<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration File No.: 33-336503
PROSPECTUS
METRIS MASTER TRUST
$455,000,000 FLOATING RATE ASSET BACKED CERTIFICATES, SERIES 1997-2, CLASS A
$101,500,000 FLOATING RATE ASSET BACKED CERTIFICATES, SERIES 1997-2, CLASS B
Metris Receivables, Inc. Direct Merchants Credit Card Bank,
Transferor National Association Servicer
Each of the Floating Rate Asset Backed Certificates, Series 1997-2, Class
A (the "Class A Certificates") and each of the Floating Rate 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(Registered Trademark) and VISA(Registered Trademark) 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 107 herein.
(continued on next page)
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 28 HEREIN.
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.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING THE
PUBLIC(1) DISCOUNT TRANSFEROR(1)(2)
- ------------------------ -------------- -------------- ----------------
<S> <C> <C> <C>
Per Class A Certificate 100% 0.300% 99.700%
- ------------------------ -------------- -------------- ----------------
Per Class B Certificate 100% 0.325% 99.675%
- ------------------------ -------------- -------------- ----------------
Total ................... $556,500,000 $1,694,875 $554,805,125
- ------------------------ -------------- -------------- ----------------
</TABLE>
- -----------------------------------------------------------------------------
(1) Plus accrued interest, if any, from November 20, 1997.
(2) Before deduction of expenses estimated to be $840,000.
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 November 20, 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.
CHASE SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY
UBS SECURITIES
UNDERWRITER OF THE CLASS B CERTIFICATES
BEAR, STEARNS & CO. INC.
-------------------
The date of this Prospectus is November 13, 1997.
<PAGE>
(continued from previous page)
Concurrently with the issuance of the Offered Certificates, the Trust will
issue the Floating Rate 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 from November 20, 1997
through December 21, 1997 at the rate of 0.20% per annum above the arithmetic
mean of the London interbank offered quotations for one-month United States
dollar deposits ("LIBOR") as determined by the Trustee on November 18, 1997,
and with respect to each Interest Accrual Period (as defined herein)
thereafter, at a rate of 0.20% per annum above LIBOR as determined by the
Trustee on the related LIBOR Determination Date (as defined herein). Interest
will accrue on the Class B Certificates from November 20, 1997, through
December 21, 1997 at the rate of 0.43% per annum above LIBOR as determined by
the Trustee on November 18, 1997, and with respect to each Interest Accrual
Period thereafter, at the rate of 0.43% per annum above LIBOR as determined
by the Trustee on the related LIBOR Determination Date. Interest with respect
to the Certificates will be paid on December 22, 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 November 2002 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.
2
<PAGE>
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.
3
<PAGE>
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.
4
<PAGE>
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 107 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 .......... $455,000,000 aggregate principal amount of
Class A Certificates and $101,500,000
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 Certificates--Subordination of the
Class B Certificates."
OTHER CERTIFICATES ............ $98,000,000 aggregate principal amount of
Class C Certificates and $45,500,000
aggregate principal amount of Class D
Certificates are being issued concurrently
with the Offered Certificates. 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."
5
<PAGE>
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(Registered
Trademark) and VISA(Registered
Trademark)(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
- ------------
(1)Mastercard(Registered Trademark) and VISA(Registered Trademark) are
federally registered servicemarks of Mastercard International Inc. and VISA
USA Incorporated, respectively.
6
<PAGE>
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.
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.
7
<PAGE>
RECEIVABLES ................... The Receivables consist of amounts owing on
MasterCard(Registered Trademark) credit
cards and VISA(Registered Trademark)
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
8
<PAGE>
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 Certificate
holders' 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'
9
<PAGE>
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 August 31, 1997 was
$2,217,646,448 comprised of $75,192,582 of
Finance Charge Receivables and
$2,142,453,866 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
$700,000,000 (the "Full Invested Amount")
during the Funding Period, remain fixed at
the Full Invested Amount during the
Revolving Period
10
<PAGE>
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 Certificateholders' 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
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<PAGE>
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
12
<PAGE>
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 ...................... Each Class A Certificate represents the
right to receive interest accruing from
the Closing Date at the rate equal to
0.20% per annum above LIBOR (calculated as
described under "Description of the
Offered Certificates--Interest Payments")
as determined on November 18, 1997 for the
period from the Closing Date through
December 21, 1997 and on the related LIBOR
Determination Date for each Interest
Accrual Period thereafter (such rate, as
in effect from time to time, the "Class A
Certificate Rate").
Each Class B Certificate represents the
right to receive interest accruing from
the Closing Date at the rate equal to
0.43% per annum above LIBOR as determined
on November 18, 1997 for the period from
the Closing Date through December 21, 1997
and on the related LIBOR Determination
Date for each Interest Accrual Period
thereafter (such rate, as in effect from
time to time, the "Class B Certificate
Rate").
Interest on the Offered Certificates will be
payable on December 22, 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 (a) with respect to the Class A
Certificates, the product of (i) the
actual number of days in the related
Interest Accrual Period divided by 360,
(ii) the Class A Certificate Rate for such
Interest Accrual Period and (iii) 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
13
<PAGE>
Certificates) and (b) with respect to the
Class B Certificates, the product of (i)
the actual number of days in the related
Interest Accrual Period divided by 360,
(ii) the Class B Certificate Rate for such
Interest Accrual Period and (iii) 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 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 November 30,
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 March 1998
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
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<PAGE>
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 February
1998 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
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 March 1998 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 October 2001 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 September 2002 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
"De-
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<PAGE>
scription 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 October 2001
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
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<PAGE>
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
17
<PAGE>
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."
18
<PAGE>
DISTRIBUTION OF AVAILABLE
SERIES FINANCE CHARGE
COLLECTIONS ALLOCABLE TO
CERTIFICATEHOLDERS ........... 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
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<PAGE>
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."
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<PAGE>
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 360 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, the product of
(a) a fraction the numerator of which is
the actual number of days in such Interest
Accrual Period and the denominator of
which is 360, (b) 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 (c) 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
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<PAGE>
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 exceeds 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
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<PAGE>
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
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-
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
26
<PAGE>
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 Underwriter does not expect that
the Class B Certificates will be held by
100 or more independent investors and,
therefore, does 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.
It is 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.
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<PAGE>
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 36% of the Accounts in the Trust
Portfolio have been originated within the last 12 months and approximately
86% of the Accounts in the Trust Portfolio have been originated within the
last 24 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.
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<PAGE>
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
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<PAGE>
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
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 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
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<PAGE>
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 the Class C Invested Amount and
the Class D Invested Amount have been reduced to zero. 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."
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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. The Class A
Certificate Rate, the Class B Certificate Rate and the Class C Certificate
Rate are each based on LIBOR. If there is a decline in such prime rate or
other designated index which does not coincide with a decline in LIBOR, 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
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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
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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 provisions 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
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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 February 1998
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, funds otherwise payable to the
Transferor may be deposited in 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.
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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, fee-based products and services and extended
service plans to moderate income consumers. Metris' consumer credit products
are primarily unsecured 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, Fingerhut
Customers, and customers of third party credit card issuers. Metris had net
income of $28.0 million for the first 9 months of 1997 and net income of $20
million for the year ended December 31, 1996.
Metris is a Delaware corporation incorporated on August 20, 1996, and is
currently 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., Metris Funding Co. and Metris
Receivables, Inc. Prior to the initial public offering, the Company's
business was operated as a division of FCI.
FCI announced on October 9, 1997, that its Board of Directors had
authorized it to file an application with the IRS for a tax-free distribution
to FCI shareholders of all of FCI's ownership in Metris (the "Spin Off"). The
proposed Spin Off, anticipated in 1998, is subject to the final approval of
FCI's Board of Directors and approval of the IRS, and is subject to market
conditions. There are no assurances that the Spin Off will be consummated.
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.
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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 8 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. These agreements
generally expire in 2003, but may expire earlier upon certain events of
default or bankruptcy. In addition, in the event that a Person or group other
than Fingerhut acquires 25% or more of the voting stock of Metris or Direct
Merchants Bank during the term of one of these agreements, Fingerhut or FCI,
as the case may be, has the right to terminate these agreements. Although the
Transferor believes that, to the extent that it is desirable to do so, Direct
Merchants Bank will be able to extend the term of these agreements, there can
be no assurance that Direct Merchants Bank will be able to do so on terms
favorable to Direct Merchants Bank or at all.
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(Registered
Trademark) credit card and VISA(Registered Trademark) 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 1.8 million credit card accounts and approximately $2.7 billion
in managed loans; Fingerhut Customers represented approximately 43% of the
accounts and approximately 44% of the managed loans.
GROWING CREDIT CARD PORTFOLIO BY PORTFOLIO ACQUISITIONS
In September 1997, Direct Merchants Bank acquired an approximately $317
million credit card portfolio consisting of approximately 260,000 accounts
from Key Bank USA, National Association, of which approximately 197,000
accounts are active accounts. In addition, in October 1997 Direct Merchants
Bank acquired an approximately $405 million credit card portfolio consisting
of approximately 460,000 accounts from Mercantile Bank National Association,
of which approximately 240,000 accounts are active accounts. None of these
accounts have been designated as Accounts and while the Transferor does not
in the near future intend to add such accounts to the Accounts designated to
have their Receivables transferred to the Trust, such a determination may be
made in the future.
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Direct Merchants Bank also acquired in the first quarter of 1997 a credit
card portfolio from a California based credit union which, as of August 31,
1997, had approximately 18,500 accounts with balances of approximately $36
million. Such accounts have been designated as Supplemental Accounts the
Receivables of which have been transferred to the Trust.
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, substantially all of 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(Registered Trademark) 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(Registered Trademark) 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 in the Fingerhut Database. 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.
Direct Merchants Bank has developed a proprietary modeling system that
uses publicly available credit bureau information and internal information
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 generated from the Proprietary Modeling
System are also checked against the Suppress File. Direct Merchants Bank
currently does not solicit External Prospects
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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's pricing strategy is to price for the risk
associated with its credit card customer. 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 over 50 different pricing
structures on its credit card products, with a range of annual fees and
variable annual percentage rates based on floating rates of interest,
primarily the prime rate. After a credit card 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, as a risk
management tool, 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). The Adaptive Control System uses a
number of data elements in determining credit lines, authorizations, and
collections strategies, including the customer's FICO score, Fingerhut Score
and other proprietary data elements, each of which is periodically updated
based on the individual's performance.
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.
39
<PAGE>
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.
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.
40
<PAGE>
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 is handled internally primarily through collection
facilities in Tulsa, Oklahoma, and Baltimore, Maryland. The Tulsa facility
employs approximately 300 collection personnel, and the Baltimore facility
employs approximately 300 collection personnel with the ability to expand to
approximately 800 employees. Through these facilities, customers with
delinquent accounts are called as early as the first day of delinquency and
generally within the first week of delinquency, based upon the customer's
behavior score and prior credit history. 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.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth the delinquency and the loss experience for
each of the periods shown for the portfolio of unsecured credit card accounts
serviced by Direct Merchants Bank (the "Direct Merchants Bank Portfolio").
There can be no assurance that the delinquency and loss experience for the
41
<PAGE>
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.
DELINQUENCY EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
AUGUST 31, 1997 JUNE 30, 1997 MARCH 31, 1997
------------------------ ------------------------ ------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(1) $2,311,411 100.0% $2,124,821 100.0% $1,816,653 100.0%
Receivables
Delinquent:
30-59 Days ..... $ 51,423 2.2% $ 41,650 2.0% $ 37,466 2.1%
60-89 Days ..... 34,918 1.5 27,400 1.3 24,820 1.4
90 or More
Days............ 62,845 2.7 55,794 2.6 46,418 2.6
----------- ----------- ----------- ----------- ----------- -----------
Total ......... $ 149,186 6.4% $ 124,844 5.9% $ 108,704 6.0%
=========== =========== =========== =========== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 SEPTEMBER 30, 1996
------------------------ ------------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Receivables
Outstanding(1) $1,615,940 100.0% $1,276,687 100.0%
Receivables
Delinquent:
30-59 Days ..... $ 32,114 2.0% $ 26,800 2.1%
60-89 Days ..... 20,398 1.2 15,782 1.3
90 or More
Days............ 36,857 2.3 23,195 1.8
----------- ----------- ----------- -----------
Total ......... $ 89,369 5.5% $ 65,777 5.2%
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
JUNE 30, 1996 MARCH 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------ ------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(1) $1,068,018 100.0% $676,974 100.0% $543,619 100.0%
Receivables
Delinquent:
30-59 Days ..... $ 14,882 1.4% $ 9,677 1.4% $ 7,546 1.4%
60-89 Days ..... 7,332 0.7 5,879 0.9 4,952 0.9
90 or More
Days............ 13,750 1.3 10,046 1.5 8,996 1.7
----------- ----------- ----------- ----------- ----------- -----------
Total ......... $ 35,964 3.4% $ 25,602 3.8% $ 21,494 4.0%
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, 1995 JUNE 30, 1995
------------------------ ------------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Receivables
Outstanding(1) $298,920 100.0% $190,069 100.0%
Receivables
Delinquent:
30-59 Days ..... $ 5,142 1.7% $ 320 0.2%
60-89 Days ..... 3,039 1.0 1 0.0
90 or More
Days............ 2,288 0.8 -- --
----------- ----------- ----------- -----------
Total ......... $ 10,469 3.5% $ 321 0.2%
=========== =========== =========== ===========
</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 FOR THE DIRECT MERCHANTS BANK PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS QUARTER ENDED QUARTER ENDED
ENDED ---------------------- YEAR ENDED ------------------------------------------
AUG. 31, JUNE 30, MARCH 31, DEC. 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1997 1997 1997 1996 1996 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(1) $2,233,184 $1,939,623 $1,704,489 $1,017,236 $1,401,552 $1,185,070 $872,529 $609,792
Total Gross
Charge-Offs (2) $ 33,379 $ 45,522 $ 36,353 $ 64,453 $ 26,445 $ 17,042 $ 12,020 $ 8,946
Total Gross
Charge-Offs as
a Percentage of
Average
Receivables
Outstanding .... 1.49% 2.35% 2.13% 6.34% 1.89% 1.44% 1.38% 1.47%
(Annualized) .. 8.80% 9.41% 8.65% 6.34% 7.51% 5.72% 5.54% 5.90%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS QUARTER ENDED
ENDED -----------------------------
DEC. 31, DEC. 31, SEPT. 30, JUNE 30,
1995 1995 1995 1995
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Average
receivables
outstanding(1) $242,694 $394,610 $248,788 $84,685
Total Gross
Charge-Offs (2) $ 4,046 $ 3,206 $ 840 --
Total Gross
Charge-Offs as
a Percentage of
Average
Receivables
Outstanding .... 1.67% 0.81% 0.34% --
(Annualized) .. 2.21% 3.22% 1.34% --
</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.
42
<PAGE>
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 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.
YIELD EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWO MONTHS QUARTER ENDED YEAR QUARTER ENDED
ENDED --------------------- ENDED ------------------------------------------
AUG. 31, JUNE 30, MARCH 31, DEC. 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1997 1997 1997 1996 1996 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding
(1).......... $2,233,184 $1,939,623 $1,704,489 $1,017,236 $1,401,552 $1,185,070 $872,529 $609,792
Total Finance
Charges
and Fees
Billed
(2)(3)....... $ 87,686 $ 124,378 $ 107,395 $ 269,298 $ 93,506 $ 75,252 $ 58,727 $ 41,813
Average
Revenue
Yield
(Annualized) 23.12% 25.72% 25.55% 26.47% 26.54% 25.26% 27.07% 27.58%
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR QUARTER ENDED
ENDED -------------------------------
DEC. 31, DEC. 31, SEPT. 30, JUNE 30,
1995 1995 1995 1995
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
Average
Receivables
Outstanding
(1).......... $242,694 $394,610 $248,788 $84,685
Total Finance
Charges
and Fees
Billed
(2)(3)....... $ 49,021 $ 23,071 $ 21,671 $ 4,279
Average
Revenue
Yield
(Annualized) 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.
43
<PAGE>
THE RECEIVABLES
The Accounts had, as of August 31, 1997, an average Principal Receivable
balance of $1,171 and an average credit limit of $2,501. The percentage of
the total Receivable balance to the aggregate total credit limit, as of
August 31, 1997, was 48.4 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 August 31, 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
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
CREDIT LIMIT RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ------------------------ ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
$ 0.00 - $ 500.00..... 163,835 8.9% $ 34,703,308.50 1.6%
$ 500.01 - $1,000.00 .. 191,868 10.5 115,530,083.10 5.2
$1,000.01 - $1,500.00 ... 262,217 14.3 232,620,266.94 10.5
$1,500.01 - $3,000.00 .. 647,350 35.4 874,980,940.01 39.5
$3,000.01 - $5,000.00 .. 561,556 30.7 952,363,749.07 42.9
$5,000.01 - $10,000.00 .. 3,364 0.2 7,426,358.41 0.3
$10,000.01 & Greater ... 17 0.0 21,741.58 0.0
----------- ------------ ----------------- -------------
Total ................. 1,830,207 100.0% $2,217,646,447.61 100.0%
=========== ============ ================= =============
</TABLE>
COMPOSITION BY PERIOD OF DELINQUENCY
TRUST PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
PERIOD OF DELINQUENCY OF TOTAL OF TOTAL
(DAYS CONTRACTUALLY NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
DELINQUENT) ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ----------------------------- ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Current 1,657,543 90.6% $1,919,195,204.54 86.5%
1 - 29 Days................. 86,611 4.7 147,201,976.86 6.6
30 - 59 Days ................ 30,996 1.7 52,453,522.33 2.4
60 - 89 Days ................ 20,121 1.1 35,012,685.08 1.6
90 - 119 Days................ 14,109 0.8 25,635,721.08 1.1
120 - 149 Days ............... 10,774 0.6 19,189,010.78 0.9
150 Days or More ............. 10,053 0.5 18,958,326.94 0.9
----------- ------------ ----------------- -------------
Total ...................... 1,830,207 100.0% $2,217,646,447.61 100.0%
=========== ============ ================= =============
</TABLE>
44
<PAGE>
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT BALANCE RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ---------------------- ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Credit Balance ........ 16,552 0.9% $ (925,865.56) 0.0%
No Balance ............ 469,078 25.6 0.00 0.0
$ 0.01 - $ 500.00 .. 243,619 13.3 53,784,354.32 2.4
$ 500.01 - $1,000.00 . 234,921 12.9 176,529,632.10 8.0
$1,000.01 - $1,500.00 . 214,436 11.7 270,744,748.05 12.2
$1,500.01 - $3,000.00 . 465,391 25.4 993,843,698.32 44.8
$3,000.01 - $5,000.00 . 176,759 9.7 674,252,474.36 30.4
$5,000.01 & Greater .. 9,451 0.5 49,417,406.02 2.2
----------- ------------ ----------------- -------------
Total ............... 1,830,207 100.0% $2,217,646,447.61 100.0%
=========== ============ ================= =============
</TABLE>
COMPOSITION BY GEOGRAPHIC DISTRIBUTION
TRUST PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
LOCATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------- ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Alabama .............. 36,328 2.0% $ 41,243,888.01 1.9%
Alaska ............... 3,171 0.2 4,445,437.64 0.2
Arizona .............. 22,606 1.2 29,370,132.73 1.3
Arkansas ............. 19,323 1.1 23,644,801.13 1.1
California ........... 210,080 11.5 282,182,399.17 12.7
Colorado ............. 26,415 1.4 34,379,020.33 1.6
Connecticut .......... 20,855 1.1 25,021,140.06 1.1
Delaware ............. 4,660 0.3 5,711,367.12 0.3
District of Columbia 4,552 0.2 5,352,339.05 0.2
Florida .............. 140,665 7.7 183,949,338.91 8.3
Georgia .............. 50,304 2.7 57,457,035.83 2.6
Hawaii ............... 6,354 0.3 8,244,149.11 0.4
Idaho ................ 8,520 0.5 9,503,515.88 0.4
Illinois ............. 65,916 3.6 78,773,507.48 3.6
Indiana .............. 47,813 2.6 56,304,594.12 2.5
Iowa ................. 17,720 1.0 19,331,744.97 0.9
Kansas ............... 17,592 1.0 21,842,340.50 1.0
Kentucky ............. 31,298 1.7 33,688,733.84 1.5
Louisiana ............ 29,261 1.6 34,951,538.91 1.6
Maine ................ 9,015 0.5 10,047,812.12 0.5
Maryland ............. 34,259 1.9 39,936,608.91 1.8
Massachusetts ........ 28,731 1.6 33,715,635.65 1.5
Michigan ............. 56,786 3.1 66,771,466.43 3.0
Minnesota ............ 27,220 1.5 29,634,560.51 1.3
Mississippi .......... 22,103 1.2 23,870,379.77 1.1
Missouri ............. 36,833 2.0 44,227,248.40 2.0
Montana .............. 6,352 0.3 7,349,964.97 0.3
Nebraska ............. 8,277 0.5 9,625,191.72 0.4
Nevada ............... 17,349 0.9 24,898,175.78 1.1
New Hampshire ........ 6,967 0.4 8,080,387.73 0.4
45
<PAGE>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
LOCATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------- ----------- ------------ ----------------- -------------
New Jersey ........... 44,482 2.4% $ 53,405,011.14 2.4%
New Mexico ........... 10,086 0.6 12,452,015.56 0.6
New York ............. 136,151 7.4 169,528,284.48 7.6
North Carolina ....... 54,803 3.0 57,282,619.40 2.6
North Dakota ......... 4,169 0.2 4,352,228.93 0.2
Ohio ................. 78,414 4.3 94,732,596.78 4.3
Oklahoma ............. 27,039 1.5 33,688,874.91 1.5
Oregon ............... 18,602 1.0 23,488,334.76 1.0
Pennsylvania ......... 76,151 4.2 84,702,090.70 3.8
Rhode Island ......... 7,163 0.4 8,466,103.80 0.4
South Carolina ....... 22,277 1.2 23,227,189.57 1.0
South Dakota ......... 4,455 0.2 5,025,790.94 0.2
Tennessee ............ 41,580 2.3 50,827,019.34 2.3
Texas ................ 135,676 7.4 170,395,271.64 7.7
Utah ................. 8,957 0.5 10,101,093.01 0.5
Vermont .............. 3,979 0.2 4,601,979.52 0.2
Virginia ............. 49,511 2.7 56,501,433.27 2.5
Washington ........... 35,704 2.0 43,284,448.58 2.0
West Virginia ........ 16,815 0.9 17,330,967.46 0.8
Wisconsin ............ 31,279 1.7 33,407,386.36 1.5
Wyoming .............. 3,758 0.2 4,770,163.86 0.2
Other ................ 1,831 0.1 2,521,086.74 0.1
----------- ------------ ----------------- -------------
Total .............. 1,830,207 100.0% $2,217,646,447.61 100.0%
=========== ============ ================= =============
</TABLE>
COMPOSITION BY ACCOUNT AGE
TRUST PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT AGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ---------------------------- ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Not more than 6 Months ..... 194,059 10.6% $ 203,562,498.67 9.2%
Over 6 Months to 12 Months . 464,026 25.4 504,058,732.83 22.7
Over 12 Months to 24 Months 919,271 50.2 1,092,393,903.86 49.3
Over 24 Months .............. 252,851 13.8 417,631,312.25 18.8
----------- ------------ ----------------- -------------
Total...................... 1,830,207 100.0% $2,217,646,447.61 100.0%
=========== ============ ================= =============
</TABLE>
46
<PAGE>
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 November 2002 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 (up to the Class A
Invested Amount) 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, or (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.
47
<PAGE>
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 (i) the aggregate amount of
Available Series Finance Charge Collections for such Monthly Period (not
including the amounts on deposit in the Payment Reserve Account applied as
Available Series Finance Charge Collections 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), (ii) the Principal Funding
Account Investment Proceeds, (iii) investment earnings on amounts on deposit
in the Pre-Funding Account and (iv) 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 in the Direct Merchants
Bank Portfolio 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>
TWO MONTHS
ENDED
AUG. 31
1997
------
<S> <C>
Highest Month ....... 7.0%
Lowest Month ........ 6.6%
Monthly Average (1) 6.8%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1997 1997 1996 1996 1996 1996 1995 1995 1995
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Highest Month ....... 7.2% 7.6% 7.5% 8.4% 8.8% 8.5% 8.7% 12.7% 64.7%
Lowest Month ........ 6.8% 6.6% 6.8% 6.4% 8.0% 8.0% 7.9% 8.5% 19.7%
Monthly Average (1) 7.0% 7.1% 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
48
<PAGE>
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 $553,965,125, 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.
49
<PAGE>
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 may be 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
50
<PAGE>
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.
51
<PAGE>
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
52
<PAGE>
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
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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 December 22,
1997, and on each Distribution Date thereafter to Certificateholders of each
Class in an amount equal to the product of (i) the actual number of days in
the related Interest Accrual Period divided by 360, (ii) the applicable
Certificate Rate and (iii) the applicable outstanding principal balance as of
the preceding Record Date (or in the case of the first Distribution Date, an
amount equal to the product of (a) the initial Invested Amount of such Class,
(b) 32 divided by 360 and (c) the applicable Certificate Rate determined on
November 18, 1997). 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.
The Class A Certificates will bear interest at the rate equal to 0.20% per
annum above LIBOR determined as set forth below for the period from the
Closing Date through December 21, 1997 and each Interest Accrual Period
thereafter. The Class B Certificates will bear interest at the rate equal to
0.43% per annum above LIBOR determined as set forth below for the period from
the Closing Date through December 21, 1997 and each Interest Accrual Period
thereafter.
The Trustee will determine LIBOR for the period from the Closing Date
through December 21, 1997 on November 18, 1997 and for each Interest Accrual
Period thereafter on the second business day prior to the Distribution Date
on which such Interest Accrual Period commences (each, a "LIBOR Determination
Date"). For purposes of calculating LIBOR, a business day is any day on which
banks in London and New York are open for the transaction of international
business.
"LIBOR" means, as of any LIBOR Determination Date, the rate for deposits
in United States dollars for one month (commencing on the first day of the
relevant interest period) which appears on Telerate Page 3750 as of 11:00
a.m., London time, on the LIBOR Determination Date for such interest period.
If such rate does not appear on Telerate Page 3750, the rate for such LIBOR
Determination Date will be determined on the basis of the rates at which
deposits in the United States dollars are offered by the Reference Banks at
approximately 11:00 a.m., London time, on such LIBOR Determination Date to
prime banks in the London interbank market for a period equal to one month
(commencing on the first day of the relevant interest period). The Trustee
will request the principal London office of each such bank to provide a
quotation of its rate. If at least two such quotations are provided, the rate
for such LIBOR Determination Date will be the arithmetic mean of the
quotations. If fewer than two quotations are provided as requested, the rate
for such LIBOR Determination Date will be the arithmetic mean of
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the rates quoted by four major banks in New York City, selected by the
Trustee, at approximately 11:00 a.m., New York City time, on the LIBOR
Determination Date for loans in United States dollars to leading European
banks for a period equal to one month (commencing on the first day of the
relevant interest period).
The Class A Certificate Rate and the Class B Certificate Rate applicable
to the then current and immediately preceding Interest Accrual Period may be
obtained by telephoning the Trustee at its Corporate Trust Office at (302)
451-2500.
Interest on the Certificates will be calculated on the basis of the actual
number of days in the Interest Accrual Period and a 360 day year.
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
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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
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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 with
respect to the Receivables. Prior to such sale and contribution and pursuant
to the Bank Purchase
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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.
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
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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
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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 and (b) the Retained Interest (as defined in the
Pooling and Servicing Agreement) equals or exceeds the Minimum Retained
Interest.
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
Variable Funding Certificates
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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 the applicable Credit Card Originator 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
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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
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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 intends to designate Supplemental Accounts to be included
as Accounts on or about November 28, 1997. The aggregate amount of the
Receivables to be transferred to the Trust in such Supplemental Accounts is
expected to be approximately $70,000,000. The Transferor expects to designate
Supplemental Accounts to be included as Accounts in subsequent periods,
including December 1997 and the first quarter of 1998.
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
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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
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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,
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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
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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
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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 March 1998 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,
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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 Finance 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) the product of (x) 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, (y) the weighted average of the Class A
Certificate Rate, the Class B Certificate Rate and the Class C Certificate
Rate (in effect for such Interest Accrual Period) and (z) 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
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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
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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 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 clauses (c) and (d), provided,
however, that the Class D Invested Amount may
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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
6.952 percent of the ABC Adjusted Invested Amount; provided, however, that in
no event shall the Stated Class D Amount be less than $19,635,000 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 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
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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
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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;
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(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"; provided, that
with respect to the Closing Date the amount of the initial deposit by the
Transferor to the Interest Funding Account will also constitute 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
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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;
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(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 the product of (i) the Class A Certificate Rate for the related
Interest Accrual Period, (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 and (iii) a fraction the numerator of which is the
actual number of days in such Interest Accrual Period and the denominator of
which is 360.
"Class B Monthly Interest" with respect to any Distribution Date will
equal the product of (i) the Class B Certificate Rate for the related
Interest Accrual Period, (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 and (iii) a
fraction the numerator of which is the actual number of days in such Interest
Accrual Period and the denominator of which is 360.
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"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
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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, $54,541,666.67; 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
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"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."
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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
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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 May
2006 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).
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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
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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.
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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,
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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
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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, (m) the number of new Accounts added to the
Trust during the related Monthly Period and (n) the Class A Certificate Rate,
the Class B Certificate Rate and the Class C Certificate Rate for the related
Interest Accrual 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.
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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.
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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.
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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.
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. 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
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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
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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
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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
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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.
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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.
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
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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
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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 ("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.
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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 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 Treasury 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.
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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
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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. The Taxpayer Relief Act of 1997
reduces the maximum rates on long-term capital gains recognized on capital
assets held by individual taxpayers for more than eighteen months as of the
date of disposition (and would further reduce the maximum rates on such gains
in the year 2001 and thereafter for certain individual taxpayers who meet
specified conditions). Prospective investors should consult their own tax
advisors concerning these tax law changes.
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.
RECENTLY EFFECTIVE LEGISLATION
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, many technical issues are to be addressed in
Treasury Regulations which have not yet been issued. In general, the FASIT
legislation enables 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 is 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
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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 state
thereof (other than a partnership that is not treated as a U.S. Person under
any applicable Treasury Regulations), (iii) an estate the income of which is
includible in gross income for U.S. federal income tax purposes, regardless
of its source or (iv) 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. Notwithstanding the preceding sentence, to the extent provided in
Treasury Regulations, certain trusts in existence on August 20, 1996, and
treated as U.S. Persons under the Code, and applicable Treasury Regulations
thereunder prior to such date, that elect to continue to be treated as U.S.
Persons under the Code or applicable Treasury Regulations thereunder will
also be considered a U.S. Person.
(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
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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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Department of the Treasury issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1998, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
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.
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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.
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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 without limitation 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.
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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:
<TABLE>
<CAPTION>
AMOUNT
OF CLASS A
CLASS A UNDERWRITERS CERTIFICATES
- --------------------------------------------------- --------------
<S> <C>
Bear, Stearns & Co. Inc............................. $ 91,000,000
Chase Securities Inc. .............................. 91,000,000
Donaldson, Lufkin & Jenrette Securities
Corporation........................................ 91,000,000
NationsBanc Montgomery Securities, Inc. ............ 91,000,000
UBS Securities LLC.................................. 91,000,000
--------------
Total............................................. $455,000,000
==============
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
OF CLASS B
CLASS B UNDERWRITER CERTIFICATES
- ------------------------ --------------
<S> <C>
Bear, Stearns & Co.
Inc..................... $101,500,000
==============
</TABLE>
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 0.18% 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 0.15% 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 0.195% 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 0.15% 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
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<PAGE>
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.
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<PAGE>
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 68 in
"Description of the Offered Certificates--Accumulation Period Reserve
Account."
"Accumulation Shortfall" is defined at page 79 in "Description of Offered
Certificates--Application of Collections--Payment of Principal."
"Adaptive Control System" is defined at page 39 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(Registered Trademark) or VISA(Registered Trademark) 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."
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<PAGE>
"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 69 in "Description
of the Offered Certificates--Accumulation Period Reserve Account."
"Available Series Finance Charge Collections" is defined at page 75 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 48 in "Maturity Considerations."
"Cash Equivalents" is defined at page 67 in "Description of the Offered
Certificates--Trust Accounts."
"Cedel" is defined at page 52 in "Description of the Offered
Certificates--Book-Entry Registration."
"Cedel Participants" is defined at page 52 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 Rate" means the Class A Certificate Rate or the Class B
Certificate Rate as applicable.
"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" is defined at page 13 in "Prospectus
Summary--Interest."
"Class A Certificates" means the Floating Rate 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
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<PAGE>
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 $455,000,000.
"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 77 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 49 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 105 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" is defined at page 13 in "Prospectus
Summary--Interest."
"Class B Certificates" means the Floating Rate 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 $101,500,000.
"Class B Invested Amount" is defined at page 71 in "Description of the
Offered Certificates--Allocation Percentages."
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<PAGE>
"Class B Investor Charge-Off" is defined at page 80 in "Description of the
Offered Certificates--Investor Charge-Offs."
"Class B Monthly Interest" is defined at page 77 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 49 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 105 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 LIBOR plus 1.50% 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 $98,000,000.
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<PAGE>
"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 80 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 80 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
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<PAGE>
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 79.
"Controlled Deposit Amount" is defined at page 47 in "Maturity
Considerations."
"Cooperative" is defined at page 52 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.
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"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 53 in "Description of the
Offered Certificates--Definitive Certificates."
"Depositaries" is defined at page 50 in "Description of the Offered
Certificates--Book-Entry Registration."
"Depository" is defined at page 50 in "Description of the Offered
Certificates--General."
"Determination Date" is defined at page 80 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 41 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 December 22, 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 62 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.
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"Euroclear" is defined at page 52 in "Description of the Offered
Certificates--Book-Entry Registration."
"Euroclear Operator" is defined at page 52 in "Description of the Offered
Certificates--Book-Entry Registration."
"Euroclear Participants" is defined at page 52 in "Description of the
Offered Certificates--Book-Entry Registration."
"Euroclear System" is defined at page 52 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 67 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 November 2002 Distribution Date.
"External Prospects" is defined at page 36 in "Metris Companies Inc."
"FASIT" is defined at page 100 in "Certain Federal Income Tax
Consequences--Recent Legislation."
"FASIT Provisions" is defined at page 100 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 38 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 36 in "Metris Companies Inc."
"Fingerhut Database" is defined at page 37 in "Fingerhut Corporation."
"Fingerhut Scores" is defined at page 37 in "Fingerhut Corporation."
"FIRREA" is defined at page 29 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.
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"Foreign Person" is defined at page 101 in "Certain Federal Income Tax
Consequences--Tax Consequences to Foreign Investors."
"Full Invested Amount" is defined at page 10 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 104 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 51 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 57 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 84 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.
"LIBOR" is defined at page 54 in "Description of the Offered
Certificates--Interest Payments."
"LIBOR Determination Date" is defined at page 54 in "Description of the
Offered Certificates--Interest Payments."
"MasterCard International" means MasterCard International Inc.
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"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
November 30, 1997.
"Monthly Servicing Fee" is defined at page 84 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."
"New Regulations" is defined at page 102 in "Certain Federal Income Tax
Consequences--New Withholding Regulations."
"Notice Date" is defined at page 63 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 98 in "Certain Federal Income Tax
Consequences--Taxation of Interest Income to Certificateholders."
"Paired Series" is defined at page 81 in "Description of the Offered
Certificates--Paired Series."
"Participants" is defined at page 50 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."
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"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 103 in "Employee Benefit Plan Considerations."
"Plan Assets Regulation" is defined at page 103 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 supplemented or amended from time to time 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 48 in "Maturity Considerations."
"Pre-Funded Amount" is defined at page 14 in "Prospectus Summary--Funding
Period."
"Pre-Funding Account" is defined at page 14 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 47 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."
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"Proprietary Modeling System" is defined at page 38 in "Direct Merchants
Bank's Credit Card Activities--New Account Underwriting--Credit Scoring."
"Proprietary Score" is defined at page 38 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 92 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 72 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.
"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."
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"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 95 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 86 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 86 in "Description of the Offered
Certificates--Servicer Default."
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"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.
"Spin Off" is defined at page 36 in "Metris Companies Inc."
"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 37 in "Fingerhut Corporation."
"Tax Certificate" is defined at page B-1-3 in "Annex II."
"Tax Opinion" is defined at page 59 in "Description of the Offered
Certificates--Exchanges."
"Termination Date" means the May 2006 Distribution Date.
"Terms and Conditions" is defined at page 53 in "Description of the
Offered Certificates--Book-Entry Registration."
"Transfer Agent and Registrar" is defined at page 54 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 77 in
"Description of the Offered Certificates--Application of Collections--Payment
of Fees, Interest and Other Items."
"Treasury Regulations" is defined at page 97 in "Certain Federal Income
Tax Consequences--General; Scope of Federal Income Tax Opinion"
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"Trigger Event" is defined at page 84 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 44 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 105 in "Underwriting."
"Underwriting Agreement" means the underwriting agreement dated November
13, 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.
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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.
<TABLE>
<CAPTION>
<S> <C>
SERIES 1995-1
CLASS A CERTIFICATES
Invested Amount as of April 23, 1997............ $692,800,000
Expected Invested Amount as of Closing Date $24,800,000
(after application of proceeds) ...............
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 $33,638,000
(after reduction of Class A Invested Amount) ..
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
A-1-1
<PAGE>
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
A-1-2
<PAGE>
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 + 1.00% (or such lesser rate as designated
in the Series 1997-1 Supplement)
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
</TABLE>
A-1-3
<PAGE>
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
B-1-1
<PAGE>
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:
B-1-2
<PAGE>
(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
B-1-3
<PAGE>
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.
B-1-4
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR 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 RECEIVABLES, INC. OR THE
RECEIVABLES SINCE THE DATE HEREOF. 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
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Reports to Certificateholders........... 3
Available Information................... 3
Incorporation of Certain Documents by
Reference.............................. 3
Other Information....................... 4
Prospectus Summary...................... 5
Risk Factors............................ 28
The Trust............................... 36
Metris Companies Inc.................... 36
The Transferor.......................... 36
Direct Merchants Credit Card Bank,
National Association................... 36
Fingerhut Corporation................... 37
Direct Merchants Bank's Credit Card
Activities............................. 37
The Receivables......................... 44
Maturity Considerations................. 47
Pool Factor and Related Information .... 49
Use of Proceeds......................... 49
Description of the Offered
Certificates........................... 49
Description of the Purchase Agreements . 90
Certain Legal Aspects of the
Receivables............................ 92
Certain Federal Income Tax
Consequences........................... 96
Certain State Tax Consequences.......... 102
Employee Benefit Plan Considerations ... 103
Underwriting............................ 105
Legal Matters........................... 106
Glossary of Terms....................... 107
</TABLE>
METRIS MASTER TRUST
$455,000,000 FLOATING RATE
ASSET BACKED
CERTIFICATES,
SERIES 1997-2, CLASS A
$101,500,000 FLOATING RATE
ASSET BACKED
CERTIFICATES,
SERIES 1997-2, CLASS B
METRIS
RECEIVABLES, INC.
TRANSFEROR
DIRECT MERCHANTS CREDIT
CARD BANK, NATIONAL
ASSOCIATION
SERVICER
PROSPECTUS
UNDERWRITERS OF THE CLASS A CERTIFICATES
BEAR, STEARNS & CO. INC.
CHASE SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY
UBS SECURITIES
UNDERWRITER OF THE CLASS B CERTIFICATES
BEAR, STEARNS & CO. INC.
NOVEMBER 13, 1997
