements of eligibility contained in the definition of Eligible
Receivable set forth in the Pooling and Servicing Agreement, (vi) the
Transferor is not an "investment company" within the meaning of the
Investment Company Act (or is exempt from all provisions of such Act),
(vii) the Transferor is not insolvent and (viii) the Transferor is the
legal and beneficial owner of all right, title and interest in and to each
Receivable conveyed to the Trust by the Transferor pursuant to the Pooling
and Servicing Agreement, and each such Receivable has been or will be
transferred to the Trust free and clear of any lien other than Permitted
Liens and in compliance in all material respect with all requirements of
law applicable to the Transferor. If any representation or warranty made by
the Transferor in the Pooling and Servicing Agreement or the Series 1997-2
Supplement proves to have been incorrect in any material respect when made,
and as a result the interests of the Certificateholders are materially
adversely affected, and such representation or warranty continues to be
incorrect for 60 days after notice to the Transferor by the Trustee or to
the Transferor and the Trustee by more than 50 percent of the Invested
Amount and the Certificateholders' Interest continues to be materially
adversely affected during such period, then the Trustee or 50 percent of
the Certificateholders' Interest of any class may give notice to the
Transferor (and to the Trustee in the latter instance) declaring that a Pay
Out Event has occurred, thereby commencing the Early Amortization Period;
provided, however, that a Pay Out Event will not be deemed to have occurred
as aforesaid if the Transferor has accepted a reassignment of the affected
Receivables during such period in accordance with the Pooling and Servicing
Agreement. See "--Pay Out Events."
It is not required or anticipated that the Trustee will make any
initial or periodic general examination of the Receivables or any records
relating to the Receivables for the purpose of establishing the presence or
absence of defects or compliance with the Transferor's representations and
warranties or for any other purpose. The Servicer, however, will deliver to
the Trustee on or before March 31 of each year an opinion of counsel with
respect to the validity of the security interest of the Trust in and to the
Receivables and certain other components of the Trust.
CERTAIN COVENANTS
Pursuant to the Pooling and Servicing Agreement, the Transferor
covenants that, among other things, subject to specified exceptions and
limitations, (i) it will take no action to cause any Receivable to be
evidenced by any instruments or to be anything other than an account,
general intangible, or chattel paper, except in connection with the
enforcement or collection of a Receivable, (ii) except for the conveyances
under the Pooling and Servicing Agreement, it will not sell any Receivable
or grant a lien (other than a Permitted Lien) on any Receivable, (iii) in
the event it receives a collection on any Receivables, it will deposit such
collections to the Collection Account within two business days, (iv) it
will notify the Trust promptly after becoming aware of any lien on any
Receivable other than Permitted Liens, (v) it will take all actions
necessary to enforce its rights and claims under the Purchase Agreement,
(vi) it will promptly provide the Trustee any notices, reports or
certificates given or delivered under the Purchase Agreement and (vii)
except as permitted by the Pooling and Servicing Agreement, it will not
commingle its assets with those of Direct Merchants Bank or Metris or any
affiliate thereof.
ELIGIBLE ACCOUNTS
As of the Initial Closing Date (or, with respect to Additional
Accounts, on the date of creation thereof, or, with respect to Supplemental
Accounts, as of the date the Receivables arising in such Accounts are
designated for inclusion in the Trust), each revolving credit consumer
credit card account owned by a Credit Card Originator and having the
following characteristics shall be an Eligible Account (each, an "Eligible
Account"): (a) which is payable in Dollars, (b) the Obligor on which has
provided, as its initial billing address, an address located in the United
States or its territories or possessions or a United States military
address, (c) which has not been identified by a Credit Card Originator in
its computer files as stolen or lost, (d) which is not at the time of
transfer to the Trust sold or pledged to any other party and which does not
have Receivables which, at the time of transfer to the Trust, are sold or
pledged to any other party (provided that Receivables which were sold or
pledged prior to the Closing Date, but were repurchased free of all liens
or where all liens were released prior to the sale hereunder, shall not be
disqualified under this clause (d)), and (e) the Receivables in which the
Credit Card Originator has not charged off in its customary and usual
manner for charging off Receivables in such Accounts as of the Initial
Closing Date (or, with respect to Additional Accounts, as of the date the
Receivables of such Accounts are first designated for inclusion in the
Trust) unless such Account is subsequently reinstated.
ELIGIBLE RECEIVABLES
Each Receivable that satisfies each of the following criteria shall
be an Eligible Receivable (each, an "Eligible Receivable"): (a) arises
under an Account, (b) it is not sold or pledged to any other party, (c) it
constitutes an "account," "chattel paper" or a "general intangible" as each
are defined in Article 9 of the UCC as then in effect in each Relevant UCC
State, (d) it is at the time of its transfer to the Trust the legal, valid
and binding obligation of, or is guaranteed by, a Person who is competent
to enter into a contract and incur debt and is enforceable against such
person in accordance with its terms, (e) it was created or acquired in
compliance, in all material respects, with all Requirements of Law
applicable to the Credit Card Originator and pursuant to a Contract that
complies, in all material respects, with all Requirements of Law applicable
to the Credit Card Originator (including without limitation, laws, rules
and regulations relating to truth in lending, usury, fair credit billing,
fair credit reporting, equal credit opportunity and fair debt collection
practices), (f) all material consents, licenses, or authorizations of, or
registrations with, any Governmental Authority required to be obtained or
given in connection with the creation of such Receivable or the execution,
delivery, creation, and performance of the related Contract have been duly
obtained or given and are in full force and effect as of the date of the
creation of such Receivables and (g) immediately prior to giving effect to
the sale, the Transferor or the Trust will have good and marketable title
free and clear of all liens and security interests arising under or through
the Transferor (other than Permitted Liens).
ADDITION OF TRUST ASSETS
During the period from the Initial Closing Date through May 31, 1996
and during the period from June 7, 1996 through November 5, 1996 all
accounts which met the definition of Additional Accounts were automatically
included as Accounts (such accounts, "Automatic Additional Accounts") from
and after the date upon which such Automatic Additional Accounts were
created and all Receivables in such Automatic Additional Accounts, whether
such Receivables were then existing or thereafter created, were transferred
automatically to the Trust upon purchase by the Transferor. The Transferor
has elected to suspend the automatic inclusion in Accounts of Automatic
Additional Accounts until a date (the "Restart Date") to be identified in
writing by the Transferor, at its option, to the Trustee, the Servicer and
each Rating Agency at least 10 days prior to such Restart Date. On and
prior to the Restart Date, the Transferor may, by giving ten business days'
notice to the Trustee and each Rating Agency, but will not be obligated to,
designate from time to time additional credit card accounts ("Supplemental
Accounts") to be included as Accounts. The Transferor has periodically
designated Supplemental Accounts to be included as Accounts and intends,
although no assurance can be given, to continue to designate additional
Supplemental Accounts to be included as Accounts. In addition, prior to the
Restart Date, if (i) on the tenth business day prior to any Determination
Date, the Transferor Interest for the related Monthly Period is less than
the Minimum Transferor Interest, the Transferor will designate Supplemental
Accounts to be included as Accounts in a sufficient amount such that the
Transferor Interest as a percentage of the Aggregate Principal Receivables
for such Monthly Period after giving effect to such addition is at least
equal to the Minimum Transferor Interest or (ii) on any Record Date, the
Aggregate Principal Receivables are less than the Minimum Aggregate
Principal Receivables, the Transferor is required to designate Supplemental
Accounts to be included as Accounts in a sufficient amount such that the
Aggregate Principal Receivables will be equal to or greater than the
Minimum Aggregate Principal Receivables. Receivables from such Supplemental
Accounts shall be transferred to the Trust on or before the tenth business
day following such Record Date. On any day on which the Receivables in
Supplemental Accounts are to be transferred to the Trust, the Receivables
in such Accounts shall be included as Eligible Receivables if they satisfy
the requirements of the definition of "Eligible Receivables."
The Transferor has conveyed, and will continue to convey, to the
Trust all Receivables arising under the Accounts, including all
Supplemental Accounts and Automatic Additional Accounts, from time to time
until the termination of the Trust.
The Transferor agrees that any such transfer of Receivables from
Supplemental Accounts will be subject to the satisfaction of the following
conditions: (i) on or before the fifth business day prior to the Addition
Date with respect to required additions and on or before the twentieth
business day prior to the Addition Date with respect to optional additions
(as applicable, the "Notice Date"), the Transferor shall give the Trustee,
each Rating Agency and the Servicer written notice that such Supplemental
Accounts will be included, which notice will specify the approximate
aggregate amount of the Receivables to be transferred; (ii) on or before
the applicable Addition Date, the Transferor will have delivered to the
Trustee a written assignment (the "Assignment") and the Transferor will
have indicated in its computer files that the Receivables created in
connection with the Supplemental Accounts have been transferred to the
Trust and, within five business days thereafter, the Transferor will have
delivered to the Trustee or the bailee of the Trustee a computer file or
microfiche list containing a true and complete list of all Supplemental
Accounts, identified by account number and the Principal Receivables in
such Supplemental Accounts, as of the Addition Date, which computer file or
microfiche list will be as of the date of such Assignment incorporated into
and made a part of such Assignment; (iii) the Transferor will represent and
warrant that (x) no selection procedure that is materially adverse to the
interests of holders of the Investor Certificates was used in selecting the
Supplemental Accounts and (y) as of the applicable Addition Date, the
Transferor is not insolvent and will not be rendered insolvent upon the
transfer of Receivables to the Trust; (iv) the Transferor will represent
and warrant that, as of the Addition Date, the Assignment constitutes
either (x) a valid transfer and assignment to the Trust of all right, title
and interest of the Transferor in and to the Receivables then existing and
thereafter created and arising in connection with the Accounts and any
accounts that meet the definition of Additional Accounts, and the proceeds
thereof or (y) a grant of a security interest (as defined in the UCC as in
effect in the Relevant UCC State) in such property to the Trust, which is
enforceable with respect to then existing Receivables of the Supplemental
Accounts and the proceeds thereof upon the conveyance of such Receivables
to the Trust, and which will be enforceable with respect to the Receivables
thereafter created in respect of Supplemental Accounts conveyed on such
Addition Date and the proceeds thereof upon such creation, and (z) if the
Assignment constitutes the grant of a security interest to the Trust in
such property, upon the filing of a financing statement with respect to
such Supplemental Accounts and in the case of the Receivables thereafter
created in such Supplemental Accounts and the proceeds thereof, upon such
creation, the Trust will have a first priority perfected security interest
in such property, except for Permitted Liens; (v) the Transferor will
deliver to the Trustee an officer's certificate confirming the items set
forth in clause (ii) above; (vi) the Transferor will deliver to the Trustee
an opinion of counsel with respect to the Trust's security interest in the
Receivables in the Supplemental Accounts (with a copy to the Rating
Agencies); and (vii) the Transferor will have received written notice from
the Rating Agencies that the inclusion of such accounts as Supplemental
Accounts will not result in the reduction or withdrawal of its then
existing rating of any class of any Series of Investor Certificates then
issued and outstanding and will have delivered such notice to the Trustee.
On and after the Restart Date, Automatic Additional Accounts will be
deemed to be Accounts the Receivables of which will be designated for
inclusion in the Trust if, unless each Rating Agency otherwise consents,
the following conditions are met: the number of Accounts the Receivables of
which are automatically designated to be included in the Trust since (x)
the first day of the eleventh preceding Monthly Period minus the number of
Accounts of the type described in clause (ii) of the definition of
"Approved Account" which have been added on the initial day of the addition
of such type of Account pursuant to such clause (ii) since the first day of
such eleventh preceding Monthly Period minus any Accounts designated to
have their Receivables removed from the Trust in accordance with the terms
of the Pooling and Servicing Agreement ("Removed Accounts") since the first
day of such eleventh preceding Monthly Period will not exceed 20 percent of
the number of Accounts on the first day of such eleventh preceding Monthly
Period, and (y) the first day of the second preceding Monthly Period minus
the number of Accounts of the type described in clause (ii) of the
definition of "Approved Accounts" which have been added on the initial day
of the addition of such type of Account pursuant to such clause (ii) since
the first day of such second preceding Monthly Period minus any Removed
Accounts removed since the first day of such second preceding Monthly
Period will not exceed 15 percent of the number of Accounts on the first
day of such second preceding Monthly Period. The automatic addition of
Receivables in new Accounts may be subject to additional conditions
specified from time to time by the Rating Agencies.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Pooling and Servicing Agreement, the Servicer is
responsible for servicing, enforcing, and administering the Receivables and
collecting payments due thereunder in accordance with its usual and
customary servicing procedures and the Credit and Collection Policy.
Servicing functions to be performed with respect to the Receivables include
statement processing and mailing, collecting and recording payments,
investigating payment delinquencies, and communicating with cardholders.
See "Direct Merchants Bank's Credit Card Activities--Delinquency, Losses
and Collections." Managerial functions to be performed by the Servicer on
behalf of the Trust include maintaining books and records with respect to
the foregoing and other matters pertinent to the Receivables, assisting the
Trustee with any inspections of such books and records by the Trustee
pursuant to the Pooling and Servicing Agreement, preparing and delivering
the monthly and annual statements described in "--Reports to
Certificateholders," and causing a firm of independent public accountants
to prepare and deliver the annual reports described in "--Evidence as to
Compliance."
DISCOUNT OPTION
Pursuant to the Pooling and Servicing Agreement, the Transferor may
designate a specified fixed or floating percentage (the "Discount
Percentage") (initially zero percent) of the amount of Receivables arising
in the Accounts on and after the date of such designation that would
otherwise be treated as Principal Receivables to be treated as Finance
Charge Receivables (the "Discount Option Receivables"). The circumstances
under which the Transferor may exercise its option to discount Principal
Receivables may include a time when the Portfolio Yield is declining and
Principal Receivables are available in sufficient quantity to allow for
such discounting. The Transferor may, without notice to or consent of the
Certificateholders, from time to time, increase (subject to the limitations
described below), reduce or eliminate the Discount Percentage for Discount
Option Receivables arising in the Accounts on and after the date of such
change. The Transferor must provide 15 days' prior written notice to the
Servicer, the Trustee and each Rating Agency of any such increase,
reduction or elimination, and such increase, reduction or elimination will
become effective on the date specified therein only if (a) the Transferor
reasonably believes that such increase, reduction or elimination will not
at the time of its occurrence cause a Pay Out Event, or an event which with
notice or the lapse of time would constitute a Pay Out Event, to occur with
respect to any Series and (b) the Transferor and the Trustee shall have
received written notice from each Rating Agency that such change will not
cause such Rating Agency to reduce or withdraw its then current rating of
the investor certificates. After the date on which the Transferor's
exercise of its discount option takes effect and with respect to
Receivables generated on and after such date, Collections in an amount
equal to the product of (i) a fraction the numerator of which is the amount
of Discount Option Receivables and the denominator of which is the amount
of all of the Principal Receivables (including Discount Option Receivables)
at the end of the prior date of processing, (ii) Collections of Principal
Receivables, prior to any reduction for Finance Charge Receivables which
are Discount Option Receivables, received on such date of processing, and
(iii) a fraction the numerator of which is the aggregate amount of
Principal Receivables arising on each date of processing falling on or
after the date on which the Transferor exercises its discount option and
the denominator of which is the aggregate Principal Receivables on such
date of processing, will be deemed Collections of Finance Charge
Receivables and will be applied accordingly. Any such designation would
result in an increase in the amount of Finance Charge Receivables and a
corresponding increase in the Portfolio Yield, a reduction in the amount of
Principal Receivables in the Trust and a reduction in the Transferor
Interest and therefore the effect on Certificateholders will be to decrease
the likelihood of a Pay Out Event based upon a reduction of the average
Portfolio Yield for any designated period to a rate below the average Base
Rate for such period while increasing the likelihood that the Transferor
will be required to add Principal Receivables to the Trust and, because of
the reduction in the aggregate amount of Principal Receivables which, if
additional Principal Receivables were not available at such time, could
cause the occurrence of a Pay Out Event. Unless otherwise specified, all
references herein to Principal Receivables or Finance Charge Receivables,
or Collections with respect thereto, are references to such Receivables, or
Collections with respect thereto, as defined above after application of the
Discount Percentage.
TRUST ACCOUNTS
The Trustee has established and maintains with a Qualified
Institution in the name of the Trust, for the benefit of the
Certificateholders, three separate accounts, each in a segregated trust
account, consisting of an "Interest Funding Account," and a "Principal
Account" and a "Payment Reserve Account" (collectively, the "Trust
Accounts"). The Trustee has also established a "Distribution Account" for
the benefit of the certificateholders of each Series which is a
non-interest bearing segregated demand deposit account established with a
Qualified Institution. The Servicer has established and maintains, in the
name of the Trust, for the benefit of certificateholders of all Series, a
"Collection Account," which is a segregated account established by and
maintained by the Servicer with a Qualified Institution. A "Qualified
Institution" is a depository institution, which may include the Trustee,
organized under the laws of the United States or any one of the states
thereof, which at all times has a short-term rating of P-1 by Moody's and
of A-1+ by Standard & Poor's or long-term unsecured debt obligation (other
than such obligation the rating of which is based on collateral or on the
credit of a person other than such institution or trust company) rating of
at least Aaa by Moody's and of AAA by Standard & Poor's and deposit
insurance provided by the FDIC, or a depository institution, which may
include the Trustee, which is acceptable to the Rating Agencies; provided,
however, that no such rating shall be required of an institution which
shall have corporate trust powers and which maintains the Collection
Account, any principal account, any interest funding account or any other
account maintained for the benefit of Certificateholders as a fully
segregated trust account with the trust department of such institution
which is rated at least Baa3 by Moody's. Funds in the Trust Accounts will
be invested, in (a) negotiable instruments or securities represented by
instruments in bearer or registered form which evidence (i) obligations of
or fully guaranteed by the United States of America; (ii) time deposits,
promissory notes, or certificates of deposit of any depository institution
or trust company; provided, however, that at the time of the Trust's
investment or contractual commitment to invest therein, the certificates of
deposit or short-term deposits of such depository institution or trust
company shall have a credit rating from Standard & Poor's of A-1+ and from
Moody's of P-1; (iii) commercial paper having, at the time of the Trust's
investment or contractual commitment to invest therein, a rating from
Standard & Poor's of A-1+ and from Moody's of P-1; (iv) banker's
acceptances issued by any depository institution or trust company described
in clause (a)(ii) above; and (v) investments in money market funds rated
AAA-m or AAA-mg by Standard & Poor's and Aaa by Moody's or otherwise
approved in writing by Moody's and Standard & Poor's; (b) time deposits and
demand deposits in the name of the
Trust or the Trustee in any depository institution or trust company
referred to in clause (a)(ii) above; (c) securities not represented by an
instrument that are registered in the name of the Trustee or its nominee
(which may not be Metris or an affiliate) upon books maintained for that
purpose by or on behalf of the issuer thereof and identified on books
maintained for that purpose by the Trustee as held for the benefit of the
Trust or the Certificateholders, and consisting of (x) shares of an open
end diversified investment company which is registered under the Investment
Company Act which (i) invests its assets exclusively in obligations of or
guaranteed by the United States of America or any instrumentality or agency
thereof having in each instance a final maturity date of less than one year
from their date of purchase or other Cash Equivalents, (ii) seeks to
maintain a constant net asset value per share, (iii) has aggregate net
assets of not less than $100,000,000 on the date of purchase of such shares
and (iv) which each Rating Agency designates in writing will not result in
a withdrawal or downgrading of its then current rating of any Series rated
by it or (y) Eurodollar time deposits of a depository institution or trust
company that are rated A-1+ by Standard & Poor's and P-1 by Moody's;
provided, however, that at the time of the Trust's investment or
contractual commitment to invest therein, the Eurodollar deposits of such
depositary institution or trust company shall have a credit rating from
Standard & Poor's of A-1+ and P-1 by Moody's; (d) a guaranteed investment
contract (guaranteed as to timely payment) which each Rating Agency
designates in writing will not result in a withdrawal or downgrading of its
then current rating of any Series rated by it; (e) repurchase agreements
transacted with either (i) an entity subject to the Bankruptcy Code,
provided, however, that (A) the term of the repurchase agreement is
consistent with the requirements with regard to the maturity of Cash
Equivalents specified herein or in the applicable Supplement for the
applicable account or is due on demand, (B) the Trustee or a third party
acting solely as agent for the Trustee has possession of the collateral,
(C) the Trustee on behalf of the Trust has a perfected first priority
security interest in the collateral, (D) the market value of the collateral
is maintained at the requisite collateral percentage of the obligation in
accordance with standards of the Rating Agencies, (E) the failure to
maintain the requisite collateral level will obligate the Trustee to
liquidate the collateral as promptly as practicable upon instructions from
the Servicer, (F) the securities subject to the repurchase agreement are
either obligations of, or fully guaranteed as to principal and interest by,
the United States of America or any instrumentality or agency thereof,
certificates of deposit or banker's acceptances and (G) the securities
subject to the repurchase agreement are free and clear of any third party
lien or claim, or (ii) a financial institution insured by the FDIC, or any
broker-dealer with "retail-customers" that is under the jurisdiction of the
Securities Investors Protection Corporation ("SIPC"), provided, however,
that (A) the market value of the collateral is maintained at the requisite
collateral percentage of the obligation in accordance with the standards of
the Rating Agencies, (B) the Trustee or a third party (with a rating from
Moody's and Standard & Poor's of P-1 and A-1+, respectively) acting solely
as agent for the Trustee has possession of the collateral, (C) the
collateral is free and clear of third party liens and, in the case of an
SIPC broker, was not acquired pursuant to a repurchase or reverse
repurchase agreement and (D) the failure to maintain the requisite
collateral percentage will obligate the Trustee to liquidate the collateral
upon instructions from the Servicer; provided, however, that at the time of
the Trust's investment or contractual commitment to invest in any
repurchase agreement the short-term deposits or commercial paper rating of
such entity or institution in subsections (i) and (ii) above shall have a
credit rating of P-1 or A-1+ or their equivalent from each Rating Agency;
and (f) any other investment if each Rating Agency confirms in writing that
such investment will not adversely affect its then current rating of the
Investor Certificates (such investments, "Cash Equivalents"). Any earnings
(net of losses and investment expenses) on funds in the Interest Funding
Account and the Principal Account will be paid to the Transferor. The
Servicer has the revocable power to withdraw funds from the Collection
Account, and to instruct the Trustee to make withdrawals and payments from
the Interest Funding Account and the Principal Account, in each case for
the purpose of making deposits and distributions required under the Pooling
and Servicing Agreement, including the deposits and distributions described
in "--Application of Collections." The agent making payments to the
Certificateholders (the "Paying Agent") has the revocable power to withdraw
funds from the Distribution Account for the purpose of making distributions
to Certificateholders. The Paying Agent initially will be The Bank of New
York.
PRINCIPAL FUNDING ACCOUNT
Pursuant to the Series 1997-2 Supplement, the Servicer will establish
and maintain with a Qualified Institution a principal funding account as a
segregated trust account held for the benefit of the Certificateholders
(the "Principal Funding Account"). During the Accumulation Period, the
Trustee at the direction of the Servicer will transfer from the Principal
Account to the Principal Funding Account collections in respect of
Principal Receivables (other than Reallocated Principal Collections) and
Shared Principal Collections from other Series, if any, allocated to the
Certificates as described herein under "--Application of Collections."
Funds on deposit in the Principal Funding Account will be invested by
the Trustee at the direction of the Servicer in Cash Equivalents maturing
no later than the following Transfer Date. Investment earnings (net of
investment losses and expenses) on funds on deposit in the Principal
Funding Account (the "Principal Funding Account Investment Proceeds")
during the Accumulation Period will be applied on each Transfer Date to the
extent of the Covered Amount as if such amount were Available Series
Finance Charge Collections on the last business day of the preceding
Monthly Period. If, for any Interest Accrual Period, the Principal Funding
Account Investment Proceeds are less than an amount equal to the Covered
Amount, the amount of such deficiency will be paid from the Accumulation
Period Reserve Account to the extent of the Available Reserve Account
Amount and applied on the applicable Transfer Date as if such amount were
Available Series Finance Charge Collections on the last business day of the
preceding Monthly Period.
EXCESS FUNDING ACCOUNT
The Trustee has established and will maintain in the name of the
Trust, for the benefit of the certificateholders of all Series, an "Excess
Funding Account" which is a segregated account established by and
maintained by the Servicer with a Qualified Institution. At any time during
which no Series is in an amortization period (including any accumulation
period or early amortization period), or for a Series in amortization, the
principal account, if any, is fully funded for an applicable period, and
the Transferor Interest does not exceed the Minimum Transferor Interest,
funds (to the extent available therefor as described herein) otherwise
payable to the Transferor will be deposited in the Excess Funding Account
on any business day until the Transferor Interest is at least equal to the
Minimum Transferor Interest. Funds on deposit in the Excess Funding Account
may, at the option of the Transferor, be withdrawn and paid to the
Transferor to the extent that on any day the Transferor Interest exceeds
the Minimum Transferor Interest as a result of the addition of new
Receivables to the Trust. Such deposits in and withdrawals from the Excess
Funding Account may be made on a daily basis.
Any funds on deposit in the Excess Funding Account at the beginning
of the Amortization Period will be deposited in the Principal Account as
part of Class A Principal, Class B Principal, or Class C Principal, as
applicable, for any Distribution Date. In the event that more than one
Series begins its accumulation period or amortization period at the same
time, amounts on deposit in the Excess Funding Account will be paid out to
each such Series pro rata based on the aggregate invested amount of each
such Series. In addition, no funds allocated to investor certificates will
be deposited in the Excess Funding Account during any amortization period
(including any accumulation period or early amortization period) for any
Series until the Principal Funding Account for such Series for such
Distribution Date has been fully funded or the investor certificates of
such Series have been paid in full.
Funds on deposit in the Excess Funding Account will be invested by
the Trustee at the direction of the Transferor in Cash Equivalents. On each
Distribution Date, all net investment income earned on amounts in the
Excess Funding Account since the preceding Distribution Date will be
withdrawn from the Excess Funding Account and treated as Finance Charge
Collections.
PRE-FUNDING ACCOUNT
The Servicer will establish and maintain in the name of the Trustee,
on behalf of the Trust, the Pre-Funding Account. The Pre-Funding Account
will be established and maintained with the trust department of The Bank of
New York. Funds on deposit in the Pre-Funding Account will be withdrawn and
paid to the Transferor to the extent of any increases in the Invested
Amount during the Funding Period as a result of an increase in the amount
of Receivables in the Trust in accordance with the Series 1997-2
Supplement. Following the occurrence of a Pay Out Event during the Funding
Period, the amounts remaining on deposit in the Pre-Funding Account, will
be payable as principal first to the Class A Certificateholders until the
Class A Invested Amount is paid in full and then to the Class B
Certificateholders until the Class B Invested Amount is paid in full and
then to the Class C Certificateholders until the Class C Invested Amount is
paid in full. Should the Pre-Funded Amount be greater than zero on the
first day of the Monthly Period, such amount will be deposited in the
Excess Funding Account. The percentage of the assets of the Trust
represented by amounts on deposit in the Pre-Funding Account and the
percentage of the assets of the Trust represented by amounts on deposit in
the Pre-Funding Account allocated to any Class of the Certificates will not
exceed 25 percent. The underwriting standards for Receivables transferred
to the Trust during the period in which the Pre-Funding Account is funded
will be the same as those described in "Direct Merchants Bank's Credit Card
Activities--New Account Underwriting."
All amounts on deposit in the Pre-Funding Account will be invested by
the Trustee at the direction of the Servicer in Cash Equivalents that would
not require registration of the Trust as an investment company under the
Investment Company Act. On each Transfer Date with respect to the Funding
Period, all investment income (net of investment losses and expenses)
earned on amounts in the Pre-Funding Account since the preceding Transfer
Date will be applied as if such amount were Available Series Finance Charge
Collections on the last business day of the preceding Monthly Period.
ACCUMULATION PERIOD RESERVE ACCOUNT
Pursuant to the Series 1997-2 Supplement, the Servicer will establish
and maintain with a Qualified Institution an accumulation period reserve
account as a segregated trust account held for the benefit of the
Certificateholders (the "Accumulation Period Reserve Account"). The
Accumulation Period Reserve Account is established to assist with the
subsequent distribution of interest on the Class A Certificates, Class B
Certificates and Class C Certificates during the Accumulation Period. On
each business day from and after the Reserve Account Funding Date, but
prior to the termination of the Accumulation Period Reserve Account, the
Trustee, acting pursuant to the Servicer's instructions, will apply
Available Series Charge Collections allocated to the Certificates (to the
extent described below under "--Application of Collections--Payment of
Fees, Interest and Other Items") to increase the amount on deposit in the
Accumulation Period Reserve Account (to the extent such amount is less than
the Required Reserve Account Amount). The "Reserve Account Funding Date"
will be the first day of the third Monthly Period prior to the commencement
of the Accumulation Period, or such earlier date as the Servicer may
determine. The "Required Reserve Account Amount" for any date on or after
the Reserve Account Funding Date will be equal to (a) 0.5 percent of the
sum of the Class A Invested Amount, the Class B Invested Amount and the
Class C Invested Amount or (b) any other amount designated by the
Transferor; provided, that if such designation is of a lesser amount, the
Transferor shall have provided the Servicer and the Trustee with evidence
that the Rating Agency Condition has been satisfied and the Transferor
shall have delivered to the Trustee a certificate of an authorized officer
to the effect that, based on the facts known to such officer at such time,
in the reasonable belief of the Transferor, such designation will not cause
a Pay Out Event or an event that, after giving of notice or the lapse of
time, would cause a Pay Out Event to occur with respect to Series 1997-2.
Provided that the Accumulation Period Reserve Account has not
terminated as described below, all amounts on deposit in the Accumulation
Period Reserve Account on any Transfer Date (after giving effect to any
deposits to, or withdrawals from, the Accumulation Period Reserve Account
to be made on such Transfer Date) will be invested by the Trustee at the
direction of the Servicer in Cash Equivalents maturing no later than the
following Transfer Date. The interest and other investment income (net of
investment expenses and losses) earned on such investments will be retained
in the Accumulation Period Reserve Account (to the extent the amount on
deposit therein is less than the Required Reserve Account Amount) or
applied on each Transfer Date as if such amount were Available Series
Finance Charge Collections on the last business day of the preceding
Monthly Period.
On or before each Transfer Date with respect to the Accumulation
Period and on the first Transfer Date with respect to the Early
Amortization Period, a withdrawal will be made from the Accumulation Period
Reserve Account, and the amount of such withdrawal will be applied as if
such amount were Available Series Finance Charge Collections on the last
business day of the preceding Monthly Period, in an amount equal to the
lesser of (a) the Available Reserve Account Amount with respect to such
Transfer Date and (b) the excess, if any, of (i) one-twelfth of the product
of (x) the weighted average of the Class A Certificate Rate, the Class B
Certificate Rate and the Class C Certificate Rate (in effect for the
related Interest Accrual Period) and (y) the Principal Funding Account
Balance as of the last day of the Monthly Period preceding the Monthly
Period in which such Interest Accrual Periods ends (the "Covered Amount")
over (ii) the Principal Funding Account Investment Proceeds with respect to
such Transfer Date. On each Transfer Date, the amount available to be
withdrawn from the Accumulation Period Reserve Account (the "Available
Reserve Account Amount") will be equal to the lesser of the amount on
deposit in the Accumulation Period Reserve Account (before giving effect to
any withdrawal from the Accumulation Period Reserve Account on such
Transfer Date) and the Required Reserve Account Amount for such Transfer
Date.
The Accumulation Period Reserve Account will be terminated following
the earliest to occur of (a) the termination of the Trust pursuant to the
Pooling and Servicing Agreement, (b) the date on which the Invested Amount
is paid in full, (c) if the Accumulation Period has not commenced, the
occurrence of a Pay Out Event with respect to the Certificates and (d) if
the Accumulation Period has commenced, the earlier of the first Transfer
Date with respect to the Early Amortization Period and the Expected Final
Payment Date. Upon the termination of the Accumulation Period Reserve
Account, all amounts on deposit therein (after giving effect to any
withdrawal from the Accumulation Period Reserve Account on such date as
described above) will be applied as if they were Available Series Finance
Charge Collections.
ALLOCATION PERCENTAGES
Pursuant to the Pooling and Servicing Agreement, during each Monthly
Period the Servicer will allocate among the Class A Certificateholders'
Interest, the Class B Certificateholders' Interest, the Class C
Certificateholders' Interest, the Class D Certificateholders' Interest, the
interest of the holders of the Previously Issued Series, the Transferor
Interest and the holders of the other Series issued and outstanding from
time to time pursuant to the Pooling and Servicing Agreement and applicable
Supplements all Finance Charge Collections and all Principal Collections
and the amount of all Defaulted Receivables. Finance Charge Collections
will be allocated prior to the commencement of an Early Amortization Period
and the amount of Defaulted Receivables will be allocated at all times, and
Principal Collections will be allocated during the Revolving Period to the
Class A Certificateholders' Interest, the Class B Certificateholders'
Interest, the Class C Certificateholders' Interest and the Class D
Certificateholders' Interest, based on the percentage equivalent of a
fraction the numerator of which is the Class A Adjusted Invested Amount,
the Class B Adjusted Invested Amount, the Class C Adjusted Invested Amount,
or the Class D Invested Amount, respectively, at the end of the preceding
business day and the denominator of which is the greater of (a) the sum of
the aggregate amount of Principal Receivables and amounts on deposit in the
Excess Funding Account as of the end of the preceding business day and (b)
the sum of the numerators for all classes of all Series then outstanding
used to calculate the applicable allocation percentage (the "Class A
Floating Allocation Percentage," the "Class B Floating Allocation
Percentage," the "Class C Floating Allocation Percentage" and the "Class D
Floating Allocation Percentage," respectively; the sum of all such
percentages, the "Floating Allocation Percentage"). During the Revolving
Period, all Principal Collections allocable to the Certificates will be
allocated and paid to te Transferor (except for collections applied as
Reallocated Principal Collections and Shared Principal Collections paid to
the holders of certificates of other Series, if any, and except for funds
deposited in the Excess Funding Account). On any business day on or after
the Amortization Period Commencement Date, Principal Collections will be
allocated to the Certificateholders' Interest based on the percentage
equivalent of a fraction the numerator of which is the Class A Invested
Amount, the Class B Invested Amount, the Class C Invested Amount or the
Class D Invested Amount, respectively, at the end of the last day of the
Revolving Period and the denominator of which is the greater of (a) the sum
of the aggregate amount of Principal Receivables and the amounts on deposit
in the Excess Funding Account at the end of the preceding business day and
(b) the sum of the numerators used to calculate the allocation percentages
with respect to Principal Collections for all Series (the "Class A
Fixed/Floating Allocation Percentage," the "Class B Fixed/Floating
Allocation Percentage," the "Class C Fixed/Floating Allocation Percentage,"
and the "Class D Fixed/Floating Allocation Percentage," respectively; the
sum of all such percentages the "Fixed/Floating Allocation Percentage").
Finance Charge Collections will be allocated on and after the date on which
a Pay Out Event is deemed to occur to the Certificateholders' Interest
based on the Fixed/Floating Allocation Percentage. On and after the date on
which a Defeasance occurs with respect to the Certificates, each of the
allocation percentages specified above with respect to the Certificates
will be zero. See "--Defeasance."
The term "Transferor Percentage" means (a) when used with respect to
(i) Principal Collections during the Revolving Period and (ii) Finance
Charge Collections and the amount of Defaulted Receivables at all times,
100 percent minus the sum of the Floating Allocation Percentage and the
floating allocation percentages for all other Series and (b) when used with
respect to Principal Collections during the Amortization Period, 100
percent minus the sum of the Fixed/Floating Allocation Percentage and the
allocation percentages used with respect to Principal Collections for all
other Series.
As used herein: (i) the term "Class A Invested Amount" means an
amount equal to (a) the Class A Initial Invested Amount less the Class A
Percentage of the initial deposit to the Pre-Funding Account plus the Class
A Percentage of any withdrawals from the Pre-Funding Account during the
Funding Period in connection with the addition of Receivables to the Trust
and the deposit of the amounts in the Pre-Funding Account at the end of the
Funding Period into the Excess Funding Account, minus (b) the aggregate
amount of principal payments (except principal payments made from the
Pre-Funding Account) made to Class A Certificateholders through and
including such date, and minus (c) the aggregate amount of Class A Investor
Charge-Offs for all prior Distribution Dates, equal to the amount by which
the Class A Invested Amount has been reduced to fund the Investor Default
Amount and the unpaid Adjustment Payments on all prior Distribution Dates
as described under "--Investor Charge-Offs," plus (d) the aggregate amount
of Available Series Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections and Reallocated Principal
Collections applied on all prior Distribution Dates for the purpose of
reimbursing amounts deducted pursuant to the foregoing clause (c),
provided, however, that the Class A Invested Amount may not be reduced
below zero; (ii) the term "Class A Adjusted Invested Amount," for any date
of determination, means an amount not less than zero equal to the then
current Class A Invested Amount, minus the Principal Funding Account
Balance on such date; (iii) the term "Class B Invested Amount" for any date
means an amount equal to (a) the Class B Initial Invested Amount less the
Class B Percentage of the initial deposit to the Pre-Funding Account plus
the Class B Percentage of any withdrawals from the Pre-Funding Account
during the Funding Period in connection with the addition of Receivables to
the Trust and the deposit of the amounts in the Pre-Funding Account at the
end of the Funding Period into the Excess Funding Account, minus (b) the
aggregate amount of principal payments (except principal payments made from
the Pre-Funding Account) made to Class B Certificateholders through and
including such date, minus (c) the aggregate amount of Class B Investor
Charge-Offs for all prior Distribution Dates, equal to the amount by which
the Class B Invested Amount has been reduced to fund the Investor Default
Amount and the unpaid Adjustment Payments on all prior Distribution Dates
as described under "--Investor Charge-Offs," minus (d) the aggregate amount
of Reallocated Class B Principal Collections for which neither the Class D
Invested Amount nor the Class C Invested Amount has been reduced for all
prior Distribution Dates, and plus (e) the aggregate amount of Available
Series Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections, Reallocated Class C Principal
Collections, Reallocated Class D Principal Collections and certain other
amounts applied on all prior Distribution Dates for the purpose of
reimbursing amounts deducted pursuant to the foregoing clauses (c) and (d),
provided, however; that the Class B Invested Amount may not be reduced
below zero; (iv) the term "Class B Adjusted Invested Amount," for any date
of determination, means an amount not less than zero equal to the then
current Class B Invested Amount minus the excess, if any, of the Principal
Funding Account Balance over the Class A Invested Amount on such date of
determination; (v) the term "Class C Invested Amount" for any date means an
amount equal to (a) the Class C Initial Invested Amount less the Class C
Percentage of the initial deposit to the Pre-Funding Account plus the Class
C Percentage of any withdrawals from the Pre-Funding Account during the
Funding Period in connection with the addition of Receivables to the Trust
and the deposit of the amounts in the Pre-Funding Account at the end of the
Funding Period into the Excess Funding Account, minus (b) the aggregate
amount of principal payments (except principal payments made from the
Pre-Funding Account) made to Class C Certificateholders through and
including such date, minus (c) the aggregate amount of Class C Investor
Charge-Offs for all prior Distribution Dates, equal to the amount by which
the Class C Invested Amount has been reduced to fund the Investor Default
Amount and the unpaid Adjustment Payments on all prior Distribution Dates
as described under "--Investor Charge-Offs," minus (d) the aggregate amount
of Reallocated Class C Principal Collections and Reallocated Class B
Principal Collections for which the Class D Invested Amount has not been
reduced for all prior Distribution Dates, and plus (e) the aggregate amount
of Available Series Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections, Reallocated Class D
Principal Collections, and certain other amounts as may be available
applied on all prior Distribution Dates for the purpose of reimbursing
amounts deducted pursuant to the foregoing clauses (c) and (d), provided,
however, that the Class C Invested Amount may not be reduced below zero;
(vi) the term "Class C Adjusted Invested Amount," for any date of
determination, means an amount not less than zero equal to the then current
Class C Invested Amount minus the excess, if any, of the Principal Funding
Account Balance over the sum of the Class A Invested Amount and the Class B
Invested Amount on such date of determination; (vii) the term "Class D
Invested Amount" means an amount equal to (a) the initial principal balance
of the Class D Certificates, minus (b) the aggregate amount of principal
payments made to Class D Certificateholders through and including such
date, minus (c) the aggregate amount of Class D Investor Charge-Offs for
all prior Distribution Dates, equal to the amount by which the Class D
Invested Amount has been reduced to fund the Investor Default Amount and
the unpaid Adjustment Payments on all prior Distribution Dates as described
under "--Investor Charge-Offs," minus (d) the aggregate amount of
Reallocated Principal Collections for all prior Distribution Dates, and
plus (e) the aggregate amount of Finance Charge Collections, Transferor
Finance Charge Collections, Excess Finance Charge Collections and certain
other amounts applied on all prior Distribution Dates for the purpose of
reimbursing amounts deducted pursuant to the foregoing clause (c),
provided, however, that the Class D Invested Amount may not be reduced
below zero, (viii) the term "Stated Class D Amount" means the greater of
(a) zero and (b) a number rounded to the nearest dollar equal to ____
percent of the ABC Adjusted Invested Amount; provided, however, that in no
event shall the Stated Class D Amount be less than $______ except that if
the ABC Adjusted Invested Amount is equal to zero the "Stated Class D
Amount" will be zero; and provided further that during any Early
Amortization Period the Stated Class D Amount shall be equal to the Stated
Class D Amount immediately preceding the commencement of the Early
Amortization Period; and (ix) the term "Invested Amount" means the sum of
the Class A Invested Amount, the Class B Invested Amount, the Class C
Invested Amount and the Class D Invested Amount.
As a result of the Floating Allocation Percentage, Finance Charge
Collections and the portion of Defaulted Receivables allocated to the
Certificateholders will change each business day based on the relationship
of the Class A Adjusted Invested Amount, the Class B Adjusted Invested
Amount, the Class C Adjusted Invested Amount, and Class D Invested Amount
to the total amount of Principal Receivables and amounts on deposit in the
Excess Funding Account on the preceding business day. The numerator of the
allocation percentages of collections of Principal Receivables allocable to
the Class A Certificateholders, the Class B Certificateholders, the Class C
Certificateholders and the Class D Certificateholders, however, will remain
fixed during the Amortization Period. Collections of Principal Receivables
allocable to the Class B Certificates are subject to possible reallocation
for the benefit of the Class A Certificateholders; collections of Principal
Receivables allocable to the Class C Invested Amount are subject to
possible reallocation for the benefit of the Class A Certificateholders and
the Class B Certificateholders and collections of Principal Receivables
allocable to the Class D Invested Amount are subject to possible
reallocation for the benefit of the Class A Certificateholders, the Class B
Certificateholders and the Class C Certificateholders. See "--Reallocated
Principal Collections" below.
REALLOCATION OF CASH FLOWS
To the extent that any amounts are on deposit in the Excess Funding
Account or the Pre-Funding Account on any business day, the Servicer will
determine the Negative Carry Amount, if any. The Servicer will apply an
amount equal to the lesser of (i) the Transferor Finance Charge Collections
on such business day, and (ii) the Negative Carry Amount for such business
day in the manner specified for application of Available Series Finance
Charge Collections.
On each business day the Servicer will determine the Required Amount.
To the extent of any Required Amount, the Servicer will apply all or a
portion of the Excess Finance Charge Collections of other Series with
respect to such business day allocable to the Series 1997-2 Certificates in
an amount equal to the remaining Required Amount. Excess Finance Charge
Collections from other Series allocable to the Series 1997-2 Certificates
for any business day will be equal to the product of (x) Excess Finance
Charge Collections available from all other Series for such business day
and (y) a fraction, the numerator of which is the Required Amount for such
business day (as reduced by amounts applied pursuant to the preceding
paragraph) and the denominator of which is the aggregate amount of
shortfalls in required amounts or other amounts to be paid from available
Finance Charge Collections for all Series for such business day.
REALLOCATED PRINCIPAL COLLECTIONS
On each business day, the Servicer will apply or cause the Trustee to
apply an amount, not to exceed the Class D Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class D Floating
Allocation Percentage or (ii) during an Amortization Period, the Class D
Fixed/Floating Allocation Percentage and (b) the amount of Principal
Collections with respect to such business day to the following amounts in
the following priority (such collections applied in accordance with clause
(a) below are called "Reallocated Class D Principal Collections"):
(a) an amount equal to the sum of (i) the Class A Required Amount
with respect to such business day, (ii) the Class B Required Amount with
respect to such business day and (iii) the Class C Required Amount with
respect to such business day will be applied first to the components of
the Class A Required Amount, then to the components of the Class B
Required Amount and then to the components of the Class C Required
Amount in the same priority as such components are applied from
Available Series Finance Charge Collections as described in
"--Application of Collections--Payment of Fees, Interest and Other
Items"; and
(b) any such collections not applied in the foregoing manner (and
therefore not constituting Reallocated Class D Principal Collections)
will, on business days with respect to the Revolving Period, be applied
as Shared Principal Collections and on business days with respect to an
Amortization Period will be included in Available Investor Principal
Collections.
On each business day, the Servicer will apply or cause the Trustee to
apply an amount, not to exceed the Class C Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class C Floating
Allocation Percentage or (ii) during an Amortization Period, the Class C
Fixed/Floating Allocation Percentage and (b) the amount of Principal
Collections with respect to such business day to the following amounts in
the following priority (such collections applied in accordance with clause
(a) below are called "Reallocated Class C Principal Collections"):
(a) an amount equal to the sum of (i) the excess, if any, of the
Class A Required Amount with respect to such business day over the
amount of Reallocated Class D Principal Collections applied with respect
thereto for such business day and (ii) the excess, if any, of the Class
B Required Amount with respect to such business day over the amount of
Reallocated Class D Principal Collections applied with respect thereto
for such business day will be applied first to the remaining components
of the Class A Required Amount and then to the remaining components of
the Class B Required Amount in the same priority as such components are
applied from Available Series Finance Charge Collections as described in
"--Application of Collections--Payment of Fees, Interest and Other
Items"; and
(b) any such collections not applied in the foregoing manner (and
therefore not constituting Reallocated Class C Principal Collections)
will, on business days with respect to the Revolving Period, be applied
as Shared Principal Collections and on business days with respect to an
Amortization Period will be included in Available Investor Principal
Collections.
On each business day, the Servicer will apply or cause the Trustee to
apply an amount, not to exceed the Class B Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class B Floating
Allocation Percentage or (ii) during an Amortization Period, the Class B
Fixed/Floating Allocation Percentage and (b) the amount of Principal
Collections with respect to such business day to the following amounts in
the following priority (such collections applied in accordance with clause
(a) below are called "Reallocated Class B Principal Collections" and the
sum of Reallocated Class D Principal Collections, Reallocated Class C
Principal Collections and Reallocated Class B Principal Collections is
called "Reallocated Principal Collections"):
(a) an amount equal to the excess, if any, of the Class A Required
Amount with respect to such business day over the sum of the amount of
Reallocated Class D Principal Collections and Reallocated Class C
Principal Collections applied with respect thereto for such business day
will be applied to the remaining components of the Class A Required
Amount in the same priority as such components are applied from
Available Series Finance Charge Collections as described in
"--Application of Collections--Payment of Fees, Interest and Other
Items"; and
(b) any such collections not applied in the foregoing manner (and
therefore not constituting Reallocated Class B Principal Collections)
will, on business days with respect to the Revolving Period, be applied
as Shared Principal Collections and on business days with respect to an
Amortization Period will be included in Available Investor Principal
Collections.
On each Distribution Date the Class D Invested Amount will be reduced
by the amount of unreimbursed Reallocated Principal Collections for the
related Monthly Period. In the event that such reduction would cause the
Class D Invested Amount to be a negative number, the Class D Invested
Amount will be reduced to zero and the Class C Invested Amount will be
reduced by the amount by which the Class D Invested Amount would have been
reduced below zero. In the event that the amount of unreimbursed
Reallocated Principal Collections for such Distribution Date would cause
the Class C Invested Amount to be a negative number, the Class C Invested
Amount will be reduced to zero and the Class B Invested Amount will be
reduced by the amount by which the Class C Invested Amount would have been
reduced below zero. In the event that the reallocation of Principal
Collections would cause the Class B Invested Amount to be a negative number
on any Distribution Date, the amount of Class B Reallocated Principal
Collections on such Distribution Date will be an amount not to exceed the
amount which would cause the Class B Invested Amount to be reduced to zero.
APPLICATION OF COLLECTIONS
Allocations. Obligors make payments on the Receivables to the
Servicer, who deposits all such payments in the Collection Account no later
than the second business day following the date of processing. On the day
on which any deposit to the Collection Account is available, the Servicer
will make the deposits and payments to the accounts and parties as
indicated below; provided, however, that for as long as Direct Merchants
Bank or any affiliate of Direct Merchants Bank remains the Servicer under
the Pooling and Servicing Agreement, then the Servicer may make such
deposits and payments on the business day immediately prior to the
Distribution Date (the "Transfer Date") in an aggregate amount equal to the
net amount of such deposits and payments which would have been made had the
conditions of this proviso not applied if (a)(i) the Servicer provides to
the Trustee a letter of credit or other form of Enhancement rated in the
highest rating category by the Rating Agencies covering the risk of
collection of the Servicer and (ii) the Transferor shall not have received
a notice from either Rating Agency that making payments monthly rather than
daily would result in the lowering of such Rating Agency's then-existing
rating of any Series of certificates then outstanding or (b) the Servicer
has and maintains a short-term credit rating of P-1 by Moody's and A-1 by
Standard & Poor's.
If clause (a) or clause (b) set forth in the proviso to the
immediately preceding paragraph is satisfied, payments on the Receivables
collected by the Servicer will not be segregated from the assets of the
Servicer. Until such payments on the Receivables collected by the Servicer
are deposited into the Collection Account, such funds may be used by the
Servicer for its own benefit, and the proceeds of any short-term investment
of such funds will accrue to the Servicer. During such times as the
Servicer holds funds representing payments on the Receivables collected by
the Servicer and is permitted to use such funds for its own benefit, the
Certificateholders are subject to risk of loss, including risk resulting
from the bankruptcy or insolvency of the Servicer. The Servicer pays no fee
to the Trust or any Certificateholder for any use by the Servicer of funds
representing Collections on the Receivables.
The Servicer will withdraw the following amounts from the Collection
Account for application on each business day as indicated:
(i) an amount equal to the Transferor Percentage of the
aggregate amount of Principal Collections will be paid to the
Transferor to the extent such funds are not allocated to any series
to cover a negative carry amount;
(ii) an amount equal to the Transferor Percentage of the
aggregate amount of Finance Charge Collections will be paid to the
holder of the Exchangeable Transferor Certificate to the extent such
funds are not allocated to any Series as set forth in the applicable
Supplement;
(iii) an amount equal to the sum of (a) prior to the occurrence
of a Pay Out Event the Floating Allocation Percentage, and on and
after the occurrence of a Pay Out Event the Fixed/Floating Allocation
Percentage, of the sum of the aggregate amount of Finance Charge
Collections and the amount of Adjustment Payments made by the
Transferor with respect to Adjustment Payments required to be made
but not made in a prior Monthly Period, (b) certain Transferor
Finance Charge Collections allocable to the Certificates and (c)
Excess Finance Charge Collections of other Series allocable to such
Series, will be allocated and paid as described below in "--Payment
of Fees, Interest and Other Items;"
(iv) during the Revolving Period, an amount equal to the
Floating Allocation Percentage of Principal Collections (less the
amount thereof which may be applied as Reallocated Principal
Collections) will be applied as Shared Principal Collections;
(v) during the Amortization Period, an amount equal to the
Fixed/Floating Allocation Percentage of Principal Collections (less
the amount thereof applied as Reallocated Principal Collections), any
amount on deposit in the Excess Funding Account and any amount on
deposit in the Pre-Funding Account allocated to the holders of Series
1997-2 Certificates, any amounts to be paid in respect of the
Investor Default Amount, unpaid Adjustment Payments, Class A Investor
Charge-Offs, Class B Investor Charge-Offs and Class C Investor
Charge-Offs and any amount of Shared Principal Collections allocated
to the Certificates on such business day, up to (a) during the
Accumulation Period, the Controlled Deposit Amount or (b) during the
Early Amortization Period, the Invested Amount, will be deposited in
the Principal Account;
(vi) Shared Principal Collections will be allocated to each
outstanding Series pro rata based on any shortfalls with respect to
principal payments with respect to any Series which is in its
amortization period, and then, at the option of the Transferor, to
make payments of principal with respect to the Variable Funding
Certificates. The Servicer will pay any remaining Shared Principal
Collections on such business day to the holder of the Exchangeable
Transferor Certificate; and
(vii) Excess Finance Charge Collections will be allocated as
set forth below in paragraph (xvi) of "--Payment of Fees, Interest
and Other Items."
Any Shared Principal Collections and other amounts described above as
being payable to the Transferor will not be paid to the Transferor if the
Transferor Interest on any date, after giving effect to the inclusion in
the Trust of all Receivables on or prior to such date and the application
of all prior payments to the Transferor, does not exceed the Minimum
Transferor Interest. Any such amounts otherwise payable to the Transferor,
together with any Adjustment Payments, as described below, will be
deposited into and held in the Excess Funding Account, and on the
Amortization Period Commencement Date with respect to any Series, such
amounts will be deposited in the principal account of such Series to the
extent specified in the related Supplement until the applicable principal
account of such Series has been funded in full or the holders of
certificates of such Series have been paid in full. See "--Excess Funding
Account."
On each business day the Transferor, at its discretion, will direct
that amounts on deposit in the Payment Reserve Account will be retained
therein, applied as Available Series Finance Charge Collections or released
to the Transferor.
Payment of Fees, Interest and Other Items. On each business day
during a Monthly Period, the Servicer will determine the sum of (a) prior
to the date on which a Pay Out Event is deemed to occur, the Floating
Allocation Percentage of the sum of Finance Charge Collections and the
amount of Adjustment Payments made by the Transferor with respect to
Adjustment Payments required to be made but not made in a prior Monthly
Period or, on and after the date on which a Pay Out Event is deemed to
occur, the Fixed/Floating Allocation Percentage of the sum of Finance
Charge Collections and the amount of Adjustment Payments made by the
Transferor with respect to Adjustment Payments required to be made but not
made in a prior Monthly Period and (b) amounts on deposit in the Payment
Reserve Account, if any, if and to the extent the Transferor designates
that such amounts are to be so applied (the "Available Series Finance
Charge Collections") and will distribute such amount in the following
priority:
(i) an amount equal to the lesser of (A) the Available Series
Finance Charge Collections and (B) the excess of (a) the sum of (1)
the Class A Monthly Interest, (2) the amount of any Class A Monthly
Interest previously due but not deposited in the Interest Funding
Account in prior Monthly Periods, and (3) any additional interest (to
the extent permitted by applicable law) at the Class A Certificate
Rate with respect to interest amounts that were due but not paid in a
prior Monthly Period over (b) the amount which has already been
deposited in the Interest Funding Account with respect thereto in the
current Monthly Period, will be deposited in the Interest Funding
Account for distribution on the next succeeding Distribution Date to
the Class A Certificateholders;
(ii) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) the excess of (a) the
sum of (1) the Class B Monthly Interest, (2) the amount of any Class
B Monthly Interest previously due but not deposited in the Interest
Funding Account in prior Monthly Periods, and (3) any additional
interest (to the extent permitted by applicable law) at the Class B
Certificate Rate with respect to Class B Monthly Interest amounts
that were due but not paid in a prior Monthly Period over (b) the
amount which has already been deposited in the Interest Funding
Account with respect thereto in the current Monthly Period, will be
deposited in the Interest Funding Account for distribution on the
next succeeding Distribution Date to the Class B Certificateholders;
(iii) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) the excess of (a) the
sum of (1) the Class C Monthly Interest, (2) the amount of any Class
C Monthly Interest previously due but not deposited in the Interest
Funding Account in prior Monthly Periods, and (3) any additional
interest (to the extent permitted by applicable law) at the Class C
Certificate Rate with respect to Class C Monthly Interest amounts
that were due but not paid in a prior Monthly Period over (b) the
amount which has already been deposited in the Interest Funding
Account with respect thereto in the current Monthly Period, will be
deposited in the Interest Funding Account for distribution on the
next succeeding Distribution Date to the Class C Certificateholders;
(iv) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) the portion of the
Monthly Servicing Fee for the current month that has not been
previously paid to the Servicer plus any prior Monthly Servicing Fee
that was due but not previously paid to the Servicer will be
distributed to the Servicer;
(v) an amount equal to the lesser of (A) the sum of any
Available Series Finance Charge Collections remaining and, if such
day is a Default Recognition Date, an amount equal to the aggregate
Transferor Retained Finance Charge Collections for each prior
business day during the related Monthly Period and (B) the sum of (1)
the aggregate Investor Default Amount for such business day and (2)
the unpaid Investor Default Amount for any prior business day during
the then-current Monthly Period, will be (w) during the Revolving
Period, treated as Shared Principal Collections and (x) during the
Amortization Period, treated as Available Investor Principal
Collections for the benefit of the Certificates;
(vi) an amount equal to the Series Allocation Percentage of any
Adjustment Payment which the Transferor is required but fails to make
pursuant to the Pooling and Servicing Agreement will be (a) during
the Revolving Period, treated as Shared Principal Collections and (b)
during the Amortization Period, treated as Available Investor
Principal Collections for the benefit of the Certificates;
(vii) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) unreimbursed Class A
Investor Charge-Offs, if any, will be applied to reimburse Class A
Investor Charge-Offs and (w) during the Revolving Period, be treated
as Shared Principal Collections and (x) during the Amortization
Period, be treated as Available Investor Principal Collections for
the benefit of the Certificates;
(viii) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) the sum of (1)
the amount of interest which has accrued with respect to the
outstanding aggregate principal amount of the Class B Certificates at
the Class B Certificate Rate but has not been deposited in the
Interest Funding Account will be deposited in the Interest Funding
Account and (2) any additional interest (to the extent permitted by
applicable law) at the Class B Certificate Rate with respect to such
interest amounts that were due but not deposited in the Interest
Funding Account in any previous Monthly Period, will be deposited in
the Interest Funding Account for distribution on the next succeeding
Distribution Date to Class B Certificateholders;
(ix) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) the sum of (1) the
amount of interest which has accrued with respect to the outstanding
aggregate principal amount of the Class C Certificates at the Class C
Certificate Rate but has not been deposited in the Interest Funding
Account will be deposited in the Interest Funding Account, and (2)
any additional interest (to the extent permitted by applicable law)
at the Class C Certificate Rate with respect to such interest amounts
that were due but not deposited in the Interest Funding Account in
any previous Monthly Period, will be deposited in the Interest
Funding Account for distribution on the next succeeding Distribution
Date to Class C Certificateholders;
(x) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) unreimbursed Class B
Investor Charge-Offs, if any, will be applied to reimburse Class B
Investor Charge-Offs and (w) during the Revolving Period, be treated
as Shared Principal Collections and (x) during the Amortization
Period, be treated as Available Investor Principal Collections for
the benefit of the Certificates;
(xi) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) unreimbursed Class C
Investor Charge-Offs, if any, will be applied to reimburse Class C
Investor Charge-Offs and (w) during the Revolving Period, be treated
as Shared Principal Collections and (x) during the Amortization
Period, be treated as Available Investor Principal Collections for
the benefit of the Certificates;
(xii) an amount equal to the lesser of (A) any Available Series
Finance Charge Collections remaining and (B) unreimbursed Class D
Investor Charge-Offs, if any, will be applied to reimburse Class D
Investor Charge-Offs and (w) during the Revolving Period, be treated
as Shared Principal Collections and (x) during the Amortization
Period, be treated as Available Investor Principal Collections for
the benefit of the Certificates;
(xiii) an amount equal to the lesser of any Available Series
Finance Charge Collections remaining and any required funding of a
reserve account for the benefit of the Class C Certificates will be
deposited in such reserve account;
(xiv) on and after the Reserve Account Funding Date, but prior
to the date on which the Accumulation Period Reserve Account
terminates, an amount equal to the lesser of any Available Series
Finance Charge Collections remaining and the excess, if any, of the
Required Reserve Account Amount over the Available Reserve Account
Amount will be deposited in the Accumulation Period Reserve Account;
(xv) an amount equal to the lesser of any remaining Available
Series Finance Charge Collections and the amount designated by the
Transferor in writing in its instructions to the Trustee to be
deposited in the Payment Reserve Account; and
(xvi) any Available Series Finance Charge Collections remaining
after making the above described distributions will be treated as
Excess Finance Charge Collections which will be available to cover
shortfalls, if any, in amounts payable from Finance Charge
Collections to certificateholders of other Series, then to pay any
unpaid commercially reasonable costs and expenses of a successor
Servicer, if any, and then on each business day other than the
Default Recognition Date to be paid to the Transferor to be treated
as "Transferor Retained Finance Charge Collections." On the Default
Recognition Date any remaining Excess Finance Charge Collections
which are not so used will be paid to the Transferor.
On each Transfer Date all investment income (net of investment losses
and expenses) on funds on deposit in the Pre-Funding Account, the Principal
Funding Account and the Accumulation Period Reserve Account will be applied
as if such amounts were Available Series Finance Charge Collections on the
last business day of the preceding Monthly Period.
"Class A Monthly Interest" with respect to any Distribution Date will
equal one-twelfth of the product of (i) the Class A Certificate Rate for
the related Interest Accrual Period and (ii) the outstanding principal
balance of the Class A Certificates at the close of business on the first
day of the related Interest Accrual Period or, with respect to any
Distribution Date related to the Funding Period, the outstanding principal
balance of the Class A Certificates at the close of business on the first
day of the related Interest Accrual Period.
"Class B Monthly Interest" with respect to any Distribution Date will
equal one-twelfth of the product of (i) the Class B Certificate Rate for
the related Interest Accrual Period and (ii) the Class B Invested Amount at
the close of business on the first day of the related Interest Accrual
Period or, with respect to any Distribution Date related to the Funding
Period, the outstanding principal balance of the Class B Certificates at
the close of business on the first day of the related Interest Accrual
Period.
"Class C Monthly Interest" with respect to any Distribution Date will
equal the product of (i) the Class C Certificate Rate for the related
Interest Accrual Period, (ii) the Class C Invested Amount at the close of
business on the first day of the related Interest Accrual Period or, with
respect to any Distribution Date related to the Funding Period, the
outstanding principal balance of the Class C Certificates at the close of
business on the first day of the related Interest Accrual Period and (iii)
a fraction the numerator of which is the actual number of days in the
related Interest Accrual Period and the denominator of which is 360.
"Required Amount" means on any business day the amount, if any, by
which the full amount to be paid pursuant to clauses (i)-(xiv) above
exceeds the portion of the Available Series Finance Charge Collections and
Transferor Finance Charge Collections, if any, applied to the payment of
the amounts described in such clauses.
"Pre-Funded Amount" for any Distribution Date with respect to the
Funding Period will equal the amount deposited in the Pre-Funding Account
on the Closing Date, less the amount of any increases in the Invested
Amount pursuant to the Series 1997-2 Supplement in connection with the
addition of Receivables to the Trust.
Any amounts remaining on deposit in the Pre-Funding Account at the
end of the Funding Period will be deposited in the Excess Funding Account.
Payment of Principal. On each business day during the Revolving
Period, the Trustee, acting in accordance with instructions from the
Servicer, will treat the amount described in clause (iv) of "--Allocations"
as Shared Principal Collections which will be applied as described in
clause (vi) of "--Allocations." On each Transfer Date during the
Amortization Period, the Trustee, acting in accordance with instructions
from the Servicer, will apply Principal Collections on deposit in the
Principal Account in the following priority:
(i) an amount equal to the Class A Principal will be deposited
on each Transfer Date in the Principal Funding Account for
distribution to the Class A Certificateholders on the
Expected Final Payment Date (with respect to the
Accumulation Period) or distributed to the Class A
Certificateholders on each Distribution Date until the
Class A Invested Amount is paid in full (with respect to
the Early Amortization Period);
(ii) on the Transfer Date related to the Class B Principal
Payment Commencement Date and on each Transfer Date
thereafter, an amount equal to the Class B Principal will
be deposited in the Principal Funding Account for
distribution to the Class B Certificateholders on the
Expected Final Payment Date (with respect to the
Accumulation Period) or distributed to the Class B
Certificateholders on each Distribution Date until the
Class B Invested Amount is paid in full (with respect to
the Early Amortization Period);
(iii) on the Transfer Date related to the Class C Principal
Payment Commencement Date and on each Transfer Date
thereafter, an amount equal to the Class C Principal will be
deposited in the Principal Funding Account for distribution
to the Class C Certificateholders on the Expected Final
Payment Date (with respect to the Accumulation Period) or
distributed to the Class C Certificateholders on each
Distribution Date until the Class C Invested Amount is paid
in full (with respect to the Early Amortization Period); and
(iv) on each Transfer Date with respect to the Accumulation
Period, the balance of Available Investor Principal
Collections not applied pursuant to (i) through (iii)
above, if any, may be applied to the payment of principal
to the Class D Certificateholders to the extent that the
Class D Invested Amount exceeds the Stated Class D Amount
and any remaining excess on each Transfer Date with respect
to the Accumulation Period and the Early Amortization
Period will be treated as Shared Principal Collections and
applied as described in clause (vi) of "--Allocations."
"Class A Principal" with respect to any Transfer Date relating to the
Accumulation Period or the Early Amortization Period, prior to the payment
in full of the Class A Invested Amount, will equal the least of (i) the
Available Investor Principal Collections on deposit in the Principal
Account with respect to such Transfer Date, (ii) for each Transfer Date
with respect to the Accumulation Period, prior to the payment in full of
the Class A Invested Amount and on or prior to the Expected Final Payment
Date, the applicable Controlled Deposit Amount for such Transfer Date and
(iii) the Class A Adjusted Invested Amount on such Transfer Date.
"Class B Principal" with respect to each Transfer Date relating to
the Accumulation Period or the Early Amortization Period beginning with the
Transfer Date first preceding the Class B Principal Commencement Date,
prior to the payment in full of the Class B Invested Amount, will equal the
least of (i) the Available Investor Principal Collections remaining on
deposit in the Principal Account with respect to such Transfer Date after
application thereof to Class A Principal, if any, (ii) for each Transfer
Date with respect to the Accumulation Period, on or prior to the Expected
Final Payment Date, the applicable Controlled Deposit Amount for such
Transfer Date (minus the Class A Principal with respect to such Transfer
Date) and (iii) the Class B Adjusted Invested Amount on such Transfer Date.
"Class C Principal" with respect to each Transfer Date relating to
the Accumulation Period or the Early Amortization Period beginning with the
Transfer Date first preceding the Distribution Date on which the Class B
Invested Amount is deposited in full in the Principal Funding Account or
paid in full, prior to the payment in full of the Class C Invested Amount,
will equal the least of (i) the Available Investor Principal Collections
remaining on deposit in the Principal Account with respect to such Transfer
Date after applications thereof to Class A Principal and Class B Principal,
if any, (ii) for each Transfer Date with respect to the Accumulation
Period, on or prior to the Expected Final Payment Date, the applicable
Controlled Deposit Amount for such Transfer Date (minus the Class A
Principal and the Class B Principal with respect to such Transfer Date) and
(iii) the Class C Adjusted Invested Amount on such Transfer Date.
"Controlled Accumulation Amount" means for any Transfer Date with
respect to the Accumulation Period, prior to the payment in full of the sum
of the Class A Invested Amount, the Class B Invested Amount and the Class C
Invested Amount, $________; provided, however, that if the commencement of
the Accumulation Period is delayed as described above under "--Postponement
of Accumulation Period," the Controlled Accumulation Amount may be higher
than the amount stated above for each Transfer Date with respect to the
Accumulation Period and will be determined by the Servicer in accordance
with the Pooling and Servicing Agreement based on the principal payment
rates for the Accounts and on the invested amounts of other Series (other
than certain excluded Series) which are scheduled to be in their revolving
periods during the Accumulation Period.
"Accumulation Shortfall" initially means zero and thereafter means,
with respect to any Monthly Period during the Accumulation Period, the
excess, if any, of the Controlled Deposit Amount for the previous Monthly
Period over the amount deposited into the Principal Funding Account with
respect to the Certificates for the previous Monthly Period.
COVERAGE OF INTEREST SHORTFALLS
To the extent of any shortfall in the amount of Available Series
Finance Charge Collections due to the accumulation of principal in the
Excess Funding Account or the Pre-Funding Account, the Transferor Finance
Charge Collections will be made available to cover such Negative Carry
Amount.
Finance Charge Collections allocable to any Series in excess of the
amounts necessary to make required payments with respect to such Series
("Excess Finance Charge Collections") will be applied to cover any
shortfalls with respect to amounts payable from Finance Charge Collections
allocable to any other Series, pro rata based upon the amounts of the
shortfalls, if any, with respect to such other Series. Any Excess Finance
Charge Collections remaining after covering shortfalls with respect to all
outstanding Series during a Monthly Period will be paid to the successor
Servicer, if any, to cover certain costs and expenses and then to the
holder of the Exchangeable Transferor Certificate.
DEFAULTED RECEIVABLES; DILUTION
Receivables in Defaulted Accounts are charged off as uncollectible in
accordance with the Servicer's customary and usual policies and the Credit
and Collection Policy (a "Defaulted Receivable"). See "Direct Merchants
Bank's Credit Card Activities--Delinquency, Losses and Collections" and
"--Loss Experience." On each business day, the Servicer will allocate to
the Certificateholders a portion of all Defaulted Receivables in an amount
(the "Investor Default Amount") equal to (i) on any business day other than
a Default Recognition Date, an amount equal to the product of (a) the
Floating Allocation Percentage applicable on such business day and (b) the
aggregate principal amount of Defaulted Receivables identified since the
prior reporting date and (ii) on any Default Recognition Date, an amount
equal to the product of (a) the Default Recognition Allocation Percentage
applicable on such Default Recognition Date and (b) the aggregate principal
amount of Defaulted Receivables with respect to such Default Recognition
Date.
If on any business day the Servicer adjusts the amount of any
Principal Receivable due to Dilution, then the amount of the Transferor
Interest in the Trust will be reduced, on a net basis, by the amount of the
adjustment on such business day. In the event the Transferor Interest would
be reduced below the Minimum Transferor Interest, the Transferor will be
required to pay to the Trust the amount of such Dilution (an "Adjustment
Payment") out of its own funds or, to the extent not paid by the
Transferor, out of Available Series Finance Charge Collections, Transferor
Finance Charge Collections, Excess Finance Charge Collections or
Reallocated Principal Collections designated for such purpose. To the
extent that such amounts are not sufficient to cover the portion of the
unpaid Adjustment Payments allocated to Series 1997-2, there will be an
Investor Charge-Off as described below.
INVESTOR CHARGE-OFFS
If on the second business day preceding each Distribution Date (the
"Determination Date"), the aggregate Investor Default Amount and the Series
Allocation Percentage of unpaid Adjustment Payments, if any, for all
business days in the preceding Monthly Period exceeds the aggregate amount
of the Available Series Finance Charge Collections, Transferor Finance
Charge Collections, Excess Finance Charge Collections, Reallocated
Principal Collections, Principal Funding Account Investment Proceeds,
Pre-Funding Account investment proceeds and amounts withdrawn from the
Accumulation Period Reserve Account and applied with respect to the
Investor Default Amount and the Series Allocation Percentage of unpaid
Adjustment Payments with respect to such Monthly Period, then the Class D
Invested Amount will be reduced by the aggregate amount of such excess, but
not more than the sum of the remaining aggregate Investor Default Amount
and the remaining unpaid Adjustment Payments for such Monthly Period (a
"Class D Investor Charge-Off"). The Class D Invested Amount thereafter will
be increased (but not in excess of the unpaid principal balance of the
Class D Certificates) on any business day by the amounts allocated and
available for that purpose as described under clause (xii) of
"--Application of Collections--Payment of Fees, Interest and Other Items."
In the event that any such reduction of the Class D Invested Amount
would cause the Class D Invested Amount to be a negative number, the Class
D Invested Amount will be reduced to zero, and the Class C Invested Amount
will be reduced by the aggregate amount of such excess, but not more than
the sum of the remaining aggregate Investor Default Amount and the
remaining unpaid Adjustment Payments for such Monthly Period (a "Class C
Investor Charge-Off"), which will have the effect of slowing or reducing
the return of principal to the Class C Certificateholders. The Class C
Invested Amount will thereafter be increased (but not in excess of the
unpaid principal balance of the Class C Certificates) on any business day
by the amounts allocated and available for that purpose as described under
clause (xi) of "--Application of Collections--Payment of Fees, Interest and
Other Items."
In the event that any such reduction of the Class C Invested Amount
would cause the Class C Invested Amount to be a negative number, the Class
C Invested Amount will be reduced to zero, and the Class B Invested Amount
will be reduced by the aggregate amount of such excess, but not more than
the sum of the remaining aggregate Investor Default Amount and the
remaining unpaid Adjustment Payments for such Monthly Period (a "Class B
Investor Charge-Off"), which will have the effect of slowing or reducing
the return of principal to the Class B Certificateholders. The Class B
Invested Amount will thereafter be increased (but not in excess of the
unpaid principal balance of the Class B Certificates) on any business day
by the amounts allocated and available for that purpose as described under
clause (x) of "--Application of Collections--Payment of Fees, Interest and
Other Items."
In the event that any such reduction of the Class B Invested Amount
would cause the Class B Invested Amount to be a negative number, the Class
B Invested Amount will be reduced to zero, and the Class A Invested Amount
will be reduced by the amount by which the Class B Invested Amount would
have been reduced below zero, but not more than the sum of the remaining
aggregate Investor Default Amount and the remaining unpaid Adjustment
Payments for such Monthly Period (a "Class A Investor Charge-Off") which
will have the effect of slowing or reducing the return of principal to the
Class A Certificateholders. The Class A Invested Amount will thereafter be
increased (but not in excess of the unpaid principal balance of the Class A
Certificates) on any business day by the amounts allocated and available
for that purpose as described under clause (vii) of "--Application of
Collections--Payment of Fees, Interest and Other Items."
PAIRED SERIES
Subject to the satisfaction of the Rating Agency Condition, prior to
the commencement of the Early Amortization Period the Certificates may be
paired with one or more other Series (each, a "Paired Series"). Each Paired
Series either will be pre-funded with an initial deposit to a pre-funding
account in an amount up to the initial principal balance of such Paired
Series and primarily from the proceeds of the sale of such Paired Series or
will have a variable principal amount. Any such pre-funding account will be
held for the benefit of such Paired Series and not for the benefit of the
Certificateholders. As amounts are deposited in the Principal Funding
Account for the benefit of the Class A Certificateholders, Class B
Certificateholders and Class C Certificateholders, either (i) in the case
of a pre-funded Paired Series, an equal amount of funds on deposit in any
pre-funding account for such pre-funded Paired Series will be released
(which funds will be distributed to the Transferor) or (ii) in the case of
a Paired Series having a variable principal amount, an interest in such
variable Paired Series in an equal or lesser amount may be sold by the
Trust (and the proceeds thereof will be distributed to the Transferor) and,
in either case, the invested amount in the Trust of such Paired Series will
increase by up to a corresponding amount. Upon payment in full of the
Certificates, assuming that there have been no unreimbursed charge-offs
with respect to any related Paired Series, the aggregate invested amount of
such related Paired Series will have been increased by an amount up to an
aggregate amount equal to the Invested Amount paid to the
Certificateholders since the issuance of such Paired Series. The issuance
of a Paired Series will be subject to the conditions described under
"--Exchanges." There can be no assurance, however, that the terms of any
Paired Series might not have an impact on the timing or amount of payments
received by a Certificateholder. In particular, the denominator of the
Fixed/Floating Allocation Percentages for the Class A Certificates and the
Class B Certificates may be increased upon the occurrence of a Pay Out
Event with respect to a Paired Series resulting in a possible reduction of
the percentage of Collections of Principal Receivables and Finance Charge
Receivables allocated to Series 1997-2 if such event required reliance by
Series 1997-2 on clause (b) of the denominator of the applicable
Fixed/Floating Allocation Percentages and, in the case of Principal
Collections allowed payment of principal at such time to the Paired Series.
See "--Allocation Percentages."
DEFEASANCE
On the date that the following conditions shall have been satisfied:
(i) the Transferor shall have deposited (x) in the Principal Funding
Account an amount equal to the sum of the outstanding principal balances of
the Class A Certificates, the Class B Certificates and the Class C
Certificates, which amount shall be invested in Cash Equivalents and (y) in
the Accumulation Period Reserve Account an amount equal to or greater than
the Covered Amount, as estimated by the Transferor, for the period from the
date of the deposit to the Principal Funding Account through the Expected
Final Payment Date; (ii) the Transferor shall have delivered to the Trustee
an opinion of counsel to the effect that such deposit and termination of
obligations will not result in the Trust being required to register as an
"investment company" within the meaning of the Investment Company Act and
an opinion of counsel to the effect that following such deposit none of the
Trust, the Accumulation Period Reserve Account or the Principal Funding
Account will be deemed to be an association (or publicly traded
partnership) taxable as a corporation; (iii) the Transferor shall have
delivered to the Trustee a certificate of an officer of the Transferor
stating that the Transferor reasonably believes that such deposit and
termination of its obligations will not constitute a Pay Out Event or any
event that, with the giving of notice or the lapse of time, would cause a
Pay Out Event to occur; and (iv) a Ratings Event will not occur as a result
of such events; then, the Certificates will no longer be entitled to the
security interest of the Trust in the Receivables and, except those set
forth in clause (i) above, other Trust assets ("Defeasance"), and the
percentages applicable to the allocation to the Certificateholders of
Principal Collections, Finance Charge Collections and Defaulted Receivables
will be reduced to zero. Upon the satisfaction of the foregoing conditions,
the Class D Invested Amount will be reduced to zero.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Class A Certificates, the Class B Certificates and the Class C
Certificates will each be subject to optional repurchase by the Transferor
on any Distribution Date if on such Distribution Date the sum of the Class
A Invested Amount, the Class B Invested Amount and the Class C Invested
Amount would be reduced to an amount less than or equal to 10 percent of
the sum of the highest Class A Invested Amount, Class B Invested Amount and
Class C Invested Amount, if certain conditions set forth in the Pooling and
Servicing Agreement are satisfied. The repurchase price will be equal to
(i) the unpaid Class A Invested Amount plus accrued and unpaid interest on
the Class A Certificates, (ii) the unpaid Class B Invested Amount plus
accrued and unpaid interest on the Class B Certificates, and (iii) the
unpaid Class C Invested Amount plus accrued and unpaid interest on the
Class C Certificates, in each case after giving effect to any payments on
such date. In each case interest will accrue through the day preceding the
Distribution Date on which the repurchase occurs.
The Certificates will be retired on the day following the
Distribution Date on which the final payment of principal is scheduled to
be made to the Certificateholders, whether as a result of optional
reassignment to the Transferor or otherwise. Subject to prior termination
as provided above, the Pooling and Servicing Agreement provides that the
final distribution of principal and interest on the Offered Certificates
will be made on the October 2005 Distribution Date (the "Termination
Date"), except to the extent provided below. In the event that the Invested
Amount is greater than zero, exclusive of any Class held by the Transferor,
on the Termination Date, the Trustee will sell or cause to be sold (and
apply the proceeds first to the Class A Certificates until paid in full,
then to the Class B Certificates until paid in full, then to the Class C
Certificates until paid in full, and finally to the Class D Certificates to
the extent necessary to pay such remaining amounts to all
Certificateholders pro rata within each Class as final payment of the
Certificates) interests in the Receivables or certain Receivables, as
specified in the Pooling and Servicing Agreement and the Series 1997-2
Supplement, in an amount up to 110 percent of the Invested Amount at the
close of business on such date (but not more than the total amount of
Receivables allocable to the Certificates in accordance with the Pooling
and Servicing Agreement). If the sale contemplated by the preceding
sentence has not occurred by the Termination Date, the affected
Certificateholders shall remain entitled to receive proceeds of such sale
when it occurs. The net proceeds of such sale and any collections on the
Receivables, up to an amount equal to the Invested Amount plus accrued
interest due on the Certificates, will be paid on the Termination Date
first to Class A Certificateholders until the Class A Invested Amount is
paid in full, then to the Class B Certificateholders until the Class B
Invested Amount is paid in full, then to the Class C Certificateholders
until the Class C Invested Amount is paid in full, and then to the Class D
Certificateholders until the Class D Invested Amount is paid in full.
Unless the Servicer and the holder of the Exchangeable Transferor
Certificate instruct the Trustee otherwise, the Trust will terminate on the
earlier of (a) the day after the Distribution Date following the date on
which funds shall have been deposited in the Distribution Account for the
payment to certificateholders sufficient to pay in full the aggregate
investor interest of all Series outstanding plus interest thereon at the
applicable certificate rates to the next Distribution Date and (b) a date
which shall not be later than May 26, 2095. Upon the termination of the
Trust and the surrender of the Exchangeable Transferor Certificate, the
Trustee will convey to the holder of the Exchangeable Transferor
Certificate all right, title and interest of the Trust in and to the
Receivables and other funds of the Trust (other than funds on deposit in
the Distribution Account and other similar bank accounts of the Trust with
respect to any Series).
PAY OUT EVENTS
As described above, the Revolving Period will continue until the
commencement of the Accumulation Period, unless a Pay Out Event occurs
prior to such date. A "Pay Out Event" refers to any of the following
events:
(i) failure on the part of the Transferor (a) to make any
payment or deposit on the date required under the Pooling and
Servicing Agreement (or within the applicable grace period which will
not exceed five business days); (b) to perform in all material
respects the Transferor's covenant not to sell, pledge, assign, or
transfer to any person, or grant any unpermitted lien on, any
Receivable; or (c) to observe or perform in any material respect any
other covenants or agreements of the Transferor set forth in the
Pooling and Servicing Agreement, the Purchase Agreement or the Series
1997-2 Supplement, which failure has a material adverse effect on the
Certificateholders and which continues unremedied for a period of 60
days after written notice of such failure, requiring the same to be
remedied, shall have been given to the Transferor by the Trustee, or
to the Transferor and the Trustee by the Certificateholders
representing more than 50 percent of the Invested Amount and
continues to materially and adversely affect the interests of the
Certificateholders for such period;
(ii) any representation or warranty made by the Transferor in
the Pooling and Servicing Agreement proves to have been incorrect in
any material respect when made, and as a result the interests of the
Certificateholders are materially adversely affected, and such
representation or warranty continues to be incorrect for 60 days
after notice to the Transferor by the Trustee or to the Transferor
and the Trustee by more than 50 percent of the Invested Amount and
the Certificateholders' Interest continues to be materially adversely
affected during such period; provided, however, that a Pay Out Event
pursuant to this subparagraph (ii) will not be deemed to occur
thereunder if the Transferor has accepted reassignment of the related
Receivable or all such Receivables, if applicable, during such period
(or such longer period as the Trustee may specify) in accordance with
the provisions thereof;
(iii) certain events of bankruptcy or insolvency relating to
the Transferor, Direct Merchants Bank or Metris;
(iv) any reduction of the average of the Portfolio Yields for
any three consecutive Monthly Periods to a rate which is less than
the weighted average Base Rates for such three consecutive Monthly
Periods;
(v) the Trust shall become subject to regulation by the
Commission as an "investment company" within the meaning of the
Investment Company Act;
(vi) (a) the Transferor Interest shall be less than the Minimum
Transferor Interest, (b) (I) the sum of the amount on deposit in the
Pre-Funding Account plus the Series Allocation Percentage of the sum
of the total amount of Principal Receivables plus amounts on deposit
in the Excess Funding Account shall be less than (II) the sum of the
aggregate outstanding principal amounts of the Class A Certificates,
the Class B Certificates, the Class C Certificates and the Class D
Certificates, (c) the total amount of Principal Receivables and the
amounts on deposit in the Excess Funding Account and the Principal
Funding Account shall be less than the Minimum Aggregate Principal
Receivables or (d) the Retained Percentage shall be equal to or less
than 2 percent, in each case as of any Determination Date; or
(vii) any Servicer Default (as defined below) shall occur which
would have a material adverse effect on the Certificateholders.
In the case of any event described in clause (i), (ii), or (vii)
above, a Pay Out Event will be deemed to have occurred with respect to the
Certificates only if, after any applicable grace period, the
Certificateholders evidencing undivided interests aggregating more than 50
percent of the Invested Amount, by written notice to the Transferor and the
Servicer declare that a Pay Out Event has occurred with respect to the
Certificates as of the date of such notice. In the case of any event
described in clause (iii) or (v) above, a Pay Out Event with respect to all
Series then outstanding, and in the case of any event described in clause
(iv) or (vi), a Pay Out Event with respect only to the Certificates, will
be deemed to have occurred without any notice or other action on the part
of the Trustee or the Certificateholders or all certificateholders, as
appropriate, immediately upon the occurrence of such event. On the date on
which a Pay Out Event is deemed to have occurred, the Early Amortization
Period will commence. In such event, distributions of principal to the
Certificateholders will begin on the first Distribution Date following the
month in which such Pay Out Event occurred. If, because of the occurrence
of a Pay Out Event, the Early Amortization Period begins,
Certificateholders will begin receiving distributions of principal earlier
than they otherwise would have, which may shorten the average life of the
Certificates.
In addition to the consequences of a Pay Out Event discussed above,
if, pursuant to certain provisions of federal law, the Transferor or Metris
voluntarily enters liquidation or a trustee-in-bankruptcy is appointed for
the Transferor or Metris (an "Insolvency Event"), the Transferor will
immediately cease to transfer Principal Receivables to the Trust and
promptly give notice to the Trustee of such event. If an Insolvency Event
occurs or, at any time the Retained Percentage is equal to or less than 2
percent (a "Trigger Event"), the Pooling and Servicing Agreement and the
Trust shall be terminated, and within 15 days of notice to the Trustee, the
Trustee will publish a notice of the Insolvency Event or Trigger Event,
stating that the Trustee intends to sell, dispose of, or otherwise
liquidate the Receivables in a commercially reasonable manner. With respect
to each Series outstanding at such time (or, if any such Series has more
than one class, of each class of such Series excluding any class or portion
thereof held by the Transferor), unless otherwise instructed within a
specified period by certificateholders representing undivided interests
aggregating more than 50 percent of the invested amount of such Series (or
class excluding any class or portion thereof held by the Transferor) and
the holders of any Supplemental Certificates or any other interest in the
Exchangeable Transferor Certificate other than the Transferor, the Trustee
will sell, dispose of, or otherwise liquidate the portion of the
Receivables allocable to the Series that did not vote to continue the Trust
in accordance with the Pooling and Servicing Agreement in a commercially
reasonable manner and on commercially reasonable terms. The proceeds from
the sale, disposition or liquidation of the Receivables will be treated as
collections of the Receivables allocable to such Certificateholders and
will be distributed to the applicable Certificateholders as provided above
in "--Application of Collections."
If the only Pay Out Event to occur is either the bankruptcy or
insolvency of the Transferor or the appointment of a bankruptcy trustee or
receiver for the Transferor, the bankruptcy trustee or receiver may have
the power to prevent the early sale, liquidation, or disposition of the
Receivables and the commencement of the Early Amortization Period. In
addition, a bankruptcy trustee or receiver may have the power to cause the
early sale of the Receivables and the early retirement of the Certificates.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's compensation for its servicing activities and
reimbursement for its expenses will take the form of the payment to it of a
servicing fee in an amount for any Monthly Period the ("Monthly Servicing
Fee") equal to the product of (i) a fraction the numerator of which is the
actual number of days in such Monthly Period and the denominator of which
is 365 or 366, (ii) the applicable Series Servicing Fee Percentage and
(iii) the Adjusted Invested Amount as of the beginning of the day on the
first day of such Monthly Period, or, in the case of the first Distribution
Date, the Initial Invested Amount. The Servicing Fee will be funded from
Finance Charge Collections allocated to the Certificateholders' Interest,
and will be paid from the amount so allocated and on deposit in the
Collection Account. See "--Application of Collections--Payment of Fees,
Interest, and Other Items" above. The remainder of the servicing fee will
be allocable to the Transferor Interest and the investor interests of other
Series. Neither the Trust nor the Certificateholders will have any
obligation to pay such portion of the servicing fee.
The Servicer will pay from its servicing compensation certain
expenses incurred in connection with servicing the Receivables, including
without limitation payment of the fees and disbursements of the Trustee and
independent certified public accountants and other fees which are not
expressly stated in the Pooling and Servicing Agreement to be payable by
the Trust or the Certificateholders other than federal, state, and local
income and franchise taxes, if any, of the Trust.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement, except upon determination that performance
of its duties is no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor to the
Servicer has assumed the Servicer's responsibilities and obligations under
the Pooling and Servicing Agreement. The Servicer may delegate some or all
of its servicing duties; provided, however, such delegation will not
relieve the Servicer of its obligation to perform such duties in accordance
with the Pooling and Servicing Agreement. In addition, any affiliate of
Direct Merchants Bank may be substituted in all respects for Direct
Merchants Bank as Servicer, provided that such affiliate expressly assumes
the performance of every covenant and obligation of the Servicer under the
Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Trust and the Trustee from and against any reasonable loss,
liability, expense, damage, or injury suffered or sustained by reason of
any acts or omissions or alleged acts or omissions of the Servicer with
respect to the activities of the Trust or the Trustee; provided, however,
that the Servicer will not indemnify (a) the Trustee for liabilities
imposed by reason of fraud, gross negligence, or willful misconduct by the
Trustee in the performance of its duties under the Pooling and Servicing
Agreement, (b) the Trust, the Certificateholders, or the Certificate Owners
for liabilities arising from actions taken by the Trustee at the request of
Certificateholders, (c) the Trust, the Certificateholders, or the
Certificate Owners for any losses, claims, damages, or liabilities incurred
by any of them in their capacities as investors, including without
limitation, losses incurred as a result of Defaulted Receivables or
Dilution, or (d) the Trust, the Certificateholders, or the Certificate
Owners for any liabilities, costs, or expenses of the Trust, the
Certificateholders, or the Certificate Owners arising under any tax law,
including without limitation any federal, state, or local income or
franchise tax or any other tax imposed on or measured by income (or any
interest or penalties with respect thereto or arising from a failure to
comply therewith) required to be paid by the Trust, the Certificateholders
or the Certificate Owners in connection with the Pooling and Servicing
Agreement to any taxing authority.
In addition, the Pooling and Servicing Agreement provides that,
subject to certain exceptions, the Transferor will indemnify the Trust and
the Trustee from and against any reasonable loss, liability, expense,
damage or injury (other than to the extent that any of the foregoing relate
to any tax law or any failure to comply therewith) suffered or sustained by
reason of any acts or omissions or alleged acts or omissions arising out of
or based upon the arrangement created by the Pooling and Servicing
Agreement as though the Pooling and Servicing Agreement created a
partnership under the Delaware Uniform Partnership Law in which the
Transferor is a general partner.
The Pooling and Servicing Agreement provides that, except for the
foregoing indemnities, neither the Transferor nor the Servicer nor any of
their respective directors, officers, employees, or agents will be under
any liability to the Trust, the Certificateholders, or any other person for
any action taken, or for refraining from taking any action pursuant to the
Pooling and Servicing Agreement. Neither the Transferor nor the Servicer
nor any of their respective directors, officers, employees or agents will
be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith, or gross negligence of the
Transferor, the Servicer, or any such person in the performance of its
duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Pooling and Servicing Agreement
provides that the Servicer is not under any obligation to appear in,
prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under the Pooling and Servicing Agreement and
which in its opinion may expose it to any expense or liability.
Under the Pooling and Servicing Agreement, the Transferor will be
liable directly to an injured party for the entire amount of any losses,
claims, damages or liabilities (other than those incurred by a
Certificateholder in the capacity of an investor in the Certificates)
arising out of or based on the arrangement created by the Pooling and
Servicing Agreement or the actions of the Servicer taken pursuant to the
Pooling and Servicing Agreement as though the Pooling and Servicing
Agreement created a partnership under the Uniform Partnership Act in which
the Transferor is a general partner. The Transferor will also pay,
indemnify and hold harmless each Certificateholder for any such losses,
claims, damages or liabilities (other than those incurred by a
Certificateholder in the capacity of an investor in the Certificates)
except to the extent that they arise from any action by any
Certificateholder. In the event of a Service Transfer, the successor
Servicer will indemnify the Transferor for any losses, claims, damages and
liabilities of the Transferor as described in this paragraph arising from
the actions or omissions of such successor.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the
Trustee or certificateholders representing undivided interests aggregating
more than 50 percent of the aggregate investor interests for all
outstanding Series, by written notice to the Servicer (and to the Trustee
if given by the certificateholders), may terminate all of the rights and
obligations of the Servicer as servicer under the Pooling and Servicing
Agreement and in and to the Receivables and the proceeds thereof and the
Trustee may appoint a new Servicer (a "Service Transfer"). The rights and
interest of the Transferor under the Pooling and Servicing Agreement and in
the Transferor Interest will not be affected by such termination. Upon such
termination, the Trustee will as promptly as possible appoint a successor
Servicer. If no such Servicer has been appointed and has accepted such
appointment by the time the Servicer ceases to act as Servicer, all
authority, power and obligations of the Servicer under the Pooling and
Servicing Agreement will pass to and be vested in the Trustee. If the
Trustee is unable to obtain any bids from eligible servicers and the
Servicer delivers an officer's certificate to the effect that it cannot in
good faith cure the applicable Servicer Default, and if the Trustee is
legally unable to act as a successor Servicer, then the Trustee will give
the Transferor the right to accept reassignment of all of the Receivables
on terms equivalent to the best purchase offer as determined by the
Trustee.
A "Servicer Default" refers to any of the following events:
(i) failure by the Servicer to make any payment, transfer, or
deposit, or to give instructions to the Trustee to make certain
payments, transfers, or deposits within five business days after the
date the Servicer is required to do so under the Pooling and
Servicing Agreement or any Supplement; provided, however, that any
such failure caused by a nonwillful act of the Servicer shall not
constitute a Servicer Default if the Servicer promptly remedies such
failure within five business days after receiving notice of such
failure or otherwise becoming aware of such failure;
(ii) failure on the part of the Servicer duly to observe or
perform in any respect any other covenants or agreements of the
Servicer which has a material adverse effect on the
certificateholders of any Series then outstanding and which continues
unremedied for a period of 60 days after written notice of such
failure, requiring the same to be remedied, shall have been given to
the Servicer by the Trustee, or to the Servicer and the Trustee by
holders of Certificates evidencing undivided interests aggregating
not less than 50 percent of the Invested Amount of any Series
materially adversely affected thereby and continues to have a
material adverse effect on the certificateholders of any Series then
outstanding for such period; or the delegation by the Servicer of its
duties under the Pooling and Servicing Agreement, except as
specifically permitted thereunder;
(iii) any representation, warranty, or certification made by
the Servicer in the Pooling and Servicing Agreement, or in any
certificate delivered pursuant to the Pooling and Servicing
Agreement, proves to have been incorrect when made which has a
material adverse effect on the certificateholders of any Series then
outstanding, and which continues to be incorrect in any material
respect for a period of 60 days after written notice of such failure,
requiring the same to be remedied, shall have been given to the
Servicer by the Trustee, or to the Servicer and Trustee by the
holders of Certificates evidencing undivided interests aggregating
not less than 50 percent of the Invested Amount of any Series
materially adversely affected thereby and continues to have a
material adverse effect on such certificateholders for such period;
or
(iv) the occurrence of certain events of bankruptcy, insolvency
or receivership of the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to in clause (i) above for a period of five business days, or
referred to under clause (ii) or (iii) for a period of 60 business days,
will not constitute a Servicer Default if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Servicer and
such delay or failure was caused by an act of God or other similar
occurrence. Upon the Servicer becoming aware of any such event, the
Servicer will not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the Pooling
and Servicing Agreement, and the Servicer will provide the Trustee, any
provider of Enhancement, the Transferor and the holders of certificates of
all Series outstanding prompt notice of such failure or delay by it,
together with a description of the cause of such failure or delay and its
efforts to perform its obligations.
In the event of a Servicer Default, if a bankruptcy trustee or
receiver were appointed for the Servicer and no Servicer Default other than
such bankruptcy or receivership or the insolvency of the Servicer exists,
the bankruptcy trustee or receiver may have the power to prevent either the
Trustee or the majority of the certificateholders from effecting a Service
Transfer.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Paying Agent will forward to each
Certificateholder of record a statement prepared by the Servicer setting
forth with respect to such Series: (a) the total amount distributed, (b)
the amount of the distribution allocable to principal on the Class A
Certificates, the Class B Certificates, the Class C Certificates and the
Class D Certificates, (c) the amount of such distribution allocable to
interest on the Class A Certificates, the Class B Certificates and the
Class C Certificates, (d) the amount of Principal Collections processed
during the related Monthly Period and allocated in respect of the Class A
Certificates, the Class B Certificates, the Class C Certificates and the
Class D Certificates, respectively, (e) the amount of Finance Charge
Collections processed during the preceding Monthly Period and allocated in
respect of the Class A Certificates, the Class B Certificates, the Class C
Certificates and the Class D Certificates, respectively, (f) the aggregate
amount of Principal Receivables, the Invested Amount, the Class A Invested
Amount, the Class B Invested Amount, the Class C Invested Amount, the Class
D Invested Amount, the Pre-Funded Amount, the Floating Allocation
Percentage, and during the Amortization Period, the Fixed/Floating
Allocation Percentage with respect to the Principal Receivables in the
Trust as of the close of business on the Record Date, (g) the aggregate
outstanding balance of Receivables which are current, 30-59, 60-89 and 90
days and over contractually delinquent as of the end of the day on the
Record Date, (h) the aggregate Investor Default Amount for the related
Monthly Period, (i) the aggregate amount of Class A Investor Charge-Offs,
Class B Investor Charge-Offs, Class C Investor Charge-Offs and Class D
Investor Charge-Offs for the preceding Monthly Period, (j) the amount of
the Monthly Servicing Fee for the preceding Monthly Period, (k) the Class A
Pool Factor and the Class B Pool Factor as of the end of the last day of
the related Monthly Period, (l) the aggregate amount of funds in the Excess
Funding Account as of the last day of the Monthly Period immediately
preceding the Distribution Date and (m) the number of new Accounts added to
the Trust during the related Monthly Period.
The Paying Agent will furnish to each person who at any time during
the preceding calendar year was a Certificateholder of record a statement
prepared by the Servicer containing the information required to be
contained in the regular monthly report to Certificateholders, as set forth
in clauses (a), (b), and (c) above aggregated for such calendar year or the
applicable portion thereof during which such person was a
Certificateholder, together with, on or before January 31 of each year,
beginning in 1998, such customary information (consistent with the
treatment of the Certificates as debt) as the Servicer or Trustee deems
necessary or desirable for tax reporting purposes.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides that within 100 days of
the end of each fiscal year the Servicer will cause a firm of independent
public accountants to furnish to the Trustee on an annual basis a report to
the effect that such firm has compared the amounts and percentages set
forth in four of the monthly settlement statements for the Monthly Periods
covered by such report with the computer reports (which may include
personal computer generated reports that summarize data from the computer
reports generated by either the Transferor, Servicer or FDR which are used
to prepare daily reports) which were the source of such amounts and
percentages and that, on the basis of such comparison, such amounts and
percentages are in agreement, except as shall be set forth in such report.
A copy of such report will be sent by the Trustee to each
Certificateholder.
The Pooling and Servicing Agreement provides that within 100 days of
the end of each fiscal year, the Servicer will cause a firm of nationally
recognized independent accountants to furnish a report to the effect that
such firm has applied certain procedures, as agreed upon between such firm
and the Servicer, which would re-perform certain accounting procedures
performed by the Servicer pursuant to certain documents and records
relating to the servicing of the Accounts. Each report shall set forth the
agreed upon procedures performed and the results of such procedures.
The Pooling and Servicing Agreement also provides for delivery to the
Trustee on an annual basis, within 100 days of the end of the fiscal year,
of a statement signed by an officer of the Servicer to the effect that the
Servicer has, or has caused to be, fully performed its obligations in all
material respects under the Pooling and Servicing Agreement throughout the
preceding year or, if there has been a default in the performance of any
such obligation, specifying the nature and status of the default. A copy of
such certificate may be obtained by any Certificateholder upon the
submission of a written request therefor addressed to the Trustee's
Corporate Trust Office.
AMENDMENTS
The Pooling and Servicing Agreement and the Series 1997-2 Supplement
may be amended by the Transferor, the Servicer and the Trustee, without the
consent of Certificateholders, for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such
Pooling and Servicing Agreement and Supplement or of modifying in any
manner the rights of such Certificateholders; provided that (i) the
Servicer shall have provided an officer's certificate to the effect that
such action will not adversely affect in any material respect the interests
of such Certificateholders, (ii) except in the case of any amendment for
the sole purpose of curing any ambiguity or correcting or supplementing any
inconsistent provision of the Pooling and Servicing Agreement or revising
any schedule thereto (other than the list of Receivables), the Rating
Agencies shall have been notified of such amendment and shall have provided
written confirmation that they would not lower the rating of the Class A
Certificates, the Class B Certificates or the Class C Certificates, and
(iii) such action will not, in the opinion of counsel satisfactory to the
Trustee, result in certain adverse tax consequences. In addition, the
Pooling and Servicing Agreement and the Series 1997-2 Supplement may be
amended from time to time by the Transferor, the Servicer, and the Trustee,
without the consent of Certificateholders, to add to or change any of the
provisions of the Pooling and Servicing Agreement to provide that bearer
certificates issued with respect to any other Series may be registrable as
to principal, to change or eliminate any restrictions on the payment of
principal of or any interest on such bearer certificates, to permit such
bearer certificates to be issued in exchange for registered certificates or
bearer certificates of other authorized denominations or to permit the
issuance of uncertificated certificates. Certificateholders by purchase of
their Certificates will be deemed to have consented to a modification to
the bankruptcy and insolvency Pay Out Event specified in the Pooling and
Servicing Agreement such that it will be as specified in clause (iii) in
"--Pay Out Events" above.
The Pooling and Servicing Agreement and the Series 1997-2 Supplement
may be amended by the Transferor, the Servicer, and the Trustee with the
consent of the holders of certificates evidencing undivided interests
aggregating not less than 66 2/3 percent of the investor interests of each
and every Series adversely affected, for the purpose of adding any
provisions to, changing in any manner or eliminating any of the provisions
of the Pooling and Servicing Agreement, or any Supplement or of modifying
in any manner the rights of certificateholders of any then outstanding
Series. No such amendment, however, may (a) reduce in any manner the amount
of, or delay the timing of, distributions required to be made on any such
Series, (b) change the definition of or the manner of calculating the
interest of any certificateholder of such Series, or (c) reduce the
aforesaid percentage of investor interests the holders of which are
required to consent to any such amendment, in each case without the consent
of all certificateholders of all Series adversely affected. Promptly
following the execution of any amendment to the Pooling and Servicing
Agreement, the Trustee will furnish written notice of the substance of such
amendment to each Certificateholder. Any Supplement and any amendments
regarding the addition or removal of Receivables from the Trust will not be
considered an amendment requiring certificateholder consent under the
provisions of the Pooling and Servicing Agreement and any Supplement.
Additionally, upon the receipt by the Transferor, the Servicer and
the Trustee of a Tax Opinion reasonably satisfactory to each of them, the
Pooling and Servicing Agreement and the Series 1997-2 Supplement may be
amended by the Transferor, the Servicer and the Trustee without the consent
of any of the Certificateholders (i) to add, modify or eliminate such
provisions as may be necessary or advisable in order to enable all or a
portion of the Trust to qualify as, and to permit an election to be made to
cause all or a portion of the Trust to be treated as, a "financial asset
securitization investment trust" as described in the provisions of the
FASIT legislation (see "Certain Federal Income Tax Consequences--Recent
Legislation"), or to enable all or a portion of the Trust to qualify and an
election to be made for similar treatment under such comparable subsequent
federal income tax provisions as may ultimately be enacted into law, and
(ii) in connection with any such election, to modify or eliminate existing
provisions of the Pooling and Servicing Agreement and any Supplement
relating to the intended federal income tax treatment of the Certificates
and the Trust in the absence of the election.
LIST OF CERTIFICATEHOLDERS
Upon written request of Certificateholders representing undivided
interests in the Trust aggregating not less than 10 percent of the Invested
Amount, the Trustee after having been adequately indemnified by such
Certificateholders for its costs and expenses, and having given the
Servicer notice that such request has been made, will afford such
Certificateholders access during business hours to the current list of
Certificateholders of the Trust for purposes of communicating with other
Certificateholders with respect to their rights under the Pooling and
Servicing Agreement. See "--Book-Entry Registration" and "--Definitive
Certificates."
THE TRUSTEE
The Bank of New York (Delaware) is the Trustee under the Pooling and
Servicing Agreement. The Trustee's corporate trust office is located at
White Clay Center, Route 273, Newark, Delaware 19711. The Transferor, the
Servicer, and their respective affiliates may from time to time enter into
normal banking, lending and trustee relationships with the Trustee and its
affiliates. The Trustee, the Transferor, the Servicer, and any of their
respective affiliates may hold Certificates in their own names. In
addition, for purposes of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint a co-trustee or
separate trustees of all or any part of the Trust. In the event of such
appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Pooling and Servicing Agreement will be
conferred or imposed upon the Trustee and such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee may resign at any time. The Transferor may also remove
the Trustee if the Trustee ceases to be eligible to continue as such under
the Pooling and Servicing Agreement or if the Trustee becomes insolvent.
The Trustee at all times must not be a Related Person. In such
circumstances, the Transferor will be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee does not become effective until acceptance of the
appointment by the successor trustee.
If the Trustee fails to perform any of its obligations under the
Pooling and Servicing Agreement, and a certificateholder delivers written
notice of such failure to the Trustee, and the Trustee shall not have
corrected such failure for 60 days thereafter, then the holders of investor
certificates representing more than 50 percent of the aggregate invested
amount of all Series (including related commitments) shall have the right
to remove the Trustee and (with the consent of the Transferor, which shall
not be unreasonably withheld) promptly appoint a successor trustee by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor trustee.
DESCRIPTION OF THE PURCHASE AGREEMENTS
PURCHASES OF RECEIVABLES
Bank Purchase Agreement. Pursuant to the Bank Purchase Agreement,
Direct Merchants Bank sells to Metris all of its right, title and interest
in and to (i) the Receivables arising in the Accounts and any other
accounts originated or acquired by Direct Merchants Bank, including,
without limitation, all accounts, general intangibles, chattel paper and
other obligations of any Obligor with respect to the Receivables, then or
thereafter existing, whether or not arising out of or in connection with
the sale or lease of goods or the rendering of services, (ii) all monies
and investments due or to become due with respect thereto (including,
without limitation, the right to any Finance Charge Receivables, including
any recoveries) and (iii) all proceeds of such Receivables. In connection
with the realignment of FCI's subsidiaries, FCI assigned to Metris all of
FCI's rights and Metris assumed all of FCI's obligations under the assigned
Bank Purchase Agreement and the Purchase Agreement.
The purchase price for the Receivables (including Receivables in
Additional Accounts) conveyed to Metris that are created on any day is
payable on the date they are conveyed by Direct Merchants Bank to Metris in
an amount equal to 100 percent of the Principal Receivables so conveyed, as
such amount may be adjusted from time to time as described in the Bank
Purchase Agreement.
Purchase Agreement. The Transferor purchases Receivables on an
ongoing basis from Metris pursuant to the Purchase Agreement. Pursuant to
the Purchase Agreement, the Transferor purchases from Metris Receivables
arising from time to time until the Purchase Termination Date (as defined
below in "--Purchase Termination Date"). On each business day prior to the
Purchase Termination Date, Metris delivers all Receivables arising in the
Accounts to the Transferor. The purchase price of such Receivables is an
amount equal to 100 percent of the amount of Principal Receivables, and is
payable by the Transferor in cash and by capital contributions. Pursuant to
the Pooling and Servicing Agreement, such Receivables are thereafter
transferred immediately by the Transferor to the Trust, and the Transferor
has assigned its rights in, to and under the Purchase Agreement and the
Bank Purchase Agreement with respect to such Receivables to the Trust.
REPRESENTATIONS AND WARRANTIES
Bank Purchase Agreement. In the Bank Purchase Agreement, Direct
Merchants Bank represents and warrants as of the Initial Closing Date that,
among other things, (a) Direct Merchants Bank is a national banking
association validly existing in good standing under the laws of the United
States, and has full corporate power, authority and legal right to execute,
deliver and perform its obligations under the Bank Purchase Agreement, (b)
the Bank Purchase Agreement constitutes the valid and binding obligations
of Direct Merchants Bank, enforceable against Direct Merchants Bank in
accordance with its terms, subject to customary bankruptcy and equity
related exceptions, (c) Direct Merchants Bank is the legal and beneficial
owner of all right, title and interest in and to each Receivable conveyed
to Metris pursuant to the Bank Purchase Agreement and each such Receivable
has been or will be transferred to Metris free and clear of any lien other
than Permitted Liens, (d) Direct Merchants Bank has the full right, power
and authority to transfer the Receivables pursuant to the Bank Purchase
Agreement, (e) the Bank Purchase Agreement constitutes a valid transfer and
assignment to Metris of all right, title and interest of Direct Merchants
Bank in and to the Receivables, all monies due or to become due and all
proceeds related thereto, or an absolute sale of such property and the
proceeds thereof and (f) each Account classified as an "Eligible Account"
by Direct Merchants Bank in any document or report delivered under the Bank
Purchase Agreement will satisfy the requirements contained in the
definition of Eligible Account and each Receivable classified as an
"Eligible Receivable" by Direct Merchants Bank in any document or report
delivered under the Bank Purchase Agreement will satisfy the requirements
contained in the definition of Eligible Receivable.
Purchase Agreement. Pursuant to the Purchase Agreement Metris
represents and warrants to the Transferor that, among other things, subject
to specified exceptions and limitations, Metris is duly organized, validly
existing, and in good standing under the laws of Delaware, Metris is duly
qualified to do business and in good standing (or is exempt from such
requirement) in any state required in order to conduct its business and has
obtained all necessary licenses and approvals required under applicable
law, and Metris has the requisite corporate power and authority to perform
its obligations under the Purchase Agreement. Pursuant to the Purchase
Agreement, Metris additionally represents and warrants that, among other
things, subject to specified exceptions and limitations, (i) the execution
and delivery of the Purchase Agreement and the consummation of the
transactions provided for in the Purchase Agreement have been duly
authorized by Metris by all necessary corporate action on its part, (ii)
the execution and delivery of the Purchase Agreement and the performance of
the transactions contemplated thereby do not contravene Metris' charter or
by-laws, violate any material provision of law applicable to it, require
any filing (except for filings under the UCC), registration, consent or
approval under any such law except for such filings, registrations,
consents, or approvals as have already been obtained and are in full force
and effect, (iii) except as described in the Purchase Agreement, Metris has
filed all tax returns required to be filed and has paid or made adequate
provision for the payment of all taxes, assessments, and other governmental
charges due from Metris or is contesting any such tax, assessment or other
governmental charge in good faith through appropriate proceedings, (iv)
there are no proceedings or investigations pending or, to the best
knowledge of Metris threatened against Metris before any court, regulatory
body, administrative agency, or other tribunal or governmental
instrumentality asserting the invalidity of the Purchase Agreement, seeking
to prevent the consummation of any of the transactions contemplated by the
Purchase Agreement, seeking any determination or ruling that would
materially and adversely affect the performance by Metris of its
obligations thereunder or seeking any determination or ruling that would
materially and adversely affect the validity of enforceability thereof, (v)
Metris has no knowledge of any fact that should have led it to expect at
the time of the classification of any Receivable as an Eligible Receivable
that such Receivable would not be paid in full when due, and each
Receivable classified as an Eligible Receivable by Metris in any document
or report delivered under the Purchase Agreement, satisfies the
requirements of eligibility contained in the definition of Eligible
Receivable set forth in the Purchase Agreement, (vi) the Purchase Agreement
constitutes the legal, valid, and binding obligation of Metris, (vii)
Metris is not insolvent, (viii) Metris is not an "investment company"
within the meaning of the Investment Company Act (or is exempt from all
provisions of such Act), (ix) Metris is the legal and beneficial owner of
all right, title and interest in and to each Receivable conveyed to the
Transferor by Metris pursuant to the Purchase Agreement, and each such
Receivable has been or will be transferred to the Transferor free and clear
of any lien other than Permitted Liens and in compliance in all material
respects with all requirements of law applicable to Metris and (x) the
transfer of by Receivables by it to the Transferor under the Purchase
Agreement constitutes a valid sale, transfer, assignment, set-over and
conveyance to the Trust of all right, title and interest of Metris in and
to the Receivables.
If certain of the representations or warranties described above are
not true with respect to any Receivable at the time such representation or
warranty was made or any Receivable becomes an Ineligible Receivable, then
Metris will be obligated to pay to the Transferor an amount equal to the
principal amount of such Receivable.
The Pooling and Servicing Agreement (i) requires the Transferor to
make a demand on Metris to repurchase Receivables in such cases where the
Transferor is required under the Pooling and Servicing Agreement to
repurchase Receivables from the Trust and (ii) permits the Transferor to
consent to the sale of Receivables to a third party only in such
circumstances where the Transferor may remove Receivables from the Trust
under the Pooling and Servicing Agreement.
CERTAIN COVENANTS
Bank Purchase Agreement. It is the intention of Direct Merchants Bank
and Metris that the conveyance of the Receivables by Direct Merchants Bank
to Metris contemplated by the Bank Purchase Agreement be construed as an
absolute sale of the Receivables by Direct Merchants Bank to Metris. It is
not intended that such conveyance be deemed a pledge of the Receivables by
Direct Merchants Bank to Metris to secure a debt or other obligation of
Direct Merchants Bank, but the Bank Purchase Agreement shall also be deemed
to be a security agreement within the meaning of Article 9 of the UCC and
the conveyance provided for in the Bank Purchase Agreement shall be deemed
to be a grant by Direct Merchants Bank to Metris of a "security interest"
within the meaning of Article 9 of the UCC in all of Direct Merchants
Bank's right, title and interest in and to the Receivables. In the Bank
Purchase Agreement, Direct Merchants Bank covenants that, among other
things, except as required by law or as Direct Merchants Bank may determine
to be appropriate and subject to specified exceptions and limitations, (i)
it will take no action to cause any Receivable to be anything other than an
account, general intangible or chattel paper, (ii) except for the
conveyances under the Bank Purchase Agreement, it will not sell any
Receivable or grant a lien (other than a Permitted Lien) on any Receivable,
(iii) except as it deems necessary to maintain its credit card business on
a competitive basis, it will not reduce the annual percentage rates of the
Periodic Finance Charges assessed on the Receivables or other fees charged
on the Accounts if, as a result of any such reduction, either a Pay Out
Event would occur or such reduction is not also applied to any comparable
segment of accounts owned by it similar to the Accounts, (iv) it will
comply with and perform its obligations under the Contracts relating to the
Accounts and the Credit and Collection Policy and that it will not change
the terms of such agreements or policies if any such change would, in
either case, materially and adversely affect the rights of the Trust or the
certificateholders, and that it will not enter into any amendment to the
Bank Purchase Agreement that would cause a Ratings Event to occur so long
as any certificates under any Series are outstanding, and (v) in the event
it receives a collection on any Receivable, it will pay such collection to
the Transferor as soon as practicable.
Purchase Agreement. It is the intention of Metris and the Transferor
that the conveyance of the Receivables by Metris be construed as an
absolute sale of the Receivables by Metris to the Transferor. It is not
intended that such conveyance be deemed a pledge of the Receivables by
Metris to the Transferor to secure a debt or other obligation of Metris,
but the Purchase Agreement shall also be deemed to be a security agreement
within the meaning of Article 9 of the UCC and the conveyance provided for
in the Purchase Agreement shall be deemed to be a grant by Metris to the
Transferor of a "security interest" within the meaning of Article 9 of the
UCC in all of Metris' right, title and interest in and to the Receivables.
Pursuant to the Purchase Agreement, Metris covenants that, among other
things, subject to specified exceptions and limitations, (i) it will take
no action to cause any Receivable to be anything other than an account,
general intangible or chattel paper, (ii) except for the conveyances under
the Purchase Agreement, it will not sell any Receivable or grant a lien
(other than a Permitted Lien) on any Receivable, (iii) except as it deems
necessary to maintain its credit card business on a competitive basis, it
will not reduce the annual percentage rates of the Periodic Finance Charges
assessed on the Receivables or other fees charged on the Accounts if, as a
result of any such reduction, either a Pay Out Event would occur or such
reduction is not also applied to any comparable segment of accounts owned
by it similar to the Accounts, (iv) it will comply with and perform its
obligations under the Contracts relating to the Accounts and the Credit and
Collection Policy and that it will not change the terms of such agreements
or policies if any such change would, in either case, materially and
adversely affect the rights of the Trust or the certificateholders, and
that it will not enter into any amendment to the Bank Purchase Agreement
that would cause a Ratings Event to occur so long as any certificates under
any Series are outstanding, (v) in the event it receives a collection on
any Receivable, it will pay such collection to the Transferor as soon as
practicable, (vi) it will not convey or transfer any Receivable, except as
otherwise provided in the Purchase Agreement, and (vii) it will take all
actions reasonably necessary to maintain its rights under all Contracts to
which it is a party.
PURCHASE TERMINATION DATE
Bank Purchase Agreement. If Direct Merchants Bank becomes insolvent,
Metris' obligations under the Bank Purchase Agreement will automatically be
terminated. In addition, if Metris becomes insolvent, or shall become
unable for any reason to purchase Receivables from Direct Merchants Bank in
accordance with the provisions of the Bank Purchase Agreement, Metris'
obligations under the Bank Purchase Agreement as to Direct Merchants Bank
will automatically be terminated.
Purchase Agreement. If Metris becomes insolvent, the Transferor's
obligations under the Purchase Agreement will automatically be terminated.
In addition, if the Transferor becomes insolvent or shall become unable for
any reason to purchase Receivables from Metris in accordance with the
provisions of the Purchase Agreement, the Transferor's obligations under
the Purchase Agreement as to Metris will automatically be terminated. The
date of any such termination will be the "Purchase Termination Date."
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The Transferor has represented and warranted in the Pooling and
Servicing Agreement that the transfer of Receivables by it to the Trust
constitutes either a valid transfer and assignment to the Trust of all
right, title, and interest of the Transferor in and to the Receivables,
except for the interest of the Transferor as holder of the Exchangeable
Transferor Certificate and any investor certificate of any Series then held
by it, or the grant to the Trust of a security interest in the Receivables.
The Transferor has also represented and warranted in the Pooling and
Servicing Agreement that, in the event the transfer of Receivables by the
Transferor to the Trust is deemed to create a security interest under the
UCC, there will exist a valid, subsisting, and enforceable first priority
perfected security interest in such Receivables created thereafter in favor
of the Trust on and after their creation, subject only to Permitted Liens.
For a discussion of the Trust's rights arising from a breach of these
warranties, see "Description of the Offered Certificates--Representations
and Warranties."
The Transferor has represented that the Receivables are "accounts,"
"general intangibles" or "chattel paper" for purposes of the UCC. Both the
sale of accounts and chattel paper and the transfer of accounts and chattel
paper as security for an obligation are treated under Article 9 of the UCC
as creating a security interest therein and are subject to its provisions,
and the filing of an appropriate financing statement is required to perfect
the security interest of the Trust. If a transfer of general intangibles is
deemed to constitute the creation of a security interest, rather than a
sale, Article 9 of the UCC applies and the filing of one or more
appropriate financing statements is also required in order to perfect the
security interest of the Trust. In order to protect the interests of the
Trust in the Receivables, financing statements covering the Receivables
have been filed under the UCC.
If the transfer of Receivables constituting general intangibles is
deemed to be a sale, then the UCC is not applicable and no further action
is required to protect the Trust's interest from third parties. Although
the priority of general intangibles arising after the Initial Closing Date
is not as clear as the priority of interests governed by the UCC, Direct
Merchants Bank, Metris and the Transferor believe that it would be
inconsistent for a court to afford the Trust less favorable treatment if
the transfer of the Receivables is deemed to be a sale than if it were
deemed to be a security interest and that a court should conclude that a
sale of Receivables consisting of general intangibles would be deemed to
have occurred as of the Initial Closing Date or, as applicable, the
relevant Addition Date.
There are certain limited circumstances under the UCC in which a
prior or subsequent transferee of Receivables coming into existence after
the Initial Closing Date could have an interest in such Receivables with
priority over the Trust's interest. Under the Pooling and Servicing
Agreement, however, the Transferor has represented and warranted that it
transferred the Receivables to the Trust free and clear of the lien of any
third party. In addition, the Transferor has covenanted that it will not
sell, pledge, assign, transfer, or grant any lien on any Receivable (or any
interest therein) other than to the Trust. A tax or other government lien
on property of the Transferor arising prior to the time a Receivable comes
into existence may also have priority over the interest of the Trust in
such Receivable. There is a significant possibility that the Trust may not
have a perfected security interest in any of the Receivables created after
the filing of a petition for relief by or against Metris or the Transferor
under the Bankruptcy Code or after the appointment of a receiver or
conservator with respect to Direct Merchants Bank. Nevertheless, it is
anticipated that the Trust will either own or have a perfected security
interest in Receivables existing on the date of filing a petition by or
against Metris or the Transferor under the Bankruptcy Code or after the
date of appointment of a receiver or conservator with respect to Direct
Merchants Bank and will be able to make payments in respect of principal
and interest on the Offered Certificates, although there can be no
assurance that any of such payments would be timely. Because the Trust's
interest in the Receivables is dependent upon the Transferor's interest in
the Receivables, which is dependent upon Metris' interest in the
Receivables, any adverse change in the priority or perfection of the
Transferor's or Metris' security interest would correspondingly affect the
Trust's interest in the affected Receivables. In addition, if a receiver or
conservator were appointed for Direct Merchants Bank, certain
administrative expenses of the receiver or conservator also may have
priority over the interest of the Trust in such Receivables. While Direct
Merchants Bank is the Servicer, certain cash collections on the Receivables
may be held by Direct Merchants Bank and commingled with its funds for
brief periods, and if an Insolvency Event occurs, the Trust may not have a
perfected interest in such commingled collections.
CERTAIN MATTERS RELATING TO BANKRUPTCY OR RECEIVERSHIP
The Transferor will not engage in any activities except purchasing
accounts receivable from Metris or any affiliate of Metris, forming trusts,
transferring such accounts receivable to such trusts and engaging in
activities incident to, or necessary or convenient to accomplish, the
foregoing. The Transferor has no intention of filing a voluntary petition
under the Bankruptcy Code or any similar applicable state law so long as
the Transferor is solvent and does not reasonably foresee becoming
insolvent.
The voluntary or involuntary application for relief under the
Bankruptcy Code or any similar applicable state law with respect to Metris
should not necessarily result in a similar voluntary application with
respect to the Transferor so long as the Transferor is solvent and does not
reasonably foresee becoming insolvent either by reason of Metris'
insolvency or otherwise. Counsel has advised Metris and the Transferor that
(i) the assets and liabilities of the Transferor would not be substantively
consolidated with the assets and liabilities of Metris in the event of an
application for relief under the Bankruptcy Code with respect to Metris and
(ii) the sale of Receivables by Metris would constitute a valid sale and,
therefore, such Receivables would not be property of Metris in the event of
the filing of an application for relief by or against Metris under the
Bankruptcy Code. The foregoing conclusions are reasoned conclusions, based
upon various assumptions regarding factual matters and future events, as to
which there necessarily can be no assurance. If a bankruptcy trustee for
Metris, Metris as debtor-in-possession, or a creditor of Metris were to
take the view that Metris and the Transferor should be substantively
consolidated or that the transfer of the Receivables from Metris to the
Transferor should be recharacterized as a pledge of such Receivables, then
delays in payments on the Class A Certificates, Class B Certificates and
Class C Certificates or (should the bankruptcy court rule in favor of any
such trustee, debtor-in-possession or creditor) reductions in such payments
on such Certificates could result.
The Pooling and Servicing Agreement provides that, upon the
bankruptcy or appointment of a receiver for the Transferor, Direct
Merchants Bank or Metris, the Transferor will promptly give notice thereof
to the Trustee, and a Pay Out Event with respect to all Series will occur,
and under the Pooling and Servicing Agreement, no new Principal Receivables
will be transferred to the Trust. Upon the bankruptcy of the Transferor,
unless otherwise instructed within a specified period by the
certificateholders representing undivided interests aggregating more than
50 percent of the aggregate invested amount of each Series (and, with
respect to Series 1997-2, the holders of more than 50 percent of each of
the Class A, Class B, and Class C Certificates), the Trustee will proceed
to sell, dispose of, or otherwise liquidate the Receivables in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds from the sale of the Receivables would then be treated by the
Trustee as collections on the Receivables. If the only Pay Out Event to
occur is either the insolvency of the Transferor or the appointment of a
bankruptcy trustee or receiver for the Transferor, the receiver or
bankruptcy trustee for the Transferor may have the power to continue to
require the Transferor to transfer new Principal Receivables to the Trust
and to prevent the early sale, liquidation or disposition of the
Receivables and the commencement of the Early Amortization Period. See
"Description of the Offered Certificates--Pay Out Events."
Direct Merchants Bank and Metris have represented and warranted to
Metris and the Transferor, respectively in the Purchase Agreements that the
sale of the Receivables to Metris or the Transferor, respectively, is a
valid sale of the Receivables to Metris or the Transferor, respectively. In
addition, Direct Merchants Bank, Metris and the Transferor have treated and
will treat the transaction described in the Purchase Agreements as sales of
the Receivables to Metris and the Transferor, respectively, and Metris has
taken or will take all actions that are required under the UCC to perfect
Metris' and the Transferor's ownership interest, respectively, in the
Receivables. Notwithstanding the foregoing, if Metris were to become a
debtor in a bankruptcy case and a creditor or trustee-in-bankruptcy of such
debtor or such debtor itself were to take the position that the sale of
Receivables from Metris to the Transferor, should be recharacterized as a
pledge of such Receivables to secure a borrowing from such debtor, then
delays in payments of collections of Receivables to the Transferor (and
therefore to the Trust and to Certificateholders) could occur and (should
the court rule in favor of any such trustee, debtor-in-possession or
creditor) reductions in the amount of such payments could result.
The Federal Deposit Insurance Act ("FDIA"), as amended by FIRREA,
which became effective August 9, 1989, sets forth certain powers that the
FDIC could exercise if it were appointed as conservator or receiver of
Direct Merchants Bank. Among other things, the FDIA grants such a
conservator or receiver the power to repudiate contracts of, and to request
a stay of up to 90 days of any judicial action or proceeding involving,
Direct Merchants Bank.
To the extent that (i) Direct Merchants Bank granted a security
interest in the Receivables to Metris, (ii) the interest was validly
perfected before Direct Merchants Bank's insolvency, (iii) the interest was
not taken or granted in contemplation of Direct Merchants Bank's insolvency
or with the intent to hinder, delay or defraud Direct Merchants Bank or its
creditors, (iv) the Pooling and Servicing Agreement is continuously a
record of Direct Merchants Bank, and (v) the Pooling and Servicing
Agreement represents a bona fide and arm's length transaction undertaken
for adequate consideration in the ordinary course of business, such valid
perfected security interest of Metris should be enforceable (to the extent
of Metris' "actual direct compensatory damages") notwithstanding the
insolvency of, or the appointment of a receiver or conservator for, Direct
Merchants Bank and payments to the Trust with respect to the Receivables
(up to the amount of such damages) should not be subject to an automatic
stay of payment or to recovery by the FDIC as conservator or receiver of
Direct Merchants Bank. If, however, the FDIC were to assert that the
security interest was unperfected or unenforceable or were to require
Metris to establish its rights to those payments by submitting to and
completing the administrative claims procedure established under FIRREA, or
the conservator or receiver were to request a stay of proceedings with
respect to Direct Merchants Bank as provided under FIRREA, delays in
payments on the Certificates and possible reductions in the amount of those
payments could occur. The FDIA does not define the terms "actual direct
compensatory damages." On April 10, 1990, the RTC, formerly a sister agency
of the FDIC, adopted a statement of policy (the "RTC Policy Statement")
with respect to the payment of interest on collateralized borrowings. The
RTC Policy Statements states that interest on such borrowings will be
payable at the contract rate up to the date of the redemption or payment by
the conservator, receive, or the trustee of an amount equal to the
principal owed plus the contract rate of interest up to the date of such
payment or redemption, plus any expenses of liquidation if provided for in
the contract, to the extent secured by the collateral. In a 1993 case
involving zero-coupon bonds, however, a federal district court held that
the RTC was instead obligated to pay bondholders the fair market value of
repudiated bonds as of the date of repudiation. The FDIC itself has not
adopted a policy statement on payment of interest on collateralized
borrowings.
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.
1993), cert. denied, 114 S. Ct. 554 (1993), the United States Court of
Appeals for the 10th Circuit suggested that even where a transfer of
accounts from a seller to a buyer constitutes a "true sale," the accounts
would nevertheless constitute property of the seller's bankruptcy estate in
a bankruptcy of the seller. If Metris or the Transferor were to become
subject to a bankruptcy proceeding or if Direct Merchants Bank were to
become subject to a receivership and a court were to follow the 10th
Circuit's reasoning, Certificateholders might experience delays in payment
or possibly losses in their investment in the Certificates. Counsel to the
Transferor has advised the Transferor that the facts of the Octagon case
are distinguishable from those in the sale transactions between Direct
Merchants Bank and Metris, Metris and the Transferor and the Transferor and
the Trust and that the reasoning of the Octagon case appears to be
inconsistent with established precedent and the UCC. In addition, because
Metris, Direct Merchants Bank, the Transferor, the Trust and the
transaction governed by the Pooling and Servicing Agreement do not have any
particular link to the 10th Circuit, it is unlikely that Metris, Direct
Merchants Bank, or the Transferor would be subject to a receivership
proceeding in the 10th Circuit. Accordingly, the Octagon case should not be
binding precedent on a court in a receivership proceeding.
The occurrence of certain events of insolvency, conservatorship or
receivership with respect to the Servicer will result in a Servicer
Default, which Servicer Default, in turn, could result in a Pay Out Event.
If no other Servicer Default other than the commencement of such bankruptcy
or similar event exists, a conservator or receiver of the Servicer may have
the power to prevent the Trustee and the Certificateholders from appointing
a successor Servicer.
CONSUMER PROTECTION LAWS
The relationship of the cardholder and credit card issuer is
extensively regulated by federal and state consumer protection and related
laws. With respect to credit cards issued by Direct Merchants Bank, the
most significant laws include the federal Truth-in-Lending Act, Fair Credit
Billing Act, Fair Debt Collection Practices Act, Equal Credit Opportunity
Act, Fair Credit Reporting Act, Electronic Funds Transfer Act and National
Bank Act, as well as applicable state laws. Claims may be brought under
these statutes by private consumers as well as federal and state
regulators. These statutes impose disclosure requirements when a credit
card account is advertised, when it is opened, at the end of monthly
billing cycles and at year end and, in addition, prohibit certain
discriminatory practices in extending credit and impose certain limitations
on the type of account related charges that may be assessed. Federal law
requires credit card issuers to disclose to consumers the interest rates,
cardholder fees, grace periods and balance calculation methods associated
with their credit card accounts. In addition, cardholders are entitled
under current laws to have payments and credits applied to the credit card
account promptly, to receive prescribed notices and to require billing
errors to be resolved promptly. Certain laws, including the laws described
above, may limit Direct Merchants Bank's ability to collect amounts owing
with respect to the Receivables regardless of any act or omission on the
part of Direct Merchants Bank. These laws further provide that in certain
cases cardholders cannot be held liable for, or the cardholder's liability
is limited with respect to, charges to the credit card account that result
from unauthorized use of the credit card.
Additional consumer protection laws may be enacted that would impose
requirements on the making, enforcement and collection of consumer credit
loans. Any new laws or rulings that may be adopted, and existing consumer
protection laws, may adversely affect the ability to collect on the
Receivables. In addition, failure of the Servicer to comply with such
requirements could adversely affect the Servicer's ability to enforce the
receivables.
Certain jurisdictions may attempt to require out-of-state credit card
issuers to comply with such jurisdictions' consumer protection laws
(including laws limiting the charges imposed by such credit card issuers)
in connection with their operations in such jurisdictions. If it were
determined that out-of-state credit card issuers must comply with a
jurisdiction's laws limiting the charges imposed by credit card issuers,
such actions could have an adverse impact on Direct Merchants Bank's credit
card operations. Application of federal and state bankruptcy and debtor
relief laws (including the Soldiers' and Sailors' Civil Relief Act of 1940)
would affect the interests of the holders of the Certificates if the
protection provided to debtors under such laws result in any receivables of
the Trust being written off as uncollectible.
The Trust may be liable for certain violations of consumer protection
laws that apply to the receivables transferred to it, either as assignee
from the Transferor with respect to obligations arising before the transfer
or as a party directly responsible for obligations arising after the
transfer. In addition, a cardholder may be entitled to assert such
violations by way of set-off against such cardholder's obligation to pay
the amount of Receivables owing. The Transferor will warrant to the Trust
in the Pooling and Servicing Agreement that all Receivables transferred to
the Trust have been and will be created in compliance with the requirements
of such laws. For discussion of the Trust's rights arising from the breach
of these warranties, see "Description of the Offered
Certificates--Representations and Warranties."
CLAIMS AND DEFENSES OF CARDHOLDERS AGAINST THE TRUST
The UCC provides that (a) unless an Obligor has made an enforceable
agreement not to assert defenses or claims arising out of a transaction,
the rights of the Trust, as assignee, are subject to all the terms of the
Contract between the Credit Card Originator and such Obligor and any
defense or claim arising therefrom, to rights of set-off and to any other
defense or claim of such Obligor against the Credit Card Originator that
accrues before such Obligor receives notification of the assignment and (b)
any such Obligor is authorized to continue to pay the Credit Card
Originator until (i) Obligor receives notification, reasonably identifying
the rights assigned, that the amount due or to become due has been assigned
and that payment is to be made to the Trustee or successor Servicer and
(ii) if requested by the Obligors, the Trustee or successor Servicer has
furnished reasonable proof of assignment. No such agreement not to assert
defenses has been entered into and no notice of the assignment of the
Receivables to the Trust will be sent to the cardholders obligated on the
Accounts in connection with the transfer of the Receivables to the Trust.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL; SCOPE OF FEDERAL INCOME TAX OPINION
Set forth below is a general discussion of the material United States
federal income tax consequences of the purchase, ownership and disposition
of the Offered Certificates which are anticipated to be relevant to most
categories of investors and has been prepared or reviewed by Skadden, Arps,
Slate, Meagher & Flom LLP, special federal income tax counsel to the
Transferor ("Special Tax Counsel"). Special Tax Counsel is of the opinion
that this discussion is correct in all material respects. As more fully
described below, Special Tax Counsel will render its opinion, subject to
the analysis and assumptions contained therein, that the Offered
Certificates will be characterized as indebtedness secured by the
Receivables for federal income tax purposes and that the Trust will not be
subject to federal income tax at the entity level. Except as expressly
provided below, Special Tax Counsel will render no other opinions to the
Transferor with respect to the Offered Certificates. This discussion is
intended as an explanatory discussion of the possible effects of the
classification of the Offered Certificates as indebtedness on investors
generally and or related tax matters affecting investors generally, but
does not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be
provided by an investor's tax advisor. This discussion is based upon
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury Regulations thereunder, current
administrative rulings, judicial decisions and other applicable authorities
in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect. There are no cases or Internal Revenue
Service ("IRS") rulings on similar transactions involving instruments
issued by a trust with terms similar to those of the Offered Certificates.
As a result, there can be no assurance that the IRS will not challenge the
conclusions reached herein, and no ruling from the IRS has been or will be
sought on any of the issues discussed below. Furthermore, legislative,
judicial or administrative changes may occur, perhaps with retroactive
effect, which could affect the accuracy of the statements and conclusions
set forth herein as well as the tax consequences to Certificateholders.
This summary does not address all aspects of federal income taxation
that may be relevant to the Certificate Owners in light of their personal
investment circumstances nor, except for certain limited discussions of
particular topics, to certain types of holders subject to special treatment
under the federal income tax laws (e.g., financial institutions,
broker-dealers, life insurance companies and tax-exempt organizations).
This information is directed to prospective purchasers who purchase Offered
Certificates in the initial distribution thereof, who are citizens or
residents of the United States, including domestic corporations and
partnerships, and who hold the Offered Certificates as "capital assets"
within the meaning of Section 1221 of the Code. Taxpayers and preparers of
tax returns (including those filed by any partnership or other issuer)
should be aware that under applicable Treasury Regulations a provider of
advice on specific issues of law is not considered an income tax return
preparer unless the advice is (i) given with respect to events that have
occurred at the time the advice is rendered and is not given with respect
to the consequences of contemplated actions, and (ii) is directly relevant
to the determination of an entry on a tax return. Accordingly, taxpayers
should consult their respective tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. EACH PROSPECTIVE
INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF OFFERED CERTIFICATES SPECIFIC TO SUCH PROSPECTIVE
INVESTOR.
CHARACTERIZATION OF THE OFFERED CERTIFICATES AS INDEBTEDNESS
The Transferor, the Servicer and each Certificate Owner will express
in the Pooling and Servicing Agreement the intent that, for federal, state
and local income and franchise tax purposes, the Offered Certificates will
be indebtedness secured by the Receivables. The Transferor, by initially
entering into, and the Servicer, by accepting the assignment of, the
Pooling and Servicing Agreement, and each Certificate Owner, by acquiring
an interest in an Offered Certificate, will agree to treat the Offered
Certificates as indebtedness for federal, state and local income and
franchise tax purposes (except to the extent that different treatment is
explicitly required under state or local tax statutes). However, because
different criteria are used in determining the nontax accounting treatment
of the transaction, the Transferor will treat the Pooling and Servicing
Agreement, for financial accounting purposes and certain other nontax
purposes, as effecting a transfer of an ownership interest in the
Receivables and not as creating a debt obligation.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured
by the property, is a question of fact, the resolution of which is based
upon the economic substance of the transaction rather than its form or the
manner in which it is labeled. While the IRS and the courts have set forth
several factors to be taken into account in determining whether the
substance of a transaction is a sale of property or a secured indebtedness
for federal income tax purposes, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or
other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Based upon its analysis of such factors,
Special Tax Counsel is of the opinion that the Transferor will be treated
as the owner of the Receivables for federal income tax purposes and,
accordingly, the Class A Certificates and the Class B Certificates will be
characterized for federal income tax purposes as indebtedness that is
secured by the Receivables. Furthermore, Special Tax Counsel is of the
opinion that the Trust will not be subject to federal income tax at the
entity level.
Although, in some instances, courts have held that a taxpayer is
bound by a particular form it has chosen for a transaction, even if the
substance of the transaction does not accord with its form, Special Tax
Counsel is of the opinion that the rationale of those cases do not apply to
the transaction evidenced by the Offered Certificates, because the form of
the transaction, as reflected in the operative provisions of the documents,
either is not inconsistent with the characterization of the Offered
Certificates as debt for federal income tax purposes or otherwise makes the
rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME TO CERTIFICATEHOLDERS
The following discussion is based in part upon Treasury Regulations
interpreting the original issue discount ("OID") provisions of Sections
1271 through 1275 of the Code which were adopted as final on January 27,
1994 (the "OID Regulations"). The OID Regulations are, however, subject to
varying interpretations and do not address all issues that could affect
Certificate Owners.
Stated Interest. It is not expected that any of the Offered
Certificates will be issued with OID. Based upon the foregoing opinions,
and assuming that all of the Offered Certificates are treated as debt, the
stated interest on Offered Certificates will be taxable as ordinary income
for federal income tax purposes when received or accrued in accordance with
a Certificateholder's method of tax accounting.
OID. The Offered Certificates may be issued at a discount from their
principal amounts, thereby creating OID. In such a case, all or a portion
of the taxable income to be recognized with respect to the Offered
Certificates would be includible in income of Certificate Owners as OID.
Any amount treated as OID would not, however, be includible again when the
interest is actually received. If the yield on a Class of Offered
Certificates were not materially different from its coupon, this treatment
would have no significant effect on Certificate Owners using the accrual
method of accounting. However, cash method Certificate Owners may be
required to report income with respect to the Offered Certificates in
advance of the receipt of cash attributable to such income.
While it is not anticipated that the Offered Certificates will be
issued at a discount from their stated principal amount that is greater
than a de minimis amount, under Treasury regulations (the "Regulations")
the Offered Certificates may nevertheless be deemed to have been issued
with OID. This could be the case, for example, if interest payments are not
deemed to be payments of "qualified stated interest" because (i) no
reasonable legal remedies exist to compel timely payment of such interest
payments and (ii) the offered Certificates do not have terms and conditions
that make the likelihood of late payment (other than a late payment that
occurs within a reasonable grace period) or nonpayment a remote
contingency. As a result, if such Regulations were to apply, all of the
taxable income to be recognized with respect to the Offered Certificates
would be includible in income as OID but would not be includible again when
the interest is actually received. The OID Regulations provide, however,
that in determining whether interest is unconditionally payable, the
possibility of nonpayment due to default, insolvency, or similar
circumstances is ignored. Accordingly, the Transferor intends to take the
position that interest payments constitute payments of "qualified stated
interest" with respect to the Offered Certificates if they are issued at a
price that is less than a de minimis discount from their stated principal
amount.
If the Offered Certificates are in fact issued at a greater than de
minimis discount, the following rules will apply. The excess of the "stated
redemption price at maturity" of an Offered Certificate (generally equal to
its principal amount as of the date of issuance plus all interest other
than "qualified stated interest" payable prior to or at maturity) over the
original issue price (in this case, the initial offering price at which a
substantial amount of the Offered Certificates are sold to the public) will
constitute OID. A Certificate Owner must include OID in income as interest
over the term of the Offered Certificate under a constant yield method. In
general, OID must be included in income in advance of the receipt of cash
representing that income. In the case of a debt instrument as to which the
repayment of principal may be accelerated as a result of the prepayment of
other obligations securing the debt instrument (a "Prepayable Instrument"),
the periodic accrual of OID is determined by taking into account both the
prepayment assumptions used in pricing the debt instrument and the
prepayment experience. If this provision applies to the Offered
Certificates (which is not clear), the amount of OID which will accrue in
any given "accrual period" may either increase or decrease depending upon
the actual prepayment rate. Accordingly, each Certificateholder should
consult its own tax advisor regarding the impact to such Certificateholder
of the OID rules if the Offered Certificates are issued with OID. An
Offered Certificate issued with de minimis OID must include such OID in
income proportionately as principal payments are made on such Offered
Certificate.
Discount and Premium. A subsequent holder who purchases an Offered
Certificate at a discount may be subject to the "market discount" rules of
Section 1276 of the Code. These rules provide, in part, for the treatment
of gain attributable to accrued market discount as ordinary income upon the
receipt of partial principal payments or on the sale or other disposition
of the Offered Certificate, and for the deferral of interest deductions
with respect to debt incurred to acquire or carry the market discount
Offered Certificate. A Certificate Owner may, however, elect to include
market discount in gross income as it accrues and, if such election is
made, is not subject to the deferral of interest deductions provision. Any
such election will apply to all debt instruments acquired by the taxpayer
on or after the first day of the first taxable year to which such election
applies. Further, the adjusted tax basis of an Offered Certificate subject
to such election will be increased to reflect market discount included in
gross income, thereby reducing any gain or increasing any loss on a sale or
taxable disposition.
A subsequent holder who purchases an Offered Certificate at a premium
may elect to amortize and deduct this premium over the remaining term of
the Offered Certificate in accordance with rules set forth in Section 171
of the Code.
Optional Election. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with
respect to an Offered Certificate, including stated interest, acquisition
discount, OID, de minimis OID, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium, using the constant yield method described above.
Treatment of Losses. OID, if any (in excess of de minimis OID), must
be reported by all Offered Certificateholders, and other interest income
must be reported by Offered Certificateholders that report income on the
accrual method, as it accrues, whether or not such Offered
Certificateholder has received cash equivalent to such income and without
giving effect to delays or reductions in distributions attributable to
defaults and delinquencies on the Receivables, except to the extent it can
be established that such amounts are uncollectible. As a result, if there
were in excess of de minimis OID, the amount of income reported by an
Offered Certificateholder in any period could exceed the amount of cash
distributed to such holder in that period. An Offered Certificateholder
generally will realize a loss where either principal or previously accrued
interest are determined to be uncollectible with respect to the Offered
Certificate, although the timing and character of such losses (or
reductions in income) are uncertain, and the deductibility of such losses
may be subject to limitations.
DISPOSITION OF OFFERED CERTIFICATES
Generally, capital gain or loss will be recognized on a sale or other
taxable disposition of Offered Certificates in an amount equal to the
difference between the amount realized (other than amounts attributable to,
and taxable as, accrued interest) and the seller's tax basis in the Offered
Certificates. A Certificate Owner's tax basis in an Offered Certificate
will generally equal such Certificate Owner's cost increased by any OID,
market discount and gain previously included by such Certificate Owner in
income with respect to the Offered Certificate and decreased by any bond
premium previously amortized and any principal payments previously received
by such Certificate Owner with respect to the Offered Certificate. Subject
to the market discount rules of the Code discussed above under "--Taxation
of Interest Income to Certificateholders--Discount and Premium", any such
gain or loss will be capital gain or loss if the Offered Certificate was
held as a capital asset (except, however, with regard to Prepayable
Instruments, in which case in the event of a prepayment or redemption
thereof such gain is ordinary income to the extent of any not yet accrued
OID). Capital gain or loss will be long-term if the Offered Certificate was
held by the holder for more than one year and otherwise will be short-term.
Any capital losses realized generally may be used by a corporate taxpayer
only to offset capital gains, and by an individual taxpayer only to the
extent of capital gains plus $3,000 of other income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee will be required to report annually to the IRS, and to
each Certificateholder, the amount of interest paid on the Offered
Certificates (and the amount withheld for federal income taxes, if any) for
each calendar year, except as to exempt recipients (generally,
corporations, tax-exempt organizations, qualified pension and
profit-sharing trusts, individual retirement accounts, or nonresident
aliens who provide certification as to their status). Each holder (other
than holders who are not subject to the reporting requirements) will be
required to provide, under penalties of perjury, a certificate containing
the holder's name, address, correct federal taxpayer identification number
and a statement that the holder is not subject to backup withholding.
Should a nonexempt Certificateholder fail to provide the required
certification, the Trustee will be required to withhold (or cause to be
withheld) 31 percent of the interest otherwise payable to the holder, and
remit the withheld amounts to the IRS as a credit against the holder's
federal income tax liability.
RECENT LEGISLATION
Recent legislation passed by Congress and signed into law by the
President on August 20, 1996 added Sections 860H through 860L to the Code
(the "FASIT Provisions") which provide for a new type of entity for federal
income tax purposes known as a "financial asset securitization investment
trust" (a "FASIT"). Although the legislation providing for the new FASIT
entity became effective on September 1, 1997, and many technical issues are
to be addressed in Treasury regulations which have not yet been issued. In
general, the FASIT legislation will enable trusts such as the Trust to be
treated as a pass-through entity not subject to federal entity-level income
tax (except with respect to certain prohibited transactions) and to issue
securities that would be treated as debt for federal income tax purposes.
Transition rules provided for by the FASIT legislation contemplate that
entities in existence on August 31, 1997 may elect to be taxed under the
FASIT Provisions, however, how such election would be made and how
outstanding interests of such entity are to be treated subsequent to the
election is not explained in the FASIT legislation.
OTHER POSSIBLE CHARACTERIZATIONS OF THE POOLING AND SERVICING AGREEMENT
Although, as described above, it is the opinion of Special Tax
Counsel that the Class A Certificates and Class B Certificates will
properly be characterized as indebtedness, and that the Class C
Certificates (not offered hereby) should be classified as indebtedness (or,
if not, would be classified as an interest in a partnership), for federal
income tax purposes, such opinion is not binding on the IRS and thus no
assurance can be given that such characterization will prevail. As set
forth above, in the opinion of Special Tax Counsel, if the IRS were to
contend successfully that the Class C Certificates were not debt for
federal income tax purposes (assuming that neither the Class A or Class B
Certificates, nor certificates of any other outstanding series, were also
recharacterized) the arrangement among the Transferor and the Class C
Certificateholders would be classified as a partnership for federal income
tax purposes. If, however, the IRS were to contend successfully that either
the Class A or Class B Certificates, or certificates of any other
outstanding series, were not debt for federal income tax purposes, the
arrangement among the Certificate Owners, the Transferor, and certificate
owners of such other Series might be classified for federal income tax
purposes as a publicly traded partnership taxable as a corporation.
If the Class C Certificates (and no Class of the Offered Certificates
nor certificates of any other outstanding Series) were treated as interests
in a partnership, it is Special Tax Counsel's opinion that the partnership
would not be treated as a publicly traded partnership because it would
qualify for an applicable "safe harbor" that the IRS has provided.
Therefore, the partnership would not be subject to federal income tax.
If, alternatively, the arrangement created by the Pooling and
Servicing Agreement were treated as a publicly traded partnership taxable
as a corporation, the resulting entity would be subject to federal income
taxes at corporate tax rates on its taxable income generated by ownership
of the Receivables. Moreover, distributions by the entity to all or some of
the classes of Certificateholders would probably not be deductible in
computing the entity's taxable income and all or part of distributions to
Certificateholders would probably be treated as dividends. Such an
entity-level tax could result in reduced distributions to
Certificateholders and the Certificateholders could be liable for a share
of such tax.
Because the Transferor will treat the Offered Certificates as
indebtedness for federal income tax purposes, the Trustee will not comply
with the tax reporting requirements that would apply under the foregoing
alternative characterizations of the Offered Certificates.
DEFEASANCE
The Certificates are subject to Defeasance in certain circumstances.
It is not clear under the existing authorities whether Defeasance would,
for federal income tax purposes, result in a deemed taxable sale or
exchange of the Certificates in exchange for the amounts deposited in the
Principal Funding Account and the Accumulation Period Reserve Account as a
result of the Defeasance; however, if such a sale or exchange were deemed
to occur, because of the short time period, the amount required to be
deposited and the nature of the assets in which such amount may be
invested, such a result would not be expected to have a material adverse
effect on a Certificateholder for federal income tax purposes,
notwithstanding that, if such a sale or exchange were deemed to occur, each
Certificateholder would thereafter be deemed to own its pro rata share of
the assets in which such amount is invested, and would be required to
report its taxable income on such basis.
TAX CONSEQUENCES TO FOREIGN INVESTORS
Special Tax Counsel will render its opinion, subject to the analysis
and assumptions contained therein, that the Class A Certificates and Class
B Certificates will properly be characterized as indebtedness secured by
the Receivables, and that the Class C Certificates (not offered hereby)
should be classified as indebtedness (or, if not, would be classified as an
interest in a partnership), for federal income tax purposes. Based upon
that opinion, the following information describes the U.S. federal income
tax treatment of investors in Offered Certificates that are not U.S.
persons (each, a "Foreign Person"). The term "Foreign Person" means any
person other than (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity organized in or under the laws of
the United States or any political subdivision thereof or (iii) an estate
the income of which is includible in gross income for U.S. federal income
tax purposes, regardless of its source or, for trusts whose taxable years
begin after December 31, 1996, a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States fiduciaries who have the authority to control all substantial
decisions of the trust.
(a) Interest paid or accrued to a Foreign Person that is not
effectively connected with the conduct of a trade or business within
the United States by the Foreign Person, will generally be considered
"portfolio interest" and generally will not be subject to United
States federal income tax and withholding tax, as long as the Foreign
Person (i) is not actually or constructively a "10 percent
shareholder" of the Transferor or a "controlled foreign corporation"
with respect to which the Transferor is a "related person" within the
meaning of the Code, and (ii) provides an appropriate statement,
signed under penalties of perjury, certifying that the beneficial
owner of the Offered Certificate is a Foreign Person and providing
that Foreign Person's name and address. If the information provided
in this statement changes, the Foreign Person must so inform the
Trustee within 30 days of such change. The statement generally must
be provided in the year a payment occurs or in either of the two
preceding years. If such interest were not portfolio interest, then
it would be subject to United States federal income and withholding
tax at a rate of 30 percent unless reduced or eliminated pursuant to
an applicable income tax treaty.
(b) Any capital gain realized on the sale or other taxable
disposition of an Offered Certificate by a Foreign Person will be
exempt from United States federal income and withholding tax,
provided that (i) the gain is not effectively connected with the
conduct of a trade or business in the United States by the Foreign
Person, and (ii) in the case of an individual Foreign Person, the
Foreign Person is not present in the United States for 183 days or
more in the taxable year.
(c) If the interest, gain or income on an Offered Certificate
held by a Foreign Person is effectively connected with the conduct of
a trade or business in the United States by the Foreign Person, the
holder (although exempt from the withholding tax previously discussed
if an appropriate statement is furnished) generally will be subject
to United States federal income tax on the interest, gain or income
at regular federal income tax rates. In addition, if the Foreign
Person is a foreign corporation, it may be subject to a branch
profits tax equal to 30 percent 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.
If the IRS were to contend successfully that any of the Offered
Certificates are interests in a partnership (not taxable as a corporation),
a Certificate Owner that is a Foreign Person might be required to file a
United States individual or corporate income tax return and pay tax on its
share of partnership income at regular United States rates including, in
the case of a corporate Certificate Owner, the branch profits tax (and
would be subject to withholding tax on its share of partnership income). If
any of the Offered Certificates were recharacterized as interests in a
"publicly traded partnership" taxable as a corporation, to the extent
distributions on such Offered Certificates were treated as dividends, a
Foreign Person would generally be subject to tax (and withholding) on the
gross amount of such dividends at a rate of 30 percent unless reduced or
eliminated pursuant to an applicable income tax treaty.
CERTAIN STATE TAX CONSEQUENCES
Because of the differences in state tax laws and their applicability
to different investors, it is not possible to summarize the potential state
tax consequences of holding the Offered Certificates. ACCORDINGLY,
PURCHASERS OF OFFERED CERTIFICATES SHOULD CONSULT THEIR RESPECTIVE TAX
ADVISORS REGARDING THE STATE TAX CONSEQUENCES OF PURCHASING ANY CLASS OF
OFFERED CERTIFICATES.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), (b) plans described in Section
4975(e)(1) of the Code, including individual retirement accounts and Keogh
Plans, (c) any entities whose underlying assets include plan assets by
reason of a plan's investment in such entities (each of (a), (b) and (c) a
"Plan") and (d) persons who have certain specified relationships to such
Plans ("Parties in Interest" under ERISA and "Disqualified Persons" under
the Code). Moreover, based on the reasoning of the United States Supreme
Court in John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank, 114 S. Ct. 517 (1993), an insurance company's general account may be
deemed to include assets of the Plans investing in the general account
(e.g., through the purchase of an annuity contract), and the insurance
company might be treated as a Party in Interest with respect to such Plans
by virtue of such investment. ERISA also imposes certain duties on persons
who are fiduciaries of Plans, and both ERISA and the Code prohibit certain
transactions involving "plan assets" between a Plan and Parties in Interest
or Disqualified Persons with respect to such Plans. Violation of these
rules may result in the imposition of an excise tax or penalty. Thus, a
Plan fiduciary considering an investment in the Offered Certificates should
consider, among other things, whether such an investment might constitute
or give rise to a prohibited transaction under ERISA or the Code.
Neither ERISA nor the Code defines the term "plan assets." Under
Section 2510.3-101 of the United States Department of Labor ("DOL")
regulations (the "Plan Assets Regulation"), a Plan's assets may be deemed
to include an interest in the underlying assets of an entity (such as a
trust) for certain purposes, including the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
in such entity. Accordingly, an investment in the Offered Certificates by a
Plan might result in the assets of the Trust being deemed to constitute
plan assets, which in turn could have the consequence that certain aspects
of such investment, including the operation of the Trust, might give rise
to or result in prohibited transactions under ERISA and the Code.
CLASS A CERTIFICATES
The Plan Assets Regulation contains an exception to the plan asset
rules that provides that if a Plan acquires a "publicly-offered security,"
the issuer of the security is not deemed to hold plan assets, regardless of
the fact that the security might otherwise represent an equity interest in
the issuer. A publicly-offered security is a security that is (i) freely
transferable, (ii) part of a class of securities that is "widely-held,"
i.e., owned by 100 or more investors independent of the issuer and of one
another and (iii) either is (A) part of a class of securities registered
under Section 12(b) or 12(g) of the Exchange Act or (B) sold to a Plan as
part of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of securities
of which such security is a part is registered under the Exchange Act
within 120 days (or such later time as may be allowed by the Commission)
after the end of the fiscal year of the issuer during which the offering of
such securities to the public occurred. Under the Plan Assets Regulation, a
class of securities will not fail to be widely-held solely because
subsequent to the initial offering the number of independent investors
falls below 100 as a result of events beyond the control of the issuer.
The Class A Underwriters expect, although no assurance can be given,
that the Class A Certificates will be held by at least 100 independent
investors at the conclusion of the offering and the Transferor anticipates
that the other conditions of the Plan Assets Regulation will be met with
respect to the Class A Certificates. No monitoring or other measures will
be taken to ensure that any such conditions will be met with respect to the
Class A Certificates. If the Trust's assets were deemed to be "plan assets"
of a Plan investor, there is uncertainty whether existing exemptions from
the "prohibited transaction" rules of ERISA and the Code would apply to all
transactions involving the Trust's assets. Accordingly, Plan fiduciaries
should consult with counsel before making a purchase of Class A
Certificates.
CLASS B CERTIFICATES
The Underwriters do not expect that the Class B Certificates will be
held by 100 or more independent investors. Accordingly, the Class B
Certificates may not be purchased by Plans subject to Title I of ERISA or
Section 4975 of the Code.
Each Certificate Owner of a Class B Certificate will be deemed to
have represented and warranted that it is not (i) an employee benefit plan
(as defined in Section 3(3) of ERISA) that is subject to the provisions of
Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Code
that is subject to Section 4975 of the Code, (iii) a governmental plan, as
defined in Section 3(32) of ERISA, subject to any federal, state or local
law which is, to a material extent, similar to the provisions of Section
406 of ERISA or Section 4975 of the Code, (iv) an entity whose underlying
assets include plan assets (as defined in the Plan Assets Regulation or
otherwise under ERISA) by reason of a plan's investment in the entity or
(v) a person investing plan assets of any such plan (including for purposes
of clause (iv) and this clause (v), as applicable, an insurance company
general account, but excluding any entity registered under the Investment
Company Act).
SPECIAL CONSIDERATIONS FOR INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of 1996
added new Section 401(c) of ERISA relating to the status of the assets of
insurance company general accounts under ERISA and Section 4975 of the
Code. Pursuant to Section 401(c), the DOL is required to issue final
regulations (the "General Account Regulations") not later than December 31,
1997 with respect to insurance policies issued on or before December 31,
1998 that are supported by an insurer's general account. The General
Account Regulations are to provide guidance on which assets held by the
insurer constitute "plan assets" for purposes of the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code. Section
401(c) also provides that, except in the case of avoidance of the General
Account Regulations and actions brought by the Secretary of Labor relating
to certain breaches of fiduciary duties that also constitute breaches of
state or federal criminal law, until the date that is 18 months after the
General Account Regulations become final, no liability under the fiduciary
responsibility and prohibited transaction provisions of ERISA and Section
4975 of the Code may result on the basis of a claim that the assets of the
general account of an insurance company constitute the plan assets of any
Plan. The plan asset status of insurance company separate accounts is
unaffected by new Section 401(c) of ERISA, and separate account assets
continue to be treated as the plan assets of any Plan invested in a
separate account. Potential investors that are insurance company general
accounts should consult their legal advisors concerning the effect of the
General Account Regulations on such investment.
GENERAL INVESTMENT CONSIDERATIONS
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code and the potential consequences
of making an investment in the Offered Certificates with respect to their
specific circumstances. Moreover, each Plan fiduciary should take into
account, among other considerations, whether the fiduciary has the
authority to make the investment; the composition of the Plan's portfolio
with respect to diversification by type of asset; the Plan's funding
objectives; the tax effects of the investment; and whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Offered Certificates is appropriate for the Plan, taking
into account the overall investment policy of the Plan and the composition
of the Plan's investment portfolio.
Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to the provisions of Title I of
ERISA and Section 4975 of the Code. Accordingly, assets of such plans may,
subject to the provisions of any other applicable federal and state law
(including, without limitation, federal or state law which is, to a
material extent, similar to the provisions of Section 406 of ERISA or
Section 4975 of the Code), be invested in any class of Offered Certificates
without regard to the ERISA considerations described herein. It should be
noted, however, that any such plan that is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") among the Transferor and the
Underwriters named below (the "Underwriters"), the Transferor has agreed to
sell to the Underwriters, and each of the Underwriters has severally agreed
to purchase, the principal amount of the Offered Certificates set forth
opposite its name:
AMOUNT
OF CLASS A
CLASS A UNDERWRITERS CERTIFICATES
Bear, Stearns & Co. Inc..................................... $
Total................................................. $
AMOUNT
OF CLASS B
CLASS B UNDERWRITER CERTIFICATES
Bear, Stearns & Co. Inc..................................... $
In the Underwriting Agreement, the Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the
Offered Certificates if any of the Offered Certificates are purchased.
The Class A Underwriters named above (the "Class A Underwriters")
propose initially to offer the Class A Certificates to the public at the
price set forth on the cover page hereof and to certain dealers at such
price less concessions not in excess of ____% of the principal amount of
the Class A Certificates. The Class A Underwriters may allow, and such
dealers may reallow, concessions not in excess of ____% of the principal
amount of the Class A Certificates to certain brokers and dealers. After
the initial public offering, the public offering price and other selling
terms may be changed by the Class A Underwriters.
The Class B Underwriter named above (the "Class B Underwriter")
proposes initially to offer the Class B Certificates to the public at the
price set forth in the cover page hereof and to certain dealers at such
price less concessions not in excess of ____% of the principal amount of
the Class B Certificates. The Class B Underwriter may allow, and such
dealers may reallow, concessions not in excess of _____% of the principal
amount of the Class B Certificates to certain brokers and dealers. After
the initial public offering, the public offering price and other selling
terms may be changed by the Class B Underwriter.
The Underwriting Agreement provides that the Transferor and Metris
will indemnify the Underwriters against certain liabilities, including
liabilities under applicable securities laws, or contribute to payments the
Underwriters may be required to make in respect thereof.
Until the distribution of the Offered Certificates is completed,
rules of the Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Offered
Certificates. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Offered Certificates. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Offered
Certificates.
If the Underwriters create a short position in the Offered
Certificates in connection with the offering, i.e., if they sell more
Offered Certificates than are set forth on the cover page of this
Prospectus, the Underwriters may reduce that short position by purchasing
Offered Certificates in the open market.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases.
Neither the Transferor nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the prices of the Offered
Certificates. In addition, neither the Transferor nor any of the
Underwriters makes any representation that the Underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Each Underwriter has represented and agreed that (a) it has only
issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the Offered
Certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996 or who is a person to whom the document may otherwise lawfully be
issued or passed on, (b) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 of Great Britain
with respect to anything done by it in relation to the Offered Certificates
in, from or otherwise involving the United Kingdom and (c) if that
Underwriter is an authorized person under the Financial Services Act 1986,
it has only promoted and will only promote (as that term is defined in
Regulation 1.02 of the Financial Services (Promotion of Unregulated
Schemes) Regulations 1991) to any person in the United Kingdom the scheme
described herein if that person is of a kind described either in Section
76(2) of the Financial Services Act 1986 or in Regulation 1.04 of the
Financial Services (Promotion of Unregulated Schemes) Regulations 1991.
In the ordinary course of business, several of the Underwriters or
their affiliates have engaged, and may engage in the future, in certain
investment banking or commercial banking transactions with Metris and its
affiliates.
LEGAL MATTERS
Certain legal matters relating to the Offered Certificates will be
passed upon for Metris, the Transferor and Direct Merchants Bank by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal
matters relating to the Offered Certificates will be passed upon for the
Underwriters by Brown & Wood LLP, New York, New York.
GLOSSARY OF TERMS
The following terms, which are used in this Prospectus, have the
meanings indicated:
"ABC Adjusted Invested Amount" means as of any business day the sum
of the Class A Invested Amount, the Class B Invested Amount and the Class C
Invested Amount minus the amount then on deposit in the Principal Funding
Account.
"Account" means each revolving credit consumer credit card account
established pursuant to a Contract between Direct Merchants Bank and any
Person, which on the Initial Closing Date was an Eligible Account or, with
respect to accounts transferred to the Trust after the Initial Closing
Date, is an Additional Account or a Supplemental Account. The definition of
Account includes each Transferred Account but does not include any Accounts
containing Ineligible Receivables and reassigned to the Transferor pursuant
to the Pooling and Servicing Agreement. The term "Account" refers to an
Additional Account or Supplemental Account only from and after the Addition
Date with respect thereto, and the term "Account" refers to any Removed
Account only prior to the Removal Date with respect thereto.
"Accumulation Period" is defined at page 15 in "Prospectus
Summary--Revolving Period."
"Accumulation Period Length" is defined at page 56 in "Description of
the Offered Certificates--Postponement of Accumulation Period."
"Accumulation Period Reserve Account" is defined at page 69 in
"Description of the Offered Certificates--Accumulation Period Reserve
Account."
"Accumulation Shortfall" is defined at page 80 in "Description of
Offered Certificates--Application of Collections--Payment of Principal."
"Adaptive Control System" is defined at page 40 in "Direct Merchants
Bank's Credit Card Activities--New Account Underwriting--The Adaptive
Control System."
"Addition Date" means each date as of which Receivables under
Additional Accounts or Supplemental Accounts are included in the Trust as
Accounts pursuant to the Pooling and Servicing Agreement.
"Additional Account" means each revolving credit consumer credit card
account owned by Direct Merchants Bank coming into existence after the
Initial Closing Date which is an Approved Account that the Transferor has
not elected to exclude from the Trust. Any such election shall be made by
the Transferor or the Servicer providing to the Trustee a written notice
thereof clearly identifying such excluded accounts.
"Adjusted Invested Amount" means as of any business day the Invested
Amount minus the sum of the amount then on deposit in the Principal Funding
Account and the Series Allocation Percentage of the amount then on deposit
in the Excess Funding Account.
"Adjustment Payment" is defined at page 80 in "Description of the
Offered Certificates--Defaulted Receivables; Dilution."
"Amortization Period" means the period commencing on the Amortization
Period Commencement Date and continuing until the earlier of (x) the
Invested Amount of the Certificates being paid in full or (y) the
Termination Date.
"Amortization Period Commencement Date" means the earlier of the
first day of the Accumulation Period and the date on which a Pay Out Event
occurs or is deemed to have occurred.
"Approved Account" means each (i) Eligible Account that is a
MasterCard(R) or VISA(R) account or (ii) any other revolving credit
consumer credit card account the inclusion in the Trust of which would not
cause a Ratings Event.
"Assignment" is defined at page 64 in "Description of the Offered
Certificates--Addition of Trust Assets."
"Automatic Additional Accounts" is defined at page 63 in "Description
of the Offered Certificates--Addition of Trust Assets."
"Available Investor Principal Collections" is defined at page 55 in
"Description of the Offered Certificates--Principal Payments."
"Available Reserve Account Amount" is defined at page 64 in
"Description of the Offered Certificates--Accumulation Period Reserve
Account."
"Available Series Finance Charge Collections" is defined at page 76
in "Description of the Offered Certificates--Application of
Collections--Payment of Fees, Interest and Other Items."
"Bank" means Direct Merchants Credit Card Bank, National Association.
"Bank Purchase Agreement" means that certain Amended and Restated
Bank Purchase Agreement dated as of May 26, 1995 between Direct Merchants
Bank and FCI, together with that certain Assignment and Assumption
Agreement dated as of September 16, 1996, among FCI, as assignor, Metris,
as assignee, and Direct Merchants Bank, as such documents may be amended
from time to time in accordance with their terms.
"Bankruptcy Code" means the United States federal bankruptcy code, as
amended.
"Base Rate" is defined at page 49 in "Maturity Considerations."
"Cash Equivalents" is defined at page 67 in "Description of the
Offered Certificates--Trust Accounts."
"Cedel" is defined at page 53 in "Description of the Offered
Certificates--Book-Entry Registration."
"Cedel Participants" is defined at page 53 in "Description of the
Offered Certificates--Book-Entry Registration."
"Certificateholders" means the record holders of the Certificates.
"Certificateholders' Interest" means the interest in the assets of
the Trust allocated to the Certificateholders.
"Certificate Owners" is defined at page 3 in "Reports to
Certificateholders."
"Certificate Rates" is defined at page 14 in "Prospectus
Summary--Interest."
"Certificates" means, collectively, the Class A Certificates, the
Class B Certificates, the Class C Certificates and the Class D
Certificates.
"Class" means any of the Class A Certificates, the Class B
Certificates, the Class C Certificates or the Class D Certificates.
"Class A Adjusted Invested Amount" is defined at page 71 in
"Description of the Offered Certificates--Allocation Percentages."
"Class A Certificateholders" means the record holders of the Class A
Certificates.
"Class A Certificateholders' Interest" means the interest in the
assets of the Trust allocated to the Class A Certificateholders.
"Class A Certificate Rate" means % per annum.
"Class A Certificates" means the % Asset Backed Certificates,
Series 1997-2, Class A.
"Class A Fixed/Floating Allocation Percentage" is defined at page 70
in "Description of the Offered Certificates--Allocation Percentages."
"Class A Floating Allocation Percentage" means, with respect to any
business day, the percentage equivalent of the ratio that the amount of the
Class A Adjusted Invested Amount as of the end of the preceding business
day bears to the greater of (a) the sum of the aggregate amount of
Principal Receivables and amounts on deposit in the Excess Funding Account
as of the end of the preceding business day and (b) the sum of the
numerators with respect to all classes of all Series then outstanding used
to calculate the applicable allocation percentage.
"Class A Initial Invested Amount" means $ .
"Class A Invested Amount" is defined at page 70 in "Description of
the Offered Certificates--Allocation Percentages."
"Class A Investor Charge-Off" is defined at page 81 in "Description
of the Offered Certificates--Investor Charge-Offs."
"Class A Monthly Interest" is defined at page 78 in "Description of
the Offered Certificates--Application of Collections--Payment of Fees,
Interest and Other Items."
"Class A Percentage" means a fraction the numerator of which is the
Class A Initial Invested Amount and the denominator of which is the sum of
the Class A Initial Invested Amount, the Class B Initial Invested Amount
and the Class C Initial Invested Amount.
"Class A Pool Factor" is defined at page 50 in "Pool Factor and
Related Information."
"Class A Principal" is defined at page 79 in "Description of the
Offered Certificates--Application of Collections--Payment of Principal."
"Class A Required Amount" means for any business day during a Monthly
Period the amount, if any, by which the sum of (i) the Class A Monthly
Interest and any overdue Class A Monthly Interest on the related
Distribution Date (and additional interest thereon), (ii) the Class A
Floating Allocation Percentage of the Default Amount for such Monthly
Period (to date), (iii) if Direct Merchants Bank, or an affiliate of Direct
Merchants Bank, is no longer the Servicer, the Class A Floating Allocation
Percentage of the Monthly Servicing Fee for the related Monthly Period,
(iv) the Class A Percentage of the Series Allocation Percentage of the
Adjustment Payment required to be made by the Transferor but not made on
the related Transfer Date and (v) the amount by which the Class A Invested
Amount has been reduced on prior business days because of unreimbursed
Class A Investor Charge-Offs exceed the Available Series Finance Charge
Collections plus any Excess Finance Charge Collections from other Series
and any Transferor Finance Charge Collections in each case allocated with
respect thereto.
"Class A Underwriters" are the Underwriters indicated at page 107 in
"Underwriting."
"Class B Adjusted Invested Amount" is defined at page 71 in
"Description of Offered Certificates--Allocation Percentages."
"Class B Certificateholders" means the record holders of the Class B
Certificates.
"Class B Certificateholders' Interest" means the interest in the
assets of the Trust allocated to the Class B Certificateholders.
"Class B Certificate Rate" means % per annum.
"Class B Certificates" means the % Asset Backed Certificates,
Series 1997-2, Class B.
"Class B Fixed/Floating Allocation Percentage" is defined at page 70
in "Description of the Offered Certificates--Allocation Percentages."
"Class B Floating Allocation Percentage" means, with respect to any
business day, the percentage equivalent of the ratio that the amount of the
Class B Adjusted Invested Amount as of the end of the preceding business
day bears to the greater of (a) the sum of the aggregate amount of
Principal Receivables and amounts on deposit in the Excess Funding Account
as of the end of the preceding business day and (b) the sum of the
numerators with respect to all classes of all Series then outstanding used
to calculate the applicable allocation percentage.
"Class B Initial Invested Amount" means $ .
"Class B Invested Amount" is defined at page 71 in "Description of the
Offered Certificates--Allocation Percentages."
"Class B Investor Charge-Off" is defined at page 81 in "Description of
the Offered Certificates--Investor Charge-Offs."
"Class B Monthly Interest" is defined at page 78 in "Description of
the Offered Certificates--Application of Collections--Payment of Fees,
Interest and Other Items."
"Class B Percentage" means a fraction the numerator of which is the
Class B Initial Invested Amount and the denominator of which is the sum of
the Class A Initial Invested Amount, the Class B Initial Invested Amount
and the Class C Initial Invested Amount.
"Class B Pool Factor" is defined at page 50 in "Pool Factor and
Related Information."
"Class B Principal" is defined at page 79 in "Description of the
Offered Certificates--Application of Collections--Payment of Principal."
"Class B Principal Payment Commencement Date" means the earlier of
(a) (i) with respect to the Accumulation Period, the Expected Final Payment
Date or (ii) during the Early Amortization Period, the first Distribution
Date on which the Class A Invested Amount is paid in full or, if there are
no Principal Collections allocable to Series 1997-2 remaining after
payments have been made to the Class A Certificates on such Distribution
Date, the next succeeding Distribution Date and (b) the Distribution Date
following a sale or repurchase of the Receivables pursuant to the Pooling
and Servicing Agreement.
"Class B Required Amount" means for any business day during a Monthly
Period the amount, if any, by which the sum of (i) the Class B Monthly
Interest and any overdue Class B Monthly Interest on the related
Distribution Date (and additional interest thereon), (ii) the Class B
Floating Allocation Percentage of the Default Amount for such Monthly
Period (to date), (iii) if Direct Merchants Bank, or an affiliate of Direct
Merchants Bank is no longer the Servicer, the Class B Floating Allocation
Percentage of the Monthly Servicing Fee for the related Monthly Period,
(iv) the Class B Percentage of the Series Allocation Percentage of the
Adjustment Payment required to be made by the Transferor but not made on
the related Transfer Date and (v) the unreimbursed amount by which the
Class B Invested Amount has been reduced on prior business days because of
unreimbursed Class B Investor Charge-Offs and Reallocated Class B Principal
Collections exceed the Available Series Finance Charge Collections plus any
Excess Finance Charge Collections from other Series and any Transferor
Finance Charge Collections in each case allocated with respect thereto.
"Class B Underwriter" is the Underwriter indicated at page 107 in
"Underwriting."
"Class C Adjusted Invested Amount" is defined at page 71 in
"Description of the Offered Certificates--Allocation Percentages."
"Class C Certificateholders" means the record holders of the Class C
Certificates.
"Class C Certificateholders' Interest" means the interest in the
assets of the Trust allocated to the Class C Certificateholders.
"Class C Certificate Rate" means the London interbank offered
quotations for one-month United States dollar deposits plus 1.00% per annum
or such lesser rate as specified in the Series 1997-2 Supplement.
"Class C Certificates" means the Floating Rate Asset Backed
Certificates, Series 1997-2, Class C.
"Class C Fixed/Floating Allocation Percentage" is defined at page 70
in "Description of the Offered Certificates--Allocation Percentages."
"Class C Floating Allocation Percentage" means, with respect to any
business day, the percentage equivalent of the ratio that the amount of the
Class C Adjusted Invested Amount as of the end of the preceding business
day bears to the greater of (a) the sum of the aggregate amount of
Principal Receivables and amounts on deposit in the Excess Funding Account
as of the end of the preceding business day and (b) the sum of the
numerators with respect to all classes of all Series then outstanding used
to calculate the applicable allocation percentage.
"Class C Initial Invested Amount" means $______.
"Class C Invested Amount" is defined at page 71 in "Description of
the Offered Certificates--Allocation Percentages."
"Class C Investor Charge-Off" is defined at page 81 in "Description
of the Offered Certificates--Investor Charge-Offs."
"Class C Monthly Interest" is defined at page 78 in "Description of
the Offered Certificates--Application of Collections--Payment of Fees,
Interest and Other Items."
"Class C Percentage" means a fraction the numerator of which is the
Class C Initial Invested Amount and the denominator of which is the sum of
the Class A Initial Invested Amount, the Class B Initial Invested Amount
and the Class C Initial Invested Amount.
"Class C Principal" is defined at page 79 in "Description of the
Offered Certificates--Application of Collections--Payment of Principal."
"Class C Principal Payment Commencement Date" means the earlier of
(a) (i) with respect to the Accumulation Period, the Expected Final Payment
Date or (ii) during the Early Amortization Period, the first Distribution
Date on which the Class B Invested Amount is paid in full or, if there are
no Principal Collections allocable to Series 1997-2 remaining after
payments have been made to the Class B Certificates on such Distribution
Date, the next succeeding Distribution Date and (b) the Distribution Date
following a sale or repurchase of the Receivables pursuant to the Pooling
and Servicing Agreement.
"Class C Required Amount" means for any business day during a Monthly
Period the amount, if any, by which the sum (i) of the Class C Monthly
Interest and any overdue Class C Monthly Interest on the related
Distribution Date (and additional interest thereon), (ii) the Class C
Floating Allocation Percentage of the Default Amount for such Monthly
Period (to date), (iii) if Direct Merchants Bank, or an affiliate of Direct
Merchants Bank is no longer the Servicer, the Class C Floating Allocation
Percentage of the Monthly Servicing Fee for the related Monthly Period,
(iv) the Class C Percentage of the Series Allocation Percentage of the
Adjustment Payment required to be made by the Transferor but not made on
the related Transfer Date and (v) the unreimbursed amount by which the
Class C Invested Amount has been reduced on prior business days because of
unreimbursed Class C Investor Charge-Offs and Reallocated Class C Principal
Collections exceed the Available Series Finance Charge Collections plus any
Excess Finance Charge Collections from other Series and any Transferor
Finance Charge Collections in each case allocated with respect thereto.
"Class D Certificateholders" means the record holders of the Class D
Certificates.
"Class D Certificateholders' Interest" means the interest in the assets
of the Trust allocated to the Class D Certificateholders.
"Class D Certificates" means the Asset Backed Certificates, Series
1997-2, Class D.
"Class D Fixed/Floating Allocation Percentage" is defined at page 70 in
"Description of the Offered Certificates--Allocation Percentages."
"Class D Floating Allocation Percentage" means, with respect to any
business day, the percentage equivalent of the ratio that the amount of the
Class D Invested Amount as of the end of the preceding business day bears
to the greater of (a) the total amount of Principal Receivables and amounts
on deposit in the Excess Funding Account as of the end of the preceding
business day and (b) the sum of the numerators with respect to all classes
of all Series then outstanding used to calculate the applicable allocation
percentage.
"Class D Invested Amount" is defined at page 71 in "Description of the
Offered Certificates--Allocation Percentages."
"Class D Investor Charge-Off" is defined at page 81 in "Description of
the Offered Certificates--Investor Charge-Offs."
"Class D Principal Payment Commencement Date" means the earlier of
(a) during the Amortization Period, the first Distribution Date on which
the Class C Invested Amount is paid in full or, if there are no Principal
Collections allocable to Series 1997-2 remaining after payments have been
made to the Class C Certificates on such Distribution Date, the
Distribution Date following the Distribution Date on which the Class C
Invested Amount is paid in full and (b) the Distribution Date following a
sale or repurchase of the Receivables pursuant to the Pooling and Servicing
Agreement.
"Closing Date" means the date of the initial issuance of the
Certificates.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Account" means an account established by the Servicer for
the purpose of depositing all collections of Receivables.
"Collections" is defined at page 8 in "Prospectus
Summary--Collections."
"Commission" means the Securities and Exchange Commission.
"Contract" means an agreement between a Credit Card Originator and
another person for the extension of revolving credit, including pursuant to
a credit card, or revolving credit agreement (but shall not include any
agreement or plan relating to the extension of credit on a closed-end
basis).
"Controlled Accumulation Amount" is defined at page .
"Controlled Deposit Amount" is defined at page 48 in "Maturity
Considerations."
"Cooperative" is defined at page in "Description of the Offered
Certificates--Book-Entry Registration."
"Covered Amount" is defined at page 69 in "Description of the Offered
Certificates--Accumulation Period Reserve Account."
"Credit and Collection Policy" means the written policies and
procedures of the applicable Credit Card Originator relating to the
operation of its consumer revolving credit card business, including,
without limitation, the written policies and procedures for determining the
creditworthiness of credit card customers and relating to the maintenance
of credit card accounts and collection of receivables with respect thereto,
as such policies and procedures may be amended, modified or otherwise
changed from time to time.
"Credit Card Originator" means Direct Merchants Bank and its
successors or assigns under the Bank Purchase Agreement and/or any
transferee of the Accounts from Direct Merchants Bank or any other
originator of accounts which enters into a receivables purchase agreement
with Direct Merchants Bank, Metris or the Transferor in accordance with the
provisions of the Pooling and Servicing Agreement.
"Default Amount" means, (i) on any business day other than the
Default Recognition Date, the aggregate amount of Principal Receivables in
Accounts which became Defaulted Accounts on such business day and (ii) on
any Default Recognition Date the aggregate amount of Principal Receivables
in Accounts which became Defaulted Accounts during the then current Monthly
Period (other than such Accounts which were included in clause (i)).
"Default Recognition Allocation Percentage" means, with respect to
each Default Recognition Date, the percentage equivalent of a fraction, the
numerator of which is the Weighted Average Invested Amount for the related
Monthly Period and the denominator of which is the Weighted Average
Principal Receivables in the Trust for the related Monthly Period.
"Default Recognition Date" means the last day of each calendar month;
provided, however that with respect to any Monthly Period the "related
Default Recognition Date" shall mean the Default Recognition Date occurring
closest to the last day of such Monthly Period and any amounts allocated or
applied on such Default Recognition Date shall be deemed to apply to the
related Monthly Period.
"Defaulted Account" means each Account with respect to which, in
accordance with the Credit and Collection Policy or the Servicer's
customary and usual servicing procedures, the Servicer has charged off the
Receivables in such Account as uncollectible.
"Defaulted Receivable" is defined at page 80 in "Description of the
Offered Certificates--Defaulted Receivables; Dilution."
"Defeasance" is defined at page 82 in "Description of the Offered
Certificates--Defeasance."
"Definitive Certificates" is defined at page 54 in "Description of the
Offered Certificates--Definitive Certificates."
"Depositaries" is defined at page 51 in "Description of the Offered
Certificates--Book-Entry Registration."
"Depository" is defined at page 51 in "Description of the Offered
Certificates--General."
"Determination Date" is defined at page 81 in "Description of the
Offered Certificates--Investor Charge-Offs."
"Direct Merchants Bank" means Direct Merchants Credit Card Bank,
National Association.
"Direct Merchants Bank Portfolio" is defined at page 44 in "Direct
Merchants Bank's Credit Card Activities--Yield Considerations."
"Discount Option Receivables" is defined at page 65 in "Description of
the Offered Certificates--Discount Option."
"Discount Percentage" is defined at page 65 in "Description of the
Offered Certificates--Discount Option."
"Distribution Account" is defined at page 66 in "Description of the
Offered Certificates--Trust Accounts."
"Distribution Date" means , 1997 and the twentieth day of each month
thereafter, or if such day is not a business day, the next succeeding
business day.
"DOL" means the U.S. Department of Labor.
"Dollars" means United States dollars.
"DTC" means The Depository Trust Company.
"DTC Participants" is defined at page 51 in "Description of the
Offered Certificates--Book-Entry Registration."
"Early Amortization Period" means the period beginning on the earlier
of (a) the day on which a Pay Out Event occurs or is deemed to have
occurred and (b) the Expected Final Payment Date if the Class A Invested
Amount, the Class B Invested Amount and the Class C Invested Amount have
not been paid in full on such date, and ending on the earlier of (i) the
date on which the Class A Invested Amount, the Class B Invested Amount, the
Class C Invested Amount and the Class D Invested Amount have been paid in
full and (ii) the Termination Date.
"Eligible Account" is defined at page 62 in "Description of the Offered
Certificates--Eligible Accounts."
"Eligible Receivable" is defined at page 63 in "Description of the
Offered Certificates--Eligible Receivables."
"Enhancement" means, with respect to any Series, any letter of
credit, cash collateral account, cash collateral guaranty, guaranty,
collateral invested amount, surety bond, guaranteed rate agreement,
maturity guaranty facility, tax protection agreement, interest rate cap,
interest rate swap, subordination of the rights of one class or one Series
to another, or other contract or agreement for the benefit of the
certificateholders of such Series (or certificateholders of a class within
such Series as designated in the applicable Supplement).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Euroclear" is defined at page 53 in "Description of the Offered
Certificates--Book-Entry Registration."
"Euroclear Operator" is defined at page 53 in "Description of the
Offered Certificates--Book-Entry Registration."
"Euroclear Participants" is defined at page 53 in "Description of the
Offered Certificates--Book-Entry Registration."
"Euroclear System" is defined at page 53 in "Description of the
Offered Certificates--Book-Entry Registration."
"Excess Finance Charge Collections" means any Finance Charge
Collections allocable to any Series in excess of the amounts necessary to
make required payments with respect to such Series.
"Excess Funding Account" is defined at page 68 in "Description of the
Offered Certificates--Excess Funding Account."
"Exchange" means any tender by the Transferor to the Trustee of the
Exchangeable Transferor Certificate, pursuant to any one or more
Supplements or, if provided in the relevant Supplement, certificates
representing any Series and the Exchangeable Transferor Certificate, in
exchange for one or more new Series and a reissued Exchangeable Transferor
Certificate.
"Exchangeable Transferor Certificate" means the certificate which
evidences the Transferor Interest.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expected Final Payment Date" means the Distribution Date.
"External Prospects" is defined at page 37 in "Metris Companies Inc."
"FASIT" is defined at page 103 in "Certain Federal Income Tax
Consequences--Recent Legislation."
"FASIT Provisions" is defined at page 103 in "Certain Federal Income
Tax Consequences--Recent Legislation."
"FCI" means Fingerhut Companies, Inc., a Minnesota corporation.
"FDIA" means the Federal Deposit Insurance Act.
"FDIC" means the Federal Deposit Insurance Corporation.
"FDR" means First Data Resources, Inc.
"FICO scores" is defined at page 39 in "Direct Merchants Bank's
Credit Card Activities--New Account Underwriting--Credit Scoring."
"Finance Charge Collections" is defined at page 6 in "Prospectus
Summary--Trust."
"Finance Charge Receivables" is defined at page 8 in "Prospectus
Summary--Receivables."
"Fingerhut" means Fingerhut Corporation, a Minnesota corporation.
"Fingerhut Customers" is defined at page 37 in "Metris Companies Inc."
"Fingerhut Database" is defined at page 38 in "Fingerhut Corporation."
"Fingerhut Scores" is defined at page 38 in "Fingerhut Corporation."
"FIRREA" is defined at page 30 in "Risk Factors--Transfer of the
Receivables; Insolvency Risk Considerations."
"Fixed/Floating Allocation Percentage" is defined at page 70 in
"Description of the Offered Certificates--Allocation Percentages."
"Floating Allocation Percentage" means the sum of the Class A
Floating Allocation Percentage, the Class B Floating Allocation Percentage,
the Class C Floating Allocation Percentage and the Class D Floating
Allocation Percentage.
"Foreign Person" is defined at page 104 in "Certain Federal Income
Tax Consequences--Tax Consequences to Foreign Investors."
"Full Invested Amount" is defined at page 11 in "Prospectus
Summary--Allocation of Trust Assets."
"Funding Period" is defined at page 14 in "Prospectus
Summary--Funding Period."
"General Account Regulations" is defined at page 106 in "Employee
Benefit Plan Considerations--Special Considerations for Insurance Company
General Accounts."
"Global Securities" is defined at page B-1-1 in "Annex II."
"Governmental Authority" means the United States of America, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of
or pertaining to government.
"Indirect Participants" is defined at page 52 in "Description of the
Offered Certificates--Book-Entry Registration."
"Ineligible Receivable" means any receivable that does not satisfy the
definition of Receivable.
"Initial Closing Date" is defined at page 58 in "Description of the
Offered Certificates--Transfer and Assignment of Receivables."
"Initial Invested Amount" is defined at page 10 in "Prospectus
Summary--Allocation of Trust Assets."
"Insolvency Event" is defined at page 85 in "Description of the Offered
Certificates--Pay Out Events."
"Interest Accrual Period" means, with respect to a Distribution Date,
the period from and including the preceding Distribution Date to but
excluding such Distribution Date; provided, however, that the initial
Interest Accrual Period shall be the period from the Closing Date to but
excluding the initial Distribution Date.
"Interest Funding Account" is defined at page 66 in "Description of
the Offered Certificates--Trust Accounts."
"Invested Amount" means the sum of the Class A Invested Amount, the
Class B Invested Amount, the Class C Invested Amount and the Class D
Invested Amount.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
"Investor Certificates" means any certificates of any Series.
"Investor Default Amount" is defined at page 80 in "Description of the
Offered Certificates--Defaulted Receivables; Dilution."
"Investor Percentage" means, (a) with respect to Finance Charge
Collections prior to the commencement of the Early Amortization Period,
Receivables in Defaulted Accounts at any time and Principal Collections
during the Revolving Period, the Floating Allocation Percentage and (b)
with respect to Finance Charge Collections during the Early Amortization
Period and Principal Collections during the Amortization Period, the
Fixed/Floating Allocation Percentage, and with respect to any Series of
certificates, the percentage specified in the related Supplement.
"IRS" means the Internal Revenue Service.
"MasterCard International" means MasterCard International Inc.
"Metris" means Metris Companies Inc., a Delaware corporation.
"Metris Direct" means Metris Direct, Inc., a Minnesota corporation
and an affiliate of Direct Merchants Bank.
"Metris Receivables, Inc." means Metris Receivables, Inc., a Delaware
corporation.
"Minimum Aggregate Principal Receivables" means, as of any date of
determination, the sum of the numerators used in the calculation of the
Investor Percentages for Principal Collections for all outstanding Series
on such date of determination.
"Minimum Retained Interest" means the product of the weighted average
Minimum Retained Percentages for all Series and the sum of the outstanding
principal amounts of all classes of all Series.
"Minimum Retained Percentage" means, for Series 1997-2, 2%.
"Minimum Transferor Interest" means the product of (i) the sum of (a)
the aggregate Principal Receivables and (b) the amounts on deposit in the
Excess Funding Account and (ii) the highest Minimum Transferor Percentage for
any Series.
"Minimum Transferor Percentage" means, for Series 1997-2, 0%; provided,
however that in certain circumstances such percentage may be increased.
"Monthly Period" means the period from and including the first day of
each fiscal month of the Transferor to and including the last day of such
fiscal month except that the first Monthly Period with respect to the
Certificates shall begin on and include the Closing Date and shall end on
and include , 1997.
"Monthly Servicing Fee" is defined at page 85 in "Description of the
Offered Certificates--Servicing Compensation and Payment of Expenses."
"Moody's" means Moody's Investors Service, Inc.
"Negative Carry Amount" is defined at page 21 in "Prospectus
Summary--Coverage of Interest Shortfalls from Transferor Finance Charge
Collections."
"Notice Date" is defined at page in "Description of the Offered
Certificates--Addition of Trust Assets."
"Obligor" means a person or persons obligated to make payments with
respect to a Receivable arising under an Account pursuant to a Contract.
"Offered Certificates" is defined at page 1.
"OID" means original issue discount.
"OID Regulations" is defined at page 100 in "Certain Federal Income Tax
Consequences--Taxation of Interest Income to Certificateholders."
"Paired Series" is defined at page 82 in "Description of the Offered
Certificates--Paired Series."
"Participants" is defined at page 51 in "Description of the Offered
Certificates--General."
"Paying Agent" is defined at page 67 in "Description of the Offered
Certificates--Trust Accounts."
"Payment Date" is defined at page 40 in "Direct Merchants Bank's Credit
Card Activities--Servicing, Billing and Payments."
"Payment Reserve Account" is defined at page 66 in "Description of the
Offered Certificates--Trust Accounts."
"Pay Out Event" is defined at page 83 in "Description of the Offered
Certificates--Pay Out Events."
"Periodic Finance Charge" has, with respect to any Account, the meaning
specified in the Contract applicable to such Account for finance charges (due
to periodic rate) or any similar term.
"Permitted Lien" means with respect to the Receivables: (i) liens in
favor of the Transferor created pursuant to the Purchase Agreement and
assigned to the Trustee pursuant to the Pooling and Servicing Agreement;
(ii) liens in favor of the Trustee pursuant to the Pooling and Servicing
Agreement; and (iii) liens which secure the payment of taxes, assessments
and governmental charges or levies, if such taxes are either (a) not
delinquent or (b) being contested in good faith by appropriate legal or
administrative proceedings and as to which adequate reserves in accordance
with generally accepted accounting principles shall have been established.
"Person" means any legal person, including any individual,
corporation, partnership, joint venture, association, joint stock company,
trust, unincorporated organization, governmental entity or other entity of
similar nature.
"Plan" is defined at page 105 in "Employee Benefit Plan
Considerations."
"Plan Assets Regulation" is defined at page 105 in "Employee Benefit
Plan Considerations."
"Pool Factor" means one of the Class A Pool Factor or the Class B Pool
Factor.
"Pooling and Servicing Agreement" means the Pooling and Servicing
Agreement, dated as of May 26, 1995, among the Transferor, the Servicer,
and the Trustee, as amended by Amendment No. 1 thereto, dated as of June
10, 1996 among the Transferor, the Servicer and the Trustee, Amendment No.
2 thereto, dated as of September 16, 1996 among the Transferor, the
Servicer and the Trustee, and as further supplemented or amended in
accordance with its terms. Unless the context requires otherwise, the term
"Pooling and Servicing Agreement" refers to the Pooling and Servicing
Agreement as supplemented by the Series 1997-2 Supplement.
"Portfolio Yield" is defined at page 49 in "Maturity Considerations."
"Pre-Funded Amount" is defined at page 14 in "Prospectus
Summary--Funding Period."
"Pre-Funding Account" is defined at page 101 in "Prospectus
Summary--Funding Period."
"Prepayable Instrument" is defined at page in "Certain Federal Income
Tax Consequences--Taxation of Interest Income to Certificateholders--OID."
"Previously Issued Series" means the Series 1995-1 Variable Funding
Certificates, the Series 1996-1 Asset Backed Certificates and the Series
1997-1 Asset Backed Certificates.
"Principal Account" is defined at page 66 in "Description of the
Offered Certificates--Trust Accounts."
"Principal Collections" means with respect to any business day
Collections received with respect to Principal Receivables.
"Principal Funding Account" is defined at page 67 in "Description of
the Offered Certificates--Principal Funding Account."
"Principal Funding Account Balance" is defined at page 67 in "Maturity
Considerations."
"Principal Funding Account Investment Proceeds" is defined at page 67
in "Description of the Offered Certificates--Principal Funding Account."
"Principal Receivables" means for any business day, the aggregate
amount shown on the Servicer's records as amounts payable by Obligors with
respect to Eligible Receivables other than such amounts that are Finance
Charge Receivables or (except as used in the definition of Investor Default
Amount) Receivables in Defaulted Accounts and shall include, without
limitation, amounts payable for purchases of goods or services or cash
advances. A Receivable shall be deemed to have been created at the end of
the day on the date of processing of such Receivable. In calculating the
aggregate amount of Principal Receivables on any day, the amount of
Principal Receivables shall be reduced by the aggregate amount of credit
balances in the Accounts on such day.
"Principal Terms" is defined at page 59 in "Description of the Offered
Certificates--Exchanges."
"Proprietary Modeling System" is defined at page 39 in "Direct
Merchants Bank's Credit Card Activities--New Account Underwriting--Credit
Scoring."
"Proprietary Score" is defined at page 39 in "Direct Merchants Bank's
Credit Card Activities--New Account Underwriting--Credit Scoring."
"Purchase Agreement" means that certain Receivables Purchase
Agreement dated as of May 26, 1995 between FCI and the Transferor, together
with that certain Assignment and Assumption Agreement, dated as of
September 16, 1996 among FCI, as assignor, Metris, as assignee, and the
Transferor, as such documents may be amended from time to time in
accordance with their terms.
"Purchase Agreements" means the Purchase Agreement and the Bank
Purchase Agreement.
"Purchase Termination Date" is defined at page 94 in "Description of
the Purchase Agreements--Purchase Termination Date."
"Qualified Institution" is defined at page 66 in "Description of the
Offered Certificates--Trust Accounts."
"Rating Agencies" means Standard & Poor's and Moody's.
"Rating Agency Condition" means the notification in writing by each
Rating Agency to the Transferor, the Servicer and the Trustee that any
action will not result in any Rating Agency reducing or withdrawing its
then existing rating of the investor certificates of any outstanding Series
or class with respect to which it is a Rating Agency.
"Ratings Event" shall mean, with respect to any Class of any
outstanding Series rated by a Rating Agency, a reduction or withdrawal of
the rating of any such Class by a Rating Agency.
"Reallocated Class B Principal Collections" is defined at page 73 in
"Description of the Offered Certificates--Reallocated Principal
Collections."
"Reallocated Class C Principal Collections" is defined at page 73 in
"Description of the Offered Certificates--Reallocated Principal
Collections."
"Reallocated Class D Principal Collections" is defined at page 73 in
"Description of the Offered Certificates--Reallocated Principal
Collections."
"Reallocated Principal Collections" is defined at page 73 in
"Description of the Offered Certificates--Reallocated Principal
Collections."
"Receivable" means all of the indebtedness of any Obligor under an
Account, including the right to receive payment of any interest or finance
charges and other obligations of such Obligors with respect thereto. Each
receivable includes, without limitation, all rights of the Transferor under
the applicable Contract.
"Record Date" means, with respect to any Distribution Date, the
business day preceding such Distribution Date, except that, with respect to
any Definitive Certificates, Record Date shall mean the fifth day of the
then current Monthly Period.
"Recoveries" means any amounts received by the Servicer with respect
to Receivables in Accounts that previously became Defaulted Accounts.
"Regulations" is defined at page 101 in "Certain Federal Income Tax
Consequences--Taxation of Interest Income to Certificateholders--OID."
"Related Person" means an entity that is an affiliate of Fingerhut,
any holder of an Investor Certificate, any provider of Enhancement, or any
person whose status would violate the conditions for a trustee contained in
Section (4)(i) of Rule 3a-7 under the Investment Company Act.
"Relevant UCC State" means each jurisdiction in which the filing of a
UCC financing statement is necessary to perfect the ownership interest and
security interest of the Transferor pursuant to the Purchase Agreement or
the ownership or security interest of the Trustee.
"Removed Accounts" is defined at page 64 in "Description of the
Offered Certificates--Addition of Trust Assets."
"Required Amount" is defined at page 78 in "Description of the
Offered Certificates--Application of Collections--Payment of Fees, Interest
and Other Items."
"Required Reserve Account Amount" is defined at page 69 in
"Description of the Offered Certificates--Accumulation Period Reserve
Account."
"Requirements of Law" means the certificate of incorporation or
articles of association and by-laws or other organizational or governing
documents of such Person, and any material law, treaty, rule or regulation
or determination of an arbitrator or Governmental Authority, in each case
applicable to or binding upon such Person or to which such Person is
subject.
"Reserve Account Funding Date" is defined at page 69 in "Description
of the Offered Certificates--Accumulation Period Reserve Account."
"Restart Date" is defined at page 63 in "Description of the Offered
Certificates--Addition of Trust Assets."
"Retained Interest" means, on any date of determination, the sum of the
Transferor Interest and the interest in the Trust represented by any
Transferor Retained Class of investor certificates.
"Retained Percentage" means, on any date of determination, the
percentage equivalent of a fraction the numerator of which is the Retained
Interest and the denominator of which is the aggregate amount of Principal
Receivables at the end of the day immediately prior to such date of
determination plus all amounts on deposit in the Excess Funding Account
(but not including investment earnings on such amounts).
"Revolving Period" is defined at page 15 in "Prospectus
Summary--Revolving Period."
"RTC" means the Resolution Trust Corporation.
"RTC Policy Statement" is defined at page 97 in "Certain Legal
Aspects of the Receivables--Certain Matters Relating to Bankruptcy or
Receivership."
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Series" means any series of certificates issued by the Trust pursuant
to a Supplement, including the Series 1997-2 Asset Backed Certificates.
"Series Allocation Percentage" means, on any date of determination,
the percentage equivalent of a fraction the numerator of which is the
Invested Amount and the denominator of which is the sum of the Invested
Amounts of all Series then outstanding.
"Series 1995-1 Variable Funding Certificates" means those
certificates issued by the Trust pursuant to the Series 1995-1 Supplement
dated as of May 23, 1995, as amended by the Amended and Restated Series
1995-1 Supplement dated as of September 16, 1996.
"Series 1996-1 Asset Backed Certificates" means those certificates
issued by the Trust pursuant to the Series 1996-1 Supplement dated as of
April 23, 1996.
"Series 1997-1 Asset Backed Certificates" means those certificates
issued by the Trust pursuant to the Series 1997-1 Supplement dated as of
May 8, 1997.
"Series 1997-2" is defined at page 2.
"Series 1997-2 Supplement" means the Supplement, dated as of the
Closing Date, among the Transferor, the Servicer and the Trustee relating
to the Series 1997-2 Certificates.
"Service Transfer" is defined at page 87 in "Description of the
Offered Certificates--Servicer Default."
"Servicer" means initially Direct Merchants Bank and thereafter any
Person appointed as successor as provided in the Pooling and Servicing
Agreement.
"Servicer Default" is defined at page 87 in "Description of the
Offered Certificates--Servicer Default."
"Servicing Fee Percentage" means 2.00 percent per annum, or for so
long as Direct Merchants Bank is the Servicer, a lesser rate if so
specified in the Supplement.
"Shared Principal Collections" means the amount of Principal
Collections for any business day allocated by the Servicer to the Invested
Amount remaining after covering required deposits or payments to the
Certificateholders and any similar amount remaining for any other Series.
"SIPC" is defined at page 67 in "Description of the Offered
Certificates--Trust Accounts."
"Special Tax Counsel" means Skadden, Arps, Slate, Meagher & Flom LLP,
counsel to the Transferor or such other counsel reasonably acceptable to
the Trustee.
"Standard & Poor's" means Standard & Poor's, a Division of The
McGraw-Hill Companies, Inc.
"Stated Class D Amount" is defined at page 72 in "Description of the
Offered Certificates--Allocation Percentages."
"Supplement" means any Supplement to the Pooling and Servicing
Agreement.
"Supplemental Accounts" is defined at page 63 in "Description of the
Offered Certificates--Addition of Trust Assets."
"Supplemental Certificate" is defined at page 60 in "Description of
the Offered Certificates--Exchanges."
"Suppress File" is defined at page 38 in "Fingerhut Corporation."
"Tax Certificate" is defined at page B-1-3 in "Annex II."
"Tax Opinion" is defined at page 60 in "Description of the Offered
Certificates--Exchanges."
"Termination Date" means the ______ Distribution Date.
"Terms and Conditions" is defined at page 55 in "Description of the
Offered Certificates--Book-Entry Registration."
"Transfer Agent and Registrar" is defined at page 55 in "Description
of the Offered Certificates--Definitive Certificates."
"Transfer Date" is defined at page 74 in "Description of the Offered
Certificates--Application of Collections--Allocations."
"Transferor" means Metris Receivables, Inc., a Delaware corporation.
"Transferor Finance Charge Collections" is defined at page 21 in
"Prospectus Summary--Coverage of Interest Shortfalls from Transferor
Finance Charge Collections."
"Transferor Interest" means, on any date of determination, the
aggregate amount of Principal Receivables at the end of the day immediately
prior to such date of determination plus all amounts on deposit in the
Excess Funding Account (but not including investment earnings on such
amounts), minus the aggregate invested amount of all Series at the end of
such day.
"Transferor Percentage" is defined at page 70 in "Description of the
Offered Certificates--Allocation Percentages."
"Transferor Retained Class" means any class of investor certificates
which is retained by the Transferor.
"Transferor Retained Finance Charge Collections" is defined at page
78 in "Description of the Offered Certificates--Application of
Collections--Payment of Fees, Interest and Other Items."
"Trigger Event" is defined at page 85 in "Description of the Offered
Certificates--Pay Out Events."
"Trust" means the Metris Master Trust.
"Trust Accounts" is defined at page 66 in "Description of the Offered
Certificates--Trust Accounts."
"Trust Portfolio" is defined at page 45 in "The Receivables."
"Trustee" means The Bank of New York (Delaware), a Delaware banking
corporation.
"Trustee's Corporate Trust Office" means the Trustee's office located
at White Clay Center, Route 273, Newark, Delaware 19711.
"UCC" means the Uniform Commercial Code as amended from time to time
as in effect in the applicable jurisdiction.
"Underwriters" is defined at page 107 in "Underwriting."
"Underwriting Agreement" means the underwriting agreement dated
__________, 1997 among the Transferor and the Underwriters.
"U.S. Person" is defined at page B-1-3 in "Annex II."
"Variable Funding Certificates" means a series of Certificates, in
one or more classes, issued pursuant to the Pooling and Servicing Agreement
and the Variable Funding Series Supplement relating thereto.
"Variable Funding Series Supplement" means the Series 1995-1
Supplement dated as of May 26, 1995 among the Transferor, the Servicer and
the Trustee relating to the Variable Funding Certificates.
"Weighted Average Invested Amount" means with respect to any Monthly
Period the weighted average Adjusted Invested Amount based on the Adjusted
Invested Amount outstanding on each business day after giving effect to all
transactions on such business day from but excluding the Default
Recognition Date related to the preceding Monthly Period to and including
the Default Recognition Date with respect to such Monthly Period.
"Weighted Average Principal Receivables" means with respect to any
Monthly Period the weighted average sum of the total amount of Principal
Receivables and the amount on deposit in the Excess Funding Account on each
business day after giving effect to all transactions on such business day
from but excluding the Default Recognition Date related to the preceding
Monthly Period to and including the Default Recognition Date with respect
to such Monthly Period.
ANNEX I
OTHER SERIES
The table below sets forth the principal characteristics of the
Series 1995-1 Variable Funding Certificates, the Series 1996-1 Asset Backed
Certificates and the Series 1997-1 Asset Backed Certificates, the only
Series heretofore issued by the Trust. For more specific information with
respect to any Series, any prospective investor should contact the Servicer
at (612) 525-5094. The Servicer will provide, without charge, to any
prospective purchaser of the Certificates, a copy of the disclosure
documents for any previous publicly issued Series.
SERIES 1995-1
CLASS A CERTIFICATES
Invested Amount as of April 23, 1997......... $692,800,000
Expected Invested Amount as of Closing Date
(after application
of proceeds)................................. $24,800,000
Maximum Permitted Invested Amount............ $824,800,000
Certificate Rate............................. A1/P1 Commercial Paper/LIBOR +
0.625% Blended
Commencement of Amortization Period.......... May 1999 (extendible)
Annual Servicing Fee Percentage.............. 2.00%
Enhancement.................................. Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ May 30, 2003 (extendible)
Series Issuance Date......................... May 1995 (Maximum Permitted
Invested Amount increased on
September 16, 1996)
CLASS B CERTIFICATES
Initial Invested Amount...................... $129,612,000
Certificate Rate............................. LIBOR + 0.625%
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
CLASS C CERTIFICATES
Initial Invested Amount...................... $70,698,000
Certificate Rate............................. LIBOR + 0.750%
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class D
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
CLASS D CERTIFICATE
Invested Amount as of April 23, 1997......... $133,454,000
Expected Invested Amount as of Closing Date
(after reduction
of Class A Invested Amount).................. $33,638,000
Maximum Permitted Invested Amount............ $153,178,000
Certificate Rate............................. None
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
SERIES 1996-1
CLASS A CERTIFICATES
Initial Invested Amount...................... $518,000,000
Certificate Rate............................. 6.45%
Commencement of Amortization Period.......... First day of August 1998
Monthly Period
Annual Servicing Fee Percentage.............. 2.00%
Enhancement.................................. Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ February 2002 Distribution Date
Series Issuance Date......................... April 23, 1996
CLASS B CERTIFICATES
Initial Invested Amount...................... $87,500,000
Certificate Rate............................. 6.80%
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class A
Certificates and Class D
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
CLASS C CERTIFICATES
Initial Invested Amount...................... $50,000,000
Certificate Rate............................. LIBOR + 0.650%
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class D
Certificates and Class C
Reserve Account
Scheduled Series Termination Date............ Same as above for Class A
Certificates
CLASS D CERTIFICATE
Invested Amount.............................. $44,500,000
Certificate Rate............................. None
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
SERIES 1997-1
CLASS A CERTIFICATES
Initial Invested Amount...................... $616,250,000
Certificate Rate............................. 6.87%
Commencement of Accumulation Period.......... Last day of March 2001 Monthly
Period or later date as
determined in the Agreement
Annual Servicing Fee Percentage.............. 2.00%
Enhancement.................................. Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ October 2005 Distribution Date
Series Issuance Date......................... May 8, 1997
CLASS B CERTIFICATES
Initial Invested Amount...................... $106,250,000
Certificate Rate............................. 7.11%
Commencement of Accumulation Period.......... Last day of March 2001 Monthly
Period or later date as
determined in the Agreement
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date............ Same as above for Class A
Certificates
CLASS C CERTIFICATES
Initial Invested Amount...................... $72,250,000
Certificate Rate............................. Libor + 0.850%
Commencement of Accumulation Period.......... Last day of March 2001 Monthly
Period or later date as
determined in the Agreement
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificates
Enhancement.................................. Subordination of Class D
Certificates and Class C
Reserve Account
Scheduled Series Termination Date............ Same as above for Class A
Certificates
CLASS D CERTIFICATE
Invested Amount.............................. $55,250,000
Certificate Rate............................. None
Annual Servicing Fee Percentage.............. Same as above for Class A
Certificate
Schedule Series Termination Date............. Same as above for Class A
Certificate
ANNEX II
GLOBAL CLEARANCE SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Metris
Master Trust Asset Backed Trust Certificates, Series 1997-2 (the "Global
Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), Cedel or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures
applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result, Cedel
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional Eurobonds,
except that there will be not temporary global security and no "look-up" or
restricted period. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global
security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in the same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to
conventional credit card certificate issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in
same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC
Participant to the accounts of a Cedel Participant or a Euroclear
Participant, the purchaser will send instructions to Cedel or Euroclear
through a Cedel Participant or Euroclear Participant at least one business
day prior to settlement. Cedel or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the
settlement date, on the basis of actual days elapsed and a 360 day year.
Payment will then be made by the respective Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance
with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next
day (European time) and the cash debit will be back-valued to, and the
interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedel or Euroclear cash debit will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing
lines of credit, as they would for any settlement occurring within Cedel or
Euroclear. Under this approach, they may take on credit exposure to Cedel
or Euroclear until the Global Securities are credited to their accounts one
day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not
to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities
were credited to their accounts. However, interest on the Global Securities
would accrue from the value date. Therefore, in many cases the investment
income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Cedel Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available
to the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between
two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in
which Global Securities are to be transferred by the respective clearing
system, through the respective Depositary, to a DTC Participant. The seller
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. In
these cases, Cedel or Euroclear will instruct their respective Depositary, as
appropriate, to deliver the bonds to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the
settlement date on the basis of actual days elapsed and a 360 day year. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds
in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Cedel Participant or Euroclear
Participant have a line of credit with its respective clearing system and
elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended
value date (i.e., the trade fails), receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant
is at least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30 percent U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 864(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10 percent shareholder (within the meaning
of Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form
W-8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the Certificate Owner or such Certificate Owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
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, such
Certificate Owner's agent, files by submitting the appropriate form to the
person through whom it holds (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8 and Form
1001 are effective for three calendar years and Form 4224 is effective for
one calendar year.
The term "U.S. Person" 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 political subdivision thereof or (iii) an estate
the income of which is includible in gross income for United States tax
purposes, regardless of its source or, for trusts whose taxable years begin
after December 31, 1996, a trust whose administration is subject to the
primary supervision of a United States court and which has one or more
United States fiduciaries who have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of
the Global Securities.
==================================== ====================================
NO DEALER, SALESMAN OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE Metris Master Trust
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN $___________ ___%
CONNECTION WITH THE OFFER MADE BY Asset-Backed
THIS PROSPECTUS AND, IF GIVEN OR Certificates,
MADE, SUCH INFORMATION OR Series 1997-2, Class B
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY
THE TRANSFEROR OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF METRIS COMPANIES
INC., DIRECT MERCHANTS CREDIT CARD $___________ ___%
BANK, NATIONAL ASSOCIATION, METRIS Asset-Backed
RECEIVABLES, INC. OR THE Certificates,
RECEIVABLES SINCE THE DATE HEREOF. Series 1997-2, Class B
THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE
IN ANY STATE IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS Metris
Receivables, Inc.
Page Transferor
Reports to Certificateholders.....3
Available Information.............3
Incorporation of Certain
Documents By Reference..........3 Direct Merchants Credit
Other Information.................4 Card Bank, National
Prospectus Summary................5 Association
Risk Factors.....................29 Servicer
The Trust........................37
Metris Companies Inc.............37
The Transferor...................37
Direct Merchants Credit
Card Bank, National
Association...................37 PROSPECTUS
Fingerhut Corporation............38
Direct Merchants Bank's
Credit Card Activities.........38 Underwriters of the Class A
The Receivables..................45 Certificates
Maturity Considerations..........48
Pool Factor and Related
Information...................50
Use of Proceeds..................50 Bear, Stearns & Co. Inc.
Description of the Offered
Certificates..................50
Description of the Purchase
Agreements....................91
Certain Legal Aspects of the
Receivables..................95 Underwriter of the Class B
Certain Federal Income Tax Certificates
Consequences..................99
Certain State Tax Consequences..105 Bear, Stearns & Co., Inc.
Employee Benefit Plan
Considerations...............105
Underwriting....................107 , 1997
Legal Matters...................108
Glossary of Terms...............109
===================================== ===================================
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Registration Fee............................................$303.04
Printing and Engraving............................................*
Trustee's Fees....................................................*
Legal Fees and Expenses...........................................*
Blue Sky Fees and Expenses........................................*
Accountants' Fees and Expenses....................................*
Rating Agency Fees................................................*
Miscellaneous Fees................................................*
Total.................................................$______
- ----------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's certificate of incorporation and by-laws provide for
the indemnification of the directors, officers, employees, and agents of
the Registrant to the full extent that may be permitted by Delaware law
from time to time. Certain provisions of the Registrant's certificate of
incorporation protect the Registrant's directors against personal liability
for monetary damages resulting from breaches of their fiduciary duty of
care; however, the Registrant's directors remain liable for breaches of
their duty of loyalty to the Registrant, as well as for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, transactions from which a director derives improper
personal benefit and liability under section 174 of the Delaware General
Corporation Law, which makes directors personally liable for unlawful
dividends or unlawful stock repurchases or redemptions in certain
circumstances and expressly sets forth a negligence standard with respect
to such liability.
Under Section 145 of the Delaware General Corporation Law, directors,
officers, employees, and other individuals may be indemnified against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative, or investigative (other than a
"derivative action" by or in the right of the corporation) if they acted in
good faith and in a manner they reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe their conduct was
unlawful. A similar standard of care is applicable in the case of a
derivative action, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with defense or
settlement of such an action and Delaware law requires court approval
before there can be any indemnification of expenses where the person
seeking indemnification has been found liable to the corporation.
The Registrant's parent corporation currently maintains a policy
insuring, subject to certain exceptions, its directors and officers and the
directors and officers of its subsidiaries against liabilities which may be
incurred by such persons acting in such capacities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of
Incorporation of Metris Receivables, Inc.
(incorporated herein by reference to
Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc.
(incorporated herein by reference to
Registration Statement No. 33-99514).
4(a) --Pooling and Servicing Agreement (incorporated
herein by reference to Registration Statement
No. 33-99514).
4(b) --Pooling and Servicing Agreement Amendment No.
1 dated as of June 10, 1996, among the
Transferor, the Servicer and the Trustee
(incorporated herein by reference to
Registration Statement No. 333-23045).
4(c) --Pooling and Servicing Agreement Amendment No.
2 dated as of September 16, 1996, among the
Transferor, the Servicer and the Trustee
(incorporated herein by reference to
Registration Statement No. 333-23045).
4(d) --Form of Series 1997-2 Supplement.*
4(e) --Amended and Restated Bank Purchase Agreement
dated as of May 26, 1995 between FCI and
Direct Merchants Bank (incorporated
herein by reference to Registration
Statement No. 33-99514).
4(f) --Assignment and Assumption Agreement dated
as of September 16, 1996 among FCI, as
assignor, Metris, as assignee, and
Direct Merchants Bank. (incorporated
herein by reference to Registration
Statement No. 333-23045).
4(g) --Receivables Purchase Agreement dated as
of May 26, 1995 between FCI and the
Transferor (incorporated herein by
reference to Registration Statement No.
33-99514).
4(h) --Assignment and Assumption Agreement dated as
of September 16, 1996 among FCI, as assignor,
Metris, as assignee, and Metris Receivables,
Inc. (incorporated herein by reference to
Registration Statement No. 333-23045).
5 --Opinion of Skadden, Arps, Slate, Meagher &
Flom LLP with respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher &
Flom LLP with respect to tax matters.*
24 --Consent of Skadden, Arps, Slate, Meagher &
Flom LLP (Contained in Exhibits 5 and 8).*
25 --Power of Attorney (contained on the signature
page).
- ----------
* To be filed by amendment.
b. Financial Statements
Inapplicable
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 14 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(e) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Trust's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the state of Minnesota, city of
Minnetonka, on September 26, 1997.
METRIS RECEIVABLES, INC.
By:
/s/ Robert W. Oberrender
--------------------------------------
Robert W. Oberrender
President
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint both Robert W. Oberrender and Michael P.
Sherman his or her true and lawful attorney-in-fact and agent, each with
full power of substitution, for him or her and on his or her behalf to
sign, execute and file this Registration Statement and any or all
amendments (including, without limitation, post-effective amendments and
any amendment or amendments increasing the amount of securities for which
registration is being sought) to this Registration Statement, with all
exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the
same as fully to all intents and purposes as he or she might or could do if
personally present, hereby ratifying and confirming all that such
attorney-in-fact and agents may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following
persons in the capacities indicated on September 26, 1997.
SIGNATURE TITLE
/s/ Robert W. Oberrender President and Director (Principal Executive
- -------------------------- Officer and Principal
Robert W. Oberrender Financial Officer)
/s/ Thomas C. Vogt Vice President and (Principal Accounting
- -------------------------- Controller Officer)
Thomas C. Vogt
/s/ Jill B. Barclift Director
- --------------------------
Jill B. Barclift
/s/ Michael P. Sherman Director
- --------------------------
Michael P. Sherman
/s/ Ruth K. Lavelle
- -------------------------- Director
Ruth K. Lavelle
- -------------------------- Director
James B. O'Neill
EXHIBIT INDEX
EXHIBIT NO.
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of Incorporation of
Metris Receivables, Inc. (incorporated herein by
reference to Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc. (incorporated
herein by reference to Registration Statement No.
33-99514).
4(a) --Pooling and Servicing Agreement (incorporated herein by
reference to Registration Statement No. 33-99514).
4(b) --Pooling and Servicing Agreement Amendment No. 1 dated
as of June 10, 1996, among the Transferor, the Servicer
and the Trustee (incorporated herein by reference to
Registration Statement No. 333-23045).
4(c) --Pooling and Servicing Agreement Amendment No. 2 dated
as of September 16, 1996, among the Transferor, the
Servicer and the Trustee (incorporated herein by
reference to Registration Statement No. 333-23045).
4(d) --Form of Series 1997-2 Supplement.*
4(e) --Amended and Restated Bank Purchase Agreement dated as
of May 26, 1995 between FCI and Direct Merchants Bank
(incorporated herein by reference to Registration
Statement No. 33-99514).
4(f) --Assignment and Assumption Agreement dated as of September
16, 1996 among FCI, as assignor, Metris, as assignee, and
Direct Merchants Bank (incorporated herein by reference
to Registration Statement No. 333-23045).
4(g) --Receivables Purchase Agreement dated as of May 26, 1995
between FCI and the Transferor (incorporated herein by
reference to Registration Statement No. 33-99514).
4(h) --Assignment and Assumption Agreement dated as of
September 16, 1996 among FCI, as assignor, Metris, as
assignee, and Metris Receivables, Inc. (incorporated
herein by reference to Registration Statement No.
333-23045).
5 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
with respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
with respect to tax matters.*
24 --Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(Contained in Exhibits 5 and 8).*
25 --Power of Attorney (contained on the signature page).
* To be filed by Amendment.
