<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 1997
REGISTRATION NO. 333-23045
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
METRIS MASTER TRUST
(Issuer with respect to Offered Certificates)
METRIS RECEIVABLES, INC.
(Originator of the Trust described herein)
(Exact name of registrant as specified in its charter)
DELAWARE 41-1810301
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
--------------------
4400 BAKER ROAD
SUITE F470
MINNETONKA, MN 55343
(612) 936-5077
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------
JILL B. BARCLIFT, ESQ.
600 SOUTH HIGHWAY 169
SUITE 1800
ST. LOUIS PARK, MN 55426
(612) 525-5090
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
--------------------
COPIES TO:
ANDREW M. FAULKNER, ESQ. MICHAEL P. SHERMAN, ESQ. RENWICK MARTIN, ESQ.
SKADDEN, ARPS, SLATE, FINGERHUT COMPANIES, INC. BROWN & WOOD LLP
MEAGHER & FLOM LLP 4400 BAKER ROAD ONE WORLD TRADE CENTER
919 THIRD AVENUE MINNETONKA, MN 55343 58TH FLOOR
NEW YORK, NY 10022 (612) 932-3585 NEW YORK, NY 10048
(212) 735-2853 (212) 839-5319
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable on or after the effective date of the Registration Statement.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
===============================================================================
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED CERTIFICATE (1) PRICE (1) FEE(2)
- ------------------------------- -------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
6.87% Asset Backed
Certificates, Series 1997-1,
Class A ....................... $616,250,000 100% $616,250,000 $186,742.42
- ------------------------------- -------------- ------------------ ------------------ --------------
7.11% Asset Backed
Certificates, Series 1997-1,
Class B ....................... $106,250,000 100% $106,250,000 $ 32,196.97
- ------------------------------- -------------- ------------------ ------------------ --------------
Total .......................... $722,500,000 100% $722,500,000 $218,939.39
- ------------------------------- -------------- ------------------ ------------------ --------------
</TABLE>
===============================================================================
(1) Estimated solely for purpose of calculating the registration fee.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)
OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
PROSPECTUS
METRIS MASTER TRUST
$616,250,000 6.87% ASSET BACKED CERTIFICATES, SERIES 1997-1, CLASS A
$106,250,000 7.11% ASSET BACKED CERTIFICATES, SERIES 1997-1, CLASS B
DIRECT MERCHANTS CREDIT CARD BANK,
METRIS RECEIVABLES, INC. NATIONAL ASSOCIATION
TRANSFEROR SERVICER
--------------------
Each of the 6.87% Asset Backed Certificates, Series 1997-1, Class A (the
"Class A Certificates") and each of the 7.11% Asset Backed Certificates,
Series 1997-1, 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) 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
106 herein.
(continued on next page)
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION
SET FORTH IN "RISK FACTORS" SET FORTH 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.
===============================================================================
PROCEEDS TO
PRICE TO UNDERWRITING THE
PUBLIC(1) DISCOUNT TRANSFEROR(1)(2)
- -------------------------------------------------------------------------------
Per Class A
Certificate............ 99.99535% 0.300% 99.69535%
- -------------------------------------------------------------------------------
Per Class B
Certificate............ 99.98348% 0.325% 99.65848%
- -------------------------------------------------------------------------------
Total................... $722,453,792 $2,194,063 $720,259,729
===============================================================================
(1) Plus accrued interest, if any, from May 8, 1997.
(2) Before deduction of expenses estimated to be $860,000.
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 May 8, 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.
NATIONSBANC CAPITAL MARKETS, INC.
UNDERWRITER OF THE CLASS B CERTIFICATES
BEAR, STEARNS & CO. INC.
--------------------
The date of this Prospectus is May 1, 1997.
<PAGE>
(continued from previous page)
Concurrently with the issuance of the Offered Certificates, the Trust will
issue the Asset Backed Certificates, Series 1997-1, Class C (the "Class C
Certificates"), which may be privately placed, and will issue the Asset
Backed Certificates, Series 1997-1, 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 1997-1". The fractional undivided interests in the Trust
represented by the Class C Certificates will be subordinated to fund certain
payments with respect to the Offered Certificates and the fractional
undivided interests in the Trust represented by the Class D Certificates will
be subordinated to fund certain payments with respect to the Class C
Certificates and the Offered Certificates. See "Description of the Offered
Certificates--Application of Collections," "--Reallocated Principal
Collections," and "--Investor Charge-Offs." The Transferor will own the
remaining undivided interest in the Trust not represented by the Certificates
and any other investor certificates issued by the Trust, which retained
interest will be represented by the Exchangeable Transferor Certificate (as
defined herein). The Transferor from time to time may offer other series of
certificates that evidence undivided interests in certain assets of the Trust
by exchanging a portion of its interest in the Trust therefor. Only the
Offered Certificates are being offered hereby.
Interest will accrue on the Class A Certificates at the rate of 6.87% per
annum (the "Class A Certificate Rate"). Interest will accrue on the Class B
Certificates at the rate of 7.11% per annum (the "Class B Certificate Rate").
Interest with respect to the Certificates will be paid on June 20, 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 April 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 106 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 .......... $616,250,000 aggregate principal amount of
Class A Certificates and $106,250,000
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 ............ $72,250,000 aggregate principal amount of
Class C Certificates and $55,250,000
aggregate principal amount of Class D
Certificates are being issued concurrently
to the Transferor. The Trust has
previously issued two 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. (formerly Fingerhut
Financial Services 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, formerly known as
Fingerhut Financial Services 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 1997-1 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) accounts and may arise under
VISA(Registered Trademark)(1) and 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
- ------------
(1) Mastercard(Registered Trademark) and VISA(Registered Trademark) are
federally registered servicemarks of Mastercard International Inc. and
VISA USA Incorporated, respectively.
6
<PAGE>
allocable to the certificateholders of
such Series are paid to the holder of the
Exchangeable Transferor Certificate or,
with respect to amounts allocated to any
class of certificates of such Series which
are not retained by the Transferor, paid
to the certificateholders of any other
Series then outstanding. See "Description
of the Offered Certificates--Application
of Collections--Payment of Fees, Interest
and Other Items."
TRUST ASSETS .................. The Trust assets include (i) all Receivables
generated or acquired from time to time by
Direct Merchants Bank satisfying certain
criteria described herein (see
"Description of the Offered
Certificates--Eligible Receivables"), (ii)
all funds to be collected from Obligors in
respect of the Receivables (which shall
not include fees and charges for insurance
and insurance type products), (iii) all
right, title, and interest of the
Transferor in, to, and under the Purchase
Agreement and the Bank Purchase Agreement,
(iv) the benefit of funds on deposit in
certain bank accounts maintained for the
benefit of certificateholders of each
Series, including the Excess Funding
Account, (v) the benefit of funds on
deposit in certain bank accounts
maintained for the benefit of the
Certificateholders, including the
Pre-Funding Account and the Principal
Funding Account, (vi) Recoveries, and
(vii) proceeds of the foregoing. The
Offered Certificates will not have the
benefit of any Enhancement other than the
subordination of the Class B Certificates,
Class C Certificates and Class D
Certificates for the benefit of each Class
of Certificates with an earlier
alphabetical designation as described
above. The Trust assets do not currently
include interchange fees received by
Direct Merchants Bank in connection with
the Receivables, but such fees may be
included as Trust assets at some future
date.
Pursuant to the Bank Purchase Agreement,
Metris purchases from Direct Merchants
Bank all of the Receivables arising from
time to time under Accounts. See
"Description of the Purchase
Agreements--Purchases of Receivables."
Pursuant to the Purchase Agreement, the
Transferor purchases from Metris all of
the Receivables arising from time to time
under Accounts. See "Description of the
Purchase Agreements--Purchases of
Receivables."
Direct Merchants Bank, Metris or the
Transferor may, from time to time, enter
into similar receivables purchase
agreements with other Credit Card
Originators.
Pursuant to the Pooling and Servicing
Agreement, the Trans feror 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 credit cards and may include
amounts owing on other revolving credit
cards, including VISA credit cards (see
"Description of the Offered
Certificates--Eligible Receivables"). The
Receivables in the Trust are divided into
two components: Principal Receivables and
Finance Charge Receivables. At any time,
"Finance Charge Receivables" means all
amounts billed from time to time to the
Obligors on any Account in respect of
Periodic Finance Charges, overlimit fees,
late charges, returned check fees, annual
membership fees and annual service
charges, if any, transaction charges, cash
advance fees and similar fees and charges
(excluding fees and charges for insurance
and insurance type products and
interchange fees), plus Recoveries,
investment earnings on amounts credited to
the Excess Funding Account and Discount
Option Receivables, if any. "Principal
Receivables" equals all other Eligible
Receivables.
All new Receivables arising in the Accounts
are purchased by Metris from Direct
Merchants Bank pursuant to the Bank
Purchase Agreement and subsequently are
purchased by the Transferor from Metris
pursuant to the Purchase Agreement and
thereafter will be automatically
transferred to the Trust. Accordingly, the
amount of Receivables fluctuates from day
to day as new Receivables are generated
and as existing Receivables are collected,
written off as uncollectible, or otherwise
adjusted.
COLLECTIONS ................... The Servicer deposits all collections of
Receivables in the Collection Account
("Collections"). The Collections on the
Receivables received on any business day
are allocated by the Servicer between
Principal Collections and Finance Charge
Collections in accordance with the
definitions thereof. All such amounts are
then allocated in accordance with the
respective interests of the
Certificateholders, the certificateholders
of any other Series, and the holder of the
Exchangeable Transferor Certificate in the
Principal Receivables and in the Finance
Charge Receivables in the Trust. See
"Description of the Offered
Certificates--Allocation Percentages."
ALLOCATION OF TRUST ASSETS .... The Trust's assets will be allocated among
the Class A Certificateholders' Interest,
the Class B Certificateholders' Interest,
the Class C Certificateholders' Interest,
the Class D Certificateholders' Interest,
the interest of the Certificateholders of
the Previously Issued Series and any other
Series issued pursuant to the Pooling and
Servicing Agreement and applicable
Supplements, and the Transferor Interest.
The interest of the certificateholders of
any class of any Series in the assets of
the Trust will be limited to the
certificateholders' interest for such
class and Series, and such
certificateholders will not have any
recourse against any assets of the Trust
other than those allocated to such
8
<PAGE>
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," "--Variable
Funding Certificates," "--Excess Funding
Account" and "--Pre-Funding Account."
The Class A Certificates will evidence
undivided interests in the assets of the
Trust allocated to the Class A
Certificateholders' Interest and will
represent the right to receive from such
assets funds up to (but not in excess of)
the amounts required to make payments of
interest on the Class A Certificates at
the Class A Certificate Rate, the payment
of principal to the extent of the Class A
Invested Amount (which may be less than
the aggregate unpaid principal amount of
the Class A Certificates, in certain
circumstances, if the Investor Default
Amount exceeds funds allocable thereto and
the Class B Invested Amount, the Class C
Invested Amount and the Class D Invested
Amount are reduced to zero) and amounts on
deposit in the Pre-Funding Account
allocated to the Class A Certificates. See
"Description of the Offered
Certificates--Subordination of the Class B
Certificates," "--Pre-Funding Account,"
"--Allocation Percentages" and "--Investor
Charge-Offs."
The Class B Certificates will evidence
undivided interests in the assets of the
Trust allocated to the Class B
Certificateholders' Interest and will
represent the right to receive from such
assets funds up to (but not in excess of)
the amounts required to make payments of
interest on the Class B Certificates at
the Class B Certificate Rate, the payment
of principal to the extent of the Class B
Invested Amount (which may be less than
the aggregate unpaid principal amount of
the Class B Certificates, in certain
circumstances, if the Investor Default
Amount exceeds funds allocable thereto and
the Class C Invested Amount and the Class
D Invested Amount are reduced to zero) and
amounts on deposit in the Pre-Funding
Account allocated to the Class B
Certificates. See "Description of the
Offered Certificates--Subordination of the
Class B Certificates," "--Pre-Funding
Account," "--Allocation Percentages" and
"--Investor Charge-Offs."
The Class C Certificates will evidence
undivided interests in the assets of the
Trust allocated to the Class C
Certificateholders' Interest and will
represent the right to receive from such
9
<PAGE>
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 February 28, 1997 was
$1,721,916,478 comprised of $54,268,861 of
Finance Charge Receivables and
$1,667,647,617 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
$850,000,000 (the "Full Invested Amount")
during the Funding Period, remain fixed at
the Full Invested Amount during the
Revolving Period and decline thereafter
during any Amortization Period or
10
<PAGE>
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
Class C Certificateholders' Interest and
the Class D Certifi-
11
<PAGE>
cateholders' Interest based on the
Fixed/Floating Allocation Percentage.
During the Revolving Period for each
Series, all Principal Collections that
would otherwise be allocated to the
Certificateholders will be allocated on
each business day and paid to the holder
of the Exchangeable Transferor Certificate
(except for Shared Principal Collections
used to make payments to other Series).
During the Amortization Period, until the
Class B Principal Payment Commencement
Date, Principal Collections will generally
be allocated on each business day to the
Class A Certificateholders' Interest based
on the Fixed/Floating Allocation
Percentage. On and after the Class B
Principal Payment Commencement Date,
Principal Collections will generally be
allocated on each business day to the
Class B Certificateholders' Interest based
on the Fixed/Floating Allocation
Percentage. On and after the Class C
Principal Payment Commencement Date, all
Principal Collections will generally be
allocated on each business day to the
Class C Certificateholders' Interest based
on the Fixed/Floating Allocation
Percentage. See "Description of the
Offered Certificates--Allocation
Percentages."
EXCHANGES ..................... The Pooling and Servicing Agreement provides
that the Trustee will issue two types of
certificates: (i) investor certificates in
one or more Series each of which may have
multiple classes of certificates of which
one or more such classes may be
transferable, and (ii) the Exchangeable
Transferor Certificate. The Exchangeable
Transferor Certificate will evidence the
Transferor Interest, will initially be
held by the Transferor, and will be
transferable only as provided in the
Pooling and Servicing Agreement, including
through the issuance of a Supplemental
Certificate. See "Description of the
Offered Certificates--Exchanges." The
Exchangeable Transferor Certificate is not
being registered under the Securities Act.
The Pooling and Servicing Agreement also
provides that, pursuant to any one or more
Supplements, the Transferor may tender the
Exchangeable Transferor Certificate or, if
provided in the relevant Supplement,
certificates comprising any Series and the
Exchangeable Transferor Certificate, to
the Trustee in exchange for certificates
comprising one or more new Series and a
reissued Exchangeable Transferor
Certificate. However, at all times, the
interest in the Principal Receivables in
the Trust and amounts on deposit in the
Excess Funding Account represented by the
Transferor Interest must equal or exceed
the Minimum Transferor Interest. Under the
Pooling and Servicing Agreement, the
Transferor may define, with respect to any
new Series, the Principal Terms of such
Series. See "Description of the Offered
Certificates--Exchanges." The Transferor
may offer any Series for sale in
transactions either registered under the
Securities Act or exempt from registration
thereunder, directly, through one or more
underwriters or placement agents, in
fixed-price offerings, in negotiated
transactions or
12
<PAGE>
otherwise. The Transferor currently
intends to offer, from time to time,
additional Series issued by the Trust.
Under the Pooling and Servicing Agreement,
an Exchange of the Exchangeable Transferor
Certificate for certificates comprising
one or more Series and a reissued
Exchangeable Transferor Certificate may
occur only upon delivery to the Trustee of
the following: (i) a Supplement specifying
the Principal Terms of each Series to be
issued in connection therewith, (ii) a Tax
Opinion, (iii) if required by such
Supplement, the form of Enhancement and an
appropriate Enhancement agreement with
respect thereto, (iv) written confirmation
from each Rating Agency that the Exchange
will not result in such Rating Agency
reducing or withdrawing its rating on any
then outstanding Series rated by it, (v)
an officer's certificate of the Transferor
stating that, after giving effect to such
Exchange, the Transferor Interest would be
at least equal to the Minimum Transferor
Interest, and (vi) the existing
Exchangeable Transferor Certificate and,
if applicable, the existing certificates
representing the Series to be exchanged.
See "Description of the Offered
Certificates--Exchanges."
INTEREST ...................... Interest on the Offered Certificates will be
payable on June 20, 1997 and on the 20th
day of each month thereafter or, if such
day is not a business day, on the next
succeeding business day (each, a
"Distribution Date"), in an amount equal
to (i) with respect to the Class A
Certificates, one-twelfth of the product
of the Class A Certificate Rate and the
outstanding principal balance of the Class
A Certificates as of the preceding Record
Date (or in the case of the first
Distribution Date, the initial principal
amount of the Class A Certificates) and
(ii) with respect to the Class B
Certificates, one-twelfth of the product
of the Class B Certificate Rate and the
outstanding principal balance of the Class
B Certificates as of the preceding Record
Date (or in the case of the first
Distribution Date, the initial principal
amount of the Class B Certificates).
Interest for the first Distribution Date
will include accrued interest at the
applicable Certificate Rate (the
"Certificate Rates") from the Closing Date
through June 19, 1997. Interest will be
calculated on the basis of a 360-day year
of twelve 30-day months.
Interest payments on the Class A
Certificates on each Distribution Date
will be funded from Available Series
Finance Charge Collections with respect to
the preceding Monthly Period (or, with
respect to the first Distribution Date,
such Collections from and including the
Closing Date to and including May 31, 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
13
<PAGE>
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 September 1997
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 1997-1 Supplement
in connection with the increase in the
amount of Receivables in the Trust. On the
Closing Date a cash deposit will be made
to the Pre-Funding Account such that the
amount of Principal Receivables plus the
amount of such cash deposit on such date
will at least equal the sum of the initial
outstanding principal balances of the
Class A Certificates, the Class B
Certificates, the Class C Certificates and
the Class D Certificates, and the then
current outstanding principal amount of
the Previously Issued Series. Funds on
deposit in the Pre-Funding Account will be
invested by the Trustee at the direction
of the Servicer in Cash Equivalents.
During the Funding Period, funds on deposit
in the Pre-Funding Account will be
withdrawn and paid to the Transferor to
the extent of any increases in the
Invested Amount as a result of the
increase in the amount of Receivables in
the Trust. The Transferor expects that the
funds on deposit in the Pre-Funding
Account will be fully invested in
Receivables by the end of the August 1997
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
14
<PAGE>
zero on the first day of the September
1997 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 March 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
February 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
"Description of the Offered
Certificates--Pay Out Events" for a
discussion of the events which might lead
to the termination of the Revolving Period
for the Certificates prior to the end of
the March 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
15
<PAGE>
deposited monthly in the Principal Funding
Account until the Principal Funding
Account Balance is equal to the sum of the
Class A Invested Amount, the Class B
Invested Amount and the Class C Invested
Amount. Although it is anticipated that
during each Monthly Period in the
Accumulation Period prior to the Expected
Final Payment Date funds will be deposited
in the Principal Funding Account in an
amount equal to the applicable Controlled
Deposit Amount and that scheduled
principal will be available for
distribution to the Class A
Certificateholders and the Class B
Certificateholders on the Expected Final
Payment Date, no assurance can be given in
that regard. See "Maturity
Considerations." If the Principal
Collections for any Monthly Period are
less than the applicable Controlled
Deposit Amount, the amount of such
deficiency will be the applicable
"Accumulation Shortfall" for the
succeeding Monthly Period. See
"Description of the Offered
Certificates--Application of Collections"
herein.
Funds on deposit in the Principal Funding
Account will be available to pay the Class
A Certificateholders in respect of the
Class A Invested Amount on the Expected
Final Payment Date. If the aggregate
principal amount of deposits made to the
Principal Funding Account are insufficient
to pay in full the Class A Invested Amount
on the Expected Final Payment Date, the
Early Amortization Period will commence as
described below, and the Class A
Certificateholders will receive
distributions of Class A Principal and
Class A Monthly Interest on each
Distribution Date thereafter until the
Class A Invested Amount is paid in full.
On the Expected Final Payment Date, provided
that the Class A Invested Amount is paid
in full and the Early Amortization Period
has not commenced, funds remaining on
deposit in the Principal Funding Account
will be used to pay the Class B Invested
Amount as described herein. If the funds
remaining on deposit in the Principal
Funding Account are insufficient to pay in
full the Class B Invested Amount on the
Expected Final Payment Date, the Early
Amortization Period will commence as
described below, and the Class B
Certificateholders will receive
distributions of Class B Principal and
Class B Monthly Interest on each
Distribution Date thereafter until the
Class B Invested Amount is paid in full.
If a Pay Out Event occurs during the
Accumulation Period, the Early
Amortization Period will commence and any
amount on deposit in the Principal Funding
Account will be paid to the
Certificateholders of each Class of
Certificates, sequentially, in
alphabetical order, on the Distribution
Date following the Monthly Period in which
the Early Amortization Period commences.
Other Series offered by the Trust may or may
not have accumulation periods like the
Accumulation Period or amortization
periods like the Early Amortization
Period, and
16
<PAGE>
such periods may have different lengths
and begin on different dates than the
Accumulation Period or Early Amortization
Period described herein. Thus, certain
Series may be in their revolving periods
while others are in periods during which
Principal Collections are distributed to
or accumulated for such other Series. In
addition, other Series may allocate
Principal Collections based upon different
investor percentages. See "Description of
the Offered Certificates--Exchanges" for a
discussion of the potential terms of other
Series. See "Annex I: Other Series" for a
description of the terms of the Previously
Issued Series.
EARLY AMORTIZATION PERIOD ..... During the Early Amortization Period,
Principal Collections allocable to the
respective Certificateholders' Interest
and certain other amounts (including
Shared Principal Collections from any
other Series, funds on deposit in the
Excess Funding Account and, on the first
Distribution Date with respect to the
Early Amortization Period, funds on
deposit in the Pre-Funding Account or the
Principal Funding Account) will no longer
be reinvested in the Trust or otherwise
used to maintain the Certificateholders'
Interest of such Series, but instead will
be distributed as principal payments
monthly on each Distribution Date
beginning with the first Distribution Date
following the Monthly Period in which a
Pay Out Event occurs or is deemed to have
occurred to the Class A Certificateholders
in respect of the Class A Invested Amount
and, following the payment in full of the
Class A Invested Amount, to the Class B
Certificateholders in respect of the Class
B Invested Amount and, following the
payment in full of the Class B Invested
Amount, to the Class C Certificateholders
in respect of the Class C Invested Amount
and, following the payment in full of the
Class C Invested Amount, to the Class D
Certificateholders until the Class D
Invested Amount is paid in full. See
"Description of the Offered
Certificates--Pay Out Events."
SHARED PRINCIPAL COLLECTIONS .. To the extent that Principal Collections and
other amounts that are allocated to the
Certificateholders' Interest of any class
of any Series are not needed to make
payments to the Certificateholders of such
class or required to be deposited in the
Principal Account, they may be applied to
cover principal payments due to or for the
benefit of certificateholders of another
Series, including principal payments which
the Transferor elects to make with respect
to any Variable Funding Certificates. Any
such reallocation will not result in a
reduction in the Certificateholders'
Interest of the Series to which such
Principal Collections were initially
allocated. In addition, Principal
Collections and certain other amounts
otherwise allocable to other Series, to
the extent such collections are not needed
to make payments to the certificateholders
of such other Series, may be applied to
cover principal payments due to or for the
benefit of the holders of the
17
<PAGE>
Certificates. See "Description of the
Offered Certificates--Application of
Collections."
EXCESS FUNDING ACCOUNT ........ At any time at which the Transferor Interest
is less than the Minimum Transferor
Interest, funds (to the extent available
therefor as described herein) otherwise
payable to the Transferor will be
deposited in the Excess Funding Account on
each business day until the Transferor
Interest is at least equal to the Minimum
Transferor Interest. Funds on deposit in
the Excess Funding Account may at the
option of the Transferor be withdrawn and
paid to the Transferor to the extent that
on any day the Transferor Interest exceeds
the Minimum Transferor Interest.
Any funds on deposit in the Excess Funding
Account at the beginning of the
Amortization Period will be deposited in
the Principal Account as part of Class A
Principal, Class B Principal, or Class C
Principal, as applicable, for any
Distribution Date. In addition, no funds
allocated to investor certificates will be
deposited in the Excess Funding Account
during any amortization period or early
amortization period for any Series until
the Principal Account for such Series for
such Distribution Date has been fully
funded or the investor certificates of
such Series have been paid in full. See
"Description of the Offered
Certificates--Excess Funding Account."
DISTRIBUTION OF AVAILABLE SERIES
FINANCE CHARGE COLLECTIONS
ALLOCABLE TO
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;
18
<PAGE>
(iv) an amount equal to the Monthly
Servicing Fee plus any Monthly
Servicing Fee that was due but not
paid on any prior business day will be
paid to the Servicer;
(v) an amount equal to the Investor Default
Amount on such business day and, to the
extent not previously paid, the
Investor Default Amount for each prior
business day in such Monthly Period
will be (a) during the Revolving
Period, treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates;
(vi) an amount equal to the Series
Allocation Percentage of any
Adjustment Payment which the
Transferor is required but fails to
make pursuant to the Pooling and
Servicing Agreement will be (a) during
the Revolving Period, treated as
Shared Principal Collections and (b)
during the Amortization Period,
treated as Available Investor
Principal Collections for the benefit
of the Certificates;
(vii) an amount equal to unreimbursed Class
A Investor Charge-Offs on such
business day will be (a) during the
Revolving Period, treated as Shared
Principal Collections and (b) during
the Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates.
(viii) an amount equal to the accrued and
unpaid interest on the outstanding
aggregate principal amount of the
Class B Certificates not previously
deposited in the Interest Funding
Account for such Monthly Period will
be deposited in the Interest Funding
Account;
(ix) an amount equal to the accrued and
unpaid interest on the outstanding
aggregate principal amount of the
Class C Certificates not previously
deposited in the Interest Funding
Account for such Monthly Period will
be deposited in the Interest Funding
Account;
(x) an amount equal to unreimbursed Class B
Investor Charge-Offs on such business
day will be (a) during the Revolving
Period, treated as Shared Principal
Collections and (b) during the
Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates;
(xi) an amount equal to unreimbursed Class
C Investor Charge-Offs on such
business day will be (a) during the
Revolving Period, treated as Shared
Principal Collections and (b) during
the Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates;
19
<PAGE>
(xii) an amount equal to unreimbursed Class
D Investor Charge-Offs on such
business day will be (a) during the
Revolving Period, treated as Shared
Principal Collections and (b) during
the Amortization Period, treated as
Available Investor Principal
Collections for the benefit of the
Certificates.
(xiii) an amount equal to the lesser of any
remaining Available Series Finance
Charge Collections and any required
funding of a reserve account for the
benefit of the Class C Certificates
will be deposited in such reserve
account;
(xiv) on and after the Reserve Account
Funding Date, but prior to the date on
which the Accumulation Period Reserve
Account terminates, an amount equal to
the lesser of any Available Series
Finance Charge Collections remaining
and the excess, if any, of the
Required Reserve Account Amount over
the Available Reserve Account Amount
will be deposited in the Accumulation
Period Reserve Account;
(xv) the amount designated by the Transferor
in writing in its instructions to the
Trustee to be deposited in the Payment
Reserve Account will be deposited in
the Payment Reserve Account; and
(xvi) the remainder will be treated as
Excess Finance Charge Collections or
Transferor Retained Finance Charge
Collections, as applicable. Transferor
Retained Finance Charge Collections
will be applied on each Default
Recognition Date to the payment of the
Investor Default Amount in accordance
with clause (v) above. See
"Description of the Offered
Certificates--Application of
Collections."
On each Transfer Date all investment income
(net of investment losses and expenses) on
funds on deposit in the Pre-Funding
Account, the Principal Funding Account and
the Accumulation Period Reserve Account
will be applied as if such amounts were
Available Series Finance Charge
Collections on the last business day of
the preceding Monthly Period.
COVERAGE OF INTEREST
SHORTFALLS FROM TRANSFEROR
FINANCE CHARGE COLLECTIONS ... To the extent that any amounts are on
deposit in the Excess Funding Account or
the Pre-Funding Account on any business
day, the Servicer will determine the
amount (the "Negative Carry Amount"), if
any, equal to the excess of (x) the
product of (a) the Base Rate and (b) the
product of (i) the sum of the amounts on
deposit in the Excess Funding Account and
the Pre-Funding Account and (ii) the
number of days elapsed since the previous
business day divided by the actual number
of days in such year over (y) the
aggregate amount of all earnings since the
previous business day available from the
Cash Equivalents in which funds on
20
<PAGE>
deposit in the Excess Funding Account or
the Pre-Funding Account are invested. The
Servicer will apply an amount equal to the
lesser of (i) the Series Allocation
Percentage of the Finance Charge
Collections allocable to the Exchangeable
Transferor Certificate ("Transferor
Finance Charge Collections") on such
business day and (ii) the Negative Carry
Amount for such business day in the manner
specified for application of Available
Series Finance Charge Collections.
COVERAGE OF INTEREST SHORTFALLS
FROM ACCUMULATION PERIOD
RESERVE ACCOUNT .............. All amounts in the Principal Funding Account
will be invested at the direction of the
Servicer by the Trustee in certain Cash
Equivalents. Investment earnings (net of
investment losses and expenses) on funds
on deposit in the Principal Funding
Account (the "Principal Funding Account
Investment Proceeds") during the
Accumulation Period will be applied on
each Transfer Date to the extent of the
Covered Amount as if such amount were
Available Series Finance Charge
Collections on the last business day of
the preceding Monthly Period. If, for any
Interest Accrual Period, the Principal
Funding Account Investment Proceeds are
less than an amount equal to, for such
Interest Accrual Period, one-twelfth of
the product of (a) the weighted average of
the Class A Certificate Rate, the Class B
Certificate Rate and the Class C
Certificate Rate for such Interest Accrual
Period and (b) the Principal Funding
Account Balance as of the last day of the
Monthly Period preceding the Monthly
Period in which such Interest Accrual
Period ends (the "Covered Amount"), the
amount of such deficiency will be paid
from the Accumulation Period Reserve
Account to the extent of the Available
Reserve Account Amount and will be applied
on the applicable Transfer Date as if such
amount were Available Series Finance
Charge Collections on the last business
day of the preceding Monthly Period.
SHARING OF EXCESS FINANCE
CHARGE COLLECTIONS ........... Finance Charge Collections on any business
day in excess of the amounts necessary to
make required payments on such business
day will be applied to cover any
shortfalls with respect to amounts payable
from Finance Charge Collections allocable
to any other Series then outstanding, pro
rata based upon the amount of the
shortfall, if any, with respect to such
other Series. Any Excess Finance Charge
Collections remaining after covering
shortfalls with respect to all outstanding
Series will be paid to the Transferor.
INVESTOR DEFAULT AMOUNT;
INVESTOR CHARGE-OFF .......... A portion of all Receivables in Defaulted
Accounts (the "Investor Default Amount")
will be allocated to the
Certificateholders in an amount equal to
the product of the Floating
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Allocation Percentage applicable during
the related Monthly Period and the
principal amount of Receivables in
Defaulted Accounts for such Monthly
Period. If on any Determination Date the
aggregate Investor Default Amount and
Series Allocation Percentage of unpaid
Adjustment Payments, if any, for the
preceding Monthly Period exceeded the
aggregate amount of Available Series
Finance Charge Collections applied to the
payment thereof as described in clauses
(v) and (vi) of "Distribution of Available
Series Finance Charge Collections
Allocable to Certificateholders" above,
and the amount of (w) Transferor Finance
Charge Collections, (x) Excess Finance
Charge Collections, in each case to the
extent applied to the payment thereof as
described in "Coverage of Interest
Shortfalls from Transferor Finance Charge
Collections" and "Sharing of Excess
Finance Charge Collections," respectively,
(y) any Reallocated Principal Collections
applied with respect thereto, and (z) any
Principal Funding Account Investment
Proceeds and amounts withdrawn from the
Accumulation Period Reserve Account to be
applied with respect thereto, then the
Class D Invested Amount will be reduced to
the extent of such excess (but not in an
amount greater than the sum of the
remaining aggregate Investor Default
Amount and the remaining unpaid Adjustment
Payments for such Monthly Period) to avoid
a charge-off with respect to the Class A
Certificates, the Class B Certificates or
the Class C Certificates.
The Class D Invested Amount will thereafter
be increased (but not in excess of the
unpaid principal balance of the Class D
Certificates) on any business day by the
amount of Available Series Finance Charge
Collections allocated and available for
such purpose as described in clause (xii)
of "Distribution of Available Series
Finance Charge Collections Allocable to
Certificateholders." If the Class D
Invested Amount is reduced to zero, a
portion of the Class C Invested Amount
equal to the amount by which such
insufficiency would have caused the Class
D Invested Amount to be reduced below zero
(but not in excess of the sum of the
remaining aggregate Investor Default
Amount and the remaining unpaid Adjustment
Payments for such Monthly Period) will be
deducted from the Class C Invested Amount
("Class C Investor Charge-Off") to avoid a
charge-off with respect to the Class A
Certificates or the Class B Certificates.
If and for so long as the Class D Invested
Amount is reduced to zero, the Class C
Certificateholders will bear directly the
credit and other risks associated with
their undivided interest in the Trust.
The Class C Invested Amount will thereafter
be increased (but not in excess of the
unpaid principal balance of the Class C
Certificates) on any business day by the
amount of Available Series Finance Charge
Collections allocated and available for
that purpose as described in clause (xi)
of "Distribution of Available Series
Finance Charge Collections Allocable to
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Certificateholders." If the Class C
Invested Amount is reduced to zero, a
portion of the Class B Invested Amount
equal to the amount by which such
insufficiency would have caused the Class
C Invested Amount to be reduced below zero
(but not in excess of the sum of the
remaining aggregate Investor Default
Amount and the remaining unpaid Adjustment
Payments for such Monthly Period) will be
deducted from the Class B Invested Amount,
and allocated to the Class B Investor
Charge-Offs to avoid a charge-off with
respect to the Class A Certificates. If
and for so long as the Class C Invested
Amount is reduced to zero, the Class B
Certificateholders will bear directly the
credit and other risks associated with
their undivided interest in the Trust.
The Class B Invested Amount will thereafter
be increased (but not in excess of the
unpaid principal balance of the Class B
Certificates) on any business day by the
amount of Available Series Finance Charge
Collections allocated and available for
that purpose as described in clause (x) of
"Distribution of Available Series Finance
Charge Collections Allocable to
Certificateholders." If the Class B
Invested Amount is reduced to zero, a
portion of the Class A Invested Amount
equal to the amount by which such
insufficiency would have caused the Class
B Invested Amount to be reduced below zero
(but not in excess of the sum of the
remaining aggregate Investor Default
Amount and the remaining unpaid Adjustment
Payments for such Monthly Period) will be
deducted from the Class A Invested Amount
and allocated to the Class A Investor
Charge-Offs. If and for so long as the
Class B Invested Amount is reduced to
zero, the Class A Certificate-holders will
bear directly the credit and other risks
associated with their undivided interest
in the Trust.
The Class A Invested Amount will thereafter
be increased (but not in excess of the
unpaid principal balance of the Class A
Certificates) on any business day by the
amount of Available Series Finance Charge
Collections allocated and available for
that purpose as described in clause (vii)
of "Distribution of Available Series
Finance Charge Collections Allocable to
Certificateholders." See "Description of
the Offered Certificates--Investor
Charge-Offs."
PAIRED SERIES ................. Subject to satisfaction of the Rating Agency
Condition, the Certificates may be paired
with one or more other Series or a portion
of one or more other series issued by the
Trust (each, a "Paired Series") at or
after the Amortization Period Commencement
Date but prior to the occurrence of a Pay
Out Event. If a Paired Series is issued
with respect to Series 1997-1, 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
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increase by an amount that otherwise would
have increased the Transferor Interest.
Upon payment in full of Series 1997-1, 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 1997-1 since
the issuance of such Paired Series. If a
Pay Out Event occurs with respect to any
such Paired Series prior to the payment in
full of the Certificates, the final
payment of principal to the
Certificateholders may be delayed. See
"Description of the Offered
Certificates--Paired Series."
SUBORDINATION OF THE CLASS B
CERTIFICATES, THE CLASS C
CERTIFICATES AND THE CLASS D
CERTIFICATES ................. The Class B Certificates will be
subordinated to fund payments of principal
and interest on the Class A Certificates.
The Class C Certificates will be
subordinated to fund payments of principal
and interest on the Class A Certificates
and the Class B Certificates. The Class D
Certificates will be subordinated to fund
payments of principal and interest on the
Class A Certificates, the Class B
Certificates and the Class C Certificates.
See "Description of the Offered
Certificates--Subordination of the Class B
Certificates," "--Reallocation of Cash
Flows" and "--Reallocated Principal
Collections." The Class B Invested Amount,
the Class C Invested Amount, and the Class
D Invested Amount will be subordinated as
described herein to the extent necessary
to fund certain payments with respect to
each Class of Certificates with an earlier
alphabetical designation as described
herein. If on any business day there is a
positive Class A Required Amount, Class B
Required Amount or Class C Required
Amount, certain Principal Collections for
such business day will be used to fund
first the Class A Required Amount, second
the Class B Required Amount and third the
Class C Required Amount and the Invested
Amounts of the Class D Certificates, the
Class C Certificates or the Class B
Certificates may be reduced on the related
Distribution Date as more fully described
herein in "Description of the Offered
Certificates--Reallocated Principal
Collections." To the extent the Class B
Invested Amount, the Class C Invested
Amount or the Class D Invested Amount is
reduced, the percentage of Finance Charge
Collections allocated to the Class B
Certificateholders, the Class C
Certificateholders, or the Class D
Certificateholders, as applicable, in
subsequent Monthly Periods will be
reduced. Moreover, to the extent the
amount of such reduction in the Class B
Invested Amount, the Class C Invested
Amount, or the Class D Invested Amount is
not reimbursed, the amount of principal
distributable to the Class B
Certificateholders, the Class C
Certificateholders, or the Class D
Certificateholders, as applicable, from
the Collection Account will be reduced.
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<PAGE>
Principal payments with respect to the Class
B Certificates will not be made until the
final payment of the Class A Invested
Amount has been made to the Class A
Certificateholders. Principal payments
with respect to the Class C Certificates
will not be made until the final payment
of the Class A Invested Amount has been
made to the Class A Certificateholders and
the final payment of the Class B Invested
Amount has been made to the Class B
Certificateholders. During the
Accumulation Period, the Class D Invested
Amount will be reduced concurrently with
deposits to the Principal Funding Account
for the benefit of the Offered
Certificates and the Class C Certificates
to an amount equal to the Stated Class D
Amount. See "Description of the Offered
Certificates--Subordination of the Class B
Certificates," "--Reallocation of Cash
Flows" and "--Reallocated Principal
Collections."
DEFEASANCE .................... On the date that the Transferor has
deposited (x) in the Principal Funding
Account an amount equal to the sum of the
outstanding principal balances of the
Class A Certificates, the Class B
Certificates and the Class C Certificates,
which amount shall be invested in Cash
Equivalents and (y) in the Accumulation
Period Reserve Account an amount equal to
or greater than the Covered Amount, as
estimated by the Transferor, for the
period from the date of the deposit to the
Principal Funding Account through the
Expected Final Payment Date for the
Offered Certificates and the Class C
Certificates and has satisfied certain
other conditions, the Certificates will no
longer be entitled to the security
interest of the Trust in the Receivables
and other Trust assets (except those set
forth above), and the percentages
applicable to the allocation to the
Certificateholders of Principal
Collections, Finance Charge Collections
and Defaulted Receivables will be reduced
to zero. Upon the satisfaction of the
foregoing conditions, the Class D Invested
Amount will be reduced to zero. See
"Description of the Offered
Certificates--Defeasance."
OPTIONAL REPURCHASE ........... The Invested Amount of the Class A
Certificates, Class B Certificates and
Class C Certificates will be subject to
optional repurchase by the Transferor on
any Distribution Date if on such
Distribution Date the sum of the Class A
Invested Amount, Class B Invested Amount
and Class C Invested Amount would be
reduced to an amount less than or equal to
10 percent of the sum of the highest Class
A Invested Amount, Class B Invested Amount
and Class C Invested Amount since the
Closing Date, if certain conditions set
forth in the Pooling and Servicing
Agreement are met. The repurchase price
will be equal to the sum of the Class A
Invested Amount, Class B Invested Amount
and Class C Invested Amount that would be
remaining on such date after giving effect
to any payments on such date plus accrued
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<PAGE>
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
Offered Certificates if the Offered
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, with respect to the Class A
Certificates, interests in the Class A
Certificates, and with respect to the
Class B Certificates, interests in the
Class B 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 Class B Underwriter
expects, although no assurance can be
given, that the Class B Certificates will
be held by at least 100 such persons. The
Transferor anticipates that the other
conditions of the "publicly-offered
security" exception contained in the Plan
Assets Regulation will be met with respect
to the Offered Certificates. No monitoring
or other measures will be taken to ensure
that any such conditions will be met with
respect to the Offered 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."
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<PAGE>
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 one-half of the Receivables in the
Trust Portfolio have been originated within the last twelve months. As a
result, the current portfolio history may not be indicative of the portfolio
performance as the Receivables and Accounts mature. See the "Composition by
Account Age--Trust Portfolio" table in "Direct Merchants Bank's Credit Card
Activities."
NON-RECOURSE TO METRIS, TRANSFEROR, DIRECT MERCHANTS BANK OR AFFILIATES
THEREOF
No Certificateholder will have recourse for payment of its Certificates to
any assets of Metris, the Transferor (other than the Exchangeable Transferor
Certificate and any Transferor Retained Class, to the extent described
herein), Direct Merchants Bank, or any affiliates thereof. Consequently,
Certificateholders must rely solely upon payments on the Receivables for the
payment of principal of and interest on the Certificates. Furthermore, under
the Pooling and Servicing Agreement, the Certificateholders have an interest
in the Receivables and Collections only to the extent of the
Certificateholders' Interest and, to the limited extent described herein, the
Transferor Interest. Should the Offered Certificates not be paid in full on a
timely basis, Certificateholders may not look to any assets of any of Metris,
the Transferor (other than the Exchangeable Transferor Certificate and any
Transferor Retained Class, to the extent described herein), Direct Merchants
Bank or any affiliates thereof to satisfy their claims.
TRANSFER OF THE RECEIVABLES; INSOLVENCY RISK CONSIDERATIONS
Under the Purchase Agreements, Direct Merchants Bank has represented and
warranted to Metris and Metris has represented and warranted to the
Transferor, respectively, that the transfer of Receivables to Metris or the
Transferor, as applicable, is a valid sale and assignment. In addition,
Direct Merchants Bank, Metris and the Transferor have agreed that if,
notwithstanding their intent, the respective sales of Receivables to Metris
and the Transferor, are not treated as sales, the Purchase Agreements will be
deemed to create a security interest in the Receivables. In a receivership or
conservatorship of Direct Merchants Bank or in a bankruptcy proceeding
involving Metris, if the conveyance of the Receivables is not treated as a
sale, but is deemed to create a security interest in the Receivables, Metris'
or the Transferor's interest in the Receivables may be subject to tax or
other governmental liens relating to Direct Merchants Bank or Metris,
respectively, arising before the subject Receivables came into existence and
to certain administrative expenses of the receivership, conservatorship or
bankruptcy proceeding. Direct Merchants Bank and Metris have taken or will
take certain actions required to perfect the
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<PAGE>
Transferor's interest in the Receivables. If a bankruptcy trustee for Metris,
Metris as debtor-in-possession, or a creditor of Metris were to take the view
that Direct Merchants Bank or Metris and the Transferor should be
substantively consolidated or that the transfer of the Receivables from
Direct Merchants Bank to Metris or from Metris to the Transferor,
respectively, should be recharacterized as a pledge of such Receivables, then
delays in payments on the Offered Certificates or (should the bankruptcy
court rule in favor of any such trustee, debtor-in-possession or creditor)
reductions in such payments on such Certificates could result.
A conservator or receiver would have the power under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") to
repudiate contracts of, and to request a stay of up to 90 days of any
judicial action or proceeding involving, Direct Merchants Bank. However,
notwithstanding the insolvency of, or the appointment of a receiver or
conservator for, Direct Merchants Bank, subject to certain qualifications, a
valid perfected security interest of Metris in the Receivables should be
enforceable (to the extent of Metris' "actual direct compensatory damages"
(as described below)) and payments to Metris with respect to the Receivables
(up to the amount of such damages) should not be subject to an automatic stay
of payment or to recovery by such a conservator or receiver. If, however, the
conservator or receiver were to assert that the security interest was
unperfected or unenforceable, or were to require Metris to establish its
right to those payments by submitting to and completing the administrative
claims procedure established under FIRREA, or the conservator or receiver
were to request a stay of proceedings with respect to Direct Merchants Bank
as provided under FIRREA, delays in payments to the Trust and on the
Certificates and possible reductions in the amount of those payments could
occur. In the event of a repudiation of obligations by a conservator or
receiver, FIRREA provides that a claim for the repudiated obligation is
limited to "actual direct compensatory damages" determined as of the date of
the appointment of the conservator or receiver (which in most cases are
expected to include the outstanding principal on the Certificates plus
interest accrued thereon to the date of payment). The FDIC has not adopted a
formal policy statement on payment of principal and interest on
collateralized borrowings of banks that are repudiated. The Transferor
believes that the general practice of the FDIC in such circumstances is to
permit the collateral to be applied to pay the principal owed plus interest
at the contract rate up to the date of payment, together with the costs of
liquidation of the collateral if provided for in the contract. In one case
involving the repudiation by the Resolution Trust Corporation (the "RTC") of
certain secured zero-coupon bonds issued by a savings association, a United
States federal district court held that "actual direct compensatory damages"
in the case of a marketable security meant the value of the repudiated bonds
as of the date of repudiation. If that court's view were applied to determine
Metris' "actual direct compensatory damages" in the event a conservator or
receiver of Direct Merchants Bank repudiated the Bank Purchase Agreement, the
amount paid to Certificateholders could, depending upon circumstances
existing on the date of the repudiation, be less than the principal of the
Certificates and the interest accrued thereon to the date of payment. See
"Certain Legal Aspects of the Receivables--Certain Matters Relating to
Bankruptcy or Receivership." In addition, in the event of a Servicer Default,
if a conservator or receiver is appointed for the Servicer, and no Servicer
Default other than such conservatorship or receivership exists, the
conservator or receiver may have the power to prevent either the Trustee or
the majority of the Certificateholders from effecting a transfer of servicing
to a successor Servicer.
Although the Pooling and Servicing Agreement provides that the Transferor
will transfer all of its right, title, and interest in and to the Receivables
to the Trust, a court could treat such transactions as an assignment of
collateral as security for the benefit of holders of certificates issued by
the Trust. It is possible that the risk of such treatment may be increased by
the retention by the Transferor of the Exchangeable Transferor Certificate,
the Class D Certificates, a class of each of the Previously Issued Series and
any other class of Certificates that may be issued and retained by the
Transferor. The Transferor represents and warrants in the Pooling and
Servicing Agreement that the transfer of the Receivables to the Trust is
either a valid transfer and assignment of the Receivables to the Trust or the
grant to the Trust of a security interest in the Receivables. The Transferor
has taken and will take certain actions required to perfect the Trust's
interest in the Receivables and warrants that if the transfer to the Trust is
deemed to be a grant to the Trust of a security interest in the Receivables,
the Trustee will have a first priority perfected security interest therein,
subject only to Permitted Liens. If the transfer of the
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<PAGE>
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 the states may enact laws
and amendments to existing laws to regulate further the credit card industry
or
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<PAGE>
to reduce finance charges or other fees or charges applicable to credit card
and other consumer revolving loan accounts. Such laws, as well as any new
laws or rulings which may be adopted, may adversely affect the Servicer's
ability to collect on the Receivables or maintain previous levels of periodic
rate finance charges and other fees and charges with respect to the Accounts.
Any failure by the Servicer, Direct Merchants Bank, or other Credit Card
Originators to comply with such legal requirements also could adversely
affect the Trust's ability to collect the full amount of the Receivables.
Although the Transferor will make certain representations and warranties
relating to the validity and enforceability of the Receivables, the Trustee
will not make any examination of the Receivables or the records relating
thereto for the purpose of establishing the presence or absence of defects or
compliance with such representations and warranties, or for any other
purpose. In the event of a breach of certain representations and warranties,
the Transferor may be obligated to accept the reassignment and transfer of
the entire Trust portfolio. See "Description of the Offered
Certificates--Representations and Warranties" and "Certain Legal Aspects of
the Receivables--Consumer Protection Laws."
Application of federal and state bankruptcy and debtor relief laws to the
obligations represented by the Receivables could adversely affect the
interests of the holders of the Offered Certificates in the Receivables, if
such laws result in any Receivables being written off as uncollectible. See
"Description of the Offered Certificates--Defaulted Receivables; Dilution."
PAYMENTS AND MATURITY
The Receivables may be paid at any time and there is no assurance that
there will be additional Receivables created or that any particular pattern
of repayments will occur. A significant decline in the amount of Receivables
generated could result in the occurrence of a Pay Out Event and the
commencement of the Early Amortization Period if, as a result, the Transferor
Interest were reduced below the Minimum Transferor Interest or amounts in the
Pre-Funding Account or the Excess Funding Account result in significant
Negative Carry Amounts. See "Maturity Considerations" and "Description of the
Offered Certificates--Pay Out Events" for a discussion of other Pay Out
Events. If a Pay Out Event occurs, the Early Amortization Period will
commence and the average life and maturity of the Offered Certificates may be
significantly reduced. There can be no assurance in that event that the
holders of the Offered Certificates would be able to reinvest any accelerated
distributions on account of such Offered Certificates in other suitable
investments having a comparable yield.
EFFECT OF SUBORDINATION OF CLASS B CERTIFICATES; PRINCIPAL PAYMENTS
The Class B Certificates will be subordinated in right of payment of
principal to the Class A Certificates. Payments of principal in respect of
the Class B Certificates are scheduled to be paid on the Expected Final
Payment Date concurrently with the payment of principal to the Class A
Certificates but if the Early Amortization Period begins, payment of
principal in respect of the Class B Certificates will not commence until
after the final principal payment with respect to the Class A Certificates
has been made and the Class A Invested Amount has been paid in full.
Moreover, the Class B Invested Amount is subject to reduction on any
Distribution Date if collections of Principal Receivables allocable to the
Class B Certificates are reallocated to cover the Class A Required Amount or
if the aggregate Investor Default Amount and unpaid Adjustment Payments, if
any, for each business day in the preceding Monthly Period exceeds the
aggregate Available Series Finance Charge Collections applied to the payment
thereof and is not funded from Excess Finance Charge Collections, Transferor
Finance Charge Collections, Class C Reallocated Principal Collections or
Class D Reallocated Principal Collections and is not assessed against the
Class C Invested Amount or the Class D Invested Amount. If the Class B
Invested Amount suffers such a reduction, Finance Charge Collections
allocable to the Class B Certificateholders' Interest in future Monthly
Periods will be reduced. Moreover, to the extent the amount of such reduction
in the Class B Invested Amount is not reimbursed, the amount of principal
distributable to the Class B Certificateholders will be reduced. See
"Description of the Offered Certificates--Allocation Percentages,"
"--Reallocated Principal Collections," "--Investor Charge-Offs" and
"--Subordination of the Class B Certificates."
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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. If there is a
decline in such prime rate or other designated index, the amount of
collections of Finance Charge Receivables on such Accounts may be reduced,
whereas the amounts payable as interest on such Certificates and other
amounts required to be funded out of collections of Finance Charge
Receivables with respect to such Series may not be similarly reduced.
COMPETITION IN THE CREDIT CARD INDUSTRY
The credit card industry is highly competitive and operates in a legal and
regulatory environment increasingly focused on the cost of services charged
for credit cards. As new credit card issuers enter the market and all issuers
seek to expand their share of the market, there is increased use of
advertising, target marketing and pricing competition. The Trust will be
dependent upon the Transferor's continued ability to purchase new
Receivables. If the rate at which new Receivables are purchased declines
significantly and the Transferor is unable to designate Supplemental Accounts
or Additional Accounts, a Pay Out Event could occur, in which case the Early
Amortization Period would commence. In the event of an early payment of
principal on the Certificates, Certificateholders may realize a lower yield
on their reinvestment of such early payment and may be required to incur
costs associated with reinvesting such early payment.
SOCIAL, TECHNOLOGICAL AND ECONOMIC FACTORS
Changes in purchase and payment patterns by Obligors may result from a
variety of social, technological, and economic factors. Social factors
include potential changes in consumers' attitudes toward financing purchases
with debt. Technological factors include new methods of payment, such as
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debit cards. Economic factors include the rate of inflation, unemployment
levels and relative interest rates. Cardholders with respect to the Accounts
generally have billing addresses in all 50 states, the District of Columbia
and other United States territories and possessions. There is no basis,
however, to predict whether, or to what extent, social, technological, or
economic factors will affect future use of credit or repayment patterns.
BOOK-ENTRY REGISTRATION
Each Class of the Offered Certificates initially will be represented by
one or more Certificates registered in the name of Cede & Co., the nominee
for DTC, and will not be registered in the names of the Certificate Owners or
their nominees. Unless and until Definitive Certificates are issued,
Certificate Owners will not be recognized by the Trustee as
Certificateholders, as that term is used in the Pooling and Servicing
Agreement. Hence, until such time, Certificate Owners will only be able to
receive payments from, and exercise the rights of Certificateholders
indirectly through DTC and its participating organizations and, unless a
Certificate Owner requests a copy of any such report from the Trustee, will
receive reports and other information provided for under the Pooling and
Servicing Agreement only if, when and to the extent provided to Certificate
Owners by DTC and its participating organizations. In addition, the ability
of Certificate Owners to pledge Certificates to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of
such Certificates, may be limited due to the lack of physical certificates
for such Certificates. See "Description of the Offered
Certificates--Book-Entry Registration" and "--Definitive Certificates."
ABILITY OF SERVICER TO CHANGE PAYMENT TERMS
Pursuant to the Pooling and Servicing Agreement, the Transferor will not
be transferring to the Trust the Accounts but only the Receivables arising in
the Accounts. As owner of the Accounts, Direct Merchants Bank will have the
right to determine the annual percentage rates and the fees which will be
applicable from time to time to the Accounts, to alter the minimum monthly
payment required under the Accounts and to change various other terms with
respect to the Accounts. A decrease in the annual percentage rates or a
reduction in fees would decrease the effective yield on the Accounts and
could result in the occurrence of a Pay Out Event with respect to the Series.
An alteration of payment terms may result in fewer payments on Receivables
being made in any month. Under the Bank Purchase Agreement, Direct Merchants
Bank agrees that, unless required by law or unless it deems it necessary in
its sole discretion to maintain on a competitive basis its credit card
business, it will not at any time reduce the annual percentage rates of the
Periodic Finance Charges assessed on the Receivables or other fees charged on
any of the Accounts if, as a result of any such reduction, either (i) Direct
Merchants Bank's reasonable expectation is that such reduction will cause a
Pay Out Event to occur so long as there are certificates of any Series
outstanding or (ii) such reduction is not also applied to any comparable
segment of consumer revolving credit card accounts owned by Direct Merchants
Bank that have characteristics the same as, or substantially similar to, such
Accounts.
In addition, the Servicer will have the right to change the terms of the
Contracts relating to the Accounts or its policies and procedures with
respect to the servicing thereof (including the amount or timing of
charge-offs and the Periodic Finance Charges and other fees to be assessed on
the Accounts) if (i) (if the Servicer owns a comparable segment of consumer
revolving credit card accounts) such change is made applicable to such
comparable segment of consumer revolving credit card accounts owned by the
Servicer that have characteristics the same as, or substantially similar to,
the Accounts that are subject to such change and (ii) (if the Servicer does
not own a comparable segment of receivables) it will not make any such change
with the intent to materially benefit the Servicer over Metris, except as
otherwise restricted by any endorsement, sponsorship or other agreement
between the Servicer and an unrelated third party or by the terms of the
Contracts. The Purchase Agreement contains parallel covenants of Metris.
There can be no assurance that changes in applicable law, changes in the
marketplace or prudent business practice might not result in a determination
by the Servicer to take actions which would change the payment or other
Account terms. Except as specified above, there are no restrictions in the
Bank Purchase Agreement or the Pooling and Servicing Agreement on the ability
of the Servicer to change the
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terms of the Accounts. While the Servicer has no current intention of taking
actions which would change the payment or other terms of the Accounts other
than in accordance with its customary and usual procedures, there can be no
assurances that changes in the marketplace or prudent business practice might
not result in a determination to do so.
CONTROL
Subject to certain exceptions, the investor certificateholders of each
Series may take certain actions, or direct certain actions to be taken, under
the Pooling and Servicing Agreement or the related Supplement. In determining
whether the required percentage of Certificateholders have given their
approval or consent, except as otherwise specified, the Class A
Certificateholders, the Class B Certificateholders and the Class C
Certificateholders will be treated as a single Series. Accordingly, the Class
A Certificateholders will have the power to determine whether any such action
is taken without regard to the position or interests of the Class B
Certificateholders or the Class C Certificateholders relating to such action.
Neither the Class B Certificateholders nor the Class C Certificateholders
will have similar power. However, under certain circumstances the consent or
approval of a specified percentage of the aggregate invested amount of all
Series outstanding or of the invested amount of each class of each Series may
be required to direct certain actions, including requiring the appointment of
a successor Servicer following a Servicer Default, amending the Pooling and
Servicing Agreement in certain circumstances, directing the Servicer not to
sell the Receivables upon the occurrence of an Insolvency Event and directing
a repurchase of all outstanding Series upon the breach of certain
representations and warranties by the Transferor.
MASTER TRUST CONSIDERATIONS
In addition to the Certificates, the Trust, as a master trust, has issued
the Previously Issued Series and is expected to issue additional Series from
time to time. See "Annex I: Other Series." While the Principal Terms of any
Series will be specified in a Supplement, the provision of a Supplement and,
therefore, the terms of any additional Series, will not be subject to the
prior review or consent of holders of the certificates of any previously
issued Series. Such Principal Terms may include methods for determining
applicable investor percentages and allocating collections, provisions
creating security or Enhancements, different classes of certificates
(including subordinated classes of certificates), provisions subordinating
such Series to another Series (if the Supplement relating to such Series so
permits) or another Series to such Series (if the Supplement for such other
Series so permits), and any other amendment or supplement to the Pooling and
Servicing Agreement which is made applicable only to such Series. See
"Description of the Offered Certificates--Exchanges." In addition, the
provisions of any Supplement may give the holders of the certificates issued
pursuant thereto consent, approval, or other rights that could result in such
holders having the power to cause the Transferor, the Servicer, or the
Trustee to take or refrain from taking certain actions, including, without
limitation, actions with respect to the exercise of certain rights and
remedies under the Pooling and Servicing Agreement, without regard to the
position or interest of the certificateholders of any other Series. Similar
rights may also be given to the provider of any Enhancement for any Series.
It is a condition precedent to issuance of any additional Series that each
Rating Agency that has rated any outstanding Series deliver written
confirmation to the Trustee that the Exchange will not result in such Rating
Agency reducing or withdrawing its rating on any outstanding Series. There
can be no assurance, however, that the Principal Terms of any other Series,
including any Series issued from time to time hereafter, might not have an
adverse impact on the timing and amount of payments received by a
Certificateholder or the value of Certificates even if there is no change in
the rating of any outstanding Series. See "Description of the Offered
Certificates--Exchanges."
CERTIFICATE RATING
It is a condition to issuance of the Class A Certificates that they be
rated "AAA" or its equivalent by at least one nationally recognized rating
agency. It is a condition to issuance of the Class B Certificates that they
be rated "A" or its equivalent by at least one nationally recognized rating
agency. The ratings assigned to the Offered Certificates by a Rating Agency
will reflect such Rating Agency's assessment of
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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 Class A Certificates will be paid
by the Expected Final Payment Date or that the principal of, or interest on,
the Class B 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 August 1997
Monthly Period; however, there can be no assurance that a sufficient amount
of Receivables will be available for such purpose. Should the Pre-Funded
Amount be greater than zero at the end of the Funding Period, the amounts
remaining on deposit in the Pre-Funding Account will be deposited into the
Excess Funding Account. If there is a decline in the balance of the
Receivables during the Funding Period, deposits may be made to the Excess
Funding Account. Amounts on deposit in the Excess Funding Account are
invested in Cash Equivalents and are treated as assets of the entire Trust
allocated to all Series then outstanding and to the Exchangeable Transferor
Certificate, and will be applied as described in "Description of the Offered
Certificates--Excess Funding Account." Such funds may be released to holders
of certificates of other Series in connection with a reduction of the
principal balance of the certificates of such other Series. To the extent
that the net investment income earned on amounts on deposit in the
Pre-Funding Account during the Funding Period or in the Excess Funding
Account is less than the Base Rate, the Servicer will apply Transferor
Finance Charge Collections to the extent available to cover any related
Negative Carry Amount. If Transferor Finance Charge Collections are not
sufficient to cover such Negative Carry Amount, there will be a decline in
the excess of the Portfolio Yield over the Base Rate which could result in a
Pay Out Event. See "--Payments and Maturity" for a discussion of certain
effects of a Pay Out Event.
THE TRUST
The Trust was formed, in accordance with the laws of the State of
Delaware, pursuant to the Pooling and Servicing Agreement. The Trust was
formed for the transactions described herein and similar
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transactions, as contemplated by the Pooling and Servicing Agreement, and
prior to formation had no assets or obligations. The Trust has not engaged,
and will not engage, in any business activity, other than as described
herein, but rather will only acquire and hold the Receivables (and related
assets), issue (or cause to be issued) the Certificates, the Exchangeable
Transferor Certificate, and certificates representing additional Series and
engage in related activities (including, with respect to any Series, entering
into any Enhancement and Enhancement agreement relating thereto) and make
payments thereon. As a consequence, the Trust is not expected to have any
need for additional capital resources.
METRIS COMPANIES INC.
Metris Companies Inc. ("Metris") is an information-based direct marketer
of consumer credit products, extended service plans, and fee-based products
and services to moderate income consumers. Metris' consumer credit products
currently are unsecured and secured credit cards issued by its subsidiary,
Direct Merchants Credit Card Bank, National Association ("Direct Merchants
Bank"). Metris' customers and prospects include existing customers of an
affiliate, Fingerhut ("Fingerhut Customers"), and individuals who are not
Fingerhut Customers but for whom credit bureau information is available
("External Prospects"). Through operating subsidiaries, Metris also provides
extended service plans on certain categories of products sold by Fingerhut
that extend service coverage beyond the manufacturer's warranty. Metris
markets its fee-based products and services, including debt waiver programs,
card registration, third party insurance and membership clubs, to its credit
card customers, customers of Fingerhut, and customers of a third party credit
card issuer. Metris had 1996 net income of $20 million.
Metris is a Delaware corporation incorporated on August 20, 1996, and is
an 83 percent owned indirect subsidiary of Fingerhut Companies, Inc. ("FCI").
Metris became a publicly held company in October 1996 after completing an
initial public offering. Metris' principal subsidiaries are Direct Merchants
Bank, Metris Direct, Inc. and Metris Receivables, Inc. Prior to the initial
public offering, the Company's business was operated as a division of FCI.
THE TRANSFEROR
Metris Receivables, Inc., formerly known as Fingerhut Financial Services
Receivables, Inc. (the "Transferor"), was incorporated under the laws of the
State of Delaware on May 23, 1995. All of its outstanding capital stock is
owned by Metris. The Transferor was organized for the limited purpose of
purchasing, holding, owning and selling receivables and any activities
incidental to and necessary or convenient for the accomplishment of such
purposes, and has no material assets other than such receivables. Neither
Metris, as stockholder of the Transferor, nor the Transferor's board of
directors, intends to change its business purpose. The Transferor's executive
offices are located at 4400 Baker Road, Suite F470, Minnetonka, Minnesota
55343. The Transferor's telephone number is (612) 936-5077.
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Direct Merchants Credit Card Bank, National Association ("Direct Merchants
Bank" or the "Bank"), a wholly owned subsidiary of Metris, is a
special-purpose credit card bank, established under Section 2(c)(2)(F) of the
Bank Holding Company Act of 1956, as amended by the Competitive Equality
Banking Act of 1987, as amended. Direct Merchants Bank was chartered as a
national banking association on February 14, 1995. Its principal executive
offices are located at 1455 West 2200 South, Salt Lake City, Utah 84119,
telephone number (801) 974-4699.
FINGERHUT CORPORATION
Fingerhut Corporation ("Fingerhut"), a wholly owned subsidiary of FCI, has
been in the direct marketing business for over 45 years and is one of the
largest consumer catalog marketers in the United States. Fingerhut sells a
broad range of general merchandise products and services to moderate income
consumers, using catalogs and other direct marketing solicitations, and had
1996 net sales of approximately $1.538 billion. Fingerhut makes substantially
all of its sales using proprietary closed-end credit, offering extended
payment terms under fixed-term, fixed payment installment contracts. As
customers make payments and order new products, Fingerhut enters a variety of
payment, behavioral and other data into its database (the "Fingerhut
Database").
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The Fingerhut Database. The Fingerhut Database contains information on
more than 30 million individuals, including approximately 9 million customers
who have made a purchase from Fingerhut within the past 24 months. This
database contains up to 1,400 potential data items in a customer record,
including names, addresses, behavioral characteristics, general demographic
information and information provided by the customer. Fingerhut uses
information in the Fingerhut Database, along with sophisticated proprietary
credit scoring models, to produce proprietary credit scores (the "Fingerhut
Scores") for Fingerhut customers. The Fingerhut Database also includes a
"suppress" file (the "Suppress File"), which contains information on
approximately 8 million individuals about whom it has information relating to
fraud and other similar indicators of unacceptably high risk. Fingerhut
periodically updates the information in the Fingerhut Database. Fingerhut
does not report its credit information to the credit bureaus, which means
this information is not publicly available. Direct Merchants Bank currently
has agreements to use the information in the Fingerhut Database for marketing
general purpose credit cards to Fingerhut Customers.
DIRECT MERCHANTS BANK'S CREDIT CARD ACTIVITIES
GENERAL
The Receivables conveyed to the Trust have been and will be generated from
transactions made by holders of co-branded and other MasterCard credit card
accounts and may also include, although they do not currently include,
receivables generated from transactions made by holders of VISA and 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 March 31,
1997, Direct Merchants Bank had approximately 1.475 million credit card
accounts and $1.8 billion in managed loans; Fingerhut Customers represented
52% of the accounts and 51% of the managed loans.
NEW ACCOUNT UNDERWRITING
Direct Merchants Bank targets moderate income consumers whom it believes
are underserved by traditional providers of consumer credit. "Moderate
income" refers to those households in the United States that have annual
incomes of between $15,000 and $35,000 (approximately 31 million households
according to a 1994 U.S. Census Bureau report).
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 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 credit card accounts. The
Transferor anticipates designating such accounts as Supplemental Accounts to
be included as Accounts by the end of 1997.
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
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Customers, including risk scores provided by Fair, Isaacs & Company, a third
party provider of risk scorecards ("FICO scores"). For those Fingerhut
Customers who have FICO scores, Direct Merchants Bank uses the Fingerhut
Score to further segment Fingerhut Customers into narrower ranges within each
FICO score subsegment, allowing it to better evaluate individual credit risk
and to tailor its risk-based pricing accordingly. Additionally, the Fingerhut
Score is used to target individuals who have no, or limited, credit bureau
information and consequently no FICO scores, allowing the Bank to target
Fingerhut Customers who would not typically be solicited by other credit card
issuers.
In 1995, Direct Merchants Bank and Equifax, Inc., a third party credit
bureau, applied the credit risk evaluation techniques and knowledge developed
in creating the Fingerhut Score models to publicly available credit bureau
information in order to develop a proprietary modeling system for External
Prospects (the "Proprietary Modeling System"). The Proprietary Modeling
System, which is available for use exclusively by Direct Merchants Bank and
other of Metris' subsidiaries, consists of sophisticated models which produce
a credit risk score (a "Proprietary Score") for each prospect. The
Proprietary Score, like the Fingerhut Score, segments External Prospects into
narrower ranges within each FICO score subsegment, allowing the Bank to
better evaluate individual credit risk and to tailor its risk-based pricing
accordingly. Direct Merchants Bank also uses this segmentation to exclude
certain individuals from its marketing solicitations.
Direct Merchants Bank generates External Prospects from lists directly
obtained from the major credit bureaus based on criteria established by the
Bank. Direct Merchants Bank establishes the range of FICO scores that it
plans to target for a specific campaign, and receives files from the credit
bureaus which contain individual credit records of the External Prospects who
fall within this range. The files are incorporated into the Proprietary
Modeling System, which further segments External Prospects based upon their
Proprietary Scores. The mailing lists that are generated from the Proprietary
Modeling System are also checked against the Suppress File. Direct Merchants
Bank currently does not solicit External Prospects who do not have FICO
scores. Direct Merchants Bank periodically monitors the performance of the
Proprietary Modeling System and re-evaluates the effectiveness of the
Proprietary Score in segmenting credit risk, resulting in further refinements
to its selection criteria for External Prospects.
Solicitation. Prospects for solicitation include both Fingerhut Customers
and External Prospects and are contacted on a nationwide basis through
pre-screened direct mail and telephone solicitations. Direct Merchants Bank
receives responses to its prescreened solicitations, performs fraud
screening, verifies name and address changes, and obtains any information
which may be missing from the application. Applications are then sent to
third party data entry providers, which key the application information and
process the applications based on the criteria provided by Direct Merchants
Bank. Applications are approved, denied or referred to Direct Merchants Bank
for exception processing. Direct Merchants Bank processes exceptions for,
among other things, derogatory credit bureau information and fraud warnings.
Exception applications are processed manually by a credit analyst based on
policies approved by the Bank's credit committee.
Pricing. Direct Merchants Bank uses a risk-based pricing strategy. The
specific pricing for each credit card offer is determined primarily based on
the prospect's risk profile prior to solicitation. Each prospect is evaluated
to determine credit needs, credit risk, and existing credit availability. A
customized offer is developed that includes the most appropriate product,
brand, pricing, and credit line. Direct Merchants Bank currently offers
multiple pricing structures, with a range of annual fees and variable annual
percentage rates based on the prime rate. Once the account is opened, the
customer's internal and external credit performance are actively monitored
and their behavior and risk scores are periodically recalculated. As the
customer evolves through the credit lifecycle and is regularly rescored, the
lending relationship can evolve to include more competitive (or more
restrictive) pricing and product configurations.
The Adaptive Control System. Direct Merchants Bank uses FDR's adaptive
control system (the "Adaptive Control System") which uses statistical models
and basic account financial information to automatically and regularly assign
appropriate credit line increases and decreases to individual customers,
38
<PAGE>
as well as to determine the systematic collection steps to be taken at the
various stages of delinquency. The Adaptive Control System manages the
authorization of each transaction; in addition, it determines the collections
strategies to be used for non-delinquent accounts that have balances above
their assigned credit line (referred to as "overlimit" accounts).
Credit Lines. Once an account is approved, an initial credit line is
established based on the individual's risk profile using automated screening
and credit scoring techniques. This process results in a portfolio with
average credit lines that are below the industry average due to the higher
average risk elements inherent in Direct Merchants Bank's target market.
Direct Merchants Bank may elect, at any time and without prior notice to the
cardholder, to preclude or restrict further credit card use by the
cardholder, usually as a result of poor payment performance or the Bank's
concern over the creditworthiness of the cardholder. Credit lines are managed
based on the results of the behavioral scoring analysis in accordance with
criteria established by Direct Merchants Bank.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants
Bank reserves the right to change or terminate certain terms, conditions,
services, or features of the account (including increasing or decreasing
periodic finance charges, late fees, returned check charges and any other
charges or the minimum payment), subject to the conditions set forth in the
account agreement.
Direct Merchants Bank may change its credit standards or screening
criteria and methods at any time.
SERVICING, BILLING AND PAYMENTS
Direct Merchants Bank has established a relationship with FDR for
cardholder processing services. FDR is a provider of information processing
and related services including cardholder processing (services for financial
institutions which issue credit cards to cardholders), and merchant
processing (services for financial institutions which make arrangements with
merchants for the acceptance of credit cards as methods of payment).
Applications processing has been handled internally by Direct Merchants Bank
since September 1995. Back office support for mail inquiries and fraud
management were internalized by the Bank in April 1996.
Direct Merchants Bank generally assesses periodic finance charges on an
account if the cardholder has not paid the balance in full from the previous
billing cycle. These finance charges are based upon the average daily balance
outstanding on the account during the monthly billing cycle. Payments by
cardholders on the accounts are processed and applied first to any billed and
unpaid fees, next to billed and unpaid finance charges and then to billed and
unpaid transactions in the order determined by Direct Merchants Bank. If a
payment in full is not received prior to 25 days after the statement cycle
date (the "Payment Date"), finance charges are imposed on all purchases from
the date of the transaction to the statement cycle date. Finance charges are
also imposed on each cash advance from the day such advance is made until the
advance is paid in full. The finance charge is applied to the average daily
balance. The average daily balance is the sum of the daily unpaid balances of
purchases and cash advances on each day of the monthly billing cycle divided
by the number of days in such monthly billing cycle. Such unpaid balances are
determined by deducting payments and credits, adding any unpaid finance
charges and late charges and adding new purchases, cash advances and other
charges, in each case as of the date of the transaction. Many cardholders are
given a grace period. For most cardholders, if the entire balance on the
account is paid during the grace period, a finance charge is not imposed.
Certain cardholders are not given a grace period, depending on the credit
card terms offered, which are determined by the prospect's risk profile prior
to solicitation.
Direct Merchants Bank generally assesses an annual fee on its accounts.
For most accounts, the annual fee is billed 90 days after the account is
opened and annually on each anniversary thereafter. Direct Merchants Bank may
waive the annual membership fees, or a portion thereof, in connection with
the solicitation of new accounts depending on the credit terms offered, which
are determined by the prospect's risk profile prior to solicitation or when
it determines a waiver to be necessary in order to be competitive. In
addition to the annual fee, Direct Merchants Bank may charge accounts certain
other fees
39
<PAGE>
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. 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.
DELINQUENCY AND COLLECTIONS
Direct Merchants Bank considers an account delinquent if a payment due
thereunder is not received within 25 days from the closing date of the
statements. Collection procedures are determined with the assistance of the
Adaptive Control System, which continually monitors all delinquent accounts.
The collections function has been handled internally since January 1996.
Metris Direct's collections department generates letters through a
proprietary letter system when appropriate. Delinquent customers receive
automatic collection letters at various stages in their delinquency, from
5-90 days past due. Metris Direct's collections personnel attempt a minimum
of two contacts 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 Salt Lake City, Utah,
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.
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
40
<PAGE>
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.
RECOVERIES
Pursuant to the terms of the Pooling and Servicing Agreement, the Servicer
will be required to transfer all Recoveries to the Trust. In the event of any
sale or other disposition of Receivables in Defaulted Accounts as provided in
the Pooling and Servicing Agreement, Recoveries will not include amounts
received by the purchaser or transferee of such Receivables but will be
limited to amounts received by the Servicer from the purchaser or transferee.
Collections of Recoveries will be treated as collections of Finance Charge
Receivables.
YIELD CONSIDERATIONS
The Portfolio Yield on the portfolio of unsecured MasterCard credit card
accounts serviced by Direct Merchants Bank (the "Direct Merchants Bank
Portfolio") is set forth in the following table. The Portfolio Yields in the
table are calculated and reported on a billed basis. The Portfolio Yields on
Receivables included in the Trust are calculated and reported on a cash
basis. Portfolio Yields calculated on a billed basis may differ from
Portfolio Yields calculated on a cash basis due to (a) a lag between when
finance charges and fees are billed to cardholder accounts and when such
finance charges and fees are collected, (b) finance charges and fees that are
not ultimately collected from the cardholder and (c) growth in the Direct
Merchants Bank Portfolio.
The Portfolio Yield calculated on both a billed and a cash basis will also
be affected by numerous factors, including changes in the monthly interest
rate, variations in the rate of payments and new borrowings on the Accounts,
the amount of the annual membership fee and other fees, changes in the
delinquency and loss rates on the Receivables, and the percentage of
cardholders who pay their balances in full each month and, except in the case
of cash advances, do not incur periodic finance charges, which may in turn be
caused by a variety of factors including seasonal variations, the
availability of other sources of credit and general economic conditions. See
"Maturity Considerations." The interchange fees are not included in the Trust
and are not included in the yield numbers for the Direct Merchants Bank
Portfolio in the following table.
41
<PAGE>
YIELD EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR TWO MONTHS
QUARTER ENDED ENDED QUARTER ENDED ENDED ENDED
----------------------------- ----------- ------------------------------------------ ---------- -----------
JUNE 30, SEPT. 30, DEC. 31, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31, FEB. 28,
1995 1995 1995 1995 1996 1996 1996 1996 1996 1997
--------- ---------- -------- ----------- --------- -------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(1) . $84,685 $248,788 $394,610 $242,694 $609,792 $872,529 $1,185,070 $1,401,552 $1,017,236 $1,677,411
Total Finance
Charges and
Fees Billed
(2)(3).......... $ 4,279 $ 21,671 $ 23,071 $ 49,021 $ 41,813 $ 58,727 $ 75,252 $ 93,506 $ 269,298 $ 68,975
Average Revenue
Yield
(Annualized).... 20.27% 34.56% 23.20% 26.81% 27.58% 27.07% 25.26% 26.54% 26.47% 25.44%
</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.
LOSS EXPERIENCE
The following table sets forth the loss experience for each of the periods
shown for the Direct Merchants Bank Portfolio. There can be no assurance that
the delinquency and loss experience for the Trust Portfolio will be similar
to the historical experience set forth below, because among other things,
economic and financial conditions affecting the ability of cardholders to
make payments may be different from those that have prevailed during the
periods reflected below and many of the Accounts have been recently
originated.
LOSS EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR TWO MONTHS
QUARTER ENDED ENDED QUARTER ENDED ENDED ENDED
----------------------------- -------- --------------------------------------------- ---------- ---------
JUNE 30, SEPT. 30, DEC. 31, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31, FEB. 28,
1995 1995 1995 1995 1996 1996 1996 1996 1996 1997
-------- -------- -------- -------- --------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding(1) . $84,685 $248,788 $394,610 $242,694 $609,792 $872,529 $1,185,070 $1,401,552 $1,017,236 $1,677,411
Total Gross
Charge-Offs(2).. $ 0 $ 840 $ 3,206 $ 4,046 $ 8,946 $ 12,020 $ 17,042 $ 26,445 $ 64,453 $ 23,321
Total Gross
Charge-Offs as
a Percentage of
Average
Receivables
Outstanding..... 0.00% 0.34% 0.81% 1.67% 1.47% 1.38% 1.44% 1.89% 6.34% 1.39%
(Annualized) ... 0.00% 1.34% 3.22% 2.21% 5.90% 5.54% 5.72% 7.51% 6.34% 8.60%
</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>
THE RECEIVABLES
The Accounts had, as of February 28, 1997, an average Principal Receivable
balance of $988 and an average credit limit of $2,104. The percentage of the
total Receivable balance to the aggregate total credit limit, as of February
28, 1997, was 48.5 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 February 28, 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... 201,203 11.9% $ 42,711,793.04 2.5%
$ 500.01 - $ 1,000.00... 258,082 15.3 143,968,183.14 8.3
$1,000.01 - $ 1,500.00... 293,496 17.4 239,026,321.33 13.9
$1,500.01 - $ 5,000.00... 931,920 55.2 1,288,215,979.97 74.8
$5,000.01 - $10,000.00 .. 3,478 0.2 7,984,002.75 0.5
$10,000.01 & Greater .... 12 0.0 10,197.78 0.0
----------- ------------ ----------------- -----------
Total ................... 1,688,191 100.0% $1,721,916,478.01 100.0%
=========== ============ ================= ===========
</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 ....................... 1,535,822 91.0% $1,486,346,618.68 86.3%
1 - 29 Days ................ 87,788 5.2 130,262,606.15 7.6
30 - 59 Days ................ 24,441 1.4 37,744,264.96 2.2
60 - 89 Days ................ 14,941 0.9 23,928,287.91 1.4
90 - 119 Days ................ 9,388 0.6 16,182,126.92 0.9
120 - 149 Days ................ 8,089 0.5 13,834,273.78 0.8
150 Days or More .............. 7,722 0.4 13,618,299.61 0.8
----------- ------------ ----------------- -----------
Total ........................ 1,688,191 100.0% $1,721,916,478.01 100.0%
=========== ============ ================= ===========
</TABLE>
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 ........... 13,334 0.8% $ (780,340.66) 0.0%
No Balance ............... 415,133 24.6 0.00 0.0
$ 0.01 - $ 500.00 .... 299,240 17.7 67,677,775.47 3.9
$ 500.01 - $1,000.00 .... 271,194 16.1 202,841,334,26 11.8
$1,000.01 - $1,500.00 .... 211,318 12.5 266,879,067.07 15.5
$1,500.01 - $3,000.00 .... 370,448 21.9 777,344,048.47 45.1
$3,000.01 - $5,000.00 .... 102,983 6.1 383,956,734.00 22.3
$5,000.01 & Greater ...... 4,541 0.3 23,997,859.40 1.4
----------- ------------ ----------------- -----------
Total ................... 1,688,191 100.0% $1,721,916,478.01 100.0%
=========== ============ ================= ===========
</TABLE>
43
<PAGE>
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 .............. 32,803 1.9% $ 31,335,443.14 1.8%
Alaska ............... 2,768 0.2 3,160,363.55 0.2
Arizona .............. 19,953 1.2 22,142,620.84 1.3
Arkansas ............. 17,427 1.0 18,229.290.10 1.1
California ........... 191,508 11.3 217,735,802.63 12.6
Colorado ............. 23,716 1.4 26,059,153.93 1.5
Connecticut .......... 19,730 1.2 19,828.955.72 1.2
Delaware ............. 4,409 0.3 4,524,534.85 0.3
District of Columbia 4,236 0.3 4,175.218.95 0.2
Florida .............. 130,568 7.7 141,469,647.92 8.2
Georgia .............. 45,775 2.7 43,925,960.10 2.6
Hawaii ............... 5,634 0.3 6,114,817.92 0.4
Idaho ................ 7,738 0.5 7,190,040.67 0.4
Illinois ............. 62,303 3.7 62,716,479.05 3.6
Indiana .............. 45,212 2.7 45,141,581.68 2.6
Iowa ................. 16,576 1.0 15,353,957.43 0.9
Kansas ............... 16,368 1.0 17,160,506.59 1.0
Kentucky ............. 29,111 1.7 26,882,249.29 1.6
Louisiana ............ 26,800 1.6 27,307,747.41 1.6
Maine ................ 8,339 0.5 8,003,063.48 0.5
Maryland ............. 31,076 1.8 30,472,273.49 1.8
Massachusetts ........ 25,664 1.5 25,294,685.60 1.5
Michigan ............. 53,122 3.2 52,475.501.21 3.0
Minnesota ............ 24,945 1.5 22,817,416.74 1.3
Mississippi .......... 20,558 1.2 18,637,348.22 1.1
Missouri ............. 33,730 2.0 34,231,839.49 2.0
Montana .............. 5,866 0.3 5,833,121.50 0.3
Nebraska ............. 7,296 0.4 7,286,476.94 0.4
Nevada ............... 15,347 0.9 18,689,732.32 1.1
New Hampshire ........ 6,136 0.4 6,041,331.93 0.4
New Jersey ........... 39,966 2.4 40,516,024.84 2.4
New Mexico ........... 8,792 0.5 9,433,333.55 0.5
New York ............. 128,682 7.6 135,241,588.01 7.8
North Carolina ....... 50,488 3.0 44,064,172.63 2.6
North Dakota ......... 3,850 0.2 3,341,964.74 0.2
Ohio ................. 73,687 4.4 74,897,337.41 4.3
Oklahoma ............. 25,073 1.5 26,323,264.29 1.5
Oregon ............... 16,779 1.0 17,407,278.08 1.0
Pennsylvania ......... 72,271 4.3 68,635,212.95 4.0
Rhode Island ......... 6,554 0.4 6,569,692.19 0.4
South Carolina ....... 21,067 1.2 18,227.408.57 1.1
South Dakota ......... 4,138 0.2 3,915,252.11 0.2
Tennessee ............ 37,726 2.3 38,741,078.57 2.2
Texas ................ 125,915 7.5 131,693,193.80 7.6
Utah ................. 8,027 0.5 7,853,474.47 0.5
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
LOCATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------- ----------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Vermont .............. 3,676 0.2 3,613,121.14 0.2
Virginia ............. 45,070 2.7 42,983,190.08 2.5
Washington ........... 31,640 1.9 32,336,985.23 1.9
West Virginia ........ 15,910 0.9 13,830,443.84 0.8
Wisconsin ............ 29,427 1.7 26,763,349.60 1.6
Wyoming .............. 3,309 0.2 3,592,112.88 0.2
Other................. 1,430 0.0 1,699,836.34 0.0
----------- ------------ ----------------- -----------
Total ............... 1,688,191 100.0% $1,721,916,478.01 100.0%
=========== ============ ================= ===========
</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 ..... 417,974 24.8% 305,916,222.38 17.8%
Over 6 Months to 12 Months . 487,635 28.9 516,614,272.85 30.0
Over 12 Months to 24 Months . 770,317 45.6 883,070,032.64 51.3
Over 24 Months .............. 12,265 0.7 16,315,950.14 0.9
----------- ------------ ----------------- -----------
Total....................... 1,688,191 100.0% $1,721,916,478.01 100.0%
=========== ============ ================= ===========
</TABLE>
45
<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 April 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 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 Class A
Invested Amount has been paid in full. After the Class A Invested Amount has
been paid in full, Available Investor Principal Collections will be paid to
the Class B Certificateholders on each Distribution Date until the earlier of
the date on which the Class B Invested Amount has been paid in full and the
Termination Date.
A "Pay Out Event" occurs, either automatically or after specified notice,
upon (a) the failure of the Transferor to make certain payments or transfers
of funds for the benefit of the Certificateholders or to observe or perform
in any material respect certain other covenants within the time periods
stated in the Pooling and Servicing Agreement, (b) material breaches of
certain representations, warranties, or covenants of the Transferor which
remain uncured after grace periods specified in the Pooling and Servicing
Agreement, (c) certain bankruptcy or insolvency events relating to Metris,
the Transferor or Direct Merchants Bank, (d) the occurrence of a Servicer
Default that would have a material adverse effect on the Certificateholders,
(e) (w) the Transferor Interest being less than the Minimum Transferor
Interest, (x) (i) the sum of the amount on deposit in the Pre-Funding Account
plus the Series Allocation Percentage of the sum of the total amount of
Principal Receivables plus amounts on deposit in the Excess Funding Account
being less than (ii) the sum of the aggregate outstanding principal amounts
of the Class A Certificates, the Class B Certificates, the Class C
Certificates and the Class D Certificates, (y) the total amount of Principal
Receivables and the amounts on deposit in the Excess Funding Account and the
Principal Funding Account being less than the Minimum Aggregate Principal
Receivables (z) the Retained Percentage shall be equal or less than 2
percent, in each case as of any Determination Date, (f) the Trust becoming
subject to regulation as an "investment company" within the meaning of the
Investment Company Act, or (g) a reduction in the average of the Portfolio
Yields for any three consecutive Monthly Periods to a rate which is less than
the weighted average of the Base Rates for such three consecutive Monthly
Periods. See "Description of the Offered Certificates--Pay Out Events." In
the event of an early payment of principal on the Offered Certificates,
Certificateholders may realize a lower yield on their reinvestment of such
early payment and may be required to incur costs associated with reinvesting
such funds.
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The "Base Rate" means, with respect to any Monthly Period, the sum of (i)
the weighted average of the Class A Certificate Rate, the Class B Certificate
Rate and the Class C Certificate Rate as of the last day of such Monthly
Period (weighted based on the Class A Invested Amount, the Class B Invested
Amount and the Class C Invested Amount, respectively, as of the last day of
such Monthly Period) plus (ii) the product of 2.00 percent per annum and the
percentage equivalent of a fraction the numerator of which is the Adjusted
Invested Amount and the denominator of which is the Invested Amount, each as
of the last day of such Monthly Period. The term "Portfolio Yield" means,
with respect to any Monthly Period, the annualized percentage equivalent of a
fraction, the numerator of which is the sum of the aggregate amount of
Available Series Finance Charge Collections for such Monthly Period (not
including the amounts on deposit in the Payment Reserve Account and
Adjustment Payments made by the Transferor with respect to Adjustment
Payments required to be made but not made in prior Monthly Periods, if any)
plus the Principal Funding Account Investment Proceeds, investment earnings
on amounts on deposit in the Pre-Funding Account and amounts withdrawn from
the Accumulation Period Reserve Account with respect to such Monthly Period
calculated on a cash basis after subtracting the Investor Default Amount and
the Series Allocation Percentage of any Adjustment Payments which the
Transferor is required but fails to make pursuant to the Pooling and
Servicing Agreement for such Monthly Period, and the denominator of which is
the average daily Invested Amount plus the Pre-Funded Amount during the
preceding Monthly Period; provided, however, that Excess Finance Charge
Collections applied for the benefit of the Certificateholders may be added to
the numerator if the Rating Agency Condition is satisfied. See "Description
of the Offered Certificates--Pay Out Events."
Payment Rates. The following table sets forth the highest and lowest
cardholder monthly payment rates for the Receivables during any month in the
period shown and the average cardholder monthly payment rates for all months
during the period shown, in each case calculated as a percentage of the
previous month's total statement balance. Payment rates shown in the table
are based on amounts which would be deemed payments of Principal Receivables
and Finance Charge Receivables with respect to the Accounts (total payments).
CARDHOLDER MONTHLY PAYMENT RATES FOR THE DIRECT MERCHANTS BANK PORTFOLIO
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------- TWO MONTHS
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, ENDED
1995 1995 1995 1996 1996 1996 1996 FEB. 28, 1997
---------- ----------- ---------- ----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Highest Month....... 64.7% 12.7% 8.7% 8.5% 8.8% 8.4% 7.5% 7.1%
Lowest Month........ 19.7% 8.5% 7.9% 8.0% 8.0% 6.4% 6.8% 6.6%
Monthly Average
(1)................ 42.2% 10.5% 8.3% 8.3% 8.3% 7.5% 7.1% 6.9%
</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 Principal
Collections with respect to the Trust, and thus the rate at which the
Certificateholders could expect to receive payments of principal on their
Certificates during the Amortization Period, will be similar to the
historical experience set forth above. If a Pay Out Event occurs, the average
life and maturity of the Offered Certificates could be significantly reduced.
Because the actual payment rate at the end of the Revolving Period may be
less than the payment rate used to determine the Controlled Accumulation
Amount, or a Pay Out Event may occur which would initiate the Early
Amortization Period, there can be no assurance that the actual number of
months elapsed from the date of issuance of the Offered Certificates to the
Expected Final Payment Date will equal the expected number of months for such
period. See "Risk Factors--Payments and Maturity." As described under
"Description of the Offered Certificates--Postponement of Accumulation
Period," the Servicer may shorten the Accumulation Period and, in such event,
there can be no assurance that the
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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 $719,399,729, 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 1997-1 Supplement. Pursuant to the Pooling
and Servicing Agreement, the Transferor and the Trustee previously executed
the Supplements with respect to the Previously Issued Series and may execute
additional Supplements in order to issue additional Series.
GENERAL
The Offered Certificates will represent undivided interests in certain
assets of the Trust, including the right to the investor allocation
percentage of all Obligor payments on the Receivables in the Trust. Each
Class A Certificate and Class B Certificate represents the right to receive
payments of interest at the Class A Certificate Rate or the Class B
Certificate Rate, as the case may be, funded from Available Series Finance
Charge Collections and the right to receive payments of principal on the
Expected Final Payment Date or such earlier date following the occurrence of
a Pay Out Event funded from Principal Collections allocated to the Class A
Certificateholders' Interest or the Class B Certificateholders' Interest, as
the case may be. With respect to the Accumulation Period, principal payments
will be made to the Class A Certificateholders and the Class B
Certificateholders on the Expected Final Payment Date.
The Transferor will own the Exchangeable Transferor Certificate and the
Class D Certificates. The Exchangeable Transferor Certificate will represent
an undivided interest in the Trust, including the right
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<PAGE>
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 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
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<PAGE>
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.
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<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
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<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 June 20, 1997,
and on each Distribution Date thereafter to Certificateholders of each Class
in an amount equal to one-twelfth of the product of the applicable
Certificate Rate and the applicable outstanding principal balance as of the
preceding Record Date, except that interest for the first Distribution Date
will include accrued interest at the applicable Certificate Rate from the
Closing Date through June 19, 1997. Interest will be calculated on the basis
of a 360-day year of twelve 30-day months. Interest payments on the Class A
Certificates on any Distribution Date will be funded from Available Series
Finance Charge Collections with respect to the preceding Monthly Period (and
with respect to the first Distribution Date, the amount of the initial
deposit to the Interest Funding Account to be made on the Closing Date) and
from certain other funds allocated as set forth in the Pooling and Servicing
Agreement to the respective classes of the Certificates and deposited on each
business day during such Monthly Period in the Interest Funding Account.
Subject to the prior payment of interest on the Class A Certificates,
interest payments on the Class B Certificates on any Distribution Date will
be funded from Available Series Finance Charge Collections with respect to
the preceding Monthly Period and from certain other funds allocated as set
forth in the Pooling and Servicing Agreement to the respective classes of the
Certificates and deposited on each business day during such Monthly Period in
the Interest Funding Account.
PRINCIPAL PAYMENTS
During the Revolving Period (the period from and including the Closing
Date to but excluding the earlier of (a) the commencement of the Accumulation
Period and (b) the commencement of the Early Amortization Period), Principal
Collections allocable to the Invested Amount, subject to certain limitations,
including the allocation of any Reallocated Principal Collections with
respect to the related Monthly Period to pay the Class A Required Amount and
the Class B Required Amount, will be treated as Shared Principal Collections.
With respect to each Monthly Period during the Accumulation Period, the
Trustee will deposit in the Principal Funding Account an amount equal to the
least of (a) the Available Investor Principal Collections with respect to the
preceding Monthly Period, (b) the applicable Controlled Deposit Amount and
(c) the ABC Adjusted Invested Amount prior to any such deposit. Amounts in
the Principal Funding Account up to the Class A Invested Amount will be paid
to the Class A Certificateholders on the Expected Final Payment Date. After
payment in full of the Class A Invested Amount, amounts remaining in the
Principal Funding Account will be paid to the Class B Certificateholders on
the Expected Final Payment Date. After payment in full of the Class A
Invested Amount and the Class B Invested Amount, amounts remaining in the
Principal Funding Account will be paid to the Class C Certificateholders on
the Expected Final Payment Date. During the Accumulation Period, concurrently
with deposits to the Principal Funding Account for the benefit of the Class A
Certificates, Class B Certificates and Class C Certificates, the Class D
Invested Amount will be reduced to an amount equal to the Stated Class D
Amount. During the Accumulation Period, the portion of Available Investor
Principal Collections not required to be deposited in the Principal Funding
Account will generally be treated as Shared Principal Collections.
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"Available Investor Principal Collections" means, with respect to any
Monthly Period, an amount equal to the sum of (i) an amount equal to the
Fixed/Floating Allocation Percentage of all Principal Collections (less the
amount of Reallocated Principal Collections) received during such Monthly
Period, (ii) any amount on deposit in the Excess Funding Account or the
Pre-Funding Account allocated to the Certificates with respect to such
Monthly Period, (iii) the aggregate Investor Default Amount and the Series
Allocation Percentage of any unpaid Adjustment Payments paid from Available
Series Finance Charge Collections, Transferor Finance Charge Collections,
Excess Finance Charge Collections or Reallocated Principal Collections with
respect to such Monthly Period and any reimbursements from Available Series
Finance Charge Collections, Transferor Finance Charge Collections, Excess
Finance Charge Collections or Reallocated Principal Collections of
unreimbursed Class A Investor Charge-Offs, Class B Investor Charge-Offs,
Class C Investor Charge-Offs and Class D Investor Charge-Offs and (iv) Shared
Principal Collections allocated to the Certificates.
On each Distribution Date following the Monthly Period in which the Early
Amortization Period commences, the Class A Certificateholders will be
entitled to receive Available Investor Principal Collections for the
preceding Monthly Period in an amount up to the Class A Invested Amount until
the earlier of the date the Class A Invested Amount is paid in full and the
Termination Date. In addition, if a Pay Out Event occurs during the
Accumulation Period, the Early Amortization Period will commence and any
amount on deposit in the Principal Funding Account will be paid to the
Certificateholders of each Class of Certificates, sequentially, in
alphabetical order, on the Distribution Date following the Monthly Period in
which the Early Amortization Period commences. After payment in full of the
Class A Invested Amount, the Class B Certificateholders will be entitled to
receive Available Investor Principal Collections on each Distribution Date
during the Early Amortization Period until the earlier of the date the Class
B Invested Amount is paid in full and the Termination Date. After payment in
full of the Class B Invested Amount, the Class C Certificateholders will be
entitled to receive Available Investor Principal Collections on each
Distribution Date until the earlier of the date the Class C Invested Amount
is paid in full and the Termination Date. See "--Pay Out Events" below for a
discussion of events which might lead to the commencement of the Early
Amortization Period.
In the event of a sale of the Receivables and an early termination of the
Trust due to a Trigger Event, the breach of certain representations and
warranties, an optional repurchase of the Receivables by the Transferor, a
repurchase of the Receivables in connection with a Servicer Default or a sale
of the Receivables in connection with the Termination Date (each as described
under "--Pay Out Events," "--Servicer Default," and "--Final Payment of
Principal; Termination"), distributions of principal will be made to the
Certificateholders upon surrender of their Certificates. The proceeds of any
such sale or repurchase of Receivables will be allocated first to pay amounts
due with respect to the Class A Certificates, then to pay amounts due with
respect to the Class B Certificates, then to pay amounts due with respect to
the Class C Certificates and then to pay amounts due with respect to the
Class D Certificates as described herein.
POSTPONEMENT OF ACCUMULATION PERIOD
Upon written notice to the Trustee, the Servicer may elect to postpone the
commencement of the Accumulation Period, and extend the length of the
Revolving Period, subject to certain conditions including those set forth
below. The Servicer may make such election only if the Accumulation Period
Length (determined as described below) is less than twelve months. On each
Determination Date, until the Accumulation Period begins, the Servicer will
determine the "Accumulation Period Length," which is the number of months
expected to be required to fully fund the Principal Funding Account no later
than the end of the Monthly Period preceding the Expected Final Payment Date,
based on (a) the monthly collections of Principal Receivables expected to be
distributable to the certificateholders of all Series (unless Shared
Principal Collections from any such other Series are not allocated to be
shared with the Certificates), assuming a principal payment rate no greater
than the lowest monthly principal payment rate on the Receivables for the
preceding twelve months and (b) the amount of principal expected to be
distributable to certificateholders of Series (which may exclude certain
other Series) which are not expected to be in their revolving periods during
the Accumulation Period. If the Accumulation Period
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Length is less than twelve months, the Servicer may, at its option, postpone
the commencement of the Accumulation Period such that the number of months
included in the Accumulation Period will be equal to or exceed the
Accumulation Period Length. The effect of the foregoing calculation is to
permit the reduction of the length of the Accumulation Period based on (i)
the invested amounts of certain other Series which are scheduled to be in
their revolving periods during the Accumulation Period and (ii) increases in
the principal payment rate occurring after the Closing Date. The length of
the Accumulation Period will not be less than one month. If the Accumulation
Period is postponed in accordance with the foregoing, and if a Pay Out Event
occurs after the date originally scheduled as the commencement date of the
Accumulation Period, it is probable that Certificateholders would receive
some of their principal later than if the Accumulation Period had not been so
postponed.
SUBORDINATION OF THE CLASS B CERTIFICATES
The Class B Certificates will be subordinated to the extent necessary to
fund certain payments with respect to the Class A Certificates. To the extent
the Class B Invested Amount is reduced, the percentage of Finance Charge
Collections allocated to the Class B Certificateholders in subsequent Monthly
Periods will be reduced. Moreover, to the extent the amount of such reduction
in the Class B Invested Amount is not reimbursed, the amount of principal
distributable to the Class B Certificateholders will be reduced.
The Class C Certificates will be subordinated to the extent necessary to
fund certain payments with respect to the Class A Certificates and the Class
B Certificates. To the extent the Class C Invested Amount is reduced, the
percentage of Finance Charge Collections allocated to the Class C
Certificateholders in subsequent Monthly Periods will be reduced. Moreover,
to the extent the amount of such reduction in the Class C Invested Amount is
not reimbursed, the amount of principal distributable to the Class C
Certificateholders will be reduced.
If, on any Determination Date, the aggregate Investor Default Amount and
the unpaid Adjustment Payments, if any, for each business day in the
preceding Monthly Period exceeds (a) the aggregate amount of Available Series
Finance Charge Collections applied to the payment thereof as described in
clauses (v) and (vi) of "--Application of Collections--Payment of Fees,
Interest and Other Items," (b) the amount of Transferor Finance Charge
Collections and Excess Finance Charge Collections allocated thereto as
described in "--Reallocation of Cash Flows," and (c) the amount of
Reallocated Principal Collections allocated with respect thereto as described
in "--Reallocated Principal Collections," the Class D Invested Amount
(following the reduction thereof in an amount equal to the amount of any
Reallocated Principal Collections to be applied on the related Distribution
Date) will be reduced by the amount by which the sum of aggregate Investor
Default Amount and the unpaid Adjustment Payments exceeds the amount applied
with respect thereto during the preceding Monthly Period. Such reductions of
the Class D Invested Amount will thereafter be reimbursed and the Class D
Invested Amount increased on each business day by the amount, if any, of
Available Series Finance Charge Collections and Excess Finance Charge
Collections allocated and available for that purpose.
In the event that any such reduction of the Class D Invested Amount would
cause the Class D Invested Amount to be a negative number, the Class D
Invested Amount will be reduced to zero and the Class C Invested Amount will
be reduced by the amount by which the Class D Invested Amount would have been
reduced below zero, but not more than the sum of the remaining aggregate
Investor Default Amount and the remaining unpaid Adjustment Payments for such
Monthly Period. Such reductions of the Class C Invested Amount will
thereafter be reimbursed and the Class C Invested Amount increased on each
business day by the amount, if any, of Available Series Finance Charge
Collections and Excess Finance Charge Collections for such business day
allocated and available for that purpose.
In the event that any such reduction of the Class C Invested Amount would
cause the Class C Invested Amount to be a negative number, the Class C
Invested Amount will be reduced to zero and the Class B Invested Amount will
be reduced by the amount by which the Class C Invested Amount would have been
reduced below zero, but not more than the sum of the remaining aggregate
Investor Default Amount and the remaining unpaid Adjustment Payments for such
Monthly Period. Such reductions of the Class B Invested Amount will
thereafter be reimbursed and the Class B Invested Amount increased on each
business day by the amount, if any, of Available Series Finance Charge
Collections and Excess
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Finance Charge Collections for such business day allocated and available for
that purpose. If the Class B Invested Amount is reduced to zero, the Class A
Invested Amount will be reduced by the amount by which the Class B Invested
Amount would have been reduced below zero, but not more than the sum of the
remaining aggregate Investor Default Amount and the remaining unpaid
Adjustment Payments for such Monthly Period. Such reductions of the Class A
Invested Amount will thereafter be reimbursed and the Class A Invested Amount
increased on each business day by the amount, if any, of Available Series
Finance Charge Collections and Excess Finance Charge Collections allocated
and available for that purpose. See "--Reallocation of Cash Flows,"
"--Reallocated Principal Collections" and "--Investor Charge-Offs."
TRANSFER AND ASSIGNMENT OF RECEIVABLES
On the date of the initial issuance of the Series 1995-1 Variable Funding
Certificates, (the "Initial Closing Date"), the Transferor transferred and
assigned to the Trust all of its right, title, and interest in and to the
Receivables outstanding as of the Initial Closing Date, all of the
Receivables thereafter created and the proceeds of all of the foregoing.
Prior to such transfer and assignment and pursuant to the Purchase Agreement,
FCI (as predecessor to Metris under the Purchase Agreement) contributed and
sold to the Transferor all its right, title and interest in and to the
Receivables existing as of the Initial Closing Date, all the Receivables
thereafter created and all FCI's interest in the Bank Purchase Agreement.
Prior to such sale and contribution and pursuant to the Bank Purchase
Agreement, Direct Merchants Bank sold to FCI (as predecessor to Metris under
the Bank Purchase Agreement) all its right, title and interest in and to the
Receivables existing as of the date of such agreement and all the Receivables
arising from time to time thereafter. In connection with the realignment of
FCI's subsidiaries in September 1996, FCI assigned to Metris all of FCI's
rights and Metris assumed all of FCI's obligations under the Bank Purchase
Agreement and the Purchase Agreement. On the Closing Date, the Trustee will
authenticate the Certificates and deliver the Certificates to the Transferor
which will in turn deliver the Offered Certificates to the Underwriters
against payment of the net proceeds of the sale of the Offered Certificates.
Direct Merchants Bank for itself and as Servicer has identified in its
computer files that the Receivables are Receivables as defined herein. Direct
Merchants Bank, as initial Servicer, retains and will not deliver to the
Trustee any other records or agreements relating to the Receivables. The
records and agreements relating to the Receivables will not be segregated
from those relating to other accounts and receivables of Direct Merchants
Bank and the physical documentation relating to Receivables will not be
stamped or marked to reflect the transfer of Receivables to the Trust. The
Trustee will have reasonable access to such records and agreements as
required by applicable law or to enforce the rights of the
Certificateholders. Direct Merchants Bank has filed one or more UCC-1
financing statements in accordance with the UCC to perfect the interest of
FCI (as predecessor to Metris) in the Receivables and a UCC-3 financing
statement reflecting FCI's assignment of such interest in the Receivables to
Metris. FCI (as predecessor to Metris under the Purchase Agreement) and
Metris have filed UCC-1 financing statements in accordance with the UCC to
perfect the Transferor's interest in the Receivables. The Transferor, in
turn, has filed one or more UCC-1 financing statements in accordance with
applicable state law to perfect the Trust's interest in the Receivables,
which financing statements have been amended by the filing of one or more
UCC-3 financing statements reflecting the change in the name of the
Transferor. See "Certain Legal Aspects of the Receivables."
EXCHANGES
The Pooling and Servicing Agreement provides for the Trustee to issue two
types of certificates: (i) investor certificates in one or more Series of
certificates, each of which may have one or more classes of certificates of
which one or more such classes may be transferable, and (ii) the Exchangeable
Transferor Certificate. The Exchangeable Transferor Certificate evidences the
Transferor Interest, is held by the Transferor, and will be transferable only
as provided in the Pooling and Servicing Agreement. The Pooling and Servicing
Agreement also provides that, pursuant to any one or more Supplements, the
holder of the Exchangeable Transferor Certificate may tender the Exchangeable
Transferor Certificate and the certificates evidencing any Series of
certificates, to the Trustee in exchange for one or more new Series and
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a reissued Exchangeable Transferor Certificate. Under the Pooling and
Servicing Agreement, the holder of the Exchangeable Transferor Certificate
may define, with respect to any newly issued Series, certain terms including:
(i) its name or designation; (ii) its initial invested amount (or method for
calculating such amount); (iii) its certificate rate (or the method of
allocating interest payments or other cash flows to such Series); (iv) the
closing date; (v) the rating agency or agencies, if any, rating the Series;
(vi) the interest payment date or dates and the date or dates from which
interest shall accrue; (vii) the name of the clearing agency, if any; (viii)
the method of allocating Principal Collections for such Series and the method
by which the principal amount of investor certificates of such Series will
amortize or accrue and the method for allocating Finance Charge Collections;
(ix) the names of any accounts to be used by such Series and the terms
governing the operation of any such accounts; (x) the percentage used to
calculate monthly servicing fees; (xi) the Minimum Transferor Interest; (xii)
the Enhancement provider, if applicable, and the terms of any Enhancement
with respect to such Series; (xiii) the base rate applicable to such Series;
(xiv) the terms on which the certificates of such Series may be repurchased
or remarketed to other investors; (xv) the termination date of such Series;
(xvi) any deposit into any account provided for such Series; (xvii) the
number of classes of such Series and, if more than one class, the rights and
priorities of each such class; (xviii) the fees, if any, to be included in
funds available to certificateholders of such Series; (xix) the
subordination, if any, of such new Series with respect to any other Series;
(xx) the rights, if any, of the holder of the Exchangeable Transferor
Certificate that have been transferred to the holders of such Series; (xxi)
the pool factor; (xxii) the Minimum Aggregate Principal Receivables; (xxiii)
whether such Series will be part of a group or subject to being paired with
any other prefunded Series; (xxiv) whether such Series will be prefunded; and
(xxv) any other relevant terms, including whether or not such Series will be
pledged as collateral for an issuance of any other securities, including
commercial paper (all such terms, the "Principal Terms" of such Series). None
of the Transferor, the Servicer, the Trustee, or the Trust is required or
intends to obtain the consent of any Certificateholder to issue any
additional Series or in connection with the determination of the Principal
Terms thereof. However, as a condition of an Exchange, the holder of the
Exchangeable Transferor Certificate will deliver to the Trustee written
confirmation that the Exchange will not result in either Rating Agency
reducing or withdrawing its rating of any outstanding Series, including the
Offered Certificates. The Transferor may offer any Series to the public or
other investors in transactions either registered under the Securities Act or
exempt from registration thereunder, directly, through one or more
underwriters or placement agents, in fixed-price offerings, in negotiated
transactions or otherwise. Any such Series may be issued in fully registered
or book-entry form in minimum denominations determined by the Transferor. The
Transferor currently intends to offer, from time to time, additional Series.
The Series 1997-1 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
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Series may be subordinated to other Series, and classes within a Series may
have different priorities. The Series 1997-1 Supplement does not permit the
subordination of the Certificates to any other Series that may be issued by
the Trust (except to the limited extent described herein with respect to
Shared Principal Collections and Excess Finance Charge Collections). There is
no limit to the number of Exchanges that may be performed under the Pooling
and Servicing Agreement. The Trust will terminate only as provided in the
Pooling and Servicing Agreement.
Under the Pooling and Servicing Agreement and pursuant to a Supplement, an
Exchange may occur only upon the satisfaction of certain conditions provided
in the Pooling and Servicing Agreement. Under the Pooling and Servicing
Agreement, the holder of the Exchangeable Transferor Certificate may perform
an Exchange by notifying the Trustee at least five business days in advance
of the date upon which the Exchange is to occur. Under the Pooling and
Servicing Agreement, the notice will state the designation of any Series to
be issued on the date of the Exchange and, with respect to each such Series:
(i) its initial principal amount (or method for calculating such amount),
(ii) its certificate rate (or the method of allocating interest payments or
other cash flows to such Series), and (iii) the provider of the Enhancement,
if any, which is expected to provide credit support with respect to it. The
Pooling and Servicing Agreement provides that on the date of the Exchange the
Trustee will authenticate any such Series only upon delivery to the Trustee
of the following: (i) a Supplement specifying the Principal Terms of such
Series, (ii) an opinion of counsel to the effect that the certificates of
such Series will be characterized as indebtedness or as partnership interests
under existing law for federal and applicable state income tax purposes, or
that the issuance of such Series will not materially adversely affect the
federal income tax characterization of any outstanding Series or result in
the trust being subject to tax at the entity level for federal or applicable
state tax purposes (a "Tax Opinion"), (iii) if required by such Supplement,
the form of Enhancement and an appropriate Enhancement agreement with respect
thereto executed by the Transferor and the issuer of the Enhancement, (iv)
written confirmation from each Rating Agency that the Exchange will not
result in such Rating Agency's reducing or withdrawing its rating on any then
outstanding Series rated by it, (v) the existing Exchangeable Transferor
Certificate and, if applicable, the certificates representing the Series to
be exchanged, and (vi) an officer's certificate of the Transferor stating
that, after giving effect to such Exchange, (a) the Transferor Interest would
be at least equal to the Minimum Transferor Interest, (b) the Retained
Interest (as defined in the Pooling and Servicing Agreement) equals or
exceeds the Minimum Retained Interest and (c) the Trustee received
confirmation from each Rating Agency that the then current ratings of the
Investor Certificates will not be reduced or withdrawn and an opinion of
Special Tax Counsel that such Certificate will be characterized as
indebtedness or interests in a partnership for federal income tax purposes or
the issuance of such Certificate will not materially adversely effect the
Federal or any applicable state tax consequences of the Series.
Under the Pooling and Servicing Agreement, the Transferor may also
exchange the Exchangeable Transferor Certificate for a newly issued
Exchangeable Transferor Certificate and a second certificate (a "Supplemental
Certificate") the terms of which will be defined in a supplement upon the
satisfaction of certain conditions provided in the Pooling and Servicing
Agreement.
PREVIOUSLY ISSUED SERIES
The Trust has previously issued the Series 1996-1 Asset Backed
Certificates bearing various rates of interest and having the following
outstanding principal amounts on April 25, 1997; Class A, $518,000,000; Class
B, $87,500,000; Class C, $50,000,000; and Class D, $44,5000,000. The Trust
has previously issued the Series 1995-1 Variable Funding Certificates bearing
a variable rate of interest and having an outstanding principal amount which
may be increased or decreased during the revolving period for such Series.
See "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
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and authority to execute, deliver, and perform its obligations under the
Pooling and Servicing Agreement, the Series 1997-1 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
1997-1 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 1997-1 Supplement, and the
Purchase Agreement constitutes a legal, valid, and binding obligation of the
Transferor, and (v) the transfer of Receivables by it to the Trust under the
Pooling and Servicing Agreement constitutes either a valid transfer and
assignment to the Trust of all right, title, and interest of the Transferor
in and to the Receivables and the proceeds thereof and amounts in any of the
accounts established for the benefit of certificateholders free and clear of
any lien of any person claiming through or under the Transferor or any of its
affiliates (except for Permitted Liens and certain rights of the Transferor)
or the grant of a first priority security interest in such Receivables and
the proceeds thereof (including amounts in any of the accounts established
for the benefit of certificateholders). In the event of a breach of any of
the representations and warranties described in this paragraph with respect
to any Series, either the Trustee or the holders of certificates evidencing
undivided interests in the Trust aggregating more than 50 percent of the
invested amount of such Series, by written notice to the Transferor (and to
the Trustee and the Servicer if given by the Certificateholders of such
Series), may direct the Transferor to accept reassignment of an amount of
Principal Receivables equal to the invested amount to be reassigned (as
described below) within 60 days of such notice, or within such longer period
specified in such notice. The Transferor will thereupon be obligated to
accept reassignment of such Receivables on a Distribution Date occurring
within such applicable period. Such reassignment will not be required to be
made, however, if at any time during such applicable period, or such longer
period, the representations and warranties shall then be true and correct in
all material respects. The amount to be deposited by the Transferor for
distribution to certificateholders in connection with such reassignment will
be equal to the invested amount for all Series of certificates other than the
Series 1995-1 Variable Funding Certificates required to be reassigned on the
last day of the Monthly Period preceding the Distribution Date on which the
reassignment is scheduled to be made, and, with respect to the Variable
Funding Certificates, the invested amount as of the Distribution Date on
which the reassignment is scheduled to be made, less the amount, if any,
previously allocated for payment of principal to such certificateholders on
such Distribution Date, plus an amount equal to all interest accrued but
unpaid on such certificates at the applicable certificate rate through the
last day of the related Interest Accrual Period, less the amount transferred
to the Distribution Account from the Interest Funding Account in respect of
interest on such certificates for the month ending on such last day of the
Monthly Period. The payment of the reassignment deposit amount and the
transfer of all other amounts deposited for the preceding month in the
Distribution Account will be considered a payment in full of the investor
interest for all Series of certificates required to be repurchased and will
be distributed upon presentation and surrender of the certificates for each
such Series. If the Trustee or certificateholders give a notice as provided
above, the obligation of the Transferor to make any such deposit will
constitute the sole remedy available to the Trustee and the
certificateholders with respect to any breach of the Transferor's
representations and warranties.
Pursuant to the Pooling and Servicing Agreement, the Transferor also
represents and warrants that, among other things, subject to specified
exceptions and limitations, (i) the execution and delivery of the Pooling and
Servicing Agreement, the Series 1997-1 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
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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
1997-1 Supplement, and the Purchase Agreement, seeking to prevent the
consummation of any of the transactions contemplated thereby, seeking any
determination or ruling that would materially and adversely affect the
performance by the Transferor of its obligations thereunder, or seeking any
determination or ruling that would materially and adversely affect the
validity or enforceability thereof or of the tax attributes of the Trust,
(iv) each Receivable is or will be an account receivable arising out of the
performance by Direct Merchants Bank in accordance with the terms of the
Contract giving rise to such Receivable, (v) each Account classified as an
Eligible Account in any document or report delivered pursuant to the Pooling
and Servicing Agreement satisfies the definition of Eligible Account and the
Transferor has no knowledge of any fact which should have led it to expect at
the time of the classification of any Receivable as an Eligible Receivable
that such Receivable would not be paid in full when due, and each Receivable
classified as an Eligible Receivable by the Transferor in any document or
report delivered under the Pooling and Servicing Agreement satisfies the
requirements of eligibility contained in the definition of Eligible
Receivable set forth in the Pooling and Servicing Agreement, (vi) the
Transferor is not an "investment company" within the meaning of the
Investment Company Act (or is exempt from all provisions of such Act), (vii)
the Transferor is not insolvent and (viii) the Transferor is the legal and
beneficial owner of all right, title and interest in and to each Receivable
conveyed to the Trust by the Transferor pursuant to the Pooling and Servicing
Agreement, and each such Receivable has been or will be transferred to the
Trust free and clear of any lien other than Permitted Liens and in compliance
in all material respect with all requirements of law applicable to the
Transferor. If any representation or warranty made by the Transferor in the
Pooling and Servicing Agreement or the Series 1997-1 Supplement proves to
have been incorrect in any material respect when made, and as a result the
interests of the Certificateholders are materially adversely affected, and
such representation or warranty continues to be incorrect for 60 days after
notice to the Transferor by the Trustee or to the Transferor and the Trustee
by more than 50 percent of the Invested Amount and the Certificateholders'
Interest continues to be materially adversely affected during such period,
then the Trustee or 50 percent of the Certificateholders' Interest of any
class may give notice to the Transferor (and to the Trustee in the latter
instance) declaring that a Pay Out Event has occurred, thereby commencing the
Early Amortization Period; provided, however, that a Pay Out Event will not
be deemed to have occurred as aforesaid if the Transferor has accepted a
reassignment of the affected Receivables during such period in accordance
with the Pooling and Servicing Agreement. See "--Pay Out Events."
It is not required or anticipated that the Trustee will make any initial
or periodic general examination of the Receivables or any records relating to
the Receivables for the purpose of establishing the presence or absence of
defects or compliance with the Transferor's representations and warranties or
for any other purpose. The Servicer, however, will deliver to the Trustee on
or before March 31 of each year an opinion of counsel with respect to the
validity of the security interest of the Trust in and to the Receivables and
certain other components of the Trust.
CERTAIN COVENANTS
Pursuant to the Pooling and Servicing Agreement, the Transferor covenants
that, among other things, subject to specified exceptions and limitations,
(i) it will take no action to cause any Receivable to be evidenced by any
instruments or to be anything other than an account, general intangible, or
chattel paper, except in connection with the enforcement or collection of a
Receivable, (ii) except for the conveyances under the Pooling and Servicing
Agreement, it will not sell any Receivable or grant a lien (other than a
Permitted Lien) on any Receivable, (iii) in the event it receives a
collection on any Receivables, it will deposit such collections to the
Collection Account within two Business Days, (iv) it will notify the Trust
promptly after becoming aware of any lien on any Receivable other than
Permitted Liens, (v) it will take all actions necessary to enforce its rights
and claims under the Purchase Agreement,
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(vi) it will promptly provide the Trustee any notices, reports or
certificates given or delivered under the Purchase Agreement and (vii) except
as permitted by the Pooling and Servicing Agreement, it will not commingle
its assets with those of Direct Merchants Bank or Metris or any affiliate
thereof.
ELIGIBLE ACCOUNTS
As of the Initial Closing Date (or, with respect to Additional Accounts,
on the date of creation thereof, or, with respect to Supplemental Accounts,
as of the date the Receivables arising in such Accounts are designated for
inclusion in the Trust), each revolving credit consumer credit card account
owned by a Credit Card Originator and having the following characteristics
shall be an Eligible Account (each, an "Eligible Account"): (a) which is
payable in Dollars, (b) the Obligor on which has provided, as its initial
billing address, an address located in the United States or its territories
or possessions or a United States military address, (c) which has not been
identified by a Credit Card Originator in its computer files as stolen or
lost, (d) which is not at the time of transfer to the Trust sold or pledged
to any other party and which does not have Receivables which, at the time of
transfer to the Trust, are sold or pledged to any other party (provided that
Receivables which were sold or pledged prior to the Closing Date, but were
repurchased free of all Liens or where all Liens were released prior to the
sale hereunder, shall not be disqualified under this clause (d)), and (e) the
Receivables in which the Credit Card Originator has not charged off in its
customary and usual manner for charging off Receivables in such Accounts as
of the Initial Closing Date (or, with respect to Additional Accounts, as of
the date the Receivables of such Accounts are first designated for inclusion
in the Trust) unless such Account is subsequently reinstated.
ELIGIBLE RECEIVABLES
Each Receivable that satisfies each of the following criteria shall be an
Eligible Receivable (each, an "Eligible Receivable"): (a) arises under an
Account, (b) it is not sold or pledged to any other party, (c) it constitutes
an "account," "chattel paper" or a "general intangible" as each are defined
in Article 9 of the UCC as then in effect in each Relevant UCC State, (d) it
is at the time of its transfer to the Trust the legal, valid and binding
obligation of, or is guaranteed by, a Person who is competent to enter into a
contract and incur debt and is enforceable against such person in accordance
with its terms, (e) it was created or acquired in compliance, in all material
respects, with all Requirements of Law applicable to the Credit Card
Originator and pursuant to a Contract that complies, in all material
respects, with all Requirements of Law applicable to the Credit Card
Originator (including without limitation, laws, rules and regulations
relating to truth in lending, usury, fair credit billing, fair credit
reporting, equal credit opportunity and fair debt collection practices), (f)
all material consents, licenses, or authorizations of, or registrations with,
any Governmental Authority required to be obtained or given in connection
with the creation of such Receivable or the execution, delivery, creation,
and performance of the related Contract have been duly obtained or given and
are in full force and effect as of the date of the creation of such
Receivables and (g) immediately prior to giving effect to the sale, the
Transferor or the Trust will have good and marketable title free and clear of
all liens and security interests arising under or through the Transferor
(other than Permitted Liens).
ADDITION OF TRUST ASSETS
During the period from the Initial Closing Date through May 31, 1996 and
during the period from June 7, 1996 through November 5, 1996 all accounts
which met the definition of Additional Accounts were automatically included
as Accounts (such accounts, "Automatic Additional Accounts") from and after
the date upon which such Automatic Additional Accounts were created and all
Receivables in such Automatic Additional Accounts, whether such Receivables
were then existing or thereafter created, were transferred automatically to
the Trust upon purchase by the Transferor. The Transferor has elected to
suspend the automatic inclusion in Accounts of Automatic Additional Accounts
until a date (the "Restart Date") to be identified in writing by the
Transferor, at its option, to the Trustee, the Servicer and each Rating
Agency at least 10 days prior to such Restart Date. On and prior to the
Restart Date, the Transferor may, by giving ten business days' notice to the
Trustee and each Rating Agency, but will not be obligated to, designate from
time to time additional credit card accounts ("Supplemental Accounts") to be
included as Accounts. On December 20, 1996 and February 21, 1997 the
Transferor designated
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Supplemental Accounts to be included as Accounts. In late May 1997 and late
June 1997, the Transferor intends to designate Supplemental Accounts that
were originated in February, March and April 1997, and in May 1997,
respectively, 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 is less than the Minimum Aggregate Principal
Receivables, the Transferor is required to designate Supplemental Accounts to
be included as Accounts in a sufficient amount such that the Aggregate
Principal Receivables will be equal to or greater than the Minimum Aggregate
Principal Receivables. Receivables from such Supplemental Accounts shall be
transferred to the Trust on or before the tenth business day following such
Record Date. On any day on which the Receivables in Supplemental Accounts are
to be transferred to the Trust, the Receivables in such Accounts shall be
included as Eligible Receivables if they satisfy the requirements of the
definition of "Eligible Receivables."
The Transferor has conveyed, and will continue to convey, to the Trust all
Receivables arising under the Accounts, including all Supplemental Accounts
and Automatic Additional Accounts, from time to time until the termination of
the Trust.
The Transferor agrees that any such transfer of Receivables from
Supplemental Accounts will be subject to the satisfaction of the following
conditions: (i) on or before the fifth business day prior to the Addition
Date with respect to required additions and on or before the twentieth
Business Day prior to the Addition Date with respect to optional additions
(as applicable, the "Notice Date"), the Transferor shall give the Trustee,
each Rating Agency and the Servicer written notice that such Supplemental
Accounts will be included, which notice will specify the approximate
aggregate amount of the Receivables to be transferred; (ii) on or before the
applicable Addition Date, the Transferor will have delivered to the Trustee a
written assignment (the "Assignment") and the Transferor will have indicated
in its computer files that the Receivables created in connection with the
Supplemental Accounts have been transferred to the Trust and, within five
business days thereafter, the Transferor will have delivered to the Trustee
or the bailee of the Trustee a computer file or microfiche list containing a
true and complete list of all Supplemental Accounts, identified by account
number and the Principal Receivables in such Supplemental Accounts, as of the
Addition Date, which computer file or microfiche list will be as of the date
of such Assignment incorporated into and made a part of such Assignment;
(iii) the Transferor will represent and warrant that (x) no selection
procedure that is materially adverse to the interests of holders of the
Investor Certificates was used in selecting the Supplemental Accounts and (y)
as of the applicable Addition Date, the Transferor is not insolvent and will
not be rendered insolvent upon the transfer of Receivables to the Trust; (iv)
the Transferor will represent and warrant that, as of the Addition Date, the
Assignment constitutes either (x) a valid transfer and assignment to the
Trust of all right, title and interest of the Transferor in and to the
Receivables then existing and thereafter created and arising in connection
with the Accounts and any accounts that meet the definition of Additional
Accounts, and the proceeds thereof or (y) a grant of a security interest (as
defined in the UCC as in effect in the Relevant UCC State) in such property
to the Trust, which is enforceable with respect to then existing Receivables
of the Supplemental Accounts and the proceeds thereof upon the conveyance of
such Receivables to the Trust, and which will be enforceable with respect to
the Receivables thereafter created in respect of Supplemental Accounts
conveyed on such Addition Date and the proceeds thereof upon such creation,
and (z) if the Assignment constitutes the grant of a security interest to the
Trust in such property, upon the filing of a financing statement with respect
to such Supplemental Accounts and in the case of the Receivables thereafter
created in such Supplemental Accounts and the proceeds thereof, upon such
creation, the Trust will have a first priority perfected security interest in
such property, except for Permitted Liens; (v) the Transferor will deliver to
the Trustee an Officer's Certificate confirming the items set forth in clause
(ii) above; (vi) the Transferor will deliver to the Trustee an opinion of
counsel with respect to the Trust's security interest in the Receivables in
the Supplemental Accounts (with a copy to the Rating Agencies); and (vii) the
Transferor will have received written notice from the Rating Agencies that
the inclusion of such accounts as Supplemental Accounts will not result in
the reduction or withdrawal of its then existing rating of any Class of any
Series of Investor Certificates then issued and outstanding and will have
delivered such notice to the Trustee.
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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 (or, in the case of any date on
which Additional Accounts are to be added to the Trust which occurs on or
before the last day of the May 1997 Monthly Period, June 1, 1996) 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 (or June 1, 1996, as the case may be)
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 (or June 1, 1996, as the case may be) will not exceed 20 percent of
the number of Accounts on the first day of such eleventh preceding Monthly
Period (or June 1, 1996, as the case may be), and (y) the first day of the
second preceding Monthly Period minus the number of Accounts of the type
described in clause (ii) of the definition of "Approved Accounts" which have
been added on the initial day of the addition of such type of Account
pursuant to such clause (ii) since the first day of such second preceding
Monthly Period minus any Removed Accounts removed since the first day of such
second preceding Monthly Period will not exceed 15 percent of the number of
Accounts on the first day of such second preceding Monthly Period. The
automatic addition of Receivables in new Accounts may be subject to
additional conditions specified from time to time by the Rating Agencies.
COLLECTION AND OTHER SERVICING PROCEDURES
Pursuant to the Pooling and Servicing Agreement, the Servicer is
responsible for servicing, enforcing, and administering the Receivables and
collecting payments due thereunder in accordance with its usual and customary
servicing procedures and the Credit and Collection Policy. Servicing
functions to be performed with respect to the Receivables include statement
processing and mailing, collecting and recording payments, investigating
payment delinquencies, and communicating with cardholders. See "Direct
Merchants Bank's Credit Card Activities--Delinquency 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
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exercise of its discount option takes effect and with respect to Receivables
generated on and after such date, Collections in an amount equal to the
product of (i) a fraction the numerator of which is the amount of Discount
Option Receivables and the denominator of which is the amount of all of the
Principal Receivables (including Discount Option Receivables) at the end of
the prior date of processing, (ii) Collections of Principal Receivables,
prior to any reduction for Finance Charge Receivables which are Discount
Option Receivables, received on such date of processing, and (iii) a fraction
the numerator of which is the aggregate amount of Principal Receivables
arising on each date of processing falling on or after the date on which the
Transferor exercises its discount option and the denominator of which is the
aggregate Principal Receivables on such date of processing, will be deemed
Collections of Finance Charge Receivables and will be applied accordingly.
Any such designation would result in an increase in the amount of Finance
Charge Receivables and a corresponding increase in the Portfolio Yield, a
reduction in the amount of Principal Receivables in the Trust and a reduction
in the Transferor Interest and therefore the effect on Certificateholders
will be to decrease the likelihood of a Pay Out Event based upon a reduction
of the average Portfolio Yield for any designated period to a rate below the
average Base Rate for such period while increasing the likelihood that the
Transferor will be required to add Principal Receivables to the Trust and,
because of the reduction in the aggregate amount of Principal Receivables
which, if additional Principal Receivables were not available at such time,
could cause the occurrence of a Pay Out Event. Unless otherwise specified,
all references herein to Principal Receivables or Finance Charge Receivables,
or Collections with respect thereto, are references to such Receivables, or
Collections with respect thereto, as defined above after application of the
Discount Percentage.
TRUST ACCOUNTS
The Trustee has established and maintains with a Qualified Institution in
the name of the Trust, for the benefit of the Certificateholders, three
separate accounts, each in a segregated trust account, consisting of an
"Interest Funding Account," and a "Principal Account" and a "Payment Reserve
Account" (collectively, the "Trust Accounts"). The Trustee has also
established a "Distribution Account" for the benefit of the
certificateholders of each Series which is a non-interest bearing segregated
demand deposit account established with a Qualified Institution. The Servicer
has established and maintains, in the name of the Trust, for the benefit of
certificateholders of all Series, a "Collection Account," which is a
segregated account established by and maintained by the Servicer with a
Qualified Institution. A "Qualified Institution" is a depository institution,
which may include the Trustee, organized under the laws of the United States
or any one of the states thereof, which at all times has a short-term rating
of P-1 by Moody's and of A-1+ by Standard & Poor's or long-term unsecured
debt obligation (other than such obligation the rating of which is based on
collateral or on the credit of a person other than such institution or trust
company) rating of at least Aa3 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
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affiliate) upon books maintained for that purpose by or on behalf of the
issuer thereof and identified on books maintained for that purpose by the
Trustee as held for the benefit of the Trust or the Certificateholders, and
consisting of (x) shares of an open end diversified investment company which
is registered under the Investment Company Act which (i) invests its assets
exclusively in obligations of or guaranteed by the United States of America
or any instrumentality or agency thereof having in each instance a final
maturity date of less than one year from their date of purchase or other Cash
Equivalents, (ii) seeks to maintain a constant net asset value per share,
(iii) has aggregate net assets of not less than $100,000,000 on the date of
purchase of such shares and (iv) which each Rating Agency designates in
writing will not result in a withdrawal or downgrading of its then current
rating of any Series rated by it or (y) Eurodollar time deposits of a
depository institution or trust company that are rated A-1+ by Standard &
Poor's and P-1 by Moody's; provided, however, that at the time of the Trust's
investment or contractual commitment to invest therein, the Eurodollar
deposits of such depositary institution or trust company shall have a credit
rating from Standard & Poor's of A-1+ and P-1 by Moody's; (d) a guaranteed
investment contract (guaranteed as to timely payment) which each Rating
Agency designates in writing will not result in a withdrawal or downgrading
of its then current rating of any Series rated by it; (e) repurchase
agreements transacted with either (i) an entity subject to the Bankruptcy
Code, provided, however, that (A) the term of the repurchase agreement is
consistent with the requirements with regard to the maturity of Cash
Equivalents specified herein or in the applicable Supplement for the
applicable account or is due on demand, (B) the Trustee or a third party
acting solely as agent for the Trustee has possession of the collateral, (C)
the Trustee on behalf of the Trust has a perfected first priority security
interest in the collateral, (D) the market value of the collateral is
maintained at the requisite collateral percentage of the obligation in
accordance with standards of the Rating Agencies, (E) the failure to maintain
the requisite collateral level will obligate the Trustee to liquidate the
collateral as promptly as practicable upon instructions from the Servicer,
(F) the securities subject to the repurchase agreement are either obligations
of, or fully guaranteed as to principal and interest by, the United States of
America or any instrumentality or agency thereof, certificates of deposit or
banker's acceptances and (G) the securities subject to the repurchase
agreement are free and clear of any third party lien or claim, or (ii) a
financial institution insured by the FDIC, or any broker-dealer with
"retail-customers" that is under the jurisdiction of the Securities Investors
Protection Corporation ("SIPC"), provided, however, that (A) the market value
of the collateral is maintained at the requisite collateral percentage of the
obligation in accordance with the standards of the Rating Agencies, (B) the
Trustee or a third party (with a rating from Moody's and Standard & Poor's of
P-1 and A-1+, respectively) acting solely as agent for the Trustee has
possession of the collateral, (C) the collateral is free and clear of third
party liens and, in the case of an SIPC broker, was not acquired pursuant to
a repurchase or reverse repurchase agreement and (D) the failure to maintain
the requisite collateral percentage will obligate the Trustee to liquidate
the collateral upon instructions from the Servicer; provided, however, that
at the time of the Trust's investment or contractual commitment to invest in
any repurchase agreement the short-term deposits or commercial paper rating
of such entity or institution in subsections (i) and (ii) above shall have a
credit rating of P-1 or A-1+ or their equivalent from each Rating Agency; and
(f) any other investment if each Rating Agency confirms in writing that such
investment will not adversely affect its then current rating of the Investor
Certificates (such investments, "Cash Equivalents"). Any earnings (net of
losses and investment expenses) on funds in the Interest Funding Account and
the Principal Account will be paid to the Transferor. The Servicer has the
revocable power to withdraw funds from the Collection Account, and to
instruct the Trustee to make withdrawals and payments from the Interest
Funding Account and the Principal Account, in each case for the purpose of
making deposits and distributions required under the Pooling and Servicing
Agreement, including the deposits and distributions described in
"--Application of Collections." The agent making payments to the
Certificateholders (the "Paying Agent") has the revocable power to withdraw
funds from the Distribution Account for the purpose of making distributions
to Certificateholders. The Paying Agent initially will be The Bank of New
York.
PRINCIPAL FUNDING ACCOUNT
Pursuant to the Series 1997-1 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
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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 will establish and maintain in the name of the Trust, for the
benefit of the certificateholders of all Series, an "Excess Funding Account"
which is a segregated account established by and maintained by the Servicer
with a Qualified Institution. At any time during which no Series is in an
amortization period (including any accumulation period or early amortization
period), or for a Series in amortization, the principal account, if any, is
fully funded for an applicable period, and the Transferor Interest does not
exceed the Minimum Transferor Interest, funds (to the extent available
therefor as described herein) otherwise payable to the Transferor will be
deposited in the Excess Funding Account on any business day until the
Transferor Interest is at least equal to the Minimum Transferor Interest.
Funds on deposit in the Excess Funding Account may, at the option of the
Transferor, be withdrawn and paid to the Transferor to the extent that on any
day the Transferor Interest exceeds the Minimum Transferor Interest as a
result of the addition of new Receivables to the Trust. Such deposits in and
withdrawals from the Excess Funding Account may be made on a daily basis.
Any funds on deposit in the Excess Funding Account at the beginning of the
Amortization Period will be deposited in the Principal Account as part of
Class A Principal, Class B Principal, or Class C Principal, as applicable,
for any Distribution Date. In the event that more than one Series begins its
accumulation period or amortization period at the same time, amounts on
deposit in the Excess Funding Account will be paid out to each such Series
pro rata based on the aggregate invested amount of each such Series. In
addition, no funds allocated to investor certificates will be deposited in
the Excess Funding Account during any amortization period (including any
accumulation period or early amortization period) for any Series until the
Principal Funding Account for such Series for such Distribution Date has been
fully funded or the investor certificates of such Series have been paid in
full.
Funds on deposit in the Excess Funding Account will be invested by the
Trustee at the direction of the Transferor in Cash Equivalents. On each
Distribution Date, all net investment income earned on amounts in the Excess
Funding Account since the preceding Distribution Date will be withdrawn from
the Excess Funding Account and treated as Finance Charge Collections.
PRE-FUNDING ACCOUNT
The Servicer will establish and maintain in the name of the Trustee, on
behalf of the Trust, the Pre-Funding Account. The Pre-Funding Account will be
established and maintained with the trust department of The Bank of New York.
Funds on deposit in the Pre-Funding Account will be withdrawn and paid to the
Transferor to the extent of any increases in the Invested Amount during the
Funding Period as a result of an increase in the amount of Receivables in the
Trust in accordance with the Series 1997-1 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
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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 September 1997 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 1997-1 Supplement, the Servicer will establish and
maintain with a Qualified Institution an accumulation period reserve account
as a segregated trust account held for the benefit of the Certificateholders
(the "Accumulation Period Reserve Account"). The Accumulation Period Reserve
Account is established to assist with the subsequent distribution of interest
on the Class A Certificates, Class B Certificates and Class C Certificates
during the Accumulation Period. On each business day from and after the
Reserve Account Funding Date, but prior to the termination of the
Accumulation Period Reserve Account, the Trustee, acting pursuant to the
Servicer's instructions, will apply Available Series Charge Collections
allocated to the Certificates (to the extent described below under
"--Application of Collections--Payment of Fees, Interest and Other Items") to
increase the amount on deposit in the Accumulation Period Reserve Account (to
the extent such amount is less than the Required Reserve Account Amount). The
"Reserve Account Funding Date" will be the first day of the third Monthly
Period prior to the commencement of the Accumulation Period, or such earlier
date as the Servicer may determine. The "Required Reserve Account Amount" for
any date on or after the Reserve Account Funding Date will be equal to (a)
0.5 percent of the sum of the Class A Invested Amount, the Class B Invested
Amount and the Class C Invested Amount or (b) any other amount designated by
the Transferor; provided, that if such designation is of a lesser amount, the
Transferor shall have provided the Servicer and the Trustee with evidence
that the Rating Agency Condition has been satisfied and the Transferor shall
have delivered to the Trustee a certificate of an authorized officer to the
effect that, based on the facts known to such officer at such time, in the
reasonable belief of the Transferor, such designation will not cause a Pay
Out Event or an event that, after giving of notice or the lapse of time,
would cause a Pay Out Event to occur with respect to Series 1997-1.
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
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an amount equal to the lesser of (a) the Available Reserve Account Amount
with respect to such Transfer Date and (b) the excess, if any, of (i)
one-twelfth of the product of (x) the weighted average of the Class A
Certificate Rate, the Class B Certificate Rate and the Class C Certificate
Rate (in effect for the related Interest Accrual Period) and (y) the
Principal Funding Account Balance as of the last day of the Monthly Period
preceding the Monthly Period in which such Interest Accrual Periods ends (the
"Covered Amount") over (ii) the Principal Funding Account Investment Proceeds
with respect to such Transfer Date. On each Transfer Date, the amount
available to be withdrawn from the Accumulation Period Reserve Account (the
"Available Reserve Account Amount") will be equal to the lesser of the amount
on deposit in the Accumulation Period Reserve Account (before giving effect
to any withdrawal from the Accumulation Period Reserve Account on such
Transfer Date) and the Required Reserve Account Amount for such Transfer
Date.
The Accumulation Period Reserve Account will be terminated following the
earliest to occur of (a) the termination of the Trust pursuant to the Pooling
and Servicing Agreement, (b) the date on which the Invested Amount is paid in
full, (c) if the Accumulation Period has not commenced, the occurrence of a
Pay Out Event with respect to the Certificates and (d) if the Accumulation
Period has commenced, the earlier of the first Transfer Date with respect to
the Early Amortization Period and the Expected Final Payment Date. Upon the
termination of the Accumulation Period Reserve Account, all amounts on
deposit therein (after giving effect to any withdrawal from the Accumulation
Period Reserve Account on such date as described above) will be applied as if
they were Available Series Finance Charge Collections.
ALLOCATION PERCENTAGES
Pursuant to the Pooling and Servicing Agreement, during each Monthly
Period the Servicer will allocate among the Class A Certificateholders'
Interest, the Class B Certificateholders' Interest, the Class C
Certificateholders' Interest, the Class D Certificateholders' Interest, the
interest of the holders of the Previously Issued Series, the Transferor
Interest and the holders of the other Series issued and outstanding from time
to time pursuant to the Pooling and Servicing Agreement and applicable
Supplements all Finance Charge Collections and all Principal Collections and
the amount of all Defaulted Receivables. Finance Charge Collections will be
allocated prior to the commencement of an Early Amortization Period and the
amount of Defaulted Receivables will be allocated at all times, and Principal
Collections will be allocated during the Revolving Period to the Class A
Certificateholders' Interest, the Class B Certificateholders' Interest, the
Class C Certificateholders' Interest and the Class D Certificateholders'
Interest, based on the percentage equivalent of a fraction the numerator of
which is the Class A Adjusted Invested Amount, the Class B Adjusted Invested
Amount, the Class C Adjusted Invested Amount, or the Class D Invested Amount,
respectively, at the end of the preceding business day and the denominator of
which is the greater of (a) the sum of the aggregate amount of Principal
Receivables and amounts on deposit in the Excess Funding Account as of the
end of the preceding business day and (b) the sum of the numerators for all
classes of all Series then outstanding used to calculate the applicable
allocation percentage (the "Class A Floating Allocation Percentage," the
"Class B Floating Allocation Percentage," the "Class C Floating Allocation
Percentage" and the "Class D Floating Allocation Percentage," respectively;
the sum of all such percentages, the "Floating Allocation Percentage").
During the Revolving Period, all Principal Collections allocable to the
Certificates will be allocated and paid to the 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
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percentages the "Fixed/Floating Allocation Percentage"). Finance Charge
Collections will be allocated on and after the date on which a Pay Out Event
is deemed to occur to the Certificateholders' Interest based on the
Fixed/Floating Allocation Percentage. On and after the date on which a
Defeasance occurs with respect to the Certificates, each of the allocation
percentages specified above with respect to the Certificates will be zero.
See "--Defeasance."
The term "Transferor Percentage" means (a) when used with respect to (i)
Principal Collections during the Revolving Period and (ii) Finance Charge
Collections and the amount of Defaulted Receivables at all times, 100 percent
minus the sum of the Floating Allocation Percentage and the floating
allocation percentages for all other Series and (b) when used with respect to
Principal Collections during the Amortization Period, 100 percent minus the
sum of the Fixed/Floating Allocation Percentage and the allocation
percentages used with respect to Principal Collections for all other Series.
As used herein: (i) the term "Class A Invested Amount" means an amount
equal to (a) the Class A Initial Invested Amount less the Class A Percentage
of the initial deposit to the Pre-Funding Account plus the Class A Percentage
of any withdrawals from the Pre-Funding Account during the Funding Period in
connection with the addition of Receivables to the Trust and the deposit of
the amounts in the Pre-Funding Account at the end of the Funding Period into
the Excess Funding Account, minus (b) the aggregate amount of principal
payments (except principal payments made from the Pre-Funding Account) made
to Class A Certificateholders through and including such date, and minus (c)
the aggregate amount of Class A Investor Charge-Offs for all prior
Distribution Dates, equal to the amount by which the Class A Invested Amount
has been reduced to fund the Investor Default Amount and the unpaid
Adjustment Payments on all prior Distribution Dates as described under
"--Investor Charge-Offs," plus (d) the aggregate amount of Available Series
Finance Charge Collections, Transferor Finance Charge Collections, Excess
Finance Charge Collections and Reallocated Principal Collections applied on
all prior Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clause (c), provided, however, that the Class A
Invested Amount may not be reduced below zero, (ii) the term "Class A
Adjusted Invested Amount," for any date of determination, means an amount not
less than zero equal to the then current Class A Invested Amount, minus the
Principal Funding Account Balance on such date, (iii) the term "Class B
Invested Amount" for any date means an amount equal to (a) the Class B
Initial Invested Amount less the Class B Percentage of the initial deposit to
the Pre-Funding Account plus the Class B Percentage of any withdrawals from
the Pre-Funding Account during the Funding Period in connection with the
addition of Receivables to the Trust and the deposit of the amounts in the
Pre-Funding Account at the end of the Funding Period into the Excess Funding
Account, minus (b) the aggregate amount of principal payments (except
principal payments made from the Pre-Funding Account) made to Class B
Certificateholders through and including such date, minus (c) the aggregate
amount of Class B Investor Charge-Offs for all prior Distribution Dates,
equal to the amount by which the Class B Invested Amount has been reduced to
fund the Investor Default Amount and the unpaid Adjustment Payments on all
prior Distribution Dates as described under "--Investor Charge-Offs," minus
(d) the aggregate amount of Reallocated Class B Principal Collections for
which neither the Class D Invested Amount nor the Class C Invested Amount has
been reduced for all prior Distribution Dates, and plus (e) the aggregate
amount of Available Series Finance Charge Collections, Transferor Finance
Charge Collections, Excess Finance Charge Collections, Reallocated Class C
Principal Collections, Reallocated Class D Principal Collections and certain
other amounts applied on all prior Distribution Dates for the purpose of
reimbursing amounts deducted pursuant to the foregoing clauses (c) and (d),
provided, however; that the Class B Invested Amount may not be reduced below
zero, (iv) the term "Class B Adjusted Invested Amount," for any date of
determination, means an amount not less than zero equal to the then current
Class B Invested Amount minus the excess, if any, of the Principal Funding
Account Balance over the Class A Invested Amount on such date of
determination, (v) the term "Class C Invested Amount" for any date means an
amount equal to (a) the Class C Initial Invested Amount less the Class C
Percentage of the initial deposit to the Pre-Funding Account plus the Class C
Percentage of any withdrawals from the Pre-Funding Account during the Funding
Period in connection with the addition of Receivables to the Trust and the
deposit of the amounts in the Pre-Funding Account at the end of the Funding
Period into the Excess Funding Account, minus (b) the aggregate amount of
principal payments (except principal payments made from the Pre-Funding
Account) made to Class C Certificateholders
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through and including such date, minus (c) the aggregate amount of Class C
Investor Charge-Offs for all prior Distribution Dates, equal to the amount by
which the Class C Invested Amount has been reduced to fund the Investor
Default Amount and the unpaid Adjustment Payments on all prior Distribution
Dates as described under "--Investor Charge-Offs," minus (d) the aggregate
amount of Reallocated Class C Principal Collections and Reallocated Class B
Principal Collections for which the Class D Invested Amount has not been
reduced for all prior Distribution Dates, and plus (e) the aggregate amount
of Available Series Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections, Reallocated Class D Principal
Collections, and certain other amounts as may be available applied on all
prior Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clauses (c) and (d), provided, however, that the
Class C Invested Amount may not be reduced below zero, (vi) the term "Class C
Adjusted Invested Amount," for any date of determination, means an amount not
less than zero equal to the then current Class C Invested Amount minus the
excess, if any, of the Principal Funding Account Balance over the sum of the
Class A Invested Amount and the Class B Invested Amount on such date of
determination; (vii) the term "Class D Invested Amount" means an amount equal
to (a) the initial principal balance of the Class D Certificates, minus (b)
the aggregate amount of principal payments made to Class D Certificateholders
through and including such date, minus (c) the aggregate amount of Class D
Investor Charge-Offs for all prior Distribution Dates, equal to the amount by
which the Class D Invested Amount has been reduced to fund the Investor
Default Amount and the unpaid Adjustment Payments on all prior Distribution
Dates as described under "--Investor Charge-Offs," minus (d) the aggregate
amount of Reallocated Principal Collections for all prior Distribution Dates,
and plus (e) the aggregate amount of Finance Charge Collections, Transferor
Finance Charge Collections, Excess Finance Charge Collections and certain
other amounts applied on all prior Distribution Dates for the purpose of
reimbursing amounts deducted pursuant to the foregoing clause (c), provided,
however, that the Class D Invested Amount may not be reduced below zero,
(viii) the term "Stated Class D Amount" means the greater of (i) zero and
(ii) 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 $23,842,500 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.
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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 1997-1 Certificates in an amount equal
to the remaining Required Amount. Excess Finance Charge Collections from
other Series allocable to the Series 1997-1 Certificates for any business day
will be equal to the product of (x) Excess Finance Charge Collections
available from all other Series for such business day and (y) a fraction, the
numerator of which is the Required Amount for such business day (as reduced
by amounts applied pursuant to the preceding paragraph) and the denominator
of which is the aggregate amount of shortfalls in required amounts or other
amounts to be paid from available Finance Charge Collections for all Series
for such business day.
REALLOCATED PRINCIPAL COLLECTIONS
On each business day, the Servicer will apply or cause the Trustee to
apply an amount, not to exceed the Class D Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class D Floating
Allocation Percentage or (ii) during an Amortization Period, the Class D
Fixed/Floating Allocation Percentage and (b) the amount of Principal
Collections with respect to such business day to the following amounts in the
following priority (such collections applied in accordance with clause (a)
below are called "Reallocated Class D Principal Collections"):
(a) an amount equal to the sum of (i) the Class A Required Amount with
respect to such business day, (ii) the Class B Required Amount with
respect to such business day and (iii) the Class C Required Amount with
respect to such business day will be applied first to the components of
the Class A Required Amount, then to the components of the Class B
Required Amount and then to the components of the Class C Required Amount
in the same priority as such components are applied from Available Series
Finance Charge Collections as described in "--Application of
Collections--Payment of Fees, Interest and Other Items"; and
(b) any such collections not applied in the foregoing manner (and
therefore not constituting Reallocated Class D Principal Collections)
will, on business days with respect to the Revolving Period, be applied as
Shared Principal Collections and on business days with respect to an
Amortization Period will be included in Available Investor Principal
Collections.
On each business day, the Servicer will apply or cause the Trustee to
apply an amount, not to exceed the Class C Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class C Floating
Allocation Percentage or (ii) during an Amortization Period, the Class C
Fixed/Floating Allocation Percentage and (b) the amount of Principal
Collections with respect to such business day to the following amounts in the
following priority (such collections applied in accordance with clause (a)
below are called "Reallocated Class C Principal Collections"):
(a) an amount equal to the sum of (i) the excess, if any, of the Class A
Required Amount with respect to such business day over the amount of
Reallocated Class D Principal Collections applied with respect thereto for
such business day and (ii) the excess, if any, of the Class B Required
Amount with respect to such business day over the amount of Reallocated
Class D Principal Collections applied with respect thereto for such
business day will be applied first to the remaining components of the
Class A Required Amount and then to the remaining components of the Class
B Required Amount in the same priority as such components are applied from
Available Series Finance Charge Collections as described in "--Application
of Collections--Payment of Fees, Interest and Other Items"; and
(b) any such collections not applied in the foregoing manner (and
therefore not constituting Reallocated Class C Principal Collections)
will, on business days with respect to the Revolving Period, be applied as
Shared Principal Collections and on business days with respect to an
Amortization Period will be included in Available Investor Principal
Collections.
On each business day, the Servicer will apply or cause the Trustee to
apply an amount, not to exceed the Class B Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the Class B Floating
Allocation Percentage or (ii) during an Amortization Period, the Class B
Fixed/Floating
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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 Collections is called "Reallocated Principal
Collections"):
(a) an amount equal to the excess, if any, of the Class A Required Amount
with respect to such business day over the sum of the amount of
Reallocated Class D Principal Collections and Reallocated Class C
Principal Collections applied with respect thereto for such business day
will be applied to the remaining components of the Class A Required Amount
in the same priority as such components are applied from Available Series
Finance Charge Collections as described in "--Application of
Collections--Payment of Fees, Interest and Other Items"; and
(b) any such collections not applied in the foregoing manner (and
therefore not constituting Reallocated Class B Principal Collections)
will, on business days with respect to the Revolving Period, be applied as
Shared Principal Collections and on business days with respect to an
Amortization Period will be included in Available Investor Principal
Collections.
On each Distribution Date the Class D Invested Amount will be reduced by
the amount of unreimbursed Reallocated Principal Collections for the related
Monthly Period. In the event that such reduction would cause the Class D
Invested Amount to be a negative number, the Class D Invested Amount will be
reduced to zero and the Class C Invested Amount will be reduced by the amount
by which the Class D Invested Amount would have been reduced below zero. In
the event that the amount of unreimbursed Reallocated Principal Collections
for such Distribution Date would cause the Class C Invested Amount to be a
negative number, the Class C Invested Amount will be reduced to zero and the
Class B Invested Amount will be reduced by the amount by which the Class C
Invested Amount would have been reduced below zero. In the event that the
reallocation of Principal Collections would cause the Class B Invested Amount
to be a negative number on any Distribution Date, the amount of Class B
Reallocated Principal Collections on such Distribution Date will be an amount
not to exceed the amount which would cause the Class B Invested Amount to be
reduced to zero.
APPLICATION OF COLLECTIONS
Allocations. Obligors make payments on the Receivables to the Servicer,
who deposits all such payments in the Collection Account no later than the
second business day following the date of processing. On the day on which any
deposit to the Collection Account is available, the Servicer will make the
deposits and payments to the accounts and parties as indicated below;
provided, however, that for as long as Direct Merchants Bank or any affiliate
of Direct Merchants Bank remains the Servicer under the Pooling and Servicing
Agreement, then the Servicer may make such deposits and payments on the
business day immediately prior to the Distribution Date (the "Transfer Date")
in an aggregate amount equal to the net amount of such deposits and payments
which would have been made had the conditions of this proviso not applied if
(a)(i) the Servicer provides to the Trustee a letter of credit or other form
of Enhancement rated in the highest rating category by the Rating Agencies
covering the risk of collection of the Servicer and (ii) the Transferor shall
not have received a notice from either Rating Agency that making payments
monthly rather than daily would result in the lowering of such Rating
Agency's then-existing rating of any Series of certificates then outstanding
or (b) the Servicer has and maintains a short-term credit rating of P-1 by
Moody's and A-1 by Standard & Poor's.
If clause (a) or clause (b) set forth in the proviso to the immediately
preceding paragraph is satisfied, payments on the Receivables collected by
the Servicer will not be segregated from the assets of the Servicer. Until
such payments on the Receivables collected by the Servicer are deposited into
the Collection Account, such funds may be used by the Servicer for its own
benefit, and the proceeds of any short-term investment of such funds will
accrue to the Servicer. During such times as the Servicer holds funds
representing payments on the Receivables collected by the Servicer and is
permitted to use such funds for its own benefit, the Certificateholders are
subject to risk of loss, including risk resulting from the bankruptcy or
insolvency of the Servicer. The Servicer pays no fee to the Trust or any
Certificateholder for any use by the Servicer of funds representing
Collections on the Receivables.
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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 (i) 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, (ii) certain Transferor Finance Charge Collections allocable to
the Certificates and (iii) Excess Finance Charge Collections of other
Series allocable to such Series, will be allocated and paid as described
below in "--Payment of Fees, Interest and Other Items;"
(iv) during the Revolving Period, an amount equal to the Floating
Allocation Percentage of Principal Collections (less the amount thereof
which may be applied as Reallocated Principal Collections) will be applied
as Shared Principal Collections;
(v) during the Amortization Period, an amount equal to the Fixed/Floating
Allocation Percentage of Principal Collections (less the amount thereof
applied as Reallocated Principal Collections), any amount on deposit in
the Excess Funding Account and any amount on deposit in the Pre-Funding
Account allocated to the holders of Series 1997-1 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.
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Payment of Fees, Interest and Other Items. On each business day during a
Monthly Period, the Servicer will determine the sum of (a) prior to the date
on which a Pay Out Event is deemed to occur, the Floating Allocation
Percentage of the sum of Finance Charge Collections and the amount of
Adjustment Payments made by the Transferor with respect to Adjustment
Payments required to be made but not made in a prior Monthly Period or, on
and after the date on which a Pay Out Event is deemed to occur, the
Fixed/Floating Allocation Percentage of the sum of Finance Charge Collections
and the amount of Adjustment Payments made by the Transferor with respect to
Adjustment Payments required to be made but not made in a prior Monthly
Period and (b) amounts on deposit in the Payment Reserve Account, if any, if
and to the extent the Transferor designates that such amounts are to be so
applied (the "Available Series Finance Charge Collections") and will
distribute such amount in the following priority:
(i) an amount equal to the lesser of (A) the Available Series Finance
Charge Collections and (B) the excess of (a) the sum of (1) the Class A
Monthly Interest, (2) the amount of any Class A Monthly Interest
previously due but not deposited in the Interest Funding Account in prior
Monthly Periods, and (3) any additional interest (to the extent permitted
by applicable law) at the Class A Certificate Rate with respect to
interest amounts that were due but not paid in a prior Monthly Period over
(b) the amount which has already been deposited in the Interest Funding
Account with respect thereto in the current Monthly Period, will be
deposited in the Interest Funding Account for distribution on the next
succeeding Distribution Date to the Class A Certificateholders;
(ii) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the excess of (a) the sum of (1) the
Class B Monthly Interest, (2) the amount of any Class B Monthly Interest
previously due but not deposited in the Interest Funding Account in prior
Monthly Periods, and (3) any additional interest (to the extent permitted
by applicable law) at the Class B Certificate Rate with respect to Class B
Monthly Interest amounts that were due but not paid in a prior Monthly
Period over (b) the amount which has already been deposited in the
Interest Funding Account with respect thereto in the current Monthly
Period, will be deposited in the Interest Funding Account for distribution
on the next succeeding Distribution Date to the Class B
Certificateholders;
(iii) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the excess of (a) the sum of (1) the
Class C Monthly Interest, (2) the amount of any Class C Monthly Interest
previously due but not deposited in the Interest Funding Account in prior
Monthly Periods, and (3) any additional interest (to the extent permitted
by applicable law) at the Class C Certificate Rate with respect to Class C
Monthly Interest amounts that were due but not paid in a prior Monthly
Period over (b) the amount which has already been deposited in the
Interest Funding Account with respect thereto in the current Monthly
Period, will be deposited in the Interest Funding Account for distribution
on the next succeeding Distribution Date to the Class C
Certificateholders;
(iv) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the portion of the Monthly Servicing
Fee for the current month that has not been previously paid to the
Servicer plus any prior Monthly Servicing Fee that was due but not
previously paid to the Servicer will be distributed to the Servicer;
(v) an amount equal to the lesser of (A) the sum of any Available Series
Finance Charge Collections remaining and, if such day is a Default
Recognition Date, an amount equal to the aggregate Transferor Retained
Finance Charge Collections for each prior business day during the related
Monthly Period and (B) the sum of (1) the aggregate Investor Default
Amount for such business day and (2) the unpaid Investor Default Amount
for any prior business day during the then-current Monthly Period, will be
(w) during the Revolving Period, treated as Shared Principal Collections
and (x) during the Amortization Period, treated as Available Investor
Principal Collections for the benefit of the Certificates;
(vi) an amount equal to the Series Allocation Percentage of any
Adjustment Payment which the Transferor is required but fails to make
pursuant to the Pooling and Servicing Agreement will be (a) during the
Revolving Period, treated as Shared Principal Collections and (b) during
the Amortization Period, treated as Available Investor Principal
Collections for the benefit of the Certificates;
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(vii) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) unreimbursed Class A Investor
Charge-Offs, if any, will be applied to reimburse Class A Investor
Charge-Offs and (w) during the Revolving Period, be treated as Shared
Principal Collections and (x) during the Amortization Period, be treated
as Available Investor Principal Collections for the benefit of the
Certificates;
(viii) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the sum of (1) the amount of interest
which has accrued with respect to the outstanding aggregate principal
amount of the Class B Certificates at the Class B Certificate Rate but has
not been deposited in the Interest Funding Account will be deposited in
the Interest Funding Account and (2) any additional interest (to the
extent permitted by applicable law) at the Class B Certificate Rate with
respect to such interest amounts that were due but not deposited in the
Interest Funding Account in any previous Monthly Period, will be deposited
in the Interest Funding Account for distribution on the next succeeding
Distribution Date to Class B Certificateholders;
(ix) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the sum of (1) the amount of interest
which has accrued with respect to the outstanding aggregate principal
amount of the Class C Certificates at the Class C Certificate Rate but has
not been deposited in the Interest Funding Account will be deposited in
the Interest Funding Account, and (2) any additional interest (to the
extent permitted by applicable law) at the Class C Certificate Rate with
respect to such interest amounts that were due but not deposited in the
Interest Funding Account in any previous Monthly Period, will be deposited
in the Interest Funding Account for distribution on the next succeeding
Distribution Date to Class C Certificateholders;
(x) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) unreimbursed Class B Investor
Charge-Offs, if any, will be applied to reimburse Class B Investor
Charge-Offs and (w) during the Revolving Period, be treated as Shared
Principal Collections and (x) during the Amortization Period, be treated
as Available Investor Principal Collections for the benefit of the
Certificates;
(xi) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) unreimbursed Class C Investor
Charge-Offs, if any, will be applied to reimburse Class C Investor
Charge-Offs and (w) during the Revolving Period, be treated as Shared
Principal Collections and (x) during the Amortization Period, be treated
as Available Investor Principal Collections for the benefit of the
Certificates;
(xii) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) unreimbursed Class D Investor
Charge-Offs, if any, will be applied to reimburse Class D Investor
Charge-Offs and (w) during the Revolving Period, be treated as Shared
Principal Collections and (x) during the Amortization Period, be treated
as Available Investor Principal Collections for the benefit of the
Certificates;
(xiii) an amount equal to the lesser of any Available Series Finance
Charge Collections remaining and any required funding of a reserve account
for the benefit of the Class C Certificates will be deposited in such
reserve account;
(xiv) on and after the Reserve Account Funding Date, but prior to the
date on which the Accumulation Period Reserve Account terminates, an
amount equal to the lesser of any Available Series Finance Charge
Collections remaining and the excess, if any, of the Required Reserve
Account Amount over the Available Reserve Account Amount will be deposited
in the Accumulation Period Reserve Account;
(xv) an amount equal to the lesser of any remaining Available Series
Finance Charge Collections and the amount designated by the Transferor in
writing in its instructions to the Trustee to be deposited in the Payment
Reserve Account; and
(xvi) any Available Series Finance Charge Collections remaining after
making the above described distributions will be treated as Excess Finance
Charge Collections which will be available
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to cover shortfalls, if any, in amounts payable from Finance Charge
Collections to certificateholders of other Series, then to pay any unpaid
commercially reasonable costs and expenses of a successor Servicer, if
any, and then on each business day other than the Default Recognition Date
to be paid to the Transferor to be treated as "Transferor Retained Finance
Charge Collections." On the Default Recognition Date any remaining Excess
Finance Charge Collections which are not so used will be paid to the
Transferor.
On each Transfer Date all investment income (net of investment losses and
expenses) on funds on deposit in the Pre-Funding Account, the Principal
Funding Account and the Accumulation Period Reserve Account will be applied
as if such amounts were Available Series Finance Charge Collections on the
last business day of the preceding Monthly Period.
"Class A Monthly Interest" with respect to any Distribution Date will
equal one-twelfth of the product of (i) the Class A Certificate Rate for the
related Interest Accrual Period and (ii) the outstanding principal balance of
the Class A Certificates at the close of business on the first day of the
related Interest Accrual Period or, with respect to any Distribution Date
related to the Funding Period, the outstanding principal balance of the Class
A Certificates at the close of business on the first day of the related
Interest Accrual Period.
"Class B Monthly Interest" with respect to any Distribution Date will
equal one-twelfth of the product of (i) the Class B Certificate Rate for the
related Interest Accrual Period and (ii) the Class B Invested Amount at the
close of business on the first day of the related Interest Accrual Period or,
with respect to any Distribution Date related to the Funding Period, the
outstanding principal balance of the Class B Certificates at the close of
business on the first day of the related Interest Accrual Period.
"Class C Monthly Interest" with respect to any Distribution Date will
equal the product of (i) the Class C Certificate Rate for the related
Interest Accrual Period, (ii) the Class C Invested Amount at the close of
business on the first day of the related Interest Accrual Period or, with
respect to any Distribution Date related to the Funding Period, the
outstanding principal balance of the Class C Certificates at the close of
business on the first day of the related Interest Accrual Period and (iii) a
fraction the numerator of which is the actual number of days in the related
Interest Accrual Period and the denominator of which is 360.
"Required Amount" means on any business day the amount, if any, by which
the full amount to be paid pursuant to clauses (i)-(xiv) above exceeds the
portion of the Available Series Finance Charge Collections and Transferor
Finance Charge Collections, if any, applied to the payment of the amounts
described in such clauses.
"Pre-Funded Amount" for any Distribution Date with respect to the Funding
Period will equal the amount deposited in the Pre-Funding Account on the
Closing Date, less the amount of any increases in the Invested Amount
pursuant to the Series 1997-1 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);
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(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); and
(iii) on the Transfer Date related to the Class C Principal Payment
Commencement Date and on each Transfer Date thereafter, an amount equal to
the Class C Principal will be deposited in the Principal Funding Account
for distribution to the Class C Certificateholders on the Expected Final
Payment Date (with respect to the Accumulation Period) or distributed to
the Class C Certificateholders on each Distribution Date until the Class C
Invested Amount is paid in full (with respect to the Early Amortization
Period); and
(iv) on each Transfer Date with respect to the Accumulation Period, the
balance of Available Investor Principal Collections not applied pursuant
to (i) through (iii) above, if any, may be applied to the payment of
principal to the Class D Certificateholders to the extent that the Class D
Invested Amount exceeds the Stated Class D Amount and any remaining excess
on each Transfer Date with respect to the Accumulation Period and the
Early Amortization Period will be treated as Shared Principal Collections
and applied as described in clause (vi) of "--Allocations."
"Class A Principal" with respect to any Transfer Date relating to the
Accumulation Period or the Early Amortization Period, prior to the payment in
full of the Class A Invested Amount, will equal the least of (i) the
Available Investor Principal Collections on deposit in the Principal Account
with respect to such Transfer Date, (ii) for each Transfer Date with respect
to the Accumulation Period, prior to the payment in full of the Class A
Invested Amount and on or prior to the Expected Final Payment Date, the
applicable Controlled Deposit Amount for such Transfer Date and (iii) the
Class A Adjusted Invested Amount on such Transfer Date.
"Class B Principal" with respect to each Transfer Date relating to the
Accumulation Period or the Early Amortization Period beginning with the
Transfer Date first preceding the Class B Principal Commencement Date, prior
to the payment in full of the Class B Invested Amount, will equal the least
of (i) the Available Investor Principal Collections remaining on deposit in
the Principal Account with respect to such Transfer Date after application
thereof to Class A Principal, if any, (ii) for each Transfer Date with
respect to the Accumulation Period, on or prior to the Expected Final Payment
Date, the applicable Controlled Deposit Amount for such Transfer Date (minus
the Class A Principal with respect to such Transfer Date) and (iii) the Class
B Adjusted Invested Amount on such Transfer Date.
"Class C Principal" with respect to each Transfer Date relating to the
Accumulation Period or the Early Amortization Period beginning with the
Transfer Date first preceding the Distribution Date on which the Class B
Invested Amount is deposited in full in the Principal Funding Account or paid
in full, prior to the payment in full of the Class C Invested Amount, will
equal the least of (i) the Available Investor Principal Collections remaining
on deposit in the Principal Account with respect to such Transfer Date after
applications thereof to Class A Principal and Class B Principal, if any, (ii)
for each Transfer Date with respect to the Accumulation Period, on or prior
to the Expected Final Payment Date, the applicable Controlled Deposit Amount
for such Transfer Date (minus the Class A Principal and the Class B Principal
with respect to such Transfer Date) and (iii) the Class C Adjusted Invested
Amount on such Transfer Date.
"Controlled Accumulation Amount" means for any Transfer Date with respect
to the Accumulation Period, prior to the payment in full of the sum of the
Class A Invested Amount, the Class B Invested Amount and the Class C Invested
Amount, $66,229,167; 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.
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"Accumulation Shortfall" initially means zero and thereafter means, with
respect to any Monthly Period during the Accumulation Period, the excess, if
any, of the Controlled Deposit Amount for the previous Monthly Period over
the amount deposited into the Principal Funding Account with respect to the
Certificates for the previous Monthly Period.
COVERAGE OF INTEREST SHORTFALLS
To the extent of any shortfall in the amount of Available Series Finance
Charge Collections due to the accumulation of principal in the Excess Funding
Account or the Pre-Funding Account, the Transferor Finance Charge Collections
will be made available to cover such Negative Carry Amount.
Finance Charge Collections allocable to any Series in excess of the
amounts necessary to make required payments with respect to such Series
("Excess Finance Charge Collections") will be applied to cover any shortfalls
with respect to amounts payable from Finance Charge Collections allocable to
any other Series, pro rata based upon the amounts of the shortfalls, if any,
with respect to such other Series. Any Excess Finance Charge Collections
remaining after covering shortfalls with respect to all outstanding Series
during a Monthly Period will be paid to the successor Servicer, if any, to
cover certain costs and expenses and then to the holder of the Exchangeable
Transferor Certificate.
DEFAULTED RECEIVABLES; DILUTION
Receivables in Defaulted Accounts are charged off as uncollectible in
accordance with the Servicer's customary and usual policies and the Credit
and Collection Policy (a "Defaulted Receivable"). See "Direct Merchants
Bank's Credit Card Activities -- Delinquency 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 1997-1, 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
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be increased (but not in excess of the unpaid principal balance of the Class
D Certificates) on any business day by the amounts allocated and available
for that purpose as described under clause (xii) of "--Application of
Collections--Payment of Fees, Interest and Other Items."
In the event that any such reduction of the Class D Invested Amount would
cause the Class D Invested Amount to be a negative number, the Class D
Invested Amount will be reduced to zero, and the Class C Invested Amount will
be reduced by the aggregate amount of such excess, but not more than the sum
of the remaining aggregate Investor Default Amount and the remaining unpaid
Adjustment Payments for such Monthly Period (a "Class C Investor
Charge-Off"), which will have the effect of slowing or reducing the return of
principal to the Class C Certificateholders. The Class C Invested Amount will
thereafter be increased (but not in excess of the unpaid principal balance of
the Class C Certificates) on any business day by the amounts allocated and
available for that purpose as described under clause (xi) of "--Application
of Collections--Payment of Fees, Interest and Other Items."
In the event that any such reduction of the Class C Invested Amount would
cause the Class C Invested Amount to be a negative number, the Class C
Invested Amount will be reduced to zero, and the Class B Invested Amount will
be reduced by the aggregate amount of such excess, but not more than the sum
of the remaining aggregate Investor Default Amount and the remaining unpaid
Adjustment Payments for such Monthly Period (a "Class B Investor
Charge-Off"), which will have the effect of slowing or reducing the return of
principal to the Class B Certificateholders. The Class B Invested Amount will
thereafter be increased (but not in excess of the unpaid principal balance of
the Class B Certificates) on any business day by the amounts allocated and
available for that purpose as described under clause (x) of "--Application of
Collections--Payment of Fees, Interest and Other Items."
In the event that any such reduction of the Class B Invested Amount would
cause the Class B Invested Amount to be a negative number, the Class B
Invested Amount will be reduced to zero, and the Class A Invested Amount will
be reduced by the amount by which the Class B Invested Amount would have been
reduced below zero, but not more than the sum of the remaining aggregate
Investor Default Amount and the remaining unpaid Adjustment Payments for such
Monthly Period (a "Class A Investor Charge-Off") which will have the effect
of slowing or reducing the return of principal to the Class A
Certificateholders. The Class A Invested Amount will thereafter be increased
(but not in excess of the unpaid principal balance of the Class A
Certificates) on any business day by the amounts allocated and available for
that purpose as described under clause (vii) of "--Application of
Collections--Payment of Fees, Interest and Other Items."
PAIRED SERIES
Subject to the satisfaction of the Rating Agency Condition, prior to the
commencement of the Early Amortization Period the Certificates may be paired
with one or more other Series (each, a "Paired Series"). Each Paired Series
either will be pre-funded with an initial deposit to a pre-funding account in
an amount up to the initial principal balance of such Paired Series and
primarily from the proceeds of the sale of such Paired Series or will have a
variable principal amount. Any such pre-funding account will be held for the
benefit of such Paired Series and not for the benefit of the
Certificateholders. As amounts are deposited in the Principal Funding Account
for the benefit of the Class A Certificateholders, Class B Certificateholders
and Class C Certificateholders, either (i) in the case of a pre-funded Paired
Series, an equal amount of funds on deposit in any pre-funding account for
such pre-funded Paired Series will be released (which funds will be
distributed to the Transferor) or (ii) in the case of a Paired Series having
a variable principal amount, an interest in such variable Paired Series in an
equal or lesser amount may be sold by the Trust (and the proceeds thereof
will be distributed to the Transferor) and, in either case, the invested
amount in the Trust of such Paired Series will increase by up to a
corresponding amount. Upon payment in full of the Certificates, assuming that
there have been no unreimbursed charge-offs with respect to any related
Paired Series, the aggregate invested amount of such related Paired Series
will have been increased by an amount up to an aggregate amount equal to the
Invested Amount paid to the Certificateholders since the issuance of such
Paired Series. The issuance of a Paired Series will be subject to the
conditions described under "--Exchanges." There can be no assurance, however,
that the terms of any Paired Series might not have an impact on the timing or
amount of payments received by a
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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 1997-1 if such event required reliance by
Series 1997-1 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 of 1940, as amended, and an
opinion of counsel to the effect that following such deposit none of the
Trust, the Accumulation Period Reserve Account or the Principal Funding
Account will be deemed to be an association (or publicly traded partnership)
taxable as a corporation; (iii) the Transferor shall have delivered to the
Trustee a certificate of an officer of the Transferor stating that the
Transferor reasonably believes that such deposit and termination of its
obligations will not constitute a Pay Out Event or any event that, with the
giving of notice or the lapse of time, would cause a Pay Out Event to occur;
and (iv) a Ratings Event will not occur as a result of such events; then, the
Certificates will no longer be entitled to the security interest of the Trust
in the Receivables and, except those set forth in clause (i) above, other
Trust assets ("Defeasance"), and the percentages applicable to the allocation
to the Certificateholders of Principal Collections, Finance Charge
Collections and Defaulted Receivables will be reduced to zero. Upon the
satisfaction of the foregoing conditions, the Class D Invested Amount will be
reduced to zero.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Class A Certificates, the Class B Certificates and the Class C
Certificates will each be subject to optional repurchase by the Transferor on
any Distribution Date if on such Distribution Date the sum of the Class A
Invested Amount, the Class B Invested Amount and the Class C Invested Amount
would be reduced to an amount less than or equal to 10 percent of the sum of
the highest Class A Invested Amount, Class B Invested Amount and Class C
Invested Amount, if certain conditions set forth in the Pooling and Servicing
Agreement are satisfied. The repurchase price will be equal to (i) the unpaid
Class A Invested Amount plus accrued and unpaid interest on the Class A
Certificates, (ii) the unpaid Class B Invested Amount plus accrued and unpaid
interest on the Class B Certificates, and (iii) the unpaid Class C Invested
Amount plus accrued and unpaid interest on the Class C Certificates, in each
case after giving effect to any payments on such date. In each case interest
will accrue through the day preceding the Distribution Date on which the
repurchase occurs.
The Certificates will be retired on the day following the Distribution
Date on which the final payment of principal is scheduled to be made to the
Certificateholders, whether as a result of optional reassignment to the
Transferor or otherwise. Subject to prior termination as provided above, the
Pooling and Servicing Agreement provides that the final distribution of
principal and interest on the Offered Certificates will be made on the
October 2005 Distribution Date (the "Termination Date"), except to the extent
provided below. In the event that the Invested Amount is greater than zero,
exclusive of any Class held by the Transferor, on the Termination Date, the
Trustee will sell or cause to be sold (and apply the proceeds first to the
Class A Certificates until paid in full, then to the Class B Certificates
until paid in full, then to the Class C Certificates until paid in full, and
finally to the Class D Certificates to the extent necessary to pay such
remaining amounts to all Certificateholders pro rata within each Class as
final payment of the
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Certificates) interests in the Receivables or certain Receivables, as
specified in the Pooling and Servicing Agreement and the Series 1997-1
Supplement, in an amount up to 110 percent of the Invested Amount at the
close of business on such date (but not more than the total amount of
Receivables allocable to the Certificates in accordance with the Pooling and
Servicing Agreement). If the sale contemplated by the preceding sentence has
not occurred by the Termination Date, the affected Certificateholders shall
remain entitled to receive proceeds of such sale when it occurs. The net
proceeds of such sale and any collections on the Receivables, up to an amount
equal to the Invested Amount plus accrued interest due on the Certificates,
will be paid on the Termination Date first to Class A Certificateholders
until the Class A Invested Amount is paid in full, then to the Class B
Certificateholders until the Class B Invested Amount is paid in full, then to
the Class C Certificateholders until the Class C Invested Amount is paid in
full, and then to the Class D Certificateholders until the Class D Invested
Amount is paid in full.
Unless the Servicer and the holder of the Exchangeable Transferor
Certificate instruct the Trustee otherwise, the Trust will terminate on the
earlier of (a) the day after the Distribution Date following the date on
which funds shall have been deposited in the Distribution Account for the
payment to certificateholders sufficient to pay in full the aggregate
investor interest of all Series outstanding plus interest thereon at the
applicable certificate rates to the next Distribution Date and (b) a date
which shall not be later than May 26, 2095. Upon the termination of the Trust
and the surrender of the Exchangeable Transferor Certificate, the Trustee
will convey to the holder of the Exchangeable Transferor Certificate all
right, title and interest of the Trust in and to the Receivables and other
funds of the Trust (other than funds on deposit in the Distribution Account
and other similar bank accounts of the Trust with respect to any Series).
PAY OUT EVENTS
As described above, the Revolving Period will continue until the
commencement of the Accumulation Period, unless a Pay Out Event occurs prior
to such date. A "Pay Out Event" refers to any of the following events:
(i) failure on the part of the Transferor (a) to make any payment or
deposit on the date required under the Pooling and Servicing Agreement (or
within the applicable grace period which will not exceed five business
days); (b) to perform in all material respects the Transferor's covenant
not to sell, pledge, assign, or transfer to any person, or grant any
unpermitted lien on, any Receivable; or (c) to observe or perform in any
material respect any other covenants or agreements of the Transferor set
forth in the Pooling and Servicing Agreement, the Purchase Agreement or
the Series 1997-1 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;
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(v) the Trust shall become subject to regulation by the Commission as an
"investment company" within the meaning of the Investment Company Act;
(vi) (a) the Transferor Interest shall be less than the Minimum
Transferor Interest, (b) (I) the sum of the amount on deposit in the
Pre-Funding Account plus the Series Allocation Percentage of the sum of
the total amount of Principal Receivables plus amounts on deposit in the
Excess Funding Account shall be less than (II) the sum of the aggregate
outstanding principal amounts of the Class A Certificates, the Class B
Certificates, the Class C Certificates and the Class D Certificates, (c)
the total amount of Principal Receivables and the amounts on deposit in
the Excess Funding Account and the Principal Funding Account shall be less
than the Minimum Aggregate Principal Receivables or (d) the Retained
Percentage shall be equal to or less than 2 percent, in each case as of
any Determination Date; or
(vii) any Servicer Default (as defined below) shall occur which would
have a material adverse effect on the Certificateholders.
In the case of any event described in clause (i), (ii), or (vii) above, a
Pay Out Event will be deemed to have occurred with respect to the
Certificates only if, after any applicable grace period, the
Certificateholders evidencing undivided interests aggregating more than 50
percent of the Invested Amount, by written notice to the Transferor and the
Servicer declare that a Pay Out Event has occurred with respect to the
Certificates as of the date of such notice. In the case of any event
described in clause (iii) or (v) above, a Pay Out Event with respect to all
Series then outstanding, and in the case of any event described in clause
(iv) or (vi), a Pay Out Event with respect only to the Certificates, will be
deemed to have occurred without any notice or other action on the part of the
Trustee or the Certificateholders or all certificateholders, as appropriate,
immediately upon the occurrence of such event. On the date on which a Pay Out
Event is deemed to have occurred, the Early Amortization Period will
commence. In such event, distributions of principal to the Certificateholders
will begin on the first Distribution Date following the month in which such
Pay Out Event occurred. If, because of the occurrence of a Pay Out Event, the
Early Amortization Period begins, Certificateholders will begin receiving
distributions of principal earlier than they otherwise would have, which may
shorten the average life of the Certificates.
In addition to the consequences of a Pay Out Event discussed above, if,
pursuant to certain provisions of federal law, the Transferor or Metris
voluntarily enters liquidation or a trustee-in-bankruptcy is appointed for
the Transferor or Metris (an "Insolvency Event"), the Transferor will
immediately cease to transfer Principal Receivables to the Trust and promptly
give notice to the Trustee of such event. If an Insolvency Event occurs or,
at any time the Retained Percentage is equal to or less than 2 percent (a
"Trigger Event"), the Pooling and Servicing Agreement and the Trust shall be
terminated, and within 15 days of notice to the Trustee, the Trustee will
publish a notice of the Insolvency Event or Trigger Event, stating that the
Trustee intends to sell, dispose of, or otherwise liquidate the Receivables
in a commercially reasonable manner. With respect to each Series outstanding
at such time (or, if any such Series has more than one class, of each class
of such Series excluding any class or portion thereof held by the
Transferor), unless otherwise instructed within a specified period by
certificateholders representing undivided interests aggregating more than 50
percent of the invested amount of such Series (or class excluding any class
or portion thereof held by the Transferor) and the holders of any
Supplemental Certificates or any other interest in the Exchangeable
Transferor Certificate other than the Transferor, the Trustee will sell,
dispose of, or otherwise liquidate the portion of the Receivables allocable
to the Series that did not vote to continue the Trust in accordance with the
Pooling and Servicing Agreement in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from the sale, disposition or
liquidation of the Receivables will be treated as collections of the
Receivables allocable to such Certificateholders and will be distributed to
the applicable Certificateholders as provided above in "--Application of
Collections."
If the only Pay Out Event to occur is either the bankruptcy or insolvency
of the Transferor or the appointment of a bankruptcy trustee or receiver for
the Transferor, the bankruptcy trustee or receiver may have the power to
prevent the early sale, liquidation, or disposition of the Receivables and
the commencement of the Early Amortization Period. In addition, a bankruptcy
trustee or receiver may have the power to cause the early sale of the
Receivables and the early retirement of the Certificates.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's compensation for its servicing activities and reimbursement
for its expenses will take the form of the payment to it of a servicing fee
in an amount for any Monthly Period the ("Monthly Servicing Fee") equal to
the product of (i) a fraction the numerator of which is the actual number of
days in such Monthly Period and the denominator of which is 365 or 366, (ii)
the applicable Series Servicing Fee Percentage and (iii) the Adjusted
Invested Amount as of the beginning of the day on the first day of such
Monthly Period, or, in the case of the first Distribution Date, the Initial
Invested Amount. The Servicing Fee will be funded from Finance Charge
Collections allocated to the Certificateholders' Interest, and will be paid
from the amount so allocated and on deposit in the Collection Account. See
"--Application of Collections--Payment of Fees, Interest, and Other Items"
above. The remainder of the servicing fee will be allocable to the Transferor
Interest and the investor interests of other Series. Neither the Trust nor
the Certificateholders will have any obligation to pay such portion of the
servicing fee.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with servicing the Receivables, including without
limitation payment of the fees and disbursements of the Trustee and
independent certified public accountants and other fees which are not
expressly stated in the Pooling and Servicing Agreement to be payable by the
Trust or the Certificateholders other than federal, state, and local income
and franchise taxes, if any, of the Trust.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement, except upon determination that performance
of its duties is no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor to the
Servicer has assumed the Servicer's responsibilities and obligations under
the Pooling and Servicing Agreement. The Servicer may delegate some or all of
its servicing duties; provided, however, such delegation will not relieve the
Servicer of its obligation to perform such duties in accordance with the
Pooling and Servicing Agreement. In addition, any affiliate of Direct
Merchants Bank may be substituted in all respects for Direct Merchants Bank
as Servicer, provided that such affiliate expressly assumes the performance
of every covenant and obligation of the Servicer under the Pooling and
Servicing Agreement.
The Pooling and Servicing Agreement provides that the Servicer will
indemnify the Trust and the Trustee from and against any reasonable loss,
liability, expense, damage, or injury suffered or sustained by reason of any
acts or omissions or alleged acts or omissions of the Servicer with respect
to the activities of the Trust or the Trustee; provided, however, that the
Servicer will not indemnify (a) the Trustee for liabilities imposed by reason
of fraud, gross negligence, or willful misconduct by the Trustee in the
performance of its duties under the Pooling and Servicing Agreement, (b) the
Trust, the Certificateholders, or the Certificate Owners for liabilities
arising from actions taken by the Trustee at the request of
Certificateholders, (c) the Trust, the Certificateholders, or the Certificate
Owners for any losses, claims, damages, or liabilities incurred by any of
them in their capacities as investors, including without limitation, losses
incurred as a result of Defaulted Receivables or Dilution, or (d) the Trust,
the Certificateholders, or the Certificate Owners for any liabilities, costs,
or expenses of the Trust, the Certificateholders, or the Certificate Owners
arising under any tax law, including without limitation any federal, state,
or local income or franchise tax or any other tax imposed on or measured by
income (or any interest or penalties with respect thereto or arising from a
failure to comply therewith) required to be paid by the Trust, the
Certificateholders or the Certificate Owners in connection with the Pooling
and Servicing Agreement to any taxing authority.
In addition, the Pooling and Servicing Agreement provides that, subject to
certain exceptions, the Transferor will indemnify the Trust and the Trustee
from and against any reasonable loss, liability, expense, damage or injury
(other than to the extent that any of the foregoing relate to any tax law or
any failure to comply therewith) suffered or sustained by reason of any acts
or omissions or alleged acts or omissions arising out of or based upon the
arrangement created by the Pooling and Servicing Agreement as though the
Pooling and Servicing Agreement created a partnership under the Delaware
Uniform Partnership Law in which the Transferor is a general partner.
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The Pooling and Servicing Agreement provides that, except for the
foregoing indemnities, neither the Transferor nor the Servicer nor any of
their respective directors, officers, employees, or agents will be under any
liability to the Trust, the Certificateholders, or any other person for any
action taken, or for refraining from taking any action pursuant to the
Pooling and Servicing Agreement. Neither the Transferor nor the Servicer nor
any of their respective directors, officers, employees or agents will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith, or gross negligence of the Transferor, the
Servicer, or any such person in the performance of its duties thereunder or
by reason of reckless disregard of obligations and duties thereunder. In
addition, the Pooling and Servicing Agreement provides that the Servicer is
not under any obligation to appear in, prosecute, or defend any legal action
that is not incidental to its servicing responsibilities under the Pooling
and Servicing Agreement and which in its opinion may expose it to any expense
or liability.
Under the Pooling and Servicing Agreement, the Transferor will be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Certificateholder in
the capacity of an investor in the Certificates) arising out of or based on
the arrangement created by the Pooling and Servicing Agreement or the actions
of the Servicer taken pursuant to the Pooling and Servicing Agreement as
though the Pooling and Servicing Agreement created a partnership under the
Uniform Partnership Act in which the Transferor is a general partner. The
Transferor will also pay, indemnify and hold harmless each Certificateholder
for any such losses, claims, damages or liabilities (other than those
incurred by a Certificateholder in the capacity of an investor in the
Certificates) except to the extent that they arise from any action by any
Certificateholder. In the event of a Service Transfer, the successor Servicer
will indemnify the Transferor for any losses, claims, damages and liabilities
of the Transferor as described in this paragraph arising from the actions or
omissions of such successor.
SERVICER DEFAULT
In the event of any Servicer Default (as defined below), either the
Trustee or certificateholders representing undivided interests aggregating
more than 50 percent of the aggregate investor interests for all outstanding
Series, by written notice to the Servicer (and to the Trustee if given by the
certificateholders), may terminate all of the rights and obligations of the
Servicer as servicer under the Pooling and Servicing Agreement and in and to
the Receivables and the proceeds thereof and the Trustee may appoint a new
Servicer (a "Service Transfer"). The rights and interest of the Transferor
under the Pooling and Servicing Agreement and in the Transferor Interest will
not be affected by such termination. Upon such termination, the Trustee will
as promptly as possible appoint a successor Servicer. If no such Servicer has
been appointed and has accepted such appointment by the time the Servicer
ceases to act as Servicer, all authority, power and obligations of the
Servicer under the Pooling and Servicing Agreement will pass to and be vested
in the Trustee. If the Trustee is unable to obtain any bids from eligible
servicers and the Servicer delivers an officer's certificate to the effect
that it cannot in good faith cure the applicable Servicer Default, and if the
Trustee is legally unable to act as a successor Servicer, then the Trustee
will give the Transferor the right to accept reassignment of all of the
Receivables on terms equivalent to the best purchase offer as determined by
the Trustee.
A "Servicer Default" refers to any of the following events:
(i) failure by the Servicer to make any payment, transfer, or deposit, or
to give instructions to the Trustee to make certain payments, transfers,
or deposits within five Business Days after the date the Servicer is
required to do so under the Pooling and Servicing Agreement or any
Supplement; provided, however, that any such failure caused by a
nonwillful act of the Servicer shall not constitute a Servicer Default if
the Servicer promptly remedies such failure within five Business Days
after receiving notice of such failure or otherwise becoming aware of such
failure;
(ii) failure on the part of the Servicer duly to observe or perform in
any respect any other covenants or agreements of the Servicer which has a
material adverse effect on the certificateholders of any Series then
outstanding and which continues unremedied for a period of 60 days after
written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the Trustee, or to the Servicer and the
Trustee by holders of Certificates evidencing undivided interests
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aggregating not less than 50 percent of the Invested Amount of any Series
materially adversely affected thereby and continues to have a material
adverse effect on the certificateholders of any Series then outstanding
for such period; or the delegation by the Servicer of its duties under the
Pooling and Servicing Agreement, except as specifically permitted
thereunder;
(iii) any representation, warranty, or certification made by the Servicer
in the Pooling and Servicing Agreement, or in any certificate delivered
pursuant to the Pooling and Servicing Agreement, proves to have been
incorrect when made which has a material adverse effect on the
certificateholders of any Series then outstanding, and which continues to
be incorrect in any material respect for a period of 60 days after written
notice of such failure, requiring the same to be remedied, shall have been
given to the Servicer by the Trustee, or to the Servicer and Trustee by
the holders of Certificates evidencing undivided interests aggregating not
less than 50 percent of the Invested Amount of any Series materially
adversely affected thereby and continues to have a material adverse effect
on such certificateholders for such period; or
(iv) the occurrence of certain events of bankruptcy, insolvency or
receivership of the Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to in clause (i) above for a period of five business days, or
referred to under clause (ii) or (iii) for a period of 60 Business Days, will
not constitute a Servicer Default if such delay or failure could not be
prevented by the exercise of reasonable diligence by the Servicer and such
delay or failure was caused by an act of God or other similar occurrence.
Upon the Servicer becoming aware of any such event, the Servicer will not be
relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of the Pooling and Servicing Agreement,
and the Servicer will provide the Trustee, any provider of Enhancement, the
Transferor and the holders of certificates of all Series outstanding prompt
notice of such failure or delay by it, together with a description of the
cause of such failure or delay and its efforts to perform its obligations.
In the event of a Servicer Default, if a bankruptcy trustee or receiver
were appointed for the Servicer and no Servicer Default other than such
bankruptcy or receivership or the insolvency of the Servicer exists, the
bankruptcy trustee or receiver may have the power to prevent either the
Trustee or the majority of the certificateholders from effecting a Service
Transfer.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Paying Agent will forward to each
Certificateholder of record a statement prepared by the Servicer setting
forth with respect to such Series: (a) the total amount distributed, (b) the
amount of the distribution allocable to principal on the Class A
Certificates, the Class B Certificates, the Class C Certificates and the
Class D Certificates, (c) the amount of such distribution allocable to
interest on the Class A Certificates, the Class B Certificates and the Class
C Certificates, (d) the amount of Principal Collections processed during the
related Monthly Period and allocated in respect of the Class A Certificates,
the Class B Certificates, the Class C Certificates and the Class D
Certificates, respectively, (e) the amount of Finance Charge Collections
processed during the preceding Monthly Period and allocated in respect of the
Class A Certificates, the Class B Certificates, the Class C Certificates and
the Class D Certificates, respectively, (f) the aggregate amount of Principal
Receivables, the Invested Amount, the Class A Invested Amount, the Class B
Invested Amount, the Class C Invested Amount, the Class D Invested Amount,
the Pre-Funded Amount, the Floating Allocation Percentage, and during the
Amortization Period, the Fixed/Floating Allocation Percentage with respect to
the Principal Receivables in the Trust as of the close of business on the
Record Date, (g) the aggregate outstanding balance of Receivables which are
current, 30-59, 60-89 and 90 days and over contractually delinquent as of the
end of the day on the Record Date, (h) the aggregate Investor Default Amount
for the related Monthly Period, (i) the aggregate amount of Class A Investor
Charge-Offs, Class B Investor Charge-Offs, Class C Investor Charge-Offs and
Class D Investor Charge-Offs for the preceding Monthly Period, (j) the amount
of the Monthly Servicing Fee for the preceding Monthly Period, (k) the Class
A Pool Factor and the Class B Pool Factor as of the end of the last day of
the related Monthly Period, (l) the aggregate amount of funds in the Excess
Funding Account as of the last day of the Monthly Period immediately
preceding the Distribution Date and (m) the number of new Accounts added to
the Trust during the related Monthly Period.
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The Paying Agent will furnish to each person who at any time during the
preceding calendar year was a Certificateholder of record a statement
prepared by the Servicer containing the information required to be contained
in the regular monthly report to Certificateholders, as set forth in clauses
(a), (b), and (c) above aggregated for such calendar year or the applicable
portion thereof during which such person was a Certificateholder, together
with, on or before January 31 of each year, beginning in 1998, such customary
information (consistent with the treatment of the Certificates as debt) as
the Servicer or Trustee deems necessary or desirable for tax reporting
purposes.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides that within 100 days of the
end of each fiscal year the Servicer will cause a firm of independent public
accountants to furnish to the Trustee on an annual basis a report to the
effect that such firm has compared the amounts and percentages set forth in
four of the monthly settlement statements for the Monthly Periods covered by
such report with the computer reports (which may include personal computer
generated reports that summarize data from the computer reports generated by
either the Transferor, Servicer or FDR which are used to prepare daily
reports) which were the source of such amounts and percentages and that, on
the basis of such comparison, such amounts and percentages are in agreement,
except as shall be set forth in such report. A copy of such report will be
sent by the Trustee to each Certificateholder.
The Pooling and Servicing Agreement provides that within 100 days of the
end of each fiscal year, the Servicer will cause a firm of nationally
recognized independent accountants to furnish a report to the effect that
such firm has applied certain procedures, as agreed upon between such firm
and the Servicer, which would re-perform certain accounting procedures
performed by the Servicer pursuant to certain documents and records relating
to the servicing of the Accounts. Each report shall set forth the agreed upon
procedures performed and the results of such procedures.
The Pooling and Servicing Agreement also provides for delivery to the
Trustee on an annual basis, within 100 days of the end of the fiscal year, of
a statement signed by an officer of the Servicer to the effect that the
Servicer has, or has caused to be, fully performed its obligations in all
material respects under the Pooling and Servicing Agreement throughout the
preceding year or, if there has been a default in the performance of any such
obligation, specifying the nature and status of the default. A copy of such
certificate may be obtained by any Certificateholder upon the submission of a
written request therefor addressed to the Trustee's Corporate Trust Office.
AMENDMENTS
The Pooling and Servicing Agreement and the Series 1997-1 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 1997-1 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
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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 1997-1 Supplement may
be amended by the Transferor, the Servicer, and the Trustee with the consent
of the holders of certificates evidencing undivided interests aggregating not
less than 66 2/3 percent of the investor interests of each and every Series
adversely affected, for the purpose of adding any provisions to, changing in
any manner or eliminating any of the provisions of the Pooling and Servicing
Agreement, or any Supplement or of modifying in any manner the rights of
certificateholders of any then outstanding Series. No such amendment,
however, may (a) reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any such Series, (b) change the
definition of or the manner of calculating the interest of any
certificateholder of such Series, or (c) reduce the aforesaid percentage of
investor interests the holders of which are required to consent to any such
amendment, in each case without the consent of all certificateholders of all
Series adversely affected. Promptly following the execution of any amendment
to the Pooling and Servicing Agreement, the Trustee will furnish written
notice of the substance of such amendment to each Certificateholder. Any
Supplement and any amendments regarding the addition or removal of
Receivables from the Trust will not be considered an amendment requiring
certificateholder consent under the provisions of the Pooling and Servicing
Agreement and any Supplement.
Additionally, upon the receipt by the Transferor, the Servicer and the
Trustee of a Tax Opinion reasonably satisfactory to each of them, the Pooling
and Servicing Agreement and the Series 1997-1 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--Future 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.
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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.
The purchase price for the Receivables (including Receivables in
Additional Accounts) conveyed to Metris that are created on any day is
payable on the date they are conveyed by Direct Merchants Bank to Metris in
an amount equal to 100 percent of the Principal Receivables so conveyed, as
such amount may be adjusted from time to time as described in the Bank
Purchase Agreement.
Purchase Agreement. The Transferor purchases Receivables on an ongoing
basis from Metris pursuant to the Purchase Agreement. Pursuant to the
Purchase Agreement, the Transferor purchases from Metris Receivables arising
from time to time until the Purchase Termination Date (as defined below in
"--Purchase Termination Date"). On each business day prior to the Purchase
Termination Date, Metris delivers all of its Receivables to the Transferor.
The purchase price of such Receivables is an amount equal to 100 percent of
the amount of Principal Receivables, and is payable by the Transferor in cash
and by capital contributions. Pursuant to the Pooling and Servicing
Agreement, such Receivables are thereafter transferred immediately by the
Transferor to the Trust, and the Transferor has assigned its rights in, to
and under the Purchase Agreement and the Bank Purchase Agreement with respect
to such Receivables to the Trust.
REPRESENTATIONS AND WARRANTIES
Bank Purchase Agreement. In the Bank Purchase Agreement, Direct Merchants
Bank represents and warrants as of the Initial Closing Date that, among other
things, (a) Direct Merchants Bank is a national banking association validly
existing in good standing under the laws of the United States, and has full
corporate power, authority and legal right to execute, deliver and perform
its obligations under the Bank Purchase Agreement, (b) the Bank Purchase
Agreement constitutes the valid and binding obligations of Direct Merchants
Bank, enforceable against Direct Merchants Bank in accordance with its terms,
subject to customary bankruptcy and equity related exceptions, (c) Direct
Merchants Bank is the legal and beneficial owner of all right, title and
interest in and to each Receivable conveyed to Metris pursuant to the Bank
Purchase Agreement and each such Receivable has been or will be transferred
to Metris free and clear of any lien other than Permitted Liens, (d) Direct
Merchants Bank has the full right, power and authority to transfer the
Receivables pursuant to the Bank Purchase Agreement, (e) the Bank Purchase
Agreement constitutes a valid transfer and assignment to Metris of all right,
title and interest of Direct Merchants Bank in and to the Receivables, all
monies due or to become due and all proceeds related thereto, or an absolute
sale of such property and the proceeds thereof and (f) each Account
classified as an "Eligible Account" by Direct Merchants Bank in any document
or report delivered under the Bank Purchase Agreement will satisfy the
requirements contained in the definition of Eligible Account and each
Receivable classified as an "Eligible Receivable" by Direct Merchants Bank in
any document or report delivered under the Bank Purchase Agreement will
satisfy the requirements contained in the definition of Eligible Receivable.
Purchase Agreement. Pursuant to the Purchase Agreement Metris represents
and warrants to the Transferor that, among other things, subject to specified
exceptions and limitations, Metris is duly organized, validly existing, and
in good standing under the laws of Delaware, Metris is duly qualified to
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do business and in good standing (or is exempt from such requirement) in any
state required in order to conduct its business and has obtained all
necessary licenses and approvals required under applicable law, and Metris
has the requisite corporate power and authority to perform its obligations
under the Purchase Agreement. Pursuant to the Purchase Agreement, Metris
additionally represents and warrants that, among other things, subject to
specified exceptions and limitations, (i) the execution and delivery of the
Purchase Agreement and the consummation of the transactions provided for in
the Purchase Agreement have been duly authorized by Metris by all necessary
corporate action on its part, (ii) the execution and delivery of the Purchase
Agreement and the performance of the transactions contemplated thereby do not
contravene Metris' charter or by-laws, violate any material provision of law
applicable to it, require any filing (except for filings under the UCC),
registration, consent or approval under any such law except for such filings,
registrations, consents, or approvals as have already been obtained and are
in full force and effect, (iii) except as described in the Purchase
Agreement, Metris has filed all tax returns required to be filed and has paid
or made adequate provision for the payment of all taxes, assessments, and
other governmental charges due from Metris or is contesting any such tax,
assessment or other governmental charge in good faith through appropriate
proceedings, (iv) there are no proceedings or investigations pending or, to
the best knowledge of Metris threatened against Metris before any court,
regulatory body, administrative agency, or other tribunal or governmental
instrumentality asserting the invalidity of the Purchase Agreement, seeking
to prevent the consummation of any of the transactions contemplated by the
Purchase Agreement, seeking any determination or ruling that would materially
and adversely affect the performance by Metris of its obligations thereunder
or seeking any determination or ruling that would materially and adversely
affect the validity of enforceability thereof, (v) Metris has no knowledge of
any fact that should have led it to expect at the time of the classification
of any Receivable as an Eligible Receivable that such Receivable would not be
paid in full when due, and each Receivable classified as an Eligible
Receivable by Metris in any document or report delivered under the Purchase
Agreement, satisfies the requirements of eligibility contained in the
definition of Eligible Receivable set forth in the Purchase Agreement, (vi)
the Purchase Agreement constitutes the legal, valid, and binding obligation
of Metris, (vii) Metris is not insolvent, (viii) Metris is not an "investment
company" within the meaning of the Investment Company Act (or is exempt from
all provisions of such Act), (ix) Metris is the legal and beneficial owner of
all right, title and interest in and to each Receivable conveyed to the
Transferor by Metris pursuant to the Purchase Agreement, and each such
Receivable has been or will be transferred to the Transferor free and clear
of any lien other than Permitted Liens and in compliance in all material
respects with all requirements of law applicable to Metris and (x) the
transfer of by Receivables by it to the Transferor under the Purchase
Agreement constitutes a valid sale, transfer, assignment, set-over and
conveyance to the Trust of all right, title and interest of Metris in and to
the Receivables.
If certain of the representations or warranties described above are not
true with respect to any Receivable at the time such representation or
warranty was made or any Receivable becomes an Ineligible Receivable, then
Metris will be obligated to pay to the Transferor an amount equal to the
principal amount of such Receivable.
The Pooling and Servicing Agreement (i) requires the Transferor to make a
demand on Metris to repurchase Receivables in such cases where the Transferor
is required under the Pooling and Servicing Agreement to repurchase
Receivables from the Trust and (ii) permits the Transferor to consent to the
sale of Receivables to a third party only in such circumstances where the
Transferor may remove Receivables from the Trust under the Pooling and
Servicing Agreement.
CERTAIN COVENANTS
Bank Purchase Agreement. It is the intention of Direct Merchants Bank and
Metris that the conveyance of the Receivables by Direct Merchants Bank to
Metris contemplated by the Bank Purchase Agreement be construed as an
absolute sale of the Receivables by Direct Merchants Bank to Metris. It is
not intended that such conveyance be deemed a pledge of the Receivables by
Direct Merchants Bank to Metris to secure a debt or other obligation of
Direct Merchants Bank, but the Bank Purchase Agreement shall also be deemed
to be a security agreement within the meaning of Article 9 of the UCC and the
conveyance provided for in the Bank Purchase Agreement shall be deemed to be
a grant by Direct Merchants Bank to Metris of a "security interest" within
the meaning of Article 9 of the UCC in
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all of Direct Merchants Bank's right, title and interest in and to the
Receivables. In the Bank Purchase Agreement, Direct Merchants Bank covenants
that, among other things, except as required by law or as Direct Merchants
Bank may determine to be appropriate and subject to specified exceptions and
limitations, (i) it will take no action to cause any Receivable to be
anything other than an account, general intangible or chattel paper, (ii)
except for the conveyances under the Bank Purchase Agreement, it will not
sell any Receivable or grant a lien (other than a Permitted Lien) on any
Receivable, (iii) except as it deems necessary to maintain its credit card
business on a competitive basis, it will not reduce the annual percentage
rates of the Periodic Finance Charges assessed on the Receivables or other
fees charged on the Accounts if, as a result of any such reduction, either a
Pay Out Event would occur or such reduction is not also applied to any
comparable segment of accounts owned by it similar to the Accounts, (iv) it
will comply with and perform its obligations under the Contracts relating to
the Accounts and the Credit and Collection Policy and that it will not change
the terms of such agreements or policies if any such change would, in either
case, materially and adversely affect the rights of the Trust or the
certificateholders, and that it will not enter into any amendment to the Bank
Purchase Agreement that would cause a Ratings Event to occur so long as any
certificates under any Series are outstanding, and (v) in the event it
receives a collection on any Receivable, it will pay such collection to the
Transferor as soon as practicable.
Purchase Agreement. It is the intention of Metris and the Transferor that
the conveyance of the Receivables by Metris be construed as an absolute sale
of the Receivables by Metris to the Transferor. It is not intended that such
conveyance be deemed a pledge of the Receivables by Metris to the Transferor
to secure a debt or other obligation of Metris, but the Purchase Agreement
shall also be deemed to be a security agreement within the meaning of Article
9 of the UCC and the conveyance provided for in the Purchase Agreement shall
be deemed to be a grant by Metris to the Transferor of a "security interest"
within the meaning of Article 9 of the UCC in all of Metris' right, title and
interest in and to the Receivables. Pursuant to the Purchase Agreement,
Metris covenants that, among other things, subject to specified exceptions
and limitations, (i) it will take no action to cause any Receivable to be
anything other than an account, general intangible or chattel paper, (ii)
except for the conveyances under the Purchase Agreement, it will not sell any
Receivable or grant a lien (other than a Permitted Lien) on any Receivable,
(iii) except as it deems necessary to maintain its credit card business on a
competitive basis, it will not reduce the annual percentage rates of the
Periodic Finance Charges assessed on the Receivables or other fees charged on
the Accounts if, as a result of any such reduction, either a Pay Out Event
would occur or such reduction is not also applied to any comparable segment
of accounts owned by it similar to the Accounts, (iv) it will comply with and
perform its obligations under the Contracts relating to the Accounts and the
Credit and Collection Policy and that it will not change the terms of such
agreements or policies if any such change would, in either case, materially
and adversely affect the rights of the Trust or the certificateholders, and
that it will not enter into any amendment to the Bank Purchase Agreement that
would cause a Ratings Event to occur so long as any certificates under any
Series are outstanding, (v) in the event it receives a collection on any
Receivable, it will pay such collection to the Transferor as soon as
practicable, (vi) it will not convey or transfer any Receivable, except as
otherwise provided in the Purchase Agreement, and (vii) it will take all
actions reasonably necessary to maintain its rights under all Contracts to
which it is a party.
PURCHASE TERMINATION DATE
Bank Purchase Agreement. If Direct Merchants Bank becomes insolvent,
Metris' obligations under the Bank Purchase Agreement will automatically be
terminated. In addition, if Metris becomes insolvent, or shall become unable
for any reason to purchase Receivables from Direct Merchants Bank in
accordance with the provisions of the Bank Purchase Agreement, Metris'
obligations under the Bank Purchase Agreement as to Direct Merchants Bank
will automatically be terminated.
Purchase Agreement. If Metris becomes insolvent, the Transferor's
obligations under the Purchase Agreement will automatically be terminated. In
addition, if the Transferor becomes insolvent or shall become unable for any
reason to purchase Receivables from Metris in accordance with the provisions
of the Purchase Agreement, the Transferor's obligations under the Purchase
Agreement as to Metris will automatically be terminated. The date of any such
termination will be the "Purchase Termination Date."
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CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The Transferor has represented and warranted in the Pooling and Servicing
Agreement that the transfer of Receivables by it to the Trust constitutes
either a valid transfer and assignment to the Trust of all right, title, and
interest of the Transferor in and to the Receivables, except for the interest
of the Transferor as holder of the Exchangeable Transferor Certificate and
any investor certificate of any Series then held by it, or the grant to the
Trust of a security interest in the Receivables. The Transferor has also
represented and warranted in the Pooling and Servicing Agreement that, in the
event the transfer of Receivables by the Transferor to the Trust is deemed to
create a security interest under the UCC, there will exist a valid,
subsisting, and enforceable first priority perfected security interest in
such Receivables created thereafter in favor of the Trust on and after their
creation, subject only to Permitted Liens. For a discussion of the Trust's
rights arising from a breach of these warranties, see "Description of the
Offered Certificates--Representations and Warranties."
The Transferor has represented that the Receivables are "accounts,"
"general intangibles" or "chattel paper" for purposes of the UCC. Both the
sale of accounts and chattel paper and the transfer of accounts and chattel
paper as security for an obligation are treated under Article 9 of the UCC as
creating a security interest therein and are subject to its provisions, and
the filing of an appropriate financing statement is required to perfect the
security interest of the Trust. If a transfer of general intangibles is
deemed to constitute the creation of a security interest, rather than a sale,
Article 9 of the UCC applies and the filing of one or more appropriate
financing statements is also required in order to perfect the security
interest of the Trust. In order to protect the interests of the Trust in the
Receivables, financing statements covering the Receivables have been filed
under the UCC.
If the transfer of Receivables constituting general intangibles is deemed
to be a sale, then the UCC is not applicable and no further action is
required to protect the Trust's interest from third parties. Although the
priority of general intangibles arising after the Initial Closing Date is not
as clear as the priority of interests governed by the UCC, Direct Merchants
Bank, Metris and the Transferor believe that it would be inconsistent for a
court to afford the Trust less favorable treatment if the transfer of the
Receivables is deemed to be a sale than if it were deemed to be a security
interest and that a court should conclude that a sale of Receivables
consisting of general intangibles would be deemed to have occurred as of the
Initial Closing Date or, as applicable, the relevant Addition Date.
There are certain limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the Initial
Closing Date could have an interest in such Receivables with priority over
the Trust's interest. Under the Pooling and Servicing Agreement, however, the
Transferor has represented and warranted that it transferred the Receivables
to the Trust free and clear of the lien of any third party. In addition, the
Transferor has covenanted that it will not sell, pledge, assign, transfer, or
grant any lien on any Receivable (or any interest therein) other than to the
Trust. A tax or other government lien on property of the Transferor arising
prior to the time a Receivable comes into existence may also have priority
over the interest of the Trust in such Receivable. There is a significant
possibility that the Trust may not have a perfected security interest in any
of the Receivables created after the filing of a petition for relief by or
against Metris or the Transferor under the Bankruptcy Code or after the
appointment of a receiver or conservator with respect to Direct Merchants
Bank. Nevertheless, it is anticipated that the Trust will either own or have
a perfected security interest in Receivables existing on the date of filing a
petition by or against Metris or the Transferor under the Bankruptcy Code or
after the date of appointment of a receiver or conservator with respect to
Direct Merchants Bank and will be able to make payments in respect of
principal and interest on the Offered Certificates, although there can be no
assurance that any of such payments would be timely. Because the Trust's
interest in the Receivables is dependent upon the Transferor's interest in
the Receivables, which is dependent upon Metris' interest in the Receivables,
any adverse change in the priority or perfection of the Transferor's or
Metris' security interest would correspondingly affect the Trust's interest
in the affected Receivables. In addition, if a receiver or conservator were
appointed for Direct Merchants Bank, certain administrative expenses of the
receiver or conservator also may have priority over the interest of
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the Trust in such Receivables. While Direct Merchants Bank is the Servicer,
certain cash collections on the Receivables may be held by Direct Merchants
Bank and commingled with its funds for brief periods, and if an Insolvency
Event occurs, the Trust may not have a perfected interest in such commingled
collections.
CERTAIN MATTERS RELATING TO BANKRUPTCY OR RECEIVERSHIP
The Transferor will not engage in any activities except purchasing
accounts receivable from Metris or any affiliate of Metris, forming trusts,
transferring such accounts receivable to such trusts and engaging in
activities incident to, or necessary or convenient to accomplish, the
foregoing. The Transferor has no intention of filing a voluntary petition
under the United States 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 United
States 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 United States 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 United States 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 1997-1, 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
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debtor itself were to take the position that the sale of Receivables from
Metris to the Transferor, should be recharacterized as a pledge of such
Receivables to secure a borrowing from such debtor, then delays in payments
of collections of Receivables to the Transferor (and therefore to the Trust
and to Certificateholders) could occur and (should the court rule in favor of
any such trustee, debtor-in-possession or creditor) reductions in the amount
of such payments could result.
The Federal Deposit Insurance Act ("FDIA"), as amended by FIRREA, which
became effective August 9, 1989, sets forth certain powers that the FDIC
could exercise if it were appointed as conservator or receiver of Direct
Merchants Bank. Among other things, the FDIA grants such a conservator or
receiver the power to repudiate contracts of, and to request a stay of up to
90 days of any judicial action or proceeding involving, Direct Merchants
Bank.
To the extent that (i) Direct Merchants Bank granted a security interest
in the Receivables to Metris, (ii) the interest was validly perfected before
Direct Merchants Bank's insolvency, (iii) the interest was not taken or
granted in contemplation of Direct Merchants Bank's insolvency or with the
intent to hinder, delay or defraud Direct Merchants Bank or its creditors,
(iv) the Pooling and Servicing Agreement is continuously a record of Direct
Merchants Bank, and (v) the Pooling and Servicing Agreement represents a bona
fide and arm's length transaction undertaken for adequate consideration in
the ordinary course of business, such valid perfected security interest of
Metris should be enforceable (to the extent of Metris' "actual direct
compensatory damages") notwithstanding the insolvency of, or the appointment
of a receiver or conservator for, Direct Merchants Bank and payments to the
Trust with respect to the Receivables (up to the amount of such damages)
should not be subject to an automatic stay of payment or to recovery by the
FDIC as conservator or receiver of Direct Merchants Bank. If, however, the
FDIC were to assert that the security interest was unperfected or
unenforceable or were to require Metris to establish its rights to those
payments by submitting to and completing the administrative claims procedure
established under FIRREA, or the conservator or receiver were to request a
stay of proceedings with respect to Direct Merchants Bank as provided under
FIRREA, delays in payments on the Certificates and possible reductions in the
amount of those payments could occur. The FDIA does not define the terms
"actual direct compensatory damages." On April 10, 1990, the RTC, formerly a
sister agency of the FDIC, adopted a statement of policy (the "RTC Policy
Statement") with respect to the payment of interest on collateralized
borrowings. The RTC Policy Statements states that interest on such borrowings
will be payable at the contract rate up to the date of the redemption or
payment by the conservator, receiver, or the trustee of an amount equal to
the principal owed plus the contract rate of interest up to the date of such
payment or redemption, plus any expenses of liquidation if provided for in
the contract, to the extent secured by the collateral. In a 1993 case
involving zero-coupon bonds, however, a federal district court held that the
RTC was instead obligated to pay bondholders the fair market value of
repudiated bonds as of the date of repudiation. The FDIC itself has not
adopted a policy statement on payment of interest on collateralized
borrowings.
In Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir. 1993),
cert. denied, 114 S. Ct. 554 (1993), the United States Court of Appeals for
the 10th Circuit suggested that even where a transfer of accounts from a
seller to a buyer constitutes a "true sale," the accounts would nevertheless
constitute property of the seller's bankruptcy estate in a bankruptcy of the
seller. If Metris or the Transferor were to become subject to a bankruptcy
proceeding or if Direct Merchants Bank were to become subject to a
receivership and a court were to follow the 10th Circuit's reasoning,
Certificateholders might experience delays in payment or possibly losses in
their investment in the Certificates. Counsel to the Transferor has advised
the Transferor that the facts of the Octagon case are distinguishable from
those in the sale transactions between Direct Merchants Bank and Metris,
Metris and the Transferor and the Transferor and the Trust and that the
reasoning of the Octagon case appears to be inconsistent with established
precedent and the UCC. In addition, because Metris, Direct Merchants Bank,
the Transferor, the Trust and the transaction governed by the Pooling and
Servicing Agreement do not have any particular link to the 10th Circuit, it
is unlikely that Metris, Direct Merchants Bank, or the Transferor would be
subject to a receivership proceeding in the 10th Circuit. Accordingly, the
Octagon case should not be binding precedent on a court in a receivership
proceeding.
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The occurrence of certain events of insolvency, conservatorship or
receivership with respect to the Servicer will result in a Servicer Default,
which Servicer Default, in turn, could result in a Pay Out Event. If no other
Servicer Default other than the commencement of such bankruptcy or similar
event exists, a conservator or receiver of the Servicer may have the power to
prevent the Trustee and the Certificateholders from appointing a successor
Servicer.
CONSUMER PROTECTION LAWS
The relationship of the cardholder and credit card issuer is extensively
regulated by federal and state consumer protection and related laws. With
respect to credit cards issued by Direct Merchants Bank, the most significant
laws include the federal Truth-in-Lending Act, Fair Credit Billing Act, Fair
Debt Collection Practices Act, Equal Credit Opportunity Act, Fair Credit
Reporting Act, Electronic Funds Transfer Act and National Bank Act, as well
as applicable state laws. Claims may be brought under these statutes by
private consumers as well as federal and state regulators. These statutes
impose disclosure requirements when a credit card account is advertised, when
it is opened, at the end of monthly billing cycles and at year end and, in
addition, prohibit certain discriminatory practices in extending credit and
impose certain limitations on the type of account related charges that may be
assessed. Federal law requires credit card issuers to disclose to consumers
the interest rates, cardholder fees, grace periods and balance calculation
methods associated with their credit card accounts. In addition, cardholders
are entitled under current laws to have payments and credits applied to the
credit card account promptly, to receive prescribed notices and to require
billing errors to be resolved promptly. Certain laws, including the laws
described above, may limit Direct Merchants Bank's ability to collect amounts
owing with respect to the Receivables regardless of any act or omission on
the part of Direct Merchants Bank. These laws further provide that in certain
cases cardholders cannot be held liable for, or the cardholder's liability is
limited with respect to, charges to the credit card account that result from
unauthorized use of the credit card.
Additional consumer protection laws may be enacted that would impose
requirements on the making, enforcement and collection of consumer credit
loans. Any new laws or rulings that may be adopted, and existing consumer
protection laws, may adversely affect the ability to collect on the
Receivables. In addition, failure of the Servicer to comply with such
requirements could adversely affect the Servicer's ability to enforce the
receivables.
Certain jurisdictions may attempt to require out-of-state credit card
issuers to comply with such jurisdictions' consumer protection laws
(including laws limiting the charges imposed by such credit card issuers) in
connection with their operations in such jurisdictions. If it were determined
that out-of-state credit card issuers must comply with a jurisdiction's laws
limiting the charges imposed by credit card issuers, such actions could have
an adverse impact on Direct Merchants Bank's credit card operations.
Application of federal and state bankruptcy and debtor relief laws (including
the Soldiers' and Sailors' Civil Relief Act of 1940) would affect the
interests of the holders of the Certificates if the protection provided to
debtors under such laws result in any receivables of the Trust being written
off as uncollectible.
The Trust may be liable for certain violations of consumer protection laws
that apply to the receivables transferred to it, either as assignee from the
Transferor with respect to obligations arising before the transfer or as a
party directly responsible for obligations arising after the transfer. In
addition, a cardholder may be entitled to assert such violations by way of
set-off against such cardholder's obligation to pay the amount of Receivables
owing. The Transferor will warrant to the Trust in the Pooling and Servicing
Agreement that all Receivables transferred to the Trust have been and will be
created in compliance with the requirements of such laws. For discussion of
the Trust's rights arising from the breach of these warranties, see
"Description of the Offered Certificates--Representations and Warranties."
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CLAIMS AND DEFENSES OF CARDHOLDERS AGAINST THE TRUST
The UCC provides that (a) unless an Obligor has made an enforceable
agreement not to assert defenses or claims arising out of a transaction, the
rights of the Trust, as assignee, are subject to all the terms of the
Contract between the Credit Card Originator and such Obligor and any defense
or claim arising therefrom, to rights of set-off and to any other defense or
claim of such Obligor against the Credit Card Originator that accrues before
such Obligor receives notification of the assignment and (b) any such Obligor
is authorized to continue to pay the Credit Card Originator until (i) Obligor
receives notification, reasonably identifying the rights assigned, that the
amount due or to become due has been assigned and that payment is to be made
to the Trustee or successor Servicer and (ii) if requested by the Obligors,
the Trustee or successor Servicer has furnished reasonable proof of
assignment. No such agreement not to assert defenses has been entered into
and no notice of the assignment of the Receivables to the Trust will be sent
to the cardholders obligated on the Accounts in connection with the transfer
of the Receivables to the Trust.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL; SCOPE OF FEDERAL INCOME TAX OPINION
Set forth below is a general discussion of the material United States
federal income tax consequences of the purchase, ownership and disposition of
the Offered Certificates which are anticipated to be relevant to most
categories of investors and has been prepared or reviewed by Skadden, Arps,
Slate, Meagher & Flom LLP, special federal income tax counsel to the
Transferor ("Special Tax Counsel"). Special Tax Counsel is of the opinion
that this discussion is correct in all material respects. As more fully
described below, Special Tax Counsel will render its opinion, subject to the
analysis and assumptions contained therein, that the Offered Certificates
will be characterized as indebtedness secured by the Receivables for federal
income tax purposes and that the Trust will not be subject to federal income
tax at the entity level. Except as expressly provided below, Special Tax
Counsel will render no other opinions to the Transferor with respect to the
Offered Certificates. This discussion is intended as an explanatory
discussion of the possible effects of the classification of the Offered
Certificates as indebtedness on investors generally and or related tax
matters affecting investors generally, but does not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's tax
advisor. This discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations thereunder, current administrative rulings, judicial decisions
and other applicable authorities in effect as of the date hereof, all of
which are subject to change, possibly with retroactive effect. There are no
cases or Internal Revenue Service ("IRS") rulings on similar transactions
involving instruments issued by a trust with terms similar to those of the
Offered Certificates. As a result, there can be no assurance that the IRS
will not challenge the conclusions reached herein, and no ruling from the IRS
has been or will be sought on any of the issues discussed below. Furthermore,
legislative, judicial or administrative changes may occur, perhaps with
retroactive effect, which could affect the accuracy of the statements and
conclusions set forth herein as well as the tax consequences to
Certificateholders.
This summary does not address all aspects of federal income taxation that
may be relevant to the Certificate Owners in light of their personal
investment circumstances nor, except for certain limited discussions of
particular topics, to certain types of holders subject to special treatment
under the federal income tax laws (e.g., financial institutions,
broker-dealers, life insurance companies and tax-exempt organizations). This
information is directed to prospective purchasers who purchase Offered
Certificates in the initial distribution thereof, who are citizens or
residents of the United States, including domestic corporations and
partnerships, and who hold the Offered Certificates as "capital assets"
within the meaning of Section 1221 of the Code. Taxpayers and preparers of
tax returns (including those filed by any partnership or other issuer) should
be aware that under applicable Treasury Regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice is (i) given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of
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an entry on a tax return. Accordingly, taxpayers should consult their
respective tax advisors and tax return preparers regarding the preparation of
any item on a tax return, even where the anticipated tax treatment has been
discussed herein. EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX
ADVISOR AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OFFERED
CERTIFICATES SPECIFIC TO SUCH PROSPECTIVE INVESTOR.
CHARACTERIZATION OF THE OFFERED CERTIFICATES AS INDEBTEDNESS
The Transferor, the Servicer and each Certificate Owner will express in
the Pooling and Servicing Agreement the intent that, for federal, state and
local income and franchise tax purposes, the Offered Certificates will be
indebtedness secured by the Receivables. The Transferor, by initially
entering into, and the Servicer, by accepting the assignment of, the Pooling
and Servicing Agreement, and each Certificate Owner, by acquiring an interest
in an Offered Certificate, will agree to treat the Offered Certificates as
indebtedness for federal, state and local income and franchise tax purposes
(except to the extent that different treatment is explicitly required under
state or local tax statutes). However, because different criteria are used in
determining the nontax accounting treatment of the transaction, the
Transferor will treat the Pooling and Servicing Agreement, for financial
accounting purposes and certain other nontax purposes, as effecting a
transfer of an ownership interest in the Receivables and not as creating a
debt obligation.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured
by the property, is a question of fact, the resolution of which is based upon
the economic substance of the transaction rather than its form or the manner
in which it is labeled. While the IRS and the courts have set forth several
factors to be taken into account in determining whether the substance of a
transaction is a sale of property or a secured indebtedness for federal
income tax purposes, the primary factor in making this determination is
whether the transferee has assumed the risk of loss or other economic burdens
relating to the property and has obtained the benefits of ownership thereof.
Based upon its analysis of such factors, Special Tax Counsel is of the
opinion that the Transferor will be treated as the owner of the Receivables
for federal income tax purposes and, accordingly, the Class A Certificates
and the Class B Certificates will be characterized for federal income tax
purposes as indebtedness that is secured by the Receivables. Furthermore,
Special Tax Counsel is of the opinion that the Trust will not be subject to
federal income tax at the entity level.
Although, in some instances, courts have held that a taxpayer is bound by
a particular form it has chosen for a transaction, even if the substance of
the transaction does not accord with its form, Special Tax Counsel is of the
opinion that the rationale of those cases do not apply to the transaction
evidenced by the Offered Certificates, because the form of the transaction,
as reflected in the operative provisions of the documents, either is not
inconsistent with the characterization of the Offered Certificates as debt
for federal income tax purposes or otherwise makes the rationale of those
cases inapplicable to this situation.
TAXATION OF INTEREST INCOME TO CERTIFICATEHOLDERS
The following discussion is based in part upon Treasury Regulations
interpreting the original issue discount ("OID") provisions of Sections 1271
through 1275 of the Code which were adopted as final on January 27, 1994 (the
"OID Regulations"). The OID Regulations are, however, subject to varying
interpretations and do not address all issues that could affect Certificate
Owners.
Stated Interest. It is not expected that any of the Offered Certificates
will be issued with OID. Based upon the foregoing opinions, and assuming that
all of the Offered Certificates are treated as debt, the stated interest on
Offered Certificates will be taxable as ordinary income for federal income
tax purposes when received or accrued in accordance with a
Certificateholder's method of tax accounting.
OID. The Offered Certificates may be issued at a discount from their
principal amounts, thereby creating OID. In such a case, all or a portion of
the taxable income to be recognized with respect to the Offered Certificates
would be includible in income of Certificate Owners as OID. Any amount
treated as OID would not, however, be includible again when the interest is
actually received. If the yield on a class
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<PAGE>
of Offered Certificates were not materially different from its coupon, this
treatment would have no significant effect on Certificate Owners using the
accrual method of accounting. However, cash method Certificate Owners may be
required to report income with respect to the Offered Certificates in advance
of the receipt of cash attributable to such income.
While it is not anticipated that the Offered Certificates will be issued
at a discount from their stated principal amount that is greater than a de
minimis amount, under Treasury regulations (the "Regulations") the Offered
Certificates may nevertheless be deemed to have been issued with OID. This
could be the case, for example, if interest payments are not deemed to be
payments of "qualified stated interest" because (i) no reasonable legal
remedies exist to compel timely payment of such interest payments and (ii)
the offered Certificates do not have terms and conditions that make the
likelihood of late payment (other than a late payment that occurs within a
reasonable grace period) or nonpayment a remote contingency. As a result, if
such Regulations were to apply, all of the taxable income to be recognized
with respect to the Offered Certificates would be includible in income as OID
but would not be includible again when the interest is actually received. The
OID Regulations provide, however, that in determining whether interest is
unconditionally payable, the possibility of nonpayment due to default,
insolvency, or similar circumstances is ignored. Accordingly, the Transferor
intends to take the position that interest payments constitute payments of
"qualified stated interest" with respect to the Offered Certificates if they
are issued at a price that is less than a de minimis discount from their
stated principal amount.
If the Offered Certificates are in fact issued at a greater than de
minimis discount, the following rules will apply. The excess of the "stated
redemption price at maturity" of an Offered Certificate (generally equal to
its principal amount as of the date of issuance plus all interest other than
"qualified stated interest" payable prior to or at maturity) over the
original issue price (in this case, the initial offering price at which a
substantial amount of the Offered Certificates are sold to the public) will
constitute OID. A Certificate Owner must include OID in income as interest
over the term of the Offered Certificate under a constant yield method. In
general, OID must be included in income in advance of the receipt of cash
representing that income. In the case of a debt instrument as to which the
repayment of principal may be accelerated as a result of the prepayment of
other obligations securing the debt instrument (a "Prepayable Instrument"),
the periodic accrual of OID is determined by taking into account both the
prepayment assumptions used in pricing the debt instrument and the prepayment
experience. If this provision applies to the Offered Certificates (which is
not clear), the amount of OID which will accrue in any given "accrual period"
may either increase or decrease depending upon the actual prepayment rate.
Accordingly, each Certificateholder should consult its own tax advisor
regarding the impact to such Certificateholder of the OID rules if the
Offered Certificates are issued with OID. An Offered Certificate issued with
de minimis OID must include such OID in income proportionately as principal
payments are made on such Offered Certificate.
Discount and Premium. A subsequent holder who purchases an Offered
Certificate at a discount may be subject to the "market discount" rules of
Section 1276 of the Code. These rules provide, in part, for the treatment of
gain attributable to accrued market discount as ordinary income upon the
receipt of partial principal payments or on the sale or other disposition of
the Offered Certificate, and for the deferral of interest deductions with
respect to debt incurred to acquire or carry the market discount Offered
Certificate. A Certificate Owner may, however, elect to include market
discount in gross income as it accrues and, if such election is made, is not
subject to the deferral of interest deductions provision. Any such election
will apply to all debt instruments acquired by the taxpayer on or after the
first day of the first taxable year to which such election applies. Further,
the adjusted tax basis of an Offered Certificate subject to such election
will be increased to reflect market discount included in gross income,
thereby reducing any gain or increasing any loss on a sale or taxable
disposition.
A subsequent holder who purchases an Offered Certificate at a premium may
elect to amortize and deduct this premium over the remaining term of the
Offered Certificate in accordance with rules set forth in Section 171 of the
Code.
Optional Election. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with respect
to an Offered Certificate, including stated interest, acquisition discount,
OID, de minimis OID, market discount, de minimis market discount, and
unstated interest, as adjusted by any amortizable bond premium or acquisition
premium, using the constant yield method described above.
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<PAGE>
Treatment of Losses. OID, if any (in excess of de minimis OID), must be
reported by all Offered Certificateholders, and other interest income must be
reported by Offered Certificateholders that report income on the accrual
method, as it accrues, whether or not such Offered Certificateholder has
received cash equivalent to such income and without giving effect to delays
or reductions in distributions attributable to defaults and delinquencies on
the Receivables, except to the extent it can be established that such amounts
are uncollectible. As a result, if there were in excess of de minimis OID,
the amount of income reported by an Offered Certificateholder in any period
could exceed the amount of cash distributed to such holder in that period. An
Offered Certificateholder generally will realize a loss where either
principal or previously accrued interest are determined to be uncollectible
with respect to the Offered Certificate, although the timing and character of
such losses (or reductions in income) are uncertain, and the deductibility of
such losses may be subject to limitations.
DISPOSITION OF OFFERED CERTIFICATES
Generally, capital gain or loss will be recognized on a sale or other
taxable disposition of Offered Certificates in an amount equal to the
difference between the amount realized (other than amounts attributable to,
and taxable as, accrued interest) and the seller's tax basis in the Offered
Certificates. A Certificate Owner's tax basis in an Offered Certificate will
generally equal such Certificate Owner's cost increased by any OID, market
discount and gain previously included by such Certificate Owner in income
with respect to the Offered Certificate and decreased by any bond premium
previously amortized and any principal payments previously received by such
Certificate Owner with respect to the Offered Certificate. Subject to the
market discount rules of the Code discussed above under "--Taxation of
Interest Income to Certificateholders--Discount and Premium", any such gain
or loss will be capital gain or loss if the Offered Certificate was held as a
capital asset (except, however, with regard to Prepayable Instruments, in
which case in the event of a prepayment or redemption thereof such gain is
ordinary income to the extent of any not yet accrued OID). Capital gain or
loss will be long-term if the Offered Certificate was held by the holder for
more than one year and otherwise will be short-term. Any capital losses
realized generally may be used by a corporate taxpayer only to offset capital
gains, and by an individual taxpayer only to the extent of capital gains plus
$3,000 of other income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee will be required to report annually to the IRS, and to each
Certificateholder, the amount of interest paid on the Offered Certificates
(and the amount withheld for federal income taxes, if any) for each calendar
year, except as to exempt recipients (generally, corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to
their status). Each holder (other than holders who are not subject to the
reporting requirements) will be required to provide, under penalties of
perjury, a certificate containing the holder's name, address, correct federal
taxpayer identification number and a statement that the holder is not subject
to backup withholding. Should a nonexempt Certificateholder fail to provide
the required certification, the Trustee will be required to withhold (or
cause to be withheld) 31 percent of the interest otherwise payable to the
holder, and remit the withheld amounts to the IRS as a credit against the
holder's federal income tax liability.
RECENT LEGISLATION
Recent legislation passed by Congress and signed into law by the President
on August 20, 1996 adds Sections 860H through 860L to the Code (the "FASIT
Provisions") which will provide for a new type of entity for federal income
tax purposes known as a "financial asset securitization investment trust" (a
"FASIT"). The legislation providing for the new FASIT entity, however, is not
to be effective until September 1, 1997, and many technical issues are to be
addressed in Treasury regulations yet to be drafted. In general, the FASIT
legislation will enable trusts such as the Trust to be treated as a
pass-through entity not subject to federal entity-level income tax (except
with respect to certain prohibited transactions) and to issue securities that
would be treated as debt for federal income tax purposes. Transition rules
provided for by the FASIT legislation contemplate that entities in existence
on
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August 31, 1997 may elect to be taxed under the FASIT Provisions, however,
how such election would be made and how outstanding interests of such entity
are to be treated subsequent to the election is not explained in the FASIT
legislation.
OTHER POSSIBLE CHARACTERIZATIONS OF THE POOLING AND SERVICING AGREEMENT
Although, as described above, it is the opinion of Special Tax Counsel
that the Class A Certificates and Class B Certificates will properly be
characterized as indebtedness, and that the Class C Certificates (not offered
hereby) should be classified as indebtedness (or, if not, would be classified
as an interest in a partnership), for federal income tax purposes, such
opinion is not binding on the IRS and thus no assurance can be given that
such characterization will prevail. As set forth above, in the opinion of
Special Tax Counsel, if the IRS were to contend successfully that the Class C
Certificates were not debt for federal income tax purposes (assuming that
neither the Class A or Class B Certificates, nor certificates of any other
outstanding series, were also recharacterized) the arrangement among the
Transferor and the Class C Certificateholders would be classified as a
partnership for federal income tax purposes. If, however, the IRS were to
contend successfully that either the Class A or Class B Certificates, or
certificates of any other outstanding series, were not debt for federal
income tax purposes, the arrangement among the Certificate Owners, the
Transferor, and certificate owners of such other Series might be classified
for federal income tax purposes as a publicly traded partnership taxable as a
corporation.
If the Class C Certificates (and no class of the Offered Certificates nor
certificates of any other outstanding Series) were treated as interests in a
partnership, it is Special Tax Counsel's opinion that the partnership would
not be treated as a publicly traded partnership because it would qualify for
an applicable "safe harbor" that the IRS has provided. Therefore, the
partnership would not be subject to federal income tax.
If, alternatively, the arrangement created by the Pooling and Servicing
Agreement were treated as a publicly traded partnership taxable as a
corporation, the resulting entity would be subject to federal income taxes at
corporate tax rates on its taxable income generated by ownership of the
Receivables. Moreover, distributions by the entity to all or some of the
classes of Certificateholders would probably not be deductible in computing
the entity's taxable income and all or part of distributions to
Certificateholders would probably be treated as dividends. Such an
entity-level tax could result in reduced distributions to Certificateholders
and the Certificateholders could be liable for a share of such tax.
Because the Transferor will treat the Offered Certificates as indebtedness
for federal income tax purposes, the Trustee will not comply with the tax
reporting requirements that would apply under the foregoing alternative
characterizations of the Offered Certificates.
DEFEASANCE
The Certificates are subject to Defeasance in certain circumstances. It is
not clear under the existing authorities whether Defeasance would, for
federal income tax purposes, result in a deemed taxable sale or exchange of
the Certificates in exchange for the amounts deposited in the Principal
Funding Account and the Accumulation Period Reserve Account as a result of
the Defeasance; however, if such a sale or exchange were deemed to occur,
because of the short time period, the amount required to be deposited and the
nature of the assets in which such amount may be invested, such a result
would not be expected to have a material adverse effect on a
Certificateholder for federal income tax purposes, notwithstanding that, if
such a sale or exchange were deemed to occur, each Certificateholder would
thereafter be deemed to own its pro rata share of the assets in which such
amount is invested, and would be required to report its taxable income on
such basis.
TAX CONSEQUENCES TO FOREIGN INVESTORS
Special Tax Counsel will render its opinion, subject to the analysis and
assumptions contained therein, that the Class A Certificates and Class B
Certificates will properly be characterized as indebtedness secured by the
Receivables, and that the Class C Certificates (not offered hereby) should be
classified as indebtedness (or, if not, would be classified as an interest in
a partnership), for federal income
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tax purposes. Based upon that opinion, the following information describes
the U.S. federal income tax treatment of investors in Offered Certificates
that are not U.S. persons (each, a "Foreign Person"). The term "Foreign
Person" means any person other than (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii)
an estate the income of which is includible in gross income for U.S. federal
income tax purposes, regardless of its source or, for trusts whose taxable
years begin after December 31, 1996, a trust whose administration is subject
to the primary supervision of a United States court and which has one or more
United States fiduciaries who have the authority to control all substantial
decisions of the trust.
(a) Interest paid or accrued to a Foreign Person that is not effectively
connected with the conduct of a trade or business within the United States
by the Foreign Person, will generally be considered "portfolio interest"
and generally will not be subject to United States federal income tax and
withholding tax, as long as the Foreign Person (i) is not actually or
constructively a "10 percent shareholder" of the Transferor or a
"controlled foreign corporation" with respect to which the Transferor is a
"related person" within the meaning of the Code, and (ii) provides an
appropriate statement, signed under penalties of perjury, certifying that
the beneficial owner of the Offered Certificate is a Foreign Person and
providing that Foreign Person's name and address. If the information
provided in this statement changes, the Foreign Person must so inform the
Trustee within 30 days of such change. The statement generally must be
provided in the year a payment occurs or in either of the two preceding
years. If such interest were not portfolio interest, then it would be
subject to United States federal income and withholding tax at a rate of
30 percent unless reduced or eliminated pursuant to an applicable income
tax treaty.
(b) Any capital gain realized on the sale or other taxable disposition of
an Offered Certificate by a Foreign Person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is
not effectively connected with the conduct of a trade or business in the
United States by the Foreign Person, and (ii) in the case of an individual
Foreign Person, the Foreign Person is not present in the United States for
183 days or more in the taxable year.
(c) If the interest, gain or income on an Offered Certificate held by a
Foreign Person is effectively connected with the conduct of a trade or
business in the United States by the Foreign Person, the holder (although
exempt from the withholding tax previously discussed if an appropriate
statement is furnished) generally will be subject to United States federal
income tax on the interest, gain or income at regular federal income tax
rates. In addition, if the Foreign Person is a foreign corporation, it may
be subject to a branch profits tax equal to 30 percent of its "effectively
connected earnings and profits" within the meaning of the Code for the
taxable year, as adjusted for certain items, unless it qualifies for a
lower rate under an applicable tax treaty.
If the IRS were to contend successfully that any of the Offered
Certificates are interests in a partnership (not taxable as a corporation), a
Certificate Owner that is a Foreign Person might be required to file a United
States individual or corporate income tax return and pay tax on its share of
partnership income at regular United States rates including, in the case of a
corporate Certificate Owner, the branch profits tax (and would be subject to
withholding tax on its share of partnership income). If any of the Offered
Certificates were recharacterized as interests in a "publicly traded
partnership" taxable as a corporation, to the extent distributions on such
Offered Certificates were treated as dividends, a Foreign Person would
generally be subject to tax (and withholding) on the gross amount of such
dividends at a rate of 30 percent unless reduced or eliminated pursuant to an
applicable income tax treaty.
CERTAIN STATE TAX CONSEQUENCES
Because of the differences in state tax laws and their applicability to
different investors, it is not possible to summarize the potential state tax
consequences of holding the Offered Certificates. ACCORDINGLY, PURCHASERS OF
OFFERED CERTIFICATES SHOULD CONSULT THEIR RESPECTIVE TAX ADVISORS REGARDING
THE STATE TAX CONSEQUENCES OF PURCHASING ANY CLASS OF OFFERED CERTIFICATES.
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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.
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. The Class B Underwriter expects, although
no assurance can be given, that the Class B Certificates will be held by at
least 100 such persons at the conclusion of the offering. The Transferor
anticipates that the other conditions of the Plan Assets Regulation will be
met with respect to the Offered Certificates. No monitoring or other measures
will be taken to ensure that any such conditions will be met with respect to
the Offered 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 Offered Certificates.
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
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Section 4975 of the Code. Pursuant to Section 401(c), the Department of Labor
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 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
such 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 such plan invested in a
separate account.
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, 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........... $205,450,000
Chase Securities Inc.............. 205,400,000
NationsBanc Capital Markets,
Inc.............................. 205,400,000
--------------
Total .......................... $616,250,000
==============
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
OF CLASS B
CLASS B UNDERWRITER CERTIFICATES
- ------------------------ --------------
<S> <C>
Bear, Stearns & Co.
Inc..................... $106,250,000
==============
</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 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.
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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 in, and may engage in the future, 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 and, with respect to certain
matters of Delaware law, Skadden, Arps, Slate, Meagher & Flom (Delaware),
Wilmington, Delaware. 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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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 54 in "Description of
Offered Certificates--Postponement of Accumulation Period."
"Accumulation Period Reserve Account" is defined at page 67 in
"Description of Offered Certificates--Accumulation Period Reserve Account."
"Accumulation Shortfall" is defined at page 78 in "Description of Offered
Certificates--Application of Collections--Payment of Principal."
"Adaptive Control System" is defined at page 38 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 78 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 or
VISA 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 62 in "Description of the Offered
Certificates--Addition of Trust Assets."
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"Automatic Additional Accounts" is defined at page 61 in "Description of
the Offered Certificates--Addition of Trust Assets."
"Available Investor Principal Collections" is defined at page 54 in
"Description of the Offered Certificates--Principal Payments."
"Available Reserve Account Amount" is defined at page 68 in "Description
of the Offered Certificates--Accumulation Period Reserve Account."
"Available Series Finance Charge Collections" is defined at page 74 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 47 in "Maturity Considerations."
"Cash Equivalents" is defined at page 65 in "Description of the Offered
Certificates--Trust Accounts."
"Cedel" is defined at page 51 in "Description of the Offered
Certificates--Book-Entry Registration."
"Cedel Participants" is defined at page 51 in "Description of the Offered
Certificates--Book-Entry Registration."
"Certificateholders" means the record holders of the Certificates.
"Certificateholders' Interest" means the interest in the assets of the
Trust allocated to the Certificateholders.
"Certificate Owners" is defined at page 3 in "Reports to
Certificateholders."
"Certificate Rates" is defined at page 13 in "Prospectus
Summary--Interest."
"Certificates" means, collectively, the Class A Certificates, the Class B
Certificates, the Class C Certificates and the Class D Certificates.
"Class" means any of the Class A Certificates, the Class B Certificates,
the Class C Certificates or the Class D Certificates.
"Class A Adjusted Invested Amount" is defined at page 69 in "Description
of the Offered Certificates--Allocation Percentages."
"Class A Certificateholders" means the record holders of the Class A
Certificates.
"Class A Certificateholders' Interest" means the interest in the assets of
the Trust allocated to the Class A Certificateholders.
"Class A Certificate Rate" means 6.87 % per annum.
"Class A Certificates" means the 6.87% Asset Backed Certificates, Series
1997-1, Class A.
"Class A Fixed/Floating Allocation Percentage" is defined at page 68 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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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 $616,250,000.
"Class A Invested Amount" is defined at page 79 in "Description of the
Offered Certificates--Allocation Percentages."
"Class A Investor Charge-Off" is defined at page 80 in "Description of the
Offered Certificates--Investor Charge-Offs."
"Class A Monthly Interest" is defined at page 76 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 48 in "Pool Factor and Related
Information."
"Class A Principal" is defined at page 77 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 104 in
"Underwriting."
"Class B Adjusted Invested Amount" is defined at page 69 in "Description
of Offered Certificates--Allocation Percentage."
"Class B Certificateholders" means the record holders of the Class B
Certificates.
"Class B Certificateholders' Interest" means the interest in the assets of
the Trust allocated to the Class B Certificateholders.
"Class B Certificate Rate" means 7.11% per annum.
"Class B Certificates" means the 7.11% Asset Backed Certificates, Series
1997-1, Class B.
"Class B Fixed/Floating Allocation Percentage" is defined at page 68 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 $106,250,000.
"Class B Invested Amount" is defined at page 69 in "Description of the
Offered Certificates--Allocation Percentages."
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"Class B Investor Charge-Off" is defined at page 79 in "Description of the
Offered Certificates--Investor Charge-Offs."
"Class B Monthly Interest" is defined at page 76 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 48 in "Pool Factor and Related
Information."
"Class B Principal" is defined at page 77 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 1997-1 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 104 in
"Underwriting."
"Class C Adjusted Invested Amount" is defined at page 70 in "Description
of the Offered Certificates--Allocation Percentages."
"Class C Certificateholders" means the record holders of the Class C
Certificates.
"Class C Certificateholders' Interest" means the interest in the assets of
the Trust allocated to the Class C Certificateholders.
"Class C Certificate Rate" means the London interbank offered quotations
for one-month United States dollar deposits plus 1.00% per annum or such
lesser rate as specified in the Series 1997-1 Supplement.
"Class C Certificates" means the Floating Rate Asset Backed Certificates,
Series 1997-1, Class C.
"Class C Fixed/Floating Allocation Percentage" is defined at page 68 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.
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"Class C Initial Invested Amount" means $77,250,000.
"Class C Invested Amount" is defined at page 69 in "Description of the
Offered Certificates--Allocation Percentages."
"Class C Investor Charge-Off" is defined at page 79 in "Description of the
Offered Certificates--Investor Charge-Offs."
"Class C Monthly Interest" is defined at page 76 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 77 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 1997-1 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 1997-1,
Class D.
"Class D Fixed/Floating Allocation Percentage" is defined at page 68 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 70 in "Description of the
Offered Certificates--Allocation Percentages."
"Class D Investor Charge-Off" is defined at page 78 in "Description of the
Offered Certificates--Investor Charge-Offs."
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"Class D Principal Payment Commencement Date" means the earlier of (a)
during the Amortization Period, the first Distribution Date on which the
Class C Invested Amount is paid in full or, if there are no Principal
Collections allocable to Series 1997-1 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 77.
"Controlled Deposit Amount" is defined at page 46 in "Maturity
Considerations."
"Cooperative" is defined at page 51 in "Description of the Offered
Certificates--Book-Entry Registration."
"Covered Amount" is defined at page 68 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 78 in "Description of the
Offered Certificates--Defaulted Receivables; Dilution."
"Defeasance" is defined at page 80 in "Description of the Offered
Certificates--Defeasance."
"Definitive Certificates" is defined at page 52 in "Description of the
Offered Certificates--Definitive Certificates."
"Depositaries" is defined at page 49 in "Description of the Offered
Certificates--Book-Entry Registration."
"Depository" is defined at page 49 in "Description of the Offered
Certificates--General."
"Determination Date" is defined at page 78 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 63 in "Description of the
Offered Certificates--Discount Option."
"Discount Percentage" is defined at page 63 in "Description of the Offered
Certificates--Discount Option."
"Distribution Account" is defined at page 64 in "Description of the
Offered Certificates--Trust Accounts."
"Distribution Date" means June 20, 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 49 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 61 in "Description of the Offered
Certificates--Eligible Accounts."
"Eligible Receivable" is defined at page 61 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 51 in "Description of the Offered
Certificates--Book-Entry Registration."
"Euroclear Operator" is defined at page 51 in "Description of the Offered
Certificates--Book-Entry Registration."
"Euroclear Participants" is defined at page 51 in "Description of the
Offered Certificates--Book-Entry Registration."
"Euroclear System" is defined at page 51 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 66 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 April 2002 Distribution Date.
"External Prospects" is defined at page 36 in "Metris Companies Inc."
"FASIT" is defined at page 99 in "Certain Federal Income Tax
Consequences--Recent Legislation."
"FASIT Provisions" is defined at page 99 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 36 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 69 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 103 in "Employee Benefit
Plan Considerations--Special Considerations for Insurance Company General
Accounts."
"Global Securities" is defined at page A II-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 50 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 56 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 82 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 64 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 Default Amount" is defined at page 78 in "Description of the
Offered Certificates--Defaulted Receivables; Dilution."
"Investor Percentage" means, (a) with respect to Finance Charge
Collections prior to the commencement of the Early Amortization Period,
Receivables in Defaulted Accounts at any time and Principal Collections
during the Revolving Period, the Floating Allocation Percentage and (b) with
respect to Finance Charge Collections during the Early Amortization Period
and Principal Collections during the Amortization Period, the Fixed/Floating
Allocation Percentage, and with respect to any Series of certificates, the
percentage specified in the related Supplement.
"IRS" means the Internal Revenue Service.
"MasterCard International" means MasterCard International Inc.
"Metris" means Metris Companies Inc., a Delaware corporation.
"Metris Direct" means Metris Direct, Inc., a Minnesota corporation and an
affiliate of Direct Merchants Bank.
"Metris Receivables, Inc." means Metris Receivables, Inc., a Delaware
corporation.
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<PAGE>
"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 1997-1, 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 1997-1, 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 May
31, 1997.
"Monthly Servicing Fee" is defined at page 83 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 20 in "Prospectus
Summary--Coverage of Interest Shortfalls from Transferor Finance Charge
Collections."
"Notice Date" is defined at page 62 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 97 in "Certain Federal Income Tax
Consequences--Taxation of Interest Income to Certificateholders."
"Paired Series" is defined at page 79 in "Description of the Offered
Certificates--Paired Series."
"Participants" is defined at page 49 in "Description of the Offered
Certificates--General."
"Paying Agent" is defined at page 65 in "Description of the Offered
Certificates--Trust Accounts."
"Payment Date" is defined at page 39 in "Direct Merchants Bank's Credit
Card Activities--Servicing, Billing and Payments."
"Payment Reserve Account" is defined at page 64 in "Description of the
Offered Certificates--Trust Accounts."
"Pay Out Event" is defined at page 81 in "Description of the Offered
Certificates--Pay Out Events."
"Periodic Finance Charge" has, with respect to any Account, the meaning
specified in the Contract applicable to such Account for finance charges (due
to periodic rate) or any similar term.
"Permitted Lien" means with respect to the Receivables: (i) liens in favor
of the Transferor created pursuant to the Purchase Agreement and assigned to
the Trustee pursuant to the Pooling and Servicing Agreement; (ii) liens in
favor of the Trustee pursuant to the Pooling and Servicing Agreement; and
(iii) liens which secure the payment of taxes, assessments and governmental
charges or levies, if such taxes are either (a) not delinquent or (b) being
contested in good faith by appropriate legal or administrative proceedings
and as to which adequate reserves in accordance with generally accepted
accounting principles shall have been established.
115
<PAGE>
"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 102 in "Employee Benefit Plan Considerations."
"Plan Assets Regulation" is defined at page 102 in "Employee Benefit Plan
Considerations."
"Pool Factor" means one of the Class A Pool Factor or the Class B Pool
Factor.
"Pooling and Servicing Agreement" means the Pooling and Servicing
Agreement, dated as of May 26, 1995, among the Transferor, the Servicer, and
the Trustee, as amended by Amendment No. 1 thereto, dated as of June 10, 1996
among the Transferor, the Servicer and the Trustee, Amendment No. 2 thereto,
dated as of September 16, 1996 among the Transferor, the Servicer and the
Trustee, and as further supplemented or amended in accordance with its terms.
Unless the context requires otherwise, the term "Pooling and Servicing
Agreement" refers to the Pooling and Servicing Agreement as supplemented by
the Series 1997-1 Supplement.
"Portfolio Yield" is defined at page 47 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 98 in "Certain Federal Income
Tax Consequences--Taxation of Interest Income to Certificateholders--OID."
"Previously Issued Series" means the Series 1995-1 Variable Funding
Certificates and the Series 1996-1 Asset Backed Certificates.
"Principal Account" is defined at page 64 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 65 in "Description of the
Offered Certificates--Principal Funding Account."
"Principal Funding Account Balance" is defined at page 46 in "Maturity
Considerations."
"Principal Funding Account Investment Proceeds" is defined at page 66 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 57 in "Description of the Offered
Certificates--Exchanges."
"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.
116
<PAGE>
"Purchase Agreements" means the Purchase Agreement and the Bank Purchase
Agreement.
"Purchase Termination Date" is defined at page 91 in "Description of the
Purchase Agreements--Purchase Termination Date."
"Qualified Institution" is defined at page 64 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 72 in
"Description of the Offered Certificates--Reallocated Principal Collections."
"Reallocated Class C Principal Collections" is defined at page 71 in
"Description of the Offered Certificates--Reallocated Principal Collections."
"Reallocated Class D Principal Collections" is defined at page 71 in
"Description of the Offered Certificates--Reallocated Principal Collections."
"Reallocated Principal Collections" is defined at page 72 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 of 1940, as amended.
"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 of security interest of the Trustee.
"Removed Accounts" is defined at page 63 in "Description of the Offered
Certificates -- Addition of Trust Assets."
"Required Amount" is defined at page 76 in "Description of the Offered
Certificates--Application of Collections--Payment of Fees, Interest and Other
Items."
"Required Reserve Account Amount" is defined at page 67 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.
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<PAGE>
"Reserve Account Funding Date" is defined at page 67 in "Description of
the Offered Certificates--Accumulation Period Reserve Account."
"Restart Date" is defined at page 61 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 94 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 1997-1 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" is defined at page 2.
"Series 1997-1 Supplement" means the Supplement, dated as of the Closing
Date, among the Transferor, the Servicer and the Trustee relating to the
Series 1997-1 Certificates.
"Service Transfer" is defined at page 84 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 85 in "Description of the Offered
Certificates--Servicer Default."
"Servicing Fee Percentage" means 2.00 percent per annum, or for so long as
Direct Merchants Bank is the Servicer, a lesser rate if so specified in the
Supplement.
"Shared Principal Collections" means the amount of Principal Collections
for any business day allocated by the Servicer to the Invested Amount
remaining after covering required deposits or payments to the
Certificateholders and any similar amount remaining for any other Series.
"SIPC" is defined at page 65 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.
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<PAGE>
"Standard & Poor's" means Standard & Poor's, a Division of The McGraw-Hill
Companies, Inc.
"Stated Class D Amount" is defined at page 70 in "Description of the
Offered Certificates--Allocation Percentages."
"Supplement" means any Supplement to the Pooling and Servicing Agreement.
"Supplemental Accounts" is defined at page 61 in "Description of the
Offered Certificates--Addition of Trust Assets."
"Supplemental Certificate" is defined at page 58 in "Description of the
Offered Certificates--Exchanges."
"Suppress File" is defined at page 37 in "Fingerhut Corporation."
"Tax Certificate" is defined at page A II-3 in "Annex II."
"Tax Opinion" is defined at page 58 in "Description of the Offered
Certificates--Exchanges."
"Termination Date" means the October 2005 Distribution Date.
"Terms and Conditions" is defined at page 52 in "Description of the
Offered Certificates--Book-Entry Registration."
"Transfer Agent and Registrar" is defined at page 53 in "Description of
the Offered Certificates--Definitive Certificates."
"Transfer Date" is defined at page 72 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 69 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 76 in
"Description of the Offered Certificates--Application of Collections--Payment
of Fees, Interest and Other Items."
"Trigger Event" is defined at page 82 in "Description of the Offered
Certificates--Pay Out Events."
"Trust" means the Metris Master Trust, formerly known as the Fingerhut
Financial Services Receivables Master Trust.
"Trust Accounts" is defined at page 64 in "Description of the Offered
Certificates--Trust Accounts."
"Trust Portfolio" is defined at page 43 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.
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<PAGE>
"Underwriters" is defined at page 104 in "Underwriting."
"Underwriting Agreement" means the underwriting agreement dated May 1,
1997 among the Transferor and the Underwriters.
"U.S. Person" is defined at page A II-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 both Series
1995-1 Variable Funding Certificates and Series 1996-1 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
(after application of proceeds) ...............$24,800,000
Maximum Permitted Invested Amount ..............$824,800,000
Certificate Rate ...............................A1/P1 Commercial Paper/LIBOR + 0.625% Blended
Commencement of Amortization Period ............May 1999 (extendible)
Annual Servicing Fee Percentage ................2.00%
Enhancement ....................................Subordination of Class B Certificates, Class C
Certificates and Class D Certificates
Scheduled Series Termination Date ..............May 30, 2003 (extendible)
Series Issuance Date ...........................May 1995 (Maximum Permitted Invested Amount
increased on September 16, 1996)
CLASS B CERTIFICATES
Initial Invested Amount ........................$129,612,000
Certificate Rate ...............................LIBOR + 0.625%
Annual Servicing Fee Percentage ................Same as above for Class A Certificates
Enhancement ....................................Subordination of Class C Certificates and Class D
Certificates
Scheduled Series Termination Date ..............Same as above for Class A Certificates
CLASS C CERTIFICATES
Initial Invested Amount ........................$70,698,000
Certificate Rate ...............................LIBOR + 0.750%
Annual Servicing Fee Percentage ................Same as above for Class A Certificates
Enhancement ....................................Subordination of Class D Certificates
Scheduled Series Termination Date...............Same as above for Class A Certificates
CLASS D CERTIFICATE
Invested Amount as of April 23, 1997 ...........$133,454,000
Expected Invested Amount as of Closing Date
(after reduction of Class A Invested Amount) ..$33,638,000
Maximum Permitted Invested Amount ..............$153,178,000
Certificate Rate ...............................None
Annual Servicing Fee Percentage ................Same as above for Class A Certificates
Scheduled Series Termination Date ..............Same as above for Class A Certificates
A-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
</TABLE>
A-2
<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 1997-1 (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
A-II-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 the respective Depositary, as appropriate,
to deliver the bonds to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date
on the basis of actual days elapsed and a 360 day year. The payment will then
be reflected in the account of the Cedel Participant or Euroclear Participant
the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would instead be valued as
of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
A-II-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 form the DTC Participant is at least
one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30 percent U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered
debt issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes
one of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) and a certificate under penalties of perjury (the "Tax Certificate")
that such beneficial owner is (i) not a controlled foreign corporation
(within the meaning of Section 957(a) of the Code) that is related (within
the meaning of Section 864(d)(4) of the Code) to the Trust or the Transferor
and (ii) not a 10 percent shareholder (within the meaning of Section
871(h)(3)(B) of the Code) of the Trust or the Transferor. If the information
shown on Form W-8 or the Tax Certificate changes, a new Form W-8 or Tax
Certificate, as the case may be, must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business
in the United States).
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8. Form 1001 may be filed by
the Certificate Owner or such Certificate Owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
Certificate Owner's agent, files by submitting the appropriate form to the
person through whom it holds (the clearing agency, in the case of persons
holding directly on the books of the clearing agency). Form W-8 and Form 1001
are effective for three calendar years and Form 4224 is effective for one
calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof or (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source or, for trusts whose taxable years begin after
December 31, 1996, a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
A-II-3
<PAGE>
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.
A-II-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............................... 35
Metris Companies Inc.................... 36
The Transferor.......................... 36
Direct Merchants Credit Card Bank,
National Association................... 36
Fingerhut Corporation .................. 36
Direct Merchants Bank's Credit Card
Activities............................. 37
The Receivables......................... 43
Maturity Considerations................. 46
Pool Factor and Related Information .... 48
Use of Proceeds......................... 48
Description of the Offered
Certificates........................... 48
Description of the Purchase Agreements . 89
Certain Legal Aspects of the
Receivables............................ 92
Certain Federal Income Tax
Consequences........................... 96
Certain State Tax Consequences.......... 101
Employee Benefit Plan Considerations ... 102
Underwriting............................ 104
Legal Matters........................... 105
Glossary of Terms ...................... 106
</TABLE>
METRIS MASTER TRUST
$616,250,000 6.87%
ASSET BACKED
CERTIFICATES,
SERIES 1997-1, CLASS A
$106,250,000 7.11%
ASSET BACKED
CERTIFICATES,
SERIES 1997-1, 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.
NATIONSBANC CAPITAL MARKETS, INC.
UNDERWRITER OF THE CLASS B CERTIFICATES
BEAR, STEARNS & CO. INC.
MAY 1, 1997
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
Registration Fee............... $218,939
Printing and Engraving......... 64,000
Trustee's Fees................. 15,000
Legal Fees and Expenses........ 250,000
Blue Sky Fees and Expenses .... 10,000
Accountants' Fees and
Expenses...................... 100,000
Rating Agency Fees............. 200,000
Miscellaneous Fees............. 2,061
----------
Total.......................... $860,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's certificate of incorporation and by-laws provide for the
indemnification of the directors, officers, employees, and agents of the
Registrant to the full extent that may be permitted by Delaware law from time
to time. Certain provisions of the Registrant's certificate of incorporation
protect the Registrant's directors against personal liability for monetary
damages resulting from breaches of their fiduciary duty of care; however, the
Registrant's directors remain liable for breaches of their duty of loyalty to
the Registrant, as well as for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, transactions
from which a director derives improper personal benefit and liability under
section 174 of the Delaware General Corporation Law, which makes directors
personally liable for unlawful dividends or unlawful stock repurchases or
redemptions in certain circumstances and expressly sets forth a negligence
standard with respect to such liability.
Under Section 145 of the Delaware General Corporation Law, directors,
officers, employees, and other individuals may be indemnified against
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative, or investigative (other than a
"derivative action" by or in the right of the corporation) if they acted in
good faith and in a manner they reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe their conduct was
unlawful. A similar standard of care is applicable in the case of a
derivative action, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with defense or settlement
of such an action and Delaware law requires court approval before there can
be any indemnification of expenses where the person seeking indemnification
has been found liable to the corporation.
The Registrant's parent corporation currently maintains a policy insuring,
subject to certain exceptions, its directors and officers and the directors
and officers of its subsidiaries against liabilities which may be incurred by
such persons acting in such capacities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXHIBITS
- ------------
<S> <C>
1 -- Form of Underwriting Agreement.
3(a) -- Amended and Restated Certificate of Incorporation of Metris Receivables, Inc.*
3(b) -- By-laws of Metris Receivables, Inc. (incorporated herein by reference to Registration
Statement No. 33-99514).
4(a) -- Pooling and Servicing Agreement (incorporated herein by reference to Registration
Statement No. 33-99514).
II-1
<PAGE>
EXHIBITS
- ------------
4(b) -- Pooling and Servicing Agreement Amendment No. 1 dated as of June 10, 1996, among the
Transferor, the Servicer and the Trustee.*
4(c) -- Pooling and Servicing Agreement Amendment No. 2 dated as of September 16, 1996, among
the Transferor, the Servicer and the Trustee.*
4(d) -- Form of Series 1997-1 Supplement.
4(e) -- Amended and Restated Bank Purchase Agreement dated as of May 26, 1995 between FCI and
Direct Merchants Bank (incorporated herein by reference to Registration Statement No.
33-99514).
4(f) -- Assignment and Assumption Agreement dated as of September 16, 1996 among FCI, as
assignor, Metris, as assignee, and Direct Merchants Bank.*
4(g) -- Receivables Purchase Agreement dated as of May 26, 1995 between FCI and the Transferor
(incorporated herein by reference to Registration Statement No. 33-99514).
4(h) -- Assignment and Assumption Agreement dated as of September 16, 1996 among FCI, as
assignor, Metris, as assignee, and Metris Receivables, Inc.*
5 -- Opinion of Skadden, Arps, Slate, Meagher & Flom (Delaware) with respect to legality.
8 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to tax matters.
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom (Delaware)(included in its opinion filed
as Exhibit 5).
23.2 -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in its opinion filed as
Exhibit 8).
</TABLE>
- ------------
* Previously filed.
b. Financial Statements.
Inapplicable
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 14 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule
II-2
<PAGE>
430A and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) under the Securities Act of 1933 shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(e) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Trust's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 2 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the state of Minnesota, city
of Minnetonka, on May 1, 1997.
METRIS RECEIVABLES, INC.
By: /s/ Robert W. Oberrender
-------------------------------
Robert W. Oberrender
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities indicated on May 1, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------- ------------------------------------
<S> <C>
/s/ Robert W. Oberrender President and Director (Principal
--------------------------------- Executive Officer and Principal
Robert W. Oberrender Financial Officer)
*
--------------------------------- Vice President and Controller
Thomas C. Vogt (Principal Accounting Officer)
*
---------------------------------
Peter G. Michielutti Director
*
---------------------------------
Michael P. Sherman Director
---------------------------------
Ruth K. Lavelle Director
---------------------------------
James B. O'Neill Director
*By: /s/ Robert W. Oberrender
------------------------------
Robert W. Oberrender
Attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- ------------------------------------------------------------------------------------------ -------------
<S> <C> <C>
1 -- Form of Underwriting Agreement.
3(a) -- Amended and Restated Certificate of Incorporation of Metris Receivables, Inc.*
3(b) -- By-laws of Metris Receivables, Inc. (incorporated herein by reference to Registration
Statement No. 33-99514).
4(a) -- Pooling and Servicing Agreement (incorporated herein by reference to Registration
Statement No. 33-99514).
4(b) -- Pooling and Servicing Agreement Amendment No. 1 dated as of June 10, 1996, among the
Transferor, the Servicer and the Trustee.*
4(c) -- Pooling and Servicing Agreement Amendment No. 2 dated as of September 16, 1996, among
the Transferor, the Servicer and the Trustee.*
4(d) -- Form of Series 1997-1 Supplement.
4(e) -- Amended and Restated Bank Purchase Agreement dated as of May 26, 1995 between FCI
and Direct Merchants Bank (incorporated herein by reference to Registration Statement
No. 33-99514).
4(f) -- Assignment and Assumption Agreement dated as of September 16, 1996 among FCI, as assignor,
Metris, as assignee, and Direct Merchants Bank.*
4(g) -- Receivables Purchase Agreement dated as of May 26, 1995 between FCI and the Transferor
(incorporated herein by reference to Registration Statement No. 33-99514).
4(h) -- Assignment and Assumption Agreement dated as of September 16, 1996 among FCI, as assignor,
Metris, as assignee, and Metris Receivables, Inc.*
5 -- Opinion of Skadden, Arps, Slate, Meagher & Flom (Delaware) with respect to legality.
8 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to tax matters.
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom (Delaware)(included in its opinion filed
as Exhibit 5).
23.2 -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in its opinion filed
as Exhibit 8).
</TABLE>
- ------------
* Previously filed.
<PAGE>
B&W DRAFT
4/30/97
$616,250,000
____% Asset Backed Certificates
Series 1997-1, Class A
$106,250,000
____% Asset Backed Certificates
Series 1997-1, Class B
METRIS MASTER TRUST
UNDERWRITING AGREEMENT
Dated May __, 1997
Bear, Stearns & Co. Inc.
as Representative of the
several Underwriters
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
Section 1. Introductory. Metris Receivables, Inc. (the
"Transferor), a Delaware corporation, and a wholly owned subsidiary of Metris
Companies Inc. ("Metris"), proposes to sell $616,250,000 ____% Asset-Backed
Certificates, Series 1997-1, Class A (the "Class A Certificates") and
$106,250,000 ____% Asset-Backed Certificates, Series 1997-1, Class B (the
"Class B Certificates" and together with the Class A Certificates, the
"Offered Certificates") of the Metris Master Trust (the "Trust"). Each Offered
Certificate will represent a fractional undivided interest in the Trust. The
assets of the Trust will include, among other things, a pool of receivables
(the "Receivables") arising under certain MasterCard, VISA or other revolving
consumer credit accounts (the "Accounts") transferred and sold by Direct
Merchants Credit Card Bank, National Association ("Direct Merchants Bank" or,
in its capacity as servicer under the P&S (as
<PAGE>
hereinafter defined), the "Servicer") to Metris pursuant to a Bank Receivables
Purchase Agreement dated as of May 26, 1995 (together with an Assignment and
Assumption Agreement dated as of September 16, 1996 among Fingerhut Companies,
Inc., as assignor, Metris, as assignee, and Direct Merchants Bank, and as
supplemented and amended from time to time, the "Bank Purchase Agreement),
then subsequently transferred by Metris to the Transferor pursuant to a
Purchase Agreement dated as of May 26, 1995 (together with an Assignment and
Assumption Agreement dated as of September 16, 1996 among Fingerhut Companies,
Inc., as assignor, Metris, as assignee, and the Transferor, and as
supplemented and amended from time to time, the "Purchase Agreement") and then
sold by the Transferor to the Trust pursuant to a Pooling and Servicing
Agreement dated as of May 26, 1995 (as supplemented and amended from time to
time, the "P&S") among the Transferor, Servicer and The Bank of New York
(Delaware), as trustee, (the "Trustee"). The Offered Certificates will be
issued pursuant to the P&S and the Series 1997-1 Supplement to the P&S (the
"Supplement") to be dated the Closing Date (as defined herein), among the
Transferor, the Servicer and the Trustee. The P&S and the Supplement are
collectively referred to as the "Pooling and Servicing Agreement". The Class C
Certificates and Class D Certificates will also be issued pursuant to the
Pooling and Servicing Agreement and, together with the Offered Certificates,
are referred to herein as the "Investor Certificates." The Bank Purchase
Agreement, the Purchase Agreement and the Pooling and Servicing Agreement are
collectively referred to as the "Designated Agreements".
The Transferor has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (No.
333-23045), including the related prospectus, for the registration under the
Securities Act of 1933, as amended (the "Act"), of the Offered Certificates,
in the form heretofore delivered to the Underwriters. The registration
statement (including the prospectus constituting a part thereof and all
documents incorporated by reference therein) in the form in which it becomes
effective under the Act (the date on which it becomes effective being the
"Effective Date"), including the exhibits thereto, is referred to herein as
the "Registration Statement", and the prospectus dated May __, 1997 in the
form in which it is filed with the Commission (including all documents
incorporated by reference therein) is referred to herein as the "Prospectus",
except that if any revised prospectus shall be provided to you by the
Transferor for use in connection with the offering of the Offered Certificates
which differs from the Prospectus on file at the Commission at the time the
Registration Statement becomes effective (whether or not such revised
prospectus is required to be filed by the Transferor pursuant to Rule 424(b)
of the rules and regulations of the Commission under the Act (the "1933 Act
2
<PAGE>
Regulation"), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to you for such use.
Capitalized terms used herein and not otherwise defined
shall have the meanings given them in the Pooling and Servicing Agreement.
Section 2. Representations, Warranties and Covenants of the
Transferor and Metris. Each of the Transferor and Metris, as applicable (the
representations and warranties as to Direct Merchants Bank being given by
Metris), represents and warrants to, and agrees with, Bear, Stearns & Co. Inc.
("Bear Stearns") and any other Underwriters named in Schedule A hereto
(collectively, the "Underwriters", which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for
whom Bear Stearns is acting as representative (in such capacity, Bear Stearns
shall hereinafter be referred to as the "Representative"), as of the date
hereof that:
(i) On the date hereof and the Effective Date, the
Registration Statement did and will comply, in all material respects,
with the requirements of the Act and the 1933 Act Regulations, and
did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The
Prospectus, at the Effective Date (unless the term "Prospectus"
refers to a prospectus which has been provided to you by the
Transferor which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective,
in which case at the time it is first provided to you for such use)
and at the Closing Date, will not include an untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that these
representations and warranties shall not apply to any statement or
omission made in reliance upon and in conformity with information
furnished in writing to the Transferor by any Underwriter through the
Representative expressly for use in the Registration Statement or the
Prospectus.
(ii) Metris is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware, and is duly
qualified to transact business and is in good standing in any state
in which the conduct of its business requires such qualification,
except where the failure to so qualify does not have a material
adverse effect on the financial condition or business of Metris, and
3
<PAGE>
Metris has the corporate power to own and conduct its business as it
is currently conducted.
(iii) The Transferor is a corporation duly incorporated,
validly existing and in good standing under the laws of Delaware, and
is duly qualified to transact business and is in good standing in any
state in which the conduct of its business requires such
qualification, except where the failure to so qualify does not have a
material adverse effect on the financial condition or business of the
Transferor, and the Transferor has the corporate power to own and
conduct its business as it is currently conducted.
(iv) Direct Merchants Bank is a national banking association
duly organized, validly existing and in good standing under the laws
of the United States, and is duly qualified to transact business and
is in good standing in any state in which the conduct of its business
requires such qualification, except where the failure to so qualify
does not have a material adverse effect on the financial condition or
business of Direct Merchants Bank, and Direct Merchants Bank has the
corporate power to own and conduct its business as it is currently
conducted.
(v) Each of the Transferor, Metris and Direct Merchants Bank
had or has the requisite power to execute and deliver each Designated
Agreement to which it is a party and, in the case of the Transferor
and Metris, this Agreement and to perform their respective
obligations thereunder and hereunder.
(vi) Each of the Designated Agreements to which it is a
party, has been duly authorized and, as of the Closing Date, will be
duly executed and delivered by the Transferor, Metris and Direct
Merchants Bank, as applicable, and each of the Designated Agreements
to which it is a party shall, as of the Closing Date, constitute the
valid, legal and binding obligation of the Transferor, Metris and
Direct Merchants Bank, as applicable, enforceable against the
Transferor, Metris and Direct Merchants Bank, as applicable, in
accordance with its terms, except (A) as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect,
affecting the enforcement of creditors' rights in general, and (B) as
such enforceability may be limited by general principles of equity
(whether considered in a suit at law or in equity).
(vii) This Agreement has been duly authorized, executed and
delivered by the Transferor and Metris.
4
<PAGE>
(viii) As of the Closing Date referred to below, the
Investor Certificates will be duly and validly authorized, and, when
duly and validly executed by the Transferor and authenticated by the
Trustee and delivered to the Transferor in accordance with the
Pooling and Servicing Agreement, and following delivery to and
payment therefor by the Underwriters as provided herein in the case
of the Offered Certificates and by the purchasers thereof in the case
of the Class C Certificates, will be validly issued and outstanding
and entitled to the benefits of the Pooling and Servicing Agreement.
(ix) The execution and delivery of any Designated Agreement
or of this Agreement and the performance of the transactions
contemplated thereby and hereby do not (i) contravene the
Transferor's, Metris' or Direct Merchants Bank's charter or by-laws,
(ii) violate any material provision of law applicable to the
Transferor, Metris or Direct Merchants Bank or require any filing
(except for filings under the UCC) or registration under, any law,
rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to
the Transferor, Metris or Direct Merchants Bank, except for such
filings or registrations as have already been made and are in full
force and effect. The execution and delivery of any Designated
Agreement or of this Agreement and the execution and delivery to the
Trustee of the Investor Certificates, the performance of the
transactions contemplated by this Agreement or any Designated
Agreement and the fulfillment of the terms hereof or thereof will not
violate any Requirement of Law applicable to the Transferor, Metris
or Direct Merchants Bank, will not violate, result in any breach of
any of the material terms and provisions of, or constitute (with or
without notice or lapse of time or both) a default under any material
indenture, contract, agreement, mortgage, deed of trust or other
instrument to which the Transferor, Metris or Direct Merchants Bank,
is a party or by which it is bound.
(x) There are no proceedings or investigations pending or,
to the best knowledge of the Transferor, Metris or Direct Merchants
Bank, threatened against the Transferor, Metris or Direct Merchants
Bank, before any Governmental Authority (i) asserting the invalidity
of any Designated Agreement or of this Agreement, (ii) seeking to
prevent the consummation of any of the transactions contemplated
thereby, (iii) seeking any determination or ruling that would
materially and adversely affect the performance by the Transferor,
Metris or Direct Merchants Bank of its obligations thereunder, (iv)
seeking any determination or
5
<PAGE>
ruling that would materially and adversely affect the validity or
enforceability thereof or (v) seeking to affect adversely the tax
attributes of the Trust.
(xi) All approvals, authorizations, consents, orders or
other actions of any Governmental Authority required in connection
with the execution and delivery of any Designated Agreement or of
this Agreement and the Investor Certificates, the performance of the
transactions contemplated by any Designated Agreement and by this
Agreement and the fulfillment of the terms hereof, have been
obtained.
(xii) Each of the Transferor, Metris and Direct Merchants
Bank possesses all material licenses, certificates, authorities or
permits issued by the appropriate state, federal or foreign
regulatory agencies or bodies necessary to conduct the business now
conducted by it and as described in the Prospectus, except to the
extent that the failure to have such licenses, certificates,
authorities or permits does not have a material adverse effect on the
Receivables, the Investor Certificates or the financial condition of
the Transferor, Metris or Direct Merchants Bank, and neither the
Transferor, Metris nor Direct Merchants Bank has received any notice
of proceedings relating to the revocation or modification of any such
license, certificate, authority or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the Receivables or the
conduct of its business, operations or financial condition.
(xiii) On the Closing Date the Trust will have good and
marketable title to, or a perfected first priority security interest
in, the Receivables, free of Liens other than any Lien permitted
under the Pooling and Servicing Agreement.
(xiv) The businesses of each of the Transferor, Metris and
Direct Merchants Bank conform, in all material respects, to the
descriptions thereof contained in the Prospectus.
Section 3. Purchase, Sale and Delivery of Offered
Certificates. (a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Transferor agrees to sell to each Underwriter, severally and
not jointly, and each Underwriter, severally and not jointly, agrees to
purchase from the Transferor, on May __, 1997, or on such other date as shall
be mutually agreed upon by the Transferor and the Representative (the "Closing
Date"), the principal amount, if any, of the Class
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A Certificates and Class B Certificates set forth in Schedule A opposite the
name of such Underwriter. The Class A Certificates shall be purchased at a
purchase price equal to _____% of the principal amount thereof, and the Class
B Certificates shall be purchased at a price equal to _______% of the
principal amount thereof.
(b) Against payment of the purchase price in same day funds
drawn to the order of the Transferor, the Transferor will deliver the Offered
Certificates to the Underwriters at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, at 10:00 a.m. New York City time, on the Closing Date. The
Offered Certificates to be so delivered will be initially represented by one
or more Offered Certificates registered in the name of Cede & Co., the nominee
of The Depository Trust Company ("DTC"). The interests of beneficial owners of
the Offered Certificates will be represented by book entries on the records of
DTC and participating members thereof.
Section 4. Public Offering of the Offered Certificates. It
is understood by the parties hereto that, after the Registration Statement
becomes effective, the Underwriters propose to offer the Offered Certificates
for sale to the public (which may include selected dealers), as set forth in
the
Prospectus.
Section 5. Covenants of the Transferor. The Transferor
covenants and agrees with each Underwriter:
(a) If required, to file the Prospectus with the Commission
pursuant to and in accordance with Rule 424(b) not later than the
time specified therein. The Transferor will advise the Underwriters
promptly of any such filing pursuant to Rule 424(b).
(b) To file no amendment to the Registration Statement and
to make no amendment or any supplement to the Prospectus as amended
or supplemented, or, during such period as a Prospectus is required
by law to be delivered in connection with sales of Certificates by
any Underwriter or a dealer, to file no document which, upon filing
becomes incorporated by reference in the Registration Statement other
than monthly Form 8-Ks containing the Certificateholders' statement
or information regarding the addition of Accounts as contemplated in
the Prospectus, without furnishing the Representative with a copy of
the proposed form thereof and providing the Representative with a
reasonable opportunity to review the same and not to file any such
amendment or supplement to which the Representative shall reasonably
object; and to advise the Representative, promptly after it
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<PAGE>
receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus as amended or supplemented or any
amended Prospectus has been filed or mailed for filing, of the
issuance of any stop order by the Commission, of the suspension of
the qualification of the Offered Certificates for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus as amended or supplemented or for additional information;
and, in the event of the issuance of any such stop order or of any
order preventing or suspending the use of any prospectus relating to
the Offered Certificates or suspending any such qualification,
promptly to use its best efforts to obtain its withdrawal.
(c) From time to time to take such action as the
Representative may reasonably request in order to qualify the Offered
Certificates for offering and sale under the securities laws of such
states as the Representative may request and to continue such
qualifications in effect so long as necessary under such laws for the
distribution of such Offered Certificates; provided, that in
connection therewith neither the Transferor nor Metris shall be
required to qualify as a foreign corporation or partnership,
respectively, to do business, or to file a general consent to service
of process in any jurisdiction.
(d) To furnish the Representative with copies of the
Registration Statement (including exhibits) and copies of the
Prospectus as amended or supplemented in such quantities as the
Representative may from time to time reasonably request; and if the
delivery of a prospectus shall be at the time required by law in
connection with sales of any Offered Certificates, either (i) any
event shall have occurred as a result of which the Prospectus would
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, or (ii) for any other reason it shall be necessary during
such same period to amend or supplement the Prospectus as amended or
supplemented, to notify the Representative and to prepare and furnish
to the Representative as the Representative may from time to time
reasonably request an amendment or a supplement to the Prospectus
which will correct such statement or omission or effect such
compliance.
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(e) To make generally available to Certificateholders an
earnings statement of the Trust complying with Rule 158 under the Act
and covering a period of at least twelve consecutive months beginning
after the Effective Date of the Registration Statement (as such date
is defined in Rule 158(c) under the Act) as soon as practicable after
such period.
(f) To furnish to the Representative a copy of the
Registration Statement (which will be signed and will include all
exhibits), each related preliminary prospectus, the Prospectus and
all amendments and supplements to such documents, in each case as
soon as available and in such quantities as such Underwriter
reasonably requests for the purposes contemplated by the Act or the
1933 Act Regulations.
(g) To pay all expenses incident to the performance of
the obligations under this Agreement, including:
(i) the word processing, printing and filing of
the Registration Statement as originally filed and of
each amendment thereto;
(ii) the reproduction of this Agreement;
(iii) the preparation, printing, issuance and
delivery of the Offered Certificates to the Under-
writers;
(iv) the reasonable fees and disbursements of
counsel and accountants for the Transferor;
(v) the qualification of the Offered Certificates
under state securities laws in accordance with the
provisions of Section 5(c) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the
Underwriters in connection therewith and in connection with
the preparation of the Blue Sky Survey;
(vi) the printing and delivery to the Underwriters
of copies of the Registration Statement as originally filed
and of each amendment thereto, of the preliminary
prospectuses, and of the Prospectus and any amendments or
supplements thereto;
(vii) the reproduction and delivery to the Under-
writers of copies of the Blue Sky Survey;
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<PAGE>
(viii) the fees of Moody's Investors Service,
Inc. and Standard & Poor's Ratings Services for rating
the Offered Certificates; and
(ix) the fees and expenses of the Trustee and its
counsel.
It is understood, however, that except as provided in this Section,
and Sections 7 and 8 hereof or as provided in the next succeeding
sentence, each Underwriter will pay all of its own costs and
expenses, including the fees of its counsel, transfer taxes on resale
of any of the Offered Certificates by it, and any advertising
expenses connected with any offers it may make. If this Agreement is
terminated by the Representative in accordance with the provisions of
Section 6 hereof, the Transferor and Metris, jointly and severally,
shall reimburse the Representative for all of its out-of-pocket
expenses, including the reasonable fees and disbursements of counsel
for the Representative.
(h) For a period from the date of this Agreement until the
retirement of the Offered Certificates, or until such time as each
Underwriter shall cease to maintain a secondary market in the Offered
Certificates, whichever occurs first, to deliver to the
Representative the annual statements of compliance, the Annual
Servicer's Certificate and the annual independent certified public
accountants' servicing reports furnished to the Trustee pursuant to
Section 3.5 and Section 3.6, respectively, of the P&S and the monthly
Distribution Date Statement pursuant to Section 5.2 of the Series
1997-1 Supplement as soon as such statements and reports are
furnished to the Trustee.
(i) From and after the Closing Date, not to take any action
inconsistent with the Trust's ownership of the Receivables other than
as permitted by the Pooling and Servicing Agreement.
(j) To the extent, if any, that the rating provided with
respect to the Offered Certificates by the rating agency or agencies
that initially rate the Offered Certificates is conditional upon the
furnishing of documents or the taking of any other actions by the
Transferor, to furnish such documents and take any such other
actions.
Section 6. Conditions Precedent to the Obligations of the
Underwriter. The obligation of the Underwriters to purchase and pay for the
Offered Certificates are subject to the accuracy of the representations and
warranties on the part of the Transferor and Metris, to the accuracy of the
statements of officers
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<PAGE>
of the Transferor and Metris made pursuant to the provisions hereof, to the
performance by the Transferor of its obligations hereunder and to the
following additional conditions precedent:
(a) The Registration Statement shall have become effective
not later than 4:00 p.m., New York time, on the day following the
date of this Agreement or such later date as shall have been
consented to by the Representative; and prior to the Closing Date no
stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have
been instituted or, to the knowledge of the Transferor or Metris,
shall be contemplated by the Commission. If the Transferor has
elected to rely upon Rule 430A of the 1933 Act Regulations, the price
of the Offered Certificates and any pricerelated information
previously omitted from the effective Registration Statement pursuant
to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the 1933 Act Regulations within the
prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Representative of
such timely filing, or a post-effective amendment providing such
information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the 1933 Act
Regulations.
(b) Each of the Transferor and Metris shall have delivered
to the Representative a certificate, dated the Closing Date, signed
by its president, a senior vice president or a vice president to the
effect that the signer of such certificate has carefully examined the
Registration Statement, the Prospectus, each Designated Agreement and
this Agreement and that:
(i) the representations and warranties of the
Transferor, and Metris as applicable, in this Agreement are
true and correct in all material respects at and as of the
Closing Date with the same effect as if made on the Closing
Date;
(ii) the Transferor or Metris, as applicable, has
complied in all material respects with all the agreements
and satisfied all the conditions on its part to be performed
or satisfied under this Agreement at or prior to the Closing
Date;
(iii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no
proceedings for that purpose have been initiated or, to
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<PAGE>
the Transferor's or Metris's knowledge, threatened by
the Commission as of the Closing Date; and
(iv) nothing has come to such person's attention
that would lead such person to believe that the Prospectus
contains an untrue statement of a material fact or omits to
state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
(c) Since the respective dates as of which information is
given in the Prospectus, there shall not have occurred any material
adverse change, or any development involving a prospective material
adverse change, in or affecting the business or assets of the Trust,
the Transferor, or Direct Merchants Bank or any material adverse
change in the financial position or results of operations of the
Trust, the Transferor, or Direct Merchants Bank otherwise than as set
forth or contemplated in the Prospectus which in any such case makes
it impracticable or inadvisable in the Representative's good faith
judgment to proceed with the public offering or the delivery of the
Offered Certificates on the terms and in the manner contemplated in
the Prospectus as amended or supplemented.
(d) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any material adverse
change in the financial markets for asset backed securities in the
United States or any outbreak of hostilities or other calamity or
crisis or (ii) the suspension of trading generally by either the
American Stock Exchange or the New York Stock Exchange, or the
establishment of minimum or maximum prices or ranges of prices by
either of such exchanges or by order of the Commission or any other
governmental authority, or any banking moratorium declared by Federal
or New York authorities, the effect of which with respect to clause
(i) or (ii) is such as to make it, in the good faith judgment of the
Representative, impracticable to market the Offered Certificates or
to enforce contracts for the sale of the Offered Certificates.
(e) The Representative shall have received:
(1) The favorable opinion of Jill B. Barclift, general
counsel of Metris, dated the Closing Date and addressed to the
Underwriters and satisfactory in form and substance to the
Representative and to counsel to the Representative, to the effect
that:
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(i) Metris is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware.
(ii) The Transferor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
and is duly qualified to transact business and is in good standing in
each state in which the conduct of its business requires such
qualification except where the failure to so qualify does not have a
material adverse effect on the financial condition or business of the
Transferor.
(iii) Direct Merchants Bank is a national banking
association formed under the laws of the United States of America and
is authorized to transact the business of banking, including to own
its assets and to transact its business as described in the
Prospectus, and had at all relevant times and now has the power,
authority and legal right to acquire, own and service the Accounts
and the Receivables;
(iv) Each Designated Agreement to which Metris, Direct
Merchants Bank or the Transferor is a party and this Agreement has
been duly and validly authorized, executed and delivered by each of
Metris, Direct Merchants Bank and the Transferor, as applicable.
(v) The sale of the Investor Certificates and the direction
by the Transferor to the Trustee to execute, authenticate and deliver
the Investor Certificates have been duly authorized by the
Transferor. The Investor Certificates have been duly and validly
authorized and executed by the Transferor.
(vi) The execution and delivery of any Designated Agreement
or of the Underwriting Agreement and the execution and delivery to
the Trustee of the Investor Certificates, the performance of the
transactions contemplated by this Agreement or any Designated
Agreement and the fulfillment of the terms thereof will not (i)
violate any Requirement of Law applicable to Metris or the Transferor
(assuming compliance with all applicable state securities and Blue
Sky laws, as to which such counsel expresses no opinion), (ii)
require any filing (except for filings under the UCC) or registration
under any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect having
applicability to Metris or the Transferor, except for such filings or
registrations as have already been made and are in full force and
effect or (iii)
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<PAGE>
violate, result in any breach of any of the material terms and
provisions of, or constitute (with or without notice or lapse of time
or both) a default under any currently existing material indenture,
contract, agreement, mortgage, deed of trust or other instrument
which has been attached as an exhibit to the report on Form 10-K
filed by Metris.
(vii) There are no legal or governmental proceedings pending
or, to such counsel's knowledge, threatened that are required to be
disclosed in the Registration Statement, other than those disclosed
therein. There are no proceedings or investigations pending or, to
the best of such counsel's knowledge, threatened against Metris or
the Transferor, before any Governmental Authority (i) asserting the
invalidity of any Designated Agreement or of this Agreement, (ii)
seeking to prevent the consummation of any of the transactions
contemplated hereby, (iii) seeking any determination or ruling that
would materially and adversely affect the performance by Metris or
the Transferor of its obligations thereunder, (iv) seeking any
determination or ruling that would materially and adversely affect
the validity or enforceability thereof or (v) seeking to affect
adversely the tax attributes of the Trust or the Investor
Certificates.
(viii) No consent, approval, authorization or order of, or
registration, filing (except for filings under the UCC) or
declaration with, any court or governmental agency or body is
required in connection with (i) the execution, delivery and
performance by Metris or the Transferor of any Designated Agreement
or of this Agreement or (ii) the offer, sale or delivery of the
Investor Certificates, except such as shall have been obtained or
made, as the case may be, or will be obtained or made, as the case
may be, prior to the Closing Date and except such as may be required
under state securities or Blue Sky laws.
(ix) Metris has full corporate power and authority to sell
and assign the Receivables to the Transferor pursuant to the terms of
the Purchase Agreement and has duly authorized such sale and
assignment by all necessary corporate action. The Transferor has full
corporate power and authority to transfer the Receivables to the
Trust pursuant to the terms of the Pooling and Servicing Agreement
and has duly authorized such transfer by all necessary corporate
action.
(x) Direct Merchants Bank has the power and authority
to execute and deliver the Bank Purchase Agreement and the
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Pooling and Servicing Agreement and to consummate the
transactions contemplated therein;
(xi) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required
for the consummation by Direct Merchants Bank of the transactions
contemplated in the Bank Purchase Agreement or the Pooling and
Servicing Agreement, except for such consents, approvals, orders or
fillings as may be required under federal or state securities laws
and except for such fillings as may be required to perfect interests
in the Receivables pursuant to the Bank Purchase Agreement;
(xii) Neither the execution, delivery and performance by
Direct Merchants Bank of its obligations under the Bank Purchase
Agreement or the Pooling and Servicing Agreement, the transfer of the
Receivables to Metris, the issuance and sale of the Investor
Certificates, nor the consummation of any other of the transactions
contemplated in the Bank Purchase Agreement or the Pooling and
Servicing Agreement will conflict with, result in a breach of or
violation of any of the terms of, or constitute a default under, the
Articles of Association or by-laws of the Bank, each as amended, or
any rule, order, statute or regulation of any court, regulatory body,
administrative agency or governmental body having jurisdiction over
Direct Merchants Bank or the terms of any material indenture or other
material agreement or instrument known to such counsel to which
Direct Merchants Bank is a party or by which it or its properties are
bound; and
(xiii) There are no actions, proceedings or investigations
pending or, to the best of such counsel's knowledge, threatened
before any court, administrative agency or other tribunal (x)
asserting the invalidity of the Bank Purchase Agreement or the
Pooling and Servicing Agreement or (y) seeking to prevent the
issuance of the Investor Certificates or the consummation of any of
the transactions contemplated by the Bank Purchase Agreement or the
Pooling and Servicing Agreement or the Investor Certificates, which
might materially and adversely affect the performance by Direct
Merchants Bank of its obligations under, or the validity or
enforceability of, the Bank Purchase Agreement or the Pooling and
Servicing Agreement or the Investor Certificates.
(xiv) Metris is duly qualified to transact business and is
in good standing in each state in which the conduct of its business
requires such qualification except where the
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<PAGE>
failure to so qualify does not have a material adverse effect on the
financial condition or business of Metris.
(xv) Each of Metris and the Transferor possesses all
material licenses, certificates, authorities or permits issued by the
appropriate state or federal regulatory agencies or bodies necessary
to conduct the business now conducted by it and as described in the
Prospectus, except to the extent that the failure to have such
licenses, certificates, authorities or permits does not have a
material adverse effect on the Receivables or the Investor
Certificates or the financial condition of Metris or the Transferor,
and neither Metris nor the Transferor has received any notice of
proceedings relating to the revocation or modification of any such
license, certificate, authority or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially and adversely affect the conduct of its
business, operations or financial condition.
(2) The favorable opinion of Skadden, Arps, Slate, Meagher &
Flom LLP, special counsel for the Transferor and Metris, dated the
Closing Date and addressed to the Underwriters and satisfactory in
form and substance to the Representative and counsel to the
Representative; to the effect that:
(i) Each of the Designated Agreements (including, with
respect to the Agreement, the allocation provisions thereof) to which
any of Metris, the Transferor, the Bank and the Servicer (the
"Companies") is a party, constitutes a valid and binding obligation
of each of them, as applicable, enforceable against each of Metris,
the Transferor and Direct Merchants Bank, as applicable, in
accordance with their respective terms, except to the extent
enforcement thereof may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium, receivership or other similar laws now or
hereafter in effect relating to creditors' rights generally and, in
the case of (for creditors of national banking associations, with
respect to the Bank) (b) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in
equity), and (c) the qualification that certain remedial provisions
of the Designated Agreements may be unenforceable in whole or in
part, but the inclusion of such provisions does not affect the
validity of any such agreement taken as a whole each of such
agreements, together with applicable law, contains adequate
provisions for the practical realization of the benefits of the
security created by such Designated Agreements;
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(ii) Neither the execution, delivery or performance by any
of the Companies of any of the Designated Agreements to which it is a
party nor the compliance by any of the companies with the terms and
provisions thereof will contravene any provision of any Applicable
Laws. For purposes of this paragraph (ii) and paragraph (iii) below,
"Applicable Laws" means those laws, rules and regulations of the
State of New York, the United States of America and the Delaware
General Corporation Law which, in our experience, are normally
applicable to transactions of the type contemplated by the Designated
Agreements.
(iii) No Governmental Approval, which has not been obtained
or taken and is not in full force and effect, is required to
authorize or is required in connection with the execution, delivery
or performance of any of the Designated Agreements and this
Agreement, except for (a) filings of Uniform Commercial Code
financing statements with respect to the transfer of the Receivables
from Metris to the Transferor pursuant to the Bank Purchase Agreement
and with respect to the transfer of the Receivables from the
Transferor to the Trust pursuant to the Purchase Agreement and (b)
such Governmental Approvals as may be required under the securities
or blue sky laws of any jurisdiction. For the purposes of this
paragraph (iii), the term "Governmental Approval" means any consent,
approval, license, authorization or validation of, or filing,
recording or registration with, any Governmental Authority pursuant
to Applicable Laws, and the term "Governmental Authority" means any
New York, Delaware or federal executive, legislative, judicial,
administrative or regulatory body.
(iv) The Investor Certificates, the Designated Agreements
and this Agreement conform in all material respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus;
(v) The Pooling and Servicing Agreement is not required to
be qualified under the Trust Indenture Act of 1939, as amended;
neither Metris, the Transferor or the Trust is required to be
registered under the Investment Company Act of 1940, as amended;
(vi) The statements in the Prospectus under the headings
"Risk Factors -- Transfer of the Receivables; Insolvency Risk
Considerations", "Certain Legal Aspects of the Receivables" and
"Certain Federal Income Tax Consequences", and "Employee Benefit Plan
Considerations" to the extent that they constitute matters of law or
legal
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conclusions with respect thereto, have been reviewed by us
and are correct in all material respects;
(vii) Each of the Registration Statement, as of its
effective date and the Prospectus, as of its date, appeared on its
face to be appropriately responsive in all material respects to the
requirements of the Act and the General Rules and Regulations under
the Act, except that in each case such counsel need not express any
opinion as to the financial and statistical data included therein or
excluded therefrom or the exhibits to the Registration Statement and,
except as and, to the extent set forth in paragraphs (iv), (vi) and
(viii) such counsel does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus;
(viii) The information in the Prospectus under the heading
"Description of the Offered Certificates", insofar as it constitutes
a summary of certain provisions of the Offered Certificates and the
Pooling and Servicing Agreement, summarizes fairly such provisions;
(ix) When duly and validly executed by the Transferor and
authenticated by the Trustee and delivered to the Transferor in
accordance with the Pooling and Servicing Agreement, and delivered to
and paid for by the Underwriters in accordance with this Agreement in
the case of the Offered Certificates delivered to and paid for and by
the purchasers in the case of the Class C Certificates and delivered
by the Transferor in exchange for a portion of the Transferror's
Certificate in the case of the Class D Certificates, the Investor
Certificates will be validly issued and outstanding and entitled to
the benefits of the Pooling and Servicing Agreement;
(x) The execution and delivery of any Designated Agreement
or this Agreement and the execution and delivery to the Trustee of
the Investor Certificates, the performance of the transactions
contemplated thereby and the fulfillment of the terms thereof will
not violate, result in any breach of any of the material terms and
provisions of, or constitute (with or without notice or lapse of time
or both) a default under any currently existing indenture, contract,
agreement, mortgage, deed of trust or other instrument to which the
Transferor is bound and which has been specifically identified to
such counsel in writing by the Transferor as being material to the
Transferor.
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(xi) With respect to such counsel's opinion set forth in
paragraph (iii) above, such counsel shall consider only such
consents, approvals, authorizations, orders and filings which, in
such counsel's experience, are customarily required for transactions
of the type contemplated by the Designated Agreements.
(xii) Such counsel shall have been advised by the Commission
that the Registration Statement was declared effective and, to the
best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or threatened by the
Commission.
Such counsel also shall state that they have participated in
conferences with officers and representatives of Metris and the
Transferor, counsel for Metris and the Transferor, representatives of
the independent accountants of Metris and the Transferor, and
representatives of the Underwriters, at which the contents of the
Registration Statement, the Prospectus and related matters were
discussed and, although they are not passing upon, and do not assume
any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus
and have made no independent check or verification thereof except as
and to the extent set forth in paragraphs (iv), (vi) and (vii) above,
on the basis of the foregoing, no facts have come to such counsel's
attention that have led such counsel to believe that the Registration
Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or the Prospectus, as of its date, contained
or contains an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, except that in each case such counsel
express no belief with respect to financial and statistical data
included therein or excluded therefrom or the exhibits to the
Registration Statement.
Such counsel shall also deliver to the Underwriters their
opinion, dated the Closing Date and addressed to the Underwriter's
and satisfactory in form and substance to the Representative and
counsel to the Representative, to the effect that for federal income
tax purposes (i) the Offered Certificates will not constitute an
ownership interest in the Receivables but will properly be
characterized as debt and (ii) any entity constituted by the Trust
will not be an
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association taxable as a corporation or publicly traded
partnership treated as a corporation;
(f) The Representative shall have received an opinion or
opinions of Dorsey & Whitney with respect to Minnesota law, Van Cott,
Bagley, Cornwall & McCarthy with respect to Utah law and Skadden,
Arps, Slate, Meagher & Flom LLP with respect to federal and New York
law, dated the Closing Date, in form and substance satisfactory to
the Representatives and their counsel, with respect to certain
matters relating to the transfers of the Receivables to Metris, the
Transferor and the Trust and the perfection of Metris', the
Transferor's and the Trust's interest in the receivables and certain
other matters relating to insolvency consideration and with respect
to other related matters in a form previously approved by you and
your counsel.
(g) The Representative shall have received from each of
Dorsey & Whitney in respect of Minnesota, Van Cott, Bagley, Cornwall
& McCarthy in respect of Utah, Johnson, Allen, Jones & Dornblasser in
respect of Oklahoma and Skadden, Arps, Slate, Meagher & Flom in
respect of Delaware, an opinion, dated the Closing Date and
satisfactory in form and substance to the Representative and to
counsel to the Underwriters, to the effect that the Offered
Certificates will be characterized for such state's income and
franchise tax purposes as indebtedness secured by the Receivables and
Certificateholders not otherwise subject to taxation in such state
will not be subject to tax in respect of the Offered Certificates.
(h) The Representative shall have received from Skadden,
Arps, Slate, Meagher & Flom LLP, special counsel to the Transferor
and Metris, opinions, dated the Closing Date, addressed to the
Underwriters and satisfactory in form and substance to the
Representative and to counsel to the Underwriters, relating to
certain insolvency and bankruptcy matters.
(i) The Representative shall have received from Richards,
Layton & Finger, Delaware counsel for the Trustee, and Emmet, Marvin
& Martin, New York counsel for the Trustee, as appropriate, opinions,
dated the Closing Date and addressed to the Underwriters, the
Transferor and Metris and satisfactory in form and substance to the
Representative and to counsel to the Underwriters, in substantially
the form of Exhibit A hereto.
(j) The Representative shall have received an
officer's certificate dated the Closing Date of the chairman
20
<PAGE>
of the board, the president, an executive vice president or the
treasurer of the Trustee in which such officer shall state that, to
the best of his/her knowledge after reasonable investigation, the
representations and warranties of the Trustee contained in the
Pooling and Servicing Agreement are true and correct in all material
respects, and that the Trustee has complied in all material respects
with all agreements and satisfied all conditions on its part to be
performed or satisfied under the Pooling and Servicing Agreement at
or prior to the Closing Date.
(k) The Representative shall have received copies of rating
letters confirming that the Class A Certificates have been rated in
the highest rating category by Standard & Poor's Ratings Services, a
Division of The McGraw Hill Companies, Inc. ("S&P") and Moody's
Investors Service, Inc. ("Moody's") and the Class B Certificates have
been rated at least "A" by S&P and A2 by Moody's, and such ratings
shall not have been reduced or withdrawn;
(l) The Trustee shall have furnished to the Representative a
certificate of the Trustee, signed by one or more duly authorized
officers of the Trustee, dated the Closing Date, as to the due
acceptance of the Pooling and Servicing Agreement by the Trustee and
the due execution and delivery of the Offered Certificates by the
Trustee thereunder and such other matters as the Representative shall
reasonably request.
(m) Counsel to the Transferor and Metris shall have
furnished to the Representative any opinions supplied to the rating
agencies relating to certain matters with respect to the Offered
Certificates.
(n) On or prior to the date of this Agreement, the
Representative shall have received a copy of a letter, dated the
Closing Date and addressed to the Underwriters, from KPMG Peat
Marwick certified public accountants, substantially in the form
heretofore approved by the Underwriters and counsel to the
Underwriters. On the Closing Date, the Representative shall have
received from KPMG Peat Marwick such letter (which may be in a
bring-down format) dated the Closing Date.
(o) The Representative shall have received (i) a copy of the
financing statement on Form UCC-1 filed with the Secretary of State
of the State of Utah with respect to the transfer of the Receivables
by Direct Merchants Bank to Metris pursuant to the Bank Purchase
Agreement, identifying the Receivables as collateral and naming
Direct Merchants
21
<PAGE>
Bank as debtor and Metris as secured party, (ii) a copy of the
financing statements on Form UCC-1 filed with the Secretary of State
of the State of Minnesota with respect to the transfer of the
Receivables by Metris to the Transferor pursuant to the Purchase
Agreement, identifying the Receivables as collateral and naming
Metris as debtor and the Transferor as the secured party and (iii) a
copy of the financing statements on Form UCC-1 filed with the
Secretary of State of the State of Minnesota with respect to the
transfer of the Receivables by the Transferor to the Trust pursuant
to the Pooling and Servicing Agreement, identifying the Receivables
as collateral and naming the Transferor as the debtor and the Trust
as the secured party.
(p) The Representative shall have received an opinion
addressed to the Underwriters of Brown & Wood LLP, counsel to the
Underwriters, dated the Closing Date, with respect to the validity of
the Investor Certificates and other related matters and the
Transferor shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to
render such opinions.
The Transferor will furnish the Representative with such
conformed copies of such certificates, letters and documents as the
Representative may reasonably request.
If any condition specified in this Section shall not have
been fulfilled when and as required to be fulfilled, this Agreement may be
terminated by the Representative by notice to the Seller at any time at or
prior to Closing Time, and such termination shall be without liability of any
party to any other party except as provided in Section 5 hereof.
Section 7. Indemnification and Contribution. (a) Each of
Metris and the Transferor shall, jointly and severally, indemnify and hold
harmless each Underwriter and each person who controls any Underwriter within
the meaning of Section 15 of the Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading,
or arising out of any untrue statement or alleged untrue statement of
a material fact contained in the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of
a material fact necessary in order to
22
<PAGE>
make the statements therein, in the light of the circum-
stances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission, if such settlement is effected with the written consent of
the Transferor and Metris; and
(iii) against any and all expense whatsoever (including,
subject to Section 7(c) hereof, the fees and disbursements of counsel
chosen by you) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Transferor by
any Underwriter through the Representative expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) and
provided, further, that the foregoing indemnity is subject to the condition
that, insofar as it relates to any untrue statement or omission, or any
alleged untrue statement or omission, made in the preliminary prospectus (as
amended or supplemented) but eliminated, corrected or remedied in the
Prospectus (as amended or supplemented), it shall not inure to the benefit of
any Underwriter (or to the benefit of any person who controls such
Underwriter) if a copy of the Prospectus (as amended or supplemented) was not
delivered by such Underwriter to the person asserting any loss, claim, damage,
or liability arising out of or based upon such untrue statement or omission,
or such alleged untrue statement or omission, at or prior to the time required
by the Securities Act.
(b) Each Underwriter severally agrees to indemnify and hold
harmless Metris, the Transferor, each of their respective directors and
officers, each of the Transferor's officers who signed the Registration
Statement, and each person, if any, who controls the Transferor and Metris,
respectively, within the
23
<PAGE>
meaning of Section 15 of the Act against any and all loss, liability, claim,
damage and expense described in the indemnity contained in subsection (a) of
this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto) or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Transferor by such
Underwriter through the Representative expressly for use in the Registration
Statement (or any amendment thereto) or such preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(c) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a) or (b) above, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may
have to any indemnified party under subsection (a) or (b) above unless the
indemnifying party has been materially prejudiced by such failure to notify.
In case any such action is brought against any indemnified party and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party (who shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. The indemnifying person shall not be
responsible for the settlement of any proceeding made without its prior
consent.
SECTION 8. Contribution. If the indemnification provided for
in Section 7 is unavailable or insufficient to hold harmless an indemnified
party under subsection (a) or (b) of Section 7, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in subsection
(a) or (b) of Section 7 (i) in such proportion as is appropriate to reflect
the relative benefits received by the Transferor and Metris on the one hand
and the Underwriters on the
24
<PAGE>
other from the offering of the Offered Certificates or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Transferor
and Metris on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims,
damages or liabilities as well as any other relevant equitable considerations.
The relative benefits received by the Transferor and Metris on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Transferor bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Transferor or by
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in the first sentence of this
Section shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any action or claim which is the subject of this Section.
Notwithstanding the provisions of this Section, no Underwriter shall be
required to contribute any amount in excess of the underwriting discount or
commission applicable to the Offered Certificate purchased by it hereunder. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
Section 9. Survival of Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of each of the Transferor, Metris or its officers and of the
Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation or statement as to the
results thereof, made by or on behalf of any Underwriter, the Transferor,
Metris or any of their respective representatives, officers or directors of
any controlling person, and will survive delivery of and payment for the
Offered Certificates.
Section 10. Default by One or More of the Underwriters. If
one or more of the Underwriters shall fail on the Closing Date to purchase the
Offered Certificates which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representative shall have the
right,
25
<PAGE>
within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but
not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the principal amount of Defaulted Securities does not
exceed 10% of the principal amount of Offered Certificates, each of
the non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the principal amount of Defaulted Securities exceeds
10% of the principal amount of Offered Certificates, this Agreement
shall terminate without liability on the part of any non-defaulting
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the Representative or the Transferor
shall have the right to postpone the Closing Date for a period not exceeding
seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements.
Section 11. Representations and Warranties of the
Underwriters. Each Underwriter represents and warrants to, and agrees with,
Metris and the Transferor 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.
26
<PAGE>
(c) If it 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.
Section 12. Notices. All communications hereunder
will be in writing and:
(i) if sent to the Underwriters, will be mailed,
delivered or sent by facsimile transmission and
confirmed to the Representative at:
Bear Stearns & Co.
245 Park Avenue
New York, New York 10167
Attention: Asset Securitization
Telephone: (212) 272-3311
Facsimile: (212) 272-7294
(ii) if sent to the Transferor, will be mailed,
delivered or sent by facsimile transmission, and confirmed
to it at:
Metris
Receivables, Inc.
4400 Baker Road
Minnetonka, MN 55343
Attention: Treasurer
Telephone: (612) 936-5077
Facsimile: (612) 932-3302;
(iii) if sent to Metris, will be mailed, delivered or
sent by facsimile transmission, and confirmed to it at:
Metris Companies Inc.
600 South Highway 169
St. Louis Park, MN 55426
Attention: General Counsel
Telephone: (612) 525-5090
Facsimile: (612) 525-5070;
or to such other address as the Transferor, Metris or the Underwriter may
designate in writing to the other parties hereto.
27
<PAGE>
Section 13. Successors. This Agreement will inure to the
benefit of and be binding upon the Underwriters, Metris and the Transferor and
their respective successors and the officers and directors and controlling
persons referred to in Section 7 hereof, and no other person will have any
right or obligations hereunder.
SECTION 14. GOVERNING LAW. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.
Section 15. Severability of Provisions. Any covenant,
provision, agreement or term of this Agreement that is prohibited or is held
to be void or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof.
Section 16. Entire Agreement. This Agreement constitutes the
entire agreement and understanding of the parties hereto with respect to the
matters and transactions contemplated hereby and supersedes all prior
agreements and understandings whatsoever relating to such matters and
transactions.
Section 17. Amendment. Neither this Agreement nor any term
hereof may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.
Section 18. Headings. The headings in this Agreement
are for the purposes of reference only and shall not limit or
otherwise affect the meaning hereof.
Section 19. Counterparts. This Agreement may be executed by
each of the parties hereto in any number of counterparts, and by each of the
parties hereto on separate counterparts, each of which counterparts, when so
executed and delivered, shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
* * *
28
<PAGE>
If the foregoing is in accordance with your understanding,
please sign and return to us a counterpart hereof, whereupon this letter and
your acceptance hereof shall constitute a binding agreement between the
Underwriters, the Transferor and Metris.
Very truly yours,
METRIS RECEIVABLES, INC.
By:_________________________
Name: ______________________
Title: _____________________
METRIS COMPANIES INC.
By:_________________________
Name: ______________________
Title: _____________________
Accepted in New York, New York, as of the date hereof:
BEAR, STEARNS & CO. INC.
By: ____________________________
Name: __________________________
Title: _________________________
For itself and as Representative
of the other Underwriters named in
Schedule A hereto.
29
<PAGE>
SCHEDULE A
Principal Amount of Principal Amount of
Name of Underwriter Class A Certificates Class B Certificates
Bear, Stearns & Co. Inc.
NationsBanc Capital Markets, Inc.
Chase Securities, Inc.
<PAGE>
_________________________________________________________
METRIS RECEIVABLES, INC.
Transferor
DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Servicer
and
THE BANK OF NEW YORK (DELAWARE)
Trustee
on behalf of the Series 1997-1 Certificateholders
SERIES 1997-1 SUPPLEMENT
Dated as of May __, 1997
to
POOLING AND SERVICING AGREEMENT
Dated as of May 26, 1995
____________________________________
METRIS MASTER TRUST
$616,250,000 ____% Asset Backed
Certificates, Series 1997-1, Class A
$106,250,000 ____% Asset Backed
Certificates, Series 1997-1, Class B
$72,250,000 Floating Rate Asset Backed
Certificates, Series 1997-1, Class C
$55,250,000 0% Asset Backed Certificates,
Series 1997-1, Class D
_________________________________________________________
<PAGE>
TABLE OF CONTENTS
SECTION 1. Designation ........................................... 1
SECTION 2. Definitions ........................................... 1
SECTION 3. Reassignment Terms .................................... 29
SECTION 4. Delivery and Payment for the Series
1997-1 Certificates ................................. 29
SECTION 5. Form of Delivery of Series 1997-1
Certificates; Denominations ......................... 29
SECTION 6. Article IV of Agreement ............................... 30
ARTICLE IV
RIGHTS OF CERTIFICATEHOLDERS AND
ALLOCATION AND APPLICATION OF COLLECTIONS .............. 30
SECTION 4.4 Rights of Certificateholders .......................... 30
SECTION 4.5 Collections and Allocation; Pay-
ments on Exchangeable Transferor
Certificate ......................................... 31
SECTION 4.6 Determination of Interest for the
Series 1997-1 Certificates .......................... 32
SECTION 4.7 Determination of Principal Amounts .................... 35
SECTION 4.8 Shared Principal Collections .......................... 36
SECTION 4.9 Application of Funds on Deposit in
the Collection Account for the
Certificates ........................................ 36
SECTION 4.10 Coverage of Required Amount for the
Series 1997-1 Certificates .......................... 46
SECTION 4.11 Payment of Certificate Interest ....................... 47
SECTION 4.12 Payment of Certificate Principal ...................... 47
SECTION 4.13 Investor Charge-Offs .................................. 50
i
<PAGE>
PAGE
SECTION 4.14 Pre-Funding Account ................................... 51
SECTION 4.15 Increases in Invested Amount .......................... 53
SECTION 4.16 Reallocated Principal Collections
for the Series 1997-1 Certifi-
cates ............................................... 54
SECTION 4.17 Determination of LIBOR ................................ 55
SECTION 4.18 Payment Reserve Account ............................... 56
SECTION 4.19 Principal Funding Account ............................. 57
SECTION 4.20 Accumulation Period Reserve Ac-
count ................................................. 58
SECTION 4.21 Postponement of Accumulation Peri-
od .................................................... 60
SECTION 4.22 Defeasance ............................................ 60
SECTION 7 Article V of the Agreement ............................ 61
ARTICLE V
DISTRIBUTIONS AND REPORTS TO INVESTOR
CERTIFICATEHOLDERS ........................ 61
SECTION 5.1 Distributions ......................................... 61
SECTION 5.2 Certificateholders' Statement ......................... 64
SECTION 8. Series 1997-1 Pay Out Events .......................... 67
SECTION 9. Series 1997-1 Termination ............................. 69
SECTION 10. Legends; Transfer and Exchange;
Restrictions on Transfer of Se-
ries 1997-1 Certificates; Tax
Treatment ........................................... 69
SECTION 11. Compliance with Withholding Re-
quirements .......................................... 74
ii
<PAGE>
PAGE
SECTION 12. Tax Characterization of the Class C
Certificates ........................................ 74
SECTION 13. Ratification of Agreement ............................. 75
SECTION 14. Registration of the Class A Cer-
tificates under the Securities
Exchange Act of 1934 ................................ 75
SECTION 15. Counterparts .......................................... 75
SECTION 16. GOVERNING LAW ......................................... 76
SECTION 17. Instructions in Writing ............................... 76
SECTION 18. Amendment for FASIT Purposes .......................... 76
SECTION 19. Paired Series ......................................... 76
EXHIBITS
Exhibit A-1 Form of Class A Investor Certificate
Exhibit A-2 Form of Class B Investor Certificate
Exhibit A-3 Form of Class C Investor Certificate
Exhibit A-4 Form of Class D Investor Certificate
Exhibit B Form of Monthly Certificateholder's Statement
Exhibit C Form of Investment Letter
iii
<PAGE>
SERIES 1997-1 SUPPLEMENT, dated as of May __,
1997 (this "Series Supplement") by and among METRIS RE-
CEIVABLES, INC., a corporation organized and existing
under the laws of the State of Delaware, as Transferor
(the "Transferor"), DIRECT MERCHANTS CREDIT CARD BANK,
NATIONAL ASSOCIATION, a national banking association
organized under the laws of the United States, as Ser-
vicer (the "Servicer"), and THE BANK OF NEW YORK (DELA-
WARE), a Delaware banking corporation organized and
existing under the laws of the State of Delaware as
trustee (together with its successors in trust thereunder
as provided in the Agreement referred to below, the
"Trustee"), under the Pooling and Servicing Agreement
dated as of May 26, 1995 as amended, supplemented or
otherwise modified from time to time (the "Agreement")
among the Transferor, the Servicer and the Trustee.
Section 6.9 of the Agreement provides, among
other things, that the Transferor and the Trustee may at
any time and from time to time enter into a supplement to
the Agreement for the purpose of authorizing the issuance
by the Trustee to the Transferor, for execution and
redelivery to the Trustee for authentication, of one or
more Series of Certificates.
Pursuant to this Series Supplement, the Trans-
feror and the Trustee shall create a new Series of Inves-
tor Certificates and shall specify the Principal Terms
thereof.
SECTION 1. Designation. There is hereby
created a Series of Investor Certificates to be issued
pursuant to the Agreement and this Series Supplement to
be known generally as the "Series 1997-1 Certificates."
The Series 1997-1 Certificates shall be issued in four
Classes, which shall be designated generally as the %
Asset Backed Certificates, Series 1997-1, Class A (the
"Class A Certificates"), the % Asset Backed Certifi-
cates, Series 1997-1, Class B (the "Class B Certifi-
cates"), the Floating Rate Asset Backed Certificates,
Series 1997-1, Class C (the "Class C Certificates") and
the 0% Asset Backed Certificates, Series 1997-1, Class D
(the "Class D Certificates").
SECTION 2. Definitions. In the event that any
term or provision contained herein shall conflict with or
<PAGE>
be inconsistent with any provision contained in the
Agreement, the terms and provisions of this Series Sup-
plement shall govern with respect to the Series 1997-1
Certificates. All Article, Section or subsection refer-
ences herein shall mean Articles, Sections or subsections
of the Agreement, as amended or supplemented by this
Series Supplement, except as otherwise provided herein.
All capitalized terms not otherwise defined herein are
defined in the Agreement. Each capitalized term defined
herein shall relate only to the Series 1997-1 Certifi-
cates and no other Series of Certificates issued by the
Trust.
"ABC Adjusted Invested Amount" shall mean 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.
"Accumulation Period" shall mean, unless a Pay
Out Event shall have occurred prior thereto, the period
commencing at the close of business on the last day of
the March 2001 Monthly Period or such later date as is
determined in accordance with Section 4.21 of the Agree-
ment and ending on the first to occur of (a) the com-
mencement of the Early Amortization Period and (b) the
Series 1997-1 Termination Date.
"Accumulation Period Factor" shall mean, for
any Monthly Period, a fraction, the numerator of which is
equal to the sum of the numerators with respect to all
Classes of all Series then outstanding used to calculate
the allocation percentages applicable for Principal
Collections, and the denominator of which is equal to the
sum of (a) the sum of the Class A Invested Amount, Class
B Invested Amount and Class C Invested Amount, (b) the
sum of the numerators with respect to all Classes of all
Series then outstanding used to calculate the allocation
percentages applicable for Principal Collections (other
than Series 1997-1 and any Class of any such Series
retained by the Transferor) which are not expected to be
in their revolving periods during such Monthly Period,
and (c) the sum of the numerators used to calculate the
allocation percentages applicable for Principal Collec-
tions of all Classes of other outstanding Series which
are not allocating Shared Principal Collections and are
expected to be in their revolving periods during such
Monthly Period.
2
<PAGE>
"Accumulation Period Length" shall have the
meaning assigned such term in Section 4.21 of the Agree-
ment.
"Accumulation Period Reserve Account" shall
have the meaning specified in Section 4.20(a) of the
Agreement.
"Accumulation Shortfall" shall initially mean
zero and thereafter shall mean, with respect to any
Monthly Period during the Accumulation Period, the ex-
cess, if any, of the Controlled Deposit Amount for the
previous Monthly Period over the amount deposited into
the Principal Funding Account pursuant to Section 4.12 of
the Agreement with respect to the Series 1997-1 Certifi-
cates for the previous Monthly Period.
"Additional Interest" shall mean, at any time
of determination, the sum of the Class A Additional
Interest, Class B Additional Interest and Class C Addi-
tional Interest.
"Adjusted Invested Amount" shall mean 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.
"Amortization Period" shall mean the Accumula-
tion Period or the Early Amortization Period.
"Amortization Period Commencement Date" shall
mean the earlier of the first day of the Accumulation
Period and the Pay Out Commencement Date.
"Available Investor Principal Collections"
shall mean, 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 Collec-
tions (less the amount of Reallocated Principal Collec-
tions) received during such Monthly Period, (ii) any
amount on deposit in the Excess Funding Account allocated
to the Series 1997-1 Certificates pursuant to subsection
4.9(d) of the Agreement with respect to such Monthly
3
<PAGE>
Period and, on and after the Pay Out Commencement Date,
any amount on deposit in the Pre-Funding Account, (iii)
the aggregate amount allocated with respect to the Inves-
tor Default Amount and the Series Allocation Percentage
of any Adjustment Payments paid pursuant to subsections
4.9(a)(v) and 4.9(a)(vi) of the Agreement with respect to
such Monthly Period, any reimbursements of unreimbursed
Investor Charge-Offs pursuant to subsections 4.9(a)(vii),
(x), (xi) and (xii) of the Agreement with respect to such
Monthly Period and further in each case, pursuant to sub-
sections 4.10(a) and (b), 4.16(a), (b) and (c), 4.19(b)
and 4.20(b), (c) and (d) of the Agreement, and (iv) the
aggregate Shared Principal Collections allocated to the
Series 1997-1 Certificates pursuant to Section 4.8 of the
Agreement with respect to such Monthly Period.
"Available Reserve Account Amount" shall mean,
with respect to any Transfer Date, the lesser of (a) the
amount on deposit in the Accumulation Period Reserve
Account as of such date (before giving effect to any
withdrawal made or to be made pursuant to subsection
4.20(c) of the Agreement from the Accumulation Period Re-
serve Account on such Transfer Date) and (b) the Required
Reserve Account Amount for such Transfer Date.
"Available Series 1997-1 Finance Charge Collec-
tions" shall have the meaning specified in subsection
4.9(a) of the Agreement.
"Base Rate" shall mean, 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%
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.
"Carryover Class A Interest" shall mean with
respect to any Business Day (a) any Class A Interest due
but not paid on any previous Distribution Date plus (b)
any Class A Additional Interest due on the next succeed-
ing Distribution Date.
4
<PAGE>
"Carryover Class B Interest" shall mean with
respect to any Business Day (a) any Class B Interest due
but not paid on any previous Distribution Date plus (b)
any Class B Additional Interest due on the next succeed-
ing Distribution Date.
"Carryover Class C Interest" shall mean with
respect to any Business Day (a) any Class C Interest due
but not paid on any previous Distribution Date plus (b)
any Class C Additional Interest due on the next succeed-
ing Distribution Date.
"Class A Additional Interest" shall have the
meaning specified in subsection 4.6(a) of the Agreement.
"Class A Adjusted Invested Amount" shall mean,
for any date of determination, an amount not less than
zero equal to the then current Class A Invested Amount
minus the Principal Funding Account Balance on such date.
"Class A Certificateholder" shall mean the
Person in whose name a Class A Certificate is registered
in the Certificate Register.
"Class A Certificateholders' Interest" shall
mean the portion of the Series 1997-1 Certificateholders'
Interest evidenced by the Class A Certificate.
"Class A Certificate" shall mean any of the
certificates executed by the Transferor and authenticated
by or on behalf of the Trustee, substantially in the form
of Exhibit A-1 hereto.
"Class A Certificate Rate" shall mean % per
annum.
"Class A Floating Allocation Percentage" shall
mean, with respect to any Business Day, the percentage
equivalent of a fraction, the numerator of which is the
Class A Adjusted Invested Amount as of 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 in the Trust and the amounts on
deposit in the Excess Funding Account as of the end of
the preceding Business Day and (b) the sum of the numera-
tors with respect to all Classes of all Series then
5
<PAGE>
outstanding used to calculate the applicable allocation
percentage.
"Class A Initial Invested Amount" shall mean
the aggregate initial principal amount of the Class A
Certificates, which is $616,250,000.
"Class A Interest" shall mean the interest
distributable in respect of the Class A Certificates as
calculated in accordance with subsection 4.6(a) of the
Agreement.
"Class A Interest Shortfall" shall have the
meaning specified in subsection 4.6(a) of the Agreement.
"Class A Invested Amount" shall mean, when used
with respect to any Business Day, the greater of (x) zero
and (y) an amount equal to (a) the Class A Initial In-
vested 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 Ac-
count (i) during the Funding Period in connection with
the addition of Receivables to the Trust or (ii) at the
end of the Funding Period for deposit into the Excess
Funding Account, minus (b) the aggregate amount of prin-
cipal payments (except principal payments made from the
Pre-Funding Account) made to Class A Certificateholders
through and including such Business Day, minus (c) the
aggregate amount of Class A Investor Charge-Offs for all
prior Distribution Dates, plus (d) the sum of the aggre-
gate amount allocated with respect to Class A Investor
Charge-Offs and available on all prior Distribution Dates
pursuant to subsection 4.9(a)(vii) of the Agreement and,
with respect to such subsection, pursuant to subsections
4.10(a) and (b), 4.16(a), (b) and (c), 4.19(b) and
4.20(b), (c) and (d) of the Agreement, for the purpose of
reinstating amounts reduced pursuant to the foregoing
clause (c).
"Class A Investor Charge-Offs" shall have the
meaning specified in subsection 4.13(d) of the Agreement.
"Class A Outstanding Principal Amount" shall
mean with respect to the Class A Certificates, when used
with respect to any Business Day, an amount equal to (a)
the Class A Initial Invested Amount minus (b) the aggre-
gate amount of principal payments (including principal
6
<PAGE>
payments made from the Pre-Funding Account) made to the
Class A Certificateholders on or prior to such Business
Day.
"Class A Percentage" shall mean 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" shall mean, with respect
to any Record Date, a number carried out to seven decimal
places representing the ratio of the sum of the Class A
Invested Amount and the Class A Percentage of funds on
deposit in the Pre-Funding Account as of such Record Date
(determined after taking into account any increases or
decreases in the Class A Invested Amount which will
occur, and the amount of funds which will be on deposit
in the Pre-Funding Account, on the following Distribution
Date) to the Class A Initial Invested Amount.
"Class A Pre-Funded Amount" shall mean the
product of the Pre-Funded Amount and the Class A Percent-
age.
"Class A Principal" shall mean the principal
distributable in respect of the Class A Certificates as
calculated in accordance with subsection 4.7(a) of the
Agreement.
"Class A Required Amount" shall mean the amount
determined by the Servicer on each Business Day equal to
the excess, if any, of (x) the sum of (i) Class A Inter-
est for the then current Monthly Period, (ii) any Carry-
over Class A Interest, (iii) if DMCCB or an Affiliate of
DMCCB is no longer the Servicer, the Class A Floating
Allocation Percentage of the Servicing Fee for the then
current Monthly Period, (iv) the Class A Floating Alloca-
tion Percentage of the Default Amount, if any, for such
Business Day and, to the extent not previously paid, for
any previous Business Day in such Monthly Period, (v) the
Class A Percentage of the Series Allocation Percentage of
the Adjustment Payment required to be made by the Trans-
feror but not made on the related Transfer Date and (vi)
the unreimbursed amount by which the Class A Invested
Amount has been reduced on prior Business Days pursuant
to clause (c) of the definition of Class A Invested
7
<PAGE>
Amount over (y) the Available Series 1997-1 Finance
Charge Collections plus any Excess Finance Charge Collec-
tions from other Series and any Transferor Finance Charge
Collections allocated with respect to the amounts de-
scribed in clauses (x)(i) through (vi) above.
"Class B Additional Interest" shall have the
meaning specified in subsection 4.6(b) of the Agreement.
"Class B Adjusted Invested Amount" shall mean,
for any date of determination, an amount not less than
zero equal to the then current Class B Invested Amount
minus the excess, if any, of the Principal Funding Ac-
count Balance over the Class A Invested Amount on such
date of determination.
"Class B Certificateholder" shall mean the
Person in whose name a Class B Certificate is registered
in the Certificate Register.
"Class B Certificateholders' Interest" shall
mean the portion of the Series 1997-1 Certificateholders'
Interest evidenced by the Class B Certificates.
"Class B Certificate Rate" shall mean % per
annum.
"Class B Certificates" shall mean any of the
certificates executed by the Transferor and authenticated
by or on behalf of the Trustee, substantially in the form
of Exhibit A-2 hereto.
"Class B Fixed/Floating Allocation Percentage"
shall mean for any Business Day the percentage equivalent
of a fraction, the numerator of which is the Class B
Invested Amount at the end of the last day of the Revolv-
ing Period and the denominator of which is the greater of
(a) the sum of the aggregate amount of Principal Receiv-
ables and the amount on deposit in the Excess Funding
Account at 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 appli-
cable allocation percentage.
"Class B Floating Allocation Percentage" shall
mean, with respect to any Business Day, the percentage equivalent of a
fraction, the numerator of which is the
8
<PAGE>
Class B Adjusted Invested Amount as of 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 in the Trust and the amount 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 out-
standing used to calculate the applicable allocation percentage.
"Class B Initial Invested Amount" shall mean
the aggregate initial principal amount of the Class B
Certificates, which is $106,250,000.
"Class B Interest" shall mean the interest
distributable in respect of the Class B Certificates as
calculated in accordance with subsection 4.6(b) of the
Agreement.
"Class B Interest Shortfall" shall have the
meaning specified in subsection 4.6(b) of the Agreement.
"Class B Invested Amount" shall mean, when used
with respect to any Business Day, the greater of (x) zero and (y) 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 (i) during the Funding
Period in connection with the addition of Receivables to the Trust or (ii) at
the end of the Funding Period for deposit 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 Business Day, minus (c) the aggregate amount of
Class B Investor Charge-Offs for all prior Distribution Dates, 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 Business Days, and plus (e) the sum of the aggregate
amount allocated and available on all prior Business Days pursuant to
subsection 4.9(a)(x) of the Agreement and, with respect to such subsection,
pursuant to subsections 4.10(a) and (b), 4.16(a) and (b), 4.19(b) and 4.20(b),
(c) and (d) of the Agreement, for the purpose of reinstating
9
<PAGE>
amounts reduced pursuant to the foregoing clauses (c) and (d).
"Class B Investor Charge-Offs" shall have the meaning
specified in subsection 4.13(c) of the Agreement.
"Class B Outstanding Principal Amount" shall mean with
respect to the Class B Certificates, when used with respect to any Business
Day, an amount equal to (a) the Class B Initial Invested Amount minus (b) the
aggregate amount of principal payments (including principal payments made
from the Pre-Funding Account) made to the Class B Certificateholders on or
prior to such Business Day.
"Class B Percentage" shall mean 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" shall mean, with respect to any Record
Date, a number carried out to seven decimal places representing the ratio of
the sum of the Class B Invested Amount and the Class B Percentage of funds on
deposit in the Pre-Funding Account as of the last day of the related Monthly
Period (determined after taking into account any increases or decreases in the
Class B Invested Amount which will occur, and the amount of funds which will
be on deposit in the Pre-Funding Account, on the following Distribution Date)
to the Class B Initial Invested Amount.
"Class B Pre-Funded Amount" shall mean the product of the
Pre-Funded Amount and the Class B Percentage.
"Class B Principal" shall mean the principal distributable
in respect of the Class B Certificates as calculated in accordance with
subsection 4.7(b) of the Agreement.
"Class B Principal Payment Commencement Date" shall mean 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 Dis-
tribution Date on which the Class A Invested Amount is
10
<PAGE>
paid in full or, if there are no Principal Collections allocable to the Series
1997-1 Certificates remaining after payments have been made to the Class A
Certificates on such Distribution Date, the Distribution Date following the
first Distribution Date on which the Class A Invested Amount is paid in full
and (b) the Distribution Date following a sale or repurchase of the
Receivables as set forth in Section 2.4(e), 9.2, 10.2(a), 12.1 or 12.2 of the
Agreement or Section 3 of this Series Supplement.
"Class B Required Amount" shall mean the amount determined
by the Servicer on each Business Day equal to the excess, if any, of (x) the
sum of (i) the Class B Interest for the then current Monthly Period, (ii) any
Carryover Class B Interest, (iii) if DMCCB or an Affiliate of DMCCB is no
longer the Servicer, the Class B Floating Allocation Percentage of the
Servicing Fee for the then current Monthly Period, (iv) the Class B Floating
Allocation Percentage of the Default Amount, if any, for such Business Day
and, to the extent not previously paid, for any previous Business Day in such
Monthly Period, (v) 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 (vi) the unreimbursed amount by
which the Class B Invested Amount has been reduced on prior Business Days
pursuant to clauses (c) and (d) of the definition of Class B Invested Amount
over (y) the Available Series 1997-1 Finance Charge Collections plus any
Excess Finance Charge Collections from other Series and any Transferor Finance
Charge Collections allocated with respect to the amounts described in clauses
(x)(i) through (vi) above.
"Class C Additional Interest" shall have the meaning
specified in subsection 4.6(c) of the Agreement.
"Class C Adjusted Invested Amount" shall mean, for any date
of determination, 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 Class A Invested Amount and Class B Invested Amount on such
date of determination.
"Class C Certificateholder" shall mean the Person in whose
name a Class C Certificate is registered in the Certificate Register.
11
<PAGE>
"Class C Certificateholders' Interest" shall mean the
portion of the Series 1997-1 Certificateholders' Interest evidenced by the
Class C Certificates.
"Class C Certificate Rate" shall mean % per annum from the
Closing Date through and including May 19, 1997 and from May 20, 1997 through
and including June 19, 1997 and with respect to each Interest Period
thereafter, a per annum rate % in excess of LIBOR as determined on the
related LIBOR Determination Date.
"Class C Certificates" shall mean any of the certificates
executed by the Transferor and authenticated by or on behalf of the Trustee,
substantially in the form of Exhibit A-3 hereto.
"Class C Fixed/Floating Allocation Percentage" shall mean
for any Business Day the percentage equivalent of a fraction, the numerator of
which is the Class C Invested Amount at the end of the last day of the Revolv-
ing Period and the denominator of which is the greater of (a) the sum of the
aggregate amount of Principal Receivables and the amount on deposit in the
Excess Funding Account at 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 Floating Allocation Percentage" shall mean, with
respect to any Business Day, the percentage equivalent of a fraction, the
numerator of which is the Class C Adjusted Invested Amount as of the end of
the preceding Business Day and the denominator of which is the greater of (a)
the total amount of Principal Receivables in the Trust and the amount 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" shall mean the aggregate
initial principal amount of the Class C Certificates, which is $72,250,000.
"Class C Interest" shall mean the interest distributable in
respect of the Class C Certificates as
12
<PAGE>
calculated in accordance with subsection 4.6(c) of the
Agreement.
"Class C Interest Shortfall" shall have the meaning
specified in subsection 4.6(c) of the Agreement.
"Class C Invested Amount" shall mean, when used with respect
to any Business Day, the greater of (x) zero and (y) 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 (i) during the Funding Period in
connection with the addition of Receivables to the Trust or (ii) at the end of
the Funding Period for deposit 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 Business Day, minus (c) the aggregate amount of Class C
Investor Charge-Offs for all prior Distribution Dates, minus (d) the aggregate
amount of Reallocated Class B Principal Collections and Reallocated Class C
Principal Collections for which the Class D Invested Amount has not been
reduced for all prior Business Days, and plus (e) the sum of the aggregate
amount allocated and available on all prior Business Days pursuant to
subsection 4.9(a)(xi) of the Agreement and, with respect to such subsection,
pursuant to subsections 4.10(a) and (b), 4.16(a), 4.19(b) and 4.20(b), (c) and
(d) of the Agreement, for the purpose of reinstating amounts reduced pursuant
to the foregoing clauses (c) and (d).
"Class C Investor Charge-Offs" shall have the meaning
specified in subsection 4.13(b) of the Agreement.
"Class C Outstanding Principal Amount" shall mean, when used
with respect to any Business Day, an amount equal to (a) the Class C Initial
Invested Amount minus (b) the aggregate amount of principal payments
(including principal payments made from the Pre-Funding Account) made to Class
C Certificateholders prior to such Business Day.
"Class C Percentage" shall mean 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
13
<PAGE>
Initial Invested Amount, the Class B Initial Invested
Amount and the Class C Initial Invested Amount.
"Class C Pool Factor" shall mean, with respect to any Record
Date, a number carried out to seven decimal places representing the ratio of
the sum of the Class C Invested Amount and the Class C Percentage of funds on
deposit in the Pre-Funding Account as of such Record Date (determined after
taking into account any increases or decreases in the Class C Invested Amount
which will occur, and the amount of funds on deposit in the PreFunding
Account, on the following Distribution Date) to the Class C Initial Invested
Amount.
"Class C Principal" shall mean the principal distributable
in respect of the Class C Certificates as calculated in accordance with
subsection 4.7(c) of the Agreement.
"Class C Principal Payment Commencement Date" shall mean 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 Dis-
tribution Date on which the Class B Invested Amount is paid in full or, if
there are no Principal Collections allocable to the Series 1997-1 Certificates
remaining after payments have been made to the Class B Certificates on such
Distribution Date, the Distribution Date following the first Distribution
Date on which the Class B Invested Amount is paid in full and (b) the
Distribution Date following a sale or repurchase of the Receivables as set
forth in Section 2.4(e), 9.2, 10.2(a), 12.1 or 12.2 of the Agreement or
Section 3 of this Series Supplement.
"Class C Required Amount" shall mean the amount determined
by the Servicer on each Business Day equal to the excess, if any, of (x) the
sum of (i) Class C Interest for the then current Monthly Period, (ii) any
Carryover Class C Interest, (iii) if DMCCB or an Affiliate of DMCCB is no
longer the Servicer, the Class C Floating Allocation Percentage of the
Servicing Fee for the then current Monthly Period, (iv) the Class C Floating
Allocation Percentage of the Default Amount, if any, for such Business Day
and, to the extent not previously paid, for any previous Business Day in such
Monthly Period, (v) the Class C Percentage of the Series Allocation Percentage
of the Adjustment Payment required to be made by the Trans-
14
<PAGE>
feror but not made on the related Transfer Date and (vi) the unreimbursed
amount by which the Class C Invested Amount has been reduced on prior Business
Days pursuant to clauses (c) and (d) of the definition of Class C Invested
Amount over (y) the Available Series 1997-1 Finance Charge Collections plus
any Excess Finance Charge Collections from other Series and any Transferor
Finance Charge Collections allocated with respect to the amounts described in
clauses (x)(i) through (vi) above.
"Class C Reserve Account" shall have the meaning specified
in the Class C Reserve Account Agreement.
"Class C Reserve Account Agreement" shall mean the Class C
Reserve Account Agreement dated as of May , 1997 among the Transferor, the
Servicer and the Trustee as amended and supplemented from time to time.
"Class C Trigger Event" shall have the meaning specified in
the Class C Reserve Account Agreement.
"Class D Certificateholder" shall mean the Person in whose
name a Class D Certificate is registered in the Certificate Register.
"Class D Certificateholders' Interest" shall mean the
portion of the Series 1997-1 Certificateholders' Interest evidenced by the
Class D Certificate.
"Class D Certificates" shall mean any of the certificates
executed by the Transferor and authenticated by or on behalf of the Trustee,
substantially in the form of Exhibit A-4 hereto.
"Class D Excess Amounts" shall mean with respect to any
Business Day, the excess of the Class D Invested Amount over the Stated Class
D Amount on such day after taking into account all adjustments of the ABC
Adjusted Invested Amount on such day.
"Class D Fixed/Floating Allocation Percentage" shall mean
for any Business Day the percentage equivalent of a fraction, the numerator of
which is the Class D Invested Amount at the end of the last day of the Revolv-
ing Period and the denominator of which is the greater of (a) the sum of the
aggregate amount of Principal Receivables and the amount on deposit in the
Excess Funding
15
<PAGE>
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 Floating Allocation Percentage" shall mean with
respect to any Business Day the percentage equivalent of a fraction, the
numerator of which is the Class D Invested Amount on such day after taking
into account all adjustments of the Class D Invested Amount on such day and
the denominator of which is the greater of (a) the sum of the aggregate amount
of Principal Receivables and the amount on deposit in the Excess Funding
Account at 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 Initial Invested Amount" shall mean the aggregate
initial principal amount of the Class D Certificates, which is $55,250,000.
"Class D Interest Shortfall" shall have the meaning
specified in subsection 4.6(d) of the Agreement.
"Class D Invested Amount" shall mean, when used with respect
to any Business Day, the greater of (x) zero and (y) 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 Certificate holders
through and including such Business Day, minus (c) the aggregate amounts by
which the Transferor has reduced the Class D Invested Amount pursuant to
subsection 4.12(d) of the Agreement, minus (d) the aggregate amount of Class
D Investor Charge-Offs for all prior Distribution Dates, minus (e) the
aggregate amount of Reallocated Principal Collections for all prior Business
Days, plus (f) the sum of the aggregate amount allocated and available on all
prior Business Days pursuant to subsection 4.9(a)(xii) of the Agreement and,
with respect to such subsection, pursuant to subsections 4.10(a) and (b),
4.19(b) and 4.20(b), (c) and (d) of the Agreement, for the purpose of
reinstating amounts reduced pursuant to the foregoing clauses (d) and (e).
"Class D Investor Charge-Offs" shall have the meaning
specified in subsection 4.13(a) of the Agreement.
16
<PAGE>
"Class D Outstanding Principal Amount" shall mean, when used
with respect to any Business Day, an amount equal to (a) the Class D Initial
Invested Amount minus (b) the aggregate amount of principal payments made to
Class D Certificateholders prior to such Business Day.
"Class D Pool Factor" shall mean, with respect to any Record
Date, a number carried out to seven decimal places representing the ratio of
the Class D Invested Amount as of such Record Date (determined after taking
into account any increases or decreases in the Class D Invested Amount which
will occur, and the amount of funds on deposit in the Pre-Funding Account, on
the following Distribution Date) to the Class D Initial Invested Amount.
"Class D Principal" shall mean the principal distributable
in respect of the Class D Certificate as specified in subsection 4.7(d) of the
Agreement.
"Class D Principal Payment Commencement Date" shall mean the
earlier of (a) during the Amortization Period, the first Distribution Date on
which the Class C Invested Amount is paid in full or, if there are no Prin-
cipal Collections allocable to the Series 1997-1 Certificates remaining
after payments have been made to the Class C Certificates on such Distribution
Date, the Distribution Date following the first 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 as set forth in Section
2.4(e), 9.2, 10.2(a), 12.1 or 12.2 of the Agreement or Section 3 of this
Series Supplement.
"Closing Date" shall mean May , 1997.
"Controlled Accumulation Amount" shall mean, 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, $66,229,167; provided, however, that if the
Accumulation Period Length is determined to be less than 12 months pursuant
to subsection 4.21 of the Agreement, the Controlled Accumulation Amount for
each 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
17
<PAGE>
and the Class C Invested Amount, will be equal to (i) the product of (x) the
sum of the Class A Initial Invested Amount, the Class B Initial Invested
Amount and the Class C Initial Invested Amount and (y) the Accumulation Period
Factor for the Monthly Period preceding such Transfer Date divided by (ii) the
Required Accumulation Factor Number.
"Controlled Deposit Amount" shall mean, with respect to any
Transfer Date, the sum of (a) the Controlled Accumulation Amount for such
Transfer Date and (b) any existing Accumulation Shortfall.
"Covered Amount" shall mean, with respect to any Interest
Accrual Period during the Accumulation Period prior to the payment in full of
the sum of the Class A Invested Amount, Class B Invested Amount and the Class
C Invested Amount, one-twelfth of the product of (a) the weighted average of
the Class A Certificate Rate, the Class B Certificate Rate and the Class C
Certificate Rate, each in effect with respect to such Interest Accrual
Period, and (b) the Principal Funding Account Balance (up to the sum of the
Class A Invested Amount, the Class B Invested Amount and the Class C Invested
Amount) as of the last day of the Monthly Period preceding the Monthly Period
in which such Interest Accrual Period ends.
"Default Amount" shall mean, (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" shall mean, 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" shall mean the last day of each
calendar month; provided, however, that with
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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.
"Distribution Date" shall mean June 20, 1997, and the
twentieth day of each month thereafter, or if such day is not a Business Day,
the next succeeding Business Day.
"Early Amortization Period" shall mean 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 In-
vested 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 Scheduled Series 1997-1 Termination Date.
"Enhancement" shall mean, with respect to the Class A
Certificates, the subordination of the Class B Invested Amount, the Class C
Invested Amount, and the Class D Invested Amount, with respect to the Class B
Certificates, the subordination of the Class C Invested Amount and the Class
D Invested Amount, and with respect to the Class C Certificates, the
subordination of the Class D Invested Amount and the amount, if any, on depos-
it from time to time in the Class C Reserve Account.
"Excess Finance Charge Collections" shall mean, with respect
to any Business Day, as the context requires, either (x) the amount
described in subsection 4.9(a)(xvii) of the Agreement allocated to the Series
1997-1 Certificates but available to cover shortfalls in amounts paid from
Finance Charge Collections for other Series, if any, or (y) the aggregate
amount of Finance Charge Collections allocable to other Series in excess of
the amounts necessary to make required payments with respect to such Series,
if any, and available to cover shortfalls with respect to the Series 1997-1
Certificates.
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"Expected Final Payment Date" shall mean the
April 2002 Distribution Date.
"FASIT" shall have the meaning specified in Section 18 of
this Series Supplement.
"Fixed/Floating Allocation Percentage" shall mean for any
Business Day the percentage equivalent of a fraction, the numerator of which
is the Invested Amount 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 amount 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.
"Floating Allocation Percentage" shall mean for any Business
Day the sum of the applicable Class A Floating Allocation Percentage, Class
B Floating Allocation Percentage, Class C Floating Allocation Percentage, and
Class D Floating Allocation Percentage for such Business Day.
"Full Invested Amount" shall mean $850,000,000.
"Funding Period" shall mean 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 day of the
September 1997 Monthly Period.
"Initial Invested Amount" shall mean an amount equal to the
sum of (i) the Class A Initial Invested Amount less the Class A Percentage of
the Initial PreFunded Amount, plus the Class A Percentage of any with-
drawals from the Pre-Funding Account during the Funding Period in connection
with the addition of Receivables to the Trust; (ii) the Class B Initial
Invested Amount less the Class B Percentage of the Initial Pre-Funded Amount,
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; (iii) the Class C Initial Invested Amount less the Class C
Percentage of the Initial Pre-Funded Amount, plus the
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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 (iv) the Class D Initial Invested Amount.
"Initial Pre-Funded Amount" shall mean $
.
"Interest Accrual Period" shall mean, 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.
"Invested Amount" shall mean, when used with respect to any
Business Day, an amount equal to the sum of (a) the Class A Invested Amount as
of such Business Day, (b) the Class B Invested Amount as of such Business Day,
(c) the Class C Invested Amount as of such Business Day and (d) the Class D
Invested Amount as of such Business Day.
"Investor Certificateholder" shall mean the Holder of record
of an Investor Certificate of Series 1997-1.
"Investor Certificates" shall mean the Class A Certificates,
the Class B Certificates, the Class C Certificates and the Class D
Certificate.
"Investor Charge-Offs" shall mean the sum of Class A
Investor Charge-Offs, Class B Investor ChargeOffs, Class C Investor
Charge-Offs and Class D Investor Charge-Offs.
"Investor Default Amount" shall mean, with respect to each
Business Day, an amount equal to the product of the Default Amount identified
since the prior reporting date and the Floating Allocation Percentage
applicable for such Business Day.
"Investor Percentage" shall mean, for any Business Day,
(a) with respect to Finance Charge Collections prior to the Pay Out
Commencement Date, Receivables in Defaulted Accounts at any time and Principal
Collections
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during the Revolving Period, the Floating Allocation Per-
centage and (b) with respect to Finance Charge Collec-
tions on and after the Pay Out Commencement Date and
Principal Collections during the Amortization Period, the
Fixed/Floating Allocation Percentage.
"LIBOR" shall mean, as of any LIBOR Determination Date,
the London interbank offered quotations for one-month Dollar deposits
determined by the Trustee for each Interest Accrual Period in accordance with
the provisions of Section 4.17 of the Agreement.
"LIBOR Determination Date" shall mean the second Business
Day prior to the commencement of each Interest Accrual Period; provided,
however, that with respect to the period from the Closing Date through May 19,
1997, LIBOR Determination Date shall mean May ___, 1997, and for the period
from May 20, 1997 through June 19, 1997, LIBOR Determination Date shall mean
May 16, 1997. For purposes of this definition, a Business Day is any day on
which banks in London and New York are open for the transaction of
international business.
"Minimum Retained Percentage" shall mean
2%.
"Minimum Transferor Percentage" shall mean 0%; provided,
however, that in certain circumstances such percentage may be increased.
"Monthly Period" shall have the meaning specified in the
Agreement, except that the first Monthly Period with respect to the Series
1997-1 Certificates shall begin on and include the Closing Date and shall end
on and include May 31, 1997.
"Negative Carry Amount" shall have the meaning specified in
subsection 4.10(a) of the Agreement.
"Paired Series" shall have the meaning specified in Section
19 of this Series Supplement.
"Paying Agent" shall mean, for the Series 1996-1
Certificates, The Bank of New York.
"Payment Reserve Account" shall have the meaning specified
in subsection 4.18 of the Agreement.
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<PAGE>
"Pay Out Commencement Date" shall mean the date on which a
Trust Pay Out Event is deemed to occur pursuant to Section 9.1 of the
Agreement or a Series 1997-1 Pay Out Event is deemed to occur pursuant to
Section 8 of this Series Supplement.
"Portfolio Adjusted Yield" shall mean, with respect to any
Monthly Period, the average of the percentages obtained for each of the
three preceding Monthly Periods by subtracting the Base Rate for such Monthly
Period from the Portfolio Yield for such Monthly Period.
"Portfolio Yield" shall mean for the Series 1997-1
Certificates, with respect to any Monthly Period, the annualized percentage
equivalent of a fraction, the numerator of which is an amount equal to the sum
of the aggregate amount of Available Series 1997-1 Finance Charge Collections
for such Monthly Period (not including the amounts on deposit in the Payment
Reserve Account and Adjustment Payments made by the Transferor with respect to
Adjustment Payments required to be made but not made in prior Monthly Periods,
if any) plus the Principal Funding Account Investment Proceeds, investment
earnings on amounts on deposit in the Pre-Funding Account deposited into the
Collection Account pursuant to subsection 4.14(b) of the Agreement and amounts
withdrawn from the Accumulation Period Reserve Account, if any, with respect
to such Monthly Period calculated on a cash basis, minus the aggregate
Investor Default Amount for such Monthly Period 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 a Ratings Event with
respect to the Series 1997-1 Certificates would not occur as a result thereof.
"Pre-Funded Amount" shall mean (a) the Initial Pre-Funded
Amount, minus (b) the amount of any increases in the Invested Amount during
the Funding Period pursuant to Section 4.15 of the Agreement, minus (c) the
amount of any principal losses on funds on deposit in the Pre-Funding Account
and minus (d) the amount withdrawn from
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the Pre-Funding Account and deposited in the Excess Funding Account.
"Pre-Funding Account" shall mean the account established and
maintained pursuant to subsection 4.14(a) of the Agreement.
"Principal Funding Account" shall have the meaning set forth
in subsection 4.19 of the Agreement.
"Principal Funding Account Balance" shall mean, with respect
to any date of determination during the Accumulation Period, the principal
amount, if any, on deposit in the Principal Funding Account on such date of
determination.
"Principal Funding Account Investment Proceeds" shall mean,
with respect to each Interest Accrual Period during the Accumulation Period,
the investment earnings on funds on deposit in the Principal Funding Account
(net of investment losses and expenses) for such Interest Accrual Period.
"Principal Shortfalls" shall mean on any Business Day (x)
for Series 1997-1, (i) during the Accumulation Period, the amount, if any,
by which the Controlled Deposit Amount for the Transfer Date immediately
following the then current Monthly Period exceeds the total of the amounts
described in clauses (v), (w), (x) and (y) of subsection 4.9(c)(i), and (ii)
at all other times, the Invested Amount of the class then receiving principal
payments after the application of Principal Collections on such Business Day
or (y) for any other Series the amounts specified as such in the Supplement
for such other Series.
"QIB" shall mean a "qualified institutional buyer" within
the meaning of Rule 144A under the Securities Act.
"Rating Agency" shall mean Standard & Poor's, a Division of
the McGraw-Hill Companies, and Moody's Investors Service, Inc.
"Reallocated Class B Principal Collections" shall have the
meaning specified in subsection 4.16(c) of the Agreement.
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<PAGE>
"Reallocated Class C Principal Collections" shall have the
meaning specified in subsection 4.16(b) of the Agreement.
"Reallocated Class D Principal Collections" shall have the
meaning specified in subsection 4.16(a) of the Agreement.
"Reallocated Principal Collections" shall mean the sum of
Reallocated Class B Principal Collections, Reallocated Class C Principal
Collections and Reallocated Class D Principal Collections.
"Reference Banks" shall mean four major banks in the London
interbank market selected by the Trustee.
"Required Accumulation Factor Number" shall be equal to a
fraction, rounded upwards to the nearest whole number, the numerator of which
is one and the denominator of which is equal to the lowest monthly principal
payment rate on the Receivables, expressed as a decimal, for the 12 months
preceding the date of such calculation.
"Required Amount" shall have the meaning specified in
subsection 4.10(b) of the Agreement.
"Required Reserve Account Amount" shall mean, with respect
to any Transfer Date on or after the Reserve Account Funding Date, an amount
equal to (a) 0.50% 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, however, that if such designation is
of a lesser amount, the Transferor shall have (i) provided the Servicer and
the Trustee with evidence that the Rating Agency Condition has been satisfied
and (ii) 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 the giving of notice or the lapse of time, would
cause a Pay Out Event to occur with respect to Series 1997-1.
"Reserve Account Funding Date" shall mean the earliest of
(a) the first day of the third Monthly Period preceding the first full day of
the Accumulation Period; (b) the Determination Date occurring in the first
Monthly
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Period for which the Portfolio Adjusted Yield is less than 2.0%, but in such
event the Reserve Account Funding Date shall not be required to occur earlier
than the first day of the Monthly Period which commences 12 months prior to
the first full day of the Accumulation Period; (c) the Determination Date
occurring in the first Monthly Period for which the Portfolio Adjusted Yield
is less than 3.0%, but in such event the Reserve Account Funding Date shall
not be required to occur earlier than the first day of the Monthly Period
which commences 6 months prior to the first full day of the Accumulation
Period; or (d) the Determination Date occurring in the first Monthly Period
for which the Portfolio Adjusted Yield is less than 3.5%, but in such event
the Reserve Account Funding Date shall not be required to occur earlier than
the first day of the Monthly Period which commences 4 months prior to the
first full day of the Accumulation Period.
"Revolving Period" shall mean the period from and including
the Closing Date to, but not including, the Amortization Period Commencement
Date.
"Scheduled Series 1997-1 Termination Date" shall mean the
October 2005 Distribution Date.
"Series 1997-1" shall mean the Series of the Metris Master
Trust represented by the Series 1997-1 Certificates.
"Series 1997-1 Allocation Percentage" shall mean, 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 relating to all other Series then outstanding.
"Series 1997-1 Certificates" shall mean the Class A
Certificates, the Class B Certificates, the Class C Certificates and the Class
D Certificate.
"Series 1997-1 Certificateholder" shall mean the holder of
record of any Series 1997-1 Certificate.
"Series 1997-1 Certificateholders' Interest" shall have the
meaning specified in Section 4.4 of the Agreement.
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<PAGE>
"Series 1997-1 Pay Out Event" shall have the meaning
specified in Section 8 of this Series Supplement.
"Series 1997-1 Termination Date" shall mean the earlier to
occur of (i) the day after the Distribution Date on which the Series 1997-1
Certificates are paid in full, or (ii) the Scheduled Series 1997-1 Termination
Date.
"Series Servicing Fee Percentage" shall mean 2.00% per
annum.
"Servicing Fee" shall mean for any Monthly Period, an amount
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 Funding Period, the Initial
Invested Amount as of the beginning of the day on the first day of such
Monthly Period.
"Shared Principal Collections" shall mean, as the context
requires, either (a) the amount allocated to the Series 1997-1 Certificates
which, in accordance with subsections 4.9(b) and 4.9(c)(v) of the Agreement,
may be applied in accordance with Section 4.3(d) of the Agreement or (b) the
amounts allocated to the investor certificates of other Series which the
applicable Series Supplements for such Series specify are to be treated as
"Shared Principal Collections" and which may be applied to cover Principal
Shortfalls with respect to the Series 1997-1 Certificates.
"Stated Class D Amount" shall mean the greater of (i) zero
and (ii) a number rounded to the nearest Dollar equal to the product of 6.952
percent and the ABC Adjusted Invested Amount; provided, however, that in no
event shall the Stated Class D Amount be less than $23,842,500, except that if
the ABC Adjusted Invested Amount is equal to zero, the Stated Class D Amount
shall 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.
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"Targeted Holder" shall mean (i) each holder of a right to
receive interest or principal with respect to the Class C Certificates (or
other interests in the Trust), other than certificates (or other such
interests) with respect to which an opinion is rendered that such certificates
(or other such interests) will be treated as debt for Federal income tax
purposes, and (ii) any holder of a right to receive any amount in respect of
the Transferor Interest; provided, that any Person holding more than one
interest each of which would cause such Person to be a Targeted Holder shall
be treated as a single Targeted Holder.
"Termination Payment Date" shall mean the earlier of the
first Distribution Date following the liquidation or sale of the Receivables
as a result of an Insolvency Event or a Class C Trigger Event and the
occurrence of the Scheduled Series 1997-1 Termination Date.
"Transfer" shall have the meaning specified in subsection
10(b) of this Series Supplement.
"Transferor Finance Charge Collections" shall mean on any
Business Day the product of (a) the Finance Charge Collections for such
Business Day, (b) the Transferor Percentage and (c) the Series Allocation
Percentage.
"Transferor Retained Certificates" shall mean investor
certificates of any Series, which may include the Class D Certificate, which
the Transferor retains, but only to the extent that and for so long as the
Transferor is the Holder of such Certificates.
"Transferor Retained Finance Charge Collections" shall
mean with respect to each Business Day other than a Default Recognition Date,
the amount specified in subsection 4.9(a)(xvii) of the Agreement.
"Weighted Average Invested Amount" shall mean 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
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<PAGE>
preceding Monthly Period to and including the Default Recognition Date with
respect to such Monthly Period.
"Weighted Average Principal Receivables" shall mean 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.
"Withholding Event" shall have the meaning specified in
subsection 10(e) of this Series Supplement.
"Withholding Tax" shall have the meaning specified in
subsection 10(e) of this Series Supplement.
SECTION 3. Reassignment Terms. The Series 1997-1
Certificates shall be subject to termination by the Transferor at its option,
in accordance with the terms specified in subsection 12.2(a) of the Agreement,
on any Distribution Date on or after the Distribution Date on which 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% of the
sum of the highest Class A Invested Amount, the highest Class B Invested
Amount and the highest Class C Invested Amount during the Revolving Period.
The deposit required in connection with any such termination and final
distribution shall be equal to the sum of the unpaid Class A Invested Amount,
the unpaid Class B Invested Amount and the unpaid Class C Invested Amount
plus accrued and unpaid interest on the Class A Certificates, Class B
Certificates and Class C Certificates through the day prior to the
Distribution Date on which the final distribution occurs, in each case after
giving effect to any payments on such date.
SECTION 4. Delivery and Payment for the Series 1997-1
Certificates. The Transferor shall execute and deliver the Series 1997-1
Certificates to the Trustee for authentication in accordance with Section 6.1
of the Agreement. The Trustee shall deliver the Series 1997-1 Certificates to
or upon the order of the Transferor when
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<PAGE>
authenticated in accordance with Section 6.2 of the Agreement.
SECTION 5. Form of Delivery of Series 1997-1 Certificates;
Denominations. (a) The Class A Certificates and the Class B Certificates
shall be delivered as Book-Entry Certificates as provided in Sections 6.1 and
6.10 of the Agreement and shall be issued in minimum denominations of $1,000
and integral multiples thereof. The Class C Certificates shall be delivered as
Registered Certificates as provided in Section 6.1 of the Agreement and shall
be issued in minimum denominations of $1,000,000 and integral multiples of
$1,000 in excess thereof. The Class D Certificates shall be delivered as
Registered Certificates as provided in Section 6.1 of the Agreement.
(b) The Depositary for Series 1997-1 shall be The
Depository Trust Company and the Class A Certificates and Class B
Certificates shall be initially registered in the name of Cede & Co., its
nominee.
SECTION 6. Article IV of Agreement. Sections 4.1, 4.2 and
4.3 of the Agreement shall read in their entirety as provided in the
Agreement. Article IV of the Agreement (except for Sections 4.1, 4.2 and 4.3
thereof) shall read in its entirety as follows and shall be applicable only
to the Series 1997-1 Certificates:
ARTICLE IV
RIGHTS OF CERTIFICATEHOLDERS AND
ALLOCATION AND APPLICATION OF COLLECTIONS
SECTION 4.4 Rights of Certificateholders. The Series 1997-1
Certificates shall represent undivided interests in the Trust, including the
right to receive, to the extent necessary to make the required payments with
respect to such Series 1997-1 Certificates at the times and in the amounts
specified in this Agreement, (a) the Floating Allocation Percentage and the
Fixed/Floating Allocation Percentage (as applicable from time to time) of
Collections (including Finance Charge Collections) available in the Collection
Account, (b) funds allocable to the Series 1997-1 Certificates on deposit in
the Excess Funding Account and (c) funds on deposit in the Interest Funding
Account, the Principal Account, the Principal Funding Account, the Accumulation
Period Re-
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serve Account, the Distribution Account, the Payment Reserve Account and the
Pre-Funding Account (for such Series, the "Series 1997-1 Certificateholders'
Interest"). The Class B Invested Amount, the Class C Invested Amount and the
Class D Invested Amount shall be subordinated to the Class A Certificates; the
Class C Invested Amount and the Class D Invested Amount shall be subordinated
to the Class B Certificates; and the Class D Invested Amount shall be
subordinated to the Class C Certificates, in each case to the extent provided
in this Article IV. The Class B Certificates will not have the right to
receive payments of principal until the Class A Invested Amount has been paid
in full. The Class C Certificates will not have the right to receive payments
of principal until the Class A Invested Amount and the Class B Invested Amount
have been paid in full. The Class D Certificates will not have the right to
receive payments of principal, other than to the extent of Class D Excess
Amounts, until the Class A Invested Amount, the Class B Invested Amount and the
Class C Invested Amount have been paid in full.
SECTION 4.5 Collections and Allocation; Payments on
Exchangeable Transferor Certificate.
(a) Collections and Allocations. The Servicer will
apply or will instruct the Trustee to apply all funds on deposit in the
Collection Account and the Excess Funding Account allocable to the Series
1997-1 Certificates, and all funds on deposit in the Interest Funding Account,
the Principal Account, the Principal Funding Account, the Accumulation Period
Reserve Account, the Distribution Account, the Payment Reserve Account and the
Pre-Funding Account maintained for this Series, as described in this Article
IV. On each Business Day, (i) the amount of Finance Charge Collections
available in the Collection Account allocable to Series 1997-1 Certificates
shall be determined by multiplying the aggregate amount of such Finance Charge
Collections by (x) prior to the Pay Out Commencement Date, the Floating
Allocation Percentage and (y) on and after the Pay Out Commencement Date, the
Fixed/Floating Allocation Percentage, (ii) the amount of Principal Collections
available in the Collection Account allocable to the Series 1997-1
Certificates shall be determined by multiplying the aggregate amount of such
Principal Collections by (x) during the Revolving Period, the Floating
Allocation Percentage and (y) during any Amortization Period, the Fixed/
Floating Allocation
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Percentage, and (iii) the Receivables in Defaulted Accounts allocable to the
Series 1997-1 Certificates shall be determined by multiplying the aggregate
amount of such Receivables in Defaulted Accounts by the Floating Allocation
Percentage. In addition, on the Closing Date the Transferor shall make a
deposit to the Interest Funding Account in the amount of $__________ to be
allocated to the Series 1997-1 Certificates and applied as Available Series
1997-1 Finance Charge Collections in accordance with subsection 4.9(a) of the
Agreement.
(b) Payments to the Holder of the Exchangeable
Transferor Certificate. On each Business Day, the Servicer shall allocate and
pay Collections in accordance with the Daily Report with respect to such
Business Day to the Holder of the Exchangeable Transferor Certificate in
accordance with subsection 4.3(b) of the Agreement.
Notwithstanding the foregoing, amounts payable to the
Transferor pursuant to this subsection 4.5(b) shall instead be deposited in
the Excess Funding Account to the extent necessary to prevent the Transferor
Interest from being less than the Minimum Transferor Interest.
SECTION 4.6 Determination of Interest for the Series 1997-1
Certificates. (a) The amount of monthly interest (the "Class A Interest")
allocable to the Class A Certificates with respect to any Interest Accrual
Period shall be an amount equal to one-twelfth of the product of (i) the Class
A Certificate Rate and (ii) the Class A Outstanding Principal Amount as of the
close of business on the first day of such Interest Accrual Period (or in the
case of the initial Distribution Date the Class A Initial Invested Amount).
On the Determination Date preceding each Distribution
Date, the Servicer shall determine an amount (the "Class A Interest
Shortfall") equal to the excess, if any, of (x) the Class A Interest for the
Interest Accrual Period applicable to the Distribution Date over (y) the
amount available to be paid to the Class A Certificateholders in respect of
interest on such Distribution Date. If there is a Class A Interest Shortfall
with respect to any Distribution Date, an additional amount ("Class A
Additional Interest") shall be payable as provided herein with respect to the
Class A Certificates
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on each Distribution Date following such Distribution Date, to and including
the Distribution Date on which such Class A Interest Shortfall is paid to Class
A Certificateholders, equal to one-twelfth of the product of (i) the Class A
Certificate Rate and (ii) such Class A Interest Shortfall remaining unpaid.
Notwithstanding anything to the contrary herein, Class A Additional Interest
shall be payable or distributed to Class A Certificateholders only to the
extent permitted by applicable law.
(b) The amount of monthly interest (the "Class B
Interest") allocable to the Class B Certificates with respect to any Interest
Accrual Period shall be an amount equal to one-twelfth of the product of (i)
the Class B Certificate Rate and (ii) the Class B Invested Amount as of the
close of business on the first day of such Interest Accrual Period (or in the
case of the initial Distribution Date the Class B Initial Invested Amount);
provided, however, that with respect to any Distribution Date related to the
Funding Period the amount described in clause (ii) shall be the Class B
Outstanding Principal Amount at the close of business on the first day of such
Interest Accrual Period.
On the Determination Date preceding each Distribution
Date, the Servicer shall determine an amount (the "Class B Interest
Shortfall") equal to the excess, if any, of (x) the aggregate Class B Interest
for the Interest Accrual Period applicable to the Distribution Date over (y)
the amount available to be paid to the Class B Certificateholders in respect
of interest on such Distribution Date. If there is a Class B Interest Short-
fall with respect to any Distribution Date, an additional amount ("Class B
Additional Interest") shall be payable as provided herein with respect to the
Class B Certificates on each Distribution Date following such Distribution
Date, to and including the Distribution Date on which such Class B Interest
Shortfall is paid to Class B Certificateholders, equal to one-twelfth of the
product of (i) the Class B Certificate Rate and (ii) such Class B Interest
Shortfall remaining unpaid. Notwithstanding anything to the contrary herein,
Class B Additional Interest shall be payable or distributed to Class B Cer-
tificateholders only to the extent permitted by applicable law.
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(c) The amount of monthly interest (for the Series 1997-1
Certificates, the "Class C Interest") allocable to the Class C Certificates
of the Series 1997-1 Certificates with respect to any Interest Accrual Period
shall be an amount equal to the product of (i) the Class C Certificate Rate,
(ii) 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 and
(iii) the Class C Invested Amount as of the close of business on the first day
of such Interest Accrual Period (or in the case of the initial Distribution
Date, an amount equal to the sum of (I) the product of (u) the Class C Initial
Invested Amount, (v) ___ divided by 360, and (w) the Class C Certificate Rate
determined on ______ ___, 1997, plus (II) the product of (x) the Class C
Initial Invested Amount, (y) ___ divided by 360, and (z) the Class C
Certificate Rate determined on May 16, 1997); provided, however, that with
respect to any Distribution Date related to the Funding Period the amount
described in clause (iii) shall be the Class C Outstanding Principal Amount
at the close of business on the first day of such Interest Accrual Period.
On the Determination Date preceding each Distribution
Date, the Servicer shall determine an amount (the "Class C Interest
Shortfall") equal to the excess, if any, of (x) the aggregate Class C Interest
for the Interest Accrual Period applicable to the Distribution Date over (y)
the amount available to be paid to the Class C Certificateholders in respect
of interest on such Distribution Date. If there is a Class C Interest Short-
fall with respect to any Distribution Date, an additional amount ("Class C
Additional Interest") shall be payable as provided herein with respect to the
Class C Certificates on each Distribution Date following such Distribution
Date, to and including the Distribution Date on which such Class C Interest
Shortfall is paid to Class C Certificateholders, equal to the product of (i)
the Class C Certificate Rate, (ii) such Class C Interest Shortfall remaining
unpaid 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. Notwithstanding anything to the contrary herein, Class C Additional
Interest shall be payable or distributed to Class C Certificateholders only to
the extent permitted by applicable law.
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SECTION 4.7 Determination of Principal Amounts. (a) The
amount of principal (the "Class A Principal") distributable from the
Distribution Account or available for deposit into the Principal Funding
Account with respect to the Class A Certificates for each Distribution Date
with respect to the Amortization Period shall be equal to the least of (i) the
Available Investor Principal Collections on deposit in the Principal Account
with respect to the related Transfer Date, (ii) for each Distribution Date
with respect 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.
(b) The amount of principal (the "Class B Principal")
distributable from the Distribution Account or available for deposit into the
Principal Funding Account with respect to the Class B Certificates for each
Distribution Date, beginning with the Class B Principal Payment Commencement
Date, shall be equal to the least of (i) the Available Investor Principal
Collections remaining on deposit in the Principal Account with respect to
the related Transfer Date after application thereof to Class A Principal, if
any, (ii) for each Distribution 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.
(c) The amount of principal (the "Class C Principal")
distributable from the Distribution Account or available for deposit into the
Principal Funding Account with respect to the Class C Certificates for each
Distribution Date, beginning with the Class C Principal Payment Commencement
Date, shall be equal to the least of (i) the Available Investor Principal
Collections remaining on deposit in the Principal Account with respect to
the related Transfer Date after application thereof to Class A Principal and
Class B Principal, if any, (ii) for each Distribution 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
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Principal with respect to such Transfer Date) and (iii) the Class C Adjusted
Invested Amount on such Transfer Date.
(d) The amount of principal (the "Class D Principal")
distributable from the Distribution Account with respect to the Class D
Certificates for each Distribution Date, beginning with the Class D
Principal Payment Commencement Date, or, in the case of distributions of Class
D Excess Amounts, on each Distribution Date during the Accumulation Period,
shall be equal to the lesser of (i) the Available Investor Principal
Collections remaining on deposit in the Principal Account with respect to
the related Transfer Date after application thereof to Class A Principal,
Class B Principal and Class C Principal, if any, (ii) the Class D Invested
Amount on such Transfer Date and (iii) in the case of distributions of Class D
Excess Amounts, the Class D Excess Amount.
SECTION 4.8 Shared Principal Collections. Shared Principal
Collections allocated to Available Investor Principal Collections for the
Series 1997-1 Certificates and to be applied to Class A Principal, Class B
Principal, Class C Principal and Class D Principal pursuant to subsection
4.9(c)(i)(z) of the Agreement for any Business Day with respect to the
Amortization Period shall mean an amount equal to the product of (x) Shared
Principal Collections for all Series for such Business Day and (y) a fraction,
the numerator of which is the Principal Shortfall for the Series 1997-1
Certificates for such Business Day and the denominator of which is the
aggregate amount of Principal Shortfalls for all Series for such Business Day.
For any Business Day with respect to the Revolving Period, Shared Principal
Collections allocated to Available Investor Principal Collections for the
Series 1997-1 Certificates shall be zero.
SECTION 4.9 Application of Funds on Deposit in the
Collection Account for the Certificates. (a) On each Business Day, the
Servicer shall deliver to the Trustee a Daily Report in which it shall
instruct the Trustee to withdraw, and the Trustee, acting in accordance with
such instructions, shall withdraw, to the extent of the sum of (x) prior to
the Pay Out Commencement Date, the Floating Allocation Percentage of the sum
of Finance Charge Collections and the amount of Adjustment Payments made by
the Transferor with respect to
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Adjustment Payments required to be made but not made in a
prior Monthly Period, available in the Collection Account
or, on and after the Pay Out Commencement Date, the
Fixed/Floating Allocation Percentage of the sum of Fi-
nance Charge Collections and the amount of Adjustment
Payments made by the Transferor with respect to Adjust-
ment Payments required to be made by not made in a prior
Monthly Period, available in the Collection Account, and
(y) 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
1997-1 Finance Charge Collections"; provided, that with
respect to the Closing Date the amount deposited by the
Transferor into the Interest Funding Account pursuant to
subsection 4.5(a) of the Agreement shall also constitute
Available Series 1997-1 Finance Charge Collections) the
amounts required to be withdrawn from the Collection
Account pursuant to subsections 4.9(a)(i) through
4.9(a)(xvii) of the Agreement.
(i) Class A Interest. On each Business
Day during a Monthly Period, the Trustee, acting in
accordance with instructions from the Servicer,
shall withdraw from the Collection Account and
deposit into the Interest Funding Account for dis-
tribution on the next Distribution Date to the Class
A Certificateholders, to the extent of the Available
Series 1997-1 Finance Charge Collections for such
Business Day, an amount equal to the lesser of (x)
the Available Series 1997-1 Finance Charge Collect-
ions and (y) the excess of (1) the sum of Class A
Interest and Carryover Class A Interest over (2) any
amounts with respect thereto previously deposited
into the Interest Funding Account on any prior
Business Day during such Monthly Period. Notwith-
standing anything to the contrary herein, the por-
tion of Carryover Class A Interest that constitutes
Class A Additional Interest shall be payable or dis-
tributable to Class A Certificateholders only to the
extent permitted by applicable law.
(ii) Class B Interest. On each Business
Day during a Monthly Period, the Trustee, acting in
accordance with instructions from the Servicer,
shall withdraw from the Collection Account and
deposit into the Interest Funding Account for dis-
tribution on the next Distribution Date to the Class
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B Certificateholders, to the extent of any Available
Series 1997-1 Finance Charge Collections remaining
after giving effect to the withdrawal pursuant to
subsection 4.9(a)(i) of the Agreement, an amount
equal to the lesser of (x) any such remaining Avail-
able Series 1997-1 Finance Charge Collections and
(y) the excess of (1) the sum of Class B Interest
and Carryover Class B Interest over (2) any amounts
with respect thereto previously deposited into the
Interest Funding Account on any prior Business Day
during such Monthly Period. Notwithstanding any-
thing to the contrary herein, the portion of Carry-
over Class B Interest that constitutes Class B
Additional Interest shall be payable or distribut-
able to Class B Certificateholders only to the
extent permitted by applicable law.
(iii) Class C Interest. On each Business
Day during a Monthly Period, the Trustee, acting in
accordance with instructions from the Servicer,
shall withdraw from the Collection Account and
deposit into the Interest Funding Account for dis-
tribution on the next Distribution Date to the Class
C Certificateholders, to the extent of any Available
Series 1997-1 Finance Charge Collections remaining
after giving effect to the withdrawal pursuant to
subsections 4.9(a)(i) and (ii) of the Agreement, an
amount equal to the lesser of (x) any such remaining
Available Series 1997-1 Finance Charge Collections
and (y) the excess of (1) the sum of Class C Inter-
est and Carryover Class C Interest over (2) any
amounts with respect thereto previously deposited
into the Interest Funding Account on any prior
Business Day during such Monthly Period. Notwith-
standing anything to the contrary herein, the por-
tion of Carryover Class C Monthly Interest that
constitutes Class C Additional Interest shall be
payable or distributable to Class C Certificatehold-
ers only to the extent permitted by applicable law.
(iv) Investor Servicing Fee. On each
Business Day, the Trustee, acting in accordance with
instructions from the Servicer, shall withdraw from
the Collection Account and distribute to the
Servicer, to the extent of any Available Series
1997-1 Finance Charge Collections remaining after
giving effect to the withdrawals pursuant to subsections
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4.9(a)(i) through (iii) of the Agreement, an
amount equal to the lesser of (x) any such remaining
Available Series 1997-1 Finance Charge Collections
and (y) the excess of (i) the Servicing Fee for such
Monthly Period plus any unpaid Servicing Fees from
prior Monthly Periods over (ii) any amounts with re-
spect thereto previously distributed to the Servicer
during such Monthly Period.
(v) Investor Default Amount. On each
Business Day, first if such day is the Default
Recognition Date for the related Monthly Period, the
Transferor will deposit (as described below) Trans-
feror Retained Finance Charge Collections for each
prior day in the Current Monthly Period and second
the Trustee, acting in accordance with instructions
from the Servicer, shall withdraw to the extent of
any Available Series 1997-1 Finance Charge Collec-
tions remaining after giving effect to the with-
drawals pursuant to subsections 4.9(a)(i) through
(iv) of the Agreement, an amount equal to the lesser
of (x) any such remaining Available Series 1997-1
Finance Charge Collections and, if such day is the
related Default Recognition Date for such Monthly
Period, an amount equal to the aggregate Transferor
Retained Finance Charge Collections for each prior
day during the related Monthly Period and (y) the
sum of (1) the aggregate Investor Default Amount for
such Business Day plus (2) the unpaid Investor De-
fault Amount for each previous Business Day during
such Monthly Period, such amount to be (A) treated
as Shared Principal Collections during the Revolving
Period, and (B) to be treated as Available Investor
Principal Collections during the Amortization Peri-
od.
(vi) Adjustment Payment Shortfalls. On
each Business Day, the Trustee, acting in accordance
with instructions from the Servicer, shall withdraw
from the Collection Account, to the extent of any
Available Series 1997-1 Finance Charge Collections
remaining after giving effect to the withdrawals
pursuant to subsections 4.9(a)(i) through (v) of the
Agreement, an amount equal to the lesser of (x) any
such remaining Available Series 1997-1 Finance
Charge Collections and (y) an amount equal to the
Series Allocation Percentage of any Adjustment
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Payment which the Transferor is required but fails
to make pursuant to subsection 3.8(a) of the Agree-
ment, such amount, (i) during the Revolving Period,
to be treated as Shared Principal Collections, and
(ii) during the Amortization Period, to be treated
as Available Investor Principal Collections.
(vii) Reimbursement of Class A Investor
Charge-Offs. On each Business Day, the Trustee,
acting in accordance with instructions from the
Servicer, shall withdraw from the Collection Ac-
count, to the extent of any Available Series 1997-1
Finance Charge Collections remaining after giving
effect to the withdrawals pursuant to subsections
4.9(a)(i) through (vi) of the Agreement, an amount
equal to the lesser of (x) any such remaining Avail-
able Series 1997-1 Finance Charge Collections and
(y) the unreimbursed Class A Investor Charge-Offs,
if any, will be applied to reimburse Class A Inves-
tor Charge-Offs, such amount during the Revolving
Period, to be treated as Shared Principal Collec-
tions, and during the Amortization Period, to be
treated as Available Investor Principal Collections.
(viii) Unpaid Class B Interest. On each
Business Day, the Trustee, acting in accordance with
the instructions from the Servicer, shall withdraw
from the Collection Account and deposit in the
Interest Funding Account for distribution to the
Class B Certificateholders on the next Distribution
Date, to the extent of any Available Series 1997-1
Finance Charge Collections remaining after giving
effect to the withdrawals pursuant to subsections
4.9(a)(i) through (vii) of the Agreement, an amount
equal to the lesser of (x) any such remaining Avail-
able Series 1997-1 Finance Charge Collections and
(y) the sum of (1) the amount of interest which has
accrued with respect to the Class B Outstanding
Principal Amount at the Class B Certificate Rate but
which has not been deposited into the Interest
Funding Account or paid to the Class B Certificate-
holders and (2) any additional interest (to the
extent permitted by applicable law) at the Class B
Certificate Rate for interest that has accrued on
interest that was due during a prior Monthly Period
pursuant to this subsection but was not deposited in
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the Interest Funding Account or paid to the Class B
Certificateholders.
(ix) Unpaid Class C Interest. On each
Business Day, the Trustee, acting in accordance with
the instructions from the Servicer, shall withdraw
from the Collection Account and deposit in the
Interest Funding Account for distribution to the
Class C Certificateholders on the next Distribution
Date, to the extent of any Available Series 1997-1
Finance Charge Collections remaining after giving
effect to the withdrawals pursuant to subsections
4.9(a)(i) through (viii) of the Agreement, an amount
equal to the lesser of (x) any such remaining Avail-
able Series 1997-1 Finance Charge Collections and
(y) the sum of (1) the amount of interest which has
accrued with respect to the Class C Outstanding
Principal Amount at the Class C Certificate Rate but
which has not been deposited into the Interest
Funding Account or paid to the Class C Certificate-
holders and (2) any additional interest (to the
extent permitted by applicable law) at the Class C
Certificate Rate for interest that has accrued on
interest that was due during a prior Monthly Period
pursuant to this subsection but was not deposited in
the Interest Funding Account or paid to the Class C
Certificateholders.
(x) Reimbursement of Class B Investor
Charge-Offs. On each Business Day, the Trustee,
acting in accordance with instructions from the
Servicer, shall withdraw from the Collection Ac-
count, to the extent of any Available Series 1997-1
Finance Charge Collections remaining after giving
effect to the withdrawals pursuant to subsections
4.9(a)(i) through (ix) of the Agreement, an amount
equal to the lesser of (x) any such remaining Avail-
able Series 1997-1 Finance Charge Collections and
(y) the unreimbursed amount by which the Class B
Invested Amount has been reduced on prior Business
Days pursuant to clauses (c) and (d) of the defini-
tion of Class B Invested Amount, if any, such
amount, (i) during the Revolving Period, to be
treated as Shared Principal Collections, and (ii)
during the Amortization Period, to be treated as
Available Investor Principal Collections.
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(xi) Reimbursement of Class C Investor
Charge-Offs. On each Business Day, the Trustee,
acting in accordance with instructions from the
Servicer, shall withdraw from the Collection Ac-
count, to the extent of any Available Series 1997-1
Finance Charge Collections remaining after giving
effect to the withdrawals pursuant to subsections
4.9(a)(i) through (x) of the Agreement, an amount
equal to the lesser of (x) any such remaining Avail-
able Series 1997-1 Finance Charge Collections and
(y) the unreimbursed amount by which the Class C
Invested Amount has been reduced on prior Business
Days pursuant to clauses (c) and (d) of the defini-
tion of Class C Invested Amount, if any, such
amount, (i) during the Revolving Period, to be
treated as Shared Principal Collections, and (ii)
during the Amortization Period, to be treated as
Available Investor Principal Collections.
(xii) Reimbursement of Class D Investor
Charge-Offs. On each Business Day, the Trustee,
acting in accordance with instructions from the
Servicer, shall withdraw from the Collection Ac-
count, to the extent of any Available Series 1997-1
Finance Charge Collections remaining after giving
effect to the withdrawals pursuant to subsections
4.9(a)(i) through (xi) of the Agreement, an amount
equal to the lesser of (x) any such remaining Avail-
able Series 1997-1 Finance Charge Collections and
(y) the unreimbursed amount by which the Class D
Invested Amount has been reduced on prior Business
Days pursuant to clauses (c) and (d) of the defini-
tion of Class D Invested Amount, if any, such
amount, (i) during the Revolving Period, to be
treated as Shared Principal Collections, and (ii)
during the Amortization Period, to be treated as
Available Investor Principal Collections.
(xiii) Class C Reserve Account. On each
Business Day, the Trustee, acting in accordance with
instructions from the Transferor, shall withdraw
from the Collection Account and distribute to the
Servicer, to the extent of any Available Series
1997-1 Finance Charge Collections remaining after
giving effect to the withdrawals pursuant to subsec-
tions 4.9(a)(i) through (xii) of the Agreement, an
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<PAGE>
amount equal to the lesser of (x) any such remaining
Available Series 1997-1 Finance Charge Collections
and (y) the amount specified to be deposited in the
Class C Reserve Account pursuant to the Class C
Reserve Account Agreement and the Servicer shall
deposit such amount, if any, in the Class C Reserve
Account.
(xiv) Accumulation Period Reserve Account.
On each Business Day on and after the Reserve Ac-
count Funding Date, but prior to the date on which
the Accumulation Period Reserve Account terminates
pursuant to subsection 4.20(d) of the Agreement, the
Trustee, acting in accordance with instructions from
the Servicer, shall withdraw from the Collection
Account and distribute to the Servicer, to the
extent of any Available Series 1997-1 Finance Charge
Collections remaining after giving effect to the
withdrawals pursuant to subsections 4.9(a)(i)
through (xiii) of the Agreement, an amount equal to
the lesser of (x) any such remaining Available
Series Finance Charge Collections and (y) the ex-
cess, if any, of the Required Reserve Account Amount
over the Available Reserve Account Amount and the
Servicer shall deposit such amount, if any, in the
Accumulation Period Reserve Account.
(xv) Payment Reserve Account. On each
Business Day, the Trustee, acting in accordance with
instructions from the Transferor, shall withdraw
from the Collection Account and distribute to the
Servicer, to the extent of any Available Series
1997-1 Finance Charge Collections remaining after
giving effect to the withdrawals pursuant to subsec-
tions 4.9(a)(i) through (xiv) of the Agreement, an
amount equal to the lesser of (x) any such remaining
Available Series 1997-1 Finance Charge Collections
and (y) the amount designated by the Transferor in
writing (which includes facsimile transmission) in
its instructions to the Trustee on such Business Day
and the Servicer shall deposit such amount, if any,
in the Payment Reserve Account.
(xvi) Excess Finance Charge Collections.
Any amounts remaining in the Collection Account to
the extent of any Available Series 1997-1 Finance
Charge Collections remaining after giving effect to
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the withdrawals pursuant to subsection 4.9(a)(i)
through (xv) of the Agreement, shall be treated as
Excess Finance Charge Collections, and the Servicer
shall direct the Trustee in writing on each Business
Day to withdraw such amounts from the Collection
Account and to first make such amounts available to
pay to Certificateholders of other Series to the
extent of shortfalls, if any, in amounts payable to
such certificateholders from Finance Charge Collect-
ions allocated to such other Series, then to pay any
unpaid commercially reasonable costs and expenses of
a Successor Servicer, if any, and then on each Busi-
ness Day other than the Default Recognition Date, to
pay to the Transferor to be treated as "Transferor
Retained Finance Charge Collections," and, on each
Default Recognition Date, to pay any remaining
Excess Finance Charge Collections to the Transferor.
(b) For each Business Day with respect to the Revolving
Period, the funds on deposit in the Collection Account to the extent of the
product of (i) the Floating Allocation Percentage and (ii) Principal
Collections with respect to such Business Day (less the amount of Reallo-
cated Principal Collections on such Business Day) will be treated as Shared
Principal Collections and applied, pursuant to the written direction of the
Servicer in the Daily Report for such Business Day, as provided in Section
4.3(d) of the Agreement.
(c) For each Business Day on and after the Amortization
Period Commencement Date, the amount of funds on deposit in the Collection
Account, the Excess Funding Account or the Pre-Funding Account and other ac-
counts as described below will be distributed, pursuant to the written
direction of the Servicer in the Daily Report for such Business Day in the
following priority:
(i) an amount (not in excess of the In-
vested Amount) equal to the sum of (v) the product
of the Fixed/Floating Allocation Percentage and
Principal Collections in the Collection Account at
the end of the preceding Business Day (less the
amount thereof applied as Reallocated Principal
Collections on such Business Day), (w) any amount on
deposit in the Excess Funding Account allocated to
the Series 1997-1 Certificates on such Business Day
pursuant to subsection 4.9(d) of the Agreement, (x)
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amounts to be paid pursuant to subsections
4.9(a)(v), (vi), (vii), (x), (xi) and (xii) of the
Agreement from Available Series Finance Charge
Collections and from amounts available pursuant to
subsections 4.10(a) and (b), 4.16(a), (b) and (c),
4.19(b) and 4.20(b), (c) and (d) of the Agreement on
such Business Day, (y) on and after the Pay Out
Commencement Date, any amount on deposit in the Pre-
Funding Account on such Business Day (less invest-
ment earnings thereon) and (z) the amount of Shared
Principal Collections allocated to the Series 1997-1
Certificates in accordance with Section 4.8 of the
Agreement on such Business Day, will be deposited
into the Principal Account; provided, however that
with respect to any Monthly Period during the Con-
trolled Accumulation Period, the aggregate amount
required to be deposited in the Principal Account
pursuant to this subsection 4.9(c)(i) shall not
exceed the sum of the Controlled Deposit Amount and,
at the option of the Transferor, the Class D Excess
Amount.
(ii) an amount equal to the excess, if
any, of (A) the sum of the amounts described in
clauses (i)(v) and (x) above over (B) the sum of
Class A Principal, Class B Principal and Class C
Principal will be treated as Shared Principal Col-
lections and applied as provided in subsection
4.3(d) of the Agreement; and
(iii) on the Class C Principal Payment
Commencement Date, the amount, if any, allocated
with respect to Class C Investor Charge-Offs pursu-
ant to clause (ii) of the second sentence of Section
3.2 of the Class C Reserve Account Agreement will be
deposited into the Principal Account.
(d) On the first Business Day of the Amortization Period
funds on deposit in the Excess Funding Account will be deposited in the
Principal Account to the extent of the lesser of (x) the Invested Amount and
(y) the product of (i) the amount on deposit in the Excess Funding Account at
the beginning of the Amortization Period and (ii) a fraction, the numerator of
which is equal to the Invested Amount and the denominator of which is equal to
the sum of the invested amounts of all Series in amortization periods on such
day.
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SECTION 4.10 Coverage of Required Amount for the Series
1997-1 Certificates. (a) 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 shall apply, in the manner specified for application of Available
Series 1997-1 Finance Charge Collections in subsections 4.9(a)(i) through
(xiv) of the Agreement, Transferor Finance Charge Collections in an amount
(the "Negative Carry Amount") equal to the excess of (x) the product of (a)
the Base Rate, (b) the amounts on deposit in the Excess Funding Account and
the Pre-Funding Account and (c) the number of days elapsed since the previous
Business Day divided by the actual number of days in such year over (y) the
aggregate amount of all earnings since the previous Business Day available
from the Cash Equivalents in which funds on deposit in the Excess Funding
Account and Pre-Funding Account are invested.
(b) To the extent that on any Business Day payments are
being made pursuant to any of subsections 4.9(a)(i) through (xiv) of the
Agreement, respectively, and the full amount to be paid pursuant to any such
subsection receiving payments on such Business Day is not paid in full on such
Business Day, the Servicer shall apply, in the manner specified for
application of Available Series 1997-1 Finance Charge Collections in subsec-
tions 4.9(a)(i) through (xiv) of the Agreement, all or a portion of the Excess
Finance Charge Collections from other Series with respect to such Business Day
allocable to the Series 1997-1 Certificates in an amount equal to the excess
of the full amount to be allocated or paid pursuant to the applicable
subsection over the amount applied with respect thereto from Available Series
1997-1 Finance Charge Collections and Transferor Finance Charge Collections on
such Business Day (the "Required Amount"). Excess Finance Charge Collections
allocated to the Series 1997-1 Certificates for any Business Day shall mean an
amount 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 and the denominator of
which is the aggregate amount of shortfalls in required amounts or other
amounts to be paid from Finance Charge Collections for all Series for such
Business Day.
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<PAGE>
SECTION 4.11 Payment of Certificate Interest. On each
Transfer Date, the Trustee, acting in accordance with instructions from the
Servicer set forth in the Daily Report for such day, shall withdraw the amount
on deposit in the Interest Funding Account with respect to the preceding
Monthly Period allocable to the Series 1997-1 Certificates and deposit such
amount in the Distribution Account. On each Distribution Date, the Paying
Agent shall pay in accordance with Section 5.1 of the Agreement to (w) the
Class A Certificateholders from the Distribution Account such amount deposited
into the Distribution Account on the related Transfer Date allocable thereto
pursuant to subsection 4.9(a)(i) of the Agreement, (x) the Class B
Certificateholders from the Distribution Account the amount deposited into the
Distribution Account on the related Transfer Date allocable thereto pursuant
to subsections 4.9(a)(ii) and (viii) of the Agreement, (y) the Class C
Certificateholders from the Distribution Account the amount deposited into the
Distribution Account on the related Transfer Date allocable thereto pursuant
to subsections 4.9(a)(iii) and (ix) of the Agreement, and (z) the Class D
Certificateholders from the Distribution Account the amount deposited into the
Distribution Account on the related Transfer Date allocable thereto pursuant
to subsection 4.9(a)(xv) of the Agreement.
SECTION 4.12 Payment of Certificate Principal.
(a) On the Transfer Date preceding each Distribution Date
with respect to the Amortization Period, the Trustee, acting in accordance
with instructions from the Servicer set forth in the Daily Report for such
day, shall withdraw from the Principal Account and deposit into the
Distribution Account with respect to the Early Amortization Period, or the
Principal Funding Account with respect to the Accumulation Period, to the
extent of funds available, an amount equal to the Class A Principal for such
Distribution Date. On each Distribution Date with respect to the Early
Amortization Period until the Class A Invested Amount is paid in full, or on
the Expected Final Payment Date with respect to the Accumulation Period
following any deposit to the Distribution Account pursuant to subsection
4.12(f), the Paying Agent shall pay in accordance with Section 5.1 of the
Agreement to the Class A Certificateholders from the Distribution Account such
amounts deposited with respect to Class A
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Principal into the Distribution Account on the related
Transfer Date.
(b) On the Transfer Date preceding the Class B Principal
Payment Commencement Date and each Transfer Date thereafter, the Trustee,
acting in accordance with instructions from the Servicer set forth in the
Daily Report for such day, shall withdraw from the Principal Account and
deposit in the Distribution Account with respect to the Early Amortization
Period, or the Principal Funding Account with respect to the Accumulation
Period, to the extent of funds available, an amount equal to the Class B
Principal for the related Distribution Date. On and after the Class B
Principal Payment Commencement Date, on each Distribution Date with respect
to the Early Amortization Period until the Class B Invested Amount is paid in
full or on the Expected Final Payment Date with respect to the Accumulation
Period following any deposit to the Distribution Account pursuant to
subsection 4.12(f), the Paying Agent shall pay in accordance with Section
5.1 of the Agreement to the Class B Certificateholders from the Distribution
Account such amounts deposited with respect to Class B Principal into the
Distribution Account on the related Transfer Date.
(c) On the Transfer Date preceding the Class C Principal
Payment Commencement Date and each Transfer Date thereafter, the Trustee,
acting in accordance with instructions from the Servicer set forth in the
Daily Report for such day, shall withdraw from the Principal Account and
deposit in the Distribution Account with respect to the Early Amortization
Period, or the Principal Funding Account with respect to the Accumulation
Period, to the extent of funds available, an amount equal to the Class C
Principal for the related Distribution Date. On and after the Class C
Principal Payment Commencement Date, on each Distribution Date with respect
to the Early Amortization Period until the Class C Invested Amount is paid in
full or on the Expected Final Payment Date with respect to the Accumulation
Period following any deposit to the Distribution Account pursuant to
subsection 4.12(f), the Paying Agent shall pay in accordance with Section
5.1 of the Agreement to the Class C Certificateholders from the Distribution
Account such amounts deposited with respect to Class C Principal into the
Distribution Account on the related Transfer Date.
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(d) On the Transfer Date preceding the Class D Principal
Payment Commencement Date and each Transfer Date thereafter, or, in the case
of distributions of Class D Excess Amounts, on each Transfer Date during the
Accumulation Period preceding a Distribution Date on which a distribution
shall be made with respect to Class D Excess Amounts, the Trustee, acting in
accordance with instructions from the Servicer set forth in the Daily Report
for such day, shall withdraw from the Principal Account and deposit in the
Distribution Account, to the extent of funds available, an amount equal to the
Class D Principal for the related Distribution Date. On the Class D Principal
Payment Commencement Date after the payment of any principal amounts to the
Class A Certificates, the Class B Certificates and the Class C Certifi-
cates on such day, and on each Distribution Date thereafter until the Class
D Invested Amount is paid in full and on each Distribution Date during the
Accumulation Period on which amounts are to be distributed with respect to
Class D Excess Amounts, the Paying Agent shall pay in accordance with Section
5.1 of the Agreement to the Class D Certificateholder from the Distribution
Account such amounts deposited with respect to Class D Principal into the
Distribution Account on the related Transfer Date; provided, however, that, if
so designated in writing by the Transferor with respect to any such Transfer
Date, any such payment of Class D Principal shall not be made to the Class D
Certificateholder and such amount shall be subtracted from the Class D
Invested Amount and added to the Transferor Interest.
(e) Any amounts remaining in the Principal Account and
allocable to the Series 1997-1 Certificates, after the Class D Invested Amount
has been paid in full, will be treated as Shared Principal Collections and
applied in accordance with Section 4.3(d) of the Agreement.
(f) On the earlier to occur of (i) the first Transfer Date
with respect to the Early Amortization Period and (ii) the Transfer Date
immediately preceding the Expected Final Payment Date, the Trustee, acting in
accordance with instructions from the Servicer, shall withdraw from the
Principal Funding Account and deposit in the Distribution Account the amount
on deposit in the Principal Funding Account for distribution first to Class A
Certificateholders up to an amount equal to the Class A
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Invested Amount, second to Class B Certificateholders up to an amount equal to
the Class B Invested Amount, and third to Class C Certificateholders up to an
amount equal to the Class C Invested Amount.
SECTION 4.13 Investor Charge-Offs. (a) If, on any
Determination Date, the aggregate Investor Default Amount and the Series
Allocation Percentage of unpaid Adjustment Payments, if any, for each Business
Day in the preceding Monthly Period exceeded the Available Series 1997-1
Finance Charge Collections applied to the payment thereof pursuant to
subsections 4.9(a)(v) and (vi) of the Agreement, the amount of Transferor
Finance Charge Collections and Excess Finance Charge Collections allocated
thereto pursuant to Section 4.10 of the Agreement, the amount of Reallocated
Principal Collections applied with respect thereto pursuant to Section 4.16 of
the Agreement, the Amount of Principal Funding Account Investment Proceeds
applied with respect thereto pursuant to subsection 4.19(b), the Amount of
Pre-Funding Account investment proceeds applied with respect thereto pursuant
to Section 4.14(c), amounts withdrawn from the Accumulation Period Reserve
Account and applied with respect to the Investor Default Amount pursuant to
subsection 4.20(c) and the Series Allocation Percentage of unpaid Adjustment
Payments with respect to such Monthly Period, the Class D Invested Amount will
be reduced by the amount by which the remaining aggregate Investor Default
Amount and Series Allocation Percentage of unpaid Adjustment Payments exceed
the amount applied with respect thereto during such preceding Monthly Period
(a "Class D Investor Charge-Off").
(b) 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 aggregate
Investor Default Amount and Series Allocation Percentage of unpaid
Adjustment Payments for such Monthly Period (a "Class C Investor Charge-Off").
(c) 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 In-
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vested 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 remaining aggregate Investor Default
Amount and Series Allocation Percentage of unpaid Adjustment Payments for such
Monthly Period (a "Class B Investor Charge-Off").
(d) 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 remaining
aggregate Investor Default Amount and Series Allocation Percentage of unpaid
Adjustment Payments for such Monthly Period (a "Class A Investor Charge-Off").
SECTION 4.14. Pre-Funding Account. (a) Establishment of the
Pre-Funding Account. The Transferor hereby directs the Servicer, for the
benefit of the Series 1997-1 Certificateholders, to establish and maintain
or cause to be established and maintained in the name of the Trustee, on
behalf of the Series 1997-1 Certificateholders, with a Qualified Institution
(which initially shall be The Bank of New York) a segregated trust account
(the "Pre-Funding Account"), bearing a designation clearly indicating that the
funds deposited therein are held for the benefit of the Series 1997-1
Certificateholders. The Transferor does hereby transfer, assign, set over
and otherwise convey to the Trust for the benefit of the Series 1997-1
Certificateholders, without recourse, all of its right, title and interest in,
to and under the Pre-Funding Account, any Cash Equivalent on deposit therein
and any proceeds of the foregoing, including the investment earnings. The Pre-
Funding Account shall be under the sole dominion and control of the Trustee
for the benefit of the Series 1997-1 Certificateholders. If, at any time, the
institution holding the Pre-Funding Account ceases to be a Qualified
Institution, the Transferor shall direct the Servicer to establish within 10
Business Days a new Pre-Funding Account meeting the conditions specified
above with a Qualified Institution, transfer any cash and/or any investments
to such new Pre-Funding Account and from
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the date such new Pre-Funding Account is established, it shall be the
"Pre-Funding Account." In addition, after five days notice to the Trustee, the
Transferor may direct the Servicer to establish a new Pre-Funding Account
meeting the conditions specified above with a different Qualified Institution,
transfer any cash and/or investments to such new Pre-Funding Account and from
the date such new Pre-Funding Account is established, it shall be, for the
Series 1997-1 Certificates, the "Pre-Funding Account." Pursuant to the
authority granted to the Servicer in subsection 3.1(b) of the Agreement, the
Servicer shall have the power, revocable by the Trustee, to make withdrawals
and payments or to instruct the Trustee to make withdrawals and payments from
the Pre-Funding Account for the purposes of carrying out the Servicer's or
Trustee's duties hereunder.
(b) Administration of Pre-Funding Account. The Transferor
shall on the Closing Date deposit in the Pre-Funding Account the Initial
Pre-Funded Amount. On the Business Day preceding each Transfer Date, the Ser-
vicer shall withdraw from the Pre-Funding Account and deposit in the
Collection Account all interest and other investment income on the Pre-Funded
Amount. Interest (including reinvested interest) and other investment income
on funds on deposit in the Pre-Funded Account shall not be considered part of
the Pre-Funded Amount for purposes of this Agreement. Funds on deposit in the
Pre-Funding Account shall be withdrawn by the Servicer and paid to the
Transferor to the extent of any increases in the Invested Amount pursuant to
Section 4.15 of the Agreement. If the Pay Out Commencement Date occurs during
the Funding Period, the remaining Pre-Funded Amount will be applied to make
principal payments with respect to the Certificates in accordance with subsec-
tion 4.9(c) of the Agreement. The Servicer shall withdraw the remaining
Pre-Funded Amount, if any, on deposit in the Pre-Funding Account on the first
Business Day of the September 1997 Monthly Period and deposit such amount into
the Excess Funding Account.
(c) Investment of Funds in Pre-Funding Account. Funds on
deposit in the Pre-Funding Account shall be invested in Cash Equivalents by
the Trustee (or, at the direction of the Trustee, by the Servicer on behalf of
the Trustee) at the direction of the Servicer. Funds on deposit in the
Pre-Funding Account on any Dis-
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tribution Date, after giving effect to any withdrawals from the Pre-Funding
Account, shall be invested in Cash Equivalents that will mature so that such
funds will be available for withdrawal on or prior to the following Transfer
Date. The proceeds of any such investments shall be invested in Cash
Equivalents that will mature so that such funds will be available for
withdrawal on or prior to the following Transfer Date and, on such Transfer
Date, such proceeds shall be applied as if they were Available Series 1997-1
Finance Charge Collections available to be applied pursuant to Subsection
4.9(a) on the last Business Day of the preceding Monthly Period.
SECTION 4.15 Increases in Invested Amount. The Transferor
may at any time during the Funding Period determine to increase the Invested
Amount up to the Full Invested Amount to the extent there are sufficient Prin-
cipal Receivables in the Trust to permit such increase in the Invested Amount
without causing a Pay Out Event to occur with respect to any outstanding
Series. Upon determining to increase the Invested Amount pursuant to this
Section 4.15, the Transferor shall deliver to the Servicer, the Trustee and
each Rating Agency an Officers' Certificate specifying the amount of the in-
crease in the Invested Amount the Transferor has determined to make and
certifying that no Pay Out Event with respect to any outstanding Series will
occur as a result of or in connection with such increase in the Invested
Amount. Upon receipt of such Officer's Certificate by the Trustee, the Class A
Invested Amount, the Class B Invested Amount and the Class C Invested Amount
shall be increased pro rata by the amount specified in such Officers'
Certificate, whereupon the Trustee shall instruct the Servicer to withdraw
from the Pre-Funding Account and pay to the Transferor an amount equal to the
amount of such increase in the Class A Invested Amount, the Class B Invested
Amount and the Class C Invested Amount.
Upon the withdrawal of the remaining Pre-Funded Amount, if
any, on deposit in the Pre-Funding Account on the first Business Day of the
September 1997 Monthly Period and the deposit of such amount in the Excess
Funding Account, the Class A Invested Amount, the Class B Invested Amount and
the Class C Invested Amount shall be increased pro rata by such amount.
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SECTION 4.16 Reallocated Principal Collections for the
Series 1997-1 Certificates. (a) On each Business Day, the Servicer will
determine an amount equal to the least of (i) the Class D Invested Amount,
(ii) the product of (x)(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 (y) the amount of Principal
Collections with respect to such Business Day and (iii) an amount equal to the
sum of (a) the Class A Required Amount for such Business Day, (b) the Class B
Required Amount for such Business Day and (c) the Class C Required Amount
for such Business Day (such amount called "Reallocated Class D Principal
Collections") and shall apply Principal Collections in an amount equal to such
amount first to the components of the Class A Required Amount, then to the
components of the Class B Required Amount and then to the components of the
Class C Required Amount in the same priority as amounts are applied to
such components from Available Series 1997-1 Finance Charge Collections
pursuant to subsection 4.9(a) of the Agreement.
(b) On each Business Day, the Servicer will determine an
amount equal to the least of (i) the Class C Invested Amount, (ii) the product
of (x)(I) during the Revolving Period, the Class C Floating Allocation Per-
centage or (II) during an Amortization Period, the Class C Fixed/Floating
Allocation Percentage and (y) the amount of Principal Collections for such
Business Day and (iii) an amount equal to the sum of (a) the excess, if any,
of the Class A Required Amount for such Business Day over the amount of
Reallocated Class D Principal Collections applied with respect thereto for
such Business Day and (b) the excess, if any, of the Class B Required
Amount for such Business Day over the amount of Reallocated Class D Principal
Collections applied with respect thereto for such Business Day (such amount
called "Reallocated Class C Principal Collections") and shall apply Principal
Collections in an amount equal to such amount first to the remaining
components of the Class A Required Amount and then to the remaining compo-
nents of the Class B Required Amount in the same priority as amounts are
applied to such components from Available Series 1997-1 Finance Charge
Collections pursuant to subsection 4.9(a) of the Agreement.
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(c) On each Business Day, the Servicer will determine an
amount equal to the least of (i) the Class B Invested Amount, (ii) the product
of (x)(I) during the Revolving Period, the Class B Floating Allocation Per-
centage or (II) during an Amortization Period, the Class B Fixed/Floating
Allocation Percentage and (y) the amount of Principal Collections for such
Business Day and (iii) an amount equal to the excess, if any, of the Class A
Required Amount for 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 (such amount
called "Reallocated Class B Principal Collections") and shall apply
Principal Collections equal to such amount to the remaining components of the
Class A Required Amount in the same priority as amounts are applied to such
components from Available Series 1997-1 Finance Charge Collections pursuant to
subsection 4.9(a) of the Agreement.
SECTION 4.17 Determination of LIBOR. (a) "LIBOR" shall mean,
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 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 such interest period).
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(b) The Class C Certificate Rate applicable to the then
current and the immediately preceding Interest Accrual Periods may be
obtained by any Series 1997-1 Certificateholder by telephoning the Trustee at
its Corporate Trust Office at (302) 451-2500.
(c) On each LIBOR Determination Date, the Trustee shall send
to the Servicer by facsimile notification of LIBOR for such LIBOR
Determination Date.
SECTION 4.18 Payment Reserve Account.
(a) The Servicer shall establish and maintain or cause to be
established and maintained with a Qualified Institution, which may be the
Trustee, in the name of the Trustee, on behalf of the Certificateholders, the
"Payment Reserve Account," which shall be a segregated trust account with the
corporate trust department of such Qualified Institution, bearing a
designation clearly indicating that the funds deposited therein are held for
the benefit of the Certificateholders. The Trustee shall possess all right,
title and interest in all funds on deposit from time to time in the Payment
Reserve Account and in all proceeds thereof. The Payment Reserve Account
shall be under the sole dominion and control of the Trustee for the benefit
of the Certificate holders. If, at any time, the institution holding the
Payment Reserve Account ceases to be a Qualified Institution, the Trustee
shall within 10 Business Days establish a new Payment Reserve Account
meeting the conditions specified above with a Qualified Institution, and
shall transfer any cash or any investments to such new Payment Reserve
Account. From the date such new Payment Reserve Account is established, it
shall be the "Payment Reserve Account."
(b) The Transferor, at its discretion, may on any Business
Day withdraw all or a part of any amounts then on deposit in the Payment
Reserve Account and apply such funds in accordance with Section 4.9(a) of the
Agreement.
(c) Funds on deposit in the Payment Reserve Account shall be
invested in Cash Equivalents by the Trustee (or, at the direction of the
Trustee, by the Servicer on behalf of the Trustee) at the direction of the
Servicer. Funds on deposit in the Payment Reserve
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Account on any Business Day, after giving effect to any withdrawals from the
Payment Reserve Account, shall be invested in Cash Equivalents that will
mature so that such funds will be available for withdrawal on or prior to the
following Business Day. The proceeds of any such investments shall be invested
in Cash Equivalents that will mature so that such funds will be available for
withdrawal on or prior to the following Business Day.
SECTION 4.19 Principal Funding Account.
(a) The Servicer shall establish and maintain or cause to be
established and maintained with a Qualified Institution, which may be the
Trustee, in the name of the Trustee, on behalf of the Certificateholders, the
"Principal Funding Account," which shall be a segregated trust account with
the corporate trust department of such Qualified Institution, bearing a
designation clearly indicating that the funds deposited therein are held for
the benefit of the Series 1997-1 Certificateholders. The Trustee shall possess
all right, title and interest in all funds on deposit from time to time in the
Principal Funding Account and in all proceeds thereof. The Principal Funding
Account shall be under the sole dominion and control of the Trustee for the
benefit of the Series 1997-1 Certificateholders. If, at any time, the
institution holding the Principal Funding Account ceases to be a Qualified
Institution, the Trustee shall within 10 Business Days establish a new
Principal Funding Account meeting the conditions specified above with a
Qualified Institution, and shall transfer any cash or any investments to such
new Principal Funding Account. From the date such new Principal Funding
Account is established, it shall be the "Principal Funding Account." The
Trustee, at the written direction of the Servicer, shall (i) make withdrawals
from the Principal Funding Account from time to time, in the amounts and for
the purposes set forth in this Series Supplement, and (ii) on each Transfer
Date (from and after the commencement of the Accumulation Period) prior to
termination of the Principal Funding Account make a deposit into the
Principal Funding Account in the amount specified in, and otherwise in
accordance with, subsection 4.12 of the Agreement.
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(b) Funds on deposit in the Principal Funding Account shall
be invested by the Trustee at the direction of the Servicer in Cash
Equivalents maturing no later than the following Transfer Date. On the
Transfer Date occurring in the month following the commencement of the
Accumulation Period and on each Transfer Date thereafter with respect to the
Accumulation Period, the Trustee, at the Servicer's written direction, shall
transfer from the Principal Funding Account to the Collection Account the
Principal Funding Account Investment Proceeds on deposit in the Principal
Funding Account, but not in excess of the Covered Amount, and shall apply such
amount as if such amounts were Available Series 1997-1 Finance Charge
Collections available to be applied pursuant to subsection 4.9(a) on the
last Business Day of the preceding Monthly Period. Principal Funding Account
Investment Proceeds (including reinvested interest) shall not be considered
part of the amounts on deposit in the Principal Funding Account for purposes
of this Series Supplement.
SECTION 4.20 Accumulation Period Reserve Account.
(a) The Servicer shall establish and maintain or cause to be
established and maintained with a Qualified Institution, which may be the
Trustee, in the name of the Trustee, on behalf of the Certificateholders, the
"Accumulation Period Reserve Account," which shall be a segregated trust
account with the corporate trust department of such Qualified Institution,
bearing a designation clearly indicating that the funds deposited therein
are held for the benefit of the Series 1997-1 Certificateholders. The Trustee
shall possess all right, title and interest in all funds on deposit from time
to time in the Accumulation Period Reserve Account and in all proceeds
thereof. The Accumulation Period Reserve Account shall be under the sole
dominion and control of the Trustee for the benefit of the Series 1997-1
Certificateholders. If, at any time, the institution holding the
Accumulation Period Reserve Account ceases to be a Qualified Institution, the
Trustee shall within 10 Business Days establish a new Accumulation Period
Reserve Account meeting the conditions specified above with a Qualified
Institution, and shall transfer any cash or any investments to such new
Accumulation Period Reserve Account. From the date such new Accumulation Period
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Reserve Account is established, it shall be the "Accumulation
Period Reserve Account." The Trustee, at the written direction of the
Servicer, shall (i) make withdrawals from the Accumulation Period Reserve
Account from time to time, in the amounts and for the purposes set forth in
this Series Supplement, and (ii) on each Transfer Date (from and after the
Reserve Account Funding Date) prior to termination of the Accumulation
Period Reserve Account make a deposit into the Accumulation Period Reserve
Account in the amount specified in, and otherwise in accordance with,
subsection 4.9(a)(xiv) of the Agreement.
(b) Funds on deposit in the Accumulation Period Reserve
Account shall 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 1997-1 Finance Charge Collections available to be ap-
plied pursuant to subsection 4.9(a) on the last Business Day of the preceding
Monthly Period.
(c) 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, the Trustee at the direction of the Servicer shall with-
draw from the Accumulation Period Reserve Account, up to the Available Reserve
Account Amount, an amount equal to the excess of the Covered Amount for the
related Interest Accrual Period over the Principal Funding Account
Investment Proceeds with respect to such Transfer Date, and the amount of such
withdrawal shall be applied as if such amount were Available Series 1997-1
Finance Charge Collections available to be applied pursuant to subsection
4.9(a) on the last Business Day of the preceding Monthly Period.
(d) The Accumulation Period Reserve Account shall be
terminated following the earliest to occur of (a) the termination of the Trust
pursuant to the Agreement, (b) the date on which the Invested Amount is paid
in full, (c) if the Accumulation Period has not com-
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menced, the occurrence of a Pay Out Event with respect to the Series 1997-1
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) shall be applied as if they were Available Series 1997-1
Finance Charge Collections available to be applied pursuant to subsection
4.9(a) on the last Business Day of the preceding Monthly Period.
SECTION 4.21 Postponement of Accumulation Period. The
Accumulation Period is scheduled to commence at the close of business on the
last day of the March 2001 Monthly Period; provided, however, that, if the
Accumulation Period Length (determined as described below) is less than 12
months, the date on which the Accumulation Period actually commences may, at
the option of the Servicer, upon written notice to the Trustee, be delayed
to the first Business Day of the month that is the number of months prior to
the Expected Final Payment Date at least equal to the Accumulation Period
Length and, as a result, the number of Monthly Periods in the Accumulation
Period will at least equal the Accumulation Period Length. On each
Determination Date until the Accumulation Period begins, the Servicer will
determine the "Accumulation Period Length" which will equal the number of
months such that the sum of the Accumulation Period Factors for each Monthly
Period during such period will be equal to or greater than the Required
Accumulation Factor Number; provided, however, that the Accumulation Period
Length will not be less than one month.
SECTION 4.22 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 such that the amount on de-
posit in the Principal Funding Account following such deposit is equal to the
sum of the Class A Outstanding Principal Amount, the Class B Outstanding
Principal Amount and the Class C Outstanding Principal Amount, and (y) in the
Accumulation Period Reserve Account, an amount equal to or greater than the
Covered Amount, as
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estimated by the Transferor, for the period from the date of such deposit to
the Principal Funding Account through the Expected Final Payment Date; (ii)
the Transferor shall have delivered to the Trustee (a) an opinion of counsel
to the effect that such deposit will not result in the Trust being required to
register as an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, (b) 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, (c) a certificate
of an officer of the Transferor stating that the Transferor reasonably be-
lieves that such deposit will not cause a Pay Out Event or any event that,
with the giving of notice or the lapse of time, would constitute a Pay Out
Event, to occur; and (iv) a Ratings Event will not occur, the Series 1997-1
Certificates will no longer be entitled to security interest of the Trust in
the Receivables and, except those set forth in clause (i) above, other Trust
assets and the percentages applicable to the allocation to the Series 1997-1
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.
SECTION 7. Article V of the Agreement. Article V of the
Agreement shall read in its entirety as follows and shall be applicable only
to the Series 1997-1 Certificates:
ARTICLE V
DISTRIBUTIONS AND REPORTS TO INVESTOR
CERTIFICATEHOLDERS
SECTION 5.1 Distributions. (a) On each Distribution Date,
the Paying Agent shall distribute (in accordance with the Settlement Statement
delivered by the Servicer to the Trustee and the Paying Agent pursuant to
subsection 3.4(c)) to each Class A Certificate holder of record on the
preceding Record Date (other than as provided in subsection 2.4(e) or in
Section 12.3 respecting a final distribution) such Certificate-
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holder's pro rata share (based on the aggregate Undivided Interests
represented by each Class A Certificate held by such Certificateholder) of
amounts on deposit in the Distribution Account as are payable to each Class A
Certificateholders pursuant to Sections 4.11 and 4.12 of the Agreement by
check mailed to each Class A Certificateholder at such Certificateholder's
address as it appears on the Certificate Register or, in the case of Class A
Certificateholders holding Class A Certificates evidencing Undivided Interests
aggregating not less than 80% of the Invested Amount, by wire transfer, at the
expense of such Class A Certificateholder, to an account or accounts
designated by such Class A Certificateholder by written notice given to the
Paying Agent not less than five days prior to related Distribution Date; pro-
vided, however, that the final payment in retirement of the Class A
Certificates will be made only upon presentation and surrender of the Class
A Certificates at the office or offices specified in the notice of such final
distribution delivered by the Trustee pursuant to Section 12.3.
(b) On each Distribution Date, the Paying Agent shall
distribute (in accordance with the Settlement Statement delivered by the
Servicer to the Trustee and the Paying Agent pursuant to subsection 3.4(c)) to
each Class B Certificateholder of record on the preceding Record Date (other
than as provided in subsection 2.4(e) or in Section 12.3 respecting a final
distribution) such Certificateholder's pro rata share (based on the
aggregate Undivided Interests represented by Class B Certificates held by such
Certificateholder) of amounts on deposit in the Distribution Account as are
payable to the Class B Certificateholders pursuant to Sections 4.11 and 4.12
of the Agreement by check mailed to each Class B Certificateholder at such
Certificateholder's address as it appears on the Certificate Register or, in
the case of Class B Certificateholders holding Class B Certificates
evidencing Undivided Interest aggregating not less than 80% of the Invested
Amount, by wire transfer, at the expense of such Class B Certificateholder, to
an account or accounts designated by such Class B Certificateholder by
written notice given to the Paying Agent not less than five days prior to the
related Distributed Date; provided, however, that the final payment in re-
tirement of the Class B Certificates will be made only upon presentation and
surrender of the Class B Certifi-
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cates at the office or offices specified in the notice of such final
distribution delivered by the Trustee pursuant to Section 12.3.
(c) On each Distribution Date, the Paying Agent shall
distribute (in accordance with the Settlement Statement delivered by the
Servicer to the Trustee and the Paying Agent pursuant to subsection 3.4(c)) to
each Class C Certificateholder of record on the preceding Record Date (other
than as provided in subsection 2.4(e) or in Section 12.3 respecting a final
distribution) such Certificateholder's pro rata share (based on the
aggregate Undivided Interests represented by Class C Certificates held by such
Certificateholder) of amounts on deposit in the Distribution Account as are
payable to the Class C Certificateholders pursuant to Sections 4.11 and 4.12
of the Agreement by wire transfer to each Class C Certificateholder to an
account or accounts designated by such Class C Certificateholder by written
notice given to the Paying Agent not less than five days prior to the related
Distribution Date; provided, however, that the final payment in retirement of
the Class C Certificates will be made only upon presentation and surrender of
the Class C Certificates at the office or offices specified in the notice of
such final distribution delivered by the Trustee pursuant to Section 12.3.
(d) On each Distribution Date, the Paying Agent shall
distribute (in accordance with the Settlement Statement delivered by the
Servicer to the Trustee and the Paying Agent pursuant to subsection 3.4(c)) to
each Class D Certificateholder of record on the preceding Record Date (other
than as provided in subsection 2.4(e) or in Section 12.3 respecting a final
distribution) such Certificateholder's pro rata share (based on the
aggregate Undivided Interests represented by Class D Certificates held by such
Certificateholder) of amounts on deposit in the Distribution Account as are
payable to the Class D Certificateholders pursuant to Sections 4.11 and 4.12
of the Agreement by wire transfer to each Class D Certificateholder to an
account or accounts designated by such Class D Certificateholder by written
notice given to the Paying Agent not less than five days prior to the related
Distribution Date; provided, however, that the final payment in retirement of
the Class D Certificates will be made only upon presentation and surrender of
the Class D Certificates at the office or
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offices specified in the notice of such final distribution delivered by the
Trustee pursuant to Section 12.3.
SECTION 5.2 Certificateholders' Statement. (a) On the 20th
day of each calendar month (or if such day is not a Business Day the next
succeeding Business Day), the Paying Agent shall forward to each Certifi-
cateholder and the Rating Agencies a statement substantially in the form of
Exhibit B prepared by the Servicer and delivered to the Trustee and the Paying
Agent on the preceding Determination Date setting forth the following
information (which, in the case of (i), (ii) and (iii) below, shall be stated
on the basis of an original principal amount of $1,000 per Certificate and,
in the case of (ix) and (x), shall be stated on an aggregate basis and on the
basis of an original principal amount of $1,000 per Certificate):
(i) the total amount distributed;
(ii) the amount of such distribution
allocable to Certificate Principal;
(iii) the amount of such distribution
allocable to Certificate Interest;
(iv) the amount of Principal Collections
received in the Collection Account during the pre-
ceding Monthly Period and allocated in respect of
the Class A Certificates, the Class B Certificates,
the Class C Certificates and the Class D Certifi-
cates, respectively;
(v) the amount of Finance Charge Collec-
tions processed during the preceding Monthly Period
and allocated in respect of the Class A Certifi-
cates, the Class B Certificates, the Class C Cer-
tificates and the Class D Certificates, respective-
ly, and the amount of Principal Funding Account
Investment Proceeds and investment earnings on
amounts on deposit in the Accumulation Period Re-
serve Account and the Pre-Funding Account;
(vi) the aggregate amount of Principal
Receivables, the Invested Amount, the Class A In-
vested Amount, the Class B Invested Amount, the
Class C Invested Amount, the Class D Invested
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Amount, the Floating Allocation Percentage and,
during the Amortization Period, the Fixed/Floating
Allocation Percentage, Class B Fixed/Floating Allo-
cation Percentage, or Class C Fixed/Floating Allo-
cation Percentage as applicable, as of the end of
the day on the last day of the related Monthly
Period;
(vii) the aggregate outstanding balance
of Receivables which are current, 30-59, 60-89, and
90 days and over delinquent as of the end of the
day on the last day of the related Monthly Period;
(viii) the aggregate Investor Default
Amount for the preceding Monthly Period;
(ix) 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;
(x) the amount of the Servicing Fee for
the preceding Monthly Period;
(xi) the Class A Pool Factor, the Class
B Pool Factor and the Class C Pool Factor as of the
end of the last day of the Monthly Period immedi-
ately preceding the Determination Date;
(xii) the amount of unreimbursed Reallo-
cated Class B Principal Collections, Reallocated
Class C Principal Collections and Reallocated Class
D Principal Collections for the related Monthly
Period;
(xiii) the aggregate amount of funds in
the Excess Funding Account and the Pre-Funding
Account as of the last day of the Monthly Period
immediately preceding the Distribution Date;
(xiv) the Specified Class C Reserve
Amount, the amount then on deposit in the Class C
Reserve Account and whether a Class C Trigger Event
has occurred;
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(xv) the number of new Accounts the
Receivables in which have been added to the Trust
during the related Monthly Period;
(xvi) the Portfolio Yield for the relat-
ed Monthly Period;
(xvii) the Base Rate for the related
Monthly Period;
(xviii) the Principal Funding Account
Balance on the related Transfer Date;
(xix) the Accumulation Shortfall;
(xx) the scheduled date for the com-
mencement of the Accumulation Period and the Accu-
mulation Period Length; and
(xxi) the amount of Principal Funding
Account Investment Proceeds deposited in the Col-
lection Account on the related Transfer Date, the
Required Reserve Account Amount and the Available
Reserve Account Amount as of the related Transfer
Date, and the Covered Amount for the related Inter-
est Accrual Period.
(b) Annual Certificateholders' Tax Statement. On or
before January 31 of each calendar year, beginning with calendar year 1998,
the Paying Agent shall distribute to each Person who at any time during the
preceding calendar year was a Series 1997-1 Certificateholder, a statement
prepared by the Servicer containing the information required to be contained
in the regular report to Series 1997-1 Certificateholders, as set forth in
subclauses (i), (ii) and (iii) above, aggregated for such calendar year or the
applicable portion thereof during which such Person was a Series 1997-1
Certificateholder, together with, on or before January 31 of each year,
beginning in 1998, such other customary information (consistent with the
treatment of the Certificates as debt) as the Trustee or the Servicer deems
necessary or desirable to enable the Series 1997-1 Certificateholders to
prepare their tax returns. Such obligations of the Trustee shall be deemed to
have been satisfied to the extent that substantially comparable information
shall be provided by the Trustee pursuant to
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any requirements of the Internal Revenue Code as from time to time in effect.
SECTION 8. Series 1997-1 Pay Out Events. If any one
of the following events shall occur with respect to the Series 1997-1
Certificates:
(a) failure on the part of the Transferor (i) to
make any payment or deposit required to be made by the Transferor by the terms
of (A) the Agreement or (B) this Series Supplement, on or before the date
occurring five Business Days after the date such payment or deposit is
required to be made herein, (ii) 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 (iii) duly to observe or
perform in any material respect any covenants or agreements of the Transferor
set forth in the Agreement or this Series Supplement, which failure has a
material adverse effect on the Series 1997-1 Certificateholders and which
continues unremedied for a period of 60 days after the date on which 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 Holders of Series 1997-1 Certificates evidencing Undivided Interests
aggregating not less than 50% of the Invested Amount of this Series 1997-1,
and continues to affect materially and adversely the interests of the Series
1997-1 Certificateholders for such period;
(b) any representation or warranty made by the
Transferor in the Agreement or this Series Supplement, (i) shall prove to
have been incorrect in any material respect when made, which continues to be
incorrect in any material respect for a period of 60 days after the date on
which 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 Holders of the Series 1997-1 Certificates evidencing Undivided
Interests aggregating more than 50% of the Invested Amount of this Series
1997-1, and (ii) as a result of which the interests of the Series 1997-1
Certificateholders are materially and adversely affected and continue to be
materially and adversely affected for such period; provided, however, that a
Series 1997-1 Pay Out Event pursuant to this
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subsection 8(b) shall not be deemed to have occurred hereunder if the
Transferor has accepted reassignment of the related Receivable, or all of such
Receivables, if applicable, during such period (or such longer period as the
Trustee may specify) in accordance with the provisions of the Agreement;
(c) the average of the Portfolio Yields for any
three consecutive Monthly Periods is reduced to a rate which is less than the
weighted average Base Rates for such three consecutive Monthly Periods;
(d) (i) the Transferor Interest shall be less than
the Minimum Transferor Interest, (ii) (A) 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 (B) the sum of the Class A
Outstanding Principal Amount, the Class B Outstanding Principal Amount, the
Class C Outstanding Principal Amount and the Class D Outstanding Principal
Amount, (iii) 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 (iv) the Retained
Percentage shall be equal to or less than 2%, in each case as of any
Determination Date; or
(e) any Servicer Default shall occur which would
have a material adverse effect on the Series 1997-1 Certificateholders;
then, in the case of any event described in subparagraph (a), (b) or (e),
after the applicable grace period, if any, set forth in such subparagraphs,
the Holders of Series 1997-1 Certificates evidencing Undivided Interests
aggregating more than 50% of the Invested Amount of this Series 1997-1, by
notice then given in writing to the Trustee, the Transferor and the Servicer
may declare that a pay out event (a "Series 1997-1 Pay Out Event") has
occurred as of the date of such notice, and in the case of any event described
in subparagraphs (c) or (d), a Series 1997-1 Pay Out Event shall occur without
any notice or other action on the part of the Trustee or the Series 1997-1
Certificateholders immediately upon the occurrence of such event.
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SECTION 9. Series 1997-1 Termination. The right of the
Series 1997-1 Certificateholders to receive payments from the Trust will
terminate on the first Business Day following the Series 1997-1 Termination
Date unless such Series is an Affected Series as specified in Section
12.1(c) of the Agreement and the sale contemplated therein has not occurred by
such date, in which event the Series 1997-1 Certificateholders shall remain
entitled to receive proceeds of such sale when such sale occurs.
SECTION 10. Legends; Transfer and Exchange; Restrictions on
Transfer of Series 1997-1 Certificates; Tax Treatment.
(a) Each Class B Certificate will bear a legend or
legends substantially in the following form:
EACH PURCHASER REPRESENTS AND WARRANTS
FOR THE BENEFIT OF METRIS RECEIVABLES, INC.
AND THE TRUSTEE THAT SUCH PURCHASER IS NOT (I)
AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN SEC-
TION 3(3) OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED ("ERISA"))
THAT IS SUBJECT TO THE PROVISIONS OF TITLE I
OF ERISA, (II) A PLAN DESCRIBED IN SECTION
4975(E)(1) OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE"), (III) A GOVERN-
MENTAL 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 SEC-
TION 4975 OF THE CODE, (IV) AN ENTITY WHOSE
UNDERLYING ASSETS INCLUDE PLAN ASSETS (AS DE-
FINED IN 29 C.F.R. SECTION 2510.3-101 OR OTH-
ERWISE UNDER ERISA) BY REASON OF A PLAN'S IN-
VESTMENT IN THE ENTITY OR (V) A PERSON INVEST-
ING PLAN ASSETS OF ANY SUCH PLAN (INCLUDING
WITHOUT LIMITATION, FOR PURPOSES OF CLAUSE
(IV) AND THIS CLAUSE (V), ANY INSURANCE COMPA-
NY GENERAL ACCOUNT, BUT EXCLUDING ANY ENTITY
REGISTERED UNDER THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED).
(b) The Class C Certificates have not been, and
will not be, registered under the Securities Act or any state securities law.
No reoffer, resale,
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pledge (except as provided in the Pooling and Servicing Agreement) or other
transfer of any Class C Certificate or any interest therein or participation
thereof will be made unless such resale or transfer is made (i) to the
Transferor, (ii) to a limited number of institutional "accredited investors"
(as defined in Rule 501 (a)(1), (2), (3) or (7) under the Securities Act) in a
transaction exempt from the registration requirements of the Securities Act
(upon delivery of the documentation required by the Pooling and Servicing
Agreement and, if the Trustee so requires, an opinion of counsel satisfac-
tory to the Trustee) or (iii) pursuant to Rule 144A to a person who the seller
of the Class C Certificates reasonably believes is a QIB purchasing for its
own account or a QIB purchasing for the account of a QIB, whom the holder has
informed, in each case, that the reoffer, resale, pledge or other transfer is
being made in reliance on Rule 144A. Neither the Transferor nor the Trustee
is obligated to register the Class C Certificates under the Securities Act
or to take any otherwise required under the Pooling and Servicing Agreement or
the Series 1997-1 Supplement to permit the transfer of Class C Certificates
without registration. No Class C Certificate or any interest therein may be
sold, traded, conveyed, assigned, hypothecated, pledged, participated, or
otherwise transferred (each, a "Transfer") except in accordance with this
Section 10. Any Transfer of a Class C Certificate otherwise permitted by this
Section 10 will be permitted only if it consists of a pro rata percentage
interest in all payments made with respect to such Holder's Class C
Certificates and no Transfers of partial interests in a Class C Certificate
will be permitted. No Class C Certificate or any interest therein may be
Transferred to any Person (each, an "Assignee") unless the Assignee has
executed and delivered the certification referred to in subsection 10(d)
below and the Transferor has granted prior written consent thereto. Such
consent shall be granted unless the Transferor determines in its sole and
absolute discretion that such Transfer would create more than an insubstantial
risk that the Trust would be classified for Federal or any applicable state
tax purposes as an association or publicly traded partnership taxable as a
corporation; provided, that any attempted Transfer that would cause the
number of Targeted Holders to exceed one hundred shall be void; and provided,
further, that there shall not at any time be more than 10 Class C
Certificateholders or
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such other number as may be consented to by the Transferor, which consent
may be withheld in its sole and absolute discretion.
(c) Each initial purchaser of a Class C Certificate
or any interest therein and any Assignee thereof shall certify to the
Transferor and the Trustee that it is either (A)(i) a citizen or resident of
the U.S., (ii) a corporation, partnership or other entity organized in or
under the laws of the U.S. or any political subdivision thereof or (iii) a
person not described in (i) or (ii) whose ownership of the Class C Certifi-
cates is effectively connected with such person's conduct of a trade or
business within the U.S. (within the meaning of the Internal Revenue Code) and
whose ownership of any interest in a Class C Certificate will not result in
any withholding obligation with respect to any payments with respect to the
Class C Certificates by any person (other than withholding, if any, under
Section 1446 of the Code) or (B) an estate the income of which is includible
in gross income for U.S. Federal income tax purposes or any trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. It also agrees
that (a) if it is a person described in clause (A)(i) or (A)(ii) above, it
will furnish to the Transferor, the Servicer and the Trustee, a properly
executed U.S. Internal Revenue Service Form W-9 and a new Form W-9, or any
successor applicable form, upon the expiration or obsolescence of any
previously delivered form or (b) if it is a person described in clause
(A)(iii) above, it will furnish to the Transferor, the Servicer and the
Trustee a properly executed U.S. Internal Revenue Service Form 4224 (or
applicable successor form) and a new Form 4224 (or applicable successor form)
upon the expiration or obsolescence of any previously delivered form (and
such other certifications, representations or opinions of counsel as may be
requested by the Transferor, the Servicer or the Trustee). Such person
recognizes that if it is a tax-exempt entity a portion of the payments with
respect to the Certificates may constitute unrelated business taxable income.
If the purchaser is a Person which is described in clause
A(iii) of the preceding paragraph, it
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will deliver a properly completed and executed Form 4224 (or applicable
successor form) indicating no taxes will be required to be withheld by any
person with respect to any payments to be made to such purchaser in respect of
the Class C Certificates (other than withholding, if any, under Section 1446
of the Code) purchased by it, and it will, during the period in which such
Form is effective, report all interest payments received by it in respect of
such Class C Certificates as income effectively connected with the conduct
of a trade or business in the United States and pay all United States federal
income taxes imposed with respect to such income as required by law. Further,
such purchaser will provide the Transferor and the Trustee a new Form 4224 (or
applicable successor form) upon the expiration or obsolescence of any
previously delivered Form and comparable statements in accordance with
applicable U.S. laws and regulations and amendments duly executed and
completed by such purchaser, and it will comply from time to time with all
applicable U.S. laws and regulations with regard to such withholding tax
exemption. Each initial purchaser of a Class C Certificate or any interest
therein and any Assignee thereof must certify to the Transferor and the
Trustee that if it is not created or organized under the laws of the United
States or any State thereof (including the District of Columbia) it will, upon
written notice by the Transferor that the Transferor intends, pursuant to
Section 1446 or other applicable section of the Code, to withhold U.S. tax (a
"Withholding Tax") from amounts paid or accruing with respect to a Class C
Certificate to such purchaser (such determination being a "Withholding
Event"), such purchaser shall for tax years for which the purchaser has
already filed U.S. federal income tax returns (each a "Prior Tax Year") prior
to proper notice of such Withholding Event, provide (A) a signed officer's
certificate of such purchaser stating that amounts paid or accruing
hereunder have been included in such purchaser's U.S. federal income tax
returns for each such Prior Tax Year, which certificate may be relied on by
the Transferor in asserting to the Internal Revenue Service the applicability
of Section 1463 of the Code with respect to any Withholding Tax for each such
Prior Tax Year and (B) provide information to the Transferor or, at the option
of such purchaser, to the Internal Revenue Service in support of the
application of Section 1463 of the Code for each such Prior Tax Year.
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(d) Each initial purchaser of a Class C Certificate
or any interest therein and any Assignee thereof shall further certify to the
Transferor and the Trustee that it has neither acquired nor will it Transfer
the Class C Certificates (or any interest therein) or cause the Class C
Certificates to be marketed on or through (i) an "established securities
market" within the meaning of Section 7704(b)(1) of the Internal Revenue
Code and any treasury regulation thereunder, including, without limitation,
an over-the-counter-market or an interdealer quotation system that regularly
disseminates firm buy or sell quotations or (ii) a "secondary market" within
the meaning of Section 7704(b)(2) of the Internal Revenue Code and any
treasury regulation thereunder, including a market wherein the Class C
Certificates (or any interest therein) are regularly quoted by any Person
making a market in such interests and a market wherein any Person regularly
makes available bid or offer quotes with respect to the Class C Certificates
(or any interest therein) and stands ready to effect buy or sell transactions
at the quoted prices for itself or on behalf of others. In addition, each
initial purchaser of a Class C Certificate or any interest therein and any
Assignee must certify, prior to any delivery or Transfer to it of a Class C
Certificate that, for so long as it holds an interest in a Class C
Certificate, it is not and will not become a partnership, Subchapter S
corporation or grantor trust for U.S. Federal income tax purposes. If an
initial purchaser of an interest in a Class C Certificate or an Assignee
cannot make the certification described in the preceding sentence, the
Transferor may, in its sole discretion, prohibit a Transfer to such entity;
provided, however, that if the Transferor agrees to permit such a Transfer,
the Transferor, the Servicer or the Trustee may require additional
certifications in order to prevent the Trust from being treated as a publicly
traded partnership. Each initial purchaser of an interest in a Class C
Certificate and Assignee acknowledges that the Opinion of Counsel to the
effect that the Trust will not be treated as a publicly traded partnership
taxable as a corporation is dependent in part on the accuracy of the
certifications described in this Section 10(d).
(e) Each Class C Certificate will bear legends
substantially in the following form:
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EACH PURCHASER REPRESENTS AND WARRANTS
FOR THE BENEFIT OF METRIS RECEIVABLES, INC.
AND THE TRUSTEE THAT SUCH PURCHASER IS NOT (I)
AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN SEC-
TION 3(3) OF THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED ("ERISA"))
THAT IS SUBJECT TO THE PROVISIONS OF TITLE I
OF ERISA, (II) A PLAN DESCRIBED IN SECTION
4975(E)(1) OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE"), (III) A GOVERN-
MENTAL 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 SEC-
TION 4975 OF THE CODE, (IV) AN ENTITY WHOSE
UNDERLYING ASSETS INCLUDE PLAN ASSETS (AS DE-
FINED IN 29 C.F.R. SECTION 2510.301-1 OR OTH-
ERWISE UNDER ERISA) BY REASON OF A PLAN'S IN-
VESTMENT IN THE ENTITY OR (V) A PERSON INVEST-
ING PLAN ASSETS OF ANY SUCH PLAN (INCLUDING
WITHOUT LIMITATION, FOR PURPOSES OF CLAUSE
(IV) AND THIS CLAUSE (V), ANY INSURANCE COMPA-
NY GENERAL ACCOUNT, BUT EXCLUDING ANY ENTITY
REGISTERED UNDER THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED).
THIS CERTIFICATE MAY NOT BE ACQUIRED, SOLD,
TRADED OR TRANSFERRED BY A PERSON WHO IS NOT EITHER
(A)(I) A CITIZEN OR RESIDENT OF THE UNITED STATES,
(II) A CORPORATION, PARTNERSHIP OR OTHER ENTITY
ORGANIZED IN OR UNDER THE LAWS OF THE UNITED STATES
OR ANY POLITICAL SUBDIVISION THEREOF OR (III) A
PERSON NOT DESCRIBED IN (I) OR (II) WHOSE OWNERSHIP
OF THE CLASS C CERTIFICATES IS EFFECTIVELY CONNECT-
ED WITH SUCH PERSON'S CONDUCT OF A TRADE OR BUSI-
NESS WITHIN THE UNITED STATES (WITHIN THE MEANING
OF THE CODE) AND ITS OWNERSHIP OF ANY INTEREST IN A
CLASS C CERTIFICATE WILL NOT RESULT IN ANY WITH-
HOLDING OBLIGATION WITH RESPECT TO ANY PAYMENTS
WITH RESPECT TO THE CLASS C CERTIFICATES BY ANY
PERSON (OTHER THAN WITHHOLDING, IF ANY, UNDER SEC-
TION 1446 OF THE CODE) OR (B) AN ESTATE THE INCOME
OF WHICH IS INCLUDIBLE IN GROSS INCOME FOR UNITED
STATES FEDERAL INCOME TAX PURPOSES OR ANY TRUST IF
A COURT WITHIN THE UNITED STATES IS ABLE TO EXER-
CISE PRIMARY SUPERVISION OVER THE ADMINISTRATION OF
THE TRUST AND ONE OR MORE UNITED STATES FIDUCIARIES
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<PAGE>
HAVE THE AUTHORITY TO CONTROL ALL SUBSTANTIAL DECI-
SIONS OF THE TRUST.
THIS CERTIFICATE MAY NOT BE ACQUIRED,
SOLD, TRADED, TRANSFERRED, ASSIGNED, PARTICI-
PATED, PLEDGED, HYPOTHECATED OR OTHERWISE DIS-
POSED, NOR MAY AN INTEREST IN THIS CERTIFICATE
BE MARKETED, ON OR THROUGH (I) AN "ESTABLISHED
SECURITIES MARKET" WITHIN THE MEANING OF SEC-
TION 7704(b)(1) OF THE CODE AND ANY PROPOSED,
TEMPORARY OR FINAL TREASURY REGULATION THERE-
UNDER, INCLUDING, WITHOUT LIMITATION, AN OVER-
THE-COUNTER-MARKET OR AN INTERDEALER QUOTATION
SYSTEM THAT REGULARLY DISSEMINATES FIRM BUY OR
SELL QUOTATIONS OR (II) A "SECONDARY MARKET"
WITHIN THE MEANING OF SECTION 7704(b)(2) OF
THE CODE AND ANY PROPOSED, TEMPORARY OR FINAL
TREASURY REGULATION THEREUNDER, INCLUDING A
MARKET WHEREIN INTERESTS IN THE CLASS C CER-
TIFICATES ARE REGULARLY QUOTED BY ANY PERSON
MAKING A MARKET IN SUCH INTERESTS AND A MARKET
WHEREIN ANY PERSON REGULARLY MAKES AVAILABLE
BID OR OFFER QUOTES WITH RESPECT TO INTERESTS
IN THE CLASS C CERTIFICATES AND STANDS READY
TO EFFECT BUY OR SELL TRANSACTIONS AT THE
QUOTED PRICES FOR ITSELF OR ON BEHALF OF OTH-
ERS.
THIS CERTIFICATE HAS NOT BEEN AND WILL
NOT BE REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR
ANY STATE SECURITIES LAW. THE HOLDER HEREOF,
BY PURCHASING THIS CERTIFICATE, AGREES THAT
THIS CERTIFICATE MAY BE REOFFERED, RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COM-
PLIANCE WITH THE SECURITIES ACT AND OTHER AP-
PLICABLE LAWS AND ONLY (1) TO THE TRANSFEROR,
(2) TO A LIMITED NUMBER OF INSTITUTIONAL "AC-
CREDITED INVESTORS" (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURI-
TIES ACT) AND IN A TRANSACTION EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT (UPON DELIVERY OF THE DOCUMENTATION RE-
QUIRED BY THE POOLING AND SERVICING AGREEMENT
AND, IF THE TRUSTEE SO REQUIRES, AN OPINION OF
COUNSEL SATISFACTORY TO THE TRUSTEE) OR (3)
PURSUANT TO RULE 144A UNDER THE SECURITIES ACT
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TO A PERSON THAT THE HOLDER REASONABLY BELIEVE
IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A ("QIB") PURCHASING FOR
ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE
ACCOUNT OF A QIB, WHOM THE HOLDER HAS IN-
FORMED, IN EACH CASE, THAT THE REOFFER, RE-
SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE
IN RELIANCE ON RULE 144A. EACH CERTIFICATE
OWNER BY ACCEPTING A BENEFICIAL INTEREST IN
THIS CERTIFICATE IS DEEMED TO REPRESENT THAT
IT IS EITHER A QIB PURCHASING FOR ITS OWN AC-
COUNT, A QIB PURCHASING FOR THE ACCOUNT OF
ANOTHER QIB OR AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2),
(3) OR (7) UNDER THE SECURITIES ACT). THIS
CERTIFICATE WILL NOT BE ACCEPTED FOR REGISTRA-
TION OF TRANSFER EXCEPT UPON PRESENTATION OF
EVIDENCE SATISFACTORY TO THE TRANSFER AGENT
AND REGISTRAR THAT THE RESTRICTIONS ON TRANS-
FER SET FORTH IN THE SERIES 1997-1 SUPPLEMENT
HAVE BEEN COMPLIED WITH. THIS CERTIFICATE MAY
NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT THE PRIOR WRITTEN CONSENT
OF THE TRANSFEROR AND UNLESS AND UNTIL THE
TRUSTEE SHALL HAVE RECEIVED THE CERTIFICATIONS
REQUIRED BY THE SERIES 1997-1 SUPPLEMENT.
(f) Upon surrender for registration of transfer of a Class C Certificate at
the office of the Transfer Agent and Registrar, accompanied by a certifi-
cation by the Class C Certificateholder substantially in the form attached as
Exhibit C, executed by the registered owner, in person or by such Class C
Certificateholder's attorney thereunto duly authorized in writing, and
receipt by the Trustee of the written consent of the Transferor to such
transfer, such Class C Certificate shall be transferred upon the Certificate
Register, and the Transferor shall execute, and the Trustee shall authenticate
and deliver, in the name of the designated transferees one or more new
registered Class C Certificates of any authorized denominations and of a
like aggregate principal amount and tenor. Such transfers of Class C
Certificates shall be subject to the restrictions set forth in this Section
10, to such other restrictions as shall be set forth in the text of the
Class C Certificates and to such reasonable regulations as may be prescribed
by the Transferor. Successive registrations and registrations of transfers as
afore-
76
<PAGE>
said may be made from time to time as desired, and each such registration shall
be noted on the Certificate Register.
(g) Each Class D Certificate will bear legends
substantially in the following form:
THIS CERTIFICATE WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"). THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAW OF ANY STATE AND MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS REG-
ISTERED PURSUANT TO OR EXEMPT FROM REGISTRATION
UNDER THE SECURITIES ACT AND ANY OTHER APPLICABLE
SECURITIES LAW. THE TRANSFEROR SHALL BE PROHIB-
ITED FROM TRANSFERRING ANY INTEREST IN OR PORTION
OF THIS CERTIFICATE.
EACH PURCHASER REPRESENTS AND WARRANTS FOR THE
BENEFIT OF METRIS RECEIVABLES, INC. AND THE TRUSTEE
THAT SUCH PURCHASER IS NOT (I) AN EMPLOYEE BENEFIT
PLAN (AS DEFINED IN SECTION 3(3) OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA")) THAT IS SUBJECT TO THE PROVISIONS OF
TITLE I OF ERISA, (II) A PLAN DESCRIBED IN SECTION
4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (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 DE-
FINED IN 29 C.F.R. SECTION 2510.3-101 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), ANY
INSURANCE COMPANY GENERAL ACCOUNT, BUT EXCLUDING
ANY ENTITY REGISTERED UNDER THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED).
SECTION 11. Compliance with Withholding Requirements. Notwithstanding any
other provision of the Agreement, the Trustee and any Paying Agent shall
comply with all Federal withholding requirements with respect
77
<PAGE>
to payments to the Class C Certificateholders of interest, original issue
discount, or other amounts that the Trustee, any Paying Agent, the Servicer or
the Transfer or reasonably believes are applicable under the Internal Revenue
Code. The consent of the Class C Certificate holders shall not be required
for any such withholding. In the event the Trustee or the Paying Agent
withholds any amount from payments made to any Class C Certificateholder
pursuant to federal withholding requirements, the Trustee or the Paying Agent
shall indicate to such Class C Certificateholder the amount withheld and all
such amounts shall be deemed to have been paid to such Class C
Certificateholders and the Class C Certificate holders shall have no claim
therefor.
SECTION 12. Tax Characterization of the Class C
Certificates. It is the intention of the parties hereto that the Class C
Certificates be treated for tax purposes as indebtedness. In the event that
the Class C Certificates are not so treated, it is the intention of the
parties that the Class C Certificates be treated as an interest in a
partnership that owns the Receivables. In the event that the Class C
Certificates are treated as an interest in a partnership, it is the intention
of the parties that interest payable on the Class C Certificates be treated
as guaranteed payment and, if for any reason it is not so treated, that the
holders of the Class C Certificates be specially allocated gross interest
income equal to the interest accrued during each Interest Accrual Period on
the Class C Certificates.
SECTION 13. Ratification of Agreement. (a) As supplemented
by this Series Supplement, the Agreement is in all respects ratified and
confirmed and the Agreement as so supplemented by this Series Supplement
shall be read, taken, and construed as one and the same instrument. The
Transferor hereby confirms the conveyance of the Trust Property to the Trustee
for the benefit of the Series 1997-1 Certificateholders.
(b) For so long as any of the Class C Certificates are
"restricted securities" within the meaning of Rule 144(a)(3) under the
Securities Act and during any period in which the Trust is not subject to
Section 13 or 15(d) of the Exchange Act, each of the Transferor, the Servicer
and the Trustee agree to cooperate with each other to provide to any Class C
Certifi-
78
<PAGE>
cateholder, and to any prospective purchaser of Class C Certificates designated
by such Class C Certificateholder upon the request of such Class C \
Certificateholder or prospective purchaser, the information required by Rule
144A(d)(4) under the Securities Act.
SECTION 14. Registration of the Class A Certificates under
the Securities Exchange Act of 1934. The Transferor shall cause the Class A
Certificates to be registered under the Securities Exchange Act of 1934, as
amended, on or before March 31, 1998 and thereafter maintain such registration
until the Class A Invested Amount has been reduced to zero.
SECTION 15. Counterparts. This Series Supplement may be
executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all of such counterparts shall together con-
stitute but one and the same instrument.
SECTION 16. GOVERNING LAW. THIS SERIES SUPPLEMENT SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT
REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS.
SECTION 17. Instructions in Writing. All instructions or
other communications given by the Servicer or any other person to the Trustee
pursuant to this Series Supplement shall be in writing, and, with respect to
the Servicer, may be included in a Daily Report or Settlement Statement.
SECTION 18. Amendment for FASIT Purposes. Each Series 1997-1
Certificateholder, by acquiring an interest in a Series 1997-1 Certificate, is
deemed to consent to any amendment to the Agreement or this Series Supplement
necessary for the Transferor to elect for the Trust or any portion thereof to
be treated as a financial asset securitization investment trust ("FASIT")
within the meaning of Section 860L of the Internal Revenue Code (or any
successor provision thereto), provided, that such election may not be made
unless the Transferor delivers an opinion to the Trustee and the Servicer to
the effect that such election will not adversely affect the Federal or
Applicable Tax State income tax charac-
79
<PAGE>
terization of any outstanding Series of Investor Certificates or the taxability
of the Trust under Federal or Applicable Tax State income tax laws.
SECTION 19. Paired Series. Subject to obtaining
confirmation by each Rating Agency of the then existing ratings of each class
of Certificates which is then rated, and 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
principal is paid with respect to the Certificates, 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 in subsection 6.9(b) of the Agreement.
80
<PAGE>
IN WITNESS WHEREOF, the Transferor, the Servicer and the
Trustee have caused this Series 1997-1 Supplement to be duly executed by their
respective officers as of the day and year first above written.
METRIS RECEIVABLES, INC.
Transferor
By:_______________________
Name:
Title:
DIRECT MERCHANTS CREDIT CARD BANK,
NATIONAL ASSOCIATION
Servicer
By:_________________________
Name:
Title:
THE BANK OF NEW YORK (DELAWARE)
Trustee
By:_________________________
Name:
Title:
<PAGE>
Exhibit A-1
FORM OF CLASS A INVESTOR CERTIFICATE
UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRE-
SENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST
HEREIN.
No. ___ $_________
CUSIP NO. _________
METRIS MASTER TRUST
___% ASSET BACKED
CERTIFICATE, SERIES 1997-1, CLASS A
Evidencing an undivided interest in a trust, the corpus of which consists of
receivables generated from time to time in the ordinary course of business
from a portfolio of revolving consumer credit card accounts transferred or
to be transferred by Metris Receivables, Inc. (the "Transferor") and other
assets and interests constituting the Trust under the Agreement described
below.
(Not an interest in or a recourse obligation of Metris
Receivables, Inc., Direct Merchants Credit Card Bank, National Association or
any affiliate of either of them.)
This certifies that _________ (the "Certificateholder") is
the registered owner of a fractional
A-1-1
<PAGE>
undivided interest in the Metris Master Trust (the "Trust") issued pursuant to
the Pooling and Servicing Agreement, dated as of May 26, 1995 (the "Pooling
and Servicing Agreement"; such term to include any amendment thereto) by and
between the Transferor, Direct Merchants Credit Card Bank, National
Association, as Servicer (the "Servicer"), and The Bank of New York (Delaware)
as Trustee (the "Trustee"), and the Series 1997-1 Supplement, dated as of
May __, 1997 (the "Series 1997-1 Supplement"), among the Transferor, the
Servicer and the Trustee. The Pooling and Servicing Agreement, as sup-
plemented by the Series 1997-1 Supplement, is herein referred to as the
"Agreement"). The corpus of the Trust consists of all of the Transferor's
right, title and interest in, to and under the Trust Property (as defined in
the Agreement).
This Certificate does not purport to summarize the Agreement and reference is
made to that Agreement for information with respect to the interests, rights,
benefits, obligations, proceeds, and duties evidenced hereby and the rights,
duties and obligations of the Trustee. To the extent not defined herein, the
capitalized terms used herein have the meanings ascribed to them in the
Agreement. This Certificate is one of a series of Certificates entitled
"Metris Master Trust ___% Asset Backed Certificates, Series 1997-1, Class A"
(the "Class A Certificates"), each of which represents a fractional undivided
interest in the Trust, and is issued under and is subject to the terms,
provisions and conditions of the Agreement, to which Agreement, as amended
from time to time, the Certificateholder by virtue of the acceptance hereof
assents and by which the Certificateholder is bound.
The Transferor has structured the Agreement, the Class A Certificates, the
Metris Master Trust ___% Asset Backed Certificates, Series 1997-1, Class B
(the "Class B Certificates" and collectively with the Class A Certificates the
"Offered Certificates") and the Metris Master Trust Floating Rate Asset Backed
Certificates, Series 1997-1, Class C (the "Class C Certificates") with the
intention that the Offered Certificates and the Class C Certificates will
qualify under applicable tax law as indebtedness, and both the Transferor and
each holder of a Class A Certificate (a "Class A Certificateholder") or any
interest therein by acceptance of its
A-1-2
<PAGE>
Certificate or any interest therein, agrees to treat the Class A Certificates
for purposes of federal, state and local income or franchise taxes and any
other tax imposed on or measured by income, as indebtedness.
No principal will be payable to the Class A
Certificateholders until the earlier of the Expected Final Payment Date and,
upon the occurrence of a Pay Out Event, the Distribution Date following the
Monthly Period in which the Pay Out Event occurs. No principal will be
payable to the Class B Certificateholders, Class C Certificateholders or Class
D Certificateholders (other than with respect to Class D Excess Amounts) until
all principal payments have been made to the Class A Certificateholders.
Interest on the Class A Certificates will be payable on June
20, 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 one-twelfth of the product of the Class A
Certificate Rate and the outstanding principal balance of the Class A
Certificates as of the close of business on the first day of such Interest
Accrual Period (or in the case of the initial Distribution Date, the Class A
Initial Invested Amount). Interest for the first Distribution Date will
include accrued interest at the applicable Certificate Rate (the "Certificate
Rates") from the Closing Date through June 19, 1997. Interest will be
calculated on the basis of a 360-day year of twelve 30-day months.
Interest payments on the Class A Certificates
on each Distribution Date will be funded from Available
Series Finance Charge Collections with respect to the
preceding Monthly Period (or, with respect to the first
Distribution Date, such collections from and including
the Closing Date to and including May 31, 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.
"Class A Invested Amount" shall mean, when used with respect
to any Business Day, the greater of
A-1-3
<PAGE>
(x) zero and (y) 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
(i) during the Funding Period in connection with the addition of Receivables
to the Trust or (ii) at the end of the Funding Period for deposit into the Ex-
cess 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 Business Day, minus (c) the
aggregate amount of Class A Investor Charge-Offs for all prior Distribution
Dates, plus (d) the sum of the aggregate amount allocated with respect to
Class A Investor Charge-Offs and available on all prior Distribution Dates
pursuant to subsection 4.9(a)(vii) of the Agreement and, with respect to such
subsection, pursuant to subsections 4.10(a) and (b), 4.16(a), (b) and (c),
4.19(b) and 4.20(b), (c) and (d) of the Agreement, for the purpose of
reinstating amounts reduced pursuant to the foregoing clause (c).
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 In-
vested Amount; (y) the first day on which a Pay Out Event is deemed to occur;
and (z) the first day of the September 1997 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 Initial Pre-Funded Amount, minus the
amounts of any increases in the Invested Amount during the Funding Period
pursuant to Section 4.15 of the Agreement, minus the amount of any principal
losses on funds on deposit in the Pre-Funding Account and minus the amount
withdrawn from the Pre-Funding Account and deposited in the Excess Funding
Account. 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
sum of the then current outstanding principal balance of all Series
(excluding the Series 1997-1 Certifi-
A-1-4
<PAGE>
cates). 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. 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 Business Day of the September 1997 Monthly Period, such amount will
be deposited in the Excess Funding Account, and the Class A Invested Amount,
Class B Invested Amount and Class C Invested Amount shall be increased pro
rata by such amount.
Subject to the Agreement, payments of principal are
limited to the unpaid Class A Invested Amount of the Class A Certificates,
which may be less than the unpaid balance of the Class A Certificates pursuant
to the terms of the Agreement. All principal on the Class A Certificates is
due and payable no later than the October 2005 Distribution Date (or if such
day is not a Business Day, the next succeeding Business Day) (the "Scheduled
Series 1997-1 Termination Date"). After the earlier to occur of (i) the
Scheduled Series 1997-1 Termination Date or (ii) the day after the
Distribution Date on which the Series 1997-1 Certificates are paid in full
(the "Series 1997-1 Termination Date") neither the Trust nor the Transferor
will have any further obligation to distribute principal or interest on the
Class A Certificates. In the event that the Class A Invested Amount is greater
than zero on the Series 1997-1 Termination Date, the Trustee will sell or
cause to be sold, to the extent necessary, an amount of interests in the
Receivables or certain of the Receivables up to 110% of the Class A Invested
Amount, the Class B Invested Amount, the Class C Invested Amount and the Class
D Invested Amount at the close of business on such date
A-1-5
<PAGE>
(but not more than the total amount of Receivables allocable to the Investor
Certificates), and shall pay the proceeds to the Class A Certificateholders
pro rata in final payment of the Class A Certificates, then to the Class B
Certificateholders pro rata in final payment of the Class B Certificates, then
to the Class C Certificateholders pro rata in final payment of the Class C
Certificates and finally to the Class D Certificateholders pro rata in final
payment of the Class D Certificates.
Unless the certificate of authentication hereon has been
executed by or on behalf of the Trustee, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement, or be valid for any
purpose.
A-1-6
<PAGE>
IN WITNESS WHEREOF, the Transferor has caused this Certificate to be duly
executed under its official seal.
METRIS RECEIVABLES, INC.
By:_____________________________
Name:
Title:
Dated:
CERTIFICATE OF AUTHENTICATION
This is one of the Class A Certificates referred to in the
within-mentioned Pooling and Servicing Agreement.
THE BANK OF NEW YORK
By: _______________________
Name:
Title:
A-1-7
<PAGE>
Exhibit A-2
FORM OF CLASS B INVESTOR CERTIFICATE
UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRE-
SENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE &
CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE
BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST
HEREIN.
EACH PURCHASER REPRESENTS AND WARRANTS FOR THE
BENEFIT OF METRIS RECEIVABLES, INC. THAT UNLESS SUCH
PURCHASER, AT ITS EXPENSE, DELIVERS TO THE TRUSTEE,
THE SERVICER AND THE TRANSFEROR AN OPINION OF COUN-
SEL SATISFACTORY TO THEM TO THE EFFECT THAT THE
PURCHASE OR HOLDING OF THIS CERTIFICATE BY SUCH
PURCHASER WILL NOT RESULT IN THE ASSETS OF THE TRUST
BEING DEEMED TO BE "ASSETS OF THE BENEFIT PLAN" OR
SUBJECT TO THE PROHIBITED TRANSACTION PROVISIONS OF
ERISA AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE,
THE TRANSFEROR OR THE SERVICER TO ANY OBLIGATION IN
ADDITION TO THOSE UNDERTAKEN IN THE POOLING AND
SERVICING AGREEMENT, SUCH PURCHASER IS NOT (I) AN
EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3(3) OF
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974,
AS AMENDED ("ERISA")) THAT IS SUBJECT TO THE PROVI-
SIONS OF TITLE I OF ERISA, (II) A PLAN DESCRIBED IN
SECTION 4975(e)(1) OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (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 SEC-
TION 406 OF ERISA OR SECTION 4975 OF THE CODE, (IV)
AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE PLAN
ASSETS (AS DEFINED IN 29 C.F.R. SECTION 2510.3-101
OR OTHERWISE UNDER ERISA) BY REASON OF APLAN'S
INVESTMENT IN THE ENTITY OR (V) A PERSON INVESTING
PLAN ASSETS OF ANY SUCH PLAN (INCLUDING FOR PURPOSES
OF CLAUSE (IV) AND THIS CLAUSE (V) ANY INSURANCE
COMPANY GENERAL ACCOUNT, BUT EXCLUDING ANY ENTITY
A-2-1
<PAGE>
REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED).
No. ___ $__________
CUSIP NO.
METRIS MASTER TRUST
___% ASSET BACKED
CERTIFICATE, SERIES 1997-1, CLASS B
Evidencing an undivided interest in a trust, the corpus of
which consists of receivables generated from time to time in the ordinary
course of business from a portfolio of revolving consumer credit card accounts
transferred or to be transferred by Metris Receivables, Inc. (the
"Transferor") and other assets and interests constituting the Trust under the
Agreement described below.
(Not an interest in or a recourse obligation of Metris
Receivables, Inc., Direct Merchants Credit Card Bank, National Association or
any affiliate of either of them.)
This certifies that __________ (the "Certificateholder")
is the registered owner of a fractional undivided interest in the Metris
Master Trust (the "Trust") issued pursuant to the Pooling and Servicing
Agreement, dated as of May 26, 1995 (the "Pooling and Servicing Agreement";
such term to include any amendment thereto) by and between the Transferor,
Direct Merchants Credit Card Bank, National Association, as the Servicer (the
"Servicer"), and The Bank of New York (Delaware), as Trustee (the "Trustee"),
and the Series 1997-1 Supplement, dated as of May __, 1997 (the "Series
1997-1 Supplement"), among the Transferor, the Servicer and the Trustee. The
Pooling and Servicing Agreement, as supplemented by the Series 1997-1
Supplement, is herein referred to as the "Agreement". The corpus of the
Trust consists of all of the Transferor's right, title and interest in, to and
under the Trust Property (as defined in the Agreement).
This Certificate does not purport to summarize the Agreement
and reference is made to that Agreement for information with respect to the
interests, rights, benefits, obligations, proceeds, and duties evidenced
hereby and the rights, duties and obligations of the Trustee. To the extent
not defined herein, the capitalized terms used herein have the meanings
ascribed to them in the Agreement. This Certificate is one of a series of Cer-
A-2-2
<PAGE>
tificates entitled "Metris Master Trust ___% Asset Backed Certificates, Series
1997-1, Class B" (the "Class B Certificates"), each of which represents a
fractional undivided interest in the Trust, and is issued under and is subject
to the terms, provisions and conditions of the Agreement, to which Agreement,
as amended from time to time, the Certificateholder by virtue of the
acceptance hereof assents and by which the Certificateholder is bound.
The Transferor has structured the Agreement, the Class B
Certificates, the Metris Master Trust ___% Asset Backed Certificates, Series
1997-1, Class A (the "Class A Certificates" and collectively with the Class B
Certificates the "Offered Certificates") and the Metris Master Trust Floating
Rate Asset Backed Certificates, Series 1997-1, Class C (the "Class C
Certificates") with the intention that the Offered Certificates will qualify
under applicable tax law as indebtedness, and both the Transferor and each
holder of a Class B Certificate (a "Class B Certificateholder") or any
interest therein by acceptance of its Certificate or any interest therein,
agrees to treat the Class B Certificates for purposes of federal, state and
local income or franchise taxes and any other tax imposed on or measured by
income, as indebtedness.
No principal will be payable to the Class B
Certificateholders until the earlier of the Expected Final Payment Date and,
upon the occurrence of a Pay Out Event, the Distribution Date following the
Monthly Period in which the Pay Out Event occurs but in no event earlier than
the Distribution Date either on or following the Distribution Date on which
the Class A Invested Amount had been paid in full. No principal will be
payable to the Class B Certificateholders until all principal payments have
been made to the Class A Certificateholders. No principal payments will be
made to the Class C Certificateholders or Class D Certificateholders (other
than with respect to Class D Excess Amounts) until the Distribution Date
either on or following the Distribution Date on which the Class B Invested
Amount has been paid in full.
Interest on the Offered Certificates will be payable on June
20, 1997 and on the 20th day of each month thereafter or, if such day is not a
business day,
A-2-3
<PAGE>
on the next succeeding business day (each, a "Distribution Date"), in an
amount equal to (i) with respect to the Class A Certificates, one-twelfth of
the product of the Class A Certificate Rate and the outstanding principal
balance of the Class A Certificates as of the close of business on the first
day of such Interest Accrual Period (or in the case of the initial
Distribution Date, the Class A Initial Invested Amount) and (ii) with re-
spect to the Class B Certificates, one-twelfth of the product of the Class B
Certificate Rate and the outstanding principal balance of the Class B
Certificates as of the close of business on the first day of such Interest
Accrual Period (or in the case of the initial Distribution Date, the Class B
Initial Invested Amount). Interest for the first Distribution Date will
include accrued interest at the applicable Certificate Rate (the "Certif-
icate Rates") from the Closing Date through June 19, 1997. Interest will be
calculated on the basis of a 360-day year of twelve 30-day months.
Interest payments on the Class A Certificates on each
Distribution Date will be funded from Available Series Finance Charge
Collections with respect to the preceding Monthly Period (or, with respect to
the first Distribution Date, such collections from and including the Closing
Date to and including May 31, 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.
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.
"Class B Invested Amount" shall mean, when used with respect
to any Business Day, the greater of (x) zero and (y) an amount equal to (a)
the Class B Initial Invested Amount less the Class B Percentage of the
initial
A-2-4
<PAGE>
deposit to the Pre-Funding Account plus the Class B Percentage of any
withdrawals from the Pre-Funding Account (i) during the Funding Period in
connection with the addition of Receivables to the Trust or (ii) at the end of
the Funding Period for deposit 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 Business Day, minus (c) the aggregate amount of Class B
Investor Charge-Offs for all prior Distribution Dates, 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 Business Days, and plus (e) the sum of the aggregate amount allo-
cated and available on all prior Business Days pursuant to subsection
4.9(a)(x) of the Agreement and, with respect to such subsection, pursuant to
subsections 4.10(a) and (b), 4.16(a) and (b), 4.19(b) and 4.20(b), (c) and (d)
of the Agreement, for the purpose of reinstating amounts reduced pursuant to
the foregoing clauses (c) and (d).
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 day of the September 1997 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 Initial Pre-Funded Amount,
minus the amounts of any increases in the Invested Amount during the Funding
Period pursuant to Section 4.15 of the Agreement, minus the amount of any
principal losses on funds on deposit in the Pre-Funding Account and minus the
amount withdrawn from the Pre-Funding Account and deposited in the Excess
Funding Account. 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
sum of the then current outstanding principal balance of all Series (excluding
the Series 1997-1 Certificates). Funds
A-2-5
<PAGE>
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. 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 Business Day of the September 1997 Monthly Period, such
amount will be deposited in the Excess Funding Account, and the Class A
Invested Amount, Class B Invested Amount and Class C Invested Amount shall be
increased pro rata by such amount.
Subject to the Agreement, payments of principal are limited
to the unpaid Class B Invested Amount of the Class B Certificates, which may
be less than the unpaid balance of the Class B Certificates pursuant to the
terms of the Agreement. All principal on the Class B Certificates is due and
payable no later than the October 2005 Distribution Date (or if such day is
not a Business Day, the next succeeding Business Day) (the "Scheduled Series
1997-1 Termination Date"). After the earlier to occur of (i) the Scheduled
Series 1997-1 Termination Date or (ii) the day after the Distribution Date on
which the Series 1997-1 Certificates are paid in full (the "Series 1997-1
Termination Date") neither the Trust nor the Transferor will have any further
obligation to distribute principal or interest on the Class B Certificates. In
the event that the Class B Invested Amount is greater than zero on the Series
1997-1 Termination Date, the Trustee will sell or cause to be sold, to the
extent necessary, an amount of interests in the Receivables or certain of the
Receiv-ables up to 110% of the Class A Invested Amount, the Class B Invested
Amount, the Class C Invested Amount and the Class D Invested Amount at the
close of business on such date (but not more than the total amount of Receiv-
ables allocable to the Investor Certificates), and shall
A-2-6
<PAGE>
pay the proceeds to the Class A Certificateholders pro rata in final payment
of the Class A Certificates, then to the Class B Certificateholders pro rata
in final payment of the Class B Certificates, then to the Class C
Certificateholders pro rata in final payment of the Class C Certificates and
finally to the Class D Certificateholders pro rata in final payment of the
Class D Certificates.
Unless the certificate of authentication hereon has been
executed by or on behalf of the Trustee, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement, or be valid for any
purpose.
A-2-7
<PAGE>
IN WITNESS WHEREOF, the Transferor has caused this
Certificate to be duly executed under its official seal.
METRIS RECEIVABLES, INC.
By:_______________________
Name:
Title:
Dated:
CERTIFICATE OF AUTHENTICATION
This is one of the Class B Certificates referred to in the
within-mentioned Pooling and Servicing Agreement.
THE BANK OF NEW YORK
By:______________________
Name:
Title:
A-2-8
<PAGE>
Exhibit A-3
FORM OF CLASS C INVESTOR CERTIFICATE
EACH PURCHASER REPRESENTS AND WARRANTS FOR THE
BENEFIT OF METRIS RECEIVABLES, INC. AND THE TRUSTEE
THAT SUCH PURCHASER IS NOT (I) AN EMPLOYEE BENEFIT
PLAN (AS DEFINED IN SECTION 3(3) OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA")) THAT IS SUBJECT TO THE PROVISIONS OF
TITLE I OF ERISA, (II) A PLAN DESCRIBED IN SECTION
4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (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 DE-
FINED IN 29 C.F.R. SECTION 2510.301-1 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 PUR-
POSES OF CLAUSE (IV) AND THIS CLAUSE (V), ANY INSUR-
ANCE COMPANY GENERAL ACCOUNT, BUT EXCLUDING ANY EN-
TITY REGISTERED UNDER THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED).
THIS CERTIFICATE MAY NOT BE ACQUIRED, SOLD,
TRADED OR TRANSFERRED BY A PERSON WHO IS NOT EITHER
(A)(I) A CITIZEN OR RESIDENT OF THE UNITED STATES,
(II) A CORPORATION, PARTNERSHIP OR OTHER ENTITY
ORGANIZED IN OR UNDER THE LAWS OF THE UNITED STATES
OR ANY POLITICAL SUBDIVISION THEREOF OR (III) A PER-
SON NOT DESCRIBED IN (I) OR (II) WHOSE OWNERSHIP OF
THE CLASS C CERTIFICATES IS EFFECTIVELY CONNECTED
WITH SUCH PERSON'S CONDUCT OF A TRADE OR BUSINESS
WITHIN THE UNITED STATES (WITHIN THE MEANING OF THE
CODE) AND ITS OWNERSHIP OF ANY INTEREST IN A CLASS C
CERTIFICATE WILL NOT RESULT IN ANY WITHHOLDING OBLI-
GATION WITH RESPECT TO ANY PAYMENTS WITH RESPECT TO
THE CLASS C CERTIFICATES BY ANY PERSON (OTHER THAN
WITHHOLDING, IF ANY, UNDER SECTION 1446 OF THE CODE)
OR (B) AN ESTATE THE INCOME OF WHICH IS INCLUDIBLE
IN GROSS INCOME FOR UNITED STATES FEDERAL INCOME TAX
PURPOSES OR ANY TRUST IF A COURT WITHIN THE UNITED
STATES IS ABLE TO EXERCISE PRIMARY SUPERVISION OVER
A-3-1
<PAGE>
THE ADMINISTRATION OF THE TRUST AND ONE OR MORE
UNITED STATES FIDUCIARIES HAVE THE AUTHORITY TO
CONTROL ALL SUBSTANTIAL DECISIONS OF THE TRUST.
THIS CERTIFICATE MAY NOT BE ACQUIRED,
SOLD, TRADED, TRANSFERRED, ASSIGNED, PARTICI-
PATED, PLEDGED, HYPOTHECATED OR OTHERWISE DIS-
POSED, NOR MAY AN INTEREST IN THIS CERTIFICATE
BE MARKETED, ON OR THROUGH (I) AN "ESTABLISHED
SECURITIES MARKET" WITHIN THE MEANING OF SEC-
TION 7704(b)(1) OF THE CODE AND ANY PROPOSED,
TEMPORARY OR FINAL TREASURY REGULATION THEREUN-
DER, INCLUDING, WITHOUT LIMITATION, AN OVER-
THE-COUNTER-MARKET OR AN INTERDEALER QUOTATION
SYSTEM THAT REGULARLY DISSEMINATES FIRM BUY OR
SELL QUOTATIONS OR (II) A "SECONDARY MARKET"
WITHIN THE MEANING OF SECTION 7704(b)(2) OF THE
CODE AND ANY PROPOSED, TEMPORARY OR FINAL TREA-
SURY REGULATION THEREUNDER, INCLUDING A MARKET
WHEREIN INTERESTS IN THE CLASS C CERTIFICATES
ARE REGULARLY QUOTED BY ANY PERSON MAKING A
MARKET IN SUCH INTERESTS AND A MARKET WHEREIN
ANY PERSON REGULARLY MAKES AVAILABLE BID OR
OFFER QUOTES WITH RESPECT TO INTERESTS IN THE
CLASS C CERTIFICATES AND STANDS READY TO EFFECT
BUY OR SELL TRANSACTIONS AT THE QUOTED PRICES
FOR ITSELF OR ON BEHALF OF OTHERS.
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT
BE REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAW. THE HOLDER HEREOF, BY PURCHAS-
ING THIS CERTIFICATE, AGREES THAT THIS CERTIFI-
CATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTH-
ERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE
SECURITIES ACT AND OTHER APPLICABLE LAWS AND
ONLY (1) TO THE TRANSFEROR, (2) TO A LIMITED
NUMBER OF INSTITUTIONAL "ACCREDITED INVESTORS"
(AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT) AND IN A TRANSACTION
EXEMPT FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT (UPON DELIVERY OF THE DOCU-
MENTATION REQUIRED BY THE POOLING AND SERVICING
AGREEMENT AND, IF THE TRUSTEE SO REQUIRES, AN
OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE)
OR (3) PURSUANT TO RULE 144A UNDER THE SECURI-
TIES ACT TO A PERSON THAT THE HOLDER REASONABLY
A-3-2
<PAGE>
BELIEVE IS A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A ("QIB") PUR-
CHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING
FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS
INFORMED, IN EACH CASE, THAT THE REOFFER, RE-
SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A. EACH CERTIFICATE OWNER
BY ACCEPTING A BENEFICIAL INTEREST IN THIS
CERTIFICATE IS DEEMED TO REPRESENT THAT IT IS
EITHER A QIB PURCHASING FOR ITS OWN ACCOUNT, A
QIB PURCHASING FOR THE ACCOUNT OF ANOTHER QIB
OR AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7)
UNDER THE SECURITIES ACT). THIS CERTIFICATE
WILL NOT BE ACCEPTED FOR REGISTRATION OF TRANS-
FER EXCEPT UPON PRESENTATION OF EVIDENCE SATIS-
FACTORY TO THE TRANSFER AGENT AND REGISTRAR
THAT THE RESTRICTIONS ON TRANSFER SET FORTH IN
THE SERIES 1997-1 SUPPLEMENT HAVE BEEN COMPLIED
WITH. THIS CERTIFICATE MAY NOT BE REOFFERED,
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED WITH-
OUT THE PRIOR WRITTEN CONSENT OF THE TRANSFEROR
AND UNLESS AND UNTIL THE TRUSTEE SHALL HAVE RE-
CEIVED THE CERTIFICATIONS REQUIRED BY THE SE-
RIES 1997-1 SUPPLEMENT.
No. ___ $_________
METRIS MASTER TRUST
FLOATING RATE ASSET BACKED
CERTIFICATE, SERIES 1997-1, CLASS C
Evidencing an undivided interest in a trust, the corpus of
which consists of receivables generated from time to time in the ordinary
course of business from a portfolio of revolving consumer credit card accounts
transferred or to be transferred by certain subsidiaries of Metris
Receivables, Inc. (the "Transferor") and other assets and interests
constituting the Trust under the Agreement described below.
(Not an interest in or a recourse obligation of Metris
Receivables, Inc., Direct Merchants Credit Card Bank, National Association or
any affiliate of either of them.)
A-3-3
<PAGE>
This certifies that ___________________ (the
"Certificateholder") is the registered owner of a fractional undivided
interest in the Metris Master Trust (the "Trust") issued pursuant to the
Pooling and Servicing Agreement, dated as of May 26, 1995 (the "Pooling and
Servicing Agreement"; such term to include any amendment thereto) by and
between the Transferor, Direct Merchants Credit Card Bank, National
Association as the Servicer (the "Servicer"), and The Bank of New York
(Delaware), as Trustee (the "Trustee"), and the Series 1997-1 Supplement,
dated as of May __, 1997 (the "Series 1997-1 Supplement"), among the
Transferor, the Servicer and the Trustee. The Pooling and Servicing Agreement,
as supplemented by the Series 1997-1 Supplement, is herein referred to as
the "Agreement." The corpus of the Trust consists of all of the Transferor's
right, title and interest in, to and under the Trust Property (as defined in
the Agreement).
This Certificate does not purport to summarize the Agreement
and reference is made to that Agreement for information with respect to the
interests, rights, benefits, obligations, proceeds, and duties evidenced
hereby and the rights, duties and obligations of the Trustee. To the extent
not defined herein, the capitalized terms used herein have the meanings
ascribed to them in the Agreement. This Certificate is one of a series of Cer-
tificates entitled "Metris Master Trust Floating Rate Asset Backed
Certificates, Series 1997-1, Class C" (the "Class C Certificates"), each of
which represents a fractional undivided interest in the Trust, and is issued
under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement, as amended from time to time, the
Certificateholder by virtue of the acceptance hereof assents and by which the
Certificateholder is bound.
The Transferor has structured the Agreement, the Class C
Certificates, the Metris Master Trust ___% Asset Backed Certificates, Series
1997-1, Class A (the "Class A Certificates") and the Metris Master Trust ___%
Asset Backed Certificates, Series 1997-1, Class B (the "Class B Certificates")
with the intention that the Class A, Class B and Class C Certificates will
qualify under applicable tax law as indebtedness, and both the Transferor and
each holder of a Class C Certificate (a "Class C Certificateholder") or any
interest therein by
A-3-4
<PAGE>
acceptance of its Certificate or any interest therein, agrees to treat the
Class C Certificates for purposes of federal, state and local income or
franchise taxes and any other tax imposed on or measured by income, as in-
debtedness.
No principal will be payable to the Class C
Certificateholders until the earlier of the Expected Final Payment Date and,
upon the occurrence of a Pay Out Event, the Distribution Date following the
Monthly Period in which the Pay Out Event occurs but in no event earlier than
the Distribution Date either on or following the Distribution Date on which
the Class A Invested Amount and the Class B Invested Amount have been paid in
full. No principal payments will be payable to the Class C Cer-
tificateholders until the Distribution Date either on or following the
Distribution Date on which the Class A Invested Amount and Class B Invested
Amount have been paid in full.
Interest on the Class C Certificates will be payable on June
20, 1997 and on each Distribution Date thereafter, in an amount equal to the
product of (i) the Class C Certificate Rate, (ii) 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 and (iii) the Class C Invested Amount as of
the close of business on the first day of such Interest Accrual Period (or in
the case of the initial Distribution Date, an amount equal to the sum of (I)
the product of (u) the Class C Initial Invested Amount, (v) ___ divided by
360, and (w) the Class C Certificate Rate determined on ______ ___, 1997, plus
(II) the product of (x) the Class C Initial Invested Amount, (y) ___ divided
by 360, and (z) the Class C Certificate Rate determined on May 16, 1997);
provided, however, that with respect to any Distribution Date related to the
Funding Period the amount described in clause (iii) shall be the Class C
Outstanding Principal Amount at the close of business on the first day of
such Interest Accrual Period.
Subject to the prior payment of interest on the Class A
Certificates and Class B Certificates, interest payments on the Class C
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
A-3-5
<PAGE>
set forth in the Pooling and Servicing Agreement to the Class C Certificates
and deposited on each business day during such Monthly Period in the Interest
Funding Account.
"Class C Invested Amount" shall mean, when used with respect
to any Business Day, the greater of (x) zero and (y) 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 (i) during the Funding Period in
connection with the addition of Receivables to the Trust or (ii) at the end of
the Funding Period for deposit 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 Business Day, minus (c) the aggregate amount of Class C
Investor Charge-Offs for all prior Distribution Dates, minus (d) the aggregate
amount of Reallocated Class B Principal Collections and Reallocated Class C
Principal Collections for which the Class D Invested Amount has not been
reduced for all prior Business Days, and plus (e) the sum of the aggregate
amount allocated and available on all prior Business Days pursuant to
subsection 4.9(a)(xi) of the Agreement and, with respect to such subsection,
pursuant to subsections 4.10(a) and (b), 4.16(a), 4.19(b) and 4.20(b), (c) and
(d) of the Agreement, for the purpose of reinstating amounts reduced pursuant
to the foregoing clauses (c) and (d).
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 day of the September 1997 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 Initial Pre-Funded Amount,
minus the amounts of any increases in the Invested Amount during the Funding
Period pursuant to Section 4.15 of the Agreement, minus the amount of any
principal losses on funds on deposit in the Pre-Funding Account and minus the
amount withdrawn from the Pre-Funding Account and deposited in the Excess
A-3-6
<PAGE>
Funding Account. 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
sum of the then current outstanding principal balance of all Series (excluding
the Series 1997-1 Certificates). 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. 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 Business Day of the September 1997 Monthly Period, such
amount will be deposited in the Excess Funding Account, and the Class A
Invested Amount, Class B Invested Amount and Class C Invested Amount shall be
increased pro rata by such amount.
Subject to the Agreement, payments of principal are limited
to the unpaid Class C Invested Amount of the Class C Certificates, which may
be less than the unpaid balance of the Class C Certificates pursuant to the
terms of the Agreement. All principal on the Class C Certificates is due and
payable no later than the October 2005 Distribution Date (or if such day is
not a Business Day, the next succeeding Business Day) (the "Scheduled Series
1997-1 Termination Date"). After the earlier to occur of (i) the Scheduled
Series 1997-1 Termination Date or (ii) the day after the Distribution Date on
which the Series 1997-1 Certificates are paid in full (the "Series 1997-1
Termination Date") neither the Trust nor the Transferor will have any further
obligation to distribute principal or interest on the Class C Certificates. In
the event
A-3-7
<PAGE>
that the Class C Invested Amount is greater than zero on the Series
Termination Date, the Trustee will sell or cause to be sold, to the extent
necessary, an amount of interests in the Receivables or certain of the Receiv-
ables up to 110% of the Class A Invested Amount, the Class B Invested Amount,
the Class C Invested Amount and the Class D Invested Amount at the close of
business on such date (but not more than the total amount of Receivables
allocable to the Investor Certificates), and shall pay the proceeds to the
Class A Certificateholders pro rata in final payment of the Class A
Certificates, then to the Class B Certificateholders pro rata in final payment
of the Class B Certificates, then to the Class C Certificateholders pro rata
in final payment of the Class C Certificates and finally to the Class D
Certificateholders pro rata in final payment of the Class D Certificates.
Unless the certificate of authentication hereon has been
executed by or on behalf of the Trustee, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement, or be valid for any
purpose.
A-3-8
<PAGE>
IN WITNESS WHEREOF, the Transferor has caused this
Certificate to be duly executed under its official seal.
METRIS RECEIVABLES, INC.
By:________________________
Name:
Title:
Dated:
CERTIFICATE OF AUTHENTICATION
This is one of the Class C Certificates referred to in the
within-mentioned Pooling and Servicing Agreement.
THE BANK OF NEW YORK
By:_______________________
Name:
Title:
A-3-9
<PAGE>
Exhibit A-4
FORM OF CLASS D INVESTOR CERTIFICATE
THIS CERTIFICATE WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"). THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAW OF ANY STATE AND MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS REGIS-
TERED PURSUANT TO OR EXEMPT FROM REGISTRATION UNDER
THE SECURITIES ACT AND ANY OTHER APPLICABLE SECURI-
TIES LAW. T HE TRANSFEROR SHALL BE PROHIBITED FROM
TRANSFERRING ANY INTEREST IN OR PORTION OF THIS
CERTIFICATE.
EACH PURCHASER REPRESENTS AND WARRANTS FOR THE
BENEFIT OF METRIS RECEIVABLES, INC. AND THE TRUSTEE
THAT SUCH PURCHASER IS NOT (I) AN EMPLOYEE BENEFIT
PLAN (AS DEFINED IN SECTION 3(3) OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA")) THAT IS SUBJECT TO THE PROVISIONS OF
TITLE I OF ERISA, (II) A PLAN DESCRIBED IN SECTION
4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (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 DE-
FINED IN 29 C.F.R. SECTION 2510.3-101 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 PUR-
POSES OF CLAUSE (IV) AND THIS CLAUSE (V), ANY INSUR-
ANCE COMPANY GENERAL ACCOUNT, BUT EXCLUDING ANY
ENTITY REGISTERED UNDER THE INVESTMENT COMPANY ACT
OF 1940, AS AMENDED).
No. ___ $_________
METRIS MASTER TRUST
0% ASSET BACKED
A-4-1
<PAGE>
CERTIFICATE, SERIES 1997-1, CLASS D
Evidencing an undivided interest in a trust, the corpus of
which consists of receivables generated from time to time in the ordinary
course of business from a portfolio of revolving consumer credit card accounts
transferred or to be transferred by Metris Receivables, Inc. (the
"Transferor") and other assets and interests constituting the Trust under the
Agreement described below.
(Not an interest in or a recourse obligation of Metris
Receivables, Inc., Direct Merchants Credit Card Bank, National Association or
any affiliate of either of them.)
This certifies that ______________ (the "Cer-
tificateholder") is the registered owner of a fractional undivided interest in
the Metris Master Trust (the "Trust") issued pursuant to the Pooling and
Servicing Agreement, dated as of May 26, 1995 (the "Pooling and Servicing
Agreement"; such term to include any amendment or Supplement thereto) by and
between the Transferor, Direct Merchants Credit Card Bank, National
Association as the Servicer (the "Servicer"), and The Bank of New York
(Delaware), as Trustee (the "Trustee"), and the Series 1997-1 Supplement,
dated as of May __, 1997 (the "Series 1997-1 Supplement"), among the
Transferor, the Servicer and the Trustee. The Pooling and Servicing Agreement,
as supplemented by the Series 1997-1 Supplement, is herein referred to as
the "Agreement." The corpus of the Trust consists of all of the Transferor's
right, title and interest in, to and under the Trust Property (as defined in
the Agreement).
This Certificate does not purport to summarize the Agreement
and reference is made to that Agreement for information with respect to the
interests, rights, benefits, obligations, proceeds, and duties evidenced
hereby and the rights, duties and obligations of the Trustee. To the extent
not defined herein, the capitalized terms used herein have the meanings
ascribed to them in the Agreement. This Certificate is one of a series of Cer-
tificates entitled "Metris Master Trust 0% Asset Backed Certificates, Series
1997-1, Class D" (the "Class D Certificates"), each of which represents a
fractional undivided interest in the Trust, and is issued under and is
A-4-2
<PAGE>
subject to the terms, provisions and conditions of the Agreement, to which
Agreement, as amended from time to time, the Certificateholder by virtue of
the acceptance hereof assents and by which the Certificateholder is bound.
Metris Receivables, Inc. shall be prohibited from
Transferring any interest in or portion of the Class D Certificate.
No principal will be payable to the Class D
Certificateholders (other than with respect to Class D Excess Amounts) until
the earlier of the Expected Final Payment Date and, upon the occurrence of a
Pay Out Event, the Distribution Date following the Monthly Period in which the
Pay Out Event occurs but in no event earlier than the Distribution Date either
on or following the Distribution Date on which Class A Invested Amount, Class
B Invested Amount and the Class C Invested Amount have been paid in full. No
principal will be payable to the Class D Certificateholders until all
principal payments have first been made to the Class A Certificateholders,
Class B Certificateholders and Class C Certificateholders.
"Class D Invested Amount" shall mean, when used with respect
to any Business Day, the greater of (x) zero and (y) 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 Business Day, minus (c) the aggregate amounts by
which the Transferor has reduced the Class D Invested Amount pursuant to
subsection 4.12(d) of the Agreement, minus (d) the aggregate amount of Class
D Investor Charge-Offs for all prior Distribution Dates, minus (e) the
aggregate amount of Reallocated Principal Collections for all prior Business
Days, plus (f) the sum of the aggregate amount allocated and available on all
prior Business Days pursuant to subsection 4.9(a)(xii) of the Agreement and,
with respect to such subsection, pursuant to subsections 4.10(a) and (b),
4.19(b) and 4.20(b), (c) and (d) of the Agreement, for the purpose of
reinstating amounts reduced pursuant to the foregoing clauses (d) and (e).
Subject to the Agreement, payments of principal are limited
to the unpaid Class D Invested Amount of the
A-4-3
<PAGE>
Class D Certificates, which may be less than the unpaid balance of the Class D
Certificates pursuant to the terms of the Agreement. All principal on the
Class D Certificates is due and payable no later than the October 2005
Distribution Date (or if such day is not a Business Day, the next succeeding
Business Day) (the "Scheduled Series 1997-1 Termination Date"). After the
earlier to occur of (i) the Scheduled Series 1997-1 Termination Date or (ii)
the day after the Distribution Date on which the Series 1997-1 Certificates
are paid in full (the "Series 1997-1 Termination Date") neither the Trust nor
the Transferor will have any further obligation to distribute principal or
interest on the Class D Certificates. In the event that the Class D Invested
Amount is greater than zero on the Series Termination Date, the Trustee will
sell or cause to be sold, to the extent necessary, an amount of interests in
the Receivables or certain of the Receivables up to 110% of the Class A
Invested Amount, the Class B Invested Amount, the Class C Invested Amount and
the Class D Invested Amount at the close of business on such date (but not
more than the total amount of Receivables allocable to the Investor
Certificates), and shall pay the proceeds to the Class A Certificateholders
pro rata in final payment of the Class A Certificates, then to the Class B
Certificateholders pro rata in final payment of the Class B Certificates, then
to the Class C Certificateholders pro rata in final payment of the Class C
Certificates and finally to the Class D Certificateholders pro rata in final
payment of the Class D Certificates.
Unless the certificate of authentication hereon has been
executed by or on behalf of the Trustee, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement, or be valid for any
purpose.
A-4-4
<PAGE>
IN WITNESS WHEREOF, the Transferor has caused this
Certificate to be duly executed under its official seal.
METRIS RECEIVABLES, INC.
By:________________________
Name:
Title:
Dated:
CERTIFICATE OF AUTHENTICATION
This is one of the Class D Certificates referred to in the
within-mentioned Pooling and Servicing Agreement.
THE BANK OF NEW YORK
By:________________________
Name:
Title:
A-4-5
<PAGE>
EXHIBIT B
[Form of Monthly Certificateholders' Statement]
B-1
<PAGE>
EXHIBIT C
Metris Receivables, Inc.
4400 Baker Road, Suite F470
Minnetonka, Minnesota 55343
The Bank of New York (Delaware)
White Clay Center
Route 273
Newark, Delaware 19711
Re: Metris Master Trust Floating Rate Asset Backed Cer-
tificates, Series 1997-1, Class C
Ladies and Gentlemen:
In connection with our proposed purchase of $_________ in principal
amount of Metris Master Trust Floating Rate Asset Backed Certificates, Series
1997-1, Class C (the "Class C Certificates"), we confirm that:
[To be included in each letter to be signed by the initial purchasers
from Bear, Stearns & Co. Inc.] [1. We have received a copy of the Private
Placement Memorandum dated April __, 1997 relating to the Class C Certif-
icates (the "Private Placement Memorandum") and such other information and
documentation as we deem necessary in order to make our investment decision.
We understand that the Private Placement Memorandum and any such other
information and documentation speaks only as of its date and that the
information contained in the Private Placement Memorandum and such other
information and documentation may not be correct or complete as of any time
subsequent to such date.]
2. We agree to be bound by the restrictions and conditions set forth
in the Pooling and Servicing Agreement, dated as of May 26, 1995, as amended
(the "Pooling and Servicing Agreement") and as supplemented by the Series
1997-1 Supplement dated as of May __, 1997 (the "Series 1997-1 Supplement" and
together with the Pooling and Servicing Agreement, the "Pooling and Servicing
Agreement"), each by and between Metris Receivables, Inc., as Transferor,
Direct Merchants Credit Card Bank, National Association, as Servicer, and The
Bank of New York (Delaware), as Trustee, relating to the Class C Certificates
and agree to be bound by, and not reoffer,
C-1
<PAGE>
resell, pledge, participate, hypothecate or otherwise dispose or transfer (any
such act, a "Transfer") the Class C Certificates except in compliance with,
certain restrictions and conditions including but not limited to those in
Section 10 of the Series 1997-1 Supplement. We understand that capitalized
terms used herein and not otherwise defined herein have the meanings given to
such terms in the Series 1997-1 Supplement.
3. We understand that the Class C Certificates have not been and will
not be registered under the Securities Act of 1933, as amended (the
"Securities Act") or any state securities law and agree that the Class C
Certificates may be reoffered, resold, pledged or otherwise transferred only
in compliance with the Securities Act and other applicable laws and only (i)
to the Transferor, (ii) to a limited number of institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) and in a transaction exempt from the registration requirements of the
Securities Act (upon delivery of the documentation required by the Pooling and
Servicing Agreement and, if the Trustee so requires, an opinion of counsel
satisfactory to the Trustee) or (iii) pursuant to Rule 144A under the Securi-
ties Act to a person that we reasonably believe is a qualified institutional
buyer within the meaning of Rule 144A ("QIB") purchasing for its own account
or a QIB purchasing for the account of a QIB, whom we have informed, in each
case, that the reoffer, resale, pledge or other transfer is being made in
reliance on Rule 144A.
4. We have neither acquired nor will we Transfer any Class C
Certificate we acquire (or any interest therein) or cause any Class C
Certificate (or any interest therein) to be marketed on or through (i) an
"established securities market" within the meaning of Section 7704(b)(1) of
the Internal Revenue Code of 1986, as amended (the "Code") and any Treasury
regulation thereunder, including, without limitation, an over-the-counter
market or an interdealer quotation system that regularly disseminates firm buy
or sell quotations or (ii) a "secondary market" within the meaning of
Section 7704(b)(2) of the Code and any Treasury regulation thereunder,
including a market wherein the Class C Certificates (or any interest therein)
are regularly quoted by any person making a market in such interests and a
market wherein any person regularly makes available bid or offer quotes
C-2
<PAGE>
with respect to the Class C Certificates (or any interest therein) and stands
ready to effect buy or sell transactions at the quoted prices for itself or
on behalf of others.
5. We are not and will not become, for so long as we own any interest
in the Class C Certificates, a partnership, Subchapter S corporation or
grantor trust for United States federal income tax purposes. If this
representation cannot be made, the Transferor may, in its sole discretion,
prohibit a Transfer to such entity; provided, however, that if the Transferor
agrees to permit such a Transfer, the Transferor or the Trustee may require
additional certifications and representations in order to prevent the Trust
from being treated as a publicly traded partnership.
6. We are a person who is either (A)(i) a citizen or resident of the
United States, (ii) a corporation or other entity organized in or under the
laws of the United States or any political subdivision thereof or (iii) a
person not described in (i) or (ii) whose ownership of the Class C
Certificates is effectively connected with such person's conduct of a trade or
business within the United States (within the meaning of the Code) and our
ownership of any interest in a Class C Certificate will not result in any
withholding obligation with respect to any payments with respect to the Class
C Certificates by any person or (B) an estate the income of which is
includible in gross income for United States federal income tax purposes or
any trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust. We agree that (a) if we are a person described in clause (A)(i) or
(A)(ii) above, we will furnish to the person from whom we are acquiring a
Class C Certificate, the Transferor, the Servicer and the Trustee, a properly
executed U.S. Internal Revenue Service Form W-9 and a new Form W-9, or any
successor applicable form, upon the expiration or obsolescence of any
previously delivered form or (b) if we are a person described in clause
(A)(iii) above, we will furnish to the person from whom we are acquiring a
Class C Certificate, the Transferor, the Servicer and the Trustee, a properly
executed U.S. Internal Revenue Service Form 4224 and a new Form 4224, or any
successor applicable form, upon the
C-3
<PAGE>
expiration or obsolescence of any previously delivered form (and, in each case,
such other certifications, representations or opinions of counsel as may be
requested by the Transferor, the Servicer or the Trustee). We recognize that if
we are a tax-exempt entity, payments with respect to the Class C Certificates
may constitute unrelated business taxable income.
7. We understand that no subsequent Transfer of a Class C Certificate
is permitted unless the Transferor and the Servicer each consent in writing to
the proposed Transfer, which consent shall be granted (assuming that all other
conditions to such Transfer are satisfied) unless either the Transferor or the
Servicer determines in its sole and absolute discretion that such Transfer
would create more than an insubstantial risk that the Trust would be
classified for federal or any applicable state tax purposes as an association
or publicly traded partnership taxable as a corporation; provided, that any
attempted Transfer that would cause the number of Targeted Holders to exceed
one-hundred shall be void; and provided, further, that there shall not at
any time be more than 10 holders of Class C Certificates of Series 1997-1 or
such other number as may be consented to by the Transferor, which consent
may be withheld in its sole and absolute discretion.
"Targeted Holder" means (i) each holder of a
right to receive interest or principal with
respect to the Class C Certificates (or other
interests in the Trust), other than certifi-
cates (or other such interests) with respect to
which an opinion is rendered that such certif-
icates (or other such interests) will be treat-
ed as debt for Federal income tax purposes, and
(ii) any holder of a right to receive any
amount in respect of the Transferor Interest;
provided, that any person holding more than one
interest each of which would cause such person
to be a Targeted Holder shall be treated as a
single Targeted Holder.
8. We understand that the opinion of tax counsel that the Trust will
not be subject to tax at the entity level is dependent in part on the accuracy
of the representations in paragraphs 4, 5, 6 and 7 and that, if such
representations are not accurate, in addition to our
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<PAGE>
being subject to having our purchase rescinded, we will be liable for damages.
9. We understand that if we are not created or organized under the
laws of the United States or any State thereof (including the District of
Columbia), we will, upon written notice by the Transferor that the Transferor
intends, pursuant to Section 1446 or other applicable section of the Code, to
withhold U.S. tax (a "Withholding Tax") from amounts paid or accruing to us
with respect to our interest in a Class C Certificate (such determination
being a "Withholding Event"), for tax years for which we have already filed
U.S. federal income tax returns (each a "Prior Tax Year") prior to proper no-
tice of such Withholding Event, provide (A) a signed officer's certificate
stating that amounts paid or accruing to us with respect to our interest in
a Class C Certificate have been included in our U.S. federal income tax
returns for each such Prior Tax Year, which certificate may be relied on by
the Transferor in asserting to the Internal Revenue Service the applicability
of Section 1463 of the Code with respect to any Withholding Tax for each such
Prior Tax Year and (B) provide information to the Transferor or, at our
option, to the Internal Revenue Service in support of the application of
Section 1463 of the Code for each such Prior Tax Year.
10. We are (a) an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3), or (7) of Regulation D under the Securities Act)
and have such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of our investment in the
Class C Certificates, and we are acquiring each of the Class C Certificates
purchased by us for our own account or for a single account (which is an
institutional "accredited investor") as to which we exercise sole investment
discretion and we and any such account for which we are acting are each able
to bear the economic risk of our or its investment or (b) a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act)
purchasing for our own account or for the account of a "qualified
institutional buyer" and we understand that the sale to us is being made in
reliance on Rule 144A under the Securities Act.
11. We are not (i) an employee benefit plan (as defined in Section
3(3) of the Employee Retirement Income
C-5
<PAGE>
Security Act of 1974, as amended ("ERISA") that is subject to the provisions
of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) 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 29 C.F.R. Section
2510.3-101 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) or this clause (v), any
insurance company general account, but excluding any entity registered under
the Investment Company Act of 1940, as amended).
12. We understand that any purported Transfer of any Class C
Certificate in contravention of the restrictions and conditions in
paragraphs 1 through 12 above (including any violation of the representation
in paragraph 5 by an investor who continues to hold a Class C Certificate
occurring any time after the Transfer in which it acquired such Class C
Certificate) shall be null and void and the purported transferee shall not be
recognized by the Trust or any other person as a Class C Certificateholder
for any purpose.
13. We further understand that, on any proposed resale, pledge or
transfer of any Class C Certificates, we will be required to furnish to the
Trustee and the Registrar, such certification and other information as the
Trustee or the Registrar may reasonably require to confirm that the proposed
sale complies with the foregoing restrictions and with the restrictions and
conditions of the Class C Certificates and the Pooling and Servicing Agreement
pursuant to which the Class C Certificates were issued and we agree that if we
determine to Transfer any Class C Certificate, we will cause our proposed
transferee to provide the Transferor, the Servicer and the Trustee with a
letter substantially in the form of this letter. We further understand that
Class C Certificates purchased by us will bear a legend to the foregoing
effect.
14. The person signing this letter on behalf of the ultimate
beneficial purchaser of the Class C Certificates
C-6
<PAGE>
has been duly authorized by such beneficial purchaser of the Class C
Certificates to do so.
15. The Class C Certificates purchased by us should be registered in
the name and issued in the denominations set forth on Schedule 1 hereto. All
payments on the Class C Certificates held by us should be wired to us in
accordance with the instructions set forth on Schedule 1 hereto unless we
otherwise notify the Transferor, the Servicer and the Trustee in writing.
You are entitled to rely upon this letter and are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceeding or official inquiry with respect to the
matters covered hereby.
Very truly yours,
[NAME OF TRANSFEREE]
By:________________________
Name:
Title:
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<PAGE>
May 1, 1997
Metris Receivables, Inc.
4400 Baker Road
Suite F470
Minnetonka, MN 55343
Re: Registration Statement on Form S-3
Registration No. 333-23045
Ladies and Gentlemen:
We have acted as special counsel to Metris Receivables,
Inc., as transferor (the "Transferor"), in connection with (a) the transfer
and assignment of a portfolio of MasterCard or other revolving consumer credit
card accounts, and all monies due or to become due in payment of such
receivables (collectively, the "Receivables"), by the Transferor to The Bank
of New York (Delaware), as trustee (the "Trustee") for the Metris Master Trust
(the "Trust"), formed pursuant to a Pooling and Servicing Agreement dated as
of May 26, 1995, as amended (the "Pooling and Servicing Agreement") by and
among the Transferor, Direct Merchants Credit Card Bank, National Association,
as servicer (the "Servicer") and the Trustee, to be allocated by the Trust
among the interests of the holders of certain Series of Certificates to be
outstanding from time to time including the Series 1997-1 Class A
Certificateholders' Interests (the "Class A Certificates"), Class B
Certificateholders' Interests (the "Class B Certificates" together with the
Class A Certificates, the "Offered Certificates"), the Class C
Certificateholders' Interest (the "Class C Certificates") and the Class D
Certificateholders' Interest (the "Class D Certificates") (together, the
"Certifi-
<PAGE>
Metris Receivables, Inc.
May 1, 1997
Page 2
cates") and (b) the sale of the Offered Certificates to the underwriters (the
"Underwriters") party to an Underwriting Agreement (the "Underwriting
Agreement"), by and among the Transferor, Metris Companies Inc. and Bear,
Stearns & Co. Inc., as representative of the Underwriters.
In connection with our engagement, we have examined and
relied upon the forms of the Pooling and Servicing Agreement and the
Underwriting Agreement included as exhibits to the Registration Statement
(Registration No. 333-23045) (as amended, the "Registration Statement"). In
addition, we have examined and considered executed originals or counterparts,
or certified or other copies identified to our satisfaction as being true
copies of such certificates, instruments, documents and other corporate
records of the Transferor and matters of fact and law as we deem necessary for
the purposes of the opinion expressed below. Capitalized terms not otherwise
defined herein have the respective meanings assigned to such terms in the
Underwriting Agreement.
In our examination we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the original of such
latter documents. As to any facts material to the opinions expressed herein
that we did not independently establish or verify, we have relied upon
statements and representations of officers and other representatives of the
Transferor and others.
We express no opinion as to the laws of any jurisdiction
other than the laws of the State of Delaware and the laws of the United States
of America to the extent specifically referred to herein.
Based upon and subject to the foregoing, we are of the
opinion that, when the Offered Certificates to be issued pursuant to the
Pooling and Servicing Agreement have been duly and validly authorized by the
Transferor and when the Offered Certificates are executed and delivered by the
Transferor and authenticated by the Trustee
<PAGE>
Metris Receivables, Inc.
May 1, 1997
Page 3
in accordance with the provisions of the Pooling and Servicing Agreement, and
when the Offered Certificates are paid for by the Underwriters in accordance
with the terms of the Underwriting Agreement, the Offered Certificates will be
legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to Skadden, Arps, Slate,
Meagher & Flom (Delaware) under the caption "Legal Matters" in the Prospectus
included in the Registration Statement.
Very truly yours,
/s/Skadden, Arps, Slate,
Meagher & Flom (Delaware)
<PAGE>
May 1, 1997
Metris Receivables, Inc.
4400 Baker Road
Suite F470
Minnetonka, MN 55343
Re: Metris Master Trust
Series 1997-1 Certificates
Ladies and Gentlemen:
We have acted as special counsel to Metris Receivables,
Inc., as transferor (the "Transferor"), in connection with (a) the transfer
and assignment of a pool of certain receivables generated or acquired from
time to time in the ordinary course of business in a portfolio of MasterCard
or other revolving consumer credit card accounts, and all monies due or to
become due in payment of such receivables, (collectively, the "Receivables")
by the Transferor to The Bank of New York, as trustee (the "Trustee") for the
Metris Master Trust, (the "Trust") to be formed pursuant to a Pooling and
Servicing Agreement dated as of May 26, 1995, as amended (the "Pooling and
Servicing Agreement") by and among the Transferor, Direct Merchants Credit
Card Bank, National Association, as servicer (the "Servicer") and the Trustee,
to be allocated by the Trust among the Class A Certificateholders' Interests
(the "Class A Certificates"), Class B Certificateholders' Interests (the
"Class B Certificates"), the Class C Certificateholders' Interest (the "Class
C Certificates") and the Class D Certificateholders' Interest (the "Class D
Certificates") (together, the "Certificates") and (b) the sale of the
Certificates
<PAGE>
Metris Receivables, Inc.
May 1, 1997
Page 2
to the underwriters (the "Underwriters") party to an Underwriting Agreement
(the "Underwriting Agreement"), by and among the Transferor, Metris Companies
Inc. and Bear, Stearns & Co. Inc., as representative of the Underwriters.
In connection with our engagement, we have examined and
relied upon the forms of the Pooling and Servicing Agreement and the
Underwriting Agreement included as exhibits to the Registration Statement
(Registration No. 333-23045) (as amended, the "Registration Statement"). In
addition, we have examined and considered executed originals or counterparts,
or certified or other copies identified to our satisfaction as being true
copies of such certificates, instruments, documents and other corporate
records of each of the Transferor and the Servicer and matters of fact and law
as we deem necessary for the purposes of the opinion expressed below, and we
have assumed (i) that such documents will not be amended and (ii) that the
parties to such documents will comply with the terms thereof. Capitalized
terms not otherwise defined herein have the respective meanings assigned to
such terms in the Registration Statement.
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of such
latter documents. As to any facts material to the opinions expressed herein
which were not independently established or verified, we have relied upon
statements, representations, and certifications of officers and other
representatives of the Transferor, the Servicer, the Underwriters, and others.
In rendering our opinion, we have also considered and relied
upon the Internal Revenue Code of 1986, as amended, and administrative
rulings, judicial decisions, regulations, and such other authorities as we
have deemed appropriate, all as in effect as of the date hereof. The statutory
provisions, regulations, interpretations, and other authorities upon which our
opinion is based are subject to change, and such changes could apply
retroactively. In addition, there can be no assurance
<PAGE>
Metris Receivables, Inc.
May 1, 1997
Page 3
that positions contrary to those stated in our opinion will not be taken by
the Internal Revenue Service.
We express no opinions as to the laws of any jurisdiction
other than the federal laws of the United States of America to the extent
specifically referred to herein.
Based upon and subject to the foregoing, we are of the
opinion that the statements in the Prospectus under the headings "Summary--Tax
Status" and "Certain Federal Income Tax Consequences," subject to the
qualifications set forth therein, accurately describe the material federal
income tax consequences to holders of the Certificates, under existing law and
the assumptions stated therein.
We consent to the filing of this opinion as an exhibit to
the Registration Statement and to the references to Skadden, Arps, Slate,
Meagher & Flom LLP under the captions "Certain Federal Income Tax Consequences"
and "Legal Matters" in the Prospectus.
Very truly yours,
/s/Skadden, Arps, Slate,
Meagher & Flom LLP
