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Filed Pursuant to Rule 424B4
Registration No. 333-63931
PROSPECTUS
METRIS MASTER TRUST
$500,000,000 FLOATING RATE ASSET BACKED SECURITIES, SERIES 1998-3, CLASS A
METRIS RECEIVABLES, INC.
Transferor
DIRECT MERCHANTS CREDIT CARD BANK,
National Association Servicer
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Each of the Floating Rate Asset Backed Securities, Series 1998-3, Class A (the
"Class A Securities" or 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" or "Direct Merchants Bank") and The Bank of New York
(Delaware), as trustee (the "Trustee"). The property of the Trust includes a
portfolio of receivables (the "Receivables") generated or acquired from time to
time in the ordinary course of business in a portfolio of
MasterCard-Registered Trademark- and VISA-Registered Trademark- or other
revolving consumer credit card accounts (the "Accounts"), all monies due or to
become due in payment of such Receivables, the benefit of funds on deposit in
certain accounts and the benefits of a Financial Guaranty Insurance Policy (the
"Policy") issued by MBIA Insurance Corporation ("MBIA" or the "Insurer") and
interest rate caps (as described herein). Certain capitalized terms used herein
are defined in the "Glossary of Terms" beginning on page 108 herein.
(CONTINUED ON NEXT PAGE)
[LOGO]
POTENTIAL INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH IN "RISK FACTORS" BEGINNING ON PAGE 23 HEREIN.
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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.
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PROCEEDS TO THE
PRICE TO PUBLIC(1) UNDERWRITING DISCOUNT TRANSFEROR(1)(2)
<S> <C> <C> <C>
Per Class A Security 100% .30% 99.70%
Total $500,000,000 $1,500,000 $498,500,000
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(1) Plus accrued interest, if any, from December 4, 1998.
(2) Before deduction of expenses estimated to be $710,000.
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 December 4, 1998 through the facilities of The
Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear System.
CHASE SECURITIES INC.
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
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The date of this Prospectus is November 24, 1998.
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(CONTINUED FROM PREVIOUS PAGE)
Concurrently with the issuance of the Class A Securities, the Trust will issue
the Asset Backed Securities, Series 1998-3, Class B (the "Class B Securities"
and, together with the Class A Securities, the "Securities" or the "Series
1998-3 Securities"), which will initially be retained by the Transferor. The
Securities constitute "Series 1998-3." The Class B Securities will be
subordinated to the Class A 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 Class A
Securities are being offered hereby.
Interest will accrue on the Class A Securities from December 4, 1998 through
January 19, 1999 at the rate of 0.65% per annum above the arithmetic mean of the
London interbank offered quotations for two-month United States dollar deposits,
as determined by the Trustee on December 2, 1998, and with respect to each
Interest Accrual Period (as defined herein) thereafter, at a rate of 0.65% per
annum above the arithmetic mean of the London Interbank offered quotations for
one-month United States dollar deposits as determined by the Trustee on the
related LIBOR Determination Date (as defined herein). Interest with respect to
the Securities will be paid on January 20, 1999 and on the 20th day of each
month thereafter (or, if any such 20th day is not a business day, the next
succeeding business day) (each, a "Distribution Date"). Principal with respect
to the Class A Securities is scheduled to be distributed on the May 2002
Distribution Date (the "Expected Final Payment Date"), but may be distributed
earlier or later under certain circumstances described herein. See "Maturity
Considerations" and "Description of the Offered Securities--Pay Out Events."
The Securities are not guaranteed by the Transferor, Metris Companies, Inc., the
Servicer or any affiliate thereof. However, the Class A Securities will be
guaranteed as to the payment of Guaranteed Distributions (as defined herein) on
each Distribution Date pursuant to the Policy to be issued by the Insurer.
Application has been made to list the Class A Securities on the Luxembourg Stock
Exchange.
There currently is no secondary market for the Class A Securities, and there is
no assurance that one will develop or, if one does develop, that it will
continue until the Class A 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."
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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 Class A 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 Class A 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.
The consolidated financial statements of MBIA, a wholly owned subsidiary of
MBIA Inc., and its subsidiaries as of December 31, 1997 and December 31, 1996
and for each of the three years in the period ended December 31, 1997, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1997 and
the consolidated financial statements of MBIA and its subsidiaries as of
September 30, 1998 and for the nine month periods ending September 30, 1998 and
September 30, 1997 included in the Quarterly Report on Form 10-Q of MBIA Inc.
for the period ending September 30, 1998 are hereby incorporated by reference
into this Prospectus, as part of the Transferor's Registration Statement on Form
S-3, and shall be deemed to be a part hereof.
All financial statements of MBIA and its subsidiaries included in documents
filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Prospectus
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and prior to the termination of the offering of the Offered Securities shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the respective dates of filing such documents.
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 filed by the Transferor, on behalf of the
Trust and 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 Class A
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."
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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 108
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.
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Offered Securities................ $500,000,000 aggregate principal amount of Class A
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.
Other Securities Issued........... $49,450,550 aggregate principal amount of Class B
Securities, which will initially be retained by the
Transferor, are being issued concurrently with the
Class A Securities. Concurrently with Series 1998-3,
the Trust will issue Series 1998-2 Asset Backed
Securities comprised of $500,000,000 aggregate
principal amount of Floating Rate Asset Backed
Securities, Series 1998-2, Class A and $49,450,550
aggregate principal amount of Asset Backed Securities,
Series 1998-2, Class B (collectively, the "Series
1998-2"). The Trust has previously issued five other
Series that will remain outstanding after the issuance
of the Securities. 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 Class A 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."
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Credit Card Originator............ The Credit Card Originator is Direct Merchants Bank,
including its predecessor in interest, Utah Bank, and its
successors or assigns under the Bank Purchase Agreement
or any other transferee of Accounts from Direct
Merchants Bank. In addition, the Credit Card Originator
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.
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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-Registered Trademark- and
VISA-Registered Trademark-* accounts and may arise
under other revolving credit 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 draws on the Policy 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
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* MasterCard-Registered Trademark- and VISA-Registered Trademark- are federally
registered servicemarks of MasterCard International Inc. and VISA USA
Incorporated, respectively.
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to the securityholders of such Series are paid to the
holder of the Exchangeable Transferor Security or 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."
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 with respect to the Accounts), (iii) the
benefits of a Financial Guaranty Insurance Policy (the
"Policy") issued by the Insurer, (iv) all right, title,
and interest of the Transferor in, to, and under the
Purchase Agreement and the Bank Purchase Agreement, (v)
the benefit of funds on deposit in certain bank
accounts maintained for the benefit of securityholders
of each Series, including the Excess Funding Account,
(vi) the benefit of funds on deposit in certain bank
accounts maintained for the benefit of the
Securityholders, including the Principal Funding
Account, (vii) Recoveries, and (viii) proceeds of the
foregoing. See "Description of the Offered
Securities--Subordination." In addition, the Transferor
is obligated to maintain interest rate caps with a
counterparty or counterparties meeting certain credit
quality standards acceptable to the Rating Agencies
that provide, in the aggregate, that the initial
notional amount thereof on each subsequent settlement
date will be at least equal to the outstanding
principal balance of the Class A 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.
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The Insurer....................... MBIA Insurance Corporation ("MBIA") is a New York
domiciled insurance company engaged exclusively in the
business of writing financial guaranty insurance,
principally in respect of securities offered in
domestic and foreign markets. See "Description of MBIA"
in this Prospectus.
Receivables....................... The Receivables consist of amounts owing on
MasterCard-Registered Trademark- credit cards and
VISA-Registered Trademark- credit cards and may include
amounts owing on other revolving credit cards (see
"Description of the Offered 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
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
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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 change from time
to time. See "Description of the Offered
Securities--General," "--Previously Issued Series" and
"--Excess Funding Account."
The Class A Securities will represent the right to
receive payments of interest on the 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, the
Class B Invested Amount is reduced to zero and the
Insurer fails to make payments required under the
Policy). 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 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 B Invested Amount. The Class B Securities are not
being offered hereby.
The aggregate amount of Receivables in the Accounts as of
September 30, 1998 was $3,309,336,940.26 comprised of
$148,659,728.59 of Finance Charge Receivables and
$3,160,677,211.67 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 and (ii) an amount equal to the
initial principal balance of the Class B Securities.
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
the Amortization Period. During the Accumulation
Period, the Class B Invested Amount may be reduced and
the amount of the Transferor Interest
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correspondingly increased concurrently with payments of
principal for the benefit of the Class A Securities to
an amount equal to the Stated Class B Amount. See
"Description of the Offered Securities--Principal
Payments."
The Class A Securityholders' Interest and the Class B
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 and the Class B
Securityholders' Interest based on the Class A Floating
Percentage and the Class B 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 and the Class B
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 (other than any Shared
Principal Collections used to make payments to other
Series, Redirected Principal Collections, if any, and
funds deposited in the Excess Funding Account). During
the Amortization Period, Principal Collections will
generally be applied on each business day to the Class
A Securityholders' Interest based on the Fixed/Floating
Percentage. See "Description of the Offered
Securities-- Allocation Percentages."
Interest.......................... Each Class A Security represents the right to receive
interest accruing from the Closing Date at the rate equal
to 0.65% per annum above LIBOR (calculated as described
under "Description of the Offered Securities--Interest
Payments") as determined on December 2, 1998 for the
period from the Closing Date through January 19, 1999
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").
Interest on the Class A Securities will be payable on
January 20, 1999 and on the 20th day of each month
thereafter or, if such day is not a business day, on
the next succeeding business day (each, a "Distribution
Date"), in an amount equal to 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
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Date (or in the case of the first Distribution Date,
the initial principal amount of Class A 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 December 31, 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."
If on any Distribution Date through the end of the
Accumulation Period, there is an Interest and Servicing
Fee Deficiency with respect to the applicable Monthly
Period, then the Trustee will demand payment on the
Policy in an amount equal to such deficiency.
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 January 2001
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 March
2002 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, if
any, and except for funds deposited in the Excess
Funding Account) 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 January 2001 Monthly Period.
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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 in full of the
Invested Amount 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, 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 Class A Adjusted
Invested Amount will be deposited monthly in the
Principal Funding Account until the Principal Funding
Account Balance is equal to the Class A 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 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."
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.
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 and then to the
Class B Securityholders 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
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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 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 until the Class B 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
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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
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."
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Distribution of Available Series
Finance Charge Collections
Allocable to Securityholders.... Available Series Finance Charge Collections will generally 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 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;
(iii) 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;
(iv) 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;
(v) 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;
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(vi) an amount equal to the portion of the monthly
premium with respect to the Policy due on the
Distribution Date in the next succeeding Monthly
Period that has not been previously deposited in
the Interest Funding Account plus any prior monthly
premium with respect to the Policy that was due but
not previously deposited in the Interest Funding
Account will be deposited in the Interest Funding
Account for distribution on the next succeeding
Distribution Date to the Insurer;
(vii) an amount equal to the aggregate unreimbursed
claims on the Policy will be deposited in the
Interest Funding Account for distribution on the
next succeeding Distribution Date to the Insurer;
(viii) an amount equal to the excess, if any, of the
amount required to be retained in the Spread
Account established for the benefit of the Insurer
over the amount on deposit in the Spread Account
will be deposited in the Spread Account;
(ix) an amount equal to any other amounts required to be
paid to the Insurer pursuant to the Insurance
Agreement that have not previously been deposited
in the Interest Funding Account will be deposited
in the Interest Funding Account for distribution on
the next succeeding Distribution Date to the
Insurer;
(x) an amount equal to the unreimbursed amount by which
the Class B Invested Amount has been reduced as a
result of Class B Charge-Offs, if any, and
Redirected Principal Collections, if any, will be
applied to reimburse such amounts and (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) 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;
(xii) 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
(xiii) the remainder will be treated as Excess Finance
Charge Collections or Transferor Retained Finance
Charge Collections, as applicable. Transferor
Retained Finance Charge Collections and certain
other amounts will be applied on each Default
Recognition Date to the payment of the Series
Default Amount in accordance with clause (iii)
above. See "Description of the Offered Securities--
Application of Collections."
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On each Transfer Date all investment income (net of
investment losses and expenses) on funds on deposit in
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 Shortfalls from
Transferor Finance Charge
Collections..................... To the extent that any amounts are on deposit in the
Excess 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 (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 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 sum of the Negative Carry
Amount for such business day and, following a claim for
payment on the Policy the unreimbursed claims on the
Policy that have not been deposited in the Interest
Funding Account prior to 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 Class A 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
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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 (iii) and (iv) of
"Distribution of Available Series Finance Charge
Collections Allocable to Securityholders" above, and
the amount of (w) Transferor Finance Charge Col-
lections, (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 B 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 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 such purpose as described
in clause (x) of "Distribution of Available Series
Finance Charge Collections Allocable to
Securityholders."
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In the event that the Class B Invested Amount is reduced
to zero, the Trustee will make a claim for payment on
the Policy in an amount equal to 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. In the event that the Insurer
fails to deliver payment of the Potential Class A
Charge-Off Amount, the Class A Invested Amount will be
reduced by the amount of such deficiency. 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 (v) of "Distribution of Available Series
Finance Charge Collections Allocable to
Securityholders." See "Description of the Offered
Securities--Investor Charge-Offs."
The Policy........................ On or before the Closing Date, the Policy will be issued
by MBIA pursuant to the provisions of the Insurance and
Reimbursement Agreement (the "Insurance Agreement") to
be dated as of the Closing Date, among MBIA, the
Trustee, the Servicer and the Transferor.
If on any Distribution Date the Available Series Finance
Charge Collections, Transferor Finance Charge
Collections, Excess Finance Charge Collections,
Redirected Principal Collections, Principal Funding
Account Investment Proceeds and the amounts withdrawn
from the Accumulation Period Reserve Account, if any,
each with respect to the Monthly Period relating to
such Distribution Date are insufficient to pay the
Class A Monthly Interest and the Monthly Servicing Fee,
then the Trustee will make a claim for payment on the
Policy in an amount equal to such deficiency (the
"Interest and Servicing Fee Deficiency").
Furthermore, on any Distribution Date with respect to
which a Potential Class A Charge-Off has occurred, the
Trustee will make a claim for payment on the Policy in
an amount equal to the amount of such Potential Class A
Charge-Off (such amount, together with the Interest and
Servicing Fee Deficiency, the "Policy Claim Amount"),
which amount will be applied as described in clause (v)
of "Distributions of Available Series Finance Charge
Collections Allocable to Securityholders."
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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 evidencing 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 would equal or exceed the Minimum Retained
Interest, and (vi) the existing Exchangeable Trans-
feror Security and, if applicable, the existing
securities representing the Series to be exchanged. See
"Description of the Offered Securities--Exchanges."
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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, if applicable, the Class B
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 Securi-
tyholders 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 Class B Securities will be subordinated to fund
payments of principal and interest on the Class A
Securities. See "Description of the Offered
Securities--Subordination," "--Redirection of Cash
Flows" and "--Redirected Principal Collections." If on
any business day there is a positive Class A Required
Amount, certain Principal Collections allocated to the
Class B Securities for such business day will be used
to fund the Class A Required Amount and the Class B
Invested Amount 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 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 reim-
bursed, the amount of principal distributable to the
Class B Securityholders 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. During the Accumulation
Period, the Class B Invested Amount will be reduced
concurrently with deposits to the Principal Funding
Account for the benefit of the Offered Securities to an
amount equal to the Stated Class B Amount. See
"Description of the Offered Securities--Subordination,"
"--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
outstanding principal balance of the Class A
Securities, which amount shall be invested in Cash
Equivalents and (y) in the Accumulation
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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
Transferor 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 B Invested Amount will be reduced
to zero. See "Description of the Offered
Securities--Defeasance."
Optional Repurchase............... The Class A Invested Amount of the Class A Securities
will be subject to optional repurchase by the Transferor
on any Distribution Date if on such Distribution Date
the Class A Invested Amount would be reduced to an
amount less than or equal to 10 percent of the highest
Class A Invested Amount since the Closing Date, if
certain conditions set forth in the Pooling and
Servicing Agreement are met, including that all amounts
due and owing to the Insurer and unreimbursed draws
under the Policy, together with interest thereon, have
been paid. The repurchase price will be equal to the
Class A Invested Amount 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 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 will be characterized as debt for federal
income tax purposes. Under the Pooling and Servicing
Agreement, the Transferor, the Servicer and the Class A
Securityholders agree to treat the Class A 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.............. The Class A Securities may not be acquired by any
employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), by
any individual retirement account or by certain other
employee benefit accounts.
The Series 1998-3 Supplement and each Class A Security
will provide that by accepting and holding a Class A
Security, each Class A Securityholder shall 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 Internal Revenue Code of 1986, as
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amended, (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 by reason of a plan's investment in
the entity or (v) a person investing plan assets of any
such plan (including without limitation, for purposes
of clause (iv) and this clause (v), as applicable, an
insurance company general account, but excluding any
entity registered under the Investment Company Act of
1940, as amended). See "Employee Benefit Plan
Considerations."
Class A Securities Rating......... 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.
Listing........................... Application has been made to list the Class A Securities
on the Luxembourg Stock Exchange.
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RECENT DEVELOPMENTS
On November 13, 1998, Metris entered into agreements with the Thomas H. Lee
Company (the "Lee Company") to make a total investment of $300 million in
Metris. The Lee Company has agreed to purchase 805,369 shares of Series C
Perpetual Convertible Stock (the "Series C Preferred"). Assuming conversion of
the Series C Preferred into common stock, the Lee Company would initially own
approximately 28.7% of Metris. Metris' Board of Directors will be expanded to a
total of 11 members and the Series C Preferred will entitle the holders to elect
four members. Issuance of the Series C Preferred is subject to a number of
conditions including but not limited to approval by the Office of the
Comptroller of the Currency and the shareholders of Metris.
In order to provide Metris funding for the PNC portfolio acquisition as well
as for general corporate purposes prior to regulatory and shareholder approval
of the Series C Preferred, the Lee Company has agreed to purchase $200 million
of Series B Perpetual Preferred Stock (the "Series B Preferred") and $100
million of Senior Notes due 2006 (the "Senior Notes"). Metris will also issue
the Lee Company warrants (the "Warrants") to purchase 3.75 million shares of
Metris common stock. Upon issuance of the Series B Preferred, Metris' Board of
Directors will be expanded from 7 to 9 members. Metris has agreed to nominate
two Lee Company representatives to fill these seats. Upon regulatory and
shareholder approval of the Series C Preferred issuance, the Series B Preferred
and the Senior Notes will automatically convert into Series C Preferred and the
Warrants will be cancelled. In the event that regulatory or shareholder approval
is not obtained, the Series B Preferred, the Senior Notes and the Warrants will
remain outstanding and the Series B Preferred dividend rate and the Senior Notes
interest rate will both increase. Metris currently expects to consummate the
initial investment in December 1998. If Metris is unable to obtain this
investment, it may not be able to fund the PNC portfolio acquisition and there
could be a material adverse impact on Metris' operations, financial condition
and prospects.
RISK FACTORS
LIMITED LIQUIDITY
There is currently no market for the Class A Securities. Each Underwriter
intends to make a market in the Class A 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
Class A 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 September 30, 1998 approximately 24.1% of the
Accounts in the Trust Portfolio had been originated within the last 12 months
and approximately 56.6% 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."
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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 and claims on the Policy 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
Class A Securities not be paid in full on a timely basis, Class A
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 or any affiliates
thereof to satisfy their claims.
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. So long as the
Insurer has not defaulted on its obligations under the Policy, the Insurer will
be entitled to exercise all voting rights of the Securityholders without the
consent of the Class A Securityholders and the Class A Securityholders may
exercise such rights only with the prior written consent of the Insurer. In
determining whether the required percentage of Securityholders has given its
approval or consent, except as otherwise specified, the Class A Securityholders
will be treated as a single Series. 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.
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
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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 B 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
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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 and will thereafter be
used to pay amounts due to the Class B 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 further regulate the consumer 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
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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 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 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 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 is based on LIBOR. If there is a decline in
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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 the Class A
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
The Class A 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 Class A 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 Class A
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 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
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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.
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. The
rating assigned to the Class A Securities by a Rating
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Agency will reflect such Rating Agency's assessment of the likelihood that the
Class A Securityholders 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
Class A Securities (including in the Excess Funding Account, if any) and the
subordination of the Class B Securities for the benefit of the Class A
Securities and the claims-paying ability of MBIA. Any reduction in MBIA's
ratings or claims-paying ability ratings may cause a reduction in the rating of
the Class A Securities. Any rating of the Class A Securities will not address
the possibility of the occurrence of a Pay Out Event with respect to the Class A
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 Class A Securities will be paid by the Expected Final
Payment Date. The Class B Securities will not be rated. The ratings are not a
recommendation to purchase, hold, or sell the Class A Securities 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 the Class A Securities
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 Class A 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 Class A Securities will nonetheless
issue a rating for the Class A Securities, and, if so, what such rating would
be. A rating assigned to the Class A 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.
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" or the "Bank").
Metris' customers and prospects include existing customers of a prior 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 $40.6 million for the first
nine 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. Metris
became a publicly held company in October 1996 after completing an initial
public offering. Until September 25, 1998, Metris was an indirect subsidiary of
Fingerhut Companies, Inc. ("FCI"). Prior to the initial public offering, Metris'
business was operated as a division of FCI. On September 25, 1998, FCI
distributed its shares in Metris to FCI's shareholders in a tax free spin off
(the "Spin Off"). Metris' principal subsidiaries are Direct
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Merchants Bank, Metris Direct, Inc. ("Metris Direct"), Metris Funding Co.,
Metris Receivables, Inc. and Metris Direct Services, Inc.
On November 13, 1998 Metris entered into agreements with the Lee Company to
make a total investment of $300 million in Metris. The Lee Company has agreed to
purchase 805,369 shares of the Series C Preferred. Assuming conversion of the
Series C Preferred into common stock, the Lee Company would initially own
approximately 28.7% of Metris. Metris' Board of Directors will be expanded to a
total of 11 members and the Series C Preferred will entitle the holders to elect
four members. Issuance of the Series C Preferred is subject to a number of
conditions including but not limited to approval by the Office of the
Comptroller of the Currency and the shareholder's of Metris approval.
In order to provide Metris funding for the PNC portfolio acquisition as well
as for general corporate purposes prior to regulatory and shareholder approval
of the Series C Preferred, the Lee Company has agreed to purchase $200 million
of the Series B Preferred and $100 million of Senior Notes. Metris will also
issue Warrants to purchase 3.75 million shares of Metris common stock. Upon
issuance of the Series B Preferred, Metris' Board of Directors will be expanded
from 7 to 9 members. Metris has agreed to nominate two Lee Company
representatives to fill these seats. Upon regulatory and shareholder approval of
the Series C Preferred issuance, the Series B Preferred and the Senior Notes
will automatically convert into Series C Preferred and the Warrants will be
cancelled. In the event that regulatory or shareholder approval is not obtained,
the Series B Preferred, the Senior Notes and the Warrants will remain
outstanding and the Series B Preferred dividend rate and the Senior Notes
interest rate will both increase. Metris currently expects to consummate the
initial investment in December 1998. If Metris is unable to obtain this
investment, it may not be able to fund the PNC portfolio acquisition and there
could be a material adverse impact on Metris' operations, financial condition
and prospects.
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, but
as a cautionary measure Metris has begun testing such internal systems for Year
2000 compliance. In addition, Metris has created a project team to identify,
address, and monitor internal systems and vendor issues related to Year 2000,
consistent with recommendations and guidelines set forth by the Office of the
Comptroller of the Currency and the Federal Financial Institutions Examination
Council. 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"). The project team has been working with its
material vendors, including FCI and FDR, to determine the status of each
vendor's plans for becoming Year 2000 compliant. The project team is striving to
obtain test results showing Year 2000 compliance by material vendors in the
first quarter of 1999 and has developed high level contingency plans to address
non-compliance by its material vendors, which may include replacing such
vendors. 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.
CERTAIN LITIGATION
Metris has developed and implemented compliance functions to monitor its
operations to ensure that it 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.
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In October 1998, two complaints were filed in the United States District
Court for the District of Minnesota against Metris, FCI and certain officers and
directors of each company. The complaints seek damages in unascertained amounts
and purport to be class actions on behalf of all persons who acquired stock of
Metris during a specified time period. The complaints generally allege that
Metris issued a series of false and misleading statements concerning the
financial position of Metris in violation of federal securities laws.
Specifically, the complaints claim that Metris prematurely recognized revenue
and improperly recognized expenses regarding its fee-based services. Although
the complaints have been filed, to date, they have not been served on Metris. In
the event that the complaints are served, Metris believes that it has numerous
substantive legal defenses to these claims and is prepared to vigorously defend
the cases. Because Metris is unable to estimate the damages at this time, there
can be no assurance that defense or resolution of these matters will not have a
material adverse effect on Metris's financial position.
Another action, 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.
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.
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DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL ASSOCIATION
Direct Merchants 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.
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DIRECT MERCHANTS BANK'S CREDIT CARD ACTIVITIES
GENERAL
The Receivables conveyed to the Trust have been and will be generated from
transactions made by holders of co-branded and other
MasterCard-Registered Trademark- credit card and VISA-Registered Trademark-
credit card accounts and, 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 September 30, 1998, Direct
Merchants Bank had approximately 2.5 million credit card accounts and
approximately $4.2 billion in managed loans; Fingerhut Customers represented
approximately 39% 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.
On September 8, 1998, Direct Merchants Bank announced that it had entered
into a definitive agreement with PNC National Bank ("PNC") under which Direct
Merchants Bank will acquire a portion of PNC's consumer credit card portfolio.
The credit card portfolio has approximately 518,000 accounts and approximately
$1 billion in receivables, as of the announcement date. The sale is expected to
close in the 4th quarter of 1998. The contemplated arrangements described herein
are subject to the negotiation and execution of definitive agreements and the
fulfillment of any business conditions contained therein. Accordingly, no
assurance can be given as to whether or to what extent such arrangements will be
consummated.
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
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linking members' credit authorization systems. MasterCard credit cards are
issued as part of the worldwide MasterCard International Inc. systems, and the
transactions creating the receivables through the use of the credit cards are
processed through the MasterCard International Inc. authorization and settlement
systems. The MasterCard-Registered Trademark- credit cards from which the
Accounts were established may be used to purchase goods and services, to obtain
cash advances and to consolidate and transfer account balances from other credit
cards. Cardholders make purchases when using a credit card to buy goods or
services. A cash advance is made when a credit card is used to obtain cash from
a financial institution, an automated teller machine, or by a draft drawn on an
account. Amounts due with respect to purchases, cash advances and transfers of
account balances will be included in the Receivables. Direct Merchants Bank is
also a member of VISA USA Incorporated. With the first quarter, 1997 acquisition
of the California Credit Union portfolio, Direct Merchants Bank acquired
approximately 20,000 VISA-Registered Trademark- 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
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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
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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
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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.
38
<PAGE>
DELINQUENCY EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30, 1998 DECEMBER
AS OF JUNE 30, 1998 AS OF MARCH 31, 1998 31, 1997
-------------------------- -------------------------- -------------------------- -----------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
TOTAL TOTAL TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Receivables Outstanding
(2).................. $3,830,742 100% $3,446,820 100% $3,259,717 100% $3,165,229
Receivables Delinquent:
30-59 Days........... 91,934 2.4 80,076 2.3 72,746 2.2 67,178
60-89 Days........... 64,443 1.7 56,674 1.6 53,413 1.6 46,252
90 or More Days...... 137,567 3.6 118,984 3.5 112,556 3.5 98,403
----------- ----- ----------- ----- ----------- ----- -----------
Total............ $ 293,944 7.7% $ 255,734 7.4% $ 238,715 7.3% $ 211,833
----------- ----- ----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- ----------- ----- -----------
<CAPTION>
PERCENTAGE OF
TOTAL
RECEIVABLES
-------------
<S> <C>
Receivables Outstanding
(2).................. 100%
Receivables Delinquent:
30-59 Days........... 2.1
60-89 Days........... 1.5
90 or More Days...... 3.1
-----
Total............ 6.7%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 AS OF JUNE 30, 1997 AS OF MARCH 31, 1997
-------------------------- -------------------------- --------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
TOTAL TOTAL TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF SEPTEMBER 30, 1996 AS OF JUNE 30, 1996
-------------------------- -------------------------- --------------------------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
TOTAL TOTAL TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE
AS OF DECEMBER 31, 1995 AS OF SEPTEMBER 30, 1995
AS OF MARCH 31, 1996 30, 1995
-------------------------- -------------------------- -------------------------- -----------
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
TOTAL TOTAL TOTAL
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Receivables Outstanding
(2).................. $ 676,974 100.0% $ 543,619 100.0% $ 298,920 100.0% $ 190,069
Receivables Delinquent:
30-59 Days........... $ 9,677 1.4% $ 7,546 1.4% $ 5,142 1.7% $ 320
60-89 Days........... 5,879 0.9 4,952 0.9 3,039 1.0 1
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% $ 321
<CAPTION>
PERCENTAGE OF
TOTAL
RECEIVABLES
-------------
<S> <C>
Receivables Outstanding
(2).................. 100.0%
Receivables Delinquent:
30-59 Days........... 0.2%
60-89 Days........... 0.0
90 or More Days...... --
-----
Total............ 0.2%
</TABLE>
- ------------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association or
Huntington BancShares acquired accounts or the Direct Merchants Bank's minor
secured card portfolio. The above amounts and percentages include the Key
Bank USA, National Association acquired accounts.
(2) The Receivables Outstanding on the accounts consist of all amounts due from
cardholders as posted to the accounts as of the date shown.
39
<PAGE>
LOSS EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR QUARTER ENDED YEAR
------------------------------- ENDED ------------------------------------------ ENDED
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
1998 1998 1998 1997 1997 1997 1997 1997 1996
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Receivables
Outstanding (2).......... $3,660,283 $3,340,018 $3,253,308 $2,204,289 $2,898,111 $2,274,934 $1,939,623 $1,704,489 $1,017,236
Total Gross Charge-Offs
(3)...................... $ 102,660 $ 93,621 $ 82,849 $ 202,639 $ 69,694 $51,070.00 $ 45,522 $ 36,353 $ 64,453
Total Gross Charge-Offs as
a Percentage of Average
Receivables
Outstanding.............. 2.80% 2.80% 2.55% 9.19% 2.40% 2.24% 2.35% 2.13% 6.34%
(Annualized)............... 11.13% 11.24% 10.33% 9.19% 9.54% 8.91% 9.41% 8.65% 6.34%
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
-------------------------------------------- NINE MONTHS -----------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, ENDED DEC. DEC. 31, SEPT. 30, JUNE 30,
1996 1996 1996 1996 31, 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 Mercantile Bank National Association or
Huntington BancShares acquired accounts, or the Direct Merchants Bank's
minor secured card portfolio. The above amounts and percentages include the
Key Bank USA, National Association acquired accounts.
(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.
40
<PAGE>
YIELD EXPERIENCE FOR THE DIRECT MERCHANTS BANK PORTFOLIO(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
------------------------------- YEAR ENDED ------------------------------------------ YEAR ENDED
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
1998 1998 1998 1997 1997 1997 1997 1997 1996
--------- --------- --------- ----------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average
Receivables
Outstanding
(2)............. $3,660,283 $3,340,018 $3,253,308 $2,204,287 $2,898,111 $2,274,934 $1,939,623 $1,704,489 $1,017,236
Total Finance
Charges
and Fees Billed
(3)(4).......... $ 214,203 $ 205,267 $ 195,601 $ 533,005 $ 167,361 $ 133,870 $ 124,378 $ 107,395 $ 269,298
Average Revenue
Yield
(Annualized).... 23.22% 24.65% 24.38% 24.18% 22.91% 23.35% 25.72% 25.55% 26.47%
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
--------------------------------------------- YEAR ------------------------------
MARCH ENDED SEPT.
DEC. 31, SEPT. 30, JUNE 30, 31, DEC. 31, DEC. 31, 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 Finance
Charges and
Fees Billed
(3)(4)....... $ 93,506 $ 75,252 $ 58,727 $ 41,813 $ 49,021 $ 23,071 $ 21,671 $ 4,279
Average Revenue
Yield
(Annualized)... 26.54% 25.26% 27.07% 27.58% 26.81% 23.20% 34.56% 20.27%
</TABLE>
- ------------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association or
Huntington BancShares acquired accounts or the Direct Merchants Bank's minor
secured card portfolio. The above amounts and percentages include the Key
Bank USA, National Association acquired accounts.
(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.
41
<PAGE>
THE RECEIVABLES
The Accounts had, as of September 30, 1998, an average Principal Receivable
balance of $1,415 and an average credit limit of $3,285. The percentage of the
total Receivable balance to the aggregate total credit limit, as of September
30, 1998, was 45.1 percent.
The following tables summarize the Receivables which have been conveyed to
the Trust (the "Trust Portfolio") by various criteria as of the close of
business on September 30, 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............................................. 86,383 3.9% $ 22,458,038.86 0.7%
$500.01-$1,000.00......................................... 162,776 7.3 104,663,660.15 3.2
$1,000.01-$1,500.00....................................... 229,743 10.3 227,035,505.70 6.8
$1,500.01-$3,000.00....................................... 685,917 30.7 1,013,523,109.77 30.6
$3,000.01-$5,000.00....................................... 712,867 31.9 1,253,447,302.33 37.9
$5,000.01-$10,000.00...................................... 356,526 15.9 688,150,098.53 20.8
$10,000.01 & Greater...................................... 33 0.0 59,224.92 0.0
----------- ----- --------------- -----
Total............................................... 2,234,245 100.0% $3,309,336,940.26 100.0%
----------- ----- --------------- -----
----------- ----- --------------- -----
</TABLE>
COMPOSITION BY PERIOD OF DELINQUENCY
TRUST PORTFOLIO
<TABLE>
<CAPTION>
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................................................... 2,014,086 90.2% $2,800,537,867.73 84.7%
1-29 Days................................................. 104,483 4.7 229,388,688.63 6.9
30-59 Days................................................ 37,356 1.7 85,920,852.92 2.6
60-89 Days................................................ 25,585 1.1 61,692,609.57 1.9
90-119 Days............................................... 20,863 0.9 50,793,801.14 1.5
120-149 Days.............................................. 17,493 0.8 43,632,253.80 1.3
150 Days or More.......................................... 14,379 0.6 37,370,866.47 1.1
----------- ----- --------------- -----
Total............................................... 2,234,245 100.0% $3,309,336,940.26 100.0%
----------- ----- --------------- -----
----------- ----- --------------- -----
</TABLE>
42
<PAGE>
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT BALANCE RANGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------------------------------------------- ----------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Credit Balance........................................... 23,410 1.0% $ (1,773,665.96) (0.1)%
No Balance............................................... 626,264 28.0 0.00 0.0
$0.01-$500.00............................................ 214,128 9.6 46,958,854.45 1.4
$500.01-$1,000.00........................................ 205,034 9.2 156,083,877.77 4.7
$1,000.01-$1,500.00...................................... 213,288 9.6 269,308,118.07 8.2
$1,500.01-$3,000.00...................................... 569,959 25.5 1,243,839,711.46 37.6
$3,000.01-$5,000.00...................................... 317,208 14.2 1,230,043,835.83 37.2
$5,000.01 & Greater...................................... 64,954 2.9 364,876,208.64 11.0
----------- ----- ---------------- -----
Total.............................................. 2,234,245 100.0% $3,309,336,940.26 100.0%
----------- ----- ---------------- -----
----------- ----- ---------------- -----
</TABLE>
COMPOSITION BY ACCOUNT AGE
TRUST PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
ACCOUNT AGE ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ---------------------------------------------------------- ----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Not more than 6 Months.................................... 158,079 7.1% $198,680,819.97 6.0%
Over 6 Months to 12 Months................................ 380,355 17.0 557,536,623.78 16.8
Over 12 Months to 24 Months............................... 725,542 32.5 1,035,054,382.32 31.3
Over 24 Months............................................ 970,269 43.4 1,518,065,114.19 45.9
----------- ----- --------------- -----
Total............................................... 2,234,245 100.0% $3,309,336,940.26 100.0%
----------- ----- --------------- -----
----------- ----- --------------- -----
</TABLE>
43
<PAGE>
COMPOSITION BY GEOGRAPHIC DISTRIBUTION
TRUST PORTFOLIO
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
NUMBER OF NUMBER OF RECEIVABLES RECEIVABLES
LOCATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- ---------------------------------------------------------- ----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Alabama................................................... 43,381 1.9% $ 61,954,004.54 1.9%
Alaska.................................................... 4,041 0.2 6,703,037.49 0.2
Arizona................................................... 30,546 1.4 46,303,514.47 1.4
Arkansas.................................................. 23,240 1.0 34,890,524.59 1.1
California................................................ 275,955 12.3 443,573,141.86 13.4
Colorado.................................................. 35,157 1.6 53,635,919.45 1.6
Connecticut............................................... 24,789 1.1 35,910,976.07 1.1
District of Columbia...................................... 5,426 0.2 8,240,321.26 0.2
Delaware.................................................. 5,602 0.2 8,149,930.96 0.2
Florida................................................... 166,949 7.5 264,957,009.87 8.0
Georgia................................................... 61,493 2.7 89,059,130.76 2.7
Hawaii.................................................... 7,835 0.4 12,875,586.59 0.4
Idaho..................................................... 10,115 0.5 13,879,420.24 0.4
Illinois.................................................. 77,449 3.5 112,437,645.61 3.4
Indiana................................................... 54,401 2.4 78,376,931.41 2.4
Iowa...................................................... 21,313 1.0 28,620,640.76 0.9
Kansas.................................................... 21,352 1.0 31,843,864.94 1.0
Kentucky.................................................. 35,037 1.6 47,933,122.19 1.4
Louisiana................................................. 35,639 1.6 51,560,202.25 1.6
Maine..................................................... 10,402 0.5 14,189,217.70 0.4
Maryland.................................................. 42,589 1.9 63,164,107.25 1.9
Massachusetts............................................. 39,255 1.8 55,023,050.23 1.7
Michigan.................................................. 67,252 3.0 95,430,837.53 2.9
Minnesota................................................. 33,266 1.5 44,040,297.93 1.3
Mississippi............................................... 25,231 1.1 34,271,519.67 1.0
Missouri.................................................. 45,236 2.0 66,287,150.17 2.0
Montana................................................... 7,310 0.3 10,395,097.64 0.3
Nebraska.................................................. 11,008 0.5 15,228,795.25 0.5
Nevada.................................................... 23,204 1.0 39,543,037.27 1.2
New Hampshire............................................. 8,962 0.4 12,681,383.91 0.4
New Jersey................................................ 58,745 2.6 82,862,820.38 2.5
New Mexico................................................ 13,183 0.6 19,311,756.70 0.6
New York.................................................. 166,504 7.5 249,887,898.70 7.6
North Carolina............................................ 64,168 2.9 87,339,544.23 2.6
North Dakota.............................................. 4,831 0.2 6,412,025.03 0.2
Ohio...................................................... 91,109 4.1 135,025,089.66 4.1
Oklahoma.................................................. 32,430 1.5 49,230,222.17 1.5
Oregon.................................................... 24,607 1.1 37,392,249.75 1.1
Pennsylvania.............................................. 85,986 3.8 119,440,310.03 3.6
Rhode Island.............................................. 8,883 0.4 12,780,230.10 0.4
South Carolina............................................ 25,333 1.1 34,834,055.37 1.1
South Dakota.............................................. 4,943 0.2 6,828,097.98 0.2
Tennessee................................................. 50,103 2.2 74,311,498.22 2.2
Texas..................................................... 167,018 7.5 253,119,182.30 7.6
Utah...................................................... 11,791 0.5 15,865,389.99 0.5
Vermont................................................... 4,743 0.2 6,744,865.03 0.2
Virginia.................................................. 59,887 2.7 86,502,428.87 2.6
Washington................................................ 43,677 2.0 66,036,197.88 2.0
West Virginia............................................. 18,336 0.8 24,074,059.64 0.7
Wisconsin................................................. 37,129 1.7 48,802,034.34 1.5
Wyoming................................................... 4,766 0.2 7,128,639.76 0.2
Other..................................................... 2,638 0.1 4,248,924.27 0.1
----------- ----- --------------- -----
Total............................................... 2,234,245 100.0% $3,309,336,940.26 100.0%
----------- ----- --------------- -----
----------- ----- --------------- -----
</TABLE>
44
<PAGE>
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement provides that the Class A
Securityholders are scheduled to receive payments of principal on the Expected
Final Payment Date, which is the May 2002 Distribution Date, but may receive
principal payments earlier in the event of a Pay Out Event which results in the
commencement of the Early Amortization Period.
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 Class A 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 Class A 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, no assurance can be given in that
regard. If the amount required to pay the Class A Invested Amount is not 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.
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 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 and the
Class B 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, (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, or (h) the occurrence of any
claim on the Policy. See "Description of the Offered Securities--Pay Out
Events." In the event of an early payment of principal on the Class A
Securities, Class A 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, (i) the weighted
average of the Class A Interest Rate as of the last day of such Monthly Period
(weighted based on the Class A Invested Amount 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"
45
<PAGE>
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 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 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)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1998 1998 1998 1997 1997 1997 1997
------------- ----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Highest Month................ 7.0% 6.9% 7.7% 7.1% 7.0% 7.2% 7.6%
Lowest Month................. 6.7% 6.7% 6.6% 6.4% 6.2% 6.8% 6.6%
Monthly Average (2).......... 6.8% 6.8% 7.0% 6.8% 6.6% 7.0% 7.1%
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1996 1996 1996 1996 1995 1995
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Highest Month............... 7.5% 8.4% 8.8% 8.5% 8.7% 12.7%
Lowest Month................ 6.8% 6.4% 8.0% 8.0% 7.9% 8.5%
Monthly Average (2)......... 7.1% 7.5% 8.3% 8.3% 8.3% 10.5%
<CAPTION>
JUNE 30,
1995
-------------
<S> <C>
Highest Month............... 64.7%
Lowest Month................ 19.7%
Monthly Average (2)......... 42.2%
</TABLE>
- ------------------------
(1) The amounts and percentages presented for the Direct Merchants Bank
Portfolio do not include the Mercantile Bank National Association or
Huntington BancShares acquired accounts or the Direct Merchants Bank's minor
secured card portfolio. The above amounts and percentages include the
KeyBank USA, National Association acquired accounts.
(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
46
<PAGE>
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 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 Class A
Securities.
USE OF PROCEEDS
The Transferor will apply the net proceeds received from the sale of the
Class A Securities, which is expected to be approximately $498,500,000, to repay
the principal of the Series 1998-A Variable Funding Securities and a portion of
principal of certain classes of the Series 1998-1 Variable Funding Securities,
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. Certain classes of the Series 1998-A Variable Funding
Securities are held by a commercial paper vehicle that is administered by The
Chase Manhattan Bank, N.A., an affiliate of Chase Securities Inc., which also
provides backup facilities for such vehicle. A class of the Series 1998-1
Variable Funding Securities is held by a commercial paper vehicle for which The
Chase Manhattan Bank, N.A. provides backup facilities. See "Annex I: Other
Series."
DESCRIPTION OF MBIA
The following information set forth in this section has been provided by
MBIA. Accordingly, neither the Transferor nor the Servicer makes any
representation as to the accuracy and completeness of such information.
MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary of
MBIA Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated
to pay the debts of or claims against MBIA. MBIA is domiciled in the State of
New York and licensed to do business in and subject to regulation under the laws
of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. MBIA has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by MBIA, changes in control and transactions
among affiliates. Additionally, MBIA is required to maintain contingency
reserves on its liabilities in certain amounts and for certain amounts and for
certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding stock
of Capital Markets Assurance Corporation ("CMAC") through a merger with its
parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has ceded
all of its net insured risks (including any amounts due but unpaid from third
party reinsurers), as well as its unearned premiums and contingency reserves, to
MBIA. MBIA Inc. is not obligated to pay the debts of or claims against CMAC.
The consolidated financial statements of MBIA, a wholly owned subsidiary of
MBIA Inc., and its subsidiaries as of December 31, 1997 and December 31, 1996
and for each of the three years in the period ended December 31, 1997, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1997 and
the consolidated financial statements of MBIA and its subsidiaries as of
September 30, 1998 and for the nine month periods ending September 30, 1998 and
September 30, 1997 included in the Quarterly Report on Form 10-Q of MBIA Inc.
for the period ending September 30, 1998 are hereby incorporated by reference
into this Prospectus, as part of the Transferor's Registration Statement on Form
S-3, and shall be deemed to be a part hereof. Any statement contained in a
document incorporated by reference herein shall be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
47
<PAGE>
in any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
All financial statements of MBIA and its subsidiaries included in documents
filed by MBIA Inc. 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 Offered Securities shall be deemed to be incorporated by
reference into this Prospectus, as part of the Transferor's Registration
Statement on Form S-3, and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information MBIA determined in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities ("SAP") and generally accepted accounting
principles ("GAAP"):
<TABLE>
<CAPTION>
SAP GAAP
---------------------------------------- ----------------------------------------
DECEMBER 31, 1997 SEPTEMBER 30, 1998 DECEMBER 31, 1997 SEPTEMBER 30, 1998
(AUDITED) (UNAUDITED) (AUDITED) (UNAUDITED)
------------------- ------------------- ------------------- -------------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Admitted Assets... $ 5,256 $ 6,318 Assets............ $ 5,988 $ 7,439
Liabilities....... 3,496 4,114 Liabilities....... 2,624 3,268
Capital and Shareholder's
Surplus......... 1,760 2,204 Equity............ 3,364 4,171
</TABLE>
Copies of the financial statements of MBIA incorporated by reference herein
and copies of MBIA's 1997 year-end audited financial statements prepared in
accordance with statutory accounting practices are available without charge,
from MBIA. The address of MBIA is 113 King Street, Armonk, New York 10504. The
telephone number of MBIA is (914) 273-4545,
MBIA does not accept any responsibility for the accuracy or completeness of
this Prospectus or any information or disclosure contained herein, or omitted
herefrom, other than with respect to the accuracy of the information regarding
MBIA set forth under the heading "Description of MBIA". Additionally, MBIA makes
no representation regarding the Offered Securities or the advisability of
investing in the Offered Securities.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Moody's Investors Service, Inc. rates the claims paying ability of MBIA
"Aaa".
Standard & Poor's, a division of the McGraw-Hill Companies, Inc. rates the
claims paying ability of MBIA "AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates the
claims paying ability of MBIA "AAA".
Each rating of MBIA should be evaluated independently. The ratings reflect
the respective rating agency's current assessment of the creditworthiness of
MBIA and its ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Securities.
MBIA does not guaranty the market price of the Securities nor does it guaranty
that the ratings on the Securities will not be revised or withdrawn.
48
<PAGE>
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 represents the right to
receive payments of interest at the Class A Interest Rate funded from Available
Series Finance Charge Collections and certain other sources designated herein
and, if such amounts are insufficient, from claims for payment on the Policy 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 Series 1998-3. In addition, if on any
Distribution Date there is a Potential Class A Charge-Off, the Trustee will make
a claim for payment on the Policy and such amount will be used during the
Amortization Period to make payments of principal to Class A Securityholders.
With respect to the Accumulation Period, principal payments will be made to the
Class A Securityholders on the Expected Final Payment Date.
The Transferor will own the Exchangeable Transferor Security and the Class B
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."
The Class A 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 the Class A 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 Class A Securities. Unless and until Definitive
Securities are issued under the limited circumstances described herein, no
Security Owner acquiring an interest in the 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 the Class A 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 Class A
49
<PAGE>
Securityholders will refer to distributions, notices, reports and statements to
the Depository or its nominee, as the registered holder of the Class A
Securities, for distribution to Security Owners in accordance with the
Depository's procedures. See "--Book-Entry Registration" and "--Definitive
Securities."
BOOK-ENTRY REGISTRATION
With respect to the Class A Securities in book-entry form, Class A
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
50
<PAGE>
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,
51
<PAGE>
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 Class A Securities will be issued in fully registered, certificated form
to the Security Owners 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
52
<PAGE>
properly its responsibilities as Depository with respect to the Class A
Securities, 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 Class A Invested Amount 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.
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 Class A
Securities and instructions for registration, the Trustee will issue the Class A
Securities 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 Class A Securities will be
made by the Trustee directly to Class A 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
Class A 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 Class A 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 Class A Securityholders. The Trustee will provide such notice to registered
Class A 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.
INTEREST PAYMENTS
Interest will accrue on the outstanding principal balance of the Class A
Securities at the Class A Interest Rate from the Closing Date. Interest will be
distributed on January 20, 1999, and on each Distribution Date thereafter to
Class A Securityholders 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 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 Class A Invested Amount, (b) 47
divided by 360 and (c) the Class A Interest Rate, determined on December 2,
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 Class A Securities and deposited on
each business day during such Monthly Period in the Interest Funding Account. In
addition, if on any Distribution Date, there is an Interest and Servicing Fee
Deficiency with respect to such Monthly Period, then the Trustee will demand
payment on the Policy in an amount equal to such deficiency in accordance with
the terms thereof.
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The Class A Securities will bear interest at the rate equal to 0.65% per
annum above LIBOR determined as set forth below for the period from the Closing
Date through January 19, 1999 and each Interest Accrual Period thereafter.
The Trustee will determine LIBOR for the period from the Closing Date
through January 19, 1999 on December 2, 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). Solely with respect to the first
Interest Accrual Period, "LIBOR" will be calculated with respect to deposits in
United States dollars for two months, commencing on the Closing Date.
The Class A 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 Class A 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 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 Class A 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. During the
Accumulation Period, concurrently with deposits to the Principal Funding Account
for the benefit of the Class A Securities, the Class B Invested Amount will be
reduced to an amount equal to the Stated Class B 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 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,
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Excess Finance Charge Collections, Redirected Principal Collections and Policy
Claim Amounts for Potential Class A Charge-Offs 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 and
reductions of the Class B Invested Amount, (iv) Shared Principal Collections
allocated to the Securities, and (v) the proceeds of the sale of all or a
portion of an Interest Rate Cap with respect to such Monthly Period.
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 Class A Securityholders on the Distribution
Date following the Monthly Period in which the Early Amortization Period
commences. 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 reimburse the Insurer for any unreimbursed draws
under the Policy and then to pay amounts due with respect to the Class B
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.
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SUBORDINATION
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 (iii)
and (iv) 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 B 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 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 allocated and available for that purpose.
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 Trustee will make a claim for payment on
the Policy in an amount equal to 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. In the event that the Insurer fails to make the payment of
the Potential Class A Charge-Off amount as required under the Policy, the Class
A Invested Amount will be reduced by the amount the Insurer has failed to pay.
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."
THE INTEREST RATE CAPS
The Transferor will obtain and at all times prior to the Termination Date
maintain one or more interest rate caps ("Interest Rate Caps") whose notional
amounts singly or taken as a group equal or exceed the outstanding principal
balance of the Class A Securities. The Transferor will pledge to the Trustee for
the benefit of the Securityholders all of the Transferor's right, title and
interest in and to the interest rate cap agreements and the Interest Rate Caps
arising thereunder, together with the Cap Proceeds Account and all other
proceeds thereof, as collateral security for the benefit of the Securityholders.
Pursuant to the Interest Rate Caps, on each Transfer Date on which LIBOR for the
related Interest Accrual Period exceeds 9.25%, the provider of the Interest Rate
Caps ("Interest Rate Cap Provider") will make a payment to the Trustee, on
behalf of the Trust, in an amount equal to the product of (i) such excess, (ii)
the notional amount as of such Transfer Date and (iii) the actual number of days
in the related Monthly Period divided by 360. The Interest Rate Caps will
terminate on the Termination Date; provided, however, that the Interest Rate
Caps may be terminated at an earlier date if the Trustee has obtained a
substitute interest rate cap or entered into an alternative arrangement
satisfactory to the Rating Agencies and the Insurer, which in each case will not
result in the reduction or withdrawal of the rating of the Securities without
giving effect to the Policy (such substitute interest rate cap, a "Replacement
Interest Rate Cap"; such alternative arrangement, a "Qualified Substitute
Arrangement").
In the event that the rating of the Interest Rate Cap Provider is reduced or
withdrawn, as specified in the Interest Rate Caps, the Servicer will use its
best efforts either to obtain for each such Interest Rate Cap a Replacement
Interest Rate Cap, at the expenses of the Interest Rate Cap Provider, or to
enter into a Qualified Substitute Arrangement.
The Trustee, on behalf of the Trust, may sell all or a portion of an
Interest Rate Cap in an amount equal to the excess on such date of the notional
amount over the outstanding principal balance of the
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Class A Securities, subject to (among other things) Rating Agency confirmation
of the ratings of the Securities without giving effect to the Policy. Funds from
any such sale will be applied as Principal Collections allocable in accordance
with the allocations described below in "Description of the Offered
Securities--Application of Collections--Payment of Principal." Each Interest
Rate Cap will provide for payments to the Trustee and the Trust's interest in
respect of such payments will be deposited into the Cap Proceeds Account.
INTEREST RATE CAP PROVIDERS
Each "Interest Rate Cap Provider" will be a third party cap provider having
a short-term rating of at least "A-1+" from Standard & Poor's and at least "P-1"
from Moody's. The Interest Rate Cap Providers are Deutsche Bank AG, New York
Branch and Credit Suisse Financial Products. Following is a description of each
of Deutsche Bank AG, New York Branch and Credit Suisse Financial Products which
has been provided, in each case, by the respective Interest Rate Cap Provider.
Accordingly, neither the Transferor nor the Servicer makes any representation as
to the accuracy or completeness of such information.
DEUTSCHE BANK AG, NEW YORK BRANCH
Deutsche Bank AG, New York Branch (the "Branch"), a branch of Deutsche Bank
Aktiengesellschaft ("Deutsche Bank AG") will be one of the Interest Rate Cap
Providers. The Branch was established in 1978 and was opened by the New York
Superintendent of Banks. Its office is currently located at 31 West 52nd Street,
New York, NY 10019. The Branch is examined by the New York State Banking
Department and is subject to the banking laws and regulations applicable to a
foreign bank that operates a New York branch. The Branch is also examined by the
Federal Reserve Bank of New York.
Deutsche Bank AG is a banking company with limited liability incorporated
under the laws of the Federal Republic of Germany under registration number HRB
30 000. Deutsche Bank AG has its registered office at Taunusanlage 12, D-60325
Frankfurt am Main.
Deutsche Bank AG is the parent company of a group consisting of banks,
capital market companies, fund management companies, mortgage banks and a
property finance company, installment financing and leasing companies, insurance
companies, research and consultancy companies and other domestic and foreign
companies (the "Deutsche Bank Group").
The Deutsche Bank Group has nearly 1,600 branches and offices engaged in
banking business in the Federal Republic of Germany and more than 700 in other
countries.
As of September 30, 1998, the share capital of Deutsche Bank AG amounted to
DM 2,664,926,070, consisting of 532,995,214 shares without par value. These
shares are fully paid up and in bearer form and are held by approximately
382,000 shareholders worldwide. The shares are listed for trading and official
quotation on all the German stock exchanges. They are also listed on the stock
exchanges in Amsterdam, Antwerp, Brussels, London, Luxembourg, Paris, Tokyo,
Vienna and on the Swiss bourse.
The long term senior debt of Deutsche Bank AG has been assigned a rating of
AAA (on review for possible downgrade) by Standard & Poor's, Aa1 by Moody's and
AA+ by Fitch/IBCA Limited ("Fitch"). Deutsche Bank AG has been assigned a
short-term rating of "A-1+" by Standard & Poor's and a short-term rating of
"P-1" by Moody's.
As of September 30, 1998 (all figures are unaudited), based on International
Accounting Standards and converted at the exchange rate from September 30, 1998
of U.S. $1 = DM 1,6759, Deutsche Bank AG had total assets of DM 1,165.8 billion
(U.S. $689.6 billion), total loan and advances to customers of DM 546.9 billion
(U.S. $326.3 billion), amounts owned to other depositors of DM 492.4 billion
(U.S. $293.8 billion), liabilities evidenced by paper of DM 171.0 billion (U.S.
$102.0 billion) and capital and reserves of DM 33.5 billion (U.S. $20.0
billion). Capital and reserves according to the Bank of International
Settlements amounted to DM 47.1 billion (U.S. $28.1 billion). International
Accounting Standards may not conform to generally accepted accounting principles
applied by United States banks.
Deutsche Bank AG will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person a copy
of the most recent annual report of Deutsche Bank AG, which contains the
consolidated statements of Deutsche Bank AG and the most recent interim
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report of Deutsche Bank AG showing unaudited figures. The interim reports of
Deutsche Bank which are made available are for purposes of information only.
Written requests should be directed to: Deutsche Bank AG, New York Branch, 31
East 52nd Street, New York, NY 10010, Attention: Management.
CREDIT SUISSE FINANCIAL PRODUCTS
Credit Suisse Financial Products was incorporated in England under the
Companies Act 1985 on May 9, 1990 with registered no. 2500199 and was
re-registered as unlimited on July 6, 1990. Its registered office and principal
place of business is at One Cabot Square, London E14 4QJ. Credit Suisse
Financial Products is an authorized institution under the Banking Act 1987 and
is regulated by The Securities and Futures Authority.
Credit Suisse Financial Products is an unlimited company and as such its
shareholders have a joint, several and unlimited obligation to meet any
insufficiency in the assets of Credit Suisse Financial Products in the event of
its liquidation.
Credit Suisse Financial Products' ordinary voting shares are 56 percent
owned by Credit Suisse First Boston (the Swiss bank formerly known as Credit
Suisse), 24 percent owned by Credit Suisse First Boston (International) AG
(formerly known as CS First Boston (Europe) AG), and 20 percent owned by
Reinsurance Derivatives Holding AG, a wholly-owned subsidiary of Swiss
Reinsurance Company ("Swiss Re"). Credit Suisse Financial Products'
participating non-voting shares (other than an issue of "Class A" participating
non-voting shares) and its perpetual non-cumulative "Class A" preference shares
are held, as to 40 percent, by each of Credit Suisse First Boston and Credit
Suisse First Boston (International) AG and, as to 20 percent, by Reinsurance
Derivatives Holding AG. In addition, Credit Suisse First Boston and Credit
Suisse First Boston (International) AG each holds half of an issue of "Class A"
participating non-voting shares and Credit Suisse First Boston (International)
AG holds all of an issue of preference shares of Credit Suisse Financial
Products. Credit Suisse First Boston is a subsidiary of Credit Suisse Group
(formerly known as CS Holding) and Credit Suisse First Boston (International) AG
is a subsidiary of Credit Suisse First Boston. As of March 31, 1998, Credit
Suisse Group held 10.50 percent of the outstanding share capital of Swiss Re and
Swiss Re held 3.67 percent of the outstanding share capital of Credit Suisse
Group.
Credit Suisse First Boston, whose head office is at Uetlibergstrasse 231,
CH-8070 Zurich, combines the investment banking and asset management businesses
formerly undertaken by it, its subsidiaries and other companies within the CS
holding group with the investment banking and trading activities formerly
undertaken by CS First Boston, Inc. and its subsidiaries. This new business
structure has been in effect since January 1, 1997. As of the same date, the
retail banking and private banking businesses formerly undertaken by Credit
Suisse and its subsidiaries were combined, in the Swiss bank formerly known as
Swiss Volksbank, newly renamed Credit Suisse, with retail bank activities of the
latter. Credit Suisse is also a subsidiary of Credit Suisse Group.
Credit Suisse Financial Products commenced business on July 16, 1990. Its
primary objective is to provide comprehensive treasury and risk management
derivative product services to its own clients and to clients of Credit Suisse
First Boston. Following the acquisition by Swiss Re in December 1994 of an
indirect economic and voting interest in Credit Suisse Financial Products,
Credit Suisse Financial Products has also developed financial risk management
products targeted at insurance companies, drawing upon the expertise of Swiss
Re.
Credit Suisse Financial Products has been assigned a long-term counterparty
rating of "AA" by Standard & Poor's, long-term debt and counterparty ratings of
"Aa3" by Moody's and a long-term rating of "AA" by Fitch.
As of December 31, 1997, Credit Suisse Financial Products had consolidated
total assets of U.S. $37.94 billion, consolidated total liabilities of U.S.
$36.31 billion and consolidated total shareholders' funds of U.S. $1.62 billion.
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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
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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,
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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 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
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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 the 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
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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 Receivable, 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
sale, 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
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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. On the Closing Date, the
Transferor intends to add to the Trust approximately $311,000,000 of Principal
Receivables arising in Supplemental Accounts, including accounts acquired from
Key Bank USA, National Association, subject to satisfaction of the Rating Agency
Condition. 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
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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 (b) 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.
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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
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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-B Variable Funding
Securities, 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 bearing the various rates of interest
and having the outstanding principal amounts set forth in "Annex I: Other
Series." Concurrently with the issuance of the Securities, the Trust will issue
the Series 1998-2 Asset Backed Securities bearing the rate of interest and
having the outstanding principal amount set forth in "Annex I: Other Series." In
addition, the Trust previously issued the Series 1998-A Variable Funding
Securities. It is anticipated that the proceeds from the issuance of this Series
and the Series 1998-2 Asset Backed Securities will be used to repay the Series
1998-A Variable Funding Securities in full.
TRUST ACCOUNTS
The Trustee will establish and maintain with a Qualified Institution in the
name of the Trust, for the benefit of the Securityholders, four separate
accounts, each in a segregated trust account, consisting of an "Interest Funding
Account," a "Principal Account," a "Cap Proceeds 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 certificates of deposit of any depository institution or trust
company; provided, however, that at the time of the Trust's investment or
contractual commitment to invest therein, the certificates of deposit or
short-term deposits of such depository institution or trust company shall have a
credit rating from Standard & Poor's of A-1+ and from Moody's of P-1; (iii)
commercial paper having, at the time of the Trust's investment or contractual
commitment to invest therein, a rating from Standard & Poor's of A-1+ and from
Moody's of P-1; (iv) banker's acceptances issued by any depository institution
or trust company described in clause (a)(ii) above; and (v) investments in money
market funds rated AAA-m or AAA-mg by Standard & Poor's
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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
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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, a segregated account with a
Qualified Institution, the "Excess Funding Account". The Servicer has the power,
revocable by the Trustee, to make withdrawals and payments from the Excess
Funding Account for the purpose of carrying out the Servicer's or the Trustee's
duties. 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. 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 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
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in the Excess Funding Account since the preceding Distribution Date will be
withdrawn from the Excess Funding Account and treated as Finance Charge
Collections.
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 and
Insurer (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 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 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 Class A 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.
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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 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 and the Class B Securityholders'
Interest, based on the percentage equivalent of a fraction the numerator of
which is the Class A Adjusted Invested Amount and the Class B Invested Amount,
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" and the "Class B Floating Percentage,"
respectively; the sum of 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 and the Class B 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," and the "Class B
Fixed/Floating Percentage," respectively; the sum of 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; provided,
however that for purposes of allocating Finance Charge Collections the numerator
of the Fixed/Floating Percentage will be the Adjusted Invested Amount at the end
of the day prior to the occurrence of a Pay Out Event. 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 when used with respect to Principal
Collections, Finance Charge Collections and the amount of Defaulted Receivables
at all times, 100 percent minus the aggregate Investor Percentages with respect
to Principal Collections, Finance Charge Collections or Defaulted Receivables.
As used herein: (i) the term "Class A Invested Amount" means an amount equal
to (a) the Class A Initial Invested Amount minus (b) the aggregate amount of
principal payments made to Class A
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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, Redirected Principal Collections
and Policy Claim Amounts for Potential Class A Charge-Offs 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" means an amount equal to (a)
the initial principal balance of the Class B Securities, minus (b) the aggregate
amount of principal payments 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 Series 1998-3
Percentage of 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
B Invested Amount may not be reduced below zero; (iv) the term "Stated Class B
Amount" means the greater of (a) zero and (b) a number rounded to the nearest
dollar equal to 9.89 percent of the Class A Adjusted Invested Amount; provided,
however, that in no event shall the Stated Class B Amount be less than
$16,483,517 except that if the Class A Adjusted Invested Amount is equal to zero
the "Stated Class B Amount" will be zero; and provided further that during the
Early Amortization Period the Stated Class B Amount shall be equal to the Stated
Class B Amount immediately preceding the commencement of the Early Amortization
Period; and (v) the term "Invested Amount" means the sum of the Class A Invested
Amount and the Class B Invested Amount.
As a result of the Floating Percentage, Finance Charge Collections, prior to
the occurrence of a Pay Out Event, 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 and the Class B 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 and the Class B Securityholders, however, will remain
fixed during the Amortization Period. Collections of Principal Receivables
allocable to the Class B Invested Amount are subject to possible reallocation
for the benefit of the Class A Securityholders. See "--Redirected Principal
Collections" below.
REDIRECTED CASH FLOWS
To the extent that any amounts are on deposit in the Excess 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 sum of the
Negative Carry Amount for such business day and, following a claim for payment
on the Policy, the unreimbursed claims on the Policy that have not been
deposited in the Interest Funding Account prior to 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
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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 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 Principal Collections"):
(a) an amount equal to the Class A Required Amount with respect to such
business day, will be applied to the components of the Class A Required
Amount, 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 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 B Invested Amount will be reduced by the
amount of unreimbursed Redirected Principal Collections for the related Monthly
Period.
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.
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The Servicer will withdraw the following amounts from the Collection Account
for application on each business day as indicated:
(i) an amount equal to the Transferor Percentage of the aggregate amount
of Principal Collections will be paid to the Transferor;
(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 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 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 (xiii) 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
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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, (b) investment earnings on amounts on
deposit in the Collection Account, (c) amounts on deposit in the Cap Proceeds
Account, if any, and (d) 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 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;
(iii) 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;
(iv) an amount equal to the lesser of (A) the sum of any Available
Series Finance Charge Collections remaining and (B) 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;
(v) 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;
(vi) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the portion of the monthly premium with
respect to the Policy due on the Distribution Date in the next succeeding
Monthly Period that has not been previously deposited in the Interest
Funding Account plus any prior monthly premium with respect to the Policy
that was due but not previously deposited in the Interest Funding Account
will be deposited in the Interest Funding Account for distribution on the
next succeeding Distribution Date to the Insurer;
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(vii) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the portion of the unreimbursed claims
on the Policy, that have not been previously deposited in the Interest
Funding Account will be deposited in the Interest Funding Account for
distribution on the next succeeding Distribution Date to the Insurer;
(viii) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the excess, if any, of the amount
required to be retained in the Spread Account established for the benefit of
the Insurer over the amount on deposit in the Spread Account will be
deposited in the Spread Account;
(ix) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) any other amounts required to be paid
to the Insurer pursuant to the Insurance Agreement that have not previously
been deposited in the Interest Funding Account, will be deposited in the
Interest Funding Account for distribution on the next succeeding
Distribution Date to the Insurer;
(x) an amount equal to the lesser of (A) any Available Series Finance
Charge Collections remaining and (B) the unreimbursed amount by which the
Class B Invested Amount has been reduced pursuant to clauses (c) and (d) of
the definition thereof on prior business days, if any, will be applied to
reimburse such amount 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) 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 (A) any Available Series Finance Charge Collections
remaining and (B) 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;
(xii) an amount equal to the lesser of (A) any remaining Available Series
Finance Charge Collections and (B) the amount designated by the Transferor
in writing in its instructions to the Trustee, to be deposited in the
Payment Reserve Account; and
(xiii) 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.
Notwithstanding the foregoing, if on any Default Recognition Date the sum of
the amount of Available Series Finance Charge Collections (including all amounts
on deposit in the Payment Reserve Account) and Transferor Retained Finance
Change Collections is less than the amount of the aggregate Series Default
Amount for such business day, the Servicer will apply amounts deposited in the
Accumulation Period Reserve Account and the Spread Account during the then
current Monthly Period in accordance with clause (iii) above to the extent of
such shortfall.
On each Transfer Date all investment income (net of investment losses and
expenses) on funds on deposit in 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.
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"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
(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) 47 divided by 360 and (z) the Class A 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)-(xi) 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.
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); and
(ii) on each Transfer Date with respect to the Accumulation Period, the
balance of Available Investor Principal Collections not applied pursuant to
(i) above, if any, may be applied to the payment of principal to the Class B
Securityholders to the extent that the Class B Invested Amount exceeds the
Stated Class B 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, (iii) the Class A Adjusted Invested
Amount on such Transfer Date and (iv) any amounts allocated to the Class A
Securityholders in respect of the sale of all or a portion of an Interest Rate
Cap with respect to the preceding Monthly Period.
"Controlled Accumulation Amount" means for any Transfer Date with respect to
the Accumulation Period, prior to the payment in full of the Class A Invested
Amount, $33,333,334; 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
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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, the Transferor Finance Charge Collections will be made
available to cover the Negative Carry Amount and the amount of any unreimbursed
claims on the Policy that have not previously been deposited in the Interest
Funding Account.
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. To the extent of any unreimbursed claim on the Policy, following
the repayment in full of the Invested Amount, Excess Finance Charge Collections
will be applied to cover any unreimbursed claims on the Policy pro rata, based
upon the amount of such unreimbursed claims and the amount of shortfalls, if
any, with respect to 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 and amounts
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withdrawn from the Accumulation Period Reserve Account, each 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 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"). The Class B Invested Amount thereafter
will 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 Trustee will make a claim for payment on
the Policy in an amount equal to 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 "Potential Class A
Charge-Off"). In the event that the Insurer fails to make the payment of the
Potential Class A Charge-Off amount as required under the Policy, the Class A
Invested Amount will be reduced by the amount the Insurer has failed to pay (a
"Class A Charge-Off"). This reduction 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 (v) of
"--Application of Collections--Payment of Fees, Interest and Other Items."
THE POLICY
On or before the Closing Date, the Policy will be issued by the Insurer
pursuant to the provisions of the Insurance and Reimbursement Agreement (the
"Insurance Agreement") to be dated as of the Closing Date, among the Insurer,
the Transferor, the Trustee and the Servicer.
The Policy will irrevocably and unconditionally guarantee to the Trustee for
the benefit of the Class A Securityholders the payment of interest, the payment
of the Monthly Servicing Fee and the payment of Potential Class A Charge-Offs,
if any, on each Distribution Date (such distributions, the "Guaranteed
Distributions").
If on any Distribution Date the Available Series Finance Charge Collections,
Transferor Finance Charge Collections, Excess Finance Charge Collections,
Redirected Principal Collections, Principal Funding Account Investment Proceeds
and the amounts withdrawn from the Accumulation Period Reserve Account, if any,
each with respect to the Monthly Period relating to such Distribution Date are
insufficient to pay the Class A Monthly Interest and the Monthly Servicing Fee
with respect to such Monthly Period, then the Trustee will demand payment on the
Policy in an amount equal to such deficiency (the "Interest and Servicing Fee
Deficiency").
Furthermore, on any Distribution Date with respect to which a Potential
Class A Charge-Off has occurred, the Trustee will make a claim for payment on
the Policy in an amount equal to the amount of such Potential Class A Charge-Off
(such amount, together with the Interest and Servicing Fee Deficiency, the
"Policy Claim Amount").
Payment of claims on the Policy will be made by the Insurer on the later of
12:00 noon New York City time on the first business day preceding the
Distribution Date and 12:00 noon New York City time on the business day
following receipt by the Insurer or the fiscal agent of the appropriate notice
for payment.
Pursuant to the Insurance Agreement and the Series 1998-3 Supplement, funds
deposited in the Spread Account shall be used to reimburse the Insurer for any
claims made on the Policy. Any such
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reimbursement will reduce any reimbursement required to be made from Available
Series Finance Charge Collections.
If payment of any amount guaranteed by the Insurer pursuant to the Policy is
avoided as a preference payment (the "Preference Amount") under applicable
bankruptcy, insolvency, receivership or similar law in the event of an
insolvency of the Transferor, the Servicer, Metris Companies, Inc. or the Trust,
the Insurer will pay such amount out of its funds on the later of (a) the date
when due to be paid pursuant to the Order referred to below or (b) the first to
occur of (i) the fourth business day following Receipt by the Insurer or the
fiscal agent from the Trustee of (A) a certified copy of the order (the "Order")
of the court or other governmental body which exercised jurisdiction to the
effect that the Trustee is required to return the amount of any Policy Claim
Amounts distributed with respect to the Class A Securities during the term of
the Policy because such distributions were avoidable preference payments under
applicable bankruptcy law, (B) a notice for payment in the form specified by the
Policy and (C) an assignment duly executed and delivered by the Class A
Securityholder, in such form as is reasonably required by the Insurer and
provided to the Class A Securityholder by the Insurer, irrevocably assigning to
the Insurer all rights and claims of the Class A Securityholder relating to or
arising under the Class A Securities against the debtor which made such
preference payment or otherwise with respect to such preference payment or (ii)
the date of Receipt by the Insurer or the fiscal agent from the Trustee of the
items referred to in clauses (A), (B) and (C) above if, at least four business
days prior to such date of Receipt, the Insurer or the fiscal agent shall have
Received written notice from the Trustee that such items were to be delivered on
such date and such date was specified in such notice. Such payment shall be
disbursed to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order and not to the Trustee or Class A Securityholder
directly.
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Insurer and to its fiscal agent appointed by the Insurer at its
option, if any, prior to 1:00 pm, New York City time, on a business day;
delivery either on a day that is not a business day or after 1:00 pm, New York
City time, shall be deemed to be Received on the next succeeding business day.
If any notice or certificate given under the Policy by the Trustee is not in
proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and the Insurer or the fiscal agent shall
promptly so advise the Trustee and the Trustee may submit an amended notice.
The Insurer shall be subrogated to the rights of each Class A Securityholder
to receive payments of principal and interest, as applicable, with respect to
distributions on the Class A Securities to the extent of any payment by the
Insurer under the Policy and shall be reimbursed in accordance with the payment
priorities described herein.
The terms of the Policy cannot be modified, altered or affected by any other
agreement or instrument. The Policy by its terms may not be cancelled or
revoked. The Policy is governed by the laws of the State of New York.
THE POLICY IS NOT COVERED BY THE PROPERTY CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
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. So long as the
Insurer has not defaulted on its obligations under the Policy, the Insurer will
be entitled to exercise all voting rights of the Securityholders without consent
of the Class A Securityholders and the Class A Securityholders may exercise such
rights only with the prior written consent of the Insurer. In addition, the
Insurer will have certain additional rights as third party beneficiary to the
Insurance Agreement.
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In the absence of payments under the Policy, and if the Class B Invested
Amount has been reduced to zero, Class A Securityholders will bear directly the
credit and other risks associated with their undivided interest in the Trust.
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, 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 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 balance of the Class A Securities
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
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Charge Collections and Defaulted Receivables will be reduced to zero. Upon the
satisfaction of the foregoing conditions, the Class B Invested Amount will be
reduced to zero.
FINAL PAYMENT OF PRINCIPAL; TERMINATION
The Class A Securities will be subject to optional repurchase by the
Transferor on any Distribution Date if on such Distribution Date the Class A
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 since the Closing Date, if
certain conditions set forth in the Pooling and Servicing Agreement are
satisfied, including that all unreimbursed draws on the Policy and other amounts
due and owing to the Insurer under the Policy, together with interest thereon,
have been paid. The repurchase price will be equal to the unpaid Class A
Invested Amount plus accrued and unpaid interest on the Class A Securities,
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 April 2006 Distribution
Date (the "Termination Date"), except to the extent provided below. In the event
that the Invested Amount is greater than zero, exclusive of any Class held by
the Transferor, on the Termination Date, the Trustee will sell or cause to be
sold (and apply the proceeds first to the Class A Securities until paid in full
and then to the Insurer for unreimbursed draws under the Policy and other
amounts payable to the Insurer under the Insurance Agreement, and then to the
Class B 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 110
percent of the Invested Amount at the close of business on such date (but not
more than the total amount of Receivables allocable to the 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
Insurer for unreimbursed draws under the Policy and other amounts payable to the
Insurer under the Insurance Agreement and then to the Class B Securityholders
until the Class B 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 May 26, 2095.
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).
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PAY OUT EVENTS
As described above, the Revolving Period will continue until the
commencement of the Accumulation Period, unless a Pay Out Event occurs prior to
such date. A "Pay Out Event" refers to any of the following events:
(i) failure on the part of the Transferor (a) to make any payment or
deposit on the date required under the Pooling and Servicing Agreement (or
within the applicable grace period which will not exceed five business
days); (b) to perform in all material respects the Transferor's covenant not
to sell, pledge, assign, or transfer to any person, or grant any unpermitted
lien on, any Receivable; or (c) to observe or perform in any material
respect any other covenants or agreements of the Transferor set forth in the
Pooling and Servicing Agreement, the Purchase Agreement or the Series 1998-3
Supplement, which failure has a material adverse effect on the
Securityholders or the Insurer 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 the
Insurer, or to the Transferor, the Insurer 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 the
Insurer or 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
clause (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 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 and the Class B 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;
(vii) any Servicer Default shall occur which would have a material
adverse effect on the Securityholders; or
(viii) any claim on the Policy shall occur.
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, Securityholders evidencing undivided
interests aggregating more than 50 percent of the Invested Amount, by written
notice
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to the Trustee, the Transferor, the Interest Rate Cap Provider pursuant to the
Series 1998-3 Supplement 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), (vi) or (viii), 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 Class A
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 voluntarily enters
liquidation or a trustee-in-bankruptcy is appointed for the Transferor (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 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.
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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.
If on any Distribution Date through the end of the Accumulation Period,
there is an Interest and Servicing Fee Deficiency with respect to such Monthly
Period, then the Trustee will demand payment on the Policy in an amount equal to
such deficiency.
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 Act 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
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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"); provided, that pursuant to the Series 1998-3 Supplement,
the Insurer (so long as the Insurer has not defaulted on its obligations under
the Policy) and not the holders of the Class A Securities, will have the right
to vote the Class A Securities with respect to the termination of the Servicer
upon the occurrence of a Servicer Default. 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
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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 and the Class B
Securities, (c) the amount of such distribution allocable to interest on the
Class A Securities, (d) the amount of Principal Collections processed during the
related Monthly Period and allocated in respect of the Class A Securities and
the Class B Securities, respectively, (e) the amount of Finance Charge
Collections processed during the preceding Monthly Period and allocated in
respect of the Class A Securities and the Class B Securities, respectively, (f)
the aggregate amount of Principal Receivables, the Invested Amount, the Class A
Invested Amount, the Class B 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 and Class B 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
aggregate Interest Rate Caps notional amount and the amount deposited in the Cap
Proceeds Account during the related Monthly Period, (m) the Class A
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Interest Rate for the Interest Accrual Period and (n) the amount of any claim on
the Policy on such Distribution Date.
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 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.
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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 without giving effect to the Policy, 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, or in the case of Series 1998-3, the Insurer, 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, or in the case of Series 1998-3, the Insurer. 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--FASIT 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
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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 not 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.
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DESCRIPTION OF THE PURCHASE AGREEMENTS
PURCHASES OF RECEIVABLES
BANK PURCHASE AGREEMENT. Pursuant to the Bank Purchase Agreement, Direct
Merchants Bank sells to Metris, all of its right, title and interest in and to
(i) the Receivables 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.
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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
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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.
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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
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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 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 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 (or, with
respect to Series 1998-3, the holders of more than 50 percent of the Class A
Securities), 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."
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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
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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
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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 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
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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 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.
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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 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 Class 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 an Offered Security 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
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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 Class A Securityholder should consult its tax advisor regarding the impact
to such Class A Securityholder of the OID rules if the Offered Securities are
issued with OID. Any 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 Class A Securityholders, and other interest income must be
reported by Class A Securityholders that report income on the accrual method, as
it accrues, whether or not such Class A 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 Class A Securityholder in any period could exceed the amount of
cash distributed to such holder in that period. An Class A Securityholder
generally will realize a loss where either principal or previously accrued
interest are determined to be uncollectible with respect to the Class A
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
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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 Class A 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 are 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 Offered Securities will properly be characterized as indebtedness 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. If, however, the
IRS were to contend successfully that the Offered 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 and 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 Class
A Securityholders would probably be treated as dividends. Such an entity-level
tax could result in reduced distributions to Class A Securityholders and the
Class A Securityholders could be liable for a share of such tax.
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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 Offered Securities will
properly be characterized as indebtedness secured by the Receivables 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
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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 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 the 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 Class A Securities may not be acquired by any (a) employee benefit plan
(as defined in Section 3(3) of ERISA), (b) plan described in Section 4975(e)(1)
of the Code, including individual retirement accounts and Keogh Plans or (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").
The Series 1998-3 Supplement and each Class A Security will provide that by
accepting and holding a Class A Security, each Class A Securityholder shall 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 29 C.F.R. Section 2510.3-101 or otherwise under ERISA) by reason
of a Plan's investment in the entity or (v) a person
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investing plan assets of any such Plan (including, without limitation, for
purposes of clause (iv) and this clause (v), any insurance company general
account, but excluding any entity registered under the Investment Company Act of
1940, as amended).
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:
<TABLE>
<CAPTION>
AMOUNT OF
CLASS A
UNDERWRITERS SECURITIES
- ------------------------------------------------------------------------------ --------------
<S> <C>
Chase Securities Inc.......................................................... $ 100,000,000
Bear, Stearns & Co. Inc....................................................... 100,000,000
Deutsche Bank Securities Inc.................................................. 100,000,000
NationsBanc Montgomery Securities LLC......................................... 100,000,000
Salomon Smith Barney Inc...................................................... 100,000,000
--------------
Total....................................................................... $ 500,000,000
--------------
--------------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Offered
Securities if any of the Offered Securities are purchased.
The 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 0.180% of the principal amount of
the Class A Securities. The Underwriters may allow, and such dealers may
reallow, concessions not in excess of 0.125% 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 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.
Chase Securities Inc., 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 specified 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 Chase Securities Inc. 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
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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, one or more 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.
As discussed under "Use of Proceeds," a portion of the proceeds of the sale
of the Class A Securities will be used to repay amounts owing to the holders of
certain of the Series 1988-A Variable Funding Securities, including a commercial
paper vehicle that is administered by The Chase Manhattan Bank, N.A., an
affiliate of Chase Securities Inc., which also provides backup facilities for
such vehicle. In addition, a portion of the proceeds of the sale of the Class A
Securities will be used to repay amounts owing to a commercial paper vehicle
that is the holder of the Class A Series 1998-1 Variable Funding Securities, and
for which The Chase Manhattan Bank, N.A. provides backup facilities.
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.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1997,
incorporated by reference in this Prospectus, as part of the Transferor's
Registration Statement on Form S-3, have been incorporated herein in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
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 Class A 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 have been accepted for clearance through the
facilities of DTC, Cedel and Euroclear. The International Securities
Identification Number (ISIN) for the Class A Securities is US59159UAL26; the
Common Code number for the Class A Securities is 9264078.
The transactions contemplated in this Prospectus were authorized by
resolutions adopted by the Transferor on September 8, 1998 and October 14, 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
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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 Banque Generale du Luxembourg SA, 50, Avenue J.F.
Kennedy, L-2951 Luxembourg. Financial information regarding Transferor is
included in the consolidated financial statements of Metris Companies, Inc. in
its Annual Report on Form 10-K for the fiscal year ended December 31, 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 on 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 September 30, 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.
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GLOSSARY OF TERMS
The following terms, which are used in this Prospectus, have the meanings
indicated:
"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 11 in "Prospectus
Summary--Revolving Period."
"Accumulation Period Length" is defined at page 55 in "Description of the
Offered Securities-- Postponement of Accumulation Period."
"Accumulation Period Reserve Account" is defined at page 70 in "Description
of the Offered Securities--Accumulation Period Reserve Account."
"Accumulation Shortfall" is defined at page 77 in "Description of Offered
Securities--Application of Collections--Payment of Principal."
"Adaptive Control System" is defined at page 36 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 78 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.
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"Approved Account" means each (i) Eligible Account that is a
MasterCard-Registered Trademark- or VISA-Registered Trademark- account or (ii)
any other revolving credit consumer credit card account the inclusion in the
Trust of which would not cause a Ratings Event.
"Assignment" is defined at page 65 in "Description of the Offered
Securities--Addition of Trust Assets."
"Automatic Additional Accounts" is defined at page 64 in "Description of the
Offered Securities-- Addition of Trust Assets."
"Available Investor Principal Collections" is defined at page 54 in
"Description of the Offered Securities--Principal Payments."
"Available Reserve Account Amount" is defined at page 70 in "Description of
the Offered Securities--Accumulation Period Reserve Account."
"Available Series Finance Charge Collections" is defined at page 73 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 and, if the context requires, the prior versions
thereof, including the Amended and Restated Bank Receivables Purchase Agreement
dated as of May 26, 1995.
"Bankruptcy Code" means the United States federal bankruptcy code, as
amended.
"Base Rate" is defined at page 45 in "Maturity Considerations."
"Branch" is defined at page 57 in "Description of the Offered
Securities--Interest Rate Cap Providers."
"Cap Proceeds Account" means the segregated trust account established and
maintained by the Trustee with a Qualified Institution for the benefit of the
Securityholders into which all amounts paid pursuant to the Interest Rate Caps
or any Qualified Substitute Arrangement are deposited.
"Cash Equivalents" is defined at page 68 in "Description of the Offered
Securities--Trust Accounts."
"Cedel" is defined at page 51 in "Description of the Offered
Securities--Book-Entry Registration."
"Cedel Participants" is defined at page 51 in "Description of the Offered
Securities--Book-Entry Registration."
"Class" means any of the Class A Securities or the Class B Securities.
"Class A Adjusted Invested Amount" is defined at page 72 in "Description of
the Offered Securities--Allocation Percentages."
"Class A Charge-Off" is defined at page 79 in "Description of the Offered
Securities--Investor Charge-Offs."
"Class A Fixed/Floating Percentage" is defined at page 71 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.
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"Class A Initial Invested Amount" means $500,000,000.
"Class A Interest Rate" is defined at page 10 in "Prospectus
Summary--Interest."
"Class A Invested Amount" is defined at page 71 in "Description of the
Offered Securities-- Allocation Percentages."
"Class A Monthly Interest" is defined at page 77 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 and the Class B Invested Amount.
"Class A Principal" is defined at page 77 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
1998-3, 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 B Charge-Off" is defined at page 79 in "Description of the Offered
Securities--Investor Charge-Offs."
"Class B Fixed/Floating Percentage" is defined at page 71 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 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 B Invested Amount" is defined at page 72 in "Description of the
Offered Securities-- Allocation Percentages."
"Class B Securities" means the 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.
"Closing Date" means the date of the initial issuance of the Securities.
"CMAC" means Capital Markets Assurance Corporation.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Account" means an account established and maintained by the
Servicer for the purpose of depositing all Collections of Receivables.
"Collections" is defined at page 8 in "Prospectus Summary--Collections."
"Commission" means the Securities and Exchange Commission.
"Contract" means an agreement between a Credit Card Originator and another
person for the extension of revolving credit, including pursuant to a credit
card or revolving credit agreement (but shall not include any agreement or plan
relating to the extension of credit on a closed-end basis).
"Controlled Accumulation Amount" is defined at page 77 in "Description of
the Offered Securities-- Application of Collections--Payment of Principal."
"Controlled Deposit Amount" is defined at page 45 in "Maturity
Considerations."
"Cooperative" is defined at page 52 in "Description of the Offered
Securities--Book-Entry Registration."
"Covered Amount" is defined at page 70 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 Direct Merchants Bank, including its
predecessor in interest, Utah 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.
"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.
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"Defaulted Receivable" is defined at page 78 in "Description of the Offered
Securities--Defaulted Receivables; Dilution."
"Defeasance" is defined at page 81 in "Description of the Offered
Securities--Defeasance."
"Definitive Securities" is defined at page 52 in "Description of the Offered
Securities--Definitive Securities."
"Depositaries" is defined at page 50 in "Description of the Offered
Securities--Book-Entry Registration."
"Depository" is defined at page 49 in "Description of the Offered
Securities--General."
"Determination Date" is defined at page 78 in "Description of the Offered
Securities--Investor Charge-Offs."
"Deutsche Bank AG" is defined at page 57 in "Description of the Offered
Securities--Interest Rate Cap Providers."
"Deutsche Bank Group" is defined at page 57 in "Description of the Offered
Securities--Interest Rate Cap Providers."
"Dilution" is defined at page 78 in "Description of the Offered
Securities--Defaulted Receivables; Dilution."
"Direct Merchants Bank" means Direct Merchants Credit Card Bank, National
Association.
"Direct Merchants Bank Portfolio" is defined at page 38 in "Direct Merchants
Bank's Credit Card Activities--Delinquency and Loss Experience."
"Discount Option Receivables" is defined at page 66 in "Description of the
Offered Securities-- Discount Option."
"Discount Percentage" is defined at page 66 in "Description of the Offered
Securities--Discount Option."
"Distribution Account" is defined at page 67 in "Description of the Offered
Securities--Trust Accounts."
"Distribution Date" means January 20, 1999 and the 20th day of each month
thereafter, or if such day is not a business day, the next succeeding business
day.
"Dollars" means United States dollars.
"DTC" means The Depository Trust Company.
"DTC Participants" is defined at page 50 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 has not been paid
in full on such date, and ending on the earlier of (i) the date on which the
Class A Invested Amount and the Class B Invested Amount have been paid in full
and (ii) the Termination Date.
"Eligible Account" is defined at page 63 in "Description of the Offered
Securities--Eligible Accounts."
"Eligible Receivable" is defined at page 63 in "Description of the Offered
Securities--Eligible Receivables."
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"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 52 in "Description of the Offered
Securities--Book-Entry Registration."
"Euroclear Operator" is defined at page 52 in "Description of the Offered
Securities--Book-Entry Registration."
"Euroclear Participants" is defined at page 52 in "Description of the
Offered Securities--Book-Entry Registration."
"Euroclear System" is defined at page 52 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 69 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 May 2002 Distribution Date.
"External Prospects" is defined at page 30 in "Metris Companies Inc."
"FASIT" is defined at page 102 in "Certain Federal Income Tax
Consequences--FASIT Legislation."
"FASIT Provisions" is defined at page 102 in "Certain Federal Income Tax
Consequences--FASIT 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.
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"FICO scores" is defined at page 35 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 30 in "Metris Companies Inc."
"Fingerhut Database" is defined at page 33 in "Fingerhut Corporation."
"Fingerhut Scores" is defined at page 33 in "Fingerhut Corporation."
"FIRREA" is defined at page 24 in "Risk Factors--Transfer of the
Receivables; Insolvency Risk Considerations."
"Fitch" is defined at page 57 in "Description of the Offered
Securities--Interest Rate Cap Providers."
"Fixed/Floating Percentage" is defined at page 71 in "Description of the
Offered Securities-- Allocation Percentages."
"Floating Percentage" means the sum of the Class A Floating Percentage and
the Class B Floating Percentage.
"Foreign Person" is defined at page 103 in "Certain Federal Income Tax
Consequences--Tax Consequences to Foreign Investors."
"GAAP" is defined at page 48 in "Description of MBIA."
"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.
"Guaranteed Distributions" is defined at page 79 in "Description of the
Offered Securities--The Policy."
"Indirect Participants" is defined at page 50 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 59 in "Description of the Offered
Securities--Transfer and Assignment of Receivables."
"Insolvency Event" is defined at page 84 in "Description of the Offered
Securities--Pay Out Events."
"Insurance Agreement" means the Insurance and Reimbursement Agreement to be
dated as of the Closing Date, among MBIA, the Transferor, the Trustee and the
Servicer.
"Insurer" is defined at page 8 in the "Prospectus Summary."
"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 and Servicing Fee Deficiency" is defined at page 18 in "Prospectus
Summary--The Policy."
"Interest Funding Account" is defined at page 67 in "Description of the
Offered Securities--Trust Accounts."
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"Interest Rate Cap Provider" is defined at page 56 in "Description of the
Offered Securities--Interest Rate Cap Providers."
"Interest Rate Caps" is defined at page 56 in "Description of the Offered
Securities--The Interest Rate Caps."
"Invested Amount" means the sum of the Class A Invested Amount and the Class
B 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.
"Lee Company" is defined at page 23 in "Recent Developments."
"LIBOR" is defined at page 54 in "Description of the Offered
Securities--Interest Payments."
"LIBOR Determination Date" is defined at page 54 in "Description of the
Offered Securities-- Interest Payments."
"MBIA" means MBIA Insurance Corporation, a New York domiciled insurance
company.
"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 December 31,
1998.
"Monthly Servicing Fee" is defined at page 84 in "Description of the Offered
Securities--Servicing Compensation and Payment of Expenses."
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"Moody's" means Moody's Investors Service, Inc.
"Negative Carry Amount" is defined at page 16 in "Prospectus
Summary--Coverage of Interest Shortfalls from Transferor Finance Charge
Collections."
"New Regulations" is defined at page 104 in "Certain Federal Income Tax
Consequences--New Withholding Regulations."
"Notice Date" is defined at page 65 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 100 in "Certain Federal Income Tax
Consequences--Taxation of Interest Income to Securityholders."
"Order" is defined at page 80 in "Description of the Offered Securities--The
Policy."
"Paired Series" is defined at page 81 in "Description of the Offered
Securities--Paired Series."
"Participants" is defined at page 49 in "Description of the Offered
Securities--General."
"Paying Agent" is defined at page 68 in "Description of the Offered
Securities--Trust Accounts."
"Payment Date" is defined at page 36 in "Direct Merchants Bank's Credit Card
Activities--Servicing, Billing and Payments."
"Payment Reserve Account" is defined at page 67 in "Description of the
Offered Securities--Trust Accounts."
"Pay Out Event" is defined at page 45 in "Maturity Considerations."
"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 104 in "Employee Benefit Plan Considerations."
"PNC" means PNC National Bank.
"Policy" means the Financial Guaranty Insurance Policy issued by MBIA.
"Policy Claim Amount" is defined on page 18 in "Prospectus Summary--The
Policy."
"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
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amended in accordance with its terms and, if the context requires, the prior
versions thereof, including the original Pooling and Servicing Agreement dated
as of May 26, 1995. 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.
"Potential Class A Charge-Off" is defined at page 79 in "Description of the
Offered Securities-- Investor Charge-Offs."
"Portfolio Yield" is defined at page 45 in "Maturity Considerations."
"Preference Amount" is defined at page 80 in "Description of the Offered
Securities--The Policy."
"Prepayable Instrument" is defined at page 100 in "Certain Federal Income
Tax Consequences-- Taxation of Interest Income to Securityholders--OID."
"Previously Issued Series" means the Series 1998-B Variable Funding
Securities, 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 67 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 69 in "Description of the
Offered Securities-- Principal Funding Account."
"Principal Funding Account Balance" is defined at page 45 in "Maturity
Considerations."
"Principal Funding Account Investment Proceeds" is defined at page 16 in
"Prospectus Summary-- Coverage of Interests Shortfalls from Accumulation Period
Reserve 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 60 in "Description of the Offered
Securities--Exchanges."
"Proprietary Modeling System" is defined at page 35 in "Direct Merchants
Bank's Credit Card Activities--New Account Underwriting--Credit Scoring."
"Proprietary Score" is defined at page 35 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 and, if the context requires, the prior versions thereof, including the
original Purchase Agreement dated as of May 26, 1995.
"Purchase Agreements" means the Purchase Agreement and the Bank Purchase
Agreement.
"Purchase Termination Date" is defined at page 94 in "Description of the
Purchase Agreements-- Purchase Termination Date."
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"Qualified Institution" is defined at page 67 in "Description of the Offered
Securities--Trust Accounts."
"Qualified Substitute Arrangement" is defined at page 56 in "Description of
the Offered Securities--Interest Rate Caps."
"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 and with respect to Series 1998-3, without regard to the
Policy.
"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.
"Receipt" or "Received" is defined at page 80 in "Description of the Offered
Securities--The Policy."
"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 Principal Collections" is defined at page 73 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.
"Replacement Interest Rate Cap" is defined at page 56 in "Description of the
Offered Securities--The Interest Rate Caps."
"Required Amount" is defined at page 77 in "Description of the Offered
Securities--Application of Collections--Payment of Fees, Interest and Other
Items."
"Required Reserve Account Amount" is defined at page 70 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.
118
<PAGE>
"Reserve Account Funding Date" is defined at page 70 in "Description of the
Offered Securities--Accumulation Period Reserve Account."
"Restart Date" is defined at page 64 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 11 in "Prospectus Summary--Revolving
Period."
"RTC" means the Resolution Trust Corporation.
"RTC Policy Statement" is defined at page 25 in "Risk Factors--Transfer of
the Receivables; Insolvency Risk Considerations."
"SAP" is defined at page 48 in "Description of MBIA."
"Securities" or "Series 1998-3 Securities" means, collectively, the Class A
Securities and the Class B 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.
"Senior Notes" is defined at page 23 in "Recent Developments".
"Series" means any series of securities issued by the Trust pursuant to a
Supplement, including the Series 1998-3 Securities.
"Series B Preferred" is defined at page 23 in "Recent Developments".
"Series C Preferred" is defined at page 23 in "Recent Developments".
"Series Default Amount" is defined at page 78 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 November 20,
1997.
"Series 1998-B Variable Funding Securities" means those securities issued by
the Trust pursuant to the Series 1998-B Supplement dated as of October 22, 1998.
"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.
119
<PAGE>
"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 Securities" is defined at page 2.
"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.
"Series 1998-2 Asset Backed Securities" means those securities issued by the
Trust pursuant to the Series 1998-2 Supplement to be dated on or about the
Closing Date.
"Service Transfer" is defined at page 86 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 86 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 68 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 30 in "Metris Companies Inc."
"Spread Account" means an account established pursuant to the Insurance
Agreement to reimburse MBIA for any draws on the Policy.
"Standard & Poor's" means Standard & Poor's, a division of The McGraw-Hill
Companies, Inc.
"Stated Class B Amount" is defined at page 72 in "Description of the Offered
Securities--Allocation Percentages."
"Supplement" means any Supplement to the Pooling and Servicing Agreement.
"Supplemental Accounts" is defined at page 64 in "Description of the Offered
Securities--Addition of Trust Assets."
"Supplemental Security" is defined at page 61 in "Description of the Offered
Securities--Exchanges."
"Suppress File" is defined at page 33 in "Fingerhut Corporation."
"Swiss Re" is defined at page 58 in "Description of the Offered
Securities--Interest Rate Cap Providers."
"Tax Certificate" is defined at page B-1-3 in "Annex II."
"Tax Opinion" is defined at page 61 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).
120
<PAGE>
"Termination Date" means the April 2006 Distribution Date.
"Terms and Conditions" is defined at page 52 in "Description of the Offered
Securities--Book-Entry Registration."
"Transfer Agent and Registrar" is defined at page 53 in "Description of the
Offered Securities--Definitive Securities."
"Transfer Date" is defined at page 73 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 16 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 71 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 76 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 98 in "Certain Federal Income Tax
Consequences--General; Scope of Federal Income Tax Opinion."
"Trigger Event" is defined at page 84 in "Description of the Offered
Securities--Pay Out Events."
"Trust" means the Metris Master Trust.
"Trust Accounts" is defined at page 67 in "Description of the Offered
Securities--Trust Accounts."
"Trust Portfolio" is defined at page 42 in "The Receivables."
"Trustee" means The Bank of New York (Delaware), a Delaware banking
corporation.
"Trustee's Corporate Trust Office" means the Trustee's office located at
White Clay Center, Route 273, Newark, Delaware 19711.
"UCC" means the Uniform Commercial Code as amended from time to time as in
effect in the applicable jurisdiction.
"Underwriters" is defined at page 105 in "Underwriting."
"Underwriting Agreement" means the underwriting agreement dated November 24,
1998 among the Transferor, Metris and the Underwriters.
"U.S. Person" is defined at page B-1-4 in "Annex II."
"Utah Bank" is defined at page 33 in "Direct Merchants Credit Card Bank,
National Association."
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<PAGE>
"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.
"Warrants" is defined at page 23 in "Recent Developments".
"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.
122
<PAGE>
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, the Series 1998-1 Variable Funding
Securities and the Series 1998-B Variable Funding Securities, the only Series
heretofore issued by the Trust which remain outstanding upon issuance of the
Series 1998-3 Asset Backed Securities. In addition, the table sets forth the
principal characteristics of the Series 1998-2 Asset Backed Securities that are
being offered by the Trust concurrently with the issuance of Series 1998-3,
pursuant to a separate prospectus. 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.
<TABLE>
<S> <C>
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
</TABLE>
A-1-1
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
A-1-2
<PAGE>
<TABLE>
<S> <C>
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
Interest Rate.......................... LIBOR + 1.05%
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
</TABLE>
A-1-3
<PAGE>
<TABLE>
<S> <C>
SERIES 1998-1
CLASS A SECURITIES
Invested Amount as of November 16,
1998................................. $555,000,000
Expected Invested Amount as of Closing
Date (after application of
proceeds)............................ $160,000,000
Maximum Permitted Invested Amount...... $600,000,000
Interest Rate.......................... A1/P1 Commercial Paper/LIBOR + 0.75%
Blended
Commencement of Amortization Period.... August 20, 2001 (extendible)
Annual Servicing Fee Percentage........ 2.00%
Enhancement............................ Subordination of Class B Securities,
Collateralized Trust Obligations and
Class D Securities
Scheduled Series Termination Date...... August 20, 2005 (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 November 16,
1998................................. $49,222,000
Expected Invested Amount as of Closing
Date (after reduction of Class A
Invested Amount)..................... $21,761,000
Maximum Permitted Invested Amount...... $52,350,000
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
</TABLE>
A-1-4
<PAGE>
<TABLE>
<S> <C>
SERIES 1998-B
CLASS A SECURITIES
Invested Amount as of November 16,
1998................................. $34,500,000
Expected Invested Amount as of Closing
Date................................. $69,000,000
Maximum Permitted Invested Amount...... $103,500,000
Interest Rate.......................... A1/P1 Commercial Paper/LIBOR + 0.85%
Blended
Commencement of Amortization Period.... March 2000 (extendible)
Annual Servicing Fee Percentage........ 2.0%
Enhancement............................ Subordination of Class B Securities
Scheduled Series Termination Date...... May 2004 (extendible)
Series Issuance Date................... October 22, 1998
CLASS B SECURITIES
Initial Invested Amount................ $34,500,000
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
Initial Invested Amount................ $500,000,000
Interest Rate.......................... LIBOR + 0.55%
Commencement of Accumulation Period.... Last day of April 2000 Monthly Period
or later date as determined in the
Agreement
Annual Servicing Fee Percentage........ 2.0%
Enhancement............................ Subordination of Class B Securities and
Financial Guaranty Insurance Policy
Scheduled Series Termination Date...... October 2004
Series Issuance Date................... December 4, 1998
CLASS B SECURITIES
Initial Invested Amount................ $49,450,550
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
</TABLE>
A-1-5
<PAGE>
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.
B-1-1
<PAGE>
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
B-1-2
<PAGE>
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
B-1-3
<PAGE>
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.
B-1-4
<PAGE>
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
Banque Generale du Luxembourg S.A.
50, Avenue J.F. Kennedy
L-2951 Luxembourg
LISTING AGENT
Banque Generale du Luxembourg S.A.
50, Avenue J.F. Kennedy
L-2951 Luxembourg
LEGAL ADVISOR TO THE TRANSFEROR
as to United States Law
Skadden, Arps, Slate, Meagher & Flom LLP
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
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRANSFEROR OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF METRIS COMPANIES INC., DIRECT MERCHANTS CREDIT CARD BANK, NATIONAL
ASSOCIATION, METRIS RECEIVABLES, INC. OR THE RECEIVABLES SINCE THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
- ------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Reports to Securityholders................................................ 3
Available Information..................................................... 3
Incorporation of Certain Documents By Reference........................... 3
Other Information......................................................... 4
Cautionary Notice Regarding Forward-Looking Statements.................... 4
Prospectus Summary........................................................ 5
Recent Developments....................................................... 23
Risk Factors.............................................................. 23
The Trust................................................................. 30
Metris Companies Inc...................................................... 30
The Transferor............................................................ 32
Direct Merchants Credit Card Bank, National Association................... 33
Fingerhut Corporation..................................................... 33
Direct Merchants Bank's Credit Card Activities............................ 34
The Receivables........................................................... 42
Maturity Considerations................................................... 45
Use of Proceeds........................................................... 47
Description of MBIA....................................................... 47
Description of the Offered Securities..................................... 49
Description of the Purchase Agreements.................................... 91
Certain Legal Aspects of the Receivables.................................. 94
Certain Federal Income Tax Consequences................................... 98
Certain State Tax Consequences............................................ 104
Employee Benefit Plan Considerations...................................... 104
Underwriting.............................................................. 105
Legal Matters............................................................. 106
Experts................................................................... 106
Listing and General Information........................................... 106
Glossary of Terms......................................................... 108
</TABLE>
- -------------------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL DEALERS EFFECTING
TRANSACTIONS IN THE OFFERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
METRIS
MASTER TRUST
$500,000,000 FLOATING RATE
ASSET BACKED SECURITIES,
SERIES 1998-3, CLASS A
METRIS RECEIVABLES, INC.
Transferor
DIRECT MERCHANTS CREDIT CARD BANK,
NATIONAL ASSOCIATION
Servicer
- ---------------------
PROSPECTUS
- ---------------------
CHASE SECURITIES INC.
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES
NATIONSBANC MONTGOMERY
SECURITIES LLC
SALOMON SMITH BARNEY
NOVEMBER 24, 1998
