AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER __, 1998
Registration No. [ ]
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Metris Master Trust
(Issuer with respect to Offered Securities)
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)
600 SOUTH HIGHWAY 169
SUITE 300
ST. LOUIS PARK, MN 55426
(612) 417-5645
(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. RENWICK MARTIN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER BROWN & WOOD LLP
& FLOM LLP ONE WORLD TRADE CENTER
919 THIRD AVENUE 58TH FLOOR
NEW YORK, NY 10022 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. |_|
----------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY (1) PRICE (1) FEE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Floating Rate Series
1998-3, Class A........... $500,000 100% $500,000 $147.50
Floating Rate Asset
Backed Securities,
Series 1998-3, Class B.... $500,000 100% $500,000 $147.50
- ------------------------------------------------------------------------------------------------------------
Total..................... $1,000,000 100% $1,000,000 $295.00
============================================================================================================
(1) Estimated solely for purpose of calculating the registration fee.
</TABLE>
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.
[FLAG]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER __, 1998
Prospectus
METRIS MASTER TRUST
$__________ FLOATING RATE ASSET BACKED SECURITIES,
SERIES 1998-3, CLASS A
$__________ FLOATING RATE ASSET BACKED SECURITIES,
SERIES 1998-3, CLASS B
METRIS RECEIVABLES, INC. DIRECT MERCHANTS CREDIT CARD BANK,
TRANSFEROR NATIONAL ASSOCIATION SERVICER
----------------------
Each of the Floating Rate Asset Backed Securities, Series 1998-3, Class
A (the "Class A Securities") and each of the Floating Rate Asset Backed
Securities, Series 1998-3, Class B (the "Class B Securities," and, together
with the Class A Securities, the "Offered Securities") will represent an
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 interests in the Trust
represented by the Class B Securities will be subordinated to fund certain
payments with respect to the Class A Securities as described in
"Description of the Offered Securities--Application of Collections,"
"--Redirected Principal Collections," and "--Investor Charge-Offs." The
property of the Trust includes a portfolio of receivables (the
"Receivables") generated or acquired from time to time in the ordinary
course of business in a portfolio of MasterCard(R) and VISA(R) or other
revolving consumer credit card accounts (the "Accounts"), all monies due or
to become due in payment of such Receivables and the benefit of funds on
deposit in certain accounts, including the Pre-Funding Account (as defined
herein). Certain capitalized terms used herein are defined in the "Glossary
of Terms" beginning on page 113 herein.
(continued on next page)
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE
INFORMATION SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE 29 HEREIN.
----------------------
THE OFFERED SECURITIES 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 SECURITY IS NOT A DEPOSIT AND NEITHER THE
OFFERED SECURITIES NOR THE UNDERLYING ACCOUNTS OR RECEIVABLES ARE INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT THE TRANSFEROR(1)(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A Security........ % % %
Per Class B Security........ % % %
- --------------------------------------------------------------------------------------------------
Total....................... $ $ $
==================================================================================================
(1) Plus accrued interest, if any, from , 1998.
(2) Before deduction of expenses estimated to be $ .
</TABLE>
The Offered Securities 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
Securities will be delivered in book-entry form on or about , 1998
through the facilities of The Depository Trust Company, Cedel Bank, societe
anonyme and the Euroclear System.
UNDERWRITERS OF THE CLASS A SECURITIES
[ ]
UNDERWRITERS OF THE B SECURITIES
[ ]
----------------------
The date of this Prospectus is , 1998.
(continued from previous page)
Concurrently with the issuance of the Offered Securities, the Trust
will issue the Floating Rate Asset Backed Collateralized Trust Obligations,
Series 1998-3 (the "Collateralized Trust Obligations"), which may be
privately placed, and the Asset Backed Securities, Series 1998-3, Class D
(the "Class D Securities," and, together with the Collateralized Trust
Obligations and the Offered Securities, the "Securities" or the "Series
1998-3 Securities"), which will initially be retained by the Transferor.
The Securities constitute "Series 1998-3". The Collateralized Trust
Obligations will be subordinated to the Offered Securities and the Class D
Securities will be subordinated to the Collateralized Trust Obligations and
the Offered Securities as described in "Description of the Offered
Securities--Subordination of the Class B Securities," "--Redirected
Principal Collections," "--Application of Collections" and "--Investor
Charge-Offs." The Transferor will own the remaining interest in the Trust
not represented by the securities and any other investor Securities issued
by the Trust, which retained interest will be represented by the
Exchangeable Transferor Security (as defined herein). The Transferor from
time to time may offer other series of Securities that evidence interests
in the Trust by exchanging a portion of its interest in the Trust therefor.
Only the Offered Securities are being offered hereby.
Interest will accrue on the Class A Securities from , 1998
through , 1998 at the rate of % per annum above the arithmetic mean
of the London interbank offered quotations for one-month United States
dollar deposits ("LIBOR") as determined by the Trustee on , 1998, and
with respect to each Interest Accrual Period (as defined herein) thereafter,
at a rate of % per annum above LIBOR as determined by the Trustee on the
related LIBOR Determination Date (as defined herein). Interest will accrue
on the Class B Securities from , 1998 through , 1998 at the
rate of % per annum above LIBOR as determined by the Trustee on ,
1998, and with respect to each Interest Accrual Period thereafter, at the
rate of % per annum above LIBOR as determined by the Trustee on the
related LIBOR Determination Date. Interest with respect to the Securities
will be paid on , 1998 and on the th day of each month thereafter
(or, if any such th day is not a business day, the next succeeding
business day) (each, a "Distribution Date"). Principal with respect to the
Class A Securities and the Class B Securities is scheduled to be distributed
on the Distribution Date (the "Expected Final Payment Date"), but may
be distributed earlier or later under certain circumstances described herein.
Principal payments will not be made to Class B Securityholders unless and
until the Class A Invested Amount is paid in full. See "Maturity
Considerations" and "Description of the Offered Securities--Pay Out Events."
Application has been made to list the Offered Securities on the
Luxembourg Stock Exchange.
There currently is no secondary market for the Offered Securities,
and there is no assurance that one will develop or, if one does develop,
that it will continue until the Offered Securities 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 SECURITIES, INCLUDING OVER-ALLOTMENT TRANSACTIONS, STABILIZING
TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS AND PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Securities (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 "Securityholder") of the Offered Securities. See
"Description of the Offered Securities--Book-Entry Registration,"
"--Reports to Securityholders" 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
Securityholders or to the owners of beneficial interests in the Offered
Securities ("Security 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 Securities 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 Securities 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 Securities 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., 600 South
Highway 169, Suite 300, St. Louis Park, Minnesota 55426. Telephone requests
for such copies should be directed to Metris Receivables, Inc. at (612)
417-5645.
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
Securities 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.
The Transferor has taken all reasonable care to ensure that the
information contained in this Prospectus is true and accurate in all
material respects and that there are no material facts the omission of
which would make misleading any statement herein, whether fact or opinion.
The Transferor accepts responsibility accordingly.
As used in this Prospectus, all references to "dollars" and "$"
refer to United States dollars.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed herein under the captions "Direct
Merchants Bank's Credit Card Activities," "The Receivables" and "Maturity
Considerations" may constitute forward-looking statements within the
meaning of Section 27A of the Securities Act. Such forward-looking
statements may involve uncertainties and other factors that may cause the
actual results and performance of the Trust and the Receivables to be
materially different from future results or performance expressed or
implied by such statements. Among others, factors that could adversely
affect actual results and performance include economic conditions, the
ability of Direct Merchants Bank to change payment terms and collection
policies, and potential changes in consumers' attitudes toward financing
purchases with debt. See "Risk Factors."
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 113 or elsewhere in this Prospectus. Unless the context
requires otherwise, certain capitalized terms, when used in this
Prospectus, relate only to the Securities and not to other securities which
may exist from time to time.
Offered Securities................. $ aggregate principal amount of
Class A Securities and $ aggregate
principal amount of Class B
Securities are being offered hereby.
The Offered Securities represent the
right to receive certain payments
from 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 Securities will be
subordinated to fund certain payments
with respect to the Class A
Securities as described herein. See
"Description of the Offered
Securities--Subordination of the
Class B Securities."
Other Securities Issued............ $ aggregate principal amount of
Collateralized Trust Obligations,
which may be privately placed, and $
aggregate principal amount of Class D
Securities, which will initially be
retained by the Transferor, are being
issued concurrently with the Offered
Securities. The Trust has previously
issued four other Series which remain
outstanding. 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 securities that evidence
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 Securities are being
offered hereby.
Transferor......................... Metris Receivables, Inc. is the
Transferor. The principal executive
offices of the Transferor are located
at 600 South Highway 169, Suite 300,
St. Louis Park, MN 55426, telephone
number (612) 417-5645. See "The
Transferor."
Servicer........................... Direct Merchants Bank is the initial
Servicer. The principal executive
offices of the Servicer are located
in Phoenix, Arizona, with a mailing
address at 6909 East Greenway
Parkway, Scottsdale, Arizona 85254,
telephone number (602) 718-4600. A
substitute Servicer may be appointed
in certain circumstances. See
"Description of the Offered
Securities--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
Securities will have the right to
remove the Trustee. See "Description
of the Offered Securities--The
Trustee."
Credit Card Originators............ The Credit Card Originators are the
Utah Bank and Direct Merchants Bank
and their successors or assigns under
the Bank Purchase Agreement or any
other transferee of Accounts from
Direct Merchants Bank. In addition,
Credit Card Originators may include
any other originator of Accounts that
enters into a receivables purchase
agreement with Direct Merchants Bank,
Metris (or any successor to or
assignee of Metris that is a party to
a receivables purchase agreement with
the Transferor) or the Transferor in
accordance with the provisions of the
Pooling and Servicing Agreement, from
time to time.
Trust.............................. Metris Master Trust (the "Trust") was
formed pursuant to the Pooling and
Servicing Agreement, which has been
supplemented by the Supplements
thereto relating to the Previously
Issued Series and will be
supplemented by the Series 1998-3
Supplement relating to the Securities
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 assets
include the Receivables (the
"Receivables") that arise under
certain MasterCard(R) and VISA(R)(1)
accounts and may arise under other
revolving consumer credit card
accounts (the "Accounts") and the
proceeds thereof arising under the
Accounts from time to time.
Collections on the Receivables are
deposited into the Collection Account
maintained in the name of the Trust
and allocated on each business day
between Collections on Finance Charge
Receivables ("Finance Charge
Collections") and Collections
received with respect to Principal
Receivables ("Principal Collections").
Finance Charge Collections and
Principal Collections are allocated
on each business day among the
Transferor Interest and the
respective interests of the
securityholders 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
securities of any Series then
outstanding, to pay certain fees and
expenses, to cover series 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
securities of any Series then
outstanding, except that during any
revolving period applicable to a
Series, Principal Collections
otherwise allocable to the
securityholders of such Series are
paid to the holder of the
Exchangeable Transferor Security or,
with respect to amounts allocated to
any class of securities of such
Series which are not retained by the
Transferor, paid to the
securityholders of any other Series
then outstanding. See "Description of
the Offered Securities--Application
of Collections--Payment of Fees,
Interest and Other Items."
- -------------------
1 MasterCard(R) and VISA(R) are federally registered servicemarks of
MasterCard International Inc. and VISA USA Incorporated, respectively.
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 Securities--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 securityholders 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 Securityholders, including the
Pre-Funding Account and the Principal
Funding Account, (vi) Recoveries, and
(vii) proceeds of the foregoing. The
Offered Securities will not have the
benefit of any Enhancement other than
the subordination of the Class B
Securities, the Collateralized Trust
Obligations and the Class D
Securities for the benefit of each
more senior Class of Securities as
described herein. See "Description of
the Offered Securities--Subordination
of the Class B Securities." The Trust
assets do not currently include
interchange fees received by Direct
Merchants Bank in connection with the
Receivables, but such fees may be
included as Trust assets at some
future date.
Pursuant to the Bank Purchase
Agreement, Metris purchases from
Direct Merchants Bank all of the
Receivables arising from time to time
under Accounts. See "Description of
the Purchase Agreements--Purchases of
Receivables."
Pursuant to the Purchase Agreement, the
Transferor purchases from Metris all
of the Receivables arising from time
to time under Accounts. See
"Description of the Purchase
Agreements--Purchases of Receivables."
Direct Merchants Bank, Metris or the
Transferor may, from time to time,
enter into similar receivables
purchase agreements with other Credit
Card Originators.
Pursuant to the Pooling and Servicing
Agreement, the Transferor
automatically transfers to the Trust
all of its right, title and interest
in and to the Receivables purchased
by it pursuant to the Purchase
Agreement. See "Risk Factors--Transfer
of the Receivables; Insolvency Risk
Considerations" for a discussion of
certain legal considerations relating
to such transfer.
Receivables........................ The Receivables consist of amounts
owing on MasterCard(R) credit cards
and VISA(R)credit cards and may
include amounts owing on other
revolving credit cards (see
"Description of the Offered
Securities--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, charged 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 applied in
accordance with the respective
interests of the Securityholders, the
securityholders of any other Series,
and the holder of the Exchangeable
Transferor Security in the Principal
Receivables and in the Finance Charge
Receivables in the Trust. See
"Description of the Offered
Securities--Allocation Percentages."
Allocation of Trust Assets......... The right to receive payments from the
Trust's assets will be allocated
among the Class A Securityholders'
Interest, the Class B
Securityholders' Interest, the CTO
Securityholders' Interest, the Class
D Securityholders' Interest, the
interest of the securityholders 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 securityholders of any class of
any Series in the assets of the Trust
will be limited to the
securityholders' interest for such
class and Series, and such
securityholders will not have any
recourse against any assets of the
Trust other than those allocated to
such securityholders' 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
Securityholders' Interest or the
interest of the securityholders 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 Principal Receivables in the
Trust, the invested amount of each
Series (including the Variable
Funding Securities) 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
Securities--General," "--Previously
Issued Series," "--Excess Funding
Account" and "--Pre-Funding Account."
The Class A Securities will represent
the right to receive payments of
interest on the aggregate outstanding
principal amount of the Class A
Securities at the Class A Interest
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 Securities, in certain
circumstances, if the Series Default
Amount exceeds funds allocable
thereto and the Class B Invested
Amount, the CTO 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 Securities.
See "Description of the Offered
Securities--Subordination of the
Class B Securities," "--Pre-Funding
Account," "--Allocation Percentages"
and "--Investor Charge-Offs."
The Class B Securities will represent
the right to receive payments of
interest on the aggregate outstanding
principal amount of the Class B
Securities at the Class B Interest
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 Securities, in certain
circumstances, if the Series Default
Amount exceeds funds allocable
thereto and the CTO 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 Securities.
See "Description of the Offered
Securities--Subordination of the
Class B Securities," "--Pre-Funding
Account," "--Allocation Percentages"
and "--Investor Charge-Offs."
The Collateralized Trust Obligations
will represent the right to receive
payments of interest on the aggregate
outstanding principal amount of the
Collateralized Trust Obligations at
the CTO Interest Rate and the payment
of principal to the extent of the CTO
Invested Amount (which may be less
than the aggregate unpaid principal
amount of the Collateralized Trust
Obligations, in certain
circumstances, if the Series 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
Collateralized Trust Obligations. See
"Description of the Offered
Securities--Subordination of the
Class B Securities," "--Pre-Funding
Account," "--Allocation Percentages"
and "--Investor Charge-Offs." The
Collateralized Trust Obligations are
not being offered hereby.
The Class D Securities will represent
the right to receive from the Trust
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
Securities are not being offered
hereby.
The aggregate amount of Receivables in
the Accounts as of , 1998 was
$ comprised of $ of Finance Charge
Receivables and $ of Principal
Receivables. The "Initial Invested
Amount" will be equal to the sum of
(i) an amount equal to the initial
principal balance of the Class A
Securities 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
Securities 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
Collateralized Trust Obligations; and
(iv) an amount equal to the initial
principal balance of the Class D
Securities. The Invested Amount will,
except as otherwise provided herein,
increase up to a maximum amount of $
(the "Full Invested Amount") during
the Funding Period, remain fixed at
the Full Invested Amount during the
Revolving Period and decline
thereafter during any Amortization
Period or Early Amortization Period
as principal is paid on the
Securities. 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 Securities, 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
Securities during any Amortization
Period. No payment of principal with
respect to the Class B Securities may
be made until the final principal
payment of the Class A Invested
Amount with respect to the Class A
Securities has been made. No payment
of principal with respect to the
Collateralized Trust Obligations may
be made until the final principal
payment of the Class A Invested
Amount with respect to the Class A
Securities and the final principal
payment of the Class B Invested
Amount with respect to the Class B
Securities have been made. During the
Controlled Amortization Period, the
Class D Invested Amount may be
reduced and the amount of the
Transferor Interest correspondingly
increased concurrently with payments
of principal for the benefit of the
Offered Securities and the
Collateralized Trust Obligations to
an amount equal to the Stated Class D
Amount. See "Description of the
Offered Securities --Principal
Payments."
The Class A Securityholders' Interest,
the Class B Securityholders'
Interest, the CTO Securityholders'
Interest, and the Class D
Securityholders' 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 applied on each
business day to the Class A
Securityholders' Interest, the Class
B Securityholders' Interest, the CTO
Securityholders' Interest, and the
Class D Securityholders' Interest
based on the Class A Floating
Percentage, the Class B Floating
Percentage, the CTO Floating
Percentage, and the Class D Floating
Percentage, respectively. On and
after the date on which a Pay Out
Event is deemed to occur, Finance
Charge Collections will be applied on
each business day to the Class A
Securityholders' Interest, the Class
B Securityholders' Interest, the CTO
Securityholders' Interest and the
Class D Securityholders' Interest
based on the Fixed/Floating
Percentage. During the Revolving
Period for each Series, all Principal
Collections that would otherwise be
applied to the Securityholders will
be applied on each business day and
paid to the holder of the
Exchangeable Transferor Security
(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 applied on each business
day to the Class A Securityholders'
Interest based on the Fixed/Floating
Percentage. On and after the Class B
Principal Payment Commencement Date,
Principal Collections will generally
be applied on each business day to
the Class B Securityholders' Interest
based on the Fixed/Floating
Percentage. On and after the CTO
Principal Payment Commencement Date,
Principal Collections will be applied
on each business day for the benefit
of the CTO Securityholders' Interest
based on the Fixed/Floating
Percentage. See "Description of the
Offered Securities --Allocation
Percentages."
Exchanges.......................... The Pooling and Servicing Agreement
provides that the Trustee will issue
two types of securities: (i) Investor
Securities in one or more Series each
of which may have multiple classes of
securities of which one or more such
classes may be transferable, and (ii)
the Exchangeable Transferor Security.
The Exchangeable Transferor Security
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 Security. See
"Description of the Offered
Securities--Exchanges." The
Exchangeable Transferor Security 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
Security or, if provided in the
relevant Supplement, securities
comprising any Series and the
Exchangeable Transferor Security, to
the Trustee in exchange for
securities comprising one or more new
Series and a reissued Exchangeable
Transferor Security. 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
Securities--Exchanges." The
Transferor may offer any Series for
sale in transactions either
registered under the Securities Act
or exempt from registration
thereunder, directly, through one or
more underwriters or placement
agents, in fixed-price offerings, in
negotiated transactions or otherwise.
The Transferor currently intends to
offer, from time to time, additional
Series issued by the Trust.
Under the Pooling and Servicing
Agreement, an Exchange of the
Exchangeable Transferor Security for
securities comprising one or more
Series and a reissued Exchangeable
Transferor Security 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, (a) the
Transferor Interest would be at least
equal to the Minimum Transferor
Interest and (b) the Retained
Interest (as defined in the Pooling
and Servicing Agreement) would equal
or exceed the Minimum Retained
Interest, and (vi) the existing
Exchangeable Transferor Security and,
if applicable, the existing
securities representing the Series to
be exchanged. See "Description of the
Offered Securities--Exchanges."
Interest........................... Each Class A Security represents the
right to receive interest accruing
from the Closing Date at the rate
equal to % per annum above LIBOR
(calculated as described under
"Description of the Offered
Securities--Interest Payments") as
determined on , 1998 for the
period from the Closing Date through
, 1998 and on the related LIBOR
Determination Date for each Interest
Accrual Period thereafter (such rate,
as in effect from time to time, the
"Class A Interest Rate").
Each Class B Security represents the
right to receive interest accruing
from the Closing Date at the rate
equal to % per annum above LIBOR
as determined on , 1998 for the
period from the Closing Date through
, 1998 and on the related LIBOR
Determination Date for each Interest
Accrual Period thereafter (such rate,
as in effect from time to time, the
"Class B Interest Rate").
Interest on the Offered Securities will
be payable on , 1998 and on the
th day of each month thereafter or,
if such day is not a business day, on
the next succeeding business day
(each, a "Distribution Date"), in an
amount equal to (a) with respect to
the Class A Securities, the product
of (i) the actual number of days in
the related Interest Accrual Period
divided by 360, (ii) the Class A
Interest Rate for such Interest
Accrual Period and (iii) the
outstanding principal balance of the
Class A Securities as of the
preceding Record Date (or in the case
of the first Distribution Date, the
initial principal amount of Class A
Securities) and (b) with respect to
the Class B Securities the product of
(i) the actual number of days in the
related Interest Accrual Period
divided by 360, (ii) the Class B
Interest Rate for such Interest
Accrual Period and (iii) the
outstanding principal balance of the
Class B Securities as of the
preceding Record Date (or in the case
of the first Distribution Date, the
initial principal amount of the Class
B Securities).
Interest payments on the Class A
Securities 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 , 1998 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
Securities and deposited on each
business day during such Monthly
Period in the Interest Funding
Account. See "Description of the
Offered Securities--Interest
Payments."
Subject to the prior payment of
interest on the Class A Securities,
interest payments on the Class B
Securities 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 Securities
and deposited on each business day
during such Monthly Period in the
Interest Funding Account. See
"Description of the Offered
Securities--Interest Payments" and
"--Application of Collections."
Funding Period..................... During the period from and including
the Closing Date to but excluding the
earlier of (x) the first day for
which the Invested Amount equals the
Full Invested Amount; (y) the first
day on which a Pay Out Event is
deemed to occur; and (z) the first
business day of the _________ Monthly
Period (the "Funding Period"), the
Pre-Funded Amount will be maintained
in a trust account to be established
with The Bank of New York (the
"Pre-Funding Account"). The
"Pre-Funded Amount" will equal the
amount of the initial deposit to the
Pre-Funding Account, less the amounts
of any increases in the Invested
Amount pursuant to the Series 1998-3
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 Securities,
the Class B Securities, the
Collateralized Trust Obligations and
the Class D Securities, and the then
current outstanding principal amount
of the Previously Issued Series.
Funds on deposit in the Pre-Funding
Account will be invested by the
Trustee at the direction of the
Servicer in Cash Equivalents.
During the Funding Period, funds on
deposit in the Pre-Funding Account
will be withdrawn and paid to the
Transferor to the extent of any
increases in the Invested Amount as a
result of the increase in the amount
of Receivables in the Trust. The
Transferor expects that the funds on
deposit in the Pre-Funding Account
will be fully invested in Receivables
by the end of the _________ Monthly
Period. In the event of the
occurrence of a Pay Out Event during
the Funding Period, the amounts
remaining on deposit in the
Pre-Funding Account, will be payable
as principal first to the Class A
Securityholders until the Class A
Invested Amount is paid in full and
then to the Class B Securityholders
until the Class B Invested Amount is
paid in full and then to the CTO
Securityholders until the CTO
Invested Amount is paid in full.
Should the Pre-Funded Amount be
greater than zero on the first day of
the __________ Monthly Period, such
amount will be deposited in the
Excess Funding Account and the
Invested Amount will be increased in
an amount equal to such deposit.
Amounts on deposit in the Excess
Funding Account are treated as assets
of the Trust allocated to all Series
then outstanding and the Exchangeable
Transferor Security and will be
applied as described in "Description
of the Offered Securities--Excess
Funding Account."
Revolving Period................... The "Revolving Period" with respect to
the Securities 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 Offered
Securities--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 Securities (the
"Accumulation Period") is scheduled
to begin at the close of business on
the last day of the _________ Monthly
Period. Subject to the conditions set
forth herein under "Description of
the Offered Securities--Postponement
of Accumulation Period," the day on
which the Revolving Period ends and
the Accumulation Period begins may be
delayed to no later than the close of
business on the last day of the
__________ Monthly Period. During the
Revolving Period, Principal
Collections otherwise allocable to
the Securityholders (other than any
Shared Principal Collections paid to
the holders of securities of other
Series and any Redirected Principal
Collections) will, subject to certain
limitations, be paid from the Trust
to the holder of the Exchangeable
Transferor Security. See "Description
of the Offered Securities--Pay Out
Events" for a discussion of the
events which might lead to the
termination of the Revolving Period
for the Securities prior to the end
of the ________ Monthly Period.
Principal Payment;
Accumulation Period............. Unless a Pay Out Event shall have
occurred, the Accumulation Period
will begin at the close of business
on the last day of the Revolving
Period and will end on the earliest
to occur of (i) the commencement of
the Early Amortization Period, (ii)
payment of the Invested Amount in
full and (iii) the Termination Date.
With respect to each Monthly Period
during the Accumulation Period, prior
to the payment in full of the Class A
Invested Amount, the Class B Invested
Amount and the CTO Invested Amount,
amounts equal to the least of (i) the
Available Investor Principal
Collections for such Monthly Period,
(ii) the sum of the Controlled
Accumulation Amount plus any
Accumulation Shortfall for such
Monthly Period and (iii) the ABC
Adjusted Invested Amount, will be
deposited monthly in the Principal
Funding Account until the Principal
Funding Account Balance is equal to
the sum of the Class A Invested
Amount, the Class B Invested Amount
and the CTO 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
Securityholders and the Class B
Securityholders 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
Securities--Application of
Collections" herein.
Funds on deposit in the Principal
Funding Account will be available to
pay the Class A Securityholders 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
Securityholders 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
Securityholders 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. No payment of principal to
the CTO Securityholders will be made
until the Class B Invested Amount has
been 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 Securityholders of each
Class of Securities, sequentially, in
alphabetical order, on the
Distribution Date following the
Monthly Period in which the Early
Amortization Period commences.
Other Series offered by the Trust may
or may not have accumulation periods
like the Accumulation Period or
amortization periods like the Early
Amortization Period, and such periods
may have different lengths and begin
on different dates than the
Accumulation Period or Early
Amortization Period described herein.
Thus, certain Series may be in their
revolving periods while others are in
periods during which Principal
Collections are distributed to or
accumulated for such other Series. In
addition, other Series may allocate
Principal Collections based upon
different investor percentages. See
"Description of the Offered
Securities--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 Securityholders'
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
Securityholders' 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 Securityholders in respect of the
Class A Invested Amount and,
following the payment in full of the
Class A Invested Amount, to the Class
B Securityholders in respect of the
Class B Invested Amount and,
following the payment in full of the
Class B Invested Amount, to the CTO
Securityholders in respect of the CTO
Invested Amount and, following the
payment in full of the CTO Invested
Amount, to the Class D
Securityholders until the Class D
Invested Amount is paid in full. See
"Description of the Offered
Securities--Pay Out Events."
Shared Principal Collections....... To the extent that Principal
Collections and other amounts that
are initially applied for the benefit
of the securityholders' interest of
any class of any Series are not
needed to make payments to the
securityholders 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
securityholders of another Series,
including principal payments which
the Transferor elects to make with
respect to any Variable Funding
Securities. Any such reallocation
will not result in a reduction in the
Securityholders' Interest. In
addition, Principal Collections and
certain other amounts initially
applied for the benefit of other
Series, to the extent such
collections are not needed to make
payments to the securityholders of
such other Series, may be applied to
cover principal payments due to or
for the benefit of the holders of the
Securities. See "Description of the
Offered Securities--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
an Amortization Period will be
deposited in the Principal Account as
part of Class A Principal, Class B
Principal, or CTO Principal, as
applicable, for any Distribution
Date. In addition, no funds allocated
to Investor Securities 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 Securities of
such Series have been paid in full.
See "Description of the Offered
Securities--Excess Funding Account."
Distribution of Available Series
Finance Charge Collections
Allocable to Securityholders...... 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
CTO Monthly Interest and any
overdue CTO Monthly Interest not
previously deposited in the
Interest Funding Account for
such Monthly Period and interest
on any overdue interest amounts
will be deposited in the
Interest Funding Account;
(iv) an amount equal to the Monthly
Servicing Fee plus any Monthly
Servicing Fee that was due but
not paid on any prior business
day will be paid to the
Servicer;
(v) an amount equal to the Series
Default Amount on such business
day and, to the extent not
previously paid, the Series
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
Securities;
(vi) an amount equal to the Series
1998-3 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 Securities;
(vii) an amount equal to unreimbursed
Class A 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
Securities;
(viii) an amount equal to the accrued
and unpaid interest on the
outstanding aggregate principal
amount of the Class B Securities
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 Collateralized
Trust Obligations 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 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
Securities;
(xi) an amount equal to unreimbursed
CTO 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
Securities;
(xii) an amount equal to unreimbursed
Class D 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
Securities;
(xiii) an amount equal to any required
funding of a reserve account for
the benefit of the
Collateralized Trust Obligations
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 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 Series Default Amount in
accordance with clause (v)
above. See "Description of the
Offered Securities--Application
of Collections."
On each Transfer Date all investment
income (net of investment losses and
expenses) on funds on deposit in the
Pre-Funding Account, the Principal
Funding Account and the Accumulation
Period Reserve Account will be
applied as if such amounts were
Available Series Finance Charge
Collections on the last business day
of the preceding Monthly Period.
Coverage of Interest Shortfalls
from Transferor Finance
Charge Collections............... To the extent that any amounts are on
deposit in the Excess Funding Account
or the Pre-Funding Account on any
business day, the Servicer will
determine the amount (the "Negative
Carry Amount"), if any, equal to the
excess of (x) the product of (a) the
Base Rate and (b) the product of (i)
the sum of the amounts on deposit in
the Excess Funding Account and the
Pre-Funding Account and (ii) the
number of days elapsed since the
previous business day divided by the
actual number of days in such year
over (y) the aggregate amount of all
earnings since the previous business
day available from the Cash
Equivalents in which funds on deposit
in the Excess Funding Account or the
Pre-Funding Account are invested. The
Servicer will apply an amount equal
to the lesser of (i) the Series
1998-3 Percentage of the Finance
Charge Collections allocable to the
Exchangeable Transferor Security
("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, of the
product of (a) a fraction the
numerator of which is the actual
number of days in such Interest
Accrual Period and the denominator of
which is 360, (b) the weighted
average of the Class A Interest Rate,
the Class B Interest Rate and the CTO
Interest Rate for such Interest
Accrual Period and (c) the Principal
Funding Account Balance as of the
last day of the Monthly Period
preceding the Monthly Period in which
such Interest Accrual Period ends
(the "Covered 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 Servicer to cover certain
costs and expenses and then to the
Transferor.
Series Default Amount;
Investor Charge-Off............. A portion of all Receivables in
Defaulted Accounts (the "Series
Default Amount") will be allocated to
the Securityholders in an amount
equal to the product of the Floating
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 Series Default Amount
and Series 1998-3 Percentage of
unpaid Adjustment Payments, if any,
for the preceding Monthly Period
exceeds the aggregate amount of
Available Series Finance Charge
Collections applied to the payment
thereof as described in clauses (v)
and (vi) of "Distribution of
Available Series Finance Charge
Collections Allocable to
Securityholders" 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 Redirected
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 Series Default Amount and
the remaining Series 1998-3
Percentage of unpaid Adjustment
Payments for such Monthly Period) to
avoid a charge-off with respect to
the Class A Securities, the Class B
Securities or the Collateralized
Trust Obligations.
The Class D Invested Amount will
thereafter be increased (but not in
excess of the unpaid principal
balance of the Class D Securities) 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
Securityholders." If the Class D
Invested Amount is reduced to zero, a
portion of the CTO 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 Series
Default Amount and the remaining
unpaid Adjustment Payments for such
Monthly Period) will be deducted from
the CTO Invested Amount ("CTO
Charge-Off") to avoid a charge-off
with respect to the Class A
Securities or the Class B Securities.
If and for so long as the Class D
Invested Amount is reduced to zero,
the CTO Invested Amount will be
reduced by an amount equal to the
amount by which such excess would
have caused the Class D Invested
Amount to be reduced below zero (but
not in excess of the sum of the
remaining aggregate Series Default
Amount and the remaining Series
1998-3 Percentage of unpaid
Adjustment Payments for such Monthly
Period).
The CTO Invested Amount will thereafter
be increased (but not in excess of
the unpaid principal amount of the
Collateralized Trust Obligations) on
any business day by the amount of
Available Series Finance Charge
Collections applied for that purpose
as described in clause (xi) of
"Distribution of Available Series
Finance Charge Collections Allocable
to Securityholders." If the CTO
Invested Amount is reduced to zero,
the Class B Invested Amount will be
reduced by an amount equal to the
amount by which such excess would
have caused the CTO Invested Amount
to be reduced below zero (but not in
excess of the sum of the remaining
aggregate Series Default Amount and
the remaining Series 1998-3
Percentage of unpaid Adjustment
Payments for such Monthly Period). If
and for so long as the CTO Invested
Amount is reduced to zero, the Class
B Securityholders 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 Securities) 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
Securityholders." 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
Series Default Amount and the
remaining Series 1998-3 Percentage of
unpaid Adjustment Payments for such
Monthly Period) will be deducted from
the Class A Invested Amount and
allocated to the Class A Charge-Offs.
If and for so long as the Class B
Invested Amount is reduced to zero,
the Class A Securityholders 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 Securities) 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
Securityholders." See "Description of
the Offered Securities--Investor
Charge-Offs."
Paired Series..................... Subject to satisfaction of the Rating
Agency Condition, the Securities 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 1998-3,
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 CTO Adjusted Invested
Amount and the Class D Invested
Amount are reduced, the Invested
Amount of the Paired Series would
increase by an amount that otherwise
would have increased the Transferor
Interest. Upon payment in full of
Series 1998-3, the increase in the
Invested Amount of the Paired Series
will be equal to the amount of the
Invested Amount paid to
Securityholders of Series 1998-3
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 Securities, the final payment
of principal to the Securityholders
may be delayed. See "Description of
the Offered Securities--Paired
Series."
Subordination of the Class B
Securities, the Collateralized
Trust Obligations and the
Class D Securities............... The Class B Securities will be
subordinated to fund payments of
principal and interest on the Class A
Securities. The Collateralized Trust
Obligations will be subordinated to
the extent necessary to fund payments
of principal and interest on the
Class A Securities and the Class B
Securities. The Class D Securities
will be subordinated to the extent
necessary to fund payments of
principal and interest on the Class A
Securities, the Class B Securities
and the Collateralized Trust
Obligations. See "Description of the
Offered Securities--Subordination of
the Class B Securities,"
"--Redirection of Cash Flows" and
"--Redirected Principal Collections."
The Class B Invested Amount, the CTO
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
Securities 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
CTO 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 CTO Required Amount and
the Invested Amounts of the Class D
Securities, the Collateralized Trust
Obligations or the Class B Securities
may be reduced on the related
Distribution Date as more fully
described herein in "Description of
the Offered Securities--Redirected
Principal Collections." To the extent
the Class B Invested Amount, the CTO
Invested Amount or the Class D
Invested Amount is reduced, the
percentage of Finance Charge
Collections allocated to the Class B
Securityholders, the CTO
Securityholders, or the Class D
Securityholders, 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 CTO Invested
Amount, or the Class D Invested
Amount is not reimbursed, the amount
of principal distributable to the
Class B Securityholders, the CTO
Securityholders, or the Class D
Securityholders, as applicable, from
the Collection Account will be
reduced. Principal payments with
respect to the Class B Securities
will not be made until the final
payment of the Class A Invested
Amount has been made to the Class A
Securityholders. Principal payments
with respect to the Collateralized
Trust Obligations will not be made
until the final payment of the Class
A Invested Amount has been made to
the Class A Securityholders and the
final payment of the Class B Invested
Amount has been made to the Class B
Securityholders. 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 Securities and
the Collateralized Trust Obligations
to an amount equal to the Stated
Class D Amount. See "Description of
the Offered Securities--Subordination
of the Class B Securities,"
"--Redirection of Cash Flows" and
"--Redirected 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 Securities,
the Class B Securities and the
Collateralized Trust Obligations,
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 Securities and the
Collateralized Trust Obligations and
has satisfied certain other
conditions, the Securities 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 Securityholders 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
Securities--Defeasance."
Optional Repurchase................ The Invested Amount of the Class A
Securities, Class B Securities and
Collateralized Trust Obligations 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 CTO
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 CTO 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 CTO Invested Amount that
would be remaining on such date after
giving effect to any payments on such
date plus accrued interest which
would otherwise remain unpaid on the
Class A Securities, Class B
Securities and Collateralized Trust
Obligations through the day preceding
the Distribution Date on which the
repurchase occurs. See "Description
of the Offered Securities--Final
Payment of Principal; Termination."
Tax Status......................... In the opinion of Special Tax Counsel,
the Class A Securities and the Class
B Securities will be characterized as
debt for federal income tax purposes.
Under the Pooling and Servicing
Agreement, the Transferor, the
Servicer, the Class A Securityholders
and the Class B Securityholders agree
to treat the Class A Securities and
the Class B Securities as debt for
federal, state, and other tax
purposes. See "Certain Federal Income
Tax Consequences" for additional
information concerning the
application of federal income tax
laws.
ERISA Considerations............... Under a regulation issued by the U.S.
Department of Labor (the "Plan Assets
Regulation"), the Trust's assets
would not be deemed "plan assets" of
an employee benefit plan holding an
interest in the Class A Securities or
Class B Securities if such Class of
Securities qualify as
"publicly-offered securities" within
the meaning of the Plan Assets
Regulation. To qualify as
"publicly-offered securities" within
the meaning of the Plan Assets
Regulation, certain conditions must
be met, including that interests in
such Class of Securities 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 Securities will be held by at
least 100 such persons, and the
Transferor anticipates that the other
conditions of the "publicly-offered
security" exception contained in the
Plan Assets Regulation will be met
with respect to the Class A
Securities.] No monitoring or other
measures will be taken to ensure that
any such conditions will be met with
respect to the Class A Securities. If
the Trust's assets were deemed to be
"plan assets" of such a plan, there
is uncertainty whether existing
exemptions from the "prohibited
transaction" rules of the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), would
apply to all transactions involving
the Trust's assets. See "Employee
Benefit Plan Considerations."
[The Class B Underwriters do not expect
that the Class B Securities will be
held by 100 or more independent
investors and, therefore, do not
expect that the Class B Securities
will qualify as "publicly-offered
securities" under the Plan Assets
Regulation.] Accordingly, the Class B
Securities may not be acquired by
employee benefit plan investors
subject to Title I of ERISA or
Section 4975 of the Internal Revenue
Code of 1986, as amended (the
"Code"), including, but not limited
to, as applicable, an insurance
company general account. Each
Security Owner of a Class B Security,
by its acceptance thereof, will be
deemed to have represented and
warranted that it is not an employee
benefit plan investor subject to
Title I of ERISA or Section 4975 of
the Code. See "Employee Benefit Plan
Considerations."
Offered Securities Ratings......... It is a condition to the issuance of
the Class A Securities 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 Securities that they be
rated at least "A" or its equivalent
by at least one nationally recognized
rating agency.
Listing............................ Application has been made to list the
Offered Securities on the Luxembourg
Stock Exchange.
RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the Offered Securities. Each
Underwriter intends to make a market in each Class of the Offered
Securities 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 Security Owners with liquidity of
investment or that it will continue until the Offered Securities are paid
in full.
LIMITED OPERATING HISTORY OF DIRECT MERCHANTS BANK
The predecessor to Direct Merchants Bank began originating and
servicing credit card accounts in March 1995. Direct Merchants Bank has and
its predecessor had limited underwriting and servicing experience, and
limited delinquency, default and loss experience with respect to the
Accounts. See "Direct Merchants Credit Card Bank, National Association."
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. As of ________, 1998 approximately %
of the Accounts in the Trust Portfolio had been originated within the last
12 months and approximately % of the Accounts in the Trust Portfolio had
been originated within the last 24 months. As a result, the current
portfolio history may not be indicative of the portfolio performance as the
Receivables and Accounts mature. See the "Composition by Account Age--Trust
Portfolio" table in "The Receivables."
NON-RECOURSE TO METRIS, THE TRANSFEROR, DIRECT MERCHANTS
BANK OR AFFILIATES THEREOF
No Securityholder will have recourse for payment of its Securities
to any assets of Metris, the Transferor (other than the Exchangeable
Transferor Security and any Transferor Retained Class, to the extent
described herein), Direct Merchants Bank, or any affiliates thereof.
Consequently, Securityholders must rely solely upon payments on the
Receivables for the payment of principal of and interest on the Securities.
Furthermore, under the Pooling and Servicing Agreement, the Securityholders
have an interest in the Receivables and Collections only to the extent of
the Securityholders' Interest and, to the limited extent described herein,
the Transferor Interest. Should the Offered Securities not be paid in full
on a timely basis, Securityholders may not look to any assets of any of
Metris, the Transferor (other than the Exchangeable Transferor Security and
any Transferor Retained Class, to the extent described herein), Direct
Merchants Bank, the Utah Bank or any affiliates thereof to satisfy their
claims.
TRANSFER OF THE RECEIVABLES; INSOLVENCY RISK CONSIDERATIONS
Under the Purchase Agreements, Direct Merchants Bank has
represented and warranted to Metris and Metris has represented and
warranted to the Transferor, respectively, that the transfer of Receivables
to Metris or the Transferor, as applicable, is a valid sale and assignment.
In addition, Direct Merchants Bank, Metris and the Transferor have agreed
that if, notwithstanding their intent, the respective sales of Receivables
to Metris and the Transferor, are not treated as sales, the Purchase
Agreements will be deemed to create a security interest in the Receivables.
In a receivership or conservatorship of Direct Merchants Bank or in a
bankruptcy proceeding involving Metris, if the conveyance of the
Receivables is not treated as a sale, but is deemed to create a security
interest in the Receivables, Metris' or the Transferor's interest in the
Receivables may be subject to tax or other governmental liens relating to
Direct Merchants Bank or Metris, respectively, arising before the subject
Receivables came into existence and to certain administrative expenses of
the receivership, conservatorship or bankruptcy proceeding. Direct
Merchants Bank and Metris have taken or will take certain actions required
to perfect the Transferor's interest in the Receivables. If a bankruptcy
trustee for Metris, Metris as debtor-in-possession, or a creditor of Metris
were to take the view that Direct Merchants Bank or Metris and the
Transferor should be substantively consolidated or that the transfer of the
Receivables from Direct Merchants Bank to Metris or from Metris to the
Transferor, respectively, should be recharacterized as a pledge of such
Receivables, then delays in payments on the Offered Securities or (should
the bankruptcy court rule in favor of any such trustee,
debtor-in-possession or creditor) reductions in such payments on such
Securities 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 the Trust in the Receivables should
be enforceable (to the extent of the Trust's "actual direct compensatory
damages" (as described below)) 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 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 the
Trust 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 Securities 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 Securities 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. On April 10, 1990, the Resolution Trust Corporation (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 Statement 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
one case involving the repudiation by 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 the
Trust's "actual direct compensatory damages" in the event a conservator or
receiver of Direct Merchants Bank repudiated the Bank Purchase Agreement,
the amount paid to Securityholders could, depending upon circumstances
existing on the date of the repudiation, be less than the principal of the
Securities 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 Securityholders 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
securities 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 Security, the Class D Securities, a class of each
of the Previously Issued Series and any other class of Securities that may
be issued and retained by the Transferor. The Transferor represents and
warrants in the Pooling and Servicing Agreement that the transfer of the
Receivables to the Trust is either a valid transfer and assignment of the
Receivables to the Trust or the grant to the Trust of a security interest
in the Receivables. The Transferor has taken and will take certain actions
required to perfect the Trust's interest in the Receivables and warrants
that if the transfer to the Trust is deemed to be a grant to the Trust of a
security interest in the Receivables, the Trustee will have a first
priority perfected security interest therein, subject only to Permitted
Liens. If the transfer of the Receivables to the Trust is deemed to create
a security interest therein under the UCC, a tax or other governmental 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 Securities 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, Securityholders might experience delays in payment or
possibly losses in their investment in the Securities. 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 Securities or any other interest in the
Exchangeable Transferor Securities other than the Transferor instruct
otherwise), thereby causing early termination of the Trust and a loss to
the Securityholders if the net proceeds allocable to the Securityholders
from such sale, if any, were insufficient to pay the Securityholders 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
Securityholders, will thereafter be used to pay amounts due to the Class B
Securityholders, will thereafter be used to pay amounts due to the CTO
Securityholders, and will thereafter be used to pay amounts due to the
Class D Securityholders. 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 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. In addition, a bankruptcy trustee or receiver for the
Transferor may have the power to cause early payment of the Securities. In
the event of an early payment of principal on the Securities,
Securityholders may realize a lower yield on their reinvestment of such
early payment and may be required to incur costs associated with
reinvesting such funds. See "Certain Legal Aspects of the
Receivables--Certain Matters Relating to Bankruptcy or Receivership."
CONSUMER AND DEBTOR PROTECTION LAWS
The Accounts and the Receivables are subject to numerous federal
and state consumer protection laws that impose requirements related to
offering and extending credit. The United States Congress and the states
may enact laws and amendments to existing laws to regulate further the
credit card industry or to reduce finance charges or other fees or charges
applicable to credit card and other consumer revolving loan accounts. Such
laws, as well as any new laws or rulings which may be adopted, may
adversely affect the Servicer's ability to collect on the Receivables or
maintain previous levels of periodic rate finance charges and other fees
and charges with respect to the Accounts. Any failure by the Servicer,
Direct Merchants Bank, or other Credit Card Originators to comply with such
legal requirements also could adversely affect the Trust's ability to
collect the full amount of the Receivables. Although the Transferor will
make certain representations and warranties relating to the validity and
enforceability of the Receivables, the Trustee will not make any
examination of the Receivables or the records relating thereto for the
purpose of establishing the presence or absence of defects or compliance
with such representations and warranties, or for any other purpose. In the
event of a breach of certain representations and warranties, the Transferor
may be obligated to accept the reassignment and transfer of the entire
Trust Portfolio. See "Description of the Offered Securities--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 Securities in the Receivables,
if such laws result in any Receivables being written off as uncollectible.
See "Description of the Offered Securities--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 Securities--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
Securities may be significantly reduced. There can be no assurance in that
event that the holders of the Offered Securities would be able to reinvest
any accelerated distributions on account of such Offered Securities in
other suitable investments having a comparable yield.
EFFECT OF SUBORDINATION OF CLASS B SECURITIES; PRINCIPAL PAYMENTS
The Class B Securities will be subordinated in right of payment of
principal to the payment of principal and interest on the Class A
Securities. Payments of principal in respect of the Class B Securities will
not commence until after the final principal payment with respect to the
Class A Securities 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 Securities are redirected to cover the Class A Required
Amount or if the aggregate Series 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, Redirected CTO
Principal Collections or Redirected Class D Principal Collections and is
not assessed against the CTO Invested Amount or the Class D Invested
Amount. If the Class B Invested Amount suffers such a reduction, Finance
Charge Collections applicable to the Securityholders' 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 Securityholders will be reduced. See
"Description of the Offered Securities--Allocation Percentages,"
"--Redirected Principal Collections," "--Investor Charge-Offs" and
"--Subordination of the Class B Securities."
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
Securities--Addition of Trust Assets," including that the Transferor shall
have received written notice from each Rating Agency that such designation
will not cause a Ratings Event to occur; however, there is no mechanism to
assure consistent credit quality from time to time.
NEGATIVE CARRY
Any amounts deposited in the Excess Funding Account, the
Pre-Funding Account and the Principal Funding Account subsequent to the
Closing Date may result in a reduction of Portfolio Yield to the extent
that the Cash Equivalents in which such amounts are invested earn a rate
which is less than the effective yield from Finance Charge Receivables.
BASIS RISK
The Accounts in the Trust generally have finance charges set at a
variable rate above a designated prime rate or other designated index. The
Class A Interest Rate, the Class B Interest Rate and the CTO Interest Rate
are each based on LIBOR. If there is a decline in such prime rate or other
designated index which does not coincide with a decline in LIBOR, the
amount of collections of Finance Charge Receivables on such Accounts may be
reduced, whereas the amounts payable as interest on such Securities 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 Securities, Securityholders may
realize a lower yield on their reinvestment of such early payment and may
be required to incur costs associated with reinvesting such early payment.
SOCIAL, TECHNOLOGICAL AND ECONOMIC FACTORS
Changes in purchase and payment patterns by Obligors may result
from a variety of social, technological, and economic factors. Social
factors include potential changes in consumers' attitudes toward financing
purchases with debt. Technological factors include new methods of payment,
such as debit cards. Economic factors include the rate of inflation,
unemployment levels and relative interest rates. Cardholders with respect
to the Accounts generally have billing addresses in all 50 states, the
District of Columbia and other United States territories and possessions.
There is no basis, however, to predict whether, or to what extent, social,
technological, or economic factors will affect future use of credit or
repayment patterns.
BOOK-ENTRY REGISTRATION
Each Class of the Offered Securities initially will be represented
by one or more securities registered in the name of Cede & Co., the nominee
for DTC, and will not be registered in the names of the Security Owners or
their nominees. Unless and until Definitive Securities are issued, Security
Owners will not be recognized by the Trustee as Securityholders, as that
term is used in the Pooling and Servicing Agreement. Hence, until such
time, Security Owners will only be able to receive payments from, and
exercise the rights of Securityholders indirectly through DTC and its
participating organizations and, unless a Security 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 Security Owners by DTC and its
participating organizations. In addition, the ability of Security Owners to
pledge Securities to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Securities, may be
limited due to the lack of physical securities for such Securities. See
"Description of the Offered Securities--Book-Entry Registration" and
"--Definitive Securities."
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 securities of any Series outstanding or (ii) such
reduction is not also applied to any comparable segment of consumer
revolving credit card accounts owned by Direct Merchants Bank that have
characteristics the same as, or substantially similar to, such Accounts.
In addition, the Servicer will have the right to change the terms
of the Contracts relating to the Accounts or its policies and procedures
with respect to the servicing thereof (including the amount or timing of
charge-offs and the Periodic Finance Charges and other fees to be assessed
on the Accounts) if (i) (if the Servicer owns a comparable segment of
consumer revolving credit card accounts) such change is made applicable to
such comparable segment of consumer revolving credit card accounts owned by
the Servicer that have characteristics the same as, or substantially
similar to, the Accounts that are subject to such change and (ii) (if the
Servicer does not own a comparable segment of receivables) it will not make
any such change with the intent to materially benefit the Servicer over
Metris, except as otherwise restricted by any endorsement, sponsorship or
other agreement between the Servicer and an unrelated third party or by the
terms of the Contracts. The Purchase Agreement contains parallel covenants
of Metris. There can be no assurance that changes in applicable law,
changes in the marketplace or prudent business practice might not result in
a determination by the Servicer to take actions which would change the
payment or other Account terms. Except as specified above, there are no
restrictions in the Bank Purchase Agreement or the Pooling and Servicing
Agreement on the ability of the Servicer to change the terms of the
Accounts. While the Servicer has no current intention of taking actions
which would change the payment or other terms of the Accounts other than in
accordance with its customary and usual procedures, there can be no
assurances that changes in the marketplace or prudent business practice
might not result in a determination to do so.
CONTROL
Subject to certain exceptions, the investor securityholders 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 Securityholders have given
their approval or consent, except as otherwise specified, the Class A
Securityholders, the Class B Securityholders and the CTO Securityholders
will be treated as a single Series. Accordingly, the Class A
Securityholders will have the power to determine whether any such action is
taken without regard to the position or interests of the Class B
Securityholders or the CTO Securityholders relating to such action. Neither
the Class B Securityholders nor the CTO Securityholders 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 Securities, the Trust, as a master trust, has
issued the Previously Issued Series and is expected to issue additional
Series from time to time. See "Annex I: Other Series." While the Principal
Terms of any Series will be specified in a Supplement, the provisions of a
Supplement and, therefore, the terms of any additional Series, will not be
subject to the prior review or consent of holders of the securities 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
securities (including subordinated classes of securities), 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 Securities--Exchanges." In
addition, the provisions of any Supplement may give the holders of the
securities 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 securityholders 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 Securityholder or the value of Securities even if
there is no change in the rating of any outstanding Series. See
"Description of the Offered Securities--Exchanges."
SECURITY RATING
It is a condition to issuance of the Class A Securities 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 Securities that
they be rated "A" or its equivalent by at least one nationally recognized
rating agency. The ratings assigned to the Offered Securities by a Rating
Agency will reflect such Rating Agency's assessment of the likelihood that
Securityholders 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 Securities (including in the
Pre-Funding Account and the Excess Funding Account, if any) and the
subordination of the Class B Securities, Collateralized Trust Obligations
and the Class D Securities for the benefit of the Class A Securities and
the subordination of the Collateralized Trust Obligations and the Class D
Securities for the benefit of the Class B Securities. However, any such
rating will not address the possibility of the occurrence of a Pay Out
Event with respect to the Offered Securities, the possibility of the
imposition of United States withholding tax with respect to non-U.S.
Securityholders or the likelihood that the principal of, or interest on,
the Offered Securities will be paid by the Expected Final Payment Date. It
is a condition to issuance of the Collateralized Trust Obligations that
they be rated "BBB" or its equivalent by at least one nationally recognized
rating agency. The Class D Securities will not be rated. The ratings are
not a recommendation to purchase, hold, or sell the Class A Securities, the
Class B Securities or the Collateralized Trust Obligations, 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 the rating of each Class
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 Securities 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
Securities will nonetheless issue a rating with respect to any Class of the
Offered Securities, and, if so, what such rating would be. A rating
assigned to any Class of the Offered Securities by a rating agency that has
not been requested by the Transferor to do so may be lower than the ratings
assigned by the Rating Agencies pursuant to the Transferor's request.
PRE-FUNDING ACCOUNT AND THE FUNDING PERIOD
The Invested Amount will be increased during the Funding Period
(but not in excess of the Full Invested Amount) to the extent amounts are
(x) withdrawn from the Pre-Funding Account and paid to the Transferor in
connection with the addition of Receivables to the Trust or (y) deposited
in the Excess Funding Account. It is anticipated that Receivables will be
added to the Trust in an amount necessary to increase the Invested Amount
to an amount equal to the Full Invested Amount by the end of the ________
Monthly Period; however, there can be no assurance that a sufficient amount
of Receivables will be available for such purpose. Should the Pre-Funded
Amount be greater than zero at the end of the Funding Period, the amounts
remaining on deposit in the Pre-Funding Account will be deposited into the
Excess Funding Account. If there is a decline in the balance of the
Receivables during the Funding Period, funds otherwise payable to the
Transferor may be deposited in the Excess Funding Account. Amounts on
deposit in the Excess Funding Account are invested in Cash Equivalents and
are treated as assets of the entire Trust allocated to all Series then
outstanding and to the Exchangeable Transferor Security, and will be
applied as described in "Description of the Offered Securities--Excess
Funding Account." Such funds may be released to holders of securities of
other Series in connection with a reduction of the principal balance of the
securities of such other Series. To the extent that the net investment
income earned on amounts on deposit in the Pre-Funding Account during the
Funding Period or in the Excess Funding Account is less than the Base Rate,
the Servicer will apply Transferor Finance Charge Collections to the extent
available to cover any related Negative Carry Amount. If Transferor Finance
Charge Collections are not sufficient to cover such Negative Carry Amount,
there will be a decline in the excess of the Portfolio Yield over the Base
Rate which could result in a Pay Out Event. See "--Payments and Maturity"
for a discussion of certain effects of a Pay Out Event.
THE TRUST
The Trust was formed, in accordance with the laws of the State of
Delaware, pursuant to the Pooling and Servicing Agreement. The Trust was
formed for the transactions described herein and similar transactions, as
contemplated by the Pooling and Servicing Agreement, and prior to formation
had no assets or obligations. The Trust has not engaged, and will not
engage, in any business activity, other than as described herein, but
rather will only acquire and hold the Receivables (and related assets),
issue (or cause to be issued) the Securities, the Exchangeable Transferor
Security, and securities representing additional Series and engage in
related activities (including, with respect to any Series, entering into
any Enhancement and Enhancement agreement relating thereto) and make
payments thereon. As a consequence, the Trust is not expected to have any
need for additional capital resources.
METRIS COMPANIES INC.
Metris Companies Inc. ("Metris") is an information-based direct
marketer of consumer credit products, fee-based services and extended
service plans primarily to moderate income consumers. Metris' consumer
credit products are primarily unsecured credit cards issued by its
subsidiary, Direct Merchants Credit Card Bank, National Association
("Direct Merchants Bank"). Metris' customers and prospects include existing
customers of an affiliate, Fingerhut ("Fingerhut Customers"), and
individuals who are not Fingerhut Customers but for whom credit bureau
information is available ("External Prospects"). Metris markets its
fee-based services, including debt waiver programs, card registration,
extended service plans, third party insurance and membership clubs, to its
credit card customers, Fingerhut Customers, and customers of third parties.
Metris had net income of $11.2 million for the first three months of 1998
and net income of $38.1 million for the year ended December 31, 1997.
Metris is a Delaware corporation incorporated on August 20, 1996,
and is currently an 83 percent owned indirect subsidiary of Fingerhut
Companies, Inc. ("FCI"). Metris became a publicly held company in October
1996 after completing an initial public offering. Metris' principal
subsidiaries are Direct Merchants Bank, Metris Direct, Inc. ("Metris
Direct"), Metris Funding Co., Metris Receivables, Inc. and Metris Direct
Services, Inc. Prior to the initial public offering, Metris' business was
operated as a division of FCI.
On October 9, 1997, FCI announced that its Board of Directors had
approved the filing of an application with the Internal Revenue Service
(the "IRS") for a ruling on a tax-free distribution of FCI's stock of
Metris (the "Spin Off"). FCI filed the ruling request with the IRS on
October 23, 1997. The proposed Spin Off of Metris would be subject to
receipt of a favorable ruling from the IRS, approval of FCI's Board of
Directors and market conditions. If approved, the Spin Off would be
expected to be completed during the third quarter of 1998. There are no
assurances that the Spin Off will be consummated.
As the year 2000 approaches, an important business issue has
emerged regarding how existing application software programs and operating
systems can accommodate the date value "2000." Many existing application
software products were designed to only accommodate a two digit date
position which represents the year (e.g., the number "95" is stored on the
system and represents the year 1995). As a result, the year 1999 (i.e.,
"99") is the maximum date value many systems will be able to accurately
process. Metris has developed plans to address potential problems posed by
this development to assure that Metris is prepared for year 2000. Most of
Metris' existing information systems are less than three years old and were
originally designed for year 2000 compliance. Metris has identified
financial and operational systems that may be impacted by the year 2000
issues and is actively working to address those issues. However, if plans
to deal with year 2000 issues are not completed on a timely basis or are
not fully effective, such issues may have a material adverse effect on
Metris' operations.
In addition, Metris is dependent on databases maintained by FCI and
card and statement generation, among other services, provided by a credit
card processor, First Data Resources, Inc. ("FDR"). Metris has ongoing
meetings with FCI to determine where Metris' and FCI's systems overlap and
to determine what steps are necessary to ensure compliance. Metris has also
been in frequent periodic contact with FDR with respect to FDR's programs
for year 2000. Metris believes that FDR will address year 2000 problems on
a timely basis. Although Metris cannot ensure compliance by all of its
vendors on a timely basis, Metris believes that it is taking appropriate
steps to identify exposure to year 2000 problems and to address them on a
timely basis.
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 Direct. 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 Direct, 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 600 South
Highway 169, Suite 300, St. Louis Park, Minnesota 55426. The Transferor's
telephone number is (612) 417-5645.
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 Credit Card
Bank, National Association, located in Salt Lake City, Utah (the "Utah
Bank") was chartered as a national banking association on February 14,
1995. On July 13, 1998, the Utah Bank was merged into Interim National
Bank, a national banking association located in Phoenix, Arizona, and an
indirect subsidiary of Metris. The name of the surviving entity was changed
to Direct Merchants Credit Card Bank, National Association. Its principal
executive offices are located in Phoenix, Arizona, with a mailing address
at 6909 East Greenway Parkway, Scottsdale, Arizona 85254, telephone number
(602) 718-4600. Any references to Direct Merchants Credit Card Bank,
National Association, prior to July 13, 1998 are references to the Utah
Bank.
FINGERHUT CORPORATION
Fingerhut Corporation ("Fingerhut"), a wholly owned subsidiary of
FCI, has been in the direct marketing business for over 46 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 1997 net sales of approximately $1.8 billion.
Fingerhut makes substantially all of its sales using proprietary private
label credit. As customers make payments and order new products, Fingerhut
enters a variety of payment, behavioral and other data into its database
(the "Fingerhut Database").
The Fingerhut Database. The Fingerhut Database contains information
on more than 31 million individuals, including approximately 8 million
customers who have made a purchase from Fingerhut within the past 24
months. This database contains up to 3,500 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 11.4 million individuals about
whom it has information relating to fraud and other similar indicators of
unacceptably high risk. Fingerhut periodically updates the information in
the Fingerhut Database. Fingerhut does not report its credit information to
the credit bureaus, which means this information is not publicly available.
Direct Merchants Bank currently has agreements to use the information in
the Fingerhut Database for marketing general purpose credit cards to
Fingerhut Customers. These agreements generally expire in 2003, but may
expire earlier upon certain events of default or bankruptcy. In addition,
in the event that a Person or group other than Fingerhut acquires 25% or
more of the voting stock of Metris or Direct Merchants Bank in a
transaction other than the Spin Off during the term of one of these
agreements, Fingerhut or FCI, as the case may be, has the right to
terminate these agreements. Although the Transferor believes that, to the
extent that it is desirable to do so, Direct Merchants Bank will be able to
extend the term of these agreements, there can be no assurance that Direct
Merchants Bank will be able to do so on terms favorable to Direct Merchants
Bank or at all.
DIRECT MERCHANTS BANK'S CREDIT CARD ACTIVITIES
GENERAL
The Receivables conveyed to the Trust have been and will be
generated from transactions made by holders of co-branded and other
MasterCard(R) credit card and VISA(R) credit card accounts and, subject to
the satisfaction of the Rating Agency Condition, may also include, although
they do not currently include, receivables generated from transactions made
by holders of other general purpose credit card accounts originated or
acquired by Direct Merchants Bank. Certain data processing, administrative
and other functions associated with the servicing of the Receivables are
performed on behalf of Direct Merchants Bank through 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. As of March 31, 1998, Direct Merchants Bank had
approximately 2.2 million credit card accounts and approximately $3.6
billion in managed loans; Fingerhut Customers represented approximately 40%
of the accounts and approximately 40% of the managed loans.
GROWING CREDIT CARD PORTFOLIO BY PORTFOLIO ACQUISITIONS
In September 1997, Direct Merchants Bank acquired an approximately
$317 million credit card portfolio consisting of approximately 260,000
accounts from Key Bank USA, National Association, of which approximately
197,000 accounts are active accounts. In addition, in October 1997 Direct
Merchants Bank acquired an approximately $405 million credit card portfolio
consisting of approximately 460,000 accounts from Mercantile Bank National
Association, of which approximately 240,000 accounts are active accounts.
In June 1998, Direct Merchants Bank acquired an approximately $100 million
credit card portfolio consisting of approximately 42,000 accounts from
Huntington National Bank. None of these accounts has been designated as an
Account and while the Transferor does not in the near future intend to add
such accounts to the Accounts designated to have their Receivables
transferred to the Trust, such a determination may be made in the future.
Direct Merchants Bank also acquired in the first quarter of 1997 a
credit card portfolio from a California based credit union which, as of
August 31, 1997, had approximately 18,500 accounts with balances of
approximately $36 million. Such accounts have been designated as
Supplemental Accounts the Receivables of which have been transferred to the
Trust.
NEW ACCOUNT UNDERWRITING
Direct Merchants Bank targets moderate income consumers whom it
believes are underserved by traditional providers of consumer credit.
"Moderate income" refers to those households in the United States that have
annual incomes of between $15,000 and $35,000 (approximately 31 million
households according to a 1994 U.S. Census Bureau report).
Prior to July 1997, substantially all of the Accounts were
generated under a license from MasterCard International Inc. and were
originated or purchased by Direct Merchants Bank. Direct Merchants Bank is
a member of MasterCard International Inc. MasterCard International Inc.
licenses its mark permitting financial institutions to issue credit cards
to their customers. In addition, MasterCard International Inc. provides
clearing services facilitating exchange of payments among member
institutions and networks linking members' credit authorization systems.
MasterCard credit cards are issued as part of the worldwide MasterCard
International Inc. systems, and the transactions creating the receivables
through the use of the credit cards are processed through the MasterCard
International Inc. authorization and settlement systems. The MasterCard(R)
credit cards from which the Accounts were established may be used to
purchase goods and services, to obtain cash advances and to consolidate and
transfer account balances from other credit cards. Cardholders make
purchases when using a credit card to buy goods or services. A cash advance
is made when a credit card is used to obtain cash from a financial
institution, an automated teller machine, or by a draft drawn on an
account. Amounts due with respect to purchases, cash advances and transfers
of account balances will be included in the Receivables. Direct Merchants
Bank is also a member of VISA USA Incorporated. With the first quarter,
1997 acquisition of the California Credit Union portfolio, Direct Merchants
Bank acquired approximately 20,000 VISA(R) credit card accounts. Beginning
in July 1997, the Bank began originating accounts under the VISA license.
Credit Scoring. Direct Merchants Bank requests a Fingerhut Score
for prospective customers in the Fingerhut Database. Direct Merchants Bank
also requests credit bureau information for all Fingerhut Customers,
including risk scores provided by Fair, Isaacs & Company, a third party
provider of risk scorecards ("FICO scores"). For those Fingerhut Customers
who have FICO scores, Direct Merchants Bank uses the Fingerhut Score to
further segment Fingerhut Customers into narrower ranges within each FICO
score subsegment, allowing it to better evaluate individual credit risk and
to tailor its risk-based pricing accordingly. Additionally, the Fingerhut
Score is used to target individuals who have no, or limited, credit bureau
information and consequently no FICO scores, allowing the Bank to target
Fingerhut Customers who would not typically be solicited by other credit
card issuers.
Direct Merchants Bank has developed a proprietary modeling system
for External Prospects (the "Proprietary Modeling System"). The Proprietary
Modeling System 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 Direct Merchants 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 Direct Merchants Bank. Direct Merchants Bank establishes the
range of FICO scores that it plans to target for a specific campaign, and
receives files from the credit bureaus which contain individual credit
records of the External Prospects who fall within this range. The files are
incorporated into the Proprietary Modeling System, which further segments
External Prospects based upon their Proprietary Scores. The mailing lists
generated from the Proprietary Modeling System are then checked against the
Suppress File and any matching names are excluded. Direct Merchants Bank
currently does not solicit External Prospects who do not have FICO scores.
Solicitation. Prospects for solicitation include both Fingerhut
Customers and External Prospects. They are contacted on a nationwide basis
generally through pre-screened direct mail and telephone solicitations.
Direct Merchants Bank receives responses to its pre-screened solicitations,
performs fraud screening, verifies name and address changes, and obtains
any information which may be missing from the application. Applications are
then sent to third party data entry providers, which key the application
information and process the applications based on the criteria provided by
Direct Merchants Bank. Applications are approved, denied or referred to
Direct Merchants Bank for exception processing. Direct Merchants Bank
processes exceptions for, among other things, derogatory credit bureau
information and fraud warnings. Exception applications are processed
manually by a credit analyst based on policies approved by the Bank's
credit committee.
Pricing. Direct Merchants Bank's pricing strategy is to price for
the risk associated with its credit card customer. The specific pricing for
a credit card offer is primarily based on the prospect's risk profile prior
to solicitation. Each prospect is evaluated to determine credit needs,
credit risk, and existing credit availability. A customized offer is
developed that includes the most appropriate product, brand, pricing, and
credit line. Direct Merchants Bank currently offers over 100 different
pricing structures on its credit card products, with a range of annual fees
and variable annual percentage rates based on floating rates of interest,
primarily the prime rate. After credit card accounts are opened, the
customer's internal and external credit performance is actively monitored
and their behavior and risk scores are periodically recalculated. As
customers evolve through the credit lifecycle and are 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 credit line increases and decreases to individual
customers, as well as to determine the systematic collection steps to be
taken at the various stages of delinquency. The Adaptive Control System
manages the authorization of each transaction; in addition, it implements
the collections strategies determined by Metris 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 (excluding portfolio acquisitions) 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 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 and back office support for mail
inquiries and fraud management are handled internally by Direct Merchants
Bank.
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. For most cardholders, if the entire balance on the
account is paid by the due date, a finance charge is not imposed.
Direct Merchants Bank generally assesses an annual fee on its
accounts. Direct Merchants Bank may waive the annual membership fees, or a
portion thereof, in connection with the solicitation of new accounts
depending on the credit terms offered, which are determined by the
prospect's risk profile prior to solicitation or when it determines a
waiver to be necessary in order to be competitive. In addition to the
annual fee, Direct Merchants Bank may charge accounts certain other fees
including: (i) a late fee with respect to any unpaid monthly payment if it
does not receive the required minimum monthly payment by the Payment Date,
(ii) a cash advance fee for each cash advance, (iii) a fee with respect to
each check submitted by a cardholder in payment of an account which is not
honored by the cardholder's bank, and (iv) an overlimit charge if, at any
time during the billing cycle, the total amount owed exceeds the
cardholder's credit line by at least $30 due to transaction activity.
Each cardholder is subject to an agreement governing the terms and
conditions of the accounts. Pursuant to such agreements, Direct Merchants
Bank reserves the right to change or terminate certain terms, conditions,
services and features of the account (including periodic finance charges,
late fees, returned check charges and any other charges or the minimum
payment), subject to the conditions set forth in the account agreement.
Monthly billing statements are sent to cardholders by FDR on behalf
of Direct Merchants Bank. Direct Merchants Bank uses third party processors
to process certain cardholder payments. When an account is established, it
is assigned a billing cycle. Currently, there are 20 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 greatest of $10.00, 2.0 percent of the outstanding balance, the
finance charge or the balance of the account if the balance is less than
$10. 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. The remaining transactions generally are low dollar amounts, typically
below $50.00.
DESCRIPTION OF FDR
FDR provides data processing, credit card reissuance, statementing,
inbound customer service telephone calls and interbank settlement for
Direct Merchants Bank. 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 Securityholders
could occur.
FDR provides computer data processing services primarily to the
bankcard industry. FDR is a subsidiary of First Data Corp.
DELINQUENCY, COLLECTIONS AND CHARGE-OFFS
Direct Merchants Bank considers an account delinquent if a payment
due thereunder is not received within 25 days from the closing date of the
statements. Collection procedures are determined with the assistance of the
Adaptive Control System, which continually monitors all delinquent
accounts. The collections function is handled internally primarily through
collection facilities in Tulsa, Oklahoma, and Baltimore, Maryland. The
Tulsa facility employs approximately 300 collection personnel, and the
Baltimore facility employs approximately 400 collection personnel with the
ability to expand to approximately 800 employees. Through these facilities,
customers with delinquent accounts are called as early as the first day of
delinquency and generally within the first week of delinquency, based upon
the customer's behavior score and prior credit history. Metris Direct's
collections department generates letters through a proprietary letter
system when appropriate. Delinquent customers receive automatic collection
letters at various stages in their delinquency, from 5-90 days past due.
Metris Direct's collections personnel attempt a minimum of two contacts in
each 30-day delinquency cycle, unless special arrangements have been made
with the customer. Accounts that become 60 days contractually 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 immediately reserved for and
charged off no later than 90 days after the last activity. Accounts
identified as deceased without a surviving, contractually liable individual
or an estate large enough to pay the debt in full are charged off
immediately upon notification. Charged-off accounts are referred to Direct
Merchants Bank's recovery unit in Baltimore, Maryland, for coordination of
collection efforts to recover the amounts owed. When appropriate, accounts
are placed with external collection agencies or attorneys.
The Federal Financial Institutions Examination Counsel on June 30,
1998 proposed a revised policy statement on the classification of retail
credit. If adopted, the revised policy statement could establish, effective
January 1, 2001, a uniform charge-off period of 150 days past due from the
contractual date for open-end and closed-end credit, including credit card
receivables. The revised policy statement could also, effective January 1,
1999, provide guidance for loans affected by bankruptcy, fraudulent
activity, and death; establish standards for re-aging, extending,
deferring, or rewriting of past due accounts; and broaden the circumstances
under which partial payments are recognized as full payments for purposes
of determining that a loan is no longer delinquent.
Direct Merchants Bank uses FDR's fraud protection system to improve
the rate of early detection of fraudulent activity on a cardholder account.
The system also provides work flow management that is used to investigate
potentially fraudulent transactions and to take prompt immediate action to
reduce further losses. A fraud score is established based on the details of
the authorization request and the previous behavior pattern of the
cardholder. This score is used in the determination of actions to be taken
for potentially fraudulent transactions.
Direct Merchants Bank reserves the right to cancel charge
privileges at any time, usually as a result of violating the contractual
terms (delinquency, overlimit, etc.) of the credit account. Activity on
lost, stolen, or fraudulent accounts is blocked immediately upon
notification by the cardholder or upon determination by FDR that a card is
lost or stolen or being used fraudulently.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth the delinquency and loss experience
for each of the periods shown for the portfolio of credit card accounts
serviced by Direct Merchants Bank (the "Direct Merchants Bank Portfolio").
There can be no assurance that the delinquency and loss experience for the
Trust Portfolio will be similar to the historical experience set forth
below because, among other things, economic and financial conditions
affecting the ability of cardholders to make payments may be different from
those that have prevailed during the periods reflected below and many of
the Accounts have been originated in the last twelve months.
DELINQUENCY EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of As of As of
June 30, 1998 March 31, 1998 December 31, 1997
-----------------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Receivables
Outstanding(2) 100.0% $2,982,652 100.0% $2,863,430 100.0%
Receivables
Delinquent:
30-59 Days $ 69,178 2.3% $ 64,547 2.3%
60-89 Days 50,644 1.7 44,115 1.5
90 or More Days 105,024 3.5 89,601 3.1
-----------------------------------------------------------------------------------
Total $ 224,846 7.5% $ 198,263 6.9%
===================================================================================
(RESTUBBED TABLE CONTINUED FROM ABOVE)
As of As of As of
September 30, 1997 June 30, 1997 March 31, 1997
-----------------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-----------------------------------------------------------------------------------
Receivables
Outstanding(2) $2,381,403 100.0% $2,124,821 100.0% $1,816,653 100.0%
Receivables
Delinquent:
30-59 Days $56,955 2.4% $ 41,650 2.0% $ 37,466 2.1%
60-89 Days 37,217 1.6 27,400 1.3 24,820 1.4
90 or More Days 70,208 2.9 55,794 2.6 46,418 2.5
-----------------------------------------------------------------------------------
Total $ 164,380 6.9% $ 124,844 5.9% $ 108,704 6.0%
===================================================================================
(RESTUBBED TABLE CONTINUED FROM ABOVE)
As of As of As of
December 31, 1996 September 30, 1996 June 30, 1996
-----------------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-----------------------------------------------------------------------------------
Receivables
Outstanding(2) $1,615,940 100.0% $1,276,687 100.0% $1,068,018 100.0%
Receivables
Delinquent:
30-59 Days $ 32,114 2.0% $ 26,800 2.1% $ 14,882 1.4%
60-89 Days 20,398 1.2 15,782 1.3 7,332 0.7
90 or More Days 36,857 2.3 23,195 1.8 13,750 1.3
-----------------------------------------------------------------------------------
Total $ 89,369 5.5% $ 65,777 5.2% $ 35,964 3.4%
===================================================================================
As of As of As of
March 31, 1996 December 31, 1995 September 30, 1995
-----------------------------------------------------------------------------------
Percentage Percentage Percentage
of Total of Total of Total
Receivables Receivables Receivables Receivables Receivables Receivables
-----------------------------------------------------------------------------------
Receivables
Outstanding(2) $ 676,974 100.0% $ 543,619 100.0% $ 298,920 100.0%
Receivables
Delinquent:
30-59 Days $ 9,677 1.4% $ 7,546 1.4% $ 5,142 1.7%
60-89 Days 5,879 0.9 4,952 0.9 3,039 1.0
90 or More Days 10,046 1.5 8,996 1.7 2,288 0.8
-----------------------------------------------------------------------------------
Total $ 25,602 3.8% $ 21,494 4.0% $ 10,469 3.5%
===================================================================================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
As of
June 30, 1995
-------------------------
Percentage
of Total
Receivables Receivables
-------------------------
Receivables
Outstanding(2) $ 190,069 100.0%
Receivables
Delinquent:
30-59 Days $ 320 0.2%
60-89 Days 1 0.0
90 or More Days -- --
-------------------------
Total $ 321 0.2%
=========================
- -------------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National Association or
Mercantile Bank National Association acquired accounts or the Direct
Merchants Bank's minor secured card portfolio.
(2) The Receivables Outstanding on the accounts consist of all amounts due
from cardholders as posted to the accounts as of the date shown.
<TABLE>
<CAPTION>
LOSS EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
Quarter Quarter
Ended Ended Year Quarter Ended Year
----------------------------- Ended --------------------------------------------------- Ended
June 30, March 31, Dec. 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
1998 1998 1997 1997 1997 1997 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding(2) $2,957,963 $2,126,677.75 $2,587,665 $2,274,934 $1,939,623 $1,704,489 $1,017,236
Total Gross
Charge-Offs(3) $ 73,931.00 $ 194,506.00 $ 61,561 $ 51,070.00 $ 45,522 $ 36,353 $ 64,453
Total Gross
Charge-Offs as
a Percentage
of Average
Receivables
Outstanding 2.50% 9.15% 2.38% 2.24% 2.35% 2.13% 6.34%
(Annualized) 10.14% 9.15% 9.44% 8.91% 9.41% 8.65% 6.34%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Nine
Quarter Ended Months Quarter Ended
------------------------------------------------- Ended ------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Dec. 31, Sept. 30, June 30,
1996 1996 1996 1996 1995 1995 1995 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding(2) $1,401,552 $1,185,070 $ 872,529 $ 609,792 $ 242,694 $ 394,610 $ 248,788 $ 84,685
Total Gross
Charge-offs(3) $ 26,445 $ 17,042 $ 12,020 $ 8,946 $ 4,046 $ 3,206 $ 840 --
Total Gross
Charge-Offs as
a Percentage
of Average
Receivables
Outstanding 1.89% 1.44% 1.38% 1.47% 1.67% 0.81% 0.34% --
(Annualized) 7.51% 5.72% 5.54% 5.90% 2.21% 3.22% 1.34% --
</TABLE>
- ------------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National Association,
Mercantile Bank National Association or Huntington BancShares acquired
accounts, or the Direct Merchants Bank's minor secured card portfolio.
(2) 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.
(3) Gross Charge-Offs are Total Principal Charge-Offs before recoveries
and do not include the amount of any reductions in Average Receivables
Outstanding due to fraud, returned goods, customer disputes or other
miscellaneous credit adjustments.
RECOVERIES
Pursuant to the terms of the Pooling and Servicing Agreement, the
Servicer will be required to transfer all Recoveries to the Trust. In the
event of any sale or other disposition of Receivables in Defaulted Accounts
as provided in the Pooling and Servicing Agreement, Recoveries will not
include amounts received by the purchaser or transferee of such Receivables
but will be limited to amounts received by the Servicer from the purchaser
or transferee. Collections of Recoveries will be treated as Collections of
Finance Charge Receivables.
YIELD CONSIDERATIONS
The Portfolio Yield on the 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 assets and are not included in the yield numbers for the Direct
Merchants Bank Portfolio in the following table.
<TABLE>
<CAPTION>
YIELD EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
Quarter Ended Quarter Ended Year
------------------------------------ ------------------------------------ Ended
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
1998 1998 1997 1997 1997 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding(2) $2,957,963 $2,587,665 $2,274,934 $1,939,623 $1,704,489 $1,017,236
Total Finance
Charges and Fees
Billed(3)(4) $ 181,651 $ 154,670 $ 133,870 $ 124,378 $ 107,395 $ 269,298
Average Revenue Yield
(Annualized) 24.91% 23.71% 23.35% 25.72% 25.55% 26.47%
</TABLE>
Quarter Ended
--------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996
--------------------------------------------------
Average Receivables
Outstanding(2) $1,401,552 $1,185,070 $ 872,529 $ 609,792
Total Finance
Charges and Fees
Billed(3)(4) $ 93,506 $ 75,252 $ 58,727 $ 41,813
Average Revenue Yield
(Annualized) 26.54% 25.26% 27.07% 27.58%
(RESTUBBED TABLE CONTINUED FROM ABOVE)
Year Quarter Ended
Ended --------------------------------
Dec. 31, Dec. 31, Sept. 30, June 30,
1995 1995 1995 1995
--------------------------------
Average Receivables
Outstanding(2) $242,694 $394,610 $248,788 $84,685
Total Finance
Charges and Fees
Billed(3)(4) $ 49,021 $ 23,071 $ 21,671 $ 4,279
Average Revenue Yield
(Annualized) 26.81% 23.20% 34.56% 20.27%
- ---------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National
Association,Mercantile Bank National Association acquired accounts or
the Direct Merchants Bank's minor secured card portfolio.
(2) 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.
(3) 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.
(4) Total Finance Charges and Fees Billed are presented net of adjustments
made pursuant to the Bank's normal servicing procedures, including
removal of incorrect or disputed finance charges and reversal of
finance charges accrued on charged-off accounts.
THE RECEIVABLES
The Accounts had, as of , 1998, an average Principal Receivable
balance of $ and an average credit limit of $ . The percentage of
the total Receivable balance to the aggregate total credit limit, as of
, 1998, was percent.
The following tables summarize the Receivables which have been
conveyed to the Trust (the "Trust Portfolio") by various criteria as of the
close of business on ______, 1998. 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
$ 500.01 -$1,000.00
$1,000.01 -$1,500.00
$1,500.01 -$3,000.00
$3,000.01 -$5,000.00
$5,000.01 -$10,000.00
$10,000.01 & Greater
--------------------------------------------------------------
Total
==============================================================
</TABLE>
<TABLE>
<CAPTION>
COMPOSITION BY PERIOD OF DELINQUENCY
TRUST PORTFOLIO
Percentage Percentage
of Total of Total
Period of Delinquency Number of Number of Receivables Receivables
(Days Contractually Delinquent) Accounts Accounts Outstanding Outstanding
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Current
1 -29 Days
30 -59 Days
60 -89 Days
90 -119 Days
120 -149 Days
150 Days or More
-------------------------------------------------------------
Total
=============================================================
</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
No Balance
$ 0.01 -$ 500.00
$ 500.01 -$1,000.00
$1,000.01 -$1,500.00
$1,500.01 -$3,000.00
$3,000.01 -$5,000.00
$5,000.01 & Greater
--------------------------------------------------------------
Total
==============================================================
</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
Over 6 Months to 12 Months
Over 12 Months to 24 Months
Over 24 Months
--------------------------------------------------------------
Total
==============================================================
</TABLE>
COMPOSITION BY GEOGRAPHIC DISTRIBUTION
TRUST PORTFOLIO
<TABLE>
<CAPTION>
Percentage Percentage
of Total of Total
Number of Number of Receivables Receivables
Location Accounts Accounts Outstanding Outstanding
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
District of Columbia
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Other
-------------------------------------------------------------
Total
=============================================================
</TABLE>
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement provides that the Class A
Securityholders and the Class B Securityholders are scheduled to receive
payments of principal on the Expected Final Payment Date, which is
the Distribution Date, but may receive principal payments earlier in
the event of a Pay Out Event which results in the commencement of the Early
Amortization Period. The Class B Securityholders 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 CTO 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
Securityholders, the Class B Invested Amount will be paid to the Class B
Securityholders and the CTO Invested Amount will be paid to the CTO
Securityholders, 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 CTO 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 Securityholders on the next Distribution Date and an amount
equal to the Available Investor Principal Collections will be paid to the
Class A Securityholders on each succeeding Distribution Date until the
earlier of the Distribution Date on which the Class A Invested Amount has
been paid in full and the Termination Date. After the Class A Invested
Amount has been paid in full, Available Investor Principal Collections will
be paid to the Class B Securityholders 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 Securityholders 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 the 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 Securityholders, (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 1998-3 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 Securities, the Class B Securities, the
Collateralized Trust Obligations and the Class D Securities, (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 being
equal to 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
Securities--Pay Out Events." In the event of an early payment of principal
on the Offered Securities, Securityholders may realize a lower yield on
their reinvestment of such early payment and may be required to incur costs
associated with reinvesting such funds.
The "Base Rate" means, with respect to any Monthly Period, the sum
of (i) the weighted average of the Class A Interest Rate, the Class B
Interest Rate and the CTO Interest 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 CTO Invested Amount, respectively, as of the last day of
such Monthly Period) plus (ii) the product of 2 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
Series Default Amount and the Series 1998-3 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
Securityholders may be added to the numerator if the Rating Agency
Condition is satisfied. See "Description of the Offered Securities--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(1)
Quarter Ended
-----------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1997 1997
------------------------ ----------------------------
Highest Month 7.2% 6.6% 7.0%
Lowest Month 6.3% 6.0% 6.2%
Monthly Average(2) 6.6% 6.3% 6.6%
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30,
1997 1997 1996 1996 1996 1996 1995 1995 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Highest Month 7.2% 7.6% 7.5% 8.4% 8.8% 8.5% 8.7% 12.7% 64.7%
Lowest Month 6.8% 6.6% 6.8% 6.4% 8.0% 8.0% 7.9% 8.5% 19.7%
Monthly Average(2) 7.0% 7.1% 7.1% 7.5% 8.3% 8.3% 8.3% 10.5% 42.2%
</TABLE>
- -----------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Key Bank USA, National Association or
Mercantile Bank National Association acquired accounts or the Direct
Merchants Bank's minor secured card portfolio.
(2) Monthly Averages shown are expressed as an arithmetic average of the
payment rate for each month for the period indicated.
The amount of collections of Receivables may vary from month to
month due to various factors, including seasonal variations, general
economic conditions, economic and financial conditions affecting the
payment habits of individual cardholders, the Credit Card Originator's
minimum monthly payment requirements, and acts of God. There can be no
assurance that collections with respect to the Trust, and thus the rate at
which the Securityholders could expect to receive payments of principal on
their Securities 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 Securities 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 Securities 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 Securities--Postponement of Accumulation
Period," the Servicer may shorten the Accumulation Period and, in such
event, there can be no assurance that the duration of the Accumulation
Period will be sufficient for the accumulation of all amounts necessary to
pay the Class A Invested Amount and the Class B Invested Amount on the
Expected Final Payment Date, especially if a pay out event were to occur
with respect to one or more other Series thereby limiting the amount of
Shared Principal Collections allocable to the Offered Securities.
USE OF PROCEEDS
The Transferor will apply the net proceeds received from the sale
of the Offered Securities, which is expected to be approximately
$__________, to repay principal of classes of the Series 1998-1 Variable
Funding Securities, 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 Monthly
Interest on the first Distribution Date.
DESCRIPTION OF THE OFFERED SECURITIES
The Offered Securities will be issued pursuant to the Pooling and
Servicing Agreement and the Series 1998-3 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 Securities will represent interests in certain assets
of the Trust, including the right to the Investor Percentage of all Obligor
payments on the Receivables in the Trust. Each Class A Security and Class B
Security represents the right to receive payments of interest at the Class
A Interest Rate or the Class B Interest 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 Securityholders' Interest or the Class
B Securityholders' Interest, as the case may be. With respect to the
Accumulation Period, principal payments will be made to the Class A
Securityholders and the Class B Securityholders on the Expected Final
Payment Date.
The Transferor will own the Exchangeable Transferor Security and
the Class D Securities. The Exchangeable Transferor Security will represent
an undivided interest in the Trust, including the right to the Transferor
Percentage of all Obligor payments on the Receivables in the Trust equal to
100 percent minus the sum of the applicable investor allocation percentages
(which shall not exceed 100 percent) for all Series of securities 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
Securityholders. During the Early Amortization Period, the Invested Amount
will decline as Obligor payments of Principal Receivables are collected and
distributed to Securityholders. 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
Securities 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 Securities initially will be represented by
securities 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
Securities 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 Securities. Unless and until Definitive Securities
are issued under the limited circumstances described herein, no Security
Owner acquiring an interest in any Class of Offered Securities will be
entitled to receive a certificate representing such Security Owner's
interest in such Securities. Until such time, all references herein to
actions by Securityholders of any Class of Offered Securities 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 Securityholders of any Class of Offered
Securities will refer to distributions, notices, reports and statements to
the Depository or its nominee, as the registered holder of the Offered
Securities of such Class, for distribution to Security Owners of such Class
in accordance with the Depository's procedures. See "--Book-Entry
Registration" and "--Definitive Securities."
BOOK-ENTRY REGISTRATION
With respect to each Class of Offered Securities in book-entry
form, Securityholders may hold their Securities 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 securities.
Cedel and Euroclear will hold omnibus positions on behalf of the Cedel
Participants and the Euroclear Participants, respectively, through
customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries (collectively, the "Depositaries")
which in turn will hold such positions in customers' securities accounts in
the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities for its Participants ("DTC
Participants") and facilitates the clearance and settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities.
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 of securities received 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 Securities under the DTC system must be made by or
through Participants, which will receive a credit for the Securities on
DTC's records. The ownership interest of each actual Security Owner is in
turn to be recorded on the DTC Participants' and Indirect Participants'
records. Security Owners will not receive written confirmation from DTC of
their purchase, but Security Owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect
Participant through which the Security Owner entered into the transaction.
Transfers of ownership interests in the Securities are to be accomplished
by entries made on the books of DTC Participants acting on behalf of
Security Owners. Security Owners will not receive Securities representing
their ownership interest in Securities, except in the event that use of the
book-entry system for the Securities is discontinued.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Securities with DTC and their
registration in the name of Cede & Co. effects no change in beneficial
ownership. DTC has no knowledge of the actual Security Owners of the
Securities; DTC's records reflect only the identity of the DTC Participants
to whose accounts such Securities are credited, which may or may not be the
Security Owners. The DTC Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect Participants, and by DTC
Participants and Indirect Participants to Security Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to
Securities. 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 Securities are credited on the record date (identified in a listing
attached thereto). Principal and interest payments on the Securities 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 Security
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 Security
Owners shall be the responsibility of Participants and Indirect
Participants.
DTC may discontinue providing its services as securities depository
with respect to the Securities 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 Securities
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 Securities 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
securities. 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
Securities. 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 securities
and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 34 currencies, including United
States dollars. The Euroclear System includes various other services,
including securities lending and borrowing and interfaces with domestic
markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. The Euroclear System is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York, (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include the underwriters of any Series of
Securities. 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 securities 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 Securities 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 Securityholder
under the 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 Securities 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 SECURITIES
The Offered Securities of each Class will be issued in fully
registered, certificated form to the Security Owners of such Class or their
nominees ("Definitive Securities"), 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 Securities 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, Security
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 Security 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
Securities. Upon surrender by the Depository of the definitive certificate
representing the Securities of the affected Class and instructions for
registration, the Trustee will issue the Securities of such Class as
Definitive Securities, and thereafter the Trustee will recognize the
holders of such Definitive Securities as Securityholders under the Pooling
and Servicing Agreement.
Distribution of principal and interest on the Offered Securities
will be made by the Trustee directly to Securityholders 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 Securityholders in whose names the Definitive Securities were
registered at the close of business on the related Record Date.
Distributions will be made by check mailed to the address of such
Securityholder as it appears on the register maintained by the Trustee. The
final payment on any Offered Security, however, will be made only upon
presentation and surrender of such Security at the office or agency
specified in the notice of final distribution to Securityholders. The
Trustee will provide such notice to registered Securityholders mailed not
later than the fifth day of the month of such final distributions.
Definitive Securities 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 Securities for the period from the
Record Date preceding the due date for any payment to the Distribution Date
with respect to such Definitive Securities.
STATUS OF THE SECURITIES
Upon issuance, the Securities will rank pari passu with all other
outstanding Series. Payments on the Class B Securities are subordinated to
the Class A Securities as described herein.
INTEREST PAYMENTS
Interest will accrue on the outstanding principal balance of the
Class A Securities at the Class A Interest Rate and on the outstanding
principal balance of the Class B Securities at the Class B Interest Rate,
in each case from the Closing Date. Interest will be distributed on , 1998,
and on each Distribution Date thereafter to Securityholders of each Class
in an amount equal to the product of (i) the actual number of days in the
related Interest Accrual Period divided by 360, (ii) the Class A Interest
Rate or Class B Interest Rate, as applicable, and (iii) the applicable
outstanding principal balance as of the preceding Record Date, (or in the
case of the first Distribution Date, an amount equal to the product of (a)
the initial Invested Amount of such Class, (b) ___divided by 360 and (c)
the Class A Interest Rate or Class B Interest Rate, as applicable,
determined on _______, 1998. Interest payments on the Class A Securities 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 Securities 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 Securities, interest payments
on the Class B Securities 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 Class B Securities and deposited on
each business day during such Monthly Period in the Interest Funding
Account.
The Class A Securities will bear interest at the rate equal to %
per annum above LIBOR determined as set forth below for the period from the
Closing Date through , 1998 and each Interest Accrual Period thereafter.
The Class B Securities will bear interest at the rate equal % per annum
above LIBOR determined as set forth below for the period from the Closing
Date through , 1998 and each Interest Accrual Period thereafter.
The Trustee will determine LIBOR for the period from the Closing
Date through , 1998 on , 1998 and for each Interest Accrual Period
thereafter on the second business day prior to the Distribution Date on
which such Interest Accrual Period commences (each, a "LIBOR Determination
Date"). For purposes of calculating LIBOR, a business day is any day on
which banks in London and New York are open for the transaction of
international business.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for one month (commencing on the first
day of the relevant Interest Accrual Period) which appears on Telerate Page
3750 as of 11:00 a.m., London time, on the LIBOR Determination Date for
such Interest Accrual 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 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 Accrual 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 that LIBOR Determination Date for loans in United States
dollars to leading European banks for a period equal to one month
(commencing on the first day of the relevant Interest Accrual Period).
The Class A Interest Rate and the Class B Interest Rate applicable
to the then current and immediately preceding Interest Accrual Period may
be obtained by telephoning the Trustee at its Corporate Trust Office at
(302) 451-2500.
Interest on the Securities will be calculated on the basis of the
actual number of days in the Interest Accrual Period and a 360 day year.
PRINCIPAL PAYMENTS
During the Revolving Period (the period from and including the
Closing Date to but excluding the earlier of (a) the commencement of the
Accumulation Period and (b) the commencement of the Early Amortization
Period), Principal Collections allocable to the Invested Amount, subject to
certain limitations, including the allocation of any Redirected 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 Securityholders 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 Securityholders 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 CTO
Securityholders 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 Securities, Class B Securities and Collateralized
Trust Obligations, the Class D Invested Amount will be reduced to an amount
equal to the Stated Class D Amount. During the Accumulation Period, the
portion of Available Investor Principal Collections not required to be
deposited in the Principal Funding Account will generally be treated as
Shared Principal Collections.
"Available Investor Principal Collections" means, with respect to
any Monthly Period, an amount equal to the sum of (i) an amount equal to
the Fixed/Floating Percentage of all Principal Collections (less the amount
of Redirected 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 Securities with respect to such Monthly Period,
(iii) the aggregate Series Default Amount and the Series 1998-3 Percentage
of any unpaid Adjustment Payments paid from Available Series Finance Charge
Collections, Transferor Finance Charge Collections, Excess Finance Charge
Collections or Redirected 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 Redirected Principal Collections of unreimbursed Class A
Charge-Offs, Class B Charge-Offs, CTO Charge-Offs and Class D Charge-Offs
and (iv) Shared Principal Collections allocated to the Securities.
On each Distribution Date following the Monthly Period in which the
Early Amortization Period commences, the Class A Securityholders 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
Securityholders of each Class of Securities, 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 Securityholders 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 CTO Securityholders will be
entitled to receive Available Investor Principal Collections on each
Distribution Date until the earlier of the date the CTO 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 Securityholders upon surrender of their Securities. The
proceeds of any such sale or repurchase of Receivables will be allocated
first to pay amounts due with respect to the Class A Securities, then to
pay amounts due with respect to the Class B Certificates, then to pay
amounts due with respect to the Collateralized Trust Obligations and then
to pay amounts due with respect to the Class D Securities 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 securityholders
of all Series (unless Shared Principal Collections from any such other
Series are not allocated to be shared with the Securities), 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 securityholders of Series
(which may exclude certain other Series) which are not expected to be in
their revolving periods during the Accumulation Period. If the Accumulation
Period Length is less than twelve months, the Servicer may, at its option,
postpone the commencement of the Accumulation Period such that the number
of months included in the Accumulation Period will be equal to or exceed
the Accumulation Period Length. The effect of the foregoing calculation is
to permit the reduction of the length of the Accumulation Period based on
(i) the invested amounts of certain other Series which are scheduled to be
in their revolving periods during the Accumulation Period and (ii)
increases in the principal payment rate occurring after the Closing Date.
The length of the Accumulation Period will not be less than one month. If
the Accumulation Period is postponed in accordance with the foregoing, and
if a Pay Out Event occurs after the date originally scheduled as the
commencement date of the Accumulation Period, it is probable that
Securityholders would receive some of their principal later than if the
Accumulation Period had not been so postponed.
SUBORDINATION OF THE CLASS B SECURITIES
The Class B Securities will be subordinated to the extent necessary
to fund certain payments with respect to the Class A Securities. To the
extent the Class B Invested Amount is reduced, the percentage of Finance
Charge Collections allocated to the Class B Securityholders 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 Securityholders will be reduced.
The Collateralized Trust Obligations will be subordinated to the
extent necessary to fund certain payments with respect to the Class A
Securities and the Class B Securities. To the extent the CTO Invested
Amount is reduced, the percentage of Finance Charge Collections allocated
to the CTO Securityholders in subsequent Monthly Periods will be reduced.
Moreover, to the extent the amount of such reduction in the CTO Invested
Amount is not reimbursed, the amount of principal distributable to the CTO
Securityholders will be reduced.
If, on any Determination Date, the aggregate Series 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 "--Redirection of Cash Flows," and (c) the amount of
Redirected Principal Collections allocated with respect thereto as
described in "--Redirected Principal Collections," the Class D Invested
Amount (following the reduction thereof in an amount equal to the amount of
any Redirected Principal Collections to be applied on the related
Distribution Date) will be reduced by the amount by which the sum of the
aggregate Series 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 CTO 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 Series Default Amount and the remaining unpaid Adjustment
Payments for such Monthly Period. Such reductions of the CTO Invested
Amount will thereafter be reimbursed and the CTO 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 CTO Invested Amount
would cause the CTO Invested Amount to be a negative number, the CTO
Invested Amount will be reduced to zero and the Class B Invested Amount
will be reduced by the amount by which the CTO Invested Amount would have
been reduced below zero, but not more than the sum of the remaining
aggregate Series Default Amount and the remaining unpaid Adjustment
Payments for such Monthly Period. Such reductions of the Class B Invested
Amount will thereafter be reimbursed and the Class B Invested Amount
increased on each business day by the amount, if any, of Available Series
Finance Charge Collections and Excess Finance Charge Collections for such
business day allocated and available for that purpose. If the Class B
Invested Amount is reduced to zero, the Class A Invested Amount will be
reduced by the amount by which the Class B Invested Amount would have been
reduced below zero, but not more than the sum of the remaining aggregate
Series 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 "--Redirection of Cash Flows," "--Redirected
Principal Collections" and "--Investor Charge-Offs."
TRANSFER AND ASSIGNMENT OF RECEIVABLES
On or about May 30, 1995 (the "Initial Closing Date"), the
Transferor transferred and assigned to the Trust all of its right, title,
and interest in and to the Receivables outstanding as of the Initial
Closing Date, all of the Receivables thereafter created and the proceeds of
all of the foregoing. Prior to such transfer and assignment and pursuant to
the Purchase Agreement, FCI (as predecessor to Metris under the Purchase
Agreement) contributed and sold to the Transferor all its right, title and
interest in and to the Receivables existing as of the Initial Closing Date,
all the Receivables thereafter created and all FCI's interest in the Bank
Purchase Agreement with respect to the Receivables. Prior to such sale and
contribution and pursuant to the Bank Purchase Agreement, Direct Merchants
Bank sold to FCI (as predecessor to Metris under the Bank Purchase
Agreement) all its right, title and interest in and to the Receivables
existing as of the date of such agreement and all the Receivables arising
from time to time thereafter. In connection with the realignment of FCI's
subsidiaries in September 1996, FCI assigned to Metris all of FCI's rights
and Metris assumed all of FCI's obligations under the Bank Purchase
Agreement and the Purchase Agreement.
Direct Merchants Bank for itself and as Servicer has identified in
its computer files that the Receivables are Receivables as defined herein.
Direct Merchants Bank, as initial Servicer, retains and will not deliver to
the Trustee any other records or agreements relating to the Receivables.
The records and agreements relating to the Receivables will not be
segregated from those relating to other accounts and receivables of Direct
Merchants Bank and the physical documentation relating to Receivables will
not be stamped or marked to reflect the transfer of Receivables to the
Trust. The Trustee will have reasonable access to such records and
agreements as required by applicable law or to enforce the rights of the
Securityholders. 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) has
filed one or more 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.
See "Certain Legal Aspects of the Receivables."
EXCHANGES
The Pooling and Servicing Agreement provides for the Trustee to
issue two types of securities: (i) Investor Securities in one or more
Series of securities, each of which may have one or more classes of
securities of which one or more such classes may be transferable, and (ii)
the Exchangeable Transferor Security. The Exchangeable Transferor Security
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 Security may
tender the Exchangeable Transferor Security and the securities evidencing
any Series of securities, to the Trustee in exchange for one or more new
Series and a reissued Exchangeable Transferor Security. Under the Pooling
and Servicing Agreement, the holder of the Exchangeable Transferor Security
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 interest 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 Securities 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 securities 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
securityholders 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 Security that have been
transferred to the holders of such Series, if any; (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 Securityholder 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 Security will deliver to the Trustee written
confirmation that the Exchange will not result in any Rating Agency
reducing or withdrawing its rating of any outstanding Series, including the
Offered Securities. 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 Pooling and Servicing Agreement provides that the holder of the
Exchangeable Transferor Security 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 Security may deliver a different
form of Enhancement agreement. The Pooling and Servicing Agreement also
provides that the holder of the Exchangeable Transferor Security 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
securities, 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 Security also has the option under the Pooling and
Servicing Agreement to vary between Series the terms upon which a Series
(or a particular class within such Series) may be repurchased by the
Transferor or remarketed to other investors. Additionally, certain Series
may be subordinated to other Series, and classes within a Series may have
different priorities. The Series 1998-3 Supplement does not permit the
subordination of the Securities 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
Security 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 interest 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 securities of such Series will be
characterized as indebtedness or as partnership interests under existing
law for federal and applicable state income tax purposes, and 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 Security and, if applicable, the securities
representing the Series to be exchanged, and (vi) an officer's certificate
of the Transferor stating that, after giving effect to such Exchange, (a)
the Transferor Interest would be at least equal to the Minimum Transferor
Interest and (b) the Retained Interest (as defined in the Pooling and
Servicing Agreement) equals or exceeds the Minimum Retained Interest.
Under the Pooling and Servicing Agreement, the Transferor may also
exchange the Exchangeable Transferor Security for a newly issued
Exchangeable Transferor Security and a second security (a "Supplemental
Security") the terms of which will be defined in a Supplement upon the
satisfaction of certain conditions provided in the Pooling and Servicing
Agreement.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Pooling and Servicing Agreement, the Transferor
represents and warrants that, among other things, subject to specified
exceptions and limitations (i) the Transferor is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
has the corporate power and authority to execute, deliver, and perform its
obligations under the Pooling and Servicing Agreement, the Series 1998-3
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 1998-3 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 1998-3 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 securityholders 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 securityholders). 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 securities 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 securityholders 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 securityholders in connection with such reassignment will
be equal to the invested amount for all Series of securities other than
Variable Funding Securities 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 Securities, 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 securityholders on
such Distribution Date, plus an amount equal to all interest accrued but
unpaid on such securities at the applicable interest 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 securities 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 securities required to be repurchased and will
be distributed upon presentation and surrender of the securities for each
such Series. If the Trustee or securityholders 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 securityholders
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 1998-3 Supplement, and the Purchase
Agreement, and the performance of the transactions contemplated thereby, do
not contravene the Transferor's charter or by-laws, violate any material
provision of law applicable to it or require any filing (except for filing
under the UCC), registration, consent, or approval under any such law
except for such filings, registrations, consents, or approvals as have
already been obtained and are in full force and effect, (ii) except as
described in the Purchase Agreement, the Transferor and each prior owner of
the Receivables has filed all material tax returns required to be filed and
has paid or made adequate provision for the payment of all material taxes,
assessments, and other governmental charges due from the Transferor or such
prior owner or is contesting any such tax, assessment or other governmental
charge in good faith through appropriate proceedings, (iii) there are no
proceedings or investigations pending or, to the best knowledge of the
Transferor, threatened against the Transferor, before any court, regulatory
body, administrative agency, or other tribunal or governmental
instrumentality asserting the invalidity of the Pooling and Servicing
Agreement, the Series 1998-3 Supplement, and the Purchase Agreement,
seeking to prevent the consummation of any of the transactions contemplated
thereby, seeking any determination or ruling that would materially and
adversely affect the performance by the Transferor of its obligations
thereunder, or seeking any determination or ruling that would materially
and adversely affect the validity or enforceability thereof or of the tax
attributes of the Trust, (iv) each Receivable is or will be an account
receivable arising out of the performance by the applicable Credit Card
Originator in accordance with the terms of the Contract giving rise to such
Receivable, (v) each Account classified as an Eligible Account in any
document or report delivered pursuant to the Pooling and Servicing
Agreement satisfies the definition of Eligible Account and the Transferor
has no knowledge of any fact which should have led it to expect at the time
of the classification of any Receivable as an Eligible Receivable that such
Receivable would not be paid in full when due, and each Receivable
classified as an Eligible Receivable by the Transferor in any document or
report delivered under the Pooling and Servicing Agreement satisfies the
requirements of eligibility contained in the definition of Eligible
Receivable set forth in the Pooling and Servicing Agreement, (vi) the
Transferor is not an "investment company" within the meaning of the
Investment Company Act (or is exempt from all provisions of such Act),
(vii) the Transferor is not insolvent and (viii) the Transferor is the
legal and beneficial owner of all right, title and interest in and to each
Receivable conveyed to the Trust by the Transferor pursuant to the Pooling
and Servicing Agreement, and each such Receivable has been or will be
transferred to the Trust free and clear of any lien other than Permitted
Liens and in compliance in all material respect with all requirements of
law applicable to the Transferor. If any representation or warranty made by
the Transferor in the Pooling and Servicing Agreement or the Series 1998-3
Supplement proves to have been incorrect in any material respect when made,
and as a result the interests of the Securityholders 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 Securityholders' Interest continues to be materially
adversely affected during such period, then the Trustee or 50 percent of
the Securityholders' Interest of any Class may give notice to the
Transferor (and to the Trustee in the latter instance) declaring that a Pay
Out Event has occurred, thereby commencing the Early Amortization Period;
provided, however, that a Pay Out Event will not be deemed to have occurred
as aforesaid if the Transferor has accepted a reassignment of the affected
Receivables during such period in accordance with the Pooling and Servicing
Agreement. See "--Pay Out Events."
It is not required or anticipated that the Trustee will make any
initial or periodic general examination of the Receivables or any records
relating to the Receivables for the purpose of establishing the presence or
absence of defects or compliance with the Transferor's representations and
warranties or for any other purpose. The Servicer, however, will deliver to
the Trustee on or before March 31 of each year an opinion of counsel with
respect to the validity of the security interest of the Trust in and to the
Receivables and certain other components of the Trust.
CERTAIN COVENANTS
Pursuant to the Pooling and Servicing Agreement, the Transferor
covenants that, among other things, subject to specified exceptions and
limitations, (i) it will take no action to cause any Receivable to be
evidenced by any instruments or to be anything other than an account,
general intangible, or chattel paper, except in connection with the
enforcement or collection of a Receivable, (ii) except for the conveyances
under the Pooling and Servicing Agreement, it will not sell any Receivable
or grant a lien (other than a Permitted Lien) on any Receivable, (iii) in
the event it receives a collection on any Receivables, it will deposit such
collections to the Collection Account within two business days, (iv) it
will notify the Trust promptly after becoming aware of any lien on any
Receivable other than Permitted Liens, (v) it will take all actions
necessary to enforce its rights and claims under the Purchase Agreement,
(vi) it will promptly provide the Trustee any notices, reports or
certificates given or delivered under the Purchase Agreement and (vii)
except as permitted by the Pooling and Servicing Agreement, it will not
commingle its assets with those of Direct Merchants Bank or Metris or any
affiliate thereof.
ELIGIBLE ACCOUNTS
As of the Initial Closing Date (or, with respect to Additional
Accounts, on the date the Credit Card Originator acquires rights therein,
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 United
States 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) it 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
is 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 ten days prior to such Restart Date. On and
prior to the Restart Date, the Transferor may, by giving ten business days'
notice to the Trustee and each Rating Agency, but will not be obligated to,
designate from time to time additional credit card accounts ("Supplemental
Accounts") to be included as Accounts. The Transferor has periodically
designated Supplemental Accounts to be included as Accounts and intends,
although no assurance can be given, to continue to designate additional
Supplemental Accounts to be included as Accounts. In addition, prior to the
Restart Date, if (i) on the tenth business day prior to any Determination
Date, the Transferor Interest for the related Monthly Period is less than
the Minimum Transferor Interest, the Transferor is required to designate
Supplemental Accounts to be included as Accounts in a sufficient amount
such that the Transferor Interest as a percentage of the aggregate
Principal Receivables for such Monthly Period after giving effect to such
addition is at least equal to the Minimum Transferor Interest or (ii) on
any Record Date, the aggregate Principal Receivables are less than the
Minimum Aggregate Principal Receivables, the Transferor is required to
designate Supplemental Accounts to be included as Accounts in a sufficient
amount such that the aggregate Principal Receivables will be equal to or
greater than the Minimum Aggregate Principal Receivables. Receivables from
such Supplemental Accounts shall be transferred to the Trust on or before
the tenth business day following such Record Date. On any day on which the
Receivables in Supplemental Accounts are to be transferred to the Trust,
the Receivables in such Accounts shall be included as Eligible Receivables
if they satisfy the requirements of the definition of "Eligible
Receivables."
The Transferor has conveyed, and will continue to convey, to the
Trust all Receivables arising under the Accounts, including all
Supplemental Accounts and Automatic Additional Accounts, from time to time
until the termination of the Trust.
The Transferor agrees that any such transfer of Receivables from
Supplemental Accounts will be subject to the satisfaction of the following
conditions: (i) on or before the fifth business day prior to the Addition
Date with respect to required additions and on or before the twentieth
business day prior to the Addition Date with respect to optional additions
(as applicable, the "Notice Date"), the Transferor shall give the Trustee,
each Rating Agency and the Servicer written notice that such Supplemental
Accounts will be included, which notice will specify the approximate
aggregate amount of the Receivables to be transferred; (ii) on or before
the applicable Addition Date, the Transferor will have delivered to the
Trustee a written assignment (the "Assignment") and the Transferor will
have indicated in its computer files that the Receivables created in
connection with the Supplemental Accounts have been transferred to the
Trust and, within five business days thereafter, the Transferor will have
delivered to the Trustee or the bailee of the Trustee a computer file or
microfiche list containing a true and complete list of all Supplemental
Accounts, identified by account number and the Principal Receivables in
such Supplemental Accounts, as of the Addition Date, which computer file or
microfiche list will be as of the date of such Assignment incorporated into
and made a part of such Assignment; (iii) the Transferor will represent and
warrant that (x) no selection procedure that is materially adverse to the
interests of holders of the Investor Securities 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 the 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
each Rating Agency 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 Securities then
issued and outstanding and will have delivered such notice to the Trustee.
On or after the Restart Date, Automatic Additional Accounts will be
deemed to be Accounts the Receivables of which will be designated for
inclusion in the Trust if, unless each Rating Agency otherwise consents,
the following conditions are met: the number of Accounts the Receivables of
which are automatically designated to be included in the Trust since (x)
the first day of the eleventh preceding Monthly Period minus the number of
Accounts of the type described in clause (ii) of the definition of
"Approved Account" which have been added on the initial day of the addition
of such type of Account pursuant to such clause (ii) since the first day of
such eleventh preceding Monthly Period will not exceed 20 percent of the
number of Accounts on the first day of such eleventh preceding Monthly
Period, and (y) the first day of the second preceding Monthly Period minus
the number of Accounts of the type described in clause (ii) of the
definition of "Approved Accounts" which have been added on the initial day
of the addition of such type of Account pursuant to such clause (ii) since
the first day of such second preceding Monthly Period 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.
The Transferor may designate revolving credit consumer credit card
accounts which would otherwise be Additional Accounts as Excluded Accounts
by the Transferor delivering to the Trustee a written notice clearly
identifying such excluded accounts. If such designation is made after the
Trust acquires rights in such Accounts, such designation will only occur in
accordance with the provisions for removals of accounts set forth in the
Pooling and Servicing Agreement.
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 customary and
usual servicing procedures and the Credit and Collection Policy. Servicing
functions to be performed by the Servicer 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, Collections and Charge-offs." 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 Securityholders," 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
Securityholders, 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 Securities. After the date on which the Transferor's exercise
of its discount option takes effect and with respect to Receivables
generated on and after such date, Collections in an amount equal to the
product of (i) a fraction the numerator of which is the amount of Discount
Option Receivables and the denominator of which is the amount of all of the
Principal Receivables (including Discount Option Receivables) at the end of
the prior date of processing, (ii) Collections of Principal Receivables,
prior to any reduction for Finance Charge Receivables which are Discount
Option Receivables, received on such date of processing, and (iii) a
fraction the numerator of which is the aggregate amount of Principal
Receivables arising on each date of processing falling on or after the date
on which the Transferor exercises its discount option and the denominator
of which is the aggregate Principal Receivables on such date of processing,
will be deemed Collections of Finance Charge Receivables and will be
applied accordingly. Any such designation would result in an increase in
the amount of Finance Charge Receivables and a corresponding increase in
the Portfolio Yield, a reduction in the amount of Principal Receivables in
the Trust and a reduction in the Transferor Interest and therefore the
effect on Securityholders 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.
PREVIOUSLY ISSUED SERIES
The Trust has previously issued the Series 1998-1 Variable Funding
Securities, [the Series 1998-2 Asset Backed Certificates], the Series
1997-2 Asset Backed Certificates, the Series 1997-1 Asset Backed
Certificates and the Series 1996-1 Asset Backed Certificates bearing the
various rates of interest and having the outstanding principal amounts set
forth in "Annex I: Other Series."
TRUST ACCOUNTS
The Trustee has established and maintains with a Qualified
Institution in the name of the Trust, for the benefit of the
Securityholders, 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 securityholders 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 securityholders 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 deposit rating of P-1 by Moody's and of A-1+ by
Standard & Poor's or long-term unsecured debt obligation (other than such
obligation the rating of which is based on collateral or on the credit of a
Person other than such institution or trust company) rating of at least Aaa
by Moody's and of AAA by Standard & Poor's and deposit insurance provided
by the FDIC, or a depository institution, which may include the Trustee,
which is acceptable to the Rating Agencies; provided, however, that no such
rating shall be required of an institution which shall have corporate trust
powers and which maintains the Collection Account, any principal account,
any interest funding account or any other account maintained for the
benefit of Securityholders 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
securities 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 securities of deposit or
short-term deposits of such depository institution or trust company shall
have a credit rating from Standard & Poor's of A-1+ and from Moody's of
P-1; (iii) commercial paper having, at the time of the Trust's investment
or contractual commitment to invest therein, a rating from Standard &
Poor's of A-1+ and from Moody's of P-1; (iv) banker's acceptances issued by
any depository institution or trust company described in clause (a)(ii)
above; and (v) investments in money market funds rated AAA-m or AAA-mg by
Standard & Poor's and Aaa by Moody's or otherwise approved in writing by
Moody's and Standard & Poor's; (b) time deposits and demand deposits in the
name of the Trust or the Trustee in any depository institution or trust
company referred to in clause (a)(ii) above; (c) securities not represented
by an instrument that are registered in the name of the Trustee or its
nominee (which may not be Metris or an affiliate) upon books maintained for
that purpose by or on behalf of the issuer thereof and identified on books
maintained for that purpose by the Trustee as held for the benefit of the
Trust or the Securityholders, 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
depository 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,
securities 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 of such
entity or institution in subclauses (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 Securities (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
Securityholders (the "Paying Agent") has the revocable power to withdraw
funds from the Distribution Account for the purpose of making distributions
to Securityholders. The Paying Agent initially will be The Bank of New
York.
PRINCIPAL FUNDING ACCOUNT
Pursuant to the Series 1998-3 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
Securityholders (the "Principal Funding Account"). During the Accumulation
Period, the Trustee at the direction of the Servicer will transfer from the
Principal Account to the Principal Funding Account Collections in respect
of Principal Receivables (other than Redirected Principal Collections) and
Shared Principal Collections from other Series, if any, allocated to the
Securities as described below under "--Application of Collections."
Funds on deposit in the Principal Funding Account will be invested
by the Trustee at the direction of the Servicer in Cash Equivalents
maturing no later than the following Transfer Date. Investment earnings
(net of investment losses and expenses) on funds on deposit in the
Principal Funding Account (the "Principal Funding Account Investment
Proceeds") during the Accumulation Period will be applied on each Transfer
Date to the extent of the Covered Amount as if such amount were Available
Series Finance Charge Collections on the last business day of the preceding
Monthly Period. If, for any Interest Accrual Period, the Principal Funding
Account Investment Proceeds are less than an amount equal to the Covered
Amount, the amount of such deficiency will be paid from the Accumulation
Period Reserve Account to the extent of the Available Reserve Account
Amount and applied on the applicable Transfer Date as if such amount were
Available Series Finance Charge Collections on the last business day of the
preceding Monthly Period.
EXCESS FUNDING ACCOUNT
The Trustee has established and will maintain in the name of the
Trust, for the benefit of the securityholders 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 an Amortization Period will be deposited in the Principal Account as
part of Class A Principal, Class B Principal, or CTO 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 Securities 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 Securities 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 1998-3
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 Securityholders until the
Class A Invested Amount is paid in full and then to the Class B
Securityholders until the Class B Invested Amount is paid in full and then
to the CTO Securityholders until the CTO Invested Amount is paid in full.
Should the Pre-Funded Amount be greater than zero on the first day of the
Monthly Period, such amount will be deposited in the Excess Funding
Account. The percentage of the assets of the Trust represented by amounts
on deposit in the Pre-Funding Account and the percentage of the assets of
the Trust represented by amounts on deposit in the Pre-Funding Account
allocated to any Class of the Securities 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 funds on deposit 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 1998-3 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
Securityholders (the "Accumulation Period Reserve Account"). The
Accumulation Period Reserve Account is established to assist with the
subsequent distribution of interest on the Class A Securities, Class B
Securities and Collateralized Trust Obligations during the Accumulation
Period. On each business day from and after the Reserve Account Funding
Date, but prior to the termination of the Accumulation Period Reserve
Account, the Trustee, acting pursuant to the Servicer's instructions, will
apply Available Series Finance Charge Collections allocated to the
Securities (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 CTO 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 1998-3.
Provided that the Accumulation Period Reserve Account has not
terminated as described below, all amounts on deposit in the Accumulation
Period Reserve Account on any Transfer Date (after giving effect to any
deposits to, or withdrawals from, the Accumulation Period Reserve Account
to be made on such Transfer Date) will be invested by the Trustee at the
direction of the Servicer in Cash Equivalents maturing no later than the
following Transfer Date. The interest and other investment income (net of
investment expenses and losses) earned on such investments will be retained
in the Accumulation Period Reserve Account (to the extent the amount on
deposit therein is less than the Required Reserve Account Amount) or
applied on each Transfer Date as if such amount were Available Series
Finance Charge Collections on the last business day of the preceding
Monthly Period.
On or before each Transfer Date with respect to the Accumulation
Period and on the first Transfer Date with respect to the Early
Amortization Period, a withdrawal will be made from the Accumulation Period
Reserve Account, and the amount of such withdrawal will be applied as if
such amount were Available Series Finance Charge Collections on the last
business day of the preceding Monthly Period, in an amount equal to the
lesser of (a) the Available Reserve Account Amount with respect to such
Transfer Date and (b) the excess, if any, of (i) the product of (x) a
fraction the numerator of which is the actual number of days in the related
Interest Accrual Period and the denominator of which is 360, (y) the
weighted average of the Class A Interest Rate, the Class B Interest Rate
and the CTO Interest Rate (in effect for the related Interest Accrual
Period) and (z) the Principal Funding Account Balance as of the last day of
the Monthly Period preceding the Monthly Period in which such Interest
Accrual Periods ends (the "Covered Amount") over (ii) the Principal Funding
Account Investment Proceeds with respect to such Transfer Date. On each
Transfer Date, the amount available to be withdrawn from the Accumulation
Period Reserve Account (the "Available Reserve Account Amount") will be
equal to the lesser of the amount on deposit in the Accumulation Period
Reserve Account (before giving effect to any withdrawal from the
Accumulation Period Reserve Account on such Transfer Date) and the Required
Reserve Account Amount for such Transfer Date.
The Accumulation Period Reserve Account will be terminated
following the earliest to occur of (a) the termination of the Trust
pursuant to the Pooling and Servicing Agreement, (b) the date on which the
Invested Amount is paid in full, (c) if the Accumulation Period has not
commenced, the occurrence of a Pay Out Event with respect to the Securities
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
Securityholders' Interest, the Class B Securityholders' Interest, the CTO
Securityholders' Interest, the Class D Securityholders' 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 Securityholders' Interest, the Class B Securityholders' Interest,
the CTO Securityholders' Interest and the Class D Securityholders'
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 CTO 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 Percentage,"
the "Class B Floating Percentage," the "CTO Floating Percentage" and the
"Class D Floating Percentage," respectively; the sum of all such
percentages, the "Floating Percentage"). During the Revolving Period, all
Principal Collections allocable to the Securities will be allocated and
paid to the Transferor (except for Collections applied as Redirected
Principal Collections and Shared Principal Collections paid to the holders
of securities 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 Securityholders' 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 CTO 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 Percentage," the "Class B Fixed/Floating Percentage," the
"CTO Fixed/Floating Percentage," and the "Class D Fixed/Floating
Percentage," respectively; the sum of all such percentages the
"Fixed/Floating Percentage"). Finance Charge Collections will be allocated
on and after the date on which a Pay Out Event is deemed to occur to the
Securityholders' Interest based on the Fixed/Floating Percentage. On and
after the date on which a Defeasance occurs with respect to the Securities,
each of the allocation percentages specified above with respect to the
Securities 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 Percentage and the floating
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 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 Securityholders through and including
such date, and minus (c) the aggregate amount of Class A Charge-Offs for
all prior Distribution Dates, equal to the amount by which the Class A
Invested Amount has been reduced to fund the Series Default Amount and the
unpaid Adjustment Payments on all prior Distribution Dates as described
under "--Investor Charge-Offs," and plus (d) the aggregate amount of
Available Series Finance Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections and Redirected 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 sum of the amount then on
deposit in the Principal Account and 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 Securityholders through and including
such date, minus (c) the aggregate amount of Class B Charge-Offs for all
prior Distribution Dates, equal to the amount by which the Class B Invested
Amount has been reduced to fund the Series Default Amount and the unpaid
Adjustment Payments on all prior Distribution Dates as described under
"--Investor Charge-Offs," minus (d) the aggregate amount of Redirected
Class B Principal Collections for which neither the Class D Invested Amount
nor the CTO 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, Redirected CTO Principal Collections, Redirected 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 sum of the amount then on deposit in the
Principal Account and the Principal Funding Account Balance over the Class
A Invested Amount on such date of determination; (v) the term "CTO Invested
Amount" for any date means an amount equal to (a) the CTO Initial Invested
Amount less the CTO Percentage of the initial deposit to the Pre-Funding
Account plus the CTO 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 CTO Securityholders
through and including such date, minus (c) the aggregate amount of CTO
Charge-Offs for all prior Distribution Dates, equal to the amount by which
the CTO Invested Amount has been reduced to fund the Series Default Amount
and the unpaid Adjustment Payments on all prior Distribution Dates as
described under "--Investor Charge-Offs," minus (d) the aggregate amount of
Redirected CTO Principal Collections and Redirected 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, Redirected 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 CTO Invested Amount may not be reduced below zero; (vi)
the term "CTO Adjusted Invested Amount," for any date of determination,
means an amount not less than zero equal to the then current CTO Invested
Amount minus the excess, if any, of the sum of the amount then on deposit
in the Principal Account and 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
Securities, minus (b) the aggregate amount of principal payments made to
Class D Securityholders through and including such date, minus (c) the
aggregate amount of Class D Charge-Offs for all prior Distribution Dates,
equal to the amount by which the Class D Invested Amount has been reduced
to fund the Series Default Amount and the unpaid Adjustment Payments on all
prior Distribution Dates as described under "--Investor Charge-Offs," minus
(d) the aggregate amount of Redirected Principal Collections for all prior
Distribution Dates, and plus (e) the aggregate amount of Finance Charge
Collections, Transferor Finance Charge Collections, Excess Finance Charge
Collections and certain other amounts applied on all prior Distribution
Dates for the purpose of reimbursing amounts deducted pursuant to the
foregoing clauses (c) and (d), provided, however, that the Class D Invested
Amount may not be reduced below zero; (viii) the term "Stated Class D
Amount" means the greater of (a) zero and (b) a number rounded to the
nearest dollar equal to ____ percent of the ABC Adjusted Invested Amount;
provided, however, that in no event shall the Stated Class D Amount be less
than $______ except that if the ABC Adjusted Invested Amount is equal to
zero the "Stated Class D Amount" will be zero; and provided further that
during the 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
CTO Invested Amount and the Class D Invested Amount.
As a result of the Floating Percentage, Finance Charge Collections
and the portion of Defaulted Receivables allocated to the Securityholders
will change each business day based on the relationship of the Class A
Adjusted Invested Amount, the Class B Adjusted Invested Amount, the CTO
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 Securityholders, the Class B Securityholders, the CTO Securityholders and
the Class D Securityholders, however, will remain fixed during the
Amortization Period. Collections of Principal Receivables allocable to the
Class B Securities are subject to possible redirection for the benefit of
the Class A Securityholders; collections of Principal Receivables allocable
to the CTO Invested Amount are subject to possible redirection for the
benefit of the Class A Securityholders and the Class B Securityholders and
collections of Principal Receivables allocable to the Class D Invested
Amount are subject to possible reallocation for the benefit of the Class A
Securityholders, the Class B Securityholders and the CTO Securityholders.
See "--Redirected Principal Collections" below.
REDIRECTED CASH FLOWS
To the extent that any amounts are on deposit in the Excess Funding
Account or the Pre-Funding Account on any business day, the Servicer will
determine the Negative Carry Amount, if any. The Servicer will apply an
amount equal to the lesser of (i) the Transferor Finance Charge Collections
on such business day, and (ii) the Negative Carry Amount for such business
day in the manner specified for application of Available Series Finance
Charge Collections.
On each business day the Servicer will determine the Required
Amount. To the extent of any Required Amount, the Servicer will apply all
or a portion of the Excess Finance Charge Collections of other Series with
respect to such business day allocable to the Series 1998-3 Securities in
an amount equal to the remaining Required Amount. Excess Finance Charge
Collections from other Series allocable to the Series 1998-3 Securities 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.
REDIRECTED 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
Percentage or (ii) during an Amortization Period, the Class D
Fixed/Floating 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 "Redirected 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 CTO 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 CTO 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 Redirected 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 CTO Invested Amount, equal to the
product of (a)(i) during the Revolving Period, the CTO Floating Percentage
or (ii) during an Amortization Period, the CTO Fixed/Floating 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 "Redirected CTO
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 Redirected 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 Redirected 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 Redirected CTO 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
Percentage or (ii) during an Amortization Period, the Class B
Fixed/Floating 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 "Redirected Class B Principal Collections" and the sum of Redirected
Class D Principal Collections, Redirected CTO Principal Collections and
Redirected Class B Principal Collections is called "Redirected 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 Redirected Class D Principal Collections and
Redirected CTO 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 Redirected 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 Redirected 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 CTO 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 Redirected
Principal Collections for such Distribution Date would cause the CTO
Invested Amount to be a negative number, the CTO Invested Amount will be
reduced to zero and the Class B Invested Amount will be reduced by the
amount by which the CTO Invested Amount would have been reduced below zero.
In the event that the redirection of Principal Collections would cause the
Class B Invested Amount to be a negative number on any Distribution Date,
the amount of Redirected Class B 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 securities 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
Securityholders 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 Securityholder for any use by the Servicer of funds
representing Collections on the Receivables.
The Servicer will withdraw the following amounts from the
Collection Account for application on each business day as indicated:
(i) an amount equal to the Transferor Percentage of the
aggregate amount of Principal Collections will be paid to the
Transferor to the extent such funds are not allocated to any series
to cover a negative carry amount;
(ii) an amount equal to the Transferor Percentage of the
aggregate amount of Finance Charge Collections will be paid to the
holder of the Exchangeable Transferor Security to the extent such
funds are not allocated to any Series as set forth in the
applicable Supplement;
(iii) an amount equal to the sum of (a) prior to the
occurrence of a Pay Out Event the Floating Percentage, and on and
after the occurrence of a Pay Out Event the Fixed/Floating
Percentage, of the sum of the aggregate amount of Finance Charge
Collections and the amount of Adjustment Payments made by the
Transferor with respect to Adjustment Payments required to be made
but not made in a prior Monthly Period, (b) certain Transferor
Finance Charge Collections allocable to the Securities and (c)
Excess Finance Charge Collections of other Series allocable to such
Series, will be allocated and paid as described below in "--Payment
of Fees, Interest and Other Items;"
(iv) during the Revolving Period, an amount equal to the
Floating Percentage of Principal Collections (less the amount
thereof which may be applied as Redirected Principal Collections)
will be applied as Shared Principal Collections;
(v) during the Amortization Period, an amount equal to the
Fixed/Floating Percentage of Principal Collections (less the amount
thereof applied as Redirected 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 1998-3
Securities, any amounts to be paid in respect of the Series Default
Amount, unpaid Adjustment Payments, Class A Charge-Offs, Class B
Charge-Offs and CTO Charge-Offs and any amount of Shared Principal
Collections allocated to the Securities 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
Securities. The Servicer will pay any remaining Shared Principal
Collections on such business day to the holder of the Exchangeable
Transferor Security; 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 securities
of such Series have been paid in full. See "--Excess Funding Account."
On each business day the Transferor, at its discretion, will direct
that amounts on deposit in the Payment Reserve Account will be retained
therein, applied as Available Series Finance Charge Collections or released
to the Transferor.
Payment of Fees, Interest and Other Items. On each business day
during a Monthly Period, the Servicer will determine the sum of (a) prior
to the date on which a Pay Out Event is deemed to occur, the Floating
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 Percentage of the sum of Finance Charge Collections and the
amount of Adjustment Payments made by the Transferor with respect to
Adjustment Payments required to be made but not made in a prior Monthly
Period and (b) amounts on deposit in the Payment Reserve Account, if any,
if and to the extent the Transferor designates that such amounts are to be
so applied (the "Available Series Finance Charge Collections", provided,
that with respect to the Closing Date the amount of the initial deposit by
the Transferor to the Interest Funding Account will also constitute
Available Series Finance Charge Collections) and will distribute such
amount in the following priority:
(i) an amount equal to the lesser of (A) the Available
Series Finance Charge Collections and (B) the excess of (a) the sum
of (1) the Class A Monthly Interest, (2) the amount of any Class A
Monthly Interest previously due but not deposited in the Interest
Funding Account in prior Monthly Periods, and (3) any additional
interest (to the extent permitted by applicable law) at the Class A
Interest 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 Securityholders;
(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 Interest 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
Securityholders;
(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 CTO Monthly Interest, (2) the amount of any
CTO 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 CTO Interest Rate with respect to CTO 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 CTO Securityholders;
(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 Series Default Amount for such business day and
(2) the unpaid Series 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 Securities;
(vi) an amount equal to the Series 1998-3 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
Securities;
(vii) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) unreimbursed
Class A Charge-Offs, if any, will be applied to reimburse Class A
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 Securities;
(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 Securities at
the Class B Interest 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 Interest 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 Securityholders;
(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 Collateralized Trust
Obligations at the CTO Interest 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 CTO Interest 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 CTO Securityholders;
(x) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) unreimbursed
Class B Charge-Offs, if any, will be applied to reimburse Class B
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 Securities;
(xi) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) unreimbursed
CTO Charge-Offs, if any, will be applied to reimburse CTO
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 Securities;
(xii) an amount equal to the lesser of (A) any Available
Series Finance Charge Collections remaining and (B) unreimbursed
Class D Charge-Offs, if any, will be applied to reimburse Class D
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 Securities;
(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 Collateralized Trust
Obligations will be deposited in such reserve account;
(xiv) on and after the Reserve Account Funding Date, but
prior to the date on which the Accumulation Period Reserve Account
terminates, an amount equal to the lesser of any Available Series
Finance Charge Collections remaining and the excess, if any, of the
Required Reserve Account Amount over the Available Reserve Account
Amount will be deposited in the Accumulation Period Reserve
Account;
(xv) an amount equal to the lesser of any remaining
Available Series Finance Charge Collections and the amount
designated by the Transferor in writing in its instructions to the
Trustee to be deposited in the Payment Reserve Account; and
(xvi) any Available Series Finance Charge Collections
remaining after making the above described distributions will be
treated as Excess Finance Charge Collections which will be
available to cover shortfalls, if any, in amounts payable from
Finance Charge Collections to securityholders of other Series, then
to pay any unpaid commercially reasonable costs and expenses of a
successor Servicer, if any, and then on each business day other
than the Default Recognition Date to be paid to the Transferor to
be treated as "Transferor Retained Finance Charge Collections." On
the Default Recognition Date any remaining Excess Finance Charge
Collections which are not so used will be paid to the Transferor.
On each Transfer Date all investment income (net of investment
losses and expenses) on funds on deposit in the Pre-Funding Account, the
Principal Funding Account and the Accumulation Period Reserve Account will
be applied as if such amounts were Available Series Finance Charge
Collections on the last business day of the preceding Monthly Period.
"Class A Monthly Interest" with respect to any Distribution Date
will equal the product of (i) the Class A Interest Rate for the related
Interest Accrual Period, (ii) the outstanding principal balance of the
Class A Securities 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
Securities at the close of business on the first day of the related
Interest Accrual Period and (iii) a fraction the numerator of which is the
actual number of days in such Interest Accrual Period and the denominator
of which is 360 (or in the case of the initial Distribution Date, an amount
equal to the product of (x) the Class A Initial Invested Amount, (y) _____
divided by 360 and (z) the Class A Interest Rate for the initial Interest
Accrual Period ).
"Class B Monthly Interest" with respect to any Distribution Date
will equal the product of (i) the Class B Interest Rate for the related
Interest Accrual Period, (ii) the Class B Invested Amount at the close of
business on the first day of the related Interest Accrual Period or, with
respect to any Distribution Date related to the Funding Period, the
outstanding principal balance of the Class B Securities at the close of
business on the first day of the related Interest Accrual Period and (iii)
a fraction the numerator of which is the actual number of days in such
Interest Accrual Period and the denominator of which is 360 (or in the case
of the initial Distribution Date, an amount equal to the product of (x) the
Class B Initial Invested Amount, (y) _____ divided by 360 and (z) the Class
B Interest Rate for the initial Interest Accrual Period).
"CTO Monthly Interest" with respect to any Distribution Date will
equal the product of (i) the CTO Interest Rate for the related Interest
Accrual Period, (ii) the CTO 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 Collateralized Trust Obligations 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 (or in
the case of the initial Distribution Date, an amount equal to the product
of (x) the CTO Initial Invested Amount, (y) divided by 360, and (z) the CTO
Interest Rate for the initial Interest Accrual Period).
"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 1998-3 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 Securityholders on the Expected
Final Payment Date (with respect to the Accumulation Period)
or distributed to the Class A Securityholders on each
Distribution Date until the Class A Invested Amount is paid
in full (with respect to the Early Amortization Period);
(ii) on the Transfer Date related to the Class B Principal Payment
Commencement Date and on each Transfer Date thereafter, an
amount equal to the Class B Principal will be deposited in
the Principal Funding Account for distribution to the Class B
Securityholders on the Expected Final Payment Date (with
respect to the Accumulation Period) or distributed to the
Class B Securityholders on each Distribution Date until the
Class B Invested Amount is paid in full (with respect to the
Early Amortization Period);
(iii) on the Transfer Date related to the CTO Principal Payment
Commencement Date and on each Transfer Date thereafter, an
amount equal to the CTO Principal will be deposited in the
Principal Funding Account for distribution to the CTO
Securityholders on the Expected Final Payment Date (with
respect to the Accumulation Period) or distributed to the CTO
Securityholders on each Distribution Date until the CTO
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 Securityholders 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 Payment 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.
"CTO 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 CTO 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 CTO 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 CTO
Invested Amount, $________; provided, however, that if the commencement of
the Accumulation Period is delayed as described above under "--Postponement
of Accumulation Period," the Controlled Accumulation Amount may be higher
than the amount stated above for each Transfer Date with respect to the
Accumulation Period and will be determined by the Servicer in accordance
with the Pooling and Servicing Agreement based on the principal payment
rates for the Accounts and on the invested amounts of other Series (other
than certain excluded Series) which are scheduled to be in their revolving
periods during the Accumulation Period.
"Accumulation Shortfall" initially means zero and thereafter means,
with respect to any Monthly Period during the Accumulation Period, the
excess, if any, of the Controlled Deposit Amount for the previous Monthly
Period over the amount deposited into the Principal Funding Account with
respect to the Securities 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 Security.
DEFAULTED RECEIVABLES; DILUTION
Receivables in Defaulted Accounts are charged off as uncollectible
in accordance with the Servicer's customary and usual Servicing procedures
and the Credit and Collection Policy (a "Defaulted Receivable"). See
"Direct Merchants Bank's Credit Card Activities--Delinquency, Collections
and Charge-offs" and "--Delinquency and Loss Experience." On each business
day, the Servicer will allocate to the Securityholders a portion of all
Defaulted Receivables in an amount (the "Series 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 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 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 downward the amount of
any Principal Receivable without receiving collections therefor or charging
off such amount as uncollectible (any such downward adjustment, a
"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 Redirected 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 1998-3, 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 Series Default Amount and the Series
1998-3 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, Redirected 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 Series Default
Amount and the Series 1998-3 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 Series Default Amount and the remaining Series
1998-3 Percentage of unpaid Adjustment Payments for such Monthly Period (a
"Class D Charge-Off"). The Class D Invested Amount thereafter will be
increased (but not in excess of the unpaid principal balance of the Class D
Securities) 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 CTO Invested Amount will
be reduced by the aggregate amount of such excess, but not more than the
sum of the remaining aggregate Series Default Amount and the remaining
Series 1998-3 Percentage of unpaid Adjustment Payments for such Monthly
Period (a "CTO Charge-Off"), which will have the effect of slowing or
reducing the return of principal to the CTO Securityholders. The CTO
Invested Amount will thereafter be increased (but not in excess of the
unpaid principal balance of the Collateralized Trust Obligations) 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 CTO Invested Amount
would cause the CTO Invested Amount to be a negative number, the CTO
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 Series Default Amount and the remaining
Series 1998-3 Percentage of unpaid Adjustment Payments for such Monthly
Period (a "Class B Charge-Off"), which will have the effect of slowing or
reducing the return of principal to the Class B Securityholders. The Class
B Invested Amount will thereafter be increased (but not in excess of the
unpaid principal balance of the Class B Securities) 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 Series Default Amount and the remaining Series 1998-3 Percentage
of unpaid Adjustment Payments for such Monthly Period (a "Class A
Charge-Off") which will have the effect of slowing or reducing the return
of principal to the Class A Securityholders. The Class A Invested Amount
will thereafter be increased (but not in excess of the unpaid principal
balance of the Class A Securities) 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 Securities 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"). 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
Securityholders. As amounts are deposited in the Principal Funding Account
for the benefit of the Class A Securityholders, Class B Securityholders and
CTO Securityholders, 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 Securities, 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 Securityholders 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 Securityholder. In particular, the denominator of
the Fixed/Floating Percentages for the Class A Securities and the Class B
Securities 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 1998-3 if such event required reliance by
Series 1998-3 on clause (b) of the denominator of the applicable
Fixed/Floating 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 Securities, the Class B Securities and the
Collateralized Trust Obligations, which amount shall be invested in Cash
Equivalents and (y) in the Accumulation Period Reserve Account an amount
equal to or greater than the Covered Amount, as estimated by the
Transferor, for the period from the date of the deposit to the Principal
Funding Account through the Expected Final Payment Date; (ii) the
Transferor shall have delivered to the Trustee an opinion of counsel to the
effect that such deposit and termination of obligations will not result in
the Trust being required to register as an "investment company" within the
meaning of the Investment Company Act and an opinion of counsel to the
effect that following such deposit none of the Trust, the Accumulation
Period Reserve Account or the Principal Funding Account will be deemed to
be an association (or publicly traded partnership) taxable as a
corporation; (iii) the Transferor shall have delivered to the Trustee a
certificate of an officer of the Transferor stating that the Transferor
reasonably believes that such deposit and termination of its obligations
will not constitute a Pay Out Event or any event that, with the giving of
notice or the lapse of time, would cause a Pay Out Event to occur; and (iv)
a Ratings Event will not occur as a result of such events; then, the
Securities 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 Securityholders 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 Securities, the Class B Securities and the
Collateralized Trust Obligations 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 CTO 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 CTO Invested Amount since the Closing
Date, 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 Securities, (ii) the unpaid Class B Invested Amount plus accrued
and unpaid interest on the Class B Securities, and (iii) the unpaid CTO
Invested Amount plus accrued and unpaid interest on the Collateralized
Trust Obligations, 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 Securities will be retired on the day following the
Distribution Date on which the final payment of principal is scheduled to
be made to the Securityholders, 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 Securities will
be made on the 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 Securities until paid in full, then to the
Class B Securities until paid in full, then to the Collateralized Trust
Obligations until paid in full, and finally to the Class D Securities to
the extent necessary to pay such remaining amounts to all Securityholders
pro rata within each Class as final payment of the Securities) interests in
the Receivables or certain Receivables, as specified in the Pooling and
Servicing Agreement and the Series 1998-3 Supplement, in an amount up
to 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
Securities 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 Securityholders 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 Securities, will be paid
on the Termination Date first to Class A Securityholders until the Class A
Invested Amount is paid in full, then to the Class B Securityholders until
the Class B Invested Amount is paid in full, then to the CTO
Securityholders until the CTO Invested Amount is paid in full, and then to
the Class D Securityholders until the Class D Invested Amount is paid in
full.
Unless the Servicer and the holder of the Exchangeable Transferor
Security 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 securityholders sufficient to pay in full the aggregate investor
interest of all Series outstanding plus interest thereon at the applicable
interest rates to the next Distribution Date and (b) a date which shall not
be later than . Upon the termination of the Trust and the surrender of
the Exchangeable Transferor Security, the Trustee will convey to the holder
of the Exchangeable Transferor Security 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 1998-3 Supplement, which failure has a material adverse
effect on the Securityholders 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
Securityholders representing more than 50 percent of the Invested
Amount and continues to materially and adversely affect the
interests of the Securityholders 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 Securityholders 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 Securityholders' Interest continues to be materially
adversely affected during such period; provided, however, that a
Pay Out Event pursuant to this subparagraph (ii) will not be deemed
to occur thereunder if the Transferor has accepted reassignment of
the related Receivable or all such Receivables, if applicable,
during such period (or such longer period as the Trustee may
specify) in accordance with the provisions thereof;
(iii) certain events of bankruptcy or insolvency relating to
the Transferor, Direct Merchants Bank or Metris;
(iv) any reduction of the average of the Portfolio Yields
for any three consecutive Monthly Periods to a rate which is less
than the weighted average Base Rates for such three consecutive
Monthly Periods;
(v) the Trust shall become subject to regulation by the
Commission as an "investment company" within the meaning of the
Investment Company Act;
(vi) (a) the Transferor Interest shall be less than the
Minimum Transferor Interest, (b) (I) the sum of the amount on
deposit in the Pre-Funding Account plus the Series 1998-3
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 Securities, the Class B Securities, the Collateralized
Trust Obligations and the Class D Securities, (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 Securityholders.
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
Securities only if, after any applicable grace period, the Securityholders
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 Securities 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 Securities, will be deemed to have
occurred without any notice or other action on the part of the Trustee or
the Securityholders or all securityholders, 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 Securityholders 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, Securityholders will begin receiving
distributions of principal earlier than they otherwise would have, which
may shorten the average life and maturity of the Securities.
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 securityholders 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 Securities or any other interest in the
Exchangeable Transferor Security 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 Securityholders and will
be distributed to the applicable Securityholders 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 Securities.
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 Monthly Servicing Fee will be funded
from Finance Charge Collections allocated to the Securityholders' 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 Securityholders 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 Securityholders 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 Securityholders, or the Security Owners for
liabilities arising from actions taken by the Trustee at the request of
Securityholders, (c) the Trust, the Securityholders, or the Security 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 Securityholders, or the Security Owners for any liabilities,
costs, or expenses of the Trust, the Securityholders, or the Security
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 Securityholders or the Security Owners in connection with the
Pooling and Servicing Agreement to any taxing authority.
In addition, the Pooling and Servicing Agreement provides that,
subject to certain exceptions, the Transferor will indemnify the Trust and
the Trustee from and against any reasonable loss, liability, expense,
damage or injury (other than to the extent that any of the foregoing relate
to any tax law or any failure to comply therewith) suffered or sustained by
reason of any acts or omissions or alleged acts or omissions arising out of
or based upon the arrangement created by the Pooling and Servicing
Agreement as though the Pooling and Servicing Agreement created a
partnership under the Delaware Uniform Partnership Law in which the
Transferor is a general partner.
The Pooling and Servicing Agreement provides that, except for the
foregoing indemnities, neither the Transferor nor the Servicer nor any of
their respective directors, officers, employees, or agents will be under
any liability to the Trust, the Securityholders, 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
Securityholder in the capacity of an investor in the Securities) 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 Delaware Uniform Partnership Act in which the
Transferor is a general partner. The Transferor will also pay, indemnify
and hold harmless each Securityholder for any such losses, claims, damages
or liabilities (other than those incurred by a Securityholder in the
capacity of an investor in the Securities) except to the extent that they
arise from any action by any Securityholder. 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 securityholders 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 securityholders), 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 securityholders
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
Securities evidencing undivided interests aggregating not less than
50 percent of the Invested Amount of any Series materially
adversely affected thereby and continues to have a material adverse
effect on the securityholders 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 securityholders 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 Securities 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 securityholders 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 securities 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 securityholders from effecting a Service
Transfer.
REPORTS TO SECURITYHOLDERS
On each Distribution Date, the Paying Agent will forward to each
Securityholder 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
Securities, the Class B Securities, the Collateralized Trust Obligations
and the Class D Securities, (c) the amount of such distribution allocable
to interest on the Class A Securities, the Class B Securities and the
Collateralized Trust Obligations, (d) the amount of Principal Collections
processed during the related Monthly Period and allocated in respect of the
Class A Securities, the Class B Securities, the Collateralized Trust
Obligations and the Class D Securities, respectively, (e) the amount of
Finance Charge Collections processed during the preceding Monthly Period
and allocated in respect of the Class A Securities, the Class B Securities,
the Collateralized Trust Obligations and the Class D Securities,
respectively, (f) the aggregate amount of Principal Receivables, the
Invested Amount, the Class A Invested Amount, the Class B Invested Amount,
the CTO Invested Amount, the Class D Invested Amount, the Pre-Funded
Amount, the Floating Percentage, and during the Amortization Period, the
Fixed/Floating 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 Series Default Amount for the related
Monthly Period, (i) the aggregate amount of Class A Charge-Offs, Class B
Charge-Offs, CTO Charge-Offs and Class D Charge-Offs for the preceding
Monthly Period, (j) the amount of the Monthly Servicing Fee for the
preceding Monthly Period, (k) the aggregate amount of funds in the Excess
Funding Account as of the last day of the Monthly Period immediately
preceding the Distribution Date, (l) the number of new Accounts added to
the Trust during the related Monthly Period and (m) the Class A Interest
Rate, the Class B Interest Rate and the CTO Interest Rate for the Interest
Accrual Period.
The Paying Agent will furnish to each person who at any time during
the preceding calendar year was a Securityholder of record a statement
prepared by the Servicer containing the information required to be
contained in the regular monthly report to Securityholders, 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 Securityholder,
together with, on or before January 31 of each year, beginning in 1999,
such customary information (consistent with the treatment of the Securities
as debt) as the Servicer or Trustee deems necessary or desirable for tax
reporting purposes.
Following the listing of the Offered Securities on the Luxembourg
Stock Exchange, the Trustee will publish or will cause to be published
following each Distribution Date in a daily newspaper in Luxembourg
(expected to be the Luxemburger Wort) a notice to the effect that the
information set forth in the second preceding paragraph will be available
for review at the main office of the listing agent of the Trust in
Luxembourg, Luxembourg. Following the listing of the Offered Securities on
the Luxembourg Stock Exchange and prior to each Distribution Date with
respect to the Amortization Period, the Luxembourg Stock Exchange will be
advised of the principal amount of the Class A Securities and the Class B
Securities that will be outstanding after the principal distribution to be
made on such Distribution Date.
Following the listing of the Offered Securities on the Luxembourg
Stock Exchange, notices to Securityholders will be given by publication in
a daily newspaper in Luxembourg, which is expected to be the Luxemburger
Wort. In the event that Definitive Securities are issued, notices to
Securityholders will also be given by mail to the addresses of such holders
as they appear in the security register.
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, the 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
Securityholder.
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 public 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 statement may be obtained by any Securityholder
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 1998-3
Supplement may be amended by the Transferor, the Servicer and the Trustee,
without the consent of Securityholders, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the
provisions of the Pooling and Servicing Agreement and the Series 1998-3
Supplement or of modifying in any manner the rights of such
Securityholders; 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 Securityholders, (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 Securities, the Class B
Securities or the Collateralized Trust Obligations, 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 1998-3 Supplement may be amended from time to time
by the Transferor, the Servicer, and the Trustee, without the consent of
Securityholders, to add to or change any of the provisions of the Pooling
and Servicing Agreement to provide that bearer securities 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 securities, to permit such bearer securities to be
issued in exchange for registered securities or bearer securities of other
authorized denominations or to permit the issuance of uncertificated
securities. Securityholders by purchase of their Securities 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 1998-3
Supplement may be amended by the Transferor, the Servicer, and the Trustee
with the consent of the holders of securities 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 securityholders 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 securityholder 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 securityholders 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 Securityholder. Any Supplement and any amendments
regarding the addition or removal of Receivables from the Trust will not be
considered an amendment requiring securityholder 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 1998-3 Supplement may be
amended by the Transferor, the Servicer and the Trustee without the consent
of any of the Securityholders (i) to add, modify or eliminate such
provisions as may be necessary or advisable in order to enable all or a
portion of the Trust to qualify as, and to permit an election to be made to
cause all or a portion of the Trust to be treated as, a "financial asset
securitization investment trust" as described in the provisions of the
FASIT legislation (see "Certain Federal Income Tax Consequences--Recent
Legislation"), or to enable all or a portion of the Trust to qualify and an
election to be made for similar treatment under such comparable subsequent
federal income tax provisions as may ultimately be enacted into law, and
(ii) in connection with any such election, to modify or eliminate existing
provisions of the Pooling and Servicing Agreement and any Supplement
relating to the intended federal income tax treatment of the Securities and
the Trust in the absence of the election.
Promptly following the execution of any amendment to the Pooling
and Servicing Agreement requiring Securityholder consent, the Trustee will
furnish written notice of the substance of such amendment to each
Securityholder. Following the listing of the Offered Securities on the
Luxembourg Stock Exchange, such notice will be published in a daily
newspaper in Luxembourg, which is expected to be the Luxemburger Wort. Any
Supplement and any amendments regarding the addition or removal of
Receivables from the Trust will not be considered an amendment requiring
Securityholder consent under the provisions of the Pooling and Servicing
Agreement and any Supplement.
LIST OF SECURITYHOLDERS
Upon written request of Securityholders 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
Securityholders for its costs and expenses, and having given the Servicer
notice that such request has been made, will afford such Securityholders
access during business hours to the current list of Securityholders of the
Trust for purposes of communicating with other Securityholders with respect
to their rights under the Pooling and Servicing Agreement. See
"--Book-Entry Registration" and "--Definitive Securities."
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 Securities in their own names. In addition,
for purposes of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint a co-trustee or
separate trustees of all or any part of the Trust. In the event of such
appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Pooling and Servicing Agreement will be
conferred or imposed upon the Trustee and such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee may resign at any time. The Transferor may also remove
the Trustee if the Trustee ceases to be eligible to continue as such under
the Pooling and Servicing Agreement or if the Trustee becomes insolvent.
The Trustee at all times must not be a Related Person. In such
circumstances, the Transferor will be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee does not become effective until acceptance of the
appointment by the successor Trustee.
If the Trustee fails to perform any of its obligations under the
Pooling and Servicing Agreement, and a securityholder 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
Securities representing more than 50 percent of the aggregate invested
amount of all Series (including related commitments) shall have the right
to remove the Trustee and (with the consent of the Transferor, which shall
not be unreasonably withheld) promptly appoint a successor Trustee by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor Trustee.
DESCRIPTION OF THE PURCHASE AGREEMENTS
PURCHASES OF RECEIVABLES
Bank Purchase Agreement. Pursuant to the Bank Purchase Agreement,
Direct Merchants Bank sells to Metris, all of its right, title and interest
in and to (i) the Receivables existing on the date of such agreement and
thereafter created and arising in connection with the Accounts and any
accounts that meet the definition of Additional Accounts, 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, but, excluding any
accounts that are designated as "excluded accounts" pursuant to the Bank
Purchase Agreement, (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.
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 all
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 will deliver all of its
Receivables to the Transferor. Pursuant to the Pooling and Servicing
Agreement, such Receivables are thereafter transferred immediately by the
Transferor to the Trust, and the Transferor has assigned its rights in, to
and under the Purchase Agreement and the Bank Purchase Agreement with
respect to such Receivables to the Trust.
REPRESENTATIONS AND WARRANTIES
Bank Purchase Agreement. In the Bank Purchase Agreement, Direct
Merchants Bank represents and warrants to Metris that, among other things,
(a) Direct Merchants Bank is a national banking association validly
existing and 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 a valid and binding obligation of Direct
Merchants Bank, enforceable against Direct Merchants Bank in accordance
with its terms, subject to customary bankruptcy- and equity-related
exceptions, (c) Direct Merchants Bank is the legal and beneficial owner of
all right, title and interest in and to each Receivable conveyed to Metris
pursuant to the Bank Purchase Agreement, and each such Receivable has been
or will be transferred to Metris free and clear of any lien other than
Permitted Liens, (d) Direct Merchants Bank has the full right, power and
authority to transfer the Receivables pursuant to the Bank Purchase
Agreement, (e) the Bank Purchase Agreement constitutes a valid transfer and
assignment to Metris of all right, title and interest of Direct Merchants
Bank in and to the Receivables, all monies due or to become due and all
proceeds related thereto, or an absolute sale of such property and the
proceeds thereof and (f) each Account classified as an "Eligible Account"
by Direct Merchants Bank in any document or report delivered under the Bank
Purchase Agreement will satisfy the requirements contained in the
definition of Eligible Account and each Receivable classified as an
"Eligible Receivable" by Direct Merchants Bank in any document or report
delivered under the Bank Purchase Agreement will satisfy the requirements
contained in the definition of Eligible Receivable.
Purchase Agreement. Pursuant to the Purchase Agreement, Metris
represents and warrants to the Transferor that, among other things, subject
to specified exceptions and limitations, Metris is duly organized, validly
existing, and in good standing under the laws of Delaware, Metris is duly
qualified to do business and in good standing (or is exempt from such
requirement) in any state required in order to conduct its business and has
obtained all necessary licenses and approvals required under applicable
law, and Metris has the requisite corporate power and authority to perform
its obligations under the Purchase Agreement.
Pursuant to the Purchase Agreement, Metris additionally represents
and warrants that, among other things, subject to specified exceptions and
limitations, (i) the execution and delivery of the Purchase Agreement and
the consummation of the transactions provided for in the Purchase Agreement
have been duly authorized by Metris by all necessary corporate action on
its part, (ii) the execution and delivery of the Purchase Agreement and the
performance of the transactions contemplated thereby do not contravene
Metris' charter or by-laws, violate any material provision of law
applicable to it, require any filing (except for filings under the UCC),
registration, consent, or approval under any such law except for such
filings, registrations, consents, or approvals as have already been
obtained and are in full force and effect, (iii) except as described in the
Purchase Agreement, Metris has filed all tax returns required to be filed
and has paid or made adequate provision for the payment of all taxes,
assessments, and other governmental charges due from Metris or is
contesting any such tax, assessment or other governmental charge in good
faith through appropriate proceedings, (iv) there are no proceedings or
investigations pending or, to the best knowledge of Metris, threatened
against Metris before any court, regulatory body, administrative agency, or
other tribunal or governmental instrumentality asserting the invalidity of
the Purchase Agreement, seeking to prevent the consummation of any of the
transactions contemplated by the Purchase Agreement, seeking any
determination or ruling that would materially and adversely affect the
performance by Metris of its obligations thereunder or seeking any
determination or ruling that would materially and adversely affect the
validity or 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 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 whether existing as of the Initial Closing Date or
thereafter created (except for Permitted Liens).
If certain of the representations or warranties described above are
not true with respect to any Receivable at the time such representation or
warranty was made or any Receivable becomes an Ineligible Receivable, then
Metris will be obligated to pay to the Transferor an amount equal to the
principal amount of such
Receivable.
The Pooling and Servicing Agreement (i) requires the Transferor to
make a demand on Metris to repurchase Receivables in such cases where the
Transferor is required under the Pooling and Servicing Agreement to
repurchase Receivables from the Trust and (ii) permits the Transferor to
consent to the sale of Receivables to a third party only in such
circumstances where the Transferor may remove Receivables from the Trust
under the Pooling and Servicing Agreement.
CERTAIN COVENANTS
Bank Purchase Agreement. It is the intention of Direct Merchants
Bank and Metris that the conveyance of the Receivables by Direct Merchants
Bank to Metris contemplated by the Bank Purchase Agreement be construed as
an absolute sale of the Receivables by Direct Merchants Bank to Metris. It
is not intended that such conveyance be deemed a pledge of the Receivables
by Direct Merchants Bank to Metris to secure a debt or other obligation of
Direct Merchants Bank, but the Bank Purchase Agreement shall also be deemed
to be a security agreement within the meaning of Article 9 of the UCC and
the conveyance provided for in the Bank Purchase Agreement shall be deemed
to be a grant by Direct Merchants Bank to Metris of a "security interest"
within the meaning of Article 9 of the UCC in all of Direct Merchants
Bank's right, title and interest in and to the Receivables.
In the Bank Purchase Agreement, Direct Merchants Bank covenants
that, among other things, except as required by law or as Direct Merchants
Bank may determine to be appropriate and subject to specified exceptions
and limitations, (i) it will take no action to cause any Receivable to be
anything other than an account, general intangible or chattel paper, (ii)
except for the conveyances under the Bank Purchase Agreement, it will not
sell any Receivable or grant a lien (other than a Permitted Lien) on any
Receivable, (iii) except as it deems necessary to maintain its credit card
business on a competitive basis, it will not reduce the annual percentage
rates of the Periodic Finance Charges assessed on the Receivables or other
fees charged on the Accounts if, as a result of any such reduction, either
a Pay Out Event would occur or such reduction is not also applied to any
comparable segment of accounts owned by it similar to the Accounts, (iv) it
will comply with and perform its obligations under the Contracts relating
to the Accounts and the Credit and Collection Policy and that it will not
change the terms of such agreements or policies if any such change would,
in either case, materially and adversely affect the rights of the Trust or
the securityholders, 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 securities 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 securityholders, 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 securities under any
Series are outstanding, (v) in the event it receives a collection on any
Receivable, it will pay such collection to the Transferor as soon as
practicable, (vi) it will not convey or transfer any Receivable, except as
otherwise provided in the Purchase Agreement, and (vii) it will take all
actions reasonably necessary to maintain its rights under all Contracts to
which it is a party.
PURCHASE TERMINATION DATE
Bank Purchase Agreement. If Direct Merchants Bank becomes
insolvent, Metris' obligations under the Bank Purchase Agreement will
automatically be terminated. In addition, if Metris becomes insolvent, or
shall become unable for any reason to purchase Receivables from Direct
Merchants Bank in accordance with the provisions of the Bank Purchase
Agreement, Metris' obligations under the Bank Purchase Agreement as to
Direct Merchants Bank will automatically be terminated.
Purchase Agreement. If Metris becomes insolvent, the Transferor's
obligations under the Purchase Agreement will automatically be terminated.
In addition, if the Transferor becomes insolvent or shall become unable for
any reason to purchase Receivables from Metris in accordance with the
provisions of the Purchase Agreement, the Transferor's obligations under
the Purchase Agreement as to Metris will automatically be terminated. The
date of any such termination will be the "Purchase Termination Date."
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The Transferor has represented and warranted in the Pooling and
Servicing Agreement that the transfer of Receivables by it to the Trust
constitutes either a valid transfer and assignment to the Trust of all
right, title, and interest of the Transferor in and to the Receivables,
except for Permitted Liens and the interest of the Transferor as holder of
the Exchangeable Transferor Security and any other Investor Security 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
Securities--Representations and Warranties."
The Transferor has represented that the Receivables are "accounts,"
"general intangibles" or "chattel paper" as each is defined in Article 9 of
the UCC as then in effect in each Relevant UCC State. 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 will 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 future generated general intangibles 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 date of
designation for inclusion in the Trust.
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 (other than a Permitted
Lien) on any Receivable (or any interest therein) other than a Permitted
Lien. A tax or other governmental 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 Securities,
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' or Direct Merchants Bank's interest in the Receivables, any adverse
change in the priority or perfection of the Transferor's or Metris'
security interest would correspondingly affect the Trust's interest in the
affected Receivables. In addition, if a receiver or conservator were
appointed for Direct Merchants Bank, certain administrative expenses of the
receiver or conservator also may have priority over the interest of the
Trust in such Receivables. While Direct Merchants Bank is the Servicer,
certain cash collections on the Receivables may be held by Direct Merchants
Bank and commingled with its funds for brief periods, and if an Insolvency
Event occurs, the Trust may not have a perfected interest in such
commingled collections.
CERTAIN MATTERS RELATING TO BANKRUPTCY OR RECEIVERSHIP
The Transferor will not engage in any activities except purchasing
accounts receivable from Metris or any affiliate of Metris, forming trusts,
transferring such accounts receivable to such trusts and engaging in
activities incident to, or necessary or convenient to accomplish, the
foregoing. The Transferor has no intention of filing a voluntary petition
under the United States federal bankruptcy code or any similar applicable
state law so long as the Transferor is solvent and does not reasonably
foresee becoming insolvent.
The voluntary or involuntary application for relief under the
Bankruptcy Code or any similar applicable state law with respect to Metris
should not necessarily result in a similar voluntary application with
respect to the Transferor so long as the Transferor is solvent and does not
reasonably foresee becoming insolvent either by reason of Metris'
insolvency or otherwise. Counsel has advised Metris and the Transferor that
(i) the assets and liabilities of the Transferor would not be substantively
consolidated with the assets and liabilities of Metris in the event of a
petition for relief under the Bankruptcy Code with respect to Metris and
(ii) the sale of Receivables by Metris would constitute a valid sale and,
therefore, such Receivables would not be property of Metris in the event of
the filing of an application for relief by or against Metris under the
Bankruptcy Code. The foregoing conclusions are reasoned conclusions, based
upon various assumptions regarding factual matters and future events, as to
which there necessarily can be no assurance. If a bankruptcy trustee for
Metris, Metris as debtor-in-possession, or a creditor of Metris were to
take the view that Metris and the Transferor should be substantively
consolidated or that the transfer of the Receivables from Metris to the
Transferor should be recharacterized as a pledge of such Receivables, then
delays in payments on the Offered Securities and the Collateralized Trust
Obligations or (should the bankruptcy court rule in favor of any such
trustee, debtor-in-possession or creditor) reductions in such payments on
such Securities 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
securityholders representing undivided interests aggregating more than 50
percent of the aggregate invested amount of each Series (and, with respect
to Series 1998-3, the holders of more than 50 percent of each of the Class
A Securities, the Class B Securities and the Collateralized Trust
Obligations), 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 Securities--Pay
Out Events."
Direct Merchants Bank has represented and warranted to Metris and
Metris has represented and warranted to the Transferor, in the Purchase
Agreements, respectively, that the sale of the Receivables to Metris or the
Transferor, respectively, is a valid sale of the Receivables to Metris or
the Transferor, respectively. In addition, Direct Merchants Bank, Metris
and the Transferor have treated and will treat the transaction described in
the Purchase Agreements as sales of the Receivables to Metris and the
Transferor, respectively, and Metris has taken or will take all actions
that are required under the UCC to perfect Metris' and the Transferor's
ownership interest, respectively, in the Receivables. Notwithstanding the
foregoing, if Metris were to become a debtor in a bankruptcy case and a
creditor or trustee-in-bankruptcy of such debtor or such debtor itself were
to take the position that the sale of Receivables from Metris to the
Transferor, should be recharacterized as a pledge of such Receivables to
secure a borrowing from such debtor, then delays in payments of collections
of Receivables to the Transferor (and therefore to the Trust and to
Securityholders) 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, Metris granted a security interest
in the Receivables to the Transferor and the Transferor granted a security
interest in the Receivables to the Trust, (ii) the interest was validly
perfected before Direct Merchants Bank's insolvency, (iii) each such
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) each of the Purchase Agreements and
the Pooling and Servicing Agreement is continuously a record of Direct
Merchants Bank, and (v) each of the Purchase Agreements and 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 the Trust should be enforceable
(to the extent of the Trust's "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 the Trust 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 on the Securities 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 the RTC Policy
Statement with respect to the payment of interest on collateralized
borrowings. The RTC Policy Statement 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. The
FDIC, however, has not adopted a formal policy statement on payment of
"actual direct compensatory damages" with respect to collateralized
borrowings of banks that are repudiated, and may not follow the approach of
the RTC. In addition, 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.
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, Securityholders might experience delays in payment or
possibly losses in their investment in the Securities. 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 10th Circuit appears to be
inconsistent with established precedent and the UCC.
The occurrence of certain events of insolvency, conservatorship or
receivership with respect to the Servicer will result in a Servicer
Default, which Servicer Default, in turn, could result in a Pay Out Event.
If no other Servicer Default other than the commencement of such bankruptcy
or similar event exists, a conservator or receiver of the Servicer may have
the power to prevent the Trustee and the Securityholders from appointing a
successor Servicer.
CONSUMER PROTECTION LAWS
The Accounts and Receivables are subject to numerous federal and
state consumer protection laws that impose requirements related to offering
and extending credit. Any failure by a Credit Card Originator or the
Servicer to comply with such legal requirements also could adversely affect
the Servicer's ability to collect the full amount of the Receivables. The
United States Congress and the states may enact laws and amendments to
existing laws to further regulate consumer credit or to reduce finance
charges or other fees or charges applicable to credit card and other
consumer revolving loan accounts. Such laws, as well as any new laws or
rulings which may be adopted, may adversely affect the Servicer's ability
to collect on the Receivables or maintain previous levels of collections.
The relationship of the Obligor 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 Securities 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
Securities--Representations and Warranties."
CLAIMS AND DEFENSES OF CARDHOLDERS AGAINST THE TRUST
The UCC provides that (a) unless an Obligor has made an enforceable
agreement not to assert defenses or claims arising out of a transaction,
the rights of the Trust, as assignee, are subject to all the terms of the
Contract between the Credit Card Originator and such Obligor and any
defense or claim arising therefrom, to rights of set-off and to any other
defense or claim of such Obligor against the Credit Card Originator that
accrues before such Obligor receives notification of the assignment and (b)
any such Obligor is authorized to continue to pay the Credit Card
Originator until (i) the 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 LITIGATION
Metris has developed and implemented compliance functions to
monitor its operations to ensure that Metris complies with all applicable
laws. However, Metris is a party to various legal proceedings resulting
from ordinary business activities relating to the operations of Metris. One
of these actions, in Alabama, seeks damages in an amount that cannot be
ascertained and purports to be a class action, although no class has been
certified. The Alabama case generally alleges a fraudulent sale of credit
protection insurance without consent. Although the Metris subsidiary that
is a party to the Alabama case believes it has substantive legal defenses
to this claim and is prepared to defend this case vigorously, should the
subsidiary's case settle or otherwise be resolved, Metris believes that the
amount, in the aggregate, will not be material to the operations of Metris.
Due to the uncertainties in litigation and other factors, there is no
assurance that Metris will ultimately prevail. Metris believes that it has
meritorious defenses to this action and any adverse decision should not
materially affect the consolidated financial condition of Metris and its
affiliates.
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 Securities 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
Securities 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 Securities. This discussion is intended as an
explanatory discussion of the possible effects of the classification of the
Offered Securities as indebtedness on investors generally and of related
tax matters affecting investors generally, but does not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's tax
advisor. This discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations ("Treasury Regulations") thereunder, current
administrative rulings, judicial decisions and other applicable authorities
in effect as of the date hereof, all of which are subject to change,
possibly with retroactive effect. There are no cases or Internal Revenue
Service ("IRS") rulings on similar transactions involving instruments
issued by a trust with terms similar to those of the Offered Securities. 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 Securityholders.
This summary does not address all aspects of federal income
taxation that may be relevant to the Security 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 Securities in the initial distribution thereof, who are
citizens or residents of the United States, including domestic corporations
and partnerships, and who hold the Offered Securities 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 entity)
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 (i) is given with respect to events that have
occurred at the time the advice is rendered and is not given with respect
to the consequences of contemplated actions, and (ii) is directly relevant
to the determination of an entry on a tax return. Accordingly, taxpayers
should consult their respective tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. EACH PROSPECTIVE
INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF OFFERED SECURITIES SPECIFIC TO SUCH PROSPECTIVE
INVESTOR.
CHARACTERIZATION OF THE OFFERED SECURITIES AS INDEBTEDNESS
The Transferor, the Servicer and each Security Owner will express
in the Pooling and Servicing Agreement the intent that, for federal, state
and local income and franchise tax purposes, the Offered Securities 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 Security Owner, by acquiring an
interest in an Offered Security, will agree to treat the Offered Securities
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 non-tax accounting treatment of the
transaction, the Transferor will treat the Pooling and Servicing Agreement,
for financial accounting purposes and certain other non-tax 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 Securities and the Class B Securities 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 Securities, 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
Securities as debt for federal income tax purposes or otherwise makes the
rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME TO SECURITYHOLDERS
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
Security Owners.
Stated Interest. It is not expected that any of the Offered
Securities will be issued with OID. Based upon the foregoing opinions, and
assuming that all of the Offered Securities are treated as debt, the stated
interest on Offered Securities will be taxable as ordinary income for
federal income tax purposes when received or accrued in accordance with a
Securityholder's method of tax accounting.
OID. The Offered Securities may be issued at a discount from their
principal amounts, thereby creating the possibility of OID. In a case where
OID exists, all or a portion of the taxable income to be recognized with
respect to the Offered Securities would be includible in income of Security
Owners as OID. Any amount treated as OID would not, however, be includible
again when the interest is actually received. If the yield on a Class of
Offered Securities were not materially different from its coupon, this
treatment would have no significant effect on Security Owners using the
accrual method of accounting. However, cash method Security Owners may be
required to report income with respect to the Offered Securities in advance
of the receipt of cash attributable to such income.
While it is not anticipated that the Offered Securities will be
issued at a discount from their stated principal amount that is greater
than a de minimis amount, under Treasury Regulations the Offered Securities
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
Securities 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 the OID
Regulations were to apply, all of the taxable income to be recognized with
respect to the Offered Securities would be includible in income as OID but
would not be includible again when the interest is actually received. In
addition, the OID Regulations provide 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
Securities if they are issued at a price that is less than a de minimis
discount from their stated principal amount.
If the Offered Securities 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 Security (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 Securities are sold to the public) will
constitute OID. A Security Owner must include OID in income as interest
over the term of the Offered Security 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 Securities
(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 Securityholder should consult its tax
advisor regarding the impact to such Securityholder of the OID rules if the
Offered Securities are issued with OID. An Offered Security issued with de
minimis OID must include such OID in income proportionately as principal
payments are made on such Offered Security.
Discount and Premium. A subsequent holder who purchases an Offered
Security 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 Security, and for the deferral of interest deductions with
respect to debt incurred to acquire or carry the market discount Offered
Security. A Security 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 Security 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 Security at a premium
may elect to amortize and deduct this premium over the remaining term of
the Offered Security 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 Security, including stated interest, acquisition
discount, OID, de minimis OID, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium, using the constant yield method described above.
Treatment of Losses. OID, if any (in excess of de minimis OID),
must be reported by all Offered Securityholders, and other interest income
must be reported by Offered Securityholders that report income on the
accrual method, as it accrues, whether or not such Offered Securityholder
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
Securityholder in any period could exceed the amount of cash distributed to
such holder in that period. An Offered Securityholder generally will
realize a loss where either principal or previously accrued interest are
determined to be uncollectible with respect to the Offered Security,
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 SECURITIES
Generally, capital gain or loss will be recognized on a sale or
other taxable disposition of Offered Securities 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
Securities. A Security Owner's tax basis in an Offered Security will
generally equal such Security Owner's cost increased by any OID, market
discount and gain previously included by such Security Owner in income with
respect to the Offered Security and decreased by any bond premium
previously amortized and any principal payments previously received by such
Security Owner with respect to the Offered Security. Subject to the market
discount rules of the Code discussed above under "--Taxation of Interest
Income to Securityholders--Discount and Premium", any such gain or loss
will be capital gain or loss if the Offered Security 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 Security was held by the holder for
more than one year and otherwise will be short-term. (Under the Taxpayer
Relief Act of 1997 the maximum rates on long-term capital gains will be
reduced further in the year 2001 and thereafter for certain individual
taxpayers who meet specified conditions). Each prospective investor should
consult its tax advisor concerning these tax law changes.)
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trustee will be required to report annually to the IRS, and to
each Securityholder, the amount of interest paid on the Offered Securities
(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
Securityholder 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.
FASIT LEGISLATION
Legislation passed by Congress and signed into law by the President
on August 20, 1996 added Sections 860H through 860L to the Code (the "FASIT
Provisions") which provide for a new type of entity for federal income tax
purposes known as a "financial asset securitization investment trust" (a
"FASIT"). Although the legislation providing for the new FASIT entity
became effective on September 1, 1997, many technical issues are to be
addressed in Treasury Regulations which have not yet been issued. In
general, the FASIT legislation enables trusts such as the Trust to be
treated as a pass-through entity not subject to federal entity-level income
tax (except with respect to certain prohibited transactions) and to issue
securities that would be treated as debt for federal income tax purposes.
Transition rules provided for by the FASIT legislation contemplate that
entities in existence on August 31, 1997 may elect to be taxed under the
FASIT Provisions. However, how such election is made and how outstanding
interests of such entity are to be treated subsequent to the election is
not explained in the FASIT legislation.
OTHER POSSIBLE CHARACTERIZATIONS OF THE POOLING AND SERVICING AGREEMENT
Although, as described above, it is the opinion of Special Tax
Counsel that the Class A Securities and Class B Securities will properly be
characterized as indebtedness, and that the Collateralized Trust
Obligations (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 Collateralized Trust Obligations were not
debt for federal income tax purposes (assuming that neither the Class A or
Class B Securities, nor securities of any other outstanding series, were
also recharacterized) the arrangement among the Transferor and the CTO
Securityholders 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 Securities, or securities of any other outstanding
series, were not debt for federal income tax purposes, the arrangement
among the Security Owners, the Transferor, and security owners of such
other Series might be classified for federal income tax purposes as a
publicly traded partnership taxable as a corporation.
If the Collateralized Trust Obligations (and no Class of the
Offered Securities nor securities 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 Securityholders would probably not be deductible in
computing the entity's taxable income and all or part of distributions to
Securityholders would probably be treated as dividends. Such an
entity-level tax could result in reduced distributions to Securityholders
and the Securityholders could be liable for a share of such tax.
Because the Transferor will treat the Offered Securities 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 Securities.
DEFEASANCE
The Securities 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 Securities 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 Securityholder for federal income tax purposes, notwithstanding
that, if such a sale or exchange were deemed to occur, each Securityholder
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
As noted above, Special Tax Counsel will render its opinion,
subject to the analysis and assumptions contained therein, that the Class A
Securities and Class B Securities will properly be characterized as
indebtedness secured by the Receivables, and that the Collateralized Trust
Obligations (not offered hereby) should be classified as indebtedness (or,
if not, would be classified as an interest in a partnership), for federal
income tax purposes. Based upon that opinion, the following information
describes the U.S. federal income tax treatment of investors in Offered
Securities 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 the District of Columbia (unless in the case of a
partnership, Treasury Regulations provide otherwise), (iii) an estate the
income of which is includible in gross income for U.S. federal income tax
purposes, regardless of its source or, (iv) a trust whose administration is
subject to the primary supervision of a United States court and which has
one or more United States fiduciaries who have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in Treasury Regulations, certain trusts in existence
on August 20, 1996, and treated as U.S. Persons under the Code, and
applicable Treasury Regulations thereunder prior to such date, that elect
to continue to be treated as U.S. Persons under the Code or applicable
Treasury Regulations thereunder will also be considered a U.S. Person.
(a) Interest paid or accrued to a Foreign Person that is not
effectively connected with the conduct of a trade or business
within the United States by the Foreign Person, will generally be
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 Security 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 Security 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 Security
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
Securities are interests in a partnership (not taxable as a corporation), a
Security 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 Security Owner, the branch profits tax (and would be subject
to withholding tax on its share of partnership income). If any of the
Offered Securities were recharacterized as interests in a "publicly traded
partnership" taxable as a corporation, to the extent distributions on such
Offered Securities were treated as dividends, a Foreign Person would
generally be subject to tax (and withholding) on the gross amount of such
dividends at a rate of 30 percent unless reduced or eliminated pursuant to
an applicable income tax treaty.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Department of the Treasury issued new
regulations (the "New Regulations") which make certain modifications to the
withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New Regulations will generally be effective
for payments made after December 31, 1999, subject to certain transition
rules. Prospective investors are urged to consult their own tax advisors
regarding the New Regulations.
CERTAIN STATE TAX CONSEQUENCES
Because of the differences in state tax laws and their
applicability to different investors, it is not possible to summarize the
potential state tax consequences of holding the Offered Securities.
ACCORDINGLY, PURCHASERS OF OFFERED SECURITIES SHOULD CONSULT THEIR
RESPECTIVE TAX ADVISORS REGARDING THE STATE TAX CONSEQUENCES OF PURCHASING
ANY CLASS OF OFFERED SECURITIES.
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 Securities should
consider, among other things, whether such an investment might constitute
or give rise to a prohibited transaction under ERISA, the Code or any
substantially similar federal, state or local law.
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 Securities by a
Plan might result in the assets of the Trust being deemed to constitute
plan assets, which in turn could have the consequence that certain aspects
of such investment, including the operation of the Trust, might give rise
to or result in prohibited transactions under ERISA and the Code.
CLASS A SECURITIES
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 (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 Securities will be held by at least 100 independent
investors at the conclusion of the offering and the Transferor anticipates
that the other conditions of the Plan Assets Regulation will be met with
respect to the Class A Securities. No monitoring or other measures will be
taken to ensure that any such conditions will be met with respect to the
Class A Securities. 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, the Code and any substantially
similar federal, state or local law would apply to all transactions
involving the Trust's assets. Accordingly, Plan fiduciaries should consult
with counsel before making a purchase of Class A Securities.
CLASS B SECURITIES
The Class B Underwriters do not expect that the Class B Securities
will be held by 100 or more independent investors. Accordingly, the Class B
Securities may not be purchased by Plans subject to Title I of ERISA,
Section 4975 of the Code and any substantially similar federal, state or
local law.
Each Security Owner of a Class B Security, by its acceptance
thereof, will be deemed to have represented and warranted that it is not
(i) an employee benefit plan (as defined in Section 3(3) of ERISA) that is
subject to the provisions of Title I of ERISA, (ii) a plan described in
Section 4975(e)(1) of the Code that is subject to Section 4975 of the Code,
(iii) a governmental plan, as defined in Section 3(32) of ERISA, subject to
any federal, state or local law which is, to a material extent, similar to
the provisions of Section 406 of ERISA or Section 4975 of the Code, (iv) an
entity whose underlying assets include plan assets (as defined in the Plan
Assets Regulation or otherwise under ERISA) by reason of a plan's
investment in the entity or (v) a Person investing plan assets of any such
plan (including for purposes of clause (iv) and this clause (v), as
applicable, an insurance company general account, but excluding any entity
registered under the Investment Company Act).
SPECIAL CONSIDERATIONS FOR INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of
1996 added new Section 401(c) of ERISA relating to the status of the assets
of insurance company general accounts under ERISA and Section 4975 of the
Code. Pursuant to Section 401(c), the DOL is required to issue final
regulations (the "General Account Regulations") with respect to insurance
policies issued on or before December 31, 1998 that are supported by an
insurer's general account. The General Account Regulations are to provide
guidance on which assets held by the insurer constitute "plan assets" for
purposes of the fiduciary responsibility provisions of ERISA and Section
4975 of the Code. Section 401(c) also provides that, except in the case of
avoidance of the General Account Regulations and actions brought by the
Secretary of Labor relating to certain breaches of fiduciary duties that
also constitute breaches of state or federal criminal law, until the date
that is 18 months after the General Account Regulations become final, no
liability under the fiduciary responsibility and prohibited transaction
provisions of ERISA and Section 4975 of the Code may result on the basis of
a claim that the assets of the general account of an insurance company
constitute the plan assets of any Plan. The plan asset status of insurance
company separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the plan assets of any
Plan invested in a separate account. Potential investors that are insurance
company general accounts should consult their legal advisors concerning the
effect of the General Account Regulations on such investment.
As of the date hereof, the DOL has issued proposed regulations
pursuant to Section 401(c) of ERISA. If adopted substantially in the form
in which proposed, the General Account Regulations may not exempt the
assets of an insurance company general account from treatment as "plan
assets" after December 31, 1998.
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 Securities 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 Securities is appropriate for the Plan, taking
into account the overall investment policy of the Plan and the composition
of the Plan's investment portfolio.
Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to the provisions of Title I of
ERISA and Section 4975 of the Code. Accordingly, assets of such plans may,
subject to the provisions of any other applicable federal and state law
(including, without limitation, federal or state law which is, to a
material extent, similar to the provisions of Section 406 of ERISA or
Section 4975 of the Code), be invested in any class of Offered Securities
without regard to the ERISA considerations described herein. It should be
noted, however, that any such plan that is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") among the Transferor, Metris 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
Securities set forth opposite its name:
AMOUNT
OF CLASS A
CLASS A UNDERWRITERS SECURITIES
- -------------------- ----------
[ ] ................................ $
----------
Total............................................ $
==========
AMOUNT
OF CLASS B
CLASS B UNDERWRITERS SECURITIES
- -------------------- ----------
[ ] ................................. $
In the Underwriting Agreement, the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of
the Offered Securities if any of the Offered Securities are purchased.
The Class A Underwriters named above (the "Class A Underwriters")
propose initially to offer the Class A Securities to the public at the
price set forth on the cover page hereof and to certain dealers at such
price less concessions not in excess of ____% of the principal amount of
the Class A Securities. The Class A Underwriters may allow, and such
dealers may reallow, concessions not in excess of ____% of the principal
amount of the Class A Securities 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 Underwriters named above (the "Class B Underwriters")
propose initially to offer the Class B Securities to the public at the
price set forth on the cover page hereof and to certain dealers at such
price less concessions not in excess of ____% of the principal amount of
the Class B Securities. The Class B Underwriters may allow, and such
dealers may reallow, concessions not in excess of _____% of the principal
amount of the Class B Securities 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 Underwriters.
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.
[ ], on behalf of the Underwriters, may engage in
over-allotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids with respect to the Offered Securities in
accordance with Regulation M under the Exchange Act. Over-allotment
transactions involve syndicate sales in excess of the offering size
creating a syndicate short position. Stabilizing transactions permit bids
to purchase the Offered Securities so long as the stabilizing bids do not
exceed a specific maximum. Syndicate covering transactions involve
purchases of the Offered Securities in the open market after the
distribution has been completed in order to cover syndicate short
positions. Penalty bids permit __________ to reclaim a selling concession
from a syndicate member when the Offered Securities originally sold by such
syndicate member are purchased in a syndicate covering transaction. Such
over-allotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids may cause prices of the Offered Securities to
be higher than they would otherwise be in the absence of such transactions.
Neither the Trust nor the Underwriters represent that the Underwriters will
engage in any such transactions nor that such transactions, once commenced,
will not be discontinued without notice.
Each Underwriter has represented and agreed that (a) it has only
issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the Offered
Securities 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 Securities
in, from or otherwise involving the United Kingdom and (c) if that
Underwriter is an authorized person under the Financial Services Act 1986,
it has only promoted and will only promote (as that term is defined in
Regulation 1.02 of the Financial Services (Promotion of Unregulated
Schemes) Regulations 1991) to any person in the United Kingdom the scheme
described herein if that person is of a kind described either in Section
76(2) of the Financial Services Act 1986 or in Regulation 1.04 of the
Financial Services (Promotion of Unregulated Schemes) Regulations 1991.
In the ordinary course of business, several of the Underwriters or
their affiliates have engaged, and may engage in the future, in certain
investment banking or commercial banking transactions with Metris and its
affiliates.
LEGAL MATTERS
Certain legal matters relating to the Offered Securities will be
passed upon for Metris, the Transferor and Direct Merchants Bank by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal
matters relating to the Offered Securities will be passed upon for the
Underwriters by Brown & Wood LLP, New York, New York.
LISTING AND GENERAL INFORMATION
Application has been made to list the Offered Securities on the
Luxembourg Stock Exchange. In connection with the listing application, the
Certificate of Incorporation and By-laws of the Transferor, as well as
legal notice relating to the issuance of the Securities will be deposited
prior to listing with the Chief Registrar of the District Court of
Luxembourg, where copies thereof may be obtained upon request. Once the
Offered Securities have been so listed, trading of the Offered Securities
may be effected on the Luxembourg Stock Exchange. The Class A Securities
and the Class B Securities have been accepted for clearance through the
facilities of DTC, Cedel and Euroclear. The International Securities
Identification Numbers (ISIN) for the Class A Securities and the Class B
Securities are and , respectively; the Common Code
numbers for the Class A Securities and the Class B Securitiesare and
, respectively.
The transactions contemplated in this Prospectus were authorized by
resolutions adopted by the Transferor on , 1998 and , 1998.
Copies of the Pooling and Servicing Agreement, the Series 1998-3
Supplement, all other Supplements, the Purchase Agreements and all
amendments thereto, the reports and statements described in "Description of
the Offered Securities--Evidence as to Compliance", each document listed
under "Available Information" and all of the reports referred to under
"Reports to Securityholders" and "Description of the Offered
Securities--Reports to Securityholders" in the Prospectus will be available
free of charge at the office of the listing agent of the Trust in
Luxembourg, whose address is . Financial information
regarding Transferor is included in the consolidated financial statements
of Fingerhut Companies, Inc. in its Annual Report and Form 10-K for the
fiscal year ended , 1997, also available at the office of the listing
agent in Luxembourg. For so long as the Offered Securities are outstanding,
copies of each Annual Report and Form 10-K for subsequent fiscal years and
Form 10-Q for subsequent fiscal quarters will also be available at the
office of the listing agent in Luxembourg.
The Transferor confirms that there has been no material adverse
change in the performance of the Trust since , 1998, the date of
the information with respect to the Trust set forth in "the Receivables."
In the event that Definitive Securities are issued and the rules of
the Luxembourg Stock Exchange require a Luxembourg Transfer Agent, the
Luxembourg Paying Agent will be appointed as a Transfer Agent.
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 CTO
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 a Credit Card Originator 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, each Additional Account or 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 61 in "Description
of the Offered Securities--Postponement of Accumulation Period."
"Accumulation Period Reserve Account" is defined at page 73 in
"Description of the Offered Securities--Accumulation Period Reserve
Account."
"Accumulation Shortfall" is defined at page 84 in "Description of
Offered Securities--Application of Collections--Payment of Principal."
"Adaptive Control System" is defined at page 41 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 (a) for the period from the Initial
Closing Date through the day preceding the Amendment Closing Date, each
revolving credit consumer credit card account owned by a Credit Card
Originator coming into existence after the Initial Closing Date which is an
Approved Account that the Transferor has not elected to exclude from the
Trust after June 7, 1996 and prior to the Amendment Closing Date or (b) on
and after the Amendment Closing Date, each revolving credit consumer credit
card account in which a Credit Card Originator acquires rights that is an
Approved Account and is not an Excluded Account; provided, however, that a
revolving credit consumer credit card account that does not satisfy the
definition of Approved Account on the date of its creation shall be an
Additional Account on the date that it satisfies the definition of Approved
Account. Any such election will 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 Account, the amount then on deposit in the Principal Funding
Account and the Series 1998-3 Percentage of the amount then on deposit in
the Excess Funding Account.
"Adjustment Payment" is defined at page 85 in "Description of the
Offered Securities--Defaulted Receivables; Dilution."
"Amendment Closing Date" means July 30, 1998.
"Amortization Period" means the period commencing on the
Amortization Period Commencement Date and continuing until the earlier of
(x) the Invested Amount of the Securities being paid in full or (y) the
Termination Date.
"Amortization Period Commencement Date" means the earlier of the
first day of the Accumulation Period and the date on which a Pay Out Event
occurs or is deemed to have occurred.
"Approved Account" means each (i) Eligible Account that is a
MasterCard(R) or VISA(R) account or (ii) any other revolving credit
consumer credit card account the inclusion in the Trust of which would not
cause a Ratings Event.
"Assignment" is defined at page 68 in "Description of the Offered
Securities--Addition of Trust Assets."
"Automatic Additional Accounts" is defined at page 68 in
"Description of the Offered Securities--Addition of Trust Assets."
"Available Investor Principal Collections" is defined at page 60 in
"Description of the Offered Securities--Principal Payments."
"Available Reserve Account Amount" is defined at page 74 in
"Description of the Offered Securities--Accumulation Period Reserve
Account."
"Available Series Finance Charge Collections" is defined at page 80
in "Description of the Offered Securities--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 Receivables Purchase Agreement dated as of July 30, 1998 between
Direct Merchants Bank and Metris, as such document may be amended from time
to time in accordance with its terms.
"Bankruptcy Code" means the United States federal bankruptcy code,
as amended.
"Base Rate" is defined at page 53 in "Maturity Considerations."
"Cash Equivalents" is defined at page 72 in "Description of the
Offered Securities--Trust Accounts."
"Cedel" is defined at page 57 in "Description of the Offered
Securities--Book-Entry Registration."
"Cedel Participants" is defined at page 57 in "Description of the
Offered Securities--Book-Entry Registration."
"Class" means any of the Class A Securities, the Class B
Securities, the Collateralized Trust Obligations or the Class D Securities.
"Class A Adjusted Invested Amount" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"Class A Charge-Off" is defined at page 86 in "Description of the
Offered Securities--Investor Charge-Offs."
"Class A Fixed/Floating Percentage" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"Class A Floating Percentage" means, with respect to any business
day, the percentage equivalent of the ratio that the amount of the Class A
Adjusted Invested Amount as of the end of the preceding business day bears
to the greater of (a) the sum of the aggregate amount of Principal
Receivables and amounts on deposit in the Excess Funding Account as of the
end of the preceding business day and (b) the sum of the numerators with
respect to all classes of all Series then outstanding used to calculate the
applicable allocation percentage.
"Class A Initial Invested Amount" means $ .
"Class A Interest Rate" is defined at page 13 in "Prospectus
Summary--Interest."
"Class A Invested Amount" is defined at page 75 in "Description of
the Offered Securities--Allocation Percentages."
"Class A Monthly Interest" is defined at page 82 in "Description of
the Offered Securities--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 CTO Initial Invested Amount.
"Class A Principal" is defined at page 84 in "Description of the
Offered Securities--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 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 Percentage of the
Monthly Servicing Fee for the related Monthly Period, (iv) the Class A
Percentage of the Series 1998-3 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 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 Securities" means the Floating Rate Asset Backed
Securities, Series 1998-2, Class A.
"Class A Securityholders" means the record holders of the Class A
Securities.
"Class A Securityholders' Interest" means the interest in the
assets of the Trust allocated to the Class A Securityholders.
"Class A Underwriters" are the Underwriters indicated at page 111
in "Underwriting."
"Class B Adjusted Invested Amount" is defined at page 76 in
"Description of the Offered Securities--Allocation Percentages."
"Class B Charge-Off" is defined at page 86 in "Description of the
Offered Securities--Investor Charge-Offs."
"Class B Fixed/Floating Percentage" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"Class B Floating Percentage" means, with respect to any business
day, the percentage equivalent of the ratio that the amount of the Class B
Adjusted Invested Amount as of the end of the preceding business day bears
to the greater of (a) the sum of the aggregate amount of Principal
Receivables and amounts on deposit in the Excess Funding Account as of the
end of the preceding business day and (b) the sum of the numerators with
respect to all classes of all Series then outstanding used to calculate the
applicable allocation percentage.
"Class B Initial Invested Amount" means $ .
"Class B Interest Rate" is defined at page 13 in "Prospectus
Summary--Interest."
"Class B Invested Amount" is defined at page 75 in "Description of
the Offered Securities--Allocation Percentages."
"Class B Monthly Interest" is defined at page 82 in "Description of
the Offered Securities--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 CTO Initial Invested Amount.
"Class B Principal" is defined at page 84 in "Description of the
Offered Securities--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 1998-3 remaining after
payments have been made to the Class A Securities 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 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 Percentage of the
Monthly Servicing Fee for the related Monthly Period, (iv) the Class B
Percentage of the Series 1998-3 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
Charge-Offs and Redirected 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 Securities" means the Floating Rate Asset Backed
Securities, Series 1998-3, Class B.
"Class B Securityholders" means the record holders of the Class B
Securities.
"Class B Securityholders' Interest" means the interest in the
assets of the Trust allocated to the Class B Securityholders.
"Class B Underwriters" means the Underwriters indicated at page 111
in "Underwriting."
"Class D Charge-Off" is defined at page 85 in "Description of the
Offered Securities--Investor Charge-Offs."
"Class D Fixed/Floating Percentage" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"Class D Floating 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 76 in "Description of
the Offered Securities--Allocation Percentages."
"Class D Principal Payment Commencement Date" means the earlier of
(a) during the Amortization Period, the first Distribution Date on which
the CTO Invested Amount is paid in full or, if there are no Principal
Collections allocable to Series 1998-3 remaining after payments have been
made to the Collateralized Trust Obligations on such Distribution Date, the
Distribution Date following the Distribution Date on which the CTO 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.
"Class D Securities" means the Asset Backed Securities, Series
1998-3, Class D.
"Class D Securityholders" means the record holders of the Class D
Securities.
"Class D Securityholders' Interest" means the interest in the
assets of the Trust allocated to the Class D Securityholders.
"Closing Date" means the date of the initial issuance of the
Securities.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateralized Trust Obligations" means the Floating Rate Asset
Backed Collateralized Trust Obligations, Series 1998-3.
"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 84 in
"Description of the Offered Securities--Application of Collections--Payment
of Principal."
"Controlled Deposit Amount" is defined at page 52 in "Maturity
Considerations."
"Cooperative" is defined at page 57 in "Description of the Offered
Securities--Book-Entry Registration."
"Covered Amount" is defined at page 74 in "Description of the
Offered Securities--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 the Utah Bank and 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 or Metris (to the extent that rights therein are
granted to the Transferor directly or indirectly) or the Transferor in
accordance with the provisions of the Pooling and Servicing Agreement and
who has been identified in a prior written notice to each Rating Agency.
"CTO Adjusted Invested Amount" is defined at page 76 in
"Description of the Offered Securities--Allocation Percentages."
"CTO Charge-Off" is defined at page 81 in "Description of the
Offered Securities--Investor Charge-Offs."
"CTO Fixed/Floating Percentage" is defined at page 75 in
"Description of the Offered Securities--Allocation Percentages."
"CTO Floating Percentage" means, with respect to any business day,
the percentage equivalent of the ratio that the amount of the CTO 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.
"CTO Initial Invested Amount" means $______.
"CTO Interest Rate" means the London interbank offered quotations
for one-month United States dollar deposits plus % per annum or such lesser
rate as specified in the Series 1998-3
Supplement.
"CTO Invested Amount" is defined at page 76 in "Description of the
Offered Securities--Allocation Percentages."
"CTO Monthly Interest" is defined at page 83 in "Description of the
Offered Securities--Application of Collections--Payment of Fees, Interest
and Other Items."
"CTO Percentage" means a fraction the numerator of which is the CTO
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 CTO Initial Invested Amount.
"CTO Principal" is defined at page 84 in "Description of the
Offered Securities--Application of Collections--Payment of Principal."
"CTO 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 1998-3 remaining after
payments have been made to the Class B Securities 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.
"CTO Required Amount" means for any business day during a Monthly
Period the amount, if any, by which the sum (i) of the CTO Monthly Interest
and any overdue CTO Monthly Interest on the related Distribution Date (and
additional interest thereon), (ii) the CTO Floating 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 CTO Floating Percentage of the Monthly Servicing Fee for the related
Monthly Period, (iv) the CTO Percentage of the Series 1998-3 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
CTO Invested Amount has been reduced on prior business days because of
unreimbursed CTO Charge-Offs and Redirected CTO 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.
"CTO Securityholders" means the record holders of the
Collateralized Trust Obligations.
"CTO Securityholders' Interest" means the interest in the assets of
the Trust allocated to the CTO Securityholders.
"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 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.
"Default Recognition 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.
"Defaulted Account" means each Account with respect to which, in
accordance with the Credit and Collection Policy or the Servicer's
customary and usual servicing procedures, the Servicer has charged off the
Receivables in such Account as uncollectible.
"Defaulted Receivable" is defined at page 85 in "Description of the
Offered Securities--Defaulted Receivables; Dilution."
"Defeasance" is defined at page 87 in "Description of the Offered
Securities--Defeasance."
"Definitive Securities" is defined at page 58 in "Description of
the Offered Securities--Definitive Securities."
"Depositaries" is defined at page 55 in "Description of the Offered
Securities--Book-Entry Registration."
"Depository" is defined at page 55 in "Description of the Offered
Securities--General."
"Determination Date" is defined at page 85 in "Description of the
Offered Securities--Investor Charge-Offs."
"Direct Merchants Bank" means Direct Merchants Credit Card Bank,
National Association.
"Direct Merchants Bank Portfolio" is defined at page 44 in "Direct
Merchants Bank's Credit Card Activities--Delinquency and Loss Experience."
"Discount Option Receivables" is defined at page 65 in "Description
of the Offered Securities--Discount Option."
"Discount Percentage" is defined at page 65 in "Description of the
Offered Securities--Discount Option."
"Distribution Account" is defined at page 66 in "Description of the
Offered Securities--Trust Accounts."
"Distribution Date" means , 1998 and the 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 56 in "Description of the
Offered Securities--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 CTO 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 CTO
Invested Amount and the Class D Invested Amount have been paid in full and
(ii) the Termination Date.
"Eligible Account" is defined at page 67 in "Description of the
Offered Securities--Eligible Accounts."
"Eligible Receivable" is defined at page 67 in "Description of the
Offered Securities--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
securityholders of such Series (or securityholders of a class within such
Series as designated in the applicable Supplement).
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Euroclear" is defined at page 57 in "Description of the Offered
Securities--Book-Entry Registration."
"Euroclear Operator" is defined at page 57 in "Description of the
Offered Securities--Book-Entry Registration."
"Euroclear Participants" is defined at page 57 in "Description of
the Offered Securities--Book-Entry Registration."
"Euroclear System" is defined at page 57 in "Description of the
Offered Securities--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 72 in "Description of
the Offered Securities--Excess Funding Account."
"Exchange" means any tender by the Transferor to the Trustee of the
Exchangeable Transferor Security, pursuant to any one or more Supplements
or, if provided in the relevant Supplement, securities representing any
Series and the Exchangeable Transferor Security, in exchange for one or
more new Series and a reissued Exchangeable Transferor Security.
"Exchangeable Transferor Security" means the security which
evidences the Transferor Interest.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Excluded Account" means on any date of determination (i) during
any period in which accounts are being automatically included as Accounts,
any revolving credit consumer credit card account which has been excluded
from addition to the Trust pursuant to the Pooling and Servicing Agreement
or any revolving credit consumer credit card account which the Transferor
has elected to exclude from the Trust and (ii) during any period following
the suspension of the automatic addition of accounts and prior to a Restart
Date, all revolving credit consumer credit card accounts other than
accounts that were Accounts on the automatic addition suspension date and
Supplemental Accounts previously added during such period.
"Expected Final Payment Date" means the Distribution Date.
"External Prospects" is defined at page 37 in "Metris Companies
Inc."
"FASIT" is defined at page 106 in "Certain Federal Income Tax
Consequences--Recent Legislation."
"FASIT Provisions" is defined at page 106 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 40 in "Direct Merchants Bank's
Credit Card Activities--New Account Underwriting--Credit Scoring."
"Finance Charge Collections" is defined at page 6 in "Prospectus
Summary--Trust."
"Finance Charge Receivables" is defined at page 8 in "Prospectus
Summary--Receivables."
"Fingerhut" means Fingerhut Corporation, a Minnesota corporation.
"Fingerhut Customers" is defined at page 37 in "Metris Companies
Inc."
"Fingerhut Database" is defined at page 38 in "Fingerhut
Corporation."
"Fingerhut Scores" is defined at page 38 in "Fingerhut
Corporation."
"FIRREA" is defined at page 30 in "Risk Factors--Transfer of the
Receivables; Insolvency Risk Considerations."
"Fixed/Floating Percentage" is defined at page 75 in "Description
of the Offered Securities--Allocation Percentages."
"Floating Percentage" means the sum of the Class A Floating
Percentage, the Class B Floating Percentage, the CTO Floating Percentage
and the Class D Floating Percentage.
"Foreign Person" is defined at page 107 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 110 in "Employee
Benefit Plan Considerations--Special Considerations for Insurance Company
General Accounts."
"Global Securities" is defined at page B-1-1 in "Annex II."
"Governmental Authority" means the United States of America, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of
or pertaining to government.
"Indirect Participants" is defined at page 56 in "Description of
the Offered Securities--Book-Entry Registration."
"Ineligible Receivable" means any receivable that does not satisfy
the definition of Receivable.
"Initial Closing Date" is defined at page 63 in "Description of the
Offered Securities--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 89 in "Description of the
Offered Securities--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 70 in "Description of
the Offered Securities--Trust Accounts."
"Invested Amount" means the sum of the Class A Invested Amount, the
Class B Invested Amount, the CTO 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 Securities" means any securities of any Series.
"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 Percentage and (b) with respect
to Finance Charge Collections during the Early Amortization Period and
Principal Collections during the Amortization Period, the Fixed/Floating
Percentage, and with respect to any Series of securities, the percentage
specified in the related Supplement.
"IRS" means the Internal Revenue Service.
"LIBOR" is defined at page 59 in "Description of the Offered
Securities--Interest Payments."
"LIBOR Determination Date" is defined at page 59 in "Description of
the Offered Securities--Interest Payments."
"MasterCard International" means MasterCard International Inc.
"Metris" means Metris Companies Inc., a Delaware corporation.
"Metris Direct" means Metris Direct, Inc., a Minnesota corporation
and an affiliate of Direct Merchants Bank.
"Metris Receivables, Inc." means Metris Receivables, Inc., a
Delaware corporation.
"Minimum Aggregate Principal Receivables" means, as of any date of
determination, the sum of the numerators used in the calculation of the
Investor Percentages for Principal Collections for all outstanding Series
on such date of determination.
"Minimum Retained Interest" means the product of the weighted
average Minimum Retained Percentages for all Series and the sum of the
outstanding principal amounts of all classes of all Series.
"Minimum Retained Percentage" means, for Series 1998-3, 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 1998-3, 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
Securities shall begin on and include the Closing Date and shall end on and
include , 1998.
"Monthly Servicing Fee" is defined at page 90 in "Description of
the Offered Securities--Servicing Compensation and Payment of Expenses."
"Moody's" means Moody's Investors Service, Inc.
"Negative Carry Amount" is defined at page 21 in "Prospectus
Summary--Coverage of Interest Shortfalls from Transferor Finance Charge
Collections."
"New Regulations" is defined at page 108 in "Certain Federal Income
Tax consequences--New Withholding Regulations."
"Notice Date" is defined at page 68 in "Description of the Offered
Securities--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 Securities" is defined at page 1.
"OID" means original issue discount.
"OID Regulations" is defined at page 104 in "Certain Federal Income
Tax Consequences--Taxation of Interest Income to Securityholders."
"Paired Series" is defined at page 86 in "Description of the
Offered Securities--Paired Series."
"Participants" is defined at page 55 in "Description of the Offered
Securities--General."
"Paying Agent" is defined at page 72 in "Description of the Offered
Securities--Trust Accounts."
"Payment Date" is defined at page 41 in "Direct Merchants Bank's
Credit Card Activities--Servicing, Billing and Payments."
"Payment Reserve Account" is defined at page 70 in "Description of
the Offered Securities--Trust Accounts."
"Pay Out Event" is defined at page 88 in "Description of the
Offered Securities--Pay Out Events."
"Periodic Finance Charge" has, with respect to any Account, the
meaning specified in the Contract applicable to such Account for finance
charges (due to periodic rate) or any similar term.
"Permitted Lien" means with respect to the Receivables: (i) liens
in favor of the Transferor created pursuant to the Purchase Agreement and
assigned to the Trustee pursuant to the Pooling and Servicing Agreement;
(ii) liens in favor of the Trustee pursuant to the Pooling and Servicing
Agreement; and (iii) liens which secure the payment of taxes, assessments
and governmental charges or levies, if such taxes are either (a) not
delinquent or (b) being contested in good faith by appropriate legal or
administrative proceedings and as to which adequate reserves in accordance
with generally accepted accounting principles shall have been established.
"Person" means any legal person, including any individual,
corporation, partnership, joint venture, association, joint stock company,
trust, unincorporated organization, governmental entity or other entity of
similar nature.
"Plan" is defined at page 109 in "Employee Benefit Plan
Considerations."
"Plan Assets Regulation" is defined at page 109 in "Employee
Benefit Plan Considerations."
"Pooling and Servicing Agreement" means the Amended and Restated
Pooling and Servicing Agreement, dated as of July 30, 1998, among the
Transferor, the Servicer, and the Trustee, as 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 1998-3 Supplement.
"Portfolio Yield" is defined at page 53 in "Maturity
Considerations."
"Pre-Funded Amount" is defined at page 14 in "Prospectus
Summary--Funding Period."
"Pre-Funding Account" is defined at page 4 in "Prospectus
Summary--Funding Period."
"Prepayable Instrument" is defined at page 105 in "Certain Federal
Income Tax Consequences--Taxation of Interest Income to
Securityholders--OID."
"Previously Issued Series" means the Series 1998-1 Variable Funding
Securities, the Series 1997-2 Asset Backed Certificates, the Series 1997-1
Asset Backed Certificates and the Series 1996-1 Asset Backed Certificates.
"Principal Account" is defined at page 70 in "Description of the
Offered Securities--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 72 in "Description
of the Offered Securities--Principal Funding Account."
"Principal Funding Account Balance" is defined at page 52 in
"Maturity Considerations."
"Principal Funding Account Investment Proceeds" is defined at page
72 in "Description of the Offered Securities--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 Series 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 64 in "Description of the
Offered Securities--Exchanges."
"Proprietary Modeling System" is defined at page 40 in "Direct
Merchants Bank's Credit Card Activities--New Account Underwriting--Credit
Scoring."
"Proprietary Score" is defined at page 40 in "Direct Merchants
Bank's Credit Card Activities--New Account Underwriting--Credit Scoring."
"Purchase Agreement" means that certain Amended and Restated
Receivables Purchase Agreement dated as of July 30, 1998 between Metris and
the Transferor, as such documents may be amended from time to time in
accordance with their terms.
"Purchase Agreements" means the Purchase Agreement and the Bank
Purchase Agreement.
"Purchase Termination Date" is defined at page 98 in "Description
of the Purchase Agreements--Purchase Termination Date."
"Qualified Institution" is defined at page 70 in "Description of
the Offered Securities--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 Securities 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.
"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 Securities, 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.
"Redirected Class B Principal Collections" is defined at page 78 in
"Description of the Offered Securities--Redirected Principal Collections."
"Redirected CTO Principal Collections" is defined at page 77 in
"Description of the Offered Securities--Redirected Principal Collections."
"Redirected Class D Principal Collections" is defined at page 77 in
"Description of the Offered Securities--Redirected Principal Collections."
"Redirected Principal Collections" is defined at page 78 in
"Description of the Offered Securities--Redirected Principal Collections."
"Reference Banks" means three major banks in the London interbank
market selected by the Servicer.
"Related Person" means an entity that is an affiliate of Metris,
any holder of an Investor Security, any provider of Enhancement, or any
person whose status would violate the conditions for a trustee contained in
Section (4)(i) of Rule 3a-7 under the Investment Company Act.
"Relevant UCC State" means each jurisdiction in which the filing of
a UCC financing statement is necessary to perfect the ownership interest
and security interest of the Transferor pursuant to the Purchase Agreement
or the ownership or security interest of the Trustee.
"Required Amount" is defined at page 83 in "Description of the
Offered Securities--Application of Collections--Payment of Fees, Interest
and Other Items."
"Required Reserve Account Amount" is defined at page 73 in
"Description of the Offered Securities--Accumulation Period Reserve
Account."
"Requirements of Law" means the certificate of incorporation or
articles of association and by-laws or other organizational or governing
documents of such Person, and any material law, treaty, rule or regulation
or determination of an arbitrator or Governmental Authority, in each case
applicable to or binding upon such Person or to which such Person is
subject.
"Reserve Account Funding Date" is defined at page 73 in
"Description of the Offered Securities--Accumulation Period Reserve
Account."
"Restart Date" is defined at page 68 in "Description of the Offered
Securities--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 securities.
"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 30 in "Risk
Factors-Transfer of the Receivables; Insolvency Risk Considerations."
"Securities" or "Series 1998-3 Securities" means, collectively, the
Class A Securities, the Class B Securities, the Collateralized Trust
Obligations and the Class D Securities.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Security Owners" is defined at page 3 in "Reports to
Securityholders."
"Securityholders" means the record holders of the Securities.
"Securityholders' Interest" means the interest in the assets of the
Trust allocated to the Securityholders.
"Series" means any series of securities issued by the Trust
pursuant to a Supplement, including the Series 1998-3 Securities.
"Series Default Amount" is defined at page 85 in "Description of
the Offered Securities--Defaulted Receivables; Dilution."
"Series 1996-1 Asset Backed Certificates" means those securities
issued by the Trust pursuant to the Series 1996-1 Supplement dated as of
April 23, 1996.
"Series 1997-1 Asset Backed Certificates" means those securities
issued by the Trust pursuant to the Series 1997-1 Supplement dated as of
May 8, 1997.
"Series 1997-2 Asset Backed Certificates" means those securities
issued by the Trust pursuant to the Series 1997-2 Supplement dated as of
_______, 1997.
"Series 1998-1 Variable Funding Securities" means those securities
issued by the Trust pursuant to the Series 1998-1 Supplement dated as of
July 30, 1998.
"Series 1998-2 Asset Backed Certificates" means those securities
issued by the Trust pursuant to the Series 1998-2 Supplement dated as of
September ___, 1998
"Series 1998-3" is defined at page 2.
"Series 1998-3 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 1998-3 Supplement" means the Supplement, dated as of the
Closing Date, among the Transferor, the Servicer and the Trustee relating
to the Series 1998-3 Securities.
"Service Transfer" is defined at page 91 in "Description of the
Offered Securities--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 91 in "Description of the
Offered Securities--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
Securityholders and any similar amount remaining for any other Series.
"SIPC" is defined at page 71 in "Description of the Offered
Securities--Trust Accounts."
"Special Tax Counsel" means Skadden, Arps, Slate, Meagher & Flom
LLP, counsel to the Transferor or such other counsel reasonably acceptable
to the Trustee.
"Spin Off" is defined on page 37 in "Metris Companies Inc."
"Standard & Poor's" means Standard & Poor's, a Division of The
McGraw-Hill Companies, Inc.
"Stated Class D Amount" is defined at page 76 in "Description of
the Offered Securities--Allocation Percentages."
"Supplement" means any Supplement to the Pooling and Servicing
Agreement.
"Supplemental Accounts" is defined at page 68 in "Description of
the Offered Securities--Addition of Trust Assets."
"Supplemental Security" is defined at page 65 in "Description of
the Offered Securities--Exchanges."
"Suppress File" is defined at page 38 in "Fingerhut Corporation."
"Tax Certificate" is defined at page B-1-3 in "Annex II."
"Tax Opinion" is defined at page 64 in "Description of the Offered
Securities--Exchanges."
"Telerate Page 3750" means the display page currently so designated
on the Dow Jones Telerate Service (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or
prices).
"Termination Date" means the ______ Distribution Date.
"Terms and Conditions" is defined at page 58 in "Description of the
Offered Securities--Book-Entry Registration."
"Transfer Agent and Registrar" is defined at page 59 in
"Description of the Offered Securities--Definitive Securities."
"Transfer Date" is defined at page 75 in "Description of the
Offered Securities--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 75 in "Description of
the Offered Securities--Allocation Percentages."
"Transferor Retained Class" means any class of Investor Securities
which is retained by the Transferor.
"Transferor Retained Finance Charge Collections" is defined at page
82 in "Description of the Offered Securities--Application of
Collections--Payment of Fees, Interest and Other Items."
"Transferred Account" means an Account with respect to which a new
credit account number has been issued by the applicable Credit Card
Originator under circumstances resulting from a lost or stolen credit card
and not requiring standard application and credit evaluation procedures
under the Credit and Collection Policy.
"Treasury Regulations" is defined at page 103 in "Certain Federal
Income Tax Consequences--General; Scope of Federal Income Tax Opinion."
"Trigger Event" is defined at page 89 in "Description of the
Offered Securities--Pay Out Events."
"Trust" means the Metris Master Trust.
"Trust Accounts" is defined at page 70 in "Description of the
Offered Securities--Trust Accounts."
"Trust Portfolio" is defined at page 48 in "The Receivables."
"Trustee" means The Bank of New York (Delaware), a Delaware banking
corporation.
"Trustee's Corporate Trust Office" means the Trustee's office
located at White Clay Center, Route 273, Newark, Delaware 19711.
"UCC" means the Uniform Commercial Code as amended from time to
time as in effect in the applicable jurisdiction.
"Underwriters" is defined at page 111 in "Underwriting."
"Underwriting Agreement" means the underwriting agreement dated
__________, 1998 among the Transferor, Metris and the Underwriters.
"U.S. Person" is defined at page B-1-3 in "Annex II."
"Utah Bank" is defined at page 38 in "Direct Merchants Credit Card
Bank, National Association."
"Variable Funding Securities" means a series of Securities, 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 1998-1
Supplement dated as of July 30, 1998 among the Transferor, the Servicer and
the Trustee relating to the Variable Funding Securities.
"Weighted Average Invested Amount" means with respect to any
Monthly Period the weighted average Adjusted Invested Amount based on the
Adjusted Invested Amount outstanding on each business day after giving
effect to all transactions on such business day from but excluding the
Default Recognition Date related to the preceding Monthly Period to and
including the Default Recognition Date with respect to such Monthly Period.
"Weighted Average Principal Receivables" means with respect to any
Monthly Period the weighted average sum of the total amount of Principal
Receivables and the amount on deposit in the Excess Funding Account on each
business day after giving effect to all transactions on such business day
from but excluding the Default Recognition Date related to the preceding
Monthly Period to and including the Default Recognition Date with respect
to such Monthly Period.
ANNEX I
OTHER SERIES
The table below sets forth the principal characteristics of the
Series 1996-1 Asset Backed Certificates, the Series 1997-1 Asset Backed
Certificates, the Series 1997-2 Asset Backed Certificates and the Series
1998-1 Variable Funding Securities, the only Series heretofore issued by
the Trust which remain outstanding. 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 Securities, a copy of the disclosure documents
for any previous publicly issued Series.
SERIES 1996-1
CLASS A CERTIFICATES
Initial Invested Amount.......................... $518,000,000
Interest 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
Interest 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
Interest 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 CERTIFICATES
Invested Amount.................................. $44,500,000
Interest Rate.................................... None
Annual Servicing Fee Percentage.................. Same as above for Class A
Certificates
Scheduled Series Termination Date................ Same as above for Class A
Certificates
SERIES 1997-1
CLASS A CERTIFICATES
Initial Invested Amount.......................... $616,250,000
Interest Rate.................................... 6.87%
Commencement of Accumulation Period.............. Last day of March 2001
Monthly Period or later
date as determined in
the Agreement
Annual Servicing Fee Percentage.................. 2.00%
Enhancement...................................... Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date................ October 2005 Distribution
Date
Series Issuance Date............................. May 8, 1997
CLASS B CERTIFICATES
Initial Invested Amount.......................... $106,250,000
Interest Rate.................................... 7.11%
Commencement of Accumulation Period.............. Last day of March 2001
Monthly Period or later
date as determined in
the Agreement
Annual Servicing Fee Percentage.................. Same as above for Class A
Certificates
Enhancement...................................... Subordination of Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date................ Same as above for Class A
Certificates
CLASS C CERTIFICATES
Initial Invested Amount.......................... $72,250,000
Interest Rate.................................... LIBOR + 0.850%
Commencement of Accumulation Period.............. Last day of March 2001
Monthly Period or later
date as determined in
the Agreement
Annual Servicing Fee Percentage.................. Same as above for Class A
Certificates
Enhancement...................................... Subordination of Class D
Certificates and Class C
Reserve Account
Scheduled Series Termination Date................ Same as above for Class A
Certificates
CLASS D CERTIFICATES
Invested Amount.................................. $55,250,000
Interest Rate.................................... None
Annual Servicing Fee Percentage.................. Same as above for Class A
Certificates
Scheduled Series Termination Date................ Same as above for Class A
Certificates
SERIES 1997-2
CLASS A CERTIFICATES
Initial Invested Amount.......................... $455,000,000
Interest Rate.................................... LIBOR + 0.20%
Commencement of Accumulation Period.............. Last day of October 2001
Monthly Period or later
date as determined in
the Agreement
Annual Servicing Fee Percentage.................. 2.00%
Enhancement...................................... Subordination of Class B
Certificates, Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date................ May 2006 Distribution Date
Series Issuance Date............................. November 20, 1997
CLASS B CERTIFICATES
Initial Invested Amount.......................... $101,500,000
Interest Rate.................................... LIBOR + 0.43%
Commencement of Accumulation Period.............. Last day of October 2001
Monthly Period or later
date as determined in
the Agreement
Annual Servicing Fee Percentage.................. Same as above for Class A
Certificates
Enhancement...................................... Subordination of Class C
Certificates and Class D
Certificates
Scheduled Series Termination Date................ Same as above for Class A
Certificates
CLASS C CERTIFICATES
Initial Invested Amount.......................... $98,000,000
Interests Rate................................... LIBOR + ____%
Commencement of Accumulation Period.............. Last day of October 2001
Monthly Period or later
date as determined in
the Agreement
Annual Servicing Fee Percentage.................. Same as above for Class A
Certificates
Enhancement...................................... Subordination of Class D
Certificates and Class C
Reserve Account
Scheduled Series Termination Date................ Same as above for Class A
Certificates
CLASS D CERTIFICATES
Invested Amount.................................. $55,250,000
Interest Rate.................................... None
Annual Servicing Fee Percentage.................. Same as above for Class A
Certificates
Scheduled Series Termination Date................ Same as above for Class A
Certificates
SERIES 1998-1
CLASS A SECURITIES
Invested Amount as of _____, 1998................ $
Expected Invested Amount as of Closing Date
(after application of proceeds)................. $
Maximum Permitted Invested Amount................ $600,000,000
Interest Rate.................................... A1/P1 Commercial Paper/
LIBOR + 0.75% Blended
Commencement of Amortization Period.............. _____________ (extendible)
Annual Servicing Fee Percentage.................. 2.00%
Enhancement...................................... Subordination of Class B
Securities,
Collateralized Trust
Obligations and Class D
Securities
Scheduled Series Termination Date................ _____________ (extendible)
Series Issuance Date............................. July 30, 1998
CLASS B SECURITIES
Initial Invested Amount.......................... $56,376,000
Interest Rate.................................... LIBOR + 0.45%
Annual Servicing Fee Percentage.................. Same as above for Class A
Securities
Enhancement...................................... Subordination of
Collateralized Trust
Obligations and Class D
Securities
Scheduled Series Termination Date................ Same as above for Class A
Securities
COLLATERALIZED TRUST OBLIGATIONS
Initial Invested Amount.......................... $96,645,000
Interest Rate.................................... LIBOR + 0.85%
Annual Servicing Fee Percentage.................. Same as above for Class A
Securities
Enhancement...................................... Subordination of Class D
Securities
Scheduled Series Termination Date................ Same as above for Class A
Securities
CLASS D SECURITIES
Invested Amount as of ___________, 1998.......... $
Expected Invested Amount as of Closing Date
(after reduction of Class A Invested Amount)... $
Maximum Permitted Invested Amount................
Interest Rate.................................... None
Annual Servicing Fee Percentage.................. Same as above for Class A
Securities
Scheduled Series Termination Date................ Same as above for Class A
Securities
SERIES 1998-2
CLASS A SECURITIES
Invested Amount as of _____, 1998................
Expected Invested Amount as of Closing Date
(after application of proceeds)................
Maximum Permitted Invested Amount................
Interest Rate....................................
Commencement of Amortization Period..............
Annual Servicing Fee Percentage..................
Enhancement......................................
Scheduled Series Termination Date................
Series Issuance Date.............................
CLASS B SECURITIES
Initial Invested Amount..........................
Interest Rate....................................
Annual Servicing Fee Percentage..................
Enhancement......................................
Scheduled Series Termination Date................
COLLATERALIZED TRUST OBLIGATIONS
Initial Invested Amount..........................
Interest Rate....................................
Annual Servicing Fee Percentage..................
Enhancement......................................
Scheduled Series Termination Date................
CLASS D SECURITIES
Invested Amount as of ___________, 1998..........
Expected Invested Amount as of Closing Date
(after reduction of Class A Invested Amount)...
Maximum Permitted Invested Amount................
Interest Rate....................................
Annual Servicing Fee Percentage..................
Scheduled Series Termination Date................
ANNEX II
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Metris Master Trust Asset Backed Trust Securities, Series 1998-3 (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 Securities 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 security issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary
market trading between Cedel Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in
same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC
Participant to the accounts of a Cedel Participant or a Euroclear
Participant, the purchaser will send instructions to Cedel or Euroclear
through a Cedel Participant or Euroclear Participant at least one business
day prior to settlement. Cedel or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the
settlement date, on the basis of actual days elapsed and a 360 day year.
Payment will then be made by the respective Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance
with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The Global Securities credit will appear the next
day (European time) and the cash debit will be back-valued to, and the
interest on the Global Securities will accrue from, the value date (which
would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Cedel or Euroclear cash debit will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing
lines of credit, as they would for any settlement occurring within Cedel or
Euroclear. Under this approach, they may take on credit exposure to Cedel
or Euroclear until the Global Securities are credited to their accounts one
day later.
As an alternative, if Cedel or Euroclear has extended a line of
credit to them, Cedel Participants or Euroclear Participants can elect not
to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Cedel Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities
were credited to their accounts. However, interest on the Global Securities
would accrue from the value date. Therefore, in many cases the investment
income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Cedel Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business
hours, DTC Participants can employ their usual procedures for sending
Global Securities to the respective Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available
to the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between
two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in
which Global Securities are to be transferred by the respective clearing
system, through the respective Depositary, to a DTC Participant. The seller
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. In
these cases, Cedel or Euroclear will instruct their respective Depositary,
as appropriate, to deliver the bonds to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment date to and excluding
the settlement date on the basis of actual days elapsed and a 360 day year.
The payment will then be reflected in the account of the Cedel Participant
or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account
would be back-valued to the value date (which would be the preceding day,
when settlement occurred in New York). Should the Cedel Participant or
Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed
on the intended value date (i.e., the trade fails), receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until
the purchase side of the day trade is reflected in their Cedel or
Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their
Cedel or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Cedel Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30 percent U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Securities 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 Security 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 Security). 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 Security Owner or such Security 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 Security Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
Security 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, any state thereof or the District of Columbia
(unless, in the case of a partnership, Treasury Regulations provide
otherwise), (iii) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source or (iv) a
trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States Persons who
have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
Regulations, certain trusts in existence on August 20, 1996, and treated as
U.S. Persons under the Code, and applicable Treasury Regulations thereunder
prior to such date, that elect to continue to be treated as U.S. Persons
under the Code or applicable Treasury Regulations thereunder will also be
considered a U.S. Person. 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.
PRINCIPAL OFFICE OF
METRIS RECEIVABLES, INC.
600 South Highway 169
Suite 300
St. Louis Park, Minnesota 55426
SERVICER
for the Trust
Direct Merchants Credit Card Bank, National Association
6909 East Greenway Parkway
Scottsdale, Arizona 85254
TRUSTEE
The Bank of New York (Delaware)
White Clay Center
route 273
Newark, Delaware 19711
PAYING AGENTS AND TRANSFER AGENTS
The Bank of New York
White Clay Center
ROUTE 273
Newark, Delaware 19711
LISTING AGENT
LEGAL ADVISOR TO THE TRANSFEROR
as to United States Law
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
LEGAL ADVISOR TO THE UNDERWRITERS
as to United States Law
Brown & Wood LLP
One World Trade Center
New York, NY 10048-0557
INDEPENDENT ACCOUNTANTS TO THE TRANSFEROR
KPMG Peat Marwick LLP
4200 Norwest Center
90 South 7th Street
Minneapolis, Minnesota 55402-3900
================================== ====================================
NO DEALER, SALESMAN OR OTHER METRIS MASTER TRUST
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 $_______FLOATING RATE
THIS PROSPECTUS AND, IF GIVEN OR ASSET BACKED
MADE, SUCH INFORMATION OR SECURITIES,
REPRESENTATIONS MUST NOT BE RELIED SERIES 1998-3, CLASS A
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 $_______FLOATING RATE
CIRCUMSTANCES CREATE AN IMPLICATION ASSET BACKED
THAT THERE HAS BEEN NO CHANGE IN SECURITIES,
THE AFFAIRS OF METRIS COMPANIES SERIES 1998-3, CLASS B
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 METRIS
IN ANY STATE IN WHICH SUCH OFFER OR RECEIVABLES, INC.
SOLICITATION IS NOT AUTHORIZED OR TRANSFEROR
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. DIRECT MERCHANTS CREDIT
CARD BANK, NATIONAL
---------------------- ASSOCIATION
SERVICER
TABLE OF CONTENTS
Page
----
Reports to Securityholders........3
Available Information.............3
Incorporation of Certain
Documents By Reference..........3 PROSPECTUS
Other Information.................4
Prospectus Summary................5
Risk Factors.....................29
The Trust........................37
Metris Companies Inc.............37
The Transferor...................38 UNDERWRITERS OF THE
Direct Merchants Credit CLASS A SECURITIES
Card Bank, National
Association....................38
Fingerhut Corporation............38
Direct Merchants Bank's
Credit Card Activities.........39
The Receivables..................48 UNDERWRITERS OF THE
Maturity Considerations..........52 CLASS B SECURITIES
Use of Proceeds..................54
Description of the
Offered Securities.............54
Description of the
Purchase Agreements............95
Certain Legal Aspects
of the Receivables.............98
Certain Federal Income
Tax Consequences..............102 , 1998
Certain State Tax
Consequences..................108
Employee Benefit Plan
Considerations................109
Underwriting....................111
Legal Matters...................112
Glossary of Terms...............113
=================================== ====================================
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Registration Fee.................................................$295
Printing and Engraving........................................... *
Trustee's Fees................................................... *
Legal Fees and Expenses.......................................... *
Blue Sky Fees and Expenses....................................... *
Accountants' Fees and Expenses................................... *
Rating Agency Fees............................................... *
Miscellaneous Fees............................................... *
----
Total....................................................$
====
- ----------
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's certificate of incorporation and by-laws provide
for the indemnification of the directors, officers, employees, and agents
of the Registrant to the full extent that may be permitted by Delaware law
from time to time. Certain provisions of the Registrant's certificate of
incorporation protect the Registrant's directors against personal liability
for monetary damages resulting from breaches of their fiduciary duty of
care; however, the Registrant's directors remain liable for breaches of
their duty of loyalty to the Registrant, as well as for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, transactions from which a director derives improper
personal benefit and liability under section 174 of the Delaware General
Corporation Law, which makes directors personally liable for unlawful
dividends or unlawful stock repurchases or redemptions in certain
circumstances and expressly sets forth a negligence standard with respect
to such liability.
Under Section 145 of the Delaware General Corporation Law,
directors, officers, employees, and other individuals may be indemnified
against expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative, or investigative
(other than a "derivative action" by or in the right of the corporation) if
they acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful. A similar standard of care is applicable in the
case of a derivative action, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with defense or
settlement of such an action and Delaware law requires court approval
before there can be any indemnification of expenses where the person
seeking indemnification has been found liable to the corporation.
The Registrant's parent corporation currently maintains a policy
insuring, subject to certain exceptions, its directors and officers and the
directors and officers of its subsidiaries against liabilities which may be
incurred by such persons acting in such capacities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
- --------
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of Incorporation of Metris
Receivables, Inc. (incorporated herein by reference to
Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc. (incorporated herein by
reference to Registration Statement No. 33-99514).
4(a) --Amended and Restated Pooling and Servicing Agreement, dated
as of July 30, 1998 among the Transferor, the Servicer and the
Trustee.
4(b) --Form of Series 1998-3 Supplement.*
4(c) --Amended and Restated Bank Receivables Purchase Agreement
dated as of July 30, 1998 between Direct Merchants Bank and
Metris.
4(d) --Amended and Restated Receivables Purchase Agreement dated as
of July 30, 1988 between Metris and the Transferor.
5 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to tax matters.*
24 --Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(Contained in Exhibits 5 and 8).*
25 --Power of Attorney (contained on the signature page).
- ----------
* To be filed by amendment.
b. Financial Statements
Inapplicable
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement securities in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 14 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(d) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(e) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Trust's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the state of Minnesota, city of
St. Louis Park, on September , 1998.
METRIS RECEIVABLES, INC.
By: /s/ Robert W. Oberrender
----------------------------
Robert W. Oberrender
President
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint both Robert W. Oberrender and Paul T. Runice
his or her true and lawful attorney-in-fact and agent, each with full power
of substitution, for him or her and on his or her behalf to sign, execute
and file this Registration Statement and any or all amendments (including,
without limitation, post-effective amendments and any amendment or
amendments increasing the amount of securities for which registration is
being sought) to this Registration Statement, with all exhibits and any and
all documents required to be filed with respect thereto, with the
Securities and Exchange Commission or any regulatory authority, granting
unto such attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that such attorney-in-fact and agents
may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following
persons in the capacities indicated on September , 1998.
SIGNATURE TITLE
- --------- -----
/s/ Robert W. Oberrender President and (Principal Executive Officer)
- ------------------------ Director
Robert W. Oberrender
/s/ Paul T. Runice Treasurer and (Principal Financial Officer)
- ------------------------ Director
Paul T. Runice
/s/ Jean C. Benson Controller (Principal Accounting Officer)
- ------------------------
Jean C. Benson
/s/ Michael P. Sherman Director
- ------------------------
Michael P. Sherman
/s/ Ruth K. Lavelle Director
- ------------------------
Ruth K. Lavelle
/s/ James B. O' Neill Director
- ------------------------
James B. O'Neill
EXHIBIT INDEX
EXHIBIT
NO.
- -------
1 --Form of Underwriting Agreement.*
3(a) --Amended and Restated Certificate of Incorporation of Metris
Receivables, Inc. (incorporated herein by reference to
Registration Statement No. 333-23045).
3(b) --By-laws of Metris Receivables, Inc. (incorporated herein by
reference to Registration Statement No. 33-99514).
4(a) --Amended and Restated Pooling and Servicing Agreement
(incorporated herein by reference to Registration Statement
No. 33-99514).
4(b) --Form of Series 1998-3 Supplement.*
4(c) --Amended and Restated Bank Receivables Purchase Agreement
dated as of July 30, 1998 between Direct Merchants Bank and
Metris.
4(d) --Amended and Restated Receivables Purchase Agreement dated
as of July 30, 1998 between Metris and the Transferor.
5 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to legality.*
8 --Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to tax matters.*
24 --Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(Contained in Exhibits 5 and 8).*
25 --Power of Attorney (contained on the signature page).
* To be filed by Amendment.
